During the financial crisis that broke out in 2007, numerous companies worldwide went under in the waves of bankruptcies which culminated in a global financial crisis. Other companies, on the other hand, emerged mostly unscathed, or even stronger than before. How did they do it? The experts at the Swiss company ALPORA GmbH know the answer: Innovation.
Star or Low Performer: The Crisis Demonstrated the Difference
“Financial crisis” was the phrase of the year 2008, accompanied by “distressed banks”. By the time the US investment bank Lehman Brothers was forced to file for bankruptcy on 09/15/2008, numerous companies worldwide, as well as banks, investors, and governments, were already reeling from the shock. Several national economies were also on the brink of collapse during the financial crisis, but cash infusions from the government helped them remain solvent. Despite this, numerous victims were left to fend for themselves.
Germany is heading towards a new record number of bankruptcies, reported Spiegel Online in February 2010; the Handelsblatt wrote: “63,000 companies are expected to go bankrupt in the USA [in 2009] In 2008, there were 43,546 companies — an increase of over 50 percent in comparison with 2007 (28,322)”. Many companies instituted radical cost-cutting measures. In particular, a number of them cut funding for research & development, and terminated R&D projects. Even Switzerland was not spared: “The forecasts for the Swiss economy are rather bleak” (01/03/2009, www.vimentis.ch). Despite the gloomy outlook, a number of companies performed well.
But how is it that on the one hand, numerous companies plunged into a downward spiral during the years of crisis, while others elegantly glided over the bump in the road? What did the survivors do differently? Coincidence, luck, circumstance — or is there more to it?
The Strategy of the Best
The Swiss investment advisor ALPORA pursued this question using quantitative scientific methods and found a clear answer: Innovation! Even, and indeed precisely, during a crisis.
In order to determine this, the ALPORA research team looked at all listed European companies and examined both the top 30 innovators — those with the highest degree of innovation efficiency in the ALPORA Innovation Europe Fund universe — as well as the bottom 30 (those with the lowest innovation efficiency), and compared them in terms of their innovative activities during the crisis and post-crisis years of 2008 through 2017.
The growth in R&D spending and the R&D quota (R&D expenditure relative to sales) were used as points of reference.
The results show that the top innovators from the ALPORA Innovation Europe Fund increased their R&D budgets during the most critical years from 2008 through 2010, in contrast to the bottom 30 companies, which either cut back on research and development and/or did not make any further investment in these areas during these crisis years. Only when the markets began to flourish again did most of the bottom 30 companies begin making investments. Albeit with a significant time delay. By then, the top 30 innovators already had a head start and had positioned themselves in the market with innovative products and services. The top innovators are able to invest more funds for the sales and marketing of innovations that were already developed during the good years. The bottom 30 companies, on the other hand, also had to invest funds for the development of the new products and services.
The same pattern is also observed in the comparison of the R&D expenditure relative to sales, i.e. the R&D quota: The top 30 have a particularly high R&D quota during crisis years of 2008 through 2010, which subsequently decreases a little. For the bottom 30, the exact opposite is observed: The low R&D quota during the crisis years only increase in the good years. During the crisis, “now’s the time” appears to be the motto of the winners, while that of the losers is “not right now”.
The Crisis Demonstrated the Difference
The summary of the analyses by ALPORA demonstrates the importance of innovation during times of crisis: Innovative companies significantly increase their R&D budgets, particularly in years with weak revenue, in order to remain competitive with new products in a volatile market. Poor performers, on the other hand, pinch pennies when it comes to what actually fuels the company — investments in R&D, choosing to postpone them until the markets rebound. By then, however, their misguided cost-cutting policies have already caused them to lag far behind.
The conclusion: Anti-cyclical innovation investments are paying off!