Why heavily invest in corporate innovation in a recession?

by | Nov 15, 2019 | Digital Transformation

2 min read

It is really funny: in good times, executives don’t really see the need to innovate (“Why take risk? Everything is fine!”) and in bad times, they are too scared to touch what is left to pay out as dividends in order to keep the shareholders somewhat happy. This is not really foresighted.

On the brink of a recession, as in Germany right now, it is even worse. If you are in charge of your company’s digital transformation, investing in “real” innovation (the one that dares to rethink business models) should remain high on your agenda. I can see why this is difficult right now, so, I would like to provide you with your storyline for the next board session. While we have to zoom out to see the big picture, I will keep this quite simple, as good storylines are quite simple:

1. There is a not-so-new reality about corporate longevity, so let’s stop pretending that everything is just fine. According to Innosight’s research, the average tenure of companies on the S&P 500 has only been 24 years in 2016 (McKinsey/IMD even claims 18 years). It used to be 33 years in 1964. They estimate that until 2027 half of the companies will be replaced in the index (McKinsey/IMD even claims 75%). Whatever the more accurate projection is: business will change at a faster pace for most companies, even if we can add those incremental 2% to our top line next year.

2. The raising dominance of digital platforms is apparent: Microsoft, Amazon and Apple are currently leading the pack (publicly traded companies by market cap), while having replaced General Electric, ExxonMobil and Pfizer from 2000. Do we really believe new shareholder value can be created neglecting the digital opportunities that lie in front of us?

3. Among the global digital leaders (again: by market cap), a stable 18 out of the top 30 are headquartered in the US, China is gaining massive momentum with 7 out of the top 30 and guess what — Europe is actually nowhere! (to be fair: there is Spotify from Sweden at #30) Do we really think we can wait and see how these global platforms capture more and more value?

4. All arguments still hold true in a recession. Researchers have found that companies who invest in technology are more agile and hence, are more able to handle uncertainty and rapid change. The type of change that comes from recessions. Even more, the opportunity costs to invest into technology during recessions are lower, while being forced to reduce operational capacity due to lower demand. Hence, recessions can create wide performance gaps between companies. By investing now, we even could come out stronger!

I hope this helps!

Written by Alex Mahr (Co-Founder)