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People often speak of industry momentum as if it were a force of nature independent of individual companies’ actions—like the mysterious “ether” scientists once believed filled the universe and allowed light to travel. While demographics and macroeconomic factors outside organizations’ control do contribute to momentum, the trajectory and pace of industry growth very much rely on the innovation efforts of a sector’s constituent businesses. By harnessing technology and creating new offerings or business models, companies can forge new markets and propel new consumption.

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Our past analyses have shown that roughly 80 percent of a typical company’s growth comes from its core business.[[footnote 1]] This is often interpreted to mean that if a business happens to be in a high-momentum industry, simply riding that wave will yield significant growth. However, even within high-momentum industries, there is a distribution of winners and losers. Companies that rebalance their business portfolios toward high-momentum segments can boost those portfolios’ performance and thus their chances of being among the winners.

But that’s not the whole story.

What are sometimes missed in that narrative are the factors behind this momentum and the role that industry members play in accelerating it. Momentum stems partly from the amount of growth headroom that remains in an industry. Just as companies or products follow an S-curve wherein a period of investment is succeeded by a stretch of steep growth that eventually tapers off, so do industry value pools. A new market experiences a period of rapid growth until it becomes saturated, causing its growth to slow. In an industry made up of mature markets, growth momentum declines to the rate determined by macroeconomic factors. Beyond this point, the growth of a company within that industry will tend to come at the expense of other companies’ market share or consumers’ wallets.

This is where innovation comes in—and those who make the boldest moves often gain the biggest benefits. Our analysis of the most successful global companies demonstrates that the degree to which an organization proactively shapes its industry’s growth momentum can significantly boost its performance and longevity.

How breakout innovations feed growth momentum

The pace of an industry’s growth is partly propelled by broad trends such as the rate of population growth, the purchasing power of that population, the rate of inflation, and GDP growth. While some industries, such as utilities and healthcare, are less affected by macroeconomic factors, they are exceptions rather than the rule.

However, there is another set of factors that relates to actions individual companies take to spur the growth and expansion of their industries. Notably, sectors with high proportions of companies that develop new categories of products, services, and experiences or invent new business models outperform other industries on economic profit,[[footnote 2]] ROIC (Exhibit 1), and revenue growth (Exhibit 2). That’s because these types of innovations—breakout, instead of incremental—create entirely new markets rather than merely new versions of existing products or experiences, thereby expanding the industry’s economic pie rather than just increasing one company’s slice of it.

[[Exhibit 1]] [[Exhibit 2]]

While industries such as biotechnology and software have the highest rates of such breakout growth because of the rapid proliferation of new technologies and their applications, slower-growing sectors can experience similar innovation-based bursts. Consider men’s grooming: a sluggish segment that long relied on basics such as bar soap, shaving cream, and aftershave. It became a high-growth category, thanks to a multitude of new skincare and grooming products.[[footnote 3]] Similarly, innovations to jet engines reduced the cost of planes and, eventually, of tickets, making plane travel more affordable to many more consumers.

Industries with many such innovation pockets typically outperform others in part because breakout innovations can create entirely new markets rather than just increase the revenues from existing ones. The development of the HPV vaccine, for example, which prevents a viral infection correlated with several types of cancer, did not replace or cannibalize tetanus vaccines or even broad sections of oncology product portfolios. Instead, it created an additional revenue category that expanded the overall industry’s size.

This pattern doesn’t apply solely to patent-heavy industries. In the early 2000s, telecommunications was considered a mature industry, yet it experienced a surge of growth when innovations in wireless technology created a new value pool. These advances launched the industry—and the companies in it—on a new growth curve since most customers, at least initially, added wireless service to their landlines instead of replacing them.

Breakout innovations can involve business models and processes instead of offerings. The introduction of endcap shelving units, for instance, at the entrances to supermarket aisles dramatically increased companies’ use of in-store displays by reducing the time it took to set up in-store promotions from weeks to days.

Just as breakout innovations expand industries’ overall pies rather than merely shifting market share from one company to another, so do they boost companies’ growth momentum through the acceleration of companies’ constituent businesses. That’s because each business that makes a big innovation advancement gives the parent company more headroom to grow.

Shapers of industry momentum gain advantages

Breakout innovations are great for industry momentum, but do you need to be the one to carry them out or can you just ride the wave of another industry member’s successful big bet? It turns out that those who take the risks gain significant advantages in the markets they create. Our review of the top 20 global companies found that 14 of them shaped new markets (Exhibit 3).[[footnote 4]] In some cases, they created entire subindustries.

[[Exhibit 3]]

This strategic move is so powerful because creating a market without competitors, or one in which only indirect substitutes exist, enables the innovator to generate much faster growth than it could in a crowded segment, assuming the new offering satisfies sizable unmet demand. Companies that do this essentially create their own high-momentum markets.

However, like most high-reward moves, this type of innovation also entails high risks, because creating something truly new is more difficult than making incremental improvements. The companies that do this successfully select opportunities where they have clear strategic advantages, looking for natural business extensions to which they can adapt or “stretch” a proven winning play. They also ensure that they have the capabilities to capture value, instead of just defining an opportunity that better-positioned competitors can seize. Tencent, for example, started as a messaging software company but was able to build on its strategic advantages of a broad customer base and experience building “sticky” applications to expand into numerous industries, from e-commerce to video games. It leveraged its more than one billion active monthly users to innovate new offerings across a broad, device-agnostic platform and has spent over $20 billion on R&D in the past three years and filed more than 62,000 patents.[[footnote 5]]

Breakout innovations need not invent entire categories. Telehealth—fed by the rapid advance of healthcare apps, AI-enabled medical imagery for remote diagnosis, and wearable biosensors—was more of a tactical expansion than a new market. Incremental innovations, such as the semiconductor industry’s steady stream of novel chips that have revolutionized numerous devices, can also create new markets but at a regular, repeatable pace rather than with a big bang. Sometimes, innovation requires minimal R&D. Take bottled water: this format that became a convenient alternative to tap water expanded the beverage industry without all its growth coming from the cannibalization of other offerings.

How to build a new market

Creating innovation-led momentum takes time. Most of the top 20 companies we studied that did so built their growth trajectories over years or even decades. Some were incumbents that could use their balance sheets and capabilities to move into new areas. Others began as start-ups with groundbreaking ideas that they were able to rapidly scale, then applied that expertise to other segments.

While their paths differ, the leading market builders do share some common characteristics. Critically, their CEOs and boards had strong convictions in the moves’ potential, giving management the ability to act boldly and bring the full organization along. For example, early in his tenure as Microsoft CEO, Satya Nadella committed to launching a new growth phase through big investments in cloud computing, a success the company is now trying to reproduce with investments in AI.[[footnote 6]] Another commonality is these companies’ reliance on strategic advantage to choose their innovation bets. Semiconductor manufacturer TSMC, for example, uses its foundry capabilities to out-innovate and outcompete potential rivals in the new markets it creates.

To reduce the risks involved in pursuing breakout innovations, companies can consider the four following strategies:

Identify a ‘two-fer.’ This involves finding an opportunity that can offer an immediate benefit while also making a new offering available to customers. Amazon Web Services, for instance, originated as a way for the online retailer to meet user demand on high-traffic days, but the company found it could rent out the extra capacity at other times. This business model innovation became an entirely new market that now accounts for the majority of Amazon’s profitable growth. Similarly, Ozempic was originally designed as a medication to treat type 2 diabetes, but its appetite suppression properties inspired the company to conduct clinical studies on its use for weight loss. That resulted in a new brand based on the same molecule. This new market has ended up creating significant additional sales.
Look for a structural opening. Factors such as excess capacity (which companies like eBay have used), government subsidies, and other incentives can also reduce the risk of the innovation investment. Today, many companies are tapping green-technology incentives to fund attempts at breakout innovations.[[footnote 7]] Energy company NextEra, for example, built one of the world’s leading renewable businesses by combining government subsidies with commercial discipline.[[footnote 8]] In the semiconductor space, TSMC is using subsidies for nearshore chip production from countries such as the United States to bolster both its scale advantage and innovation resources.[[footnote 9]]
Strike a partnership. Big companies often watch start-up activity to gauge new market trends and are increasingly partnering with or acquiring smaller companies to fuel their own breakout growth. The incumbents combine the start-ups’ innovative ideas with resources, customer relationships, and other competitive advantages the smaller companies lack. Pharmaceutical firms, for instance, are using their expertise at navigating highly regulated development processes, as well as their branding and sales reach, to rapidly turn innovative drugs into new product lines. Pfizer’s partnership with BioNTech on the COVID-19 vaccine is a famous example, a success the company built on by making four acquisitions in 2022 to further strengthen its innovation pipeline.[[footnote 10]] The company saw 60 percent of its 2022 revenue come from products it had developed during the previous three years.
Provide tools to enable others’ growth. Some companies, rather than trying to be gold miners, are embracing the concept of selling picks and shovels instead. As was the case with endcap supermarket displays, with this strategy, the innovator can spread its risk across numerous industry participants striving to outsell each other. John Deere, for example, has successfully developed a platform for apps, sensors, and other products that help agricultural businesses be more productive.[[footnote 11]]

Industry momentum—and, by extension, business portfolio momentum—is a function of both broad external factors and individual companies’ actions. By investing in bold innovations that create new customers and markets and thus spark new waves of industry growth, innovative business leaders can not only expand their companies’ headroom for growth but also change the trajectories of their industries.