Executive
Perspectives

The Race forInnovation
May 2021

INNOVATION DRIVES STAKEHOLDER & SOCIETAL VALUEOBJECTIVES OF THIS DOCUMENT

Copyright © 2021 by Boston Consulting Group. All rights reserved. Updated 19 May 2021 Version 11.1.

BCG Executive
Perspectives

As the world continues to change rapidly amid the global COVID-19
pandemic, innovation is becoming increasingly important. The
COVID-19 vaccines were an unprecedented innovative developmentthat will positively impact billions of lives. Additionally, innovation
has allowed companies to better adapt their businesses andworkforces to ever-present uncertainties. Embracing new ideas,
business models, and ways of working will be critical for survival in
an unpredictable future.

LEADERS CAN TAILOR THEIR INNOVATIONPATH ACCORDING TO THEIR OBJECTIVES
From 2020 to 2021, there has been a tremendous shift inemphasis and investment in innovation as organizations grapple
with unfamiliar challenges. Earlier this year, BCG released theMost Innovative Companies 2021 report and The CEO Innovation
Agenda. The current document is intended to further amplify andextend the messages from those pieces in order to help leaders
select their most suitable innovation path.
2

Faster recovery

Beyond the core

Changing leaders

New disrupters

17 pp

20%

56%

50%

Outperformance intotal shareholder
return (TSR) by the 50
most innovative
companies in 2020

Higher averagevaluation multiple
for companies that
innovated across bothcore and newmarkets1of industry-leading
companies2 lost theirleading position in last
decade, a reduction inincumbent advantage
compared with past
decades (23% lost)

Decrease in averageage of S&P 500
companies today,
compared with 1980
(19 vs. 37 years old)

1. Analysis compared companies that disrupted more across adjacent and frontier markets with those that innovated only in core markets among BCG's top 100 Most Innovative Companies; P/E multiple used for valuation
multiple; innovation focus measured by peer survey respondents within core and outside core industry; N = 1,600 C-level and SVP-level innovation executives. 2. Based on US industry leaders by operating income in 69 industries
Source: BCG Most Innovative Companies of 2021 report and survey (April 2021); BCG Deep Tech and the Great Wave of Innovation article (March 2021); Capital IQ; BCG Henderson Institute; BCG analysis
3

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Innovative companies are better positioned to recover and thrive
in increasingly dynamic markets

The Race for Innovation

Innovation
trendsCOVID-19 has tested companies’ ability to adapt to changing environments;
75% of companies report innovation as a top 3 priority in 2021
Incumbent advantage is declining as only 44% of industry leaders maintained
their industry rank in the past decade, compared with 77% in previous decades
Innovative companies have outperformed their peers before and during COVID-19
downturn by ~10-20 pp in shareholder returns, led by the top 3 most innovative
companies—Apple, Alphabet, and Amazon (A-A-A)

Innovation
options

Companies must determine their innovation focus among core, adjacent,and new frontier opportunities, which will impact other innovation plan options
1.
2.
3.
4.
5.

Vehicles: Explore growing innovation vehicles such as partnerships/VC
Technology: Leverage existing technologies and explore nascent areas
Process: Use agile processes to rapidly build, test, launch, and learn
Working model: Facilitate cross-functional teams to drive innovation engine
Culture: Reward innovative thinking across all teams, including frontline

Source: BCG Most Innovative Companies of 2021 report (April 2021); BCG Most Innovative Companies of 2020 report (2020); BCG Deep Tech and the Great Wave of Innovation article (March 2021); BCG Henderson Institute; BCG analysis 4

Copyright © 2021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives updated 19 May 2021 Version 2.0

SummaryIncreasing importance of innovation

Increased innovation budgets

Percent of organizations ranking innovation a top 3priority, in 2020 and 20211

Share of respondents that have increased theirinnovation budget slightly or significantly2

+10%

2020

2020

2021

2021

75%

63%
+12%

In 2021, innovation as a top 3 priority jumped 10 pp from
2020, the largest year-over-year increase in 15 years of
research; COVID-19 drove the increased importanceInnovation budget includes building new digitalproducts and processes, exploring new businessmodels, and reorienting the innovation portfolio

1. Percent responding “top priority” or “top 3 priority” to the question “Where does innovation/R&D/product development rank among your company’s priorities?” 2. Percent responding “increased significantly” or“increased slightly” to the questions “Compared with 2019, how much did you adjust your company’s budget for innovation/R&D/product development in 2020?” and “Compared with the year 2020, how do you
expect your company’s budget for innovation/R&D/product development to be adjusted in 2021?”
Source: BCG Most Innovative Companies of 2021 report (April 2021)

5

Copyright © 2021 by Boston Consulting Group. All rights reserved. Updated 19 May 2021 Version 2.0

COVID-19 has increased the importance of innovation and driven increased
innovation budgets, as flexibility and resilience are necessary to survive

Incumbent companies are more likely to be outcompeted;innovation requires leadership and commitment at the C-level
Incumbent advantage is declining

Innovation needs CEO/CXO ownership

Percent of industry-leading companies1 that kept 5-yearindustry ranking, in last decade compared to past decades

Percent of respondents with clear C-level ownershipof innovation2

88%

Top innovators3

77%
44%
Past decades

Bottom innovators420%

Last decade

The average age of companies in the S&P 500 today ishalf of what it was in 1980 (19 vs. 37 years); incumbents
must continue to innovate to survive

CEOs/CXOs must set the overall ambition and definestrategic priorities, ensure accountability for innovation
outcomes, and support innovation culture and talent

1. Based on US industry leaders by operating income in 69 industries. 2. Percent responding “defined & implemented (w/impact)” to the survey statement “Executive ownership: Innovation is owned and actively
championed by the CEO or an ExCo member.” 3. Top 50 companies in innovation based on BCG innovation (i2i) score. 4. Bottom 50 companies in innovation based on BCG innovation (i2i) score
Source: BCG Most Innovative Companies of 2021 report (April 2021); BCG Deep Tech and the Great Wave of Innovation article (March 2021); BCG Henderson Institute6

Copyright © 2021 by Boston Consulting Group. All rights reserved. Updated 19 May 2021 Version 2.0

33 pp

The 50 Most Innovative Companies of 2021 accelerated out of the crisis

outperformance in2020 of a portfolio
invested in last year’s
50 Most Innovative
Companies
compared with MSCI
world index, a global
large and mid-cap
equity index1
Most Innovative Companies report
includes a global perception
survey2, competitor views, multiindustry participation, and value
creation (total shareholder return)2020 Total Shareholder Return (December 31, 2019 = 100)133

+17 pp
TSR
116
100

BCG Most Innovative Companies top 50
Morgan Stanley Capital International (MSCI) World Index

1. Consists of 1,583 constituents, which covers ~85% of free-float adjusted market capitalization in each of 23 developed markets countries. 2. N = 1,600 C-level and SVP-level innovation executives.
3. For example, FAANG (Facebook, Amazon, Apple, Netflix, Google), Alibaba, Jingdong, Microsoft, Cisco, and others
Source: BCG Most Innovative Companies of 2021 report (April 2021); MSCI; CapitalIQ; BCG analysis

Even after
removing
digital players3,
nondigital
innovators still
outperformed
MSCI by 12 pp

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17 pp

Innovative companies continue to outperform during COVID-19

A Alphabet

A AmazonApple, Alphabet, andAmazon (A-A-A) are
the top 3 mostinnovative companiesof 2021 and have beenranked in the top 10
for the past decade

MYTH:
A-A-A spends more on innovation
than other companies

A-A-A invests similar amounts oninnovation (~15% of sales1) but gets 3x
better returns through improved
innovation practices and decision making
Not everyone has to be A-A-A…
but CEOs can apply A-A-A lessons
that are relevant to their respective
companies/sectors as they revamp
innovation in the COVID-19 era

1. Based on responses to the question “Innovation input: What is the total % of sales allocated to
R&D as well as other innovation activities” from the BCG Most Innovative Companies 2021 report
Source: BCG Most Innovative Companies report over time8

Copyright © 2021 by Boston Consulting Group. All rights reserved. Updated 19 May 2021 Version 2.0

A AppleAs the COVID-19 battle continues, innovation is taking priority in global agendas
As of 12 May 2021

COVID innovations: vaccines forvariants, drone deliveries, printyour-own shots, and more
February 18, 2021

Kenya is becoming a global hubof fintech innovation

May 4, 2021

Boeing gives Virginia Tech $50 million
to help launch innovation campus

May 9, 2021

Tech giants bet $19 billion on global
electric car frenzy

March 7, 2021

China targets AI, chips among sevenbattlefronts in tech race with US

December 20, 2020

Deep tech startups are emerging inIndia, but money and markets tosustain are still needed

May 11, 2021

Biden and world leaders focus on
innovation for ‘clean energy future’at climate summit
May 10, 2021

Plans to increase tech unicorns
tenfold in Europe proposed
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Copyright © 2021 by Boston Consulting Group. All rights reserved. Updated 19 May 2021 Version 2.0

April 30, 2021

CEOs should set the innovation focus and use it to navigate
their innovation plan options across 5 key dimensions

1 Vehicle

Add capabilities through ventures/ecosystems; different
options exist based on innovation focus

2 Technology

Leverage existing or nascent technologies to power
innovation based on focus

3 Processes

Use agile innovation processes to build, test, launch,and learn across innovation focus areas

4 Working model

Facilitate cross-functional collaboration between productand sales teams and ensure alignment across levels

5 Culture

Reward innovative thinking across teams and ensure talent is
empowered to challenge the status quo
10

Copyright © 2021 by Boston Consulting Group. All rights reserved. BCG Executive Perspectives updated 19 May 2021 Version 2.0

Focus

Determine the innovation focus (core, adjacent, new frontier)based on company objectives, which will shape subsequent path

1

Focus

Determine innovation areas to focus on given company
objectives and positioning, which will shape subsequent path

Explore new frontiersInnovation area

1

Innovation focused on developing new products
or services in markets that may not currently exist

Expand into adjacencies

2

Innovation aimed at expanding into areas
adjacent to core that are new to the company

Maximize the core3

Innovation aligned to scaling
and optimizing existing core business

ExampleElectronics company develops
autonomous vehicle software

Companies invest acrossall three areas, but basedon market context, theychoose where to invest
the most to match
aspiration

ExampleAirline builds and sells operations
optimization platform

Allocation examples:

ExampleApparel manufacturer adopts
fully digital design process

The business model will also need to change in order to match desired
innovation and to maximize chances of success and ability to scale
1. Analysis compared companies that disrupted more across adjacent and frontier markets with those that innovated only in core markets among BCG’s top 100
Most Innovative Companies; P/E multiple used for valuation multiple; innovation focus measured by peer survey respondents within core and outside coreindustry, N = 1,600 C-level and SVP-level innovation executives
Source: BCG Most Innovative Companies of 2021 report and survey (April 2021); BCG analysis

Leader: 60% core, 30%
adjacent, 10% frontier
Reinventor: 20%
core, 20% adjacent, 60%
frontier
Among most innovative
companies, there is a
20% valuation multiple
premium for innovating
across adjacent andfrontier in addition to
core1
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Description and examples

Add capabilities through ventures/ecosystems;
different options exist based on innovation focus

Partners and ecosystems

Based on innovation focus area and desired engagement model,
determine appropriate innovation vehicle

1
New Frontier2
Adjacent

Internal
researchanddevelopment

Mergersandacquisitions

Corporate
venturecapitalIncubatorsand startup
accelerators

Innovation
network (e.g.,
public labs)

Partnerships
and joint
ventures3

Companies haveincreasingly partneredand invested in startups
and public research labsthat are driving
technology innovation
In the past decade, A-A-A
invested in 500+ startups
and 25+ have become
unicorns (>$1 billion
valuation)
From 2019 to 2016, there
was an 8x increase ininnovation alliances
formed

Core

Model

Venture/Ecosystem:

Build

Buy

Partner

Source: BCG Most Innovative Companies of 2020 report (2020); BCG 4 Strategies to Orchestrate a Digital Ecosystem report (2020); Refinitiv/SDC Platinum; BCG
Transaction Center

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2
1

2.3
2

Leverage existing or developing technology
to power innovation based on timeline and focus
Develop or partner in deep tech areas to meet future needs

Technology investments

New Frontier

4X
Growth in deep tech investmentsfrom 2016 to 2020 (from $15B to $60B)

Biotechnology, artificial
intelligence, photonics andelectronics, drones and robotics,
advanced materials, blockchain,quantum computing

Timeline considerations: Deep tech areas may have uncertain timelines
as technologies may not yet be commercially available
Business model innovation: New frontier innovation can occasionally
rely entirely on business model innovation with little technology development

Leverage or improve existing technologies in current markets

2
Adjacent

3Core

60% of companies are leveraging digital transformation for innovation goals
ExampleFertilizer company adds satellite
imagery service to help farmers
maximize crop yields while
minimizing environmental emissions

ExampleAuto manufacturer develops
virtual sales platform that allows
for car tours, financing options,and delivery during COVID-19

Source: BCG Deep Tech and the Great Wave of Innovation article (March 2021); BCG Most Innovative Companies of 2020 report (2020); BCG Digital Strategy Roadmap
Survey; BCG analysis

Diversify portfolio:
Like other companies,
A-A-A invests in a
portfolio of innovation:
70-80% core/adjacentand remainder in newfrontier. Some A-A-A new
frontier bets are highly
visible (e.g., Google X)

Within core, A-A-A
develops products fasterthan others (averageof 7 vs. 15 months), but
outside core, A-A-A
timelines match others

13

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1

Key deep tech
investment areas:43

Use agile innovation processes to build, test, launch,and learn across innovation focus areas
1

Innovation Flywheel

Innovation processes

New Frontier

Usually requires longer timeline fortechnology development. May deliverintermediate results and iterate
prototypes before going to market

2

3

Adjacent

Core

Flywheel will be started by frontline
teams with quick innovation sprints
and aim to launch MVP (minimal
viable product). Product launches drive
new feedback and restart cycle

1

Learn
from users

Continuously capture
feedback to improveunderstanding ofcustomers/users

4

Launchand engage

Build processes toenhance products,
services, and platforms todrive trust/engagement

2

Analyzeand build

Use analytical toolkit
on expanding dataand identify highvalue opportunities

3

Run
experiments

Generate new versions
through rapid tests thatmonitor impact, drive KPIs,
and eliminate dead ends

1. Based on survey respondent feedback on competitor choice set; successful decisions defined as prioritizing more successful projects
Source: BCG Digital Ventures Powering the Innovation Flywheel in the Digital Era article (March 2021); BCG Most Innovative Companies of 2020 report (2020); BCG analysis

A-A-A involves customers
closely in the productdevelopment process
to obtain continuous
feedback
2-3. Analyze, build, andrun experiments:
A-A-A tends to move
forward with ~50% of
innovation projects, likeother companies,
but tends to make more
successful decisions(90% vs. 60% forother companies)1

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Innovation process is effective acrossinnovation types, with some tailoring

34

Facilitate cross-functional collaboration between productand sales teams and ensure alignment across levels

Innovation struggles occur when ideas are pushed to market
rather than pulled. R&D and sales must align to be effective
R&D or productdevelopment unit

Market or
sales units

Drive product/service/tech innovations
for market units. Must
apply market feedback

Commercialize
innovations acrossmarkets/use cases.
Must translate
customer needs

Customers
and end users

Solutions to bridge divide:
•
•
•

•

Build a one-team mentality
Align incentives with metrics
Establish communicationlines, mandates, andaccountability
Shift the status quo
and celebrate successes

Decentralized, nimble teamsaligned to overall objectives

2
Development ownership, butplan for launch and handoff

Source: BCG Most Innovative Companies 2021 report (April 2021)

European insurance co.
links product and sales
team by building end-toend teams and ensuring
members possess a set ofcross-functional skills
Align at the top:

Teams working on innovations should have senior-stakeholder governance andcommitment to align purpose and direction, while also having decision-making authority

1

Encourage crossfunctional teams:

3

Leading medtech co.
brought heads of R&D,
technology, sales, andinnovation together tocreate an innovation
council that manages
portfolio and pipeline

Decoupled launch schedules,considering key connections
15

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Innovation teampractices

Operating model

Across industries, almost 1/3 of companies cited less than optimal collaboration
between R&D and sales team as the biggest obstacle to higher innovation output

35

Reward innovative thinking across teams and ensure
talent is empowered to challenge the status quo

1

Customer obsession …while ensuring economic viability

2Interdisciplinary collaboration …with individual accountability

3

Risk taking and tolerance of failure …with strong performance management

4

Bias for action and fast decisions …while singling out irreversible ones

5

Individual sense of ownership …with strong strategic direction

Reward risk taking and not being
afraid of experiment failures; ensure top
performers have opportunity to completea focused innovation rotation

1. Innovation revenues defined as revenue from products launched in past 3 years
Source: BCG Most Innovative Companies 2021 report (April 2021)

Build teams that have a diversity ofbackgrounds and thinking; focus on
recruiting talent that will continuously
challenge the status quo

Innovation culture:
Talent allocation is thetrue differentiator. A-A-A
places the best andbrightest on innovationand fosters a culture ofexperimentation

Diverse teams:
Companies that have
above-average diversity
scores have 19 pp higher
revenues frominnovation products
than companies withbelow-average scores1

16

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Culture enablement

Culture principles

All teams, including frontline/operations, should embed innovation culture
and recruit talent that would excel in this cultureSource: BCG

The CEO
Innovation Agenda(Most Innovative
Companies 2021)

Deep Tech andthe Great Waveof Innovation

Applying the Lessonsof the Pandemic to
Build for the Future

The Readiness Gap(Most Innovative
Companies 2021)

Powering theInnovation Flywheel
in the Digital Era

How do You Managea Business Ecosystem?

15 Years of the
Most Innovative
Companies

The Next Generationof Climate Innovation

In Innovation, Big is
Back (Most
Innovative
Companies 2020)

17

Copyright © 2021 by Boston Consulting Group. All rights reserved. Updated 19 May 2021 Version 2.0

Additional perspectives on innovation

Disclaimer

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Executive
Perspectives

29