McKinsey Global Survey results

Managing the innovation portfolio to win

According to executives, the best-performing portfolios that help companies outinnovate competitors are well aligned with strategy, effectively governed, and focused on breakthrough innovation.
Companies innovation aspirations are high, but only a minority are outperforming

1 

The online survey was in the field from July 9 to July 19, 2013, and garnered responses from 1,241 executives representing the full range of regions, industries, company sizes, tenures, and functional specialties. To adjust for differences in response rates, the data are weighted by the contribution of each respondents nation to global GDP. 2  From November 6 to November 16, 2012, we surveyed 2,586 executives on eight categories of innovation practices that drive high performance. The respondents represented the full range of regions, industries, company sizes, tenures, and functional specialties.

their peers and mastering the portfolio-management activities that are critical to success, according to McKinseys latest survey on innovation.1 In our previous research on the topic, we explored the eight key dimensions that underpin successful innovation (and affirmed that these eight issues all matter to performance).2 Most recently, we focused on the portfolio: specifically, what companies decide to include in their innovation portfolios, how well the portfolios align with overall company or business-unit strategy, and how those decisions link to overall innovation performance. While a few elements of portfolio composition are consistent across different levels of innovation performance, several practices distinguish the best innovatorscompanies where respondents report high overall performance, as well as high margins and growth rates relative to competitors. According to executives, these companies focus significantly more than others on disruptive and breakthrough innovation activities, and they invest more of their

Jean-Franois Martin

McKinsey Global Survey results Managing the innovation portfolio to win

budgets in developing new products and technologies rather than maintaining those already in the portfolio. They also govern their portfolios more effectively, through strong alignment with strategy and agile resource allocation. Although they are susceptible to the same decisionmaking biases that plague their lower-performing peers, respondents at high-performing companies are more likely to report having the right expertise and cross-functional alignment needed to make effective decisions for their portfolios.
Ambitions to outperform

Survey 2014 According to the results, many companies and business units have lofty goals for their Innovation/R&D innovation programs. Nearly half of all respondents describe their strategic postures Exhibit 1 of 6 competitors, rather than keeping pace with the overall industry or top as out-innovating
competitors, being a fast adopter, or investing minimally in innovation (Exhibit 1).

Exhibit 1

Of seeking to excel at innovation, a minority of executives say Of those those seeking to excel at innovation, a minority of executives their companies succeed. say their companies succeed.
% of respondents1 Strategic posture companies or business units want to adopt to meet innovation goals, n = 1,118 Invest minimum amount to stay relevant No particular posture Keep pace with industry 6 3 average 10 Be fast adopter or 14 follower 22 Keep pace with top 23 competitors
1 Respondents 2Our

Distribution of companies seeking to out-innovate, along overall innovationperformance index2

43 1st quartile

Successful at out-innovation

45

Out-innovate others in our industry

24 2nd quartile Unsuccessful at out-innovation

18 3rd quartile 15 4th quartile

who answered dont know are not shown. innovation-performance index includes all organizations represented in the survey, not only those where respondents report an out-innovation posture.

McKinsey Global Survey results Managing the innovation portfolio to win

Despite the high aspirations, not all companies that seek to outperform are doing so. Just 43 percent of executives at these companies report relative growth rates, relative operating margins, and overall innovation performance that rank in the top quartile of our innovationperformance index for all respondents companies, across all strategic approaches. Across industries, executives at high-tech, manufacturing, and telecommunications firms are the most likely to say their companies want to out-innovate (Exhibit 2).
The disruptive advantage

To perform well, companies and business units need to pay more attention to their portfolios than to how much they spend on innovation. The results indicate that, on average, companies Survey 2014 with lower rates of organic growth and lower operating margins spend roughly the same Innovation/R&D share of sales Exhibit 2 ofon 6 R&D as their peers with higher growth rates and margins, which is consistent with our experience and other research.

Exhibit 2

High-tech companies lead the way in their ambitions. High-tech companies lead the way in innovation their innovation ambitions.
% of respondents, by industry Companies with a strategic posture of out-innovation High tech, n = 90 Manufacturing, n = 121 Telecommunications, n = 72 Professional services, n = 142 62 Pharmaceuticals, n = 81 Consumer products, n = 89 Global energy and materials, n = 155 Financial, n = 101 43

54

41

49

39

44

35

McKinsey Global Survey results Managing the innovation portfolio to win

Survey 2014 Innovation/R&D Exhibit 3 of 6

Exhibit 3

Bothhigh high and low performers devote the largest shares Both and low performers devote the largest shares of their of portfolios to product-related innovations and to products shorter their portfolios to product-related innovations andwith to products times to launch. with shorter times to launch.
% of R&D portfolio spending1 Allocation of portfolio resources By type of innovation work
Product innovation Process innovation Services innovation Business-model innovation

By time to launch
<1 year 710 years 13 years >10 years 46 years

High-performing innovators, n = 252 Low-performing innovators, n = 257

1 Figures

2 49 23 16 13 48 35 12 4

42

25

22

11

43

33

15

64

may not sum to 100%, because of rounding.

Comparing the portfolio composition of top-quartile and bottom-quartile companies, some likenesses emerge. In both the high-performing and low-performing portfolios, the
3 

While this result may seem counterintuitivegiven that high performers spend substantially more than low performers on breakthrough innovation projects, which usually take more time and resources to develop in the longer termthe question asked about companies annual R&D budgets as a whole, in a given year, and not the total amount spent on a given project over time.

largest share of these companies innovation work focuses on products rather than the innovation of services, processes, or business models (Exhibit 3). Both types of companies also distribute their resources similarly among projects with respect to time horizons for launch.3 But there are some key portfolio-level differences, too. According to respondents, the low performers spend nearly twice as much of their R&D budgets on maintenance and compliance as the high performers, which devote most of their spending to the development of new products and technology platforms. The most notable difference, though, is the high performers investment in disruptive and breakthrough innovationthe innovation activities that enable

McKinsey Global Survey results Managing the innovation portfolio to win

Survey 2014 Innovation/R&D Exhibit 4 of 6 (alternate version)

Exhibit 4

But performers spend much moremore overall on disruptive and Buthigh high performers spend much overall on disruptive breakthrough technologies. and breakthrough technologies.
% of R&D portfolio spending Allocation of portfolio resources, by type of innovation activities
Disruptive (ie, to dramatically change how market works and to enable an advantageous position in that market) Breakthrough (ie, to enable substantial gains in market share) Incremental (ie, to maintain todays market position)

High-performing innovators, n = 246 Low-performing innovators, n = 251

28

38

34

10

23

67

substantial market-share gains and dramatically change how the markets work to create competitive advantage. Compared with low performers, high-performing companies spend twice as much of their overall portfolio resources on disruptive and breakthrough activities (Exhibit 4). Although the high performers are spending more on disruptive innovation work, their assessment of risk is on par with that of the low performers. On average, 78 percent of the high performers portfolios include low- or moderate-risk products (that is, products that are at least 51 percent likely to launch), compared with 79 percent of low performers portfolios.

McKinsey Global Survey results Managing the innovation portfolio to win

Governing the portfolio to win

Beyond their focus on disruptive and breakthrough innovation, the high performers portfolios are also characterized by strong alignment, resources, and governance. Fifty-seven percent

Survey 2014 of executives at top-quartile companies say their innovation portfolios are very aligned with Innovation/R&D corporateor business-unit-level strategy, compared with 11 percent in the bottom quartile. Exhibit 5 of 6 reporting outright misalignment between portfolio and strategy most often The respondents
cite issues with their budgets and the scale of ideas for innovations (Exhibit 5).

Exhibit 5

When and strategy dont align,align, executives most often cite Whenportfolio portfolio and strategy dont executives most often issues with budgets and the scale of innovation ideas. cite issues with budgets and the scale of innovation ideas.
% of respondents Level of alignment between R&D portfolio and company/business-unit strategy, n = 1,118 Very misaligned Somewhat misaligned 16 Scale of ideas for new innovations (ie, too few ideas with major impact) Somewhat aligned 43 Balance of breakthrough and incremental innovations 46 60 2 Areas of portfolio and strategy misalignment,1 n = 206

Budget (ie, investing too little in portfolio to meet goals)

63

Product-category priorities

45

Technology platforms Very aligned 36 Geographic priorities Dont know 3 Others 5 23

38

1Asked

only of respondents who selected very misaligned or somewhat misaligned in the rst question; those who answered dont know are not shown.

McKinsey Global Survey results Managing the innovation portfolio to win

Moreover, the high performers do a better job of aligning the allocation of R&D resources with their agreed-upon portfolios. At these companies, 68 percent of executives report strong alignment between their portfolio and the allotted resources, while just 23 percent at the low performers say the same. The high performers are more agile in their reallocation, too. These companies reallocate a larger share of their annual budgets among businesses and divisions than the low performers do and report a healthier range for how much of their R&D budgets they redistribute (Exhibit 6).

Survey 2014 To close the gap with the top-quartile companies, responses from the bottom-quartile innoInnovation/R&D vators suggest that better decision making and stronger alignment between portfolio and Exhibit 6 of 6 strategy would most help their portfolios overall performance. These companies face some
significant hurdles, though, in improving decisions and aligning resources. The biggest

Exhibit 6

On the high performers reallocate more of their of their R&D On average, average, the high performers reallocate more R&D budgets than their low-performing peers. budgets than their low-performing peers.
Reallocation of annual R&D budget among businesses and divisions, past 3 years, % of R&D budget <2% 25% 610% 1120% 2130% 3140% >40% Average % of budget that is reallocated 4 9 7 18 19 16 4 8 14 11 10 % of respondents1 High-performing innovators, n = 182 26 22 Low-performing innovators, n = 190 31

14.8

11.6

1 Respondents

who answered dont know are not shown.

McKinsey Global Survey results Managing the innovation portfolio to win

decision-making challenge for both high and low performers is behavioral biases. However, the low performers are much more likely to cite this hurdle (45 percent, compared with 35 percent) and are more vulnerable to a host of other challenges, such as a lack of expertise and cross-functional alignment. With respect to resource alignment, the low performers struggle much more than their high-performer peers to define their innovation strategies and to generate more market-led ideas.
Looking ahead

 Align planning cycles. Despite their high aspirations, many companies are struggling to create alignment between strategy and portfolio, though it is critical to an innovation programs success. Companies would do well to align their cycles of planning for company or businessunit strategy, for portfolio composition, and for budgeting, so that strategic priorities are clearly defined and properly resourced.  Make cross-functional decisions. Developing a portfolio of winning ideas (and getting more of them to market) requires a wide variety of perspectives, starting from the top; innovation portfolios cannot succeed if they are managed by a single function or in silos. A systematic approach that includes all levels of the organization and a broad range of functionsand takes marketing, technological, operational, and business expertise into accountis needed. This approach is also the best way to ensure that companies can prioritize resources and the projects that they can successfully execute and bring to market.  Reduce decision-making biases. The results indicate that behavioral biases can derail decision making at both high- and low-performing companies. To improve the process for innovation decisions, some best practices include the introduction of an objective, premortem analysis of proposals for new products, development of a new innovation budget to overcome bias toward status quo spending, the use of clear criteria to assess innovation opportunities, and involvement of multiple perspectives, people, and roles in the decision-making process.

The contributors to the development and analysis of this survey include Vanessa
Chan, a principal in McKinseys Philadelphia office, and Marc de Jong and Vidyadhar Ranade, a principal and associate principal, respectively, in the Amsterdam office.

They would also like to acknowledge Peet van Biljon for his contribution to this work. Copyright 2014 McKinsey & Company. All rights reserved.