Leadership and innovation

Like short skirts, innovation has traditionally swung into and out of fashion: popular in good times and tossed back into the closet in downturns. But as globalization tears down the geographic boundaries and market barriers that once kept businesses from achieving their potential, a company's ability to innovate—to tap the fresh value-creating ideas of its employees and those of its partners, customers, suppliers, and other parties beyond its own boundaries—is anything but faddish. In fact, innovation has become a core driver of growth, performance, and valuation.

Our research bears out this point. More than 70 percent of the senior executives in a survey we recently conducted say that innovation will be at least one of the top three drivers of growth for their companies in the next three to five years.1 Other executives see innovation as the most important way for companies to accelerate the pace of change in today's global business environment.2 Leading strategic thinkers are moving beyond a focus on traditional product and service categories to pioneer innovations in business processes, distribution, value chains, business models, and even the functions of management (see "Innovative management: A conversation with Gary Hamel and Lowell Bryan").

Our research also shows that most executives are generally disappointed in their ability to stimulate innovation: some 65 percent of the senior executives we surveyed were only "somewhat," "a little," or "not at all" confident about the decisions they make in this area.3 What explains the gap between the leaders' aspirations and execution? Even starting to build an organization in which innovation plays a central role is often far more frustrating than most executives ever imagine it to be. Many of those who mimic the approaches of the most successful practitioners have found that path to be ineffective. Sustaining innovation to create real value at scale—the only kind of innovation that has a significant financial impact—is even harder.

There are no best-practice solutions to seed and cultivate innovation. The structures and processes that many leaders reflexively use to encourage it are important, we find, but not sufficient. On the contrary, senior executives almost unanimously—94 percent—say that people and corporate culture are the most important drivers of innovation.

Our experience convinces us that a disciplined focus on three people-management fundamentals may produce the building blocks of an innovative organization. A first step is to formally integrate innovation into the strategic-management agenda of senior leaders to an extent that few companies have done so far. In this way, innovation can be not only encouraged but also managed, tracked, and measured as a core element in a company's growth aspirations. Second, executives can make better use of existing (and often untapped) talent for innovation, without implementing disruptive change programs, by creating the conditions that allow dynamic innovation networks to emerge and flourish. Finally, they can take explicit steps to foster an innovation culture based on trust among employees. In such a culture, people understand that their ideas are valued, trust that it is safe to express those ideas, and oversee risk collectively, together with their managers. Such an environment can be more effective than monetary incentives in sustaining innovation.

This list of steps is not exhaustive. Still, given the limited time and means—as well as the short-term performance pressures that executives constantly face—pursuing innovation with anything other than existing talent and resources often isn't an option. These three fundamentals are a practical starting point to improve an organization's chances of stimulating and sustaining innovation where it matters most—among a company's people.

Leading innovation

While senior executives cite innovation as an important driver of growth, few of them explicitly lead and manage it. About one-third say that they manage innovation on an ad hoc basis when necessary. Another third manage innovation as part of the senior-leadership team's agenda. How can something be a top priority if it isn't an integrated part of a company's core processes and of the leadership's strategic agenda and—above all—behavior?

According to 19 percent of the senior executives, neither growth nor innovation is part of the strategic-planning process, which focuses solely on budgeting and forecasting. Just under half indicated that innovation is integrated into the process informally. Only 27 percent said that innovation is fully integrated into it. But these executives feel more confident about their decisions on innovation and say that they have implemented ways to protect it and to ensure that it gets the right talent.

Additional writing by Marla M. Capozzi and Jonathan Davidson

• To read the full article on The McKinsey Quarterly, click here »