Using adversity to drive innovation in business

Most established businesses have seen their share of adversity in recent times but there is an opportunity to turn the difficulties to their advantage.

As Albert Einstein is quoted as saying; “In the middle of difficulty lies opportunity.” In business, however, the opportunities will most likely only materialise if management is astute enough to learn from the lessons gained during periods of great difficulty – such as those most of us have suffered over the last six to seven years.

During the global recession that began in 2008, many companies found they had just weeks of existence remaining. When faced with such stark reality, business leaders have few choices. For some, it takes an entrepreneurial mindset to turn the company around. For others, a very methodical and highly focused approach works. In both cases, the survivors also need a bit of luck! As history shows, many make it but most fail, stuck in their old ways and paralysed like rabbits in the headlights.

Driving innovation through failure

Much has been written in the media about the need to innovate, the term most commonly used to denote creativity, ingenuity, transformation, the creation of new ideas, methods and products. But failure, too, can be part of the innovation process. However, with many organisations, there is such strong emphasis on excellence that failure is not an option. Unless, that is, you’re in the pharmaceutical industry, where for every one product that makes it commercially, probably ten will have failed. This is one of the few industries that accepts that innovation and failure are often inextricably linked. In most industries, fear of failure stifles innovation.

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With distressed companies, corporate failure is no longer a key issue; they have already reached that point. Neither is there any advantage to be gained in pursuing excellence because such methodologies can drive work effort that does not create true value. The first call to action must be based on turnaround and revenue improvement strategies where speed is a key objective.

More often than not, cash is the starting point, often becoming an understandable obsession. More companies fail for lack of cash flow than for lack of profit. Even where a company may have healthy accounts receivable on its balance sheet, it could still go under through the lack of cash with which to make essential purchases.

With ailing companies, the focus must be on actual cash rather than predicted cash and have the undivided attention of all department managers, not just the finance department. It is the Finance Director’s responsibility to root out payment difficulties as quickly as possible and design flexible solutions that release more cash and lower the company’s accounts receivable.

Cash is one particular area where those who have it can learn valuable lessons from those who don’t. When there is an abundance of cash, there is a tendency for executives to focus on other issues, taking their eye off the cash ball. They simply rely on cash flow forecasts derived from financial statements, don’t look at the bank statements and fail to see the train rushing towards them . When cash markets tighten up – as they did at the start of this last recession – the lack of cash discipline becomes very transparent.

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It’s not that long ago that companies holding large reserves of cash were regarded as poorly run and justifiably ripe for takeover. Leverage was the name of the game and cash reserves were either used for stock buybacks or as increased dividends paid to shareholders. Whilst the debt/equity ratio may still be preferred by some CFOs, today Cash is King. Cheap and easy-to-get credit facilities are gone and even when financing is available, the premiums that lenders demand are often prohibitive.

Cash is king

Those companies with large reserves are no longer looked upon with disdain by corporate raiders. I certainly don’t see anyone castigating Apple executives over the company’s $178 billion cash pile, a treasure trove that is greater than the market cap of all but 17 companies in the S&P 500 index.

Interestingly, Steve Jobs must have learned a valuable lesson from his time at the helm of NeXT where he spent lavishly on furniture and furnishing for NeXT’s Redwood City headquarters – $10,000 sofas, $5,000 chairs, $450 telephones in every office and large Ansel Adams prints (some have fetched more than $700,000 at auction). Returning to Apple in 1997 (when Apple bought NeXT), Jobs had to go hat in hand to arch-rival Bill Gates for a $150 million lifeline: Apple was weeks away from bankruptcy. The company’s worth was estimated at less than $3 billion when Jobs took Gates’s money; today Apple has a valuation of more than $700 billion.

During a downturn, cash is not the only resource that can be very limited. Economic growth, therefore, depends on using existing resources more efficiently and, where possible, investing in new, cheaper and more agile, resources. Management must have a clear vision of where the company needs to be rather than where they might want it to be and focussing on getting there in the quickest and most cost-effective way.

In 1993, IBM reported an $8 billion loss, the biggest in corporate history at that time. Under the leadership of newly appointed CEO, Lou Gerstner, the company got rid of business units that did not meet IBM’s core competencies, it shed redundant infrastructure and concentrated on three areas where it excelled – hardware, business software and IT services. Gerstner saw a way forward, he took decisive action and simplified what was then the world’s largest computer company. Apart from recently streamlining its hardware business, that strategy has remained.

Maintaining both employee and consumer confidence is of paramount importance and, again, healthy companies can learn valuable lessons from ailing organisations. Whether in good times or in bad, companies cannot afford to lose key staff. Often, money is thrown at good people in an effort to retain them. However, in ailing companies this can be near impossible. But, more importantly, very rarely does an increase in pay produce the desired results.

Bold HR strategies

With culture and opportunity taking centre stage for employees in what has become a “new world in which to work”, bold and innovative HR strategies are now required. Today, it is the opportunity to develop and use more of their skills and abilities that keeps people with the organisation, not simply an increase in their salary, especially now the labour market is freeing up, People are looking for stimulation and personal growth rather than merely a job.

Executives in distressed companies accept that they probably can’t match the money their competitors pay their staff, but there are other ways to incentivise those they believe might be about to jump ship. By talking with their subordinates about the things that might motivate them, there may be a number of non pecuniary incentives that can be devised.

When management is so busy and so focussed dealing either with fires or the crush of new business, they tend to forget that it’s the people who make up the company. How these people think and respond will define the company’s reputation just as much as the reputation of its products and services.

If necessity is the mother of invention, then so too can be adversity. Lessons learnt during a crisis can strengthen the organisation. Likewise the strategies used to survive while struggling can equally be adapted once the company is restored to health to achieve results in accelerated ways.

David Dumeresque is a partner at executive search experts Tyzack

Further reading on business: Building businesses with a start-up mentality

Praseeda Nair

Praseeda Nair

Praseeda was Editor for from 2016 to 2018.

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Innovation in Business