Jul 10, 2020

Efficiency or Innovation? Balance Both to Emerge as a Leader Post-Recession

The COVID-19 pandemic has changed nearly every aspect of how we work, create value, and serve customers. Many CEOs and business owners face important choices around short term decisions while trying to look forward to a better future.

A June 2020 McKinsey study, “Innovation in a Crisis – Why it is more critical than ever,” found that many companies are concentrating on operational efficiencies: shoring up their core business, conserving cash, minimizing risk, and waiting until “there is more clarity.”

Focusing on the core is understandable.

Concerns for business continuity are paramount, like cutting costs, driving productivity, and implementing new health and safety practices.

One investor I spoke with recently during the mandated pandemic closure said that his company’s strategy plan had a shelf-life of two days.

Just making it through the week was an accomplishment.

According to the McKinsey survey, 60% of executives were focused on new growth initiatives prior to the crisis. Now, only 21% of executives expect new growth to be a focus area.

Competitive dynamics are shifting business models and causing companies to adapt to new realities.

What made an organization distinctive pre-crisis may be less differentiating going forward.

Building a foundation for post-crisis growth to remain competitive in the recovery period is critical. But, ignoring innovation and playing it too safe may be a shortsighted decision.

The 2010 study Roaring Out of Recession in the Harvard Business Review found companies that master the delicate balance between cutting costs to survive today and investing to grow tomorrow outperform peers after a recession.

Their findings were austere.

17% of the companies in the study didn’t survive. They went bankrupt, were acquired, or became private.

The survivors were “painfully slow to recover from the battering.” Most had not regained their pre-recession growth rates for sales and profits three years after a recession.

Only a small number of companies—approximately 9% —flourished and performed better on key financial parameters than they had before, and outperformed industry rivals by at least 10% in terms of sales and profit growth.

According to the HBR study, the companies that balanced cost cutting to survive today and investing to grow tomorrow outperformed industry rivals after the recession.

Finding The Elusive Balance

Companies most likely to outperform competitors after a recession are “progressive” — equally focused on efficiencies and investment.

Organizations that reduced costs by improving operational efficiency rather than by drastically reducing the number of employees relative to peer companies was a key factor. Many reexamined fundamentals of their business model, from supply chains to organizational structures, to reduce operating costs permanently. When demand returned, costs stayed lower, enabling profits to grow faster than their competitors.

The other factor was comprehensive offensive moves. According to the HBR study, the higher performing companies developed new business opportunities by making significantly greater investments than their rivals in R&D and marketing, and they invested in assets such as plants and machinery. Their post-recession growth in sales and earnings was the best among all of the groups.

Conclusion: Balance a Portfolio of Initiatives

The HBR study concluded that progressive CEOs took an agile approach. Teams learned what worked and developed a portfolio of initiatives to improve efficiency as well as investing in customer, market, and asset development.

“An analysis of the stock market performance of companies that use progressive strategies reveals that they can also ride the momentum after a recession is over. Their approach doesn’t just combat a downturn; it can lay the foundation for continued success once the downturn ends.”

Questions For CEOs To Consider:

  • DEFENSIVE MOVES: How has your company improved operational efficiency as a competitive advantage?
  • OFFENSIVE MOVES: How is your company continuing to invest in innovation and market development?
  • AGILE BALANCE: Is your company learning from what’s working, and taking a balanced portfolio approach between efficiency and innovation initiatives to invest in your future?

A combination of defensive and offensive moves has the highest probability of success as a recession antidote.

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