Corporate Innovation & COVID19 - How should you proceed?
Pre-COVID 19, business surveys consistently placed innovation high among the priorities for Corporates. As recently as January this year, in the Conference Board's 2020 business survey, global leaders put creating new business models to address disruptive tech in their top 3 'hot button' issues. Many businesses saw being 'innovative' as critical as they strived to digitise, harness new and emerging technologies and fight off the risk of business model disruption.
Not surprisingly, COVID19 has put innovation, and every other business expense, under the microscope.
Two camps emerging
In the first camp, the position on Corporate Innovation spend is super clear – shut it down, save money, it is not essential. The business may be fundamentally challenged, and its very survival demands freeing up money – we “will think about innovation if we survive!” If not fundamentally challenged, the business may be disappointed and frustrated with the impact of its' innovation spend. There is nothing to be lost by shutting it down – it was a “nice to have!”
A recent global study commissioned by Rainmaking, suggested up to one in four corporates will be stopping their innovation spend as a consequence of COVID19 — up from less than one in ten immediately before the Covid19 restrictions hit hard.
In the other camp, there are those businesses that understand they need to cut back on unnecessary spending. But they also understand their operating model will have to change, and there is more disruption coming, including:
the rapid move to digital and not only with customers but also through the supply chain,
data-driven decisions,
robotics and automation,
new technology driving efficiency and delivering better customer outcomes,
customers/partners looking for better value, and
a distributed work-force.
These businesses get there are real business problems to be solved and see 'innovation' as a set of tools to identify and solve problems or exploit opportunities. So where it hasn't been working well, they are increasing their effort to focus it and make it work because they believe they are going to need it.
What is the best approach?
Individual business and sector circumstances are critical in determining whether and what role Corporate Innovation has to play in response to the challenging business environment created by COVID19. Airlines and white goods manufacturers face very different challenges!
Two reports shed some light on the best approach.
2009 report by The Ewing Marion Kauffman Foundation
This 2009 report, found that well over half of the companies on the 2009 Fortune 500 list, and just under half of the 2008 Inc. list, began during a recession or bear market.
New competitors will emerge in the aftermath of COVID, just as they have in previous downturns. But unlike previous down cycles, these competitors have easy access to a smorgasbord of low cost, easy to configure technologies that provide the foundations for highly disruptive, customer focused and rapidly scalable solutions. Meanwhile, traditional businesses will be struggling with their legacy overheads and the changing dynamics in their market. Those that have shut down their innovation capability have reduced their access to strategic options. So they are poorly positioned to understand, use and respond to those same new and emerging technologies and business models that the challengers are exploiting!
BCG report on transformation and renewal during a crisis
This BCG report examines the performance of companies in the Global S&P 1200. The key measures used were earnings before interest, taxes, depreciation, and amortisation (EBITDA) and total shareholder return (TSR).
The top performing 25 companies increased their EBITDA margins by 25 percentage points, on average, compared with only four percentage points, on average, for other companies in the S&P Global 1200. The TSR performance of the top 25 was just as strong, with an average annual increase of 21%, compared with a 4% average yearly growth for the index. The 25 to performers span a range of industries including biotechnology, semiconductors, and health care supplies.
The report identifies key factors in the success of these companies. Importantly, immediately following the crisis, the top 25 companies were far more likely to hoard cash and maintain liquidity than companies in the S&P Global 1200 index. "Cash and cash equivalents made up nearly 20% of each company's total assets, whereas the average for companies in the index was less than 10%. The liquidity served as a cushion during times of extreme volatility, allowing the top 25 to ride out periods of slow or non-existent sales and giving them the means to take action quickly as soon as the market stabilised".
Going for cash and liquidity would involve cutting deep into expenses, including innovation spend. Critically, however, after weathering the initial storm, the top 25 companies quickly moved to 'increase vitality'. BCG describes this as "…the ability to innovate, explore new ideas, and reinvent the corporate strategy to achieve sustainable long-term growth. They actively sought out promising markets and concepts, and they redesigned their development processes to get new ideas to market quickly. The vitality mindset helped these companies stay nimble and find growth regardless of how market conditions had changed."
So which camp should you be in?
Businesses need to create liquidity as they work their way through the early stages of the COVID19 storm. As with every other business spend, Corporate Innovation should be under the microscope. After weathering the initial storm, resource and effort should go into reinvigorating the innovation effort to find new pathways and opportunities for growth and profitability. It will be critical in fending off challengers and new entrants.
With this in mind, where cutbacks are needed, the focus should be on retaining as much innovation IP and capability as possible. So when the time comes, the Corporate Innovation effort can be reinvigorated quickly.
11eight is a specialist advisory firm helping Corporates get better results from their innovation and helping start-ups get ready to work with Corporates. Please sign up to our Newsletter and you can contact us here.It all begins with an idea. Maybe you want to launch a business. Maybe you want to turn a hobby into something more. Or maybe you have a creative project to share with the world. Whatever it is, the way you tell your story online can make all the difference.
