Innovation Management Watch Summary: “Investing in Innovation” by McKinsey & Company

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Innovation is widely recognized as one of the most important drivers of long-term growth and competitive advantage. Yet McKinsey’s latest global survey reveals a striking contradiction: while executives expect innovation to play a critical role in their organizations’ future success, most companies are either freezing, reducing, or holding flat their innovation spending. Nearly 60% of surveyed organizations reported plans to cut or freeze innovation investments, even as many expect a significant share of future revenue to come from products, services, and business models that do not yet exist. 

They argue that this pattern is particularly risky during periods of economic uncertainty. When markets become volatile, organizations often prioritize short-term profitability over longer-term growth initiatives. However, the firm’s research suggests that companies that maintain a through-cycle approach to innovation and growth investments consistently outperform peers over time. Rather than waiting for stability to return, organizations should adapt to changing conditions while continuing to build future growth options. 

The survey also highlights a major execution challenge. Many organizations struggle to generate strong returns from their innovation investments. Respondents reported low rates of projects reaching the market on time and within budget, while many executives admitted they lack visibility into the actual value generated by innovation initiatives. In some cases, leaders cannot clearly determine whether new offerings create significantly more value than the products or services they replace. This lack of transparency makes it difficult to allocate resources effectively and can create a gap between growth expectations and actual results. 

According to this article, the problem is often not insufficient funding but ineffective resource allocation. Organizations frequently fund too many low-performing initiatives while higher-potential opportunities remain underfunded. Innovation portfolios may also become disconnected from evolving strategic priorities, especially during periods of disruption when market attractiveness and competitive dynamics change rapidly. Without a rigorous process for evaluating projects, companies risk spreading resources too thinly across too many initiatives. 

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To address these challenges, there are three actions recommended. The first is conducting an innovation portfolio teardown—a systematic review of innovation investments to evaluate strategic alignment, growth potential, risk profile, and expected returns. This process helps leaders identify projects that no longer support business objectives, rebalance funding toward higher-value opportunities, and remove underperforming initiatives before they consume additional resources. 

The second recommendation is to encourage greater risk-taking while actively managing downside risk. McKinsey notes that excessive risk aversion can suppress innovation and lead organizations to focus only on incremental improvements. At the same time, successful innovators create mechanisms to monitor project performance, learn from failures, and quickly stop initiatives that are unlikely to deliver value. This balance allows organizations to experiment more boldly without creating uncontrolled exposure. 

The third recommendation is to strengthen discipline around innovation funding decisions. Many organizations undermine their innovation strategies through frequent exceptions, shifting priorities, and politically driven resource allocation. McKinsey argues that strategic innovation initiatives should be protected from short-term pressures and evaluated through clear governance processes that align funding decisions with long-term growth objectives.  

Ultimately, the report reinforces a familiar but important lesson for innovation leaders: uncertainty is not a reason to reduce innovation efforts. In fact, periods of disruption often create opportunities for organizations willing to invest in future growth. By improving portfolio management, encouraging disciplined experimentation, and applying greater rigor to resource allocation, companies can generate stronger returns from innovation without necessarily increasing spending. 

This Innovation Management Watch Summary is based on the McKinsey & Company article “Investing in Innovation” by Matt Banholzer, Tim Koller, Enes Gokkus, and Laura LaBerge. All rights to the original content remain with the respective copyright holders.