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22 June, 2021updated 01 Nov 2021 10:22

Lara Williams

Opinion: Innovative investing is the only way through a crisis

Most companies prioritised their core business over investing in innovation during the Covid-19 crisis. Many will resume this investment as the crisis passes, but it could be too little, too late.

apple-investment-crisis

Apple launched the iPhone in 2007, just before the financial crisis hit, but the company kept on investing in the innovative technology and reaped the long-term rewards. (Photo by Tony Avelar/AFP via Getty Images)

Past economic crises have demonstrated that a company’s recovery depends on sector and geography but also on the business strategies followed before, during and after the crisis. Doubling down on strategic investments has proven key to long-term growth post-disruption, but timing and strategy is critical as research shows that fewer than 10% of companies emerge stronger after an economic crisis.

The most valuable companies in the world have been investing heavily throughout the Covid-19 crisis. According to CB Insights, tech giants such as Facebook, Amazon, Microsoft, Google and Apple have ramped up investment amid the pandemic, using the economic uncertainty to make strategic acquisitions. During the third quarter of 2020, equity funding with Big Tech participation hit a historic quarter high of $7.9bn across nine deals. Investment for 2020 had already far surpassed 2019’s total by the third quarter, making it a record year for Big Tech investment despite the coronavirus outbreak, according to CB Insights.

How financial crisis fed investment strategies during Covid

While digital acceleration during the pandemic may explain Big Tech’s current growth, it is a strategy the Big Five successfully tested during the 2008 financial crisis. Apple’s Steve Jobs unveiled the iPhone at MacWorld 2007, in what most agree was a seminal moment for consumer technology. As the 2008 financial crisis began to domino across global economic systems, Apple continued investing in its new product. Arguably, this led to an exponential growth of consumer tech adoption, triggering a decade of tech innovations.

Successful companies find pockets for investment, perhaps doubling down on services when people are not buying products, investing in certain geographies, new business models, just finding a way to grow in the crisis. Anna Koivuniemi, McKinsey

Lessons learned from investing through a crisis are not limited to Big Tech. Consultant McKinsey examined a sample of 2,000 cross-sector companies from 2007 to 2017, identifying a cohort they describe as ‘outperformers’. Within this group a number of businesses entered the 2008 financial crisis ahead of their competitors, achieved higher revenue growth and profitability throughout the downturn years and emerged from the crisis stronger than before.

McKinsey partner Anna Koivuniemi says these outperformers demonstrated three times higher revenue growth and nine times higher profitability, outperforming their peers in both crisis and recovery. In fact, they delivered excess returns to shareholders of roughly 8% while their peers hovered around 0% throughout the 2008 financial crisis. On average, these outperforming companies had 20% more excess cash than their peers when they entered the crisis. “That way they were able to focus on growth,” says Koivuniemi.

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However, the majority of companies made cost reductions at the apex of the 2008 financial crisis, according to Koivuniemi. Similarly, during the Covid-19 crises, a survey of 200 cross-sector companies in April 2020 found that investment in innovation had indeed slowed. Not surprisingly, executives prioritised their core businesses over innovation during this period. Pre-pandemic, 53% of executives considered innovation the number one priority compared with 23% during the Covid-19 crisis.

However, while Koivuniemi found that ‘outperformers’ reduced investment in line with their peers between 2007 and 2009, the recovery phase showed significant divergences. Between 2009 and 2011, these outperformers increased their capital expenditure by 90%, whereas their peers increased theirs by only 25%.

Koivuniemi is careful to point out that despite reducing investments at the peak of the crisis, outperforming companies were consistently focused on growth throughout the disruption. “Successful companies find pockets for investment, perhaps doubling down on services when people are not buying products, investing in certain geographies, new business models, just finding a way to grow in the crisis,” she says. However, Koivuniemi qualifies this by saying that if a company has failed to grow during a crisis, it must invest heavily in the recovery phase.

Time to look to blockchain and quantum computing?

Innovations to adopt will vary, with blockchain and quantum computing emerging high on both pundits and analysts’ agendas, but Koivuniemi believes that while these are interesting areas to explore, their contribution at scale for growth is likely to be longer term. Mid-term, an effective investment could be to build on the pandemic’s accelerated digitisation.

In December 2020, McKinsey found that 51% of executives surveyed in North America and Europe said they had increased investment in new technologies (excluding remote work technologies) during 2020. Companies digitised many activities 20 to 25 times faster than they had previously thought possible, according to the consultant.

Gleaning lessons from before the 2008 financial crisis, Harvard Business Review analysed strategy selection and corporate performance during the economic downturns of the 1980s, 1990s and 2000s. The study, published in March 2010, broke down data collected from 4,700 companies into three-year periods before, during and after a recession.

In line with McKinsey’s later study, Harvard Business Review found that only 9% of companies flourished after a slowdown, doing better on key financial parameters than they had before and outperforming rivals in their industry by at least 10% in terms of sales and profits growth.

Harvard Business Review identified four different strategies deployed by businesses in an economic downturn:

  • Prevention-focused companies, which make primarily defensive moves associated with avoiding losses and minimising downside risks.
  • Promotion-focused companies, which invest more in offensive moves that provide upside benefits.
  • Pragmatic companies, which combine defensive and offensive moves.
  • Progressive companies, which deploy the optimal combination of defence and offence.

Cost-cutting yielded the lowest probability (21%) of emerging ahead of the competition in recovery, according to the study. However, businesses that invested significantly more than their rivals during a recession did not emerge much better off, with only 26% becoming leaders after a downturn.

The highest probability (37%) of emerging strongest post-recession required a specific combination of defensive and offensive moves. These progressive companies selectively cut costs by improving operational efficiency rather than reducing headcount relative to peers. They developed new business opportunities by making significantly greater investments than their rivals in R&D and marketing, as well as investing in assets.

Planning and strategy over widespread cost-cutting has helped a successful cohort of companies survive successive recessions. Companies must stay focused on growth and plan ahead for the post-pandemic period even as they navigate current economic shocks if they are to emerge stronger from a crisis. Kouvuniemi points to the importance – now more than ever – of investing protocols remaining top of mind.

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