With the global economy teetering on the brink of recession, CEOs might be tempted to turn from the risk of innovation to focus on maintaining a financially healthy business.
However, this could be a huge mistake. Businesses that persevere with investment in innovation, even in economically challenging conditions, consistently outperform their peers in the medium term. As CEOs plan their paths through the recessionary storm, they should not neglect the imperative to nurture a culture of innovation.
Nervousness around the global economic outlook is growing. The IMF forecasts that global growth will slow from 3.2% in 2022 to 2.7% in 2023. CEOs are particularly sensitive to this threat: PwC’s latest annual survey finds that, as a group, CEOs are “extremely pessimistic” about the outlook, with 73% expecting growth to decline this year.
Clearly, the short-term priority for CEOs is to ensure that their businesses ride out the coming storm. In light of this, it is unsurprising that, in another recent study by EY, 97% of CEOs say it will be very or fairly important to make overall cost reductions to maintain profitability in the first half of 2023. Almost as many say they will be reviewing projects and capital expenditure with a view to delaying or cancelling those deemed non-essential.
These findings chime with my conversations with CEOs, who have made clear that their current focus is maintaining the business: preserving what they have, rather than exploring potential gains. As one CEO told me: “We have to be careful, with the recession and inflation, and risk being pretty high right now. Before we make any investment to investigate the value of ideas, we should wait until we have more clarity, or the situation has become more stable.”
As I tell those CEOs, this approach is problematic in at least three ways.
First, there is robust data highlighting the advantages of maintaining a commitment to innovation during a crisis. One McKinsey study shows that organizations that maintained their innovation focus through the 2008‒09 financial crisis emerged significantly stronger than the competition, outperforming the S&P500 average by more than 30% during the subsequent five years. Similarly, BCG research has found that, in 2005‒20, a portfolio invested in its Most Innovative Companies 50 group would have beaten the MSCI World Index by more than three percentage points per year. Underlining the benefits of innovating through a crisis, companies that were among the more innovative group in 2020, when COVID-19 hit, outperformed the index by a staggering 17 points the following year.
Second, crises often generate new customer needs. Think, for instance, how COVID-19 spurred sudden demand in all sorts of markets – from turbocharging the development of new pharmaceutical products, to driving the uptake of home exercise equipment. Such new and unanticipated demand requires new solutions. CEOs should heed the advice of Winston Churchill: “Never let a good crisis go to waste.”
Companies that were among the more innovative group in 2020, when COVID-19 hit, outperformed the index by a staggering 17 points the following year
My third point is that innovation is still possible, even if costs must be cut. CEOs can focus on identifying new sources of customer value while eliminating unnecessary costs. Crises can be the perfect moment to introduce what authors Chan Kim and Renée Mauborgne call “blue ocean strategy”: the simultaneous pursuit of differentiation and lower costs to open up a new market space and create demand.
As a use case for this strategy, Hotel chain CitizenM took advantage of the pause in global travel to launch a new model for hotels, targeting today’s “mobile citizens” by stripping out costly elements of the traditional hotel experience that many customers no longer require or desire, and focusing instead on what they do want.
Of course, not all CEOs share this cautious approach to innovation. Some recognize the opportunity to build medium-term advantage, and are not only pushing ahead with innovation but devising new ways in which to do so.
Increasingly, I see companies looking to drive revenue growth and profits through business-model innovation. Many have realized that they have opportunities to create value in different ways, often owing to a new awareness of digital technology. It might mean giving away a previously monetized service, on the basis that the enhanced customer data gathered as a result is more valuable than the sacrificed revenue stream.
It is also clear that sustainability has become an integral aspect of CEOs’ thinking. Innovation is essential to reducing the environmental impact of business, be that by cutting CO2 emissions, or eliminating waste and investing in the creation of a circular economy.
Crises can be the perfect moment to introduce what authors Chan Kim and Renée Mauborgne call “blue ocean strategy”: the simultaneous pursuit of differentiation and lower costs to open up a new market space and create demand.CEOs are also realizing that innovation is not only about meeting customer needs. The war for talent is still raging – the latest Conference Board research finds that attracting and retaining talent is CEOs’ number one internal focus for 2023. L’Oréal, for example, is thinking creatively about how metaverse technologies could improve the employee experience by facilitating learning on the job and connecting with colleagues.
What, then, can the CEO do to maintain and strengthen company culture on innovation? There are six critical areas to consider:
In unprecedented times, no one person, regardless of experience, has the answer to every problem. Successful innovation can only be delivered via new combinations of people who bring to bear diverse expertise. CEOs need to talk to colleagues from the C-suite to the “factory floor.” They need to get out of the building, too, to see what ideas are floating around outside their organizations and how these could feed into their own business models.
The need to draw on a wide range of expertise makes collaboration and team-working critical. That requires empathy, social listening, and even a touch of humility. The capacity to be resilient and receptive is vital, too; when colleagues criticize your ideas, recognize that challenge and debate are healthy – essential, even – for the best outcomes.
I once heard a senior executive remark, “If you torture the data long enough, it will confess.” Running experiments purely to find evidence that supports your thinking is a huge error. As I put it in my book, Alien Thinking: don’t test to prove, test to improve. You need a scientific mindset based on a genuinely experimental approach, with a willingness to test ideas and refresh your thinking based on the results. Avoid picking your innovation winners early. Nobody wants to disappoint the CEO, and new ideas and concepts may be harmfully underplayed if people perceive you as having a preferred solution.
As my friend and IMD colleague Alex Osterwalder has identified, one of the “showstoppers” for innovation is a lack of top–level support. If your organization’s leadership has not set a clear innovation strategy, it is near impossible to develop a systematic approach to innovation. If you are serious about innovation, aim to spend 30‒40% of your time on it.
Another showstopper is poor organizational design. When innovation executives sit two or three levels below the C-suite, they struggle to secure resources. Innovation must be instilled from the top down, with real influence on the company’s strategic destiny. Steve Jobs believed this: he asked Jony Ive, his Chief Design Officer, to sit next to him at most executive meetings.
CEOs’ top priority should be creating psychological safety. Google’s Project Aristotle found this was the number one dynamic for top-performing teams. Ensuring employees feel they can take risks and expose their thinking to criticism without negative repercussions is vital. The most innovative companies make it safe for individuals and teams to take small, calculated risks as they explore new ways of thinking.
Taking this approach a step further, don’t just celebrate innovative projects that work out – celebrate those that don’t. Remove the word “failure” from the corporate vocabulary and instead frame experiments that do not go to scale as part of the learning process that leads to eventual success.
Garry Ridge, CEO of the WD-40 Company, even put in place a “Maniac Pledge” requiring employees to document and share their experiences of learning if something doesn’t work, recognizing that these were critical opportunities to improve. Tata created a “Dare to Try” award to highlight bold (but failed) experiments that yielded valuable learning. Such initiatives convey a powerful message: it is okay to experiment and take risks. Reinforce that message through “fireside chats” in which teams reflect on experiments that didn’t work out as hoped, showing a shared creative vulnerability and willingness to learn.
The clouds gathering over the global economy are real, and many CEOs are battening down the hatches to ensure they survive the storm. But, when we emerge on the other side, the companies that outperform their peers will be those that refused to let their innovation efforts be blown off course. CEOs may need to steady the ship during 2023, but they should keep it resolutely pointed towards an innovative vision of the future.
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