Companies-that-invest-in-innovation-through-a-crisis-outperform-peers-during-the-recovery

Companies that invest in innovation through a crisis outperform peers during the recovery

To innovate your way out of this downturn, you need to change behaviours and mindsets—starting at the very top.

Crises are adrenaline for innovation. You must make decisions quickly under extremely uncertain conditions, and you never have enough time or information to fully weigh difficult choices that may affect both employee livelihoods and the survival of the business. Yet these very constraints can unleash waves of creativity. Necessity and urgency spur ideas and dissipate inertia. Leading innovators seize such conditions to reshape mindsets and behaviours, embracing the opportunity to uncover fresh solutions and make bold bets that can reignite growth.

While the COVID-19 crisis has not affected all sectors or geographies equally, the major discontinuities it has introduced across markets, customer behaviours, and ways of working and living mark an inflection point in history. Research suggests organisations that innovate through crises by focusing on generating new growth versus simply weathering the storm outperform significantly over time. But leading your organisation to a successful COVID-19 exit requires making fundamental shifts in mindsets—starting at the top.

Being a bold innovator is a choice that must be backed by a commitment. To put the organisation on a new growth trajectory requires three actions:

  • Reallocating toward the future—place bets, backed by sufficient funds and people, on emerging profit pools while reassessing legacy decisions.
  • Embedding flexibility—reorganise around new, crisis-inspired ways of working.
  • Hacking processes—focus on outcomes rather than activities to increase speed.

Driving change of this magnitude has to be deliberate. To spearhead transformation-related initiatives and impose accountability that ensures the changes stick, organisations should create “reimagination teams” staffed with top emerging talent. Ultimately, however, it is the business leaders’ responsibility to set the course, speed, and tone of the pivot that will deliver innovation-led growth.

Bold innovators win the long race

Our analysis shows that bold innovators emerge from crises substantially ahead of peers—and maintain this advantage for years to come. In comparing companies designated as innovators1 in 2007 and 2008 against the S&P 500, we found that this select group not only outperformed the market during the financial crisis but continued to widen the gap during and after the recovery (exhibit). Recent research on “through-cycle out-performers” delivered similar conclusions: companies that invest in growth initiatives throughout the economic cycle emerge ahead of the pack, generating almost 17 percent higher total returns to shareholders (TRS) coming out of a downturn than businesses that hunker down during a crisis.

Exhibit

high tech performers

It’s a pattern manifested throughout history: a significant economic or social disruption creates a market need or shift in behaviour that innovators use as a launchpad for new products, services, and business models. In the 1940s, manufacturers of home appliances and convenience technologies responded to the needs of women who entered the workforce and were spending less time at home. The SARS epidemic that ravaged Asia in 2002 and led its citizens to shelter in place kick-started widespread adoption of e-commerce in the region, making China the epicenter of innovation in online transactions and social commerce. A workforce left underemployed by the financial crisis enabled the explosive growth of the sharing economy. Now, climate change and the corporate crisis of conscience are not only driving significant investments in solar technologies, electric cars, and sustainable foods but also shifting many organisations’ focus to environmental, social, and corporate governance (ESG) priorities.In most cases, pivoting in response to a major crisis has required organisations to adopt new mindsets and approaches to their operations.

Prioritising speed over precision.One key shift is prioritising speed over precision. In 1918, the Dixie cup became a “life-saving innovation” when it was embraced as a cheap and sanitary way of dispensing water in public buildings, thus helping to stop the spread of the Spanish flu. Similarly, the COVID-19 crisis catalysed an almost overnight reinvention of the restaurant industry as digital menus accessed via QR codes redefined the table ordering processes and eateries set up “dark kitchens” to enable large-scale preparation of food for delivery.

Embracing and managing risk. Taking advantage of opportunities also requires embracing and managing risk. Small-scale experimentation can enable organisations investing in audacious new ventures to learn what can work at scale. One car-sharing business, for example, has experimented with shifting its focus from short trips (as a competitor to ride hailing) to longer-term “touchless” rentals, recognising the value of a distributed fleet in close proximity to customers wishing to avoid human interactions and travel to rental hubs during a pandemic. Sometimes, competitors and nontraditional partners can become collaborators in the service of reducing risk in the development of breakthroughs. Seven pharmaceutical companies, for example, have pooled plasma samples to collaborate on clinical trials and manufacture the first-ever unbranded pharmaceutical product.

Prune tasks and sharpen focus. Furthermore, the competing demands and extreme strain that crises impose on employees make it vital to prune tasks and sharpen focus. Leaders should empower their staff to ask, “Are my day-to-day activities benefiting customers and our business?” If the answer is no, employees should be encouraged to reorient their activities toward those initiatives that really matter. Successful innovators will turn to flatter, leaner organisational models, connected using technology, as the foundation for the “next normal.”

A proven recipe for sustainable innovation

“How do we accelerate the pivot to growth?” This is one of the most common questions we hear today, particularly from executives whose organisational cultures prioritise short-term financial returns and execution over innovation. Leaders’ tendency is to ask for “bigger, bolder ideas,” but that is only part of the innovation equation—and not the most important one. Successful innovators invest in building sustainable delivery systems for innovation. The how is far more important than the what to ensuring that innovation is a predictable, stable profit-growth engine. A siloed innovation group that simply generates myriad ideas will not produce such results. Pivoting to innovation-led new growth needs to be an explicit choice backed with dedicated resources. Our research and experience suggest that creating an innovation launchpad out of this crisis entails three core steps.

Successful innovators invest in building sustainable delivery systems for innovation.

Reallocate toward the future. In most organisations, innovation is not an ideas problem but a resource-allocation problem. A crisis that reshapes market conditions, with potentially dramatic impact on existing business models, only accentuates this disconnect. Funds and people may need to be rapidly redeployed to secure the organisation’s future. Such redirection of investment requires quick reassessments of market dynamics to identify new opportunity areas and profit pools.

Leaders should review product pipelines and challenge assumptions that the crisis may have changed. Consider doing reverse P&Ls—for example, start with the profit a project would need to generate and work backward to determine the revenue needed to meet that hurdle. Such assessments can create the foundation for resource-reallocation decisions. Almost every organisation we encounter has a long tail of noncore initiatives whose resources can be put toward higher-value, more urgent growth opportunities.

Embed flexibility. When an organisation faces a crisis, it is usually forced to suddenly shift to agile ways of working. Companies that are no longer operating in crisis mode should use this time to make these agile models part of their next normal rather than reverting to the old normal.

Organisations should also systematise working and operating processes that empower the front lines to make connections with customers. Investments in digital and advanced analytics that help uncover and track new customer and market insights will help remove some of the risk inherent in shifting decisions down in the organisation. Leaders, meanwhile, need to serve as role models for the new behaviours and mindsets they seek from the workforce, including challenging orthodoxies about “how it has always been done” to encourage the embrace of “the way we now do it.”

Hack processes to increase development speed. Too much of most organisations’ time is spent on tracking and managing processes instead of the outcomes of those activities. Through years of risk aversion and scrupulous process monitoring, companies can lose sight of the ultimate prize: delighting the customer. Changing such a culture starts with shifting the organisation’s focus to the decisions that matter. We often encounter organisations whose product development processes involve more than a hundred discreet decisions, even though taking a product from insight to commercialisation typically requires no more than five critical decision points.

In innovation, perfect truly is the enemy of good, so letting go of perfectionist tendencies is an important institutional change. Another harmful tendency is the “not invented here” syndrome, which holds many organisations back from collaborating with the broader industry ecosystem in the belief that their own experts know best. Organisations should shift from stage gates to agile, learning-based development plans that test the highest-impact and most uncertain assumptions first. Leveraging analytics platforms that predict failure modes or incorporate the latest customer insights into suggestions or actions can further reduce time to market.

How to implement lasting innovation change

Change of the magnitude we are proposing cannot rely on inspiring words alone; it requires engaging the entire organisation in reinventing the approach to innovation. Every employee should understand the organisation’s new North Star as well as their own role in reaching that destination.

Crises create opportunities to move up-and-coming talent into prominent positions to help develop the solutions that will sustain the organisation in the future. Working with talent managers, leaders should create high-performing teams where diversity and inclusiveness—two critical components of some of the most innovative cultures—are celebrated. Bringing them together in a re-imagination team is a powerful mechanism for putting the right talent, focus, and accountability in place to make innovation happen.

Creating such a team starts with the right mix of mindsets; you need both “dreamers” and “doers.” This action-oriented group will play a critical role from design right through to execution, and its success needs to be measured and celebrated based on clear and transparent targets. Core team members should, first and foremost, exhibit a “how might we” mindset, combined with a track record of boldly hacking problems and being comfortable with accountability for outcomes. They should possess a problem-solving acumen, be able to identify and challenge assumptions, and rapidly generate solutions for testing and iteration. They should also be curious learners who decisively codify success and failures and quickly develop the next experiment or iteration.

There are several critical roles and skills that should be represented on the re-imagination team, including:

  • customer experts, including “customer-back” thinkers who understand the impact of changing market dynamics on customer needs
  • “black hat” thinkers—often seasoned market, operations, or commercial experts who readily challenge the status quo, anticipate challenges around corners, and show an aptitude for finding routes to market
  • change champions who can embed agile ways of working and find mechanisms to scale promising projects as well as identify additional change leaders throughout the organisation
  • digital enablers, including engineers and data access and science specialists who can rapidly prototype solutions

These core skill sets can be combined with other subject-matter expertise to create sprint teams that ultimately execute solutions. If some of these capabilities are not a core strength of your organisation, consider acquisitions or partnerships (even with competitors) that can bring those skills on board quickly. Finally, the re-imagination team should be empowered to make decisions and have direct access to senior management—with the team leader potentially reporting directly to the CEO and top executives regularly dropping in on team huddles—to ensure bureaucracy does not get in the way of action.


We know that those who prioritise innovation and maintain a through-cycle perspective emerge from crises stronger, with a foundation for continuing outperformance. Accordingly, innovation that pivots products and services to new customer priorities and makes the organisation more responsive to new market opportunities should be a key ingredient of any COVID-19 exit strategy. As an ancient Chinese proverb states, “When the winds of change blow, some people build walls, others build windmills.” More than any other time, crises represent decision points. What will you build?

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