AI innovation: driving economic shifts
Business leaders today face a changing world order: intensifying geopolitical changes, shifts in trade relationships and policy, depopulation, fluctuating interest rates, stretched customers, and revolutionary technological innovations. In times of such uncertainty and change, productivity and cost cutting often become the natural focus. Such a view, however, is shortsighted and not a harbinger of prosperity in the years to come.
An urgent call
Sustaining above-market growth is an important facet of long-term resilience but not a novel one. So why the urgency to act now? McKinsey analysis shows that about 50 percent of transformation value today comes from growth initiatives, up from less than 40 percent two years ago. As previous periods of uncertainty have shown, leaders with a through-cycle mindset remain ahead.
The following key forces define why now is the time to act.
Uncertainty exposes opportunity
Previous cycles of economic uncertainty have shown that companies’ paths to growth are shaped not only by their industries, regions, and individual corporate characteristics but also by the actions they take before, during, and after the uncertainty. With questions about economic performance across sectors and regions today, opportunities are ripe for first movers to win the next cycle.
Businesses that drive growth during a downturn sustain that edge over their competitors and deliver higher-than-average total shareholder returns for years to come. Time and time again, these through-cycle outperformers innovate in technology and business models, escalate their investments in competitive capabilities, and expand addressable markets, often producing higher revenue growth than their peers.
Shifting growth pools
Shifts in the global order—up to $4.6 trillion in trade in years to come—are radically changing the attractiveness of new growth pools today. Whereas the impact of geopolitics on most global companies used to be relatively mild, leaders now cite it as the primary agenda item that could change value or create disruption for their enterprises. This reality calls for looking beyond the risks posed by such global shifts and executing along three distinct growth pathways:
- Expanding the core of the business. The emergence of new tariffs could disproportionately increase the cost of a competitor’s product, or new trade agreements could make it possible for a company to market to customers who have previously been economically unattractive. On average, 80 percent of corporate growth comes from within a company’s core industry, and innovation is critical to that growth.
- Expanding into adjacencies. Once-stable high-growth business segments may spiral, while previously overlooked ones could represent new potential. Expansion could mean entering related categories, as Nintendo did with subscription gaming services, in-person entertainment, and movies, or it could involve geographies. For example, geopolitical tensions today are prompting restructurings of company supply chains, making markets like India and Japan increasingly more attractive.
- Igniting breakout businesses. Deploying technological innovation and digitization to launch disruptive businesses can provide access to new value pools like data and analytics. Companies that invest 20 percent of their growth capital into business building achieve revenue growth two percentage points higher than those that don’t.
AI’s transformative powers
With an estimated $4.4 trillion in long-term productivity gains, AI is advancing at record speed. In just the last two years, we’ve seen the transition from an AI bot that can support call center representatives by synthesizing and summarizing large volumes of data to an AI agent that can converse directly with a customer and take action independently. Consider the case of construction equipment dealer Ascendum, which integrated AI to diagnose and resolve equipment repair issues, freeing up field service time to focus on improving customer experience.
Changing customer preferences
Today, consumers and businesses are grappling with the pressure of sustained inflation, reaching a tipping point where passing along further cost increases creates even greater pressure on volumes.
At the same time, preferences are shifting across B2C and B2B decision makers. For consumers, we have seen a pivot to the experience economy, with spending moving away from products and toward experiences. In addition, shopper loyalty is in flux as consumers look to new brands and retailers for better value. B2B customers now use an average of ten interaction channels in their buying journey (up from five in 2016). Buyers want a true omnichannel experience, switching seamlessly across channels. When the experience is not smooth, they are more likely to switch suppliers.
Implications for growth now
Business context is and will remain uncertain, but one truth prevails: if you get moving now, you can ride the waves of uncertainty instead of being swamped by them. Previous McKinsey research shows that early movers flourish. Such resilient leaders not only think, act, and speak differently, they also make three crucial moves.
Make growth a top company priority
It’s easy to say, “Growth is a priority,” but leaders need to turn mindsets into action. Several measures can have a positive impact:
- allocating resources to promising long-term areas, even when budgets are tight
- incorporating customer input into decisions across functions and businesses
- experimenting with bold investments to support innovative ideas, even if they may not pan out
- favoring speedy action over perfection to capture first-mover advantage
Rewire to deploy AI
The speed of AI innovation is only accelerating. Organizations capturing value from these advances “rewire to compete,” moving beyond specific use cases to adopt a domain-driven approach. With nearly half of the expected impact from AI touching customer-facing functions, leaders need to identify and prioritize capabilities to rebuild using AI. It is critical to have a quantified road map and to shift the organization’s operating model to support new, AI-driven ways of working.
Execute the fundamentals well
With the tone set from the top and AI unleashed to help, companies still need to execute proven growth tactics. The following tactics have been linked to growth:
- setting targets for customer acquisition, cross-selling, and retention across businesses and markets
- tracking performance versus market growth at the most granular level possible
- managing a portfolio of four to five ambitious “bets”—initiatives with potential to improve performance by at least 100 basis points—on top of daily execution
- deploying rigorous, cascading performance management, from the CEO to the front line, with individual goals linked to compensation
The evidence is clear. Business leaders cannot afford to wait for growth to come. Executives who act on the shifting world order today will outperform tomorrow.
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