Innovation and growth are inherently linked. Companies that build new businesses and develop new offerings, processes, or business models are better able to capture growth opportunities and hedge against disruption in a highly uncertain business environment.
This conclusion was forcefully reinforced in our recent survey of 1,039 companies around the world. The largest share of respondents identified the ability to innovate as the most important strategic factor for generating growth over the coming 12 months (Exhibit 1).
While we found some variation by industry, innovation capabilities were consistently among the top three growth levers. In sectors undergoing significant disruption—energy, for example, where supply disruptions and large investments in sustainability require companies to evolve their businesses—innovation is particularly important. But even in industries where the evolution of business models is a less urgent need, such as retail, nearly a third of the respondents identified innovation as a top three source of competitive advantage.
What distinguishes top economic performers from the broader group, however, is their comprehensive approach to innovation and growth—both within and outside their current industries or geographies (Exhibit 2). In our survey, top performers cited innovating new offerings as their number-one investment priority for accelerating growth over the next 12 months. They were also more than 63 percent more likely to innovate at scale by building or acquiring new businesses outside their current industries and 50 percent more likely to expand geographically compared with their lower-performing peers.
Innovation spurs growth within and beyond the core
On average, 80 percent of corporate growth comes from within a company’s core industry, and innovation is critical to that growth. While overall industry momentum and commercial levers such as pricing and marketing are critical, the next two largest factors, noted by 38 and 34 percent of our survey respondents, respectively, are innovation of new offerings within the core business and expanding into new regions (Exhibit 3).
Innovation not only gives companies new revenue streams within their core businesses but also potentially steepens the entire sector’s growth trajectory. For example, Taiwan Semiconductor Manufacturing Company’s disruption of the integrated semiconductor industry by supplying manufacturing services to other players, combined with its innovations that increase chip computing density, has both raised its revenues by 17 percent annually between 1995 and 2023 and contributed to boosting the sector’s growth. Similarly, Apple famously helped redefine the music industry by introducing the iPod and its associated apps and created entirely new platforms with the iPad and Apple Watch, all of which bolstered its ascent to the number-two spot among the world’s most profitable companies.
Top-performing companies put as much effort as other firms do into growing the core. What differentiates them from their peers is their use of innovation to venture beyond their industries. As technology continues to break down traditional industry barriers, the need to innovate outside the core deepens. For example, in our research, top performers were 78 percent more likely than their peers to build new businesses in different industries and 68 percent more likely to acquire one in another sector.
This pattern holds true when we narrow the lens to the top 20 global companies by average five-year economic profit (Exhibit 4). Fourteen of them accelerated growth through significant innovation investments within their core businesses or by creating entirely new markets outside their core—sometimes both—underscoring the importance of innovation-led growth. These moves often occurred over numerous years, even entire economic cycles.
How top performers accelerate growth through innovation
Each of the top 20 companies followed a clear path of strategic advantage in choosing their innovation investments, to both maximize the upside potential and limit risk. They based their strategies on evergreen principles of innovation.
Commit to an innovation aspiration. Companies that pursue growth even during downturns consistently outperform their peers, our research shows. Their leaders foster an aspirational mindset by building an innovation culture and ensuring employee ownership of growth initiatives.
Discover new ways to extend your strengths. Top performers master ways to take their unique strengths and deploy them profitably outside their immediate ecosystems. Where are your manufacturing capabilities, intellectual property, customer relationships, and other strengths truly distinctive? AI tools can facilitate these searches, revealing more granular growth pockets faster than traditional methods. Following your competitive advantage essentially extends your core business to adjacent or even breakout opportunities, but with less risk.
Accelerate into tailwinds. If you operate in an industry with high growth momentum—thanks to rapid innovation, as in semiconductor or biotechnology sectors, or significant headroom for growth, as is the case with emerging technologies—focusing on gaining more market share in that sector by innovating new offerings or acquiring new capabilities is a less risky (and likely more profitable) growth path than moving into an unfamiliar sector. Companies in mature or highly competitive markets, on the other hand, can bolster their growth by exploring high-growth markets elsewhere.
Evolve and disrupt your own business, even the entire ecosystem. Many of today’s top companies didn’t just ride industry tailwinds—they created them. For example, defense technology unicorn Anduril Industries is challenging the industry’s conventional “cost plus” acquisition model in the public sector by fostering an open ecosystem of partners to build customized, interoperable solutions.
Scale faster by hardwiring M&A into your innovation capabilities. Many leading organizations acquire capabilities, such as technologies or intellectual property, to accelerate their growth. They define growth opportunities they want to capture, develop lists of capabilities required to win in those spaces, and then assess which capabilities they already have, which they should build organically through innovation, and which they need to buy. Such capability maps help business leaders chart paths into areas of strategic importance and reduce the risk of falling behind competitors.
Every company that aspires to outgrow its peers in revenue and profit could benefit from these practices. However, the organization’s competitive context, health, and performance will determine the right mix and intensity of each innovation lever.
Top performers understand that investments in innovation are the best way to secure growth in an uncertain economic environment. By innovating new products, processes, and business models as a means of both expanding their core businesses and breaking into new sectors, they not only emerge as leaders of their industries but also create entirely new businesses that grow the economic pie for all.
McKinsey Quarterly 60th birthday
We are celebrating the 60th birthday of the McKinsey Quarterly with a yearlong campaign featuring four issues on major themes related to the future of business and society, as well as related interactives, collections from the magazine’s archives, and more. This article will appear in the third themed issue, on the Future of Growth, which will launch in May. Sign up for the McKinsey Quarterly alert list to be notified as soon as other new Quarterly articles are published.
“Our firm is designed to operate as one—a single global partnership united by a strong set of values. We are equally committed to both sides of our mission: attracting and developing a talented and diverse group of colleagues and helping our clients create meaningful and lasting change.
From the C-suite to the front line, we partner with clients to help them innovate more sustainably, achieve lasting gains in performance, and build workforces that will thrive for this generation and the next.”
Please visit the firm link to site