Why Underinvesting in Innovation is Riskier Than Ever

June 26, 2020

Corporate boards have been debating the need to invest in innovation as a driver of future growth for the better part of a decade.

And while many enterprises have demonstrated an organizational commitment to innovation through standing up dedicated teams, allocating budget, and developing bets for the future, innovation leaders now face a sizable challenge. As the world grapples with the current public health crisis and its long-tail impacts on society and the economy, many CEOs and their boards of directors are looking for reasons not to invest in innovation.

Ali Geramian, Managing Director, Innovation & Enterprise Solutions, KPMG LLP

Balance sheet strength becomes a priority during an economic contraction – particularly as sentiment moves from an efficiency ethos to a mindset of financial resiliency and stability. Organizations prepare to survive periods of decreasing revenue and liquidity, and as a result, strengthening cash flow becomes an imperative. These austerity measures traditionally impact discretionary funding for long-term priorities, such as innovation. Leaders and board members must manage a difficult dance: How do we make money today while investing for tomorrow?

When grappling with this question, it’s vital to remember that economic downturns and radical periods of change often result in equally radical waves of innovation and adoption of emerging opportunities. While many companies will hit pause, others will seize this historic opportunity to unlock competitive advantages, capture market share, and crack into large new markets by making the right bets for the future. Truly innovative leaders will leverage this moment to deepen their commitment to business model and product innovation – positioning themselves to create sustainable, compounding competitive advantages over time and leapfrogging ahead of their peers.

It’s vital to remember that economic downturns and radical periods of change often result in equally radical waves of innovation and adoption of emerging opportunities.

The changing customer narrative is no longer passé: Consumer behaviors have evolved faster in the first half of 2020 than they have in recent memory. While we won’t know what “normal” will look like for the foreseeable future, the COVID-19 health pandemic has given rise to new habits, some of which will dissipate as we revert to older norms, and some of which will become permanent routines. These stark changes require the development of new solutions that will not only impact how we connect with customers, but also force our operating models to change. For example, it looks like telemedicine is here to stay, supply chains will likely be reimagined, and real estate will evolve to meet changing priorities and sensibilities. We’ve only scratched the surface of leveraging emerging technologies to reshape how we work, how we connect with others, and what the human experience will look like in the future.

As evidenced in preceding crises, the rapid reshuffling of our societal climate creates fertile ground to produce new businesses that meet changing customer needs. For example, during the aftermath of the financial crisis, a generation of iconic companies driven by unique business models emerged that have changed our lives. As a result, these organizations captured substantial market share from legacy players, and in some cases, they upended entire industries.

The reality is that operational efficiency alone will not save an organization in times of turmoil – paradigm shifts require fundamentally different solutions. Enterprises, particularly those with brand loyalty and a strong base of existing customers, are well-positioned to invest in innovation to win in the land grab of the future. As difficult as it is to cultivate new business models and products as a large enterprise, organizations that look to innovate, versus merely improve incrementally, can catch their competitors flat-footed and capture a bigger piece of the pie. Company valuations will undoubtedly face a new reversion to the mean, which will present creative acquisition opportunities and hypotheses to drive scalable innovation.

Organizations that look to innovate, versus merely improve incrementally, can catch their competitors flat-footed and capture a bigger piece of the pie. 

The foresight, speed, and relentless execution requisite to capture tomorrow’s innovations don’t necessarily happen during an annual strategy planning and budget process – wartime innovation wins are captured by those that eschew traditional orthodoxies, in favor of leaders who can anticipate how this new reality will impact their organization and react accordingly. Some thoughts on how to get started:

Align Innovation Efforts to Where the Business Needs You Most

The best innovation teams are particularly adept at aligning their efforts to the parent company’s priority strategic objectives in order to demonstrate value to business unit stakeholders. In a crisis, however, priorities can shift rapidly, threatening in-flight innovation projects as market dynamics are disrupted. This can cause innovation efforts to pause — leading to increased frustrations for the innovation team, business unit sponsors, and external collaborators — as well as a lack of clarity into how innovation leaders should be spending their time. As priorities change for your organization, this presents an opportunity for innovation leaders to quickly re-adjust their focus on short-term  priorities of the organization. Demonstrating value in this environment, however challenging, can lead to deeper relevance and a larger role in further strategic initiatives. Ultimately, innovation can act as an accelerator to these initiatives, helping to drive the business forward where it needs it most.

Explore Combinatory Plays

Albert Einstein posited that combinatory plays – the act of combining unrelated concepts and ideas to unlock new insights – are an “essential feature in productive thought.” We see combinatory plays happening often in the business world, where organizations that have built strong capabilities in one discipline apply them to adjacent markets or products where they currently do not compete (e.g. an e-commerce player getting into the grocery distribution business, or an apparel manufacturer producing personal protective equipment). Crises present rapidly closing windows of opportunity where solutions must be quickly developed to meet unmet market demands, which forces executives to look beyond existing orthodoxies and toward adjacent opportunities to win in the time horizon of impact. By exploring what your organization currently does well, and combining your unique attributes with what’s working well in adjacent markets, your organization will be able to quickly develop the next generation of business models that meet the evolving needs of your customers.

History has shown us that a rapidly-changing environment will yield a new set of winners and losers. Now, more than ever, is the time for innovation leaders to ensure that they have a seat at the table in helping shape the direction of their companies. 

Lean on Your Innovation Ecosystem

When prioritizing your efforts and combining outside-in perspectives, do not hesitate to look to your ecosystem partners for innovation, including startups, accelerators, and venture capital firms. In many industries, the startup landscape is dependent on partnership with large enterprises to realize their innovation ambitions – a crisis can provide a stellar opportunity for mutually-beneficial outcomes. Lead with a clear and pressing need that moves the needle for your organizatio, get business unit buy-in, and don’t be afraid to get more involved in getting a win over the line. Your business unit leaders will be dealing with rapidly evolving challenges and may look to innovation leaders to not only develop the hypotheses, but also drive outcomes. Don’t forget about your venture capital connections: VC platform teams are excited to connect their portfolio companies to corporate partners who are looking for solutions.

History has shown us that a rapidly changing environment will yield a new set of winners and losers. Now, more than ever, is the time for innovation leaders to ensure that they have a seat at the table in helping shape the direction of their companies. Corporate innovation isn’t intended to be a “check-the-box” activity only when times are good, but rather a competitive accelerator that differentiates your organization even in times of turmoil.

Key Questions to Ask in 2020

• How do we make money today while investing for tomorrow?

• What do we need to accelerate? Where do we need to make new investments? What do we need to rethink? Where do we need to scale? Where do we need to be bold?

• Where can we accelerate operational transformation? How can we rethink what is the nature of our work, who the does the work, where the work gets done, how the work gets done, and how is that changing?

• How can we best balance investments for short-term operational needs with longer-term opportunities?

• How do we make sure that we are seeding high growth investments, for the benefit of our future organization?

• What is the right combination of build, buy, partner?

• Where do we need to focus our innovation efforts?

• How do we make sure that we have enough qualified resources to execute critical innovation and transformation initiatives?


Ali Geramian is a Managing Director in the Innovation & Enterprise Solutions group at KPMG LLP. InnoLead regularly publishes Thought Leadership pieces written by our sponsors.

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