Lauren Macpherson
CCO
March 8, 2022

Did gambling your budget on innovation during Covid pay off?

When the lockdowns began, you fell in one of two camps when it came to protecting your business: hunker down and freeze your budgets or invest in new (mostly digital) things and act quickly.

As someone with a clear bias from working in software, I told everyone that investing in innovation, technology and digital would be essential for almost any company’s survival. The world was moving online and to me, it made sense to push further towards digital solutions. I’d seen projects like this be successful before, so why not now when users needed them the most? Now, as we hit the 2-year mark, I want to see if this was good advice or terrible.

What companies normally do

The truth is, most businesses are smart enough to do their research, recognise threats, analyse the situation, work out the best course of action, and respond. This is why McDonald’s have salads now. Problems arise they choose the wrong thing - often due to having a fixed mindset and focusing on what made them successful in the past and present, rather than what will make them succeed in the future. It’s the ‘if it ain’t broke, don’t fix it’ mentality that drove companies like Laura Ashley further and further into the red. 

The downsides are that if you focus too much on the current market, you’ll miss signals from alternative ones. Or you could back yourself into a corner by investing heavily in current success, systems or equipment to the point you then can’t afford to invest in new stuff when the need arises. This is especially important when short, sharp shocks like a pandemic, market crash, or security failure occur - but equally important to respond to changing trends, political shifts, and viral sensations. Faced with the unpredictable and ever-changing world outside, having a fixed mindset tends to deepen the hole you’re in rather than dig you out of it.

As our world has become more digital in the last 30 years, businesses have had to become better at balancing the three horizons. Digital is accessible, efficient and cost-effective when compared to historical businesses that are labour-intensive or involve physical goods. But online, customers are also flooded with alternatives to your offerings every day. Therefore, it’s Horizon 3 will help you to avoid an empty pipeline. To bang the very cliched drum: it’s no longer safe to keep doing the same thing. You have to be vigilant, prepared and flexible. However, what is important to bear in mind when it comes to digital solutions, is that there are ways to do this that are incremental, cost-effective and fast-paced.

What changed?

Well, this time, the global pandemic. And that has meant a combination of enforced lockdowns and general wariness about being out in public. The result is that we have been doing almost everything via online channels - from working, learning and exercising to socialising, shopping and cooking. In order to maintain contact and still interact with customers and employees, companies have been forced to step up their adoption of digital technologies. 

For most, this was a straightforward adoption of existing SaaS like Zoom. For others, this meant building new apps, platforms and other software from scratch. Or at least extending out or speeding up existing projects.

What happened in venturing?

The Corporate Venturing Network study contacted 40 companies with an active corporate venturing strategy in April and October of 2020. While they thought firm resilience would be dependent on how hard the core business was hit, the real impact was felt by those with little to no history of venturing. During their survey, they said, “it became clear that Corporate Venturing is one of the key factors that helps explain why some firms are able to continue their innovation efforts during a crisis and others are not”. They go on to explain the reason why is because “the mindset, ways of working and networks that are essential in Corporate Venturing are also effective in dealing with the disruptions of the core”. In simple terms, a resilient organisation is one that invests in a culture of exploration and innovation.

What is important to note here is that in the McKinsey Global Survey of executives 2021, rates for developing digital products that were customer-facing during the pandemic differ - mainly between sectors with and without physical products. Understandably, CPG, automotive and manufacturing reported lower levels of change. Whereas healthcare and pharma, financial services, and professional services were much more likely to have changed their digital-product portfolios. However, when it came to digitising core internal operations, adoption rates were mostly the same across sectors.

What happened in innovation?

However, the same Corporate Venturing study also found that, of the 40 companies they spoke to, more than a third cut their innovation budgets in response to the pandemic. A third also “stopped or decreased their collaboration with startups”. Far from the catalyst for change that everyone (including me) expected the pandemic to be, this evidence shows that a big chunk of corporates cut spending as a means to survive. Especially when it came to external projects.

Again, those who did not cut back on innovation spending were the ones already experienced with it, who make predictions based on long-term projections. This is likely because these plans usually account for a lack of income in the formative years of a project and instead look several years into the future for the return on their investment. The success of new ideas often follows an S-shaped curve, taking time to produce substantial profits. This is why, in some cases, projects were actually accelerated.

But what none of these companies were doing was forming any new relationships. Even those who were proudly still innovating were not willing to take the risk on any new collaborations.

What we can learn

As 2021 came to a close, a corporate innovation report by Boston Consulting Group (BCG) found that three-quarters of companies surveyed said innovation was a priority. This represents a huge turn around from the Corporate Venturing study at the end of 2020 where a third had cut innovation. However, only 20% of these companies were “ready and equipped to innovate”. For the lucky few established companies with liquid capital, this can also be done by bringing in ready-made innovations from the outside. You just have to move extremely quickly to gain the market advantage. For the rest, there is a desperate need to move innovation from ‘a priority’ into a working reality within their existing walls. When you note that the top 50 most innovative companies in the BCG report recovered more quickly from the effects of the pandemic, you can understand why. A portfolio invested in these companies outperformed the MSCI World Index by 17 points. And without the hindrance of a recovery period, they will likely continue to outperform.

It appears failure comes when you get stuck in the same modes of thinking and working that made you successful. The common attribute of a lot of these companies (Apple, Alphabet, Amazon, Microsoft, Tesla) is the need to always be scanning the landscape for alternative routes to success. They pivot, and they pivot well. At some point, almost every change you make will become stale. Your experience will help to form strategies but it can also result in you making assumptions that blind you. Your processes will become routines to be maintained rather than upgraded. Some of the relationships you work hard to build with shareholders, suppliers, distributors, employees and even customers will eventually hold you back. And the values that were supposed to push you to be better will become part of your corporate culture.

In the McKinsey report ​​nearly one-third of B2B respondents said that fear of customer resistance to changes was a barrier to them implementing their changes earlier. They also cited organisational and technology issues. To them, “the required changes represented too big a shock to established ways of working, IT infrastructure was insufficient, or organisational silos impeded commitment to and execution of the required changes”. All the classic excuses we hear but yet none of them pushed through these barriers to innovate before the pandemic hit.

But it’s never too late. The McKinsey report also notes that, of those organisations that experimented with new digital technologies during the crisis, and among those that invested more capital expenditures in digital technology than their peers did, “executives are twice as likely to report outsize revenue growth than executives at other companies”. And more than half say they are investing in technology for competitive advantage or refocusing their entire business around digital technologies”. Executives are now recognising technology’s strategic importance as a “critical component of the business, not just a source of cost efficiencies”.

So what now?

The key pattern I observed in my research is that the companies that did well were those that were never satisfied with success. To sustain a business long-term you need to master both exploitation (short-term, disciplined efficiency drives that are focused on productivity) and exploration (long-term, flexible innovations with external partners that are focused on growth). This is no mean feat when they essentially have completely contradictory trajectories - pitting profitability against growth and efficiency against innovation.

Companies that seem to perform the best at both of these always have another thing in common - being user-focused. They draw influence from outside of themselves to ensure they are always making the user happy. The fashion retailer Zara is a great example of this - combining a constant awareness of the ever-changing world of fashion with agile design processes, manufacturing that both makes gradual improvements in quality whilst creating industry-shaping innovations, and a super-efficient supply chain. 

An easy way to frame this is through Jeff Bezos’s ‘Day 1’ mentality. He states that “staying in Day 1 requires you to experiment patiently, accept failures, plant seeds, protect saplings, and double down when you see customer delight”. You have to wake up, assess the landscape, and decide how you would construct your company if this was its first day, coupled with constant analysis on the results of your bets to see where you should double down. This forces you to change your relationship with unexpected disruptions and instead embrace them and work each one to your advantage. Day 2, according to Bezos “is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death”. You must, therefore, stay in Day 1.

And the executives in the McKinsey report agree. Respondents said that “technology capabilities stand out as key factors of success during the crisis” and a related indicator for success was “having a culture that encourages experimentation and acting early”. Nearly half of the respondents at successful companies said they were first to market with innovations during the crisis and that they were the first companies in their industries to experiment with new digital technologies. They were also more likely than others to speed up the time it takes for leaders to receive critical business information and reallocating resources to fund new initiatives. Both are key aspects of a culture of experimentation.

Tl;Dr

Companies that innovate do well. To answer my original question, it seems like there is never a bad time to bet some of your budget on innovation. The top tips are:

  • Welcome disruption and change. You should embrace challenges to your way of doing things and prioritise a culture of reflection, flexibility and long-term thinking. The best source is external - people who are unbiased, unconditioned, have the advantage of ignorance (an ‘outside-in’ perspective) and knowledge or experience that you might not have yet. Bringing the outside in as much as possible will always help you get closer to your customers. 
  • Take ‘Day 1’ thinking and apply it to your forecasting. Think about how you will need to change over the years, as well as how to balance your exploitative activities with your exploration ones. When can you expect results and how will those results impact your plans? How will you become both resilient and flexible? 
  • Be blunt. Find out what risks exist and be honest about how you will have to adapt. I mentioned Laura Ashley earlier who tried almost everything to save their business, except change their style to suit the changing market.
  • Never be satisfied with success. Or at least, not for long. Be modest, cautious and always strive to be better.
  • Keep reviewing your plans. Keep aside resources for innovation and ensure you have a diverse portfolio And always have clearly defined metrics for success and failure - sticking to them will save a lot of wasted time and energy. Focus on success metrics like robustness, adaptability and sustainability over profit.
  • And finally, when it comes to digital, just keep placing those bets. Gather, validate, and test as many ideas as you can, with the lowest possible stake you can invest in those bets. Fail fast, fail often, but do it softly.


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Sources:

McKinsey Global Survey of executives: 

​​https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-business-forever 

Boston Consulting Group: ​​https://www.bcg.com/publications/2018/2-percent-company 

Corporate Venturing Network: https://corporateventuringentrepreneurship.com/resources/content/files/CV%20during%20the%20C19%20pandemic%20%20-%20Phase%20I%20%26%20II%20results%20v2(1).pdf 

Harvard Business Review: https://hbr.org/1999/07/why-good-companies-go-bad 

​​World Economic Forum: https://www.weforum.org/agenda/2021/04/worlds-most-innovative-companies/

Lauren Macpherson
CCO
I'm an avid sharer of the latest news, tools, and tricks relating to all aspects of product development. My main aim is to stay true to our Explain-Like-I'm-5 roots: keeping things simple and easy to understand. My other is to find any excuse to talk about gaming.

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