Innovation in a crisis: Why it is more critical than ever

Here is an excerpt from an article written by Jordan Bar Am, Laura Furstenthal, Felicitas Jorge, and Erik Roth for the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.

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John F. Kennedy once observed that the word “crisis” in Chinese is composed of two characters—one representing danger, the other opportunity. He may not have been entirely correct on the linguistics, but the sentiment is true enough: a crisis presents a choice. This is particularly true today.The COVID-19 pandemic has upended nearly every aspect of life, from the personal (how people live and work) to the professional (how companies interact with their customers, how customers choose and purchase products and services, how supply chains deliver them). In our recent survey of more than 200 organizations across industries, more than 90 percent of executives said they expect the fallout from COVID-19 to fundamentally change the way they do business over the next five years, with almost as many asserting that the crisis will have a lasting impact on their customers’ needs (Exhibit 1).Of course, seeing the opportunities emerging from this crisis is not the same as being able to seize them. Fewer than 30 percent of these same executives feel confident that they are prepared to address the changes they see coming. The area in which they feel the most challenged is delivering net new growth opportunities (Exhibit 3).

How are executives responding? As might be expected, they are largely focusing on maintaining business continuity, especially in their core. Executives must weigh cutting costs, driving productivity, and implementing safety measures against supporting innovation-led growth. Unsurprisingly, investments in innovation are suffering. The executives in our survey strongly believe that they will return to innovation-related initiatives once the world has stabilized, the core business is secure, and the path forward is clearer. However, only a quarter reported that capturing new growth was a top priority (first- or second-order) today, compared to roughly 60 percent before the crisis hit (Exhibit 4).

This decline in focus on innovation is evident across every industry we surveyed; the sole exception is pharmaceuticals and medical products, where we see an almost 30-percent increase in the immediate focus on innovation (Exhibit 5).

Leaders face an important choice around supporting innovation-led growth in the short term, one that may have lasting consequences for their companies’ ability to grow in the years to come. Our research suggests that playing it safe may be a shortsighted decision right now.

The case for innovation

Our survey and subsequent interviews with business leaders tell us that many companies are deprioritizing innovation to concentrate on four things: shoring up their core business, pursuing known opportunity spaces, conserving cash and minimizing risk, and waiting until “there is more clarity.” However, we believe that, particularly in times of crisis more urgent actions to take include:

  • adapting the core to meet shifting customer needs
  • identifying and quickly addressing new opportunity areas being created by the changing landscape
  • reevaluating the innovation initiative portfolio and ensuring resources are allocated appropriately
  • building the foundation for postcrisis growth in order to remain competitive in the recovery period

Many businesses simply cannot operate as they have in the past. What made a company successful historically may no longer be possible during or after the crisis. Customers may struggle to pay. Channels may have radically shifted to accommodate new needs or work around new constraints. A stable regulatory context may have changed, potentially creating opportunities that never existed before. The assumptions that supported years of stable, predictable growth may no longer be valid.

Competitive advantages shift dynamically as business models adapt to new market realities, and the core capabilities that made an organization distinctive may suddenly be less differentiating. While the rise of digital has been mounting similar pressures for more than a decade, the current crisis has significantly exacerbated and accelerated its disruptive force. Sudden pivots observed during the COVID-19 pandemic include:

  • Changes to sales models. Firms with significant field forces can no longer rely on in-person coverage to outcompete. According to McKinsey’s B2B Decision-Maker Pulse survey, 96 percent of businesses have changed their go-to-market model since the pandemic hit, with the overwhelming majority turning to multiple forms of digital engagement with customers. Sales coverage has been completely redefined as companies discover that virtual technology allows them to do things that were nearly impossible previously, such as assembling the “perfect team” of experts for every sales pitch. In this digital sales sphere, smaller firms can often “match up” to even their biggest competitors.
  • Need for new offerings. Food distributors that traditionally supplied restaurants are setting up digital direct-to-consumer channels as the crisis decimated their core restaurant sales. Similarly, the entertainment industry is generating new content (for example, sports retrospectives) to fill the void in programming created by the suspension in sports leagues. Even museums are creating and streaming digital content to enable people to enjoy their offerings from the comfort and safety of home (for instance, Getty’s “life Imitating art” challenge).
  • Rapid changes in customer behavior. For years, videoconferencing providers enjoyed steady growth by focusing on corporate customers. This market typically required expensive deployments, often involving the physical installation of specialized equipment and training to ensure high-quality connections. Now Zoom, with its simple setup and almost viral connectivity, has become the “Kleenex” of the videoconference world. Practically overnight, the world has grown accustomed to “zooming” for myriad purposes, including the arts, religion, fitness, and social connections with colleagues, friends, and family.
  • Influx of competitors from different industries. Medical-device firms that historically had a narrow competitive set and were insulated by a complex and highly technical regulatory approval process are facing competition from previously unimagined new entrants such as home appliance manufacturers and automakers, as regulations are relaxed to meet critical needs. Who could have predicted the rapid approval and success of GM and Dyson as ventilator manufacturers?

Businesses can gain long-term advantages by understanding such shifts and the opportunities they present. In past crises, companies that invested in innovation delivered superior growth and performance postcrisis. Organizations that maintained their innovation focus through the 2009 financial crisis, for example, emerged stronger, outperforming the market average by more than 30 percent and continuing to deliver accelerated growth over the subsequent three to five years (Exhibit 6).

Crises, especially the one we are experiencing now, have a significant financial and human toll, stranding assets and human capital and causing significant social and economic dislocation. However, many of these dynamics are ingredients for disruption from which new business models emerge. For example, the sharing economy rose out of the 2009 financial crisis as technology enabled the creation of marketplaces for underutilized assets just as people were seeking much-needed new sources of income, catching incumbents unprepared. The SARS epidemic that ravaged Asia in 2002 and led its citizens to shelter in place was the impetus for growth and widespread adoption of e-commerce in that region, making China the epicenter of innovation around social commerce. The more recent focus on the climate change crisis has driven significant growth in solar equipment and electric cars, as well as innovation around more “earth-friendly” foods such plant-based meat substitutes.

How should companies that believe in the innovation imperative pivot to pursue it today? What follows are our recommendations for ways to approach the recovery from this crisis that can significantly increase the value captured from innovation-led growth.

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The essential practices underpinning distinctive innovation have not changed in this time of crisis, but the relative emphasis and urgency of where businesses should focus has. Whereas in our 2019 article “The innovation commitment” we highlighted Aspire and Choose as disproportionately important during times of stable economic growth, we believe the uncertainty and severity of the current crisis requires leaders, first and foremost, to re-Discover customer needs and Evolve their business models to meet those needs.

Above all, organizations need to realize that innovation, now more than ever, is a choice. Regardless of the relative emphasis and order, we believe that the Eight Essentials of Innovation, which for years have helped leading innovators more than double the total returns to shareholders compared to laggards, will continue to be critical in navigating and emerging even stronger from this crisis.

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Here is a direct link to the complete article.

Jordan Bar Am is an associate partner in McKinsey’s New Jersey office, where Felicitas Jorge is a consultant; Laura Furstenthal is a senior partner in the San Francisco office, and Erik Roth is a senior partner in the Stamford office.

The authors wish to thank Matt Banholzer, Katie Kroeger-Davis, Katie LeLarge, Olivia Papa, Lakshmi Prakash, Brian Quinn, and Henrik Sachs for their contributions to this article.

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