Disclaimer: This article is published in partnership with Siemens. Siemens is paying for my engagement, not for promotional purpose. Opinions are my own.
The Covid-19 crisis has upended almost all aspects of our lives. Implications and changed behaviors affect how:
- people live and work
- companies engage with their customers
- customers select and purchase products/services
- supply chains operate and deliver those offerings
Given the unprecedented disruption and downturn this event has caused for most companies, leaders are focusing on getting a grips on the immediate impact – whether that means maintaining liquidity, securing survival and safety or shoring up the existing business.
At this point, there is still uncertainty about what the future will look like in respect to the overall economy, human lives and the way people will work. One thing is already clear, though: the future will be digital. Being asked about the main drivers for Digital Transformation in their companies, many respond by now: Covid-19 (rather than CEO, CDO or whatsoever).
The ongoing crisis presents an opportunity that few leaders feel prepared to pursue
A recent study of executives from more than 200 organizations across industries unveiled the following key findings:
- 90% of respondents believe that the Covid-19 crisis will fundamentally change the way they do business over the next five years.
- 85% are concerned that the Covid-19 crisis will have a lasting impact on their customers’ needs over the next five years.
- Only 21% have the expertise, resources and commitment to pursue new growth successfully.
In a nutshell: although most executives agree that pursuing innovation in this crisis proves critical, few of them feel equipped to successfully pulling it off. Facing unprecedented pressure and waiting for more ‘clarity’, how do leaders respond? Most of them are – quite understandably – largely focused on recovering their core business through top- and bottom-line measures, supposed to be kicking in swiftly.
Result: innovation activities are being de-prioritized
How does this affect innovation activities in companies? Leaders have widely prioritized short-term measures, such as
- cost saving
- conserving cash/liquidity
- efficiency improvement
- restabilizing core business
- risk minimization
They expect to prioritize innovation once the Covid-19 situation has leveled off, core business has been sustained and the future is clearer. A decline in priority on innovation can be ascertained across all industries – in particular those that have been severely hit by the crisis (see figure below).
Is this the right strategy? What history tells us…
As comprehensible as it seems, ‘playing it safe’ may be a shortsighted strategy. Why? Over the long term, creating value requires growth – which in turn calls for innovation. Companies that take decisive actions while positioning themselves for the upturn post-crisis will reap disproportionate rewards. History backs this: data from the 2009 financial crisis shows that companies that were investing in innovation during the crisis
- not only outperformed therein by 10% in market capitalization, but also outperformed the market by upward of 30% in post-crisis years (McKinsey).
- delivered a post-crisis premium in Total Shareholder Return (TSR) by more than 4% per year compared to the market (BCG, see figure below).
Why does innovation during crisis pay off? Beyond the above-mentioned measures, aiming at stabilizing and recovering the core business, companies are equally forced to adapt their businesses to new, and unpredictably evolving, conditions and requirements. This involves:
- adjusting the existing offerings and operating model to shifting customer needs, employee behaviors and safety requirements.
- building the foundation for future-proofness and post-crisis growth in the Next Normal. Even before Covid-19 hit, 92% of companies thought their business models would need to change given digitalization. Yet, only very few have already started reinventing their businesses for a post-crisis environment.
- re-evaluating the innovation portfolio, making sure resources are allocated appropriately to high-priority initiatives.
Moreover, established companies seem to have an edge when it comes to innovating during a crisis: more financial and human resources, higher stability, and consequently a greater ability to sustain innovation activities. What’s more: their size and reach may make them more attractive partners to smaller companies and startups amidst uncertainty.
The upcoming second part of this post will be discussing what it takes for companies to innovate in these times and, as a result, raise their odds of moving on from the crisis as outperformers.