Corporate Innovation/Interview/ What’s wrong with European innovation? Boston Consulting Group's list of the world's innovative companies contains few European names. We asked the report's authors why. By Maija Palmer 21 July 2020 \Sustainability Six carbon capture startups and scaleups to watch By Sifted 22 August 2022 Corporate Innovation/Interview/ What’s wrong with European innovation? Boston Consulting Group's list of the world's innovative companies contains few European names. We asked the report's authors why. By Maija Palmer 21 July 2020 Earlier this summer Boston Consulting Group published its yearly list of the world’s most innovative companies, and we noticed something: there weren’t many European companies on the list. Even fewer European companies had been on the list consistently. So we asked Ramón Baeza, one of the authors of the BCG report to explain what the problem was. 1) Why do so few European companies feature on the list? Is there a fundamental problem with European innovation? The gap between USA (~25) and Europe (~15) is largely attributable to the big digital innovators like Apple, Amazon, Google, Microsoft, Cisco and others that the US has and Europe, with few exceptions (e.g. SAP), does not. So the question becomes: Why does Europe lag behind in digital? A lot has been written and said about the particular “recipe” that brought up the Silicon Valley ecosystem. In addition to that specific ecosystem: we need to acknowledge that the mental models & management styles to succeed in software (“bits”) are very different from those in hardware products (“atoms”). In software, release cycles are fast, iterative and near-weekly, software mistakes often are not fatal and can be patched quickly. In an age in which “software is eating the world”, European firms need to adjust their management styles. Building consumer goods, durable goods such as cars, industrial-scale assets follows a vastly different logic. As a result of these different logics, different management styles (flat, multi-cellular, meritocratic vs. still very much single-centre, hierarchical) and on the staff level different work ethics have evolved on this side and the other side of the Atlantic. An example of these differences is the strong product orientation of European companies: Colloquially innovation is often understood as “product innovation”. In Europe, product innovation is the predominant way companies innovate. This is different in the US and China, for example, where companies also gravitate towards other forms of innovation, like new ways to go to market, more aggressively pushing internal process innovation (e.g. use of AI to replace/enhance routine tasks) and also driving business model innovation. In an age in which “software is eating the world”, European firms need to adjust their management styles and organisational models towards the US-American style while keeping their distinctive, valuable European features that make European brands loved for quality around the world. 2) The presence of European companies on this list has been growing. In 2005 there were only 2, now there are 15. Does that mean European corporations are learning to be more innovative? Over the last 10 years, Europe had on average 13 companies on our list. This year it’s 15, and the numbers fluctuate by 1–3 every year. I see neither an upward nor downward trend. The fact that Europe as a whole remains steady is in fact quite remarkable, given the rise in number and ranking position of Chinese companies, and the prevailing pessimism about Europe’s ability to innovate. Until now, the largest European innovators have held up their ground pretty well! If we enter a new bipolar world order…emerging European challengers will have a harder time to break through. For the future, I expect less dynamism when it comes to our Top50. Our Top50 list captures globally well known, well-performing innovators. If we enter a new bipolar world order which is less open to trade, then quite naturally we might expect to see fewer new companies that break through on a global level. TikTok being banned now in India, or Facebook in China, or Chinese companies from acquiring companies in Europe are examples of such new emerging restrictions. This — if I venture a prediction — will mean that US, European and Asian innovators’ share in the MIC Top 50 will by and large remain stable. Emerging European challengers like fintechs (Revolut, TransferWise, N26) or ecommerce players (Zalando) will in this environment have a harder time breaking through on a global level. In Europe, these unicorn start-up innovators are special because there are so few. But there is a broader point than just the inclusion of European companies on this list. A strong, innovative economy needs many more than the 15 global innovators from Europe on this year’s ranking. Here, when we talk local or national level or specific niche industry innovators, I am more concerned. The best innovators walk the talk. Here, Europe lags severely. We know that one of the biggest predictors of future innovation success is executives’ commitment to it. The best, most successful innovators walk the talk. Here, Europe lags severely: Only 36% of European companies are truly committed to innovating (globally: 45%, and some Asian countries > 55%). Instead, a whopping 40% are what we call sceptics, companies that declare innovation not to be a top three management priority. How can Europe succeed if the number of companies that actively choose not to innovate (40%) is bigger than the number of those who commit to innovation (34%)? You see this pattern also when we ask companies if they plan to significantly increase their innovation spend: In China, 1 in 3 companies plans to do so. In Europe, it’s only 1 in 10. A continent that does not commit to innovation and is not planning to mobilise resources to do so will lag further and further behind stronger innovation poles like North America and Asia, especially China. 3) How can the “European sceptics” be convinced to commit to innovation? Are there any strategies that you think might work? Before converting the sceptics one needs to support the ones we call, slightly provocatively, ‘confused’ ones. These ‘confused ones’ are 24% of all European firms (vs 25% globally) and do not “walk the talk”. They, for example, declare their ambition to innovate but then struggle to do the hard task: putting resources behind that ambition. A lot of organisations talk about innovation, but you make a career by shepherding the P&L of an established cash cow business. Case in point: A sure-fire way to tell if a company walks the talk is to ask where the bulk of its emerging leadership cadre is put to play. In a lot of organisations, it’s en vogue to talk about innovation, but you make a career by shepherding the P&L of an established cash cow business. Truly innovative companies are led by people who have proven their ability to orchestrate the creation of new value propositions for customers. Now onto the sceptics. Many of these (40% of all European firms vs 30% globally) are in this camp because of two reasons: either their existing strategy of “keep doing what’s worked in the past” has succeeded, or they have tried to innovate in the past, burnt a lot of money and took the lessons with them that they cannot innovate. The growth of large European companies in the last 10 years was fuelled by a surge in exports. I fear this era has come to an end. I feel the first group needs to realise that their game might be over. The growth of large European companies in the last 10 years was fuelled by a surge in exports, especially towards emerging countries in Asia who had developed a taste for and the ability to pay for premium European products. I fear this era has come to an end. I also very much empathise with the second group of sceptics. Innovating successfully at scale is anything but easy, and it’s a long-term game. We have distilled the success factors of serial innovators in our report, and see that only a few companies manage to put all of them into place at the same time. Company-wide, transformative success is hard, but this doesn’t mean local success isn’t possible. In every company we work with we see small teams of empowered, driven and inspired people who have a legitimate chance to succeed in their quest to deliver new products, services or business models for their company. Will they all fundamentally disrupt the foundations of their companies? For sure not. But if the sceptics manage to better nurture, support and guide these teams of explorers then they will reap the rewards and discover that they indeed can innovate. Related Articles The world’s 50 most innovative companies — and what we can learn from them By Maija Palmer Click here to read more 2020 Vision: predictions from 28 big-hitters in Europe’s startup scene By Sifted reporters Click here to read more The Sifted guide to innovation consultancies By Kimberly Eynon Click here to read more Most Read 1 \Healthtech Is Daniel Ek’s new body scanner worth the hype? Sifted tried it out 2 \Venture Capital VC diversity needs to change — and white men need to take responsibility 3 \Venture Capital New €3.75bn European Investment Fund pot to back late-stage VCs 4 \Sustainability Counteract closes £15m fund for carbon removal solutions 5 \Mobility Was the $5bn that VCs plugged into escooters worth it?