Companies always seem to think right away of cutting their innovation budgets whenever there is a crisis. Why invest in “pipe dreams” of all things when funds are short? Instead, save money wherever possible and put what funds there are into securing revenues for the short term. A mistake!
Are companies in Germany using the crisis as a reason to set aside innovations? Or are they saying, now, more than ever, is the right time? Reports indicate a wide range of attitudes. An online survey conducted by the Federal Ministry of Economics reveals that businesses have postponed or extended the terms of around three-quarters of their projects. More than 50 percent of the projects have been put on hold and almost a quarter have been canceled completely.
While one innovation climate study by Trendone from August 2020 confirms my fears that companies are scaling down their innovation projects, the Research Department at KfW appears to have come to a different conclusion in mid-July 2020, at least for SMEs: “SMEs are increasingly responding to the coronavirus crisis with innovations,” is the finding of the KfW analysts.
Ad hoc measures are the norm
A closer look, however, indicates that KfW Research’s survey of small and medium-sized enterprises does not produce significantly better results than Trendone. A good one-fourth of those surveyed say they have initiated product, process, or business model innovations, including the switch to digital distribution channels. It is striking that, according to KfW Research, “the innovations in the coronavirus crisis are rarely the result of longer development phases; the majority are ad hoc improvements of products and processes.” The most likely interpretation is that the innovations often mean no more than giving employees the opportunity to work from home.
Innovation projects become part of a distant future
According to Trendone, companies are putting a damper on their expenditures for innovation in the wake of the pandemic. In the first four months of the crisis, companies shunted their planned innovation projects off to the side. It does not even appear that the “innovation gaps” brought to light by the pandemic are being closed for the time being as uncertainty persists. Yet the first few weeks of the crisis presented clear evidence that the more “digital” companies were better equipped for dealing with the short-term lockdown. They were able to stabilize the productivity of their employees more quickly because the technology for working from home was either already available or could at least be activated in a very short time.
Apparently, the companies that have retained a more “analog” structure have not learned from this. According to the Trendone study, major innovation projects are still on ice, and companies have capped their budgets by an average of 20 percent. It is alarming that even digital innovation topics such as artificial intelligence or the 5G expansion are being affected by the budget cuts. One conclusion: “Essentially, it can be said that large and disruptive innovation projects will be virtually non-existent in 2020,” even though the 2008 financial crisis showed that companies that did not reduce their innovation spending recovered more quickly from the downward turn of that time.
Innovation funds decline to a trickle
The figures are less than optimal for Germany as a site of innovation, even though the political establishment has recognized that the coffers for innovation must remain open. At the beginning of September, for instance, a closed conference of the CDU/CSU during which top politicians discussed “key future issues” such as innovation and digitalization took as its theme, “Now. Future.” In contrast, the Federal Ministry of Research has announced that the federal government will not be providing a single additional euro for AI and quantum technologies in 2020. And only €7.2 million has been earmarked for project-related research in 2020.
The truth of the matter is that everyone’s sights should be set on innovation right now. Otherwise, companies – indeed, Germany as a whole – will fall hopelessly behind future developments. Countries such China are at this moment seizing every opportunity to drive forward their innovative capacity. Of course, the industries that have been hit especially hard by the coronavirus crisis have other concerns than thinking about innovation right now. But assuming they survive the crisis, they will have to expend all the greater efforts to close the gap if they are not ultimately to fail. There have been any number of warning examples: companies that were highly successful for decades have disappeared from the market. A frequent cause has been their missing the decisive moment to take advantage of developments.
Smaller projects and innovation partnerships
Companies should be especially poised to adapt their innovation strategies when budgets are shrinking. Innovation projects can be successfully implemented even when available funds are scarce. I recommend that companies structure and prioritize their innovation projects differently.
1. Innovation sourcing and ideation or innovation pipeline and foresighting
A pandemic cannot be predicted. We see now, however, just how important it is to deal with the topics of the future, most of them digital, so that processes can be set up faster and more efficiently, enabler technologies can be used at an early phase, and new business models can be established. These are essential prerequisites if companies want to change their mode of operation from simply reacting to the events driving them to becoming proactive drivers.
2. Innovation validation and impact analysis or innovation prioritization and road map
There must be a clear view of the impact innovations will have, a vision of how disruptive or close to the core business they should be. An essential step is the definition of a road map depicting short-, middle-, and longer-term initiatives and their influence on strategy. Longer-term issues should not automatically be deprioritized or postponed as this can have an extraordinarily negative impact on competitiveness later on. One helpful methodology can be found in OKR (objectives and key results). Used as a bridge between long-term goals and everyday operations, it helps people to work together and to commit to the realization of goals.
3. Innovation execution and scaling or co-innovation and partner ecosystems
Co-innovation helps to achieve market maturity faster and to make complexity manageable. Moreover, the partners contribute their special skills and assets and can share the burden of expenditures. Smaller projects that quickly produce visible results and motivate the teams to continue to push innovation are advantageous in this sense as well. One decisive factor for the development of partner and business ecosystems is the overcoming of linear added-value chains. Companies in Germany still find it difficult to move in this direction as they are reluctant to share their “knowledge” with third parties.
My appeal, even in the difficult times of the pandemic, is that we should continue to think about the future and not crush the spirit of innovation and shut down the flow of money. The order of the day is now, more than ever, to press ahead with digitalization so that we emerge from the crisis more capable than before – whether to cope more skillfully with the next crisis or to create and implement a clear agenda of innovation that is not driven by a crisis.