How do great companies innovate?

The top 50 companies listed on Boston Consulting Group's (BCG) report on the Most Innovative Companies (MIC) of 2023 surpassed the MSCI World Index in delivering a 3.3 per cent higher annual return to their shareholders.

The report reveals a strong correlation between innovation and superior shareholder returns.

Companies that prioritise innovation consistently outperform the broader market in terms of financial gains for their shareholders.

Among the top-ranking companies on the MIC 2023 list are well-known giants like Apple, Tesla, Amazon, Alphabet and Microsoft, which also belong to the prestigious group known as the "Surging Seven", dominant companies that have a significant influence on the overall performance of the S&P 500 index.

OpenAI, the company at the forefront of artificial intelligence research, secures the top spot on the MIC 2023 list of Fast Company, followed by McDonald's and Airbnb.

Despite the slow growth of the global economy, these companies continue to thrive by embracing innovation. This phenomenon prompts us to explore how these leading companies innovate to maintain a competitive edge over their peers.

What is innovation?

In essence, innovation is the process of translating valuable ideas into practical reality, setting the path that others follow.

It differentiates itself from creativity, which involves generating new ideas, as innovation is focused on taking action to create something valuable.

Innovation is a collaborative effort that spans across the entire organisation, which is facilitated by cross-cutting practices and procedures to structure, coordinate and encourage it.

Guy Kawasaki, a Silicon Valley-based author, speaker and Apple's marketing pioneer, defined innovations as "perspectives to jump curves."

He emphasised that true innovation involves leaping to an entirely new way of doing things, revolutionising industries rather than making incremental advancements. Kawasaki cleverly illustrated this with the ice business analogy.

While using sharper saws and bigger horses represented innovation within the same curve of ice harvesting during the 1800s-1900s, the real leap occurred with the invention of ice factories, eliminating the need to wait for winter.

Another significant curve jump came with the invention of refrigerators, allowing households to have their mini-ice factories.

How can a company innovate?

Peter F Drucker, widely revered for his influence on modern management, proposed that innovation arises from a calculated examination of seven forms of opportunities rather than fleeting moments of inspiration.

These sources of innovation encompass unexpected events, incongruent elements, process requirements, changes in industry and market structure, shifts in demographics, evolving perspectives and interpretations, and the acquisition of new knowledge.

Successful innovation requires a combination of knowledge, ingenuity and focus.

Professor Rosabeth M Kanter, a specialist in strategy, innovation and leadership for change, emphasises that innovation can encompass small, gradual advancements and not solely rely on breakthroughs.

She highlights the potential for transformative ideas to arise from various business functions beyond new product development.

Kanter advocates adopting an "innovation pyramid" framework, which involves investing in significant ventures, testing promising midrange ideas, and nurturing early-stage or incremental innovations.

In addition, she advises organizations to break free from tight controls and traditional processes in planning, budgeting, and review to foster a culture of innovation.

A multi-year study by McKinsey involving 2,500 executives representing 300 companies identified eight essential factors for successful innovation.

Two key factors among these are having a quantified "innovation target for growth" and integrating it into strategic plans and focusing on specific ideas that the business aims to support and expand.

What Great Companies Are Doing to Foster Innovation?

A study investigating leaders of disruptive organizations and their influence on innovation revealed five unique skills commonly observed in leaders of the most innovative companies worldwide.

Leaders of disruptive innovation excel in connecting unrelated ideas, posing thought-provoking questions, actively observing customers, competitors, and processes, networking with diverse individuals, and fearlessly embracing experimentation.

These visionary leaders cultivate organizational cultures that mirror their traits, empowering every team member to think creatively, solve complex problems, and drive the development of exceptional products, services, and processes.

A shining example of such a disruptive innovation leader is Jeff Bezos, whose remarkable questioning, experimentation, and observation skills have propelled Amazon to its prominent position among the top three companies on BCG's MIC 2023 list.

Apple's remarkable innovation journey took off when Steve Jobs returned as CEO in 1997.

Jobs revolutionized Apple's organizational design by consolidating all functional departments into a cohesive unit.

This unique structure empowered domain experts to hold decision-making authority, enabling Apple to harness the highest expertise and experience in each area.

Apple's organizational design also nurtures a culture of innovation by prioritizing user benefits over cost and price targets in their design and engineering decisions.

This strategic approach allowed Apple to anticipate future technology trends and deliver groundbreaking products that have redefined the industry.

Tesla, led by the visionary Elon Musk and named after the renowned innovator Nikola Tesla, refuses to settle for mediocrity.

A survey with 2,810 Tesla employees revealed that innovation is the most positively discussed value at Tesla. Under the guidance of Elon Musk, Tesla actively encourages its employees to push boundaries and accomplish what is deemed unimaginable to others.

Drucker's timeless warning, "Innovate or die," continues to resonate with today's context, as the survival and growth of businesses in today's fiercely competitive and ever-evolving world depend on their ability to innovate.

Looking back at the ice business example, we can see that none of the ice cutters established ice factories, and none of the ice factory businesses invented refrigerators.

This phenomenon occurs because most organizations and businesses concentrate on what they currently do instead of what they will do in the future.

To innovate, we must shift our gaze toward what lies ahead. By studying and embracing the practical lessons from the trailblazing innovators, we can pave the way for our transformative innovation journey.