HOW 20 COVID-19 PANDEMIC TRENDS WILL TRANSFORM INNOVATION – Part 3
Insight | June 2, 2020
HOW 20 COVID-19 PANDEMIC TRENDS WILL TRANSFORM INNOVATION
Invitation Code: MD86588
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This is the third part of the blog series. To read the previous parts, please scroll to the bottom of the page and click on the link of your desired part in the Related Posts section.8. The Rise Of Outcome-driven Innovation, Economy And SolutionsOutcome-driven Innovation (ODI) methodology has been around for a while. It is well documented by its creator Anthony W. Ulwick at Strategyn and Clayton Christensen the Harvard business professor in his 2016 book titled ‘Competing Against Luck’.ODI and “Jobs-to-be-done” theory are based on the premise that people buy products and services to get jobs done. As people complete these jobs, they have certain measurable outcomes that they are attempting to achieve. In a nutshell, what the customers’ want is solving a business challenge and achieving an outcome that the solution can deliver, not how it should be done using a product.In the past few years we have witnessed a new kind of economic model called an “outcome-based economy” based on this methodology. The dominance of unicorns like Uber, and Air B&B is a testimony to the adoption and success of this model. We believe, however, that what we have witnessed so far is just the beginning of a new era. Given all mentioned above, we believe that this trend will accelerate exponentially as more and more customers switch from “owning a product” to “paying for results” model. This will create a new wave of innovations as more companies will have to compete on their ability to provide outcomes rather than just selling products. In other words, we will witness more innovations at the business model level versus process, technology, or market segment levels.Tomorrow’s successful innovators will offer solutions based on an outcome-based model that uses a full-service do-it-for-me (DIFM) model versus the old and obsolete do-it-yourself (DIY) self-service model. This means that moving forward we will also witness a new transaction model. Presently, the majority of the existing suppliers still rely on the old transaction model wherein one side—supplier—offers products and services in the form of an output to the other side—customer—who will use the output to generate and deliver an specific business outcome. In the new model though, the supplier “delivers an outcome” and the customer “pays for the results.”The implications for the existing businesses are twofold: 1) optimize the business model and migrate to a DIFM model; or 2) risk being disrupted by new innovators who will either use you as a supplier or will completely displace you in the value-chain by delivering the end-result and outcome in the form of the experiences that the customers will demand.Examples are already abound for both cases in the B2B and B2C markets. Jet engine suppliers are a good example of the former case. They’ve already seen the writing on the wall and are afraid of being disrupted as their customers are moving away from the old CAPEX model and migrating into an OPEX model. Simply said, airlines are no longer going to pay millions of dollars to buy and maintain jet engines. Instead they will pay for the outcome based on a “thrust-as-a-service” business model in the form of “power-by-hour” in the new transaction model.Similarly, we are witnessing the emergence of new breed of retailers in the B2C markets that benefit from the platform business model to deliver the end-to-end solutions in the form of the outcomes that the customers desire. For instance, food or grocery delivery services such as Door-dash or Instacart are delivering the outcomes and experiences that the customers want that the grocery stores and restaurants cannot deliver. As a result, the retail model is disrupted and many of incumbents are displaced by new comers.9. Remote Collaboration Is The New NormalRemote collaboration and “working from home” is here to stay. With more companies asking their employees to extend work from home (WFH) in the next few months, it is highly plausible that remote working will become the new normal as more companies try to cut costs and more employees will get used to it. In fact, some companies like Twitter have already announced that moving forward their employees could work from home, forever.This means that more remote collaboration tools and solutions will be developed to enhance productivity of these remote workers. And with more solutions available to get the job done remotely, it is safe to assume that many companies will not hire as many employees as before after the crisis has passed as there will be a large pool of contractors, and self-employed solopreneurs who can get the job done remotely, and effectively.10. Accelerated Demise Rate Of Large Companies—Innovate Or Die DilemmaA recent McKinsey & Company research found that before the pandemic 84% of CEOs of large companies believed that innovation was their #1 business priority but only 6% were satisfied with the progress of their organization. A similar study by Harvard Business Review & Information Age also found that more Fortune 500 enterprises are failing at record levels. The study revealed that between 1955 to 2017, 88% of F500 vanished. Similarly, between 2000 to 2017, 52% of them vanished. Finally, based on their projections 75% of the existing ones will perish by 2027.Assuming that they did not anticipate the current crisis, this number will probably be higher than expected. Therefore, we can expect the larger enterprises to fail faster as a result of three colliding trends. First, the growing capability and resource gaps that are incapacitating their innovation operations. Second, their inability to adapt to the new normal and the rapid market changes in a timely manner. Finally, as more companies are forced to abandon the failing 3-C DIY model in favor of the 3-D DIFM model to stay competitive, they will face new and unprecedented challenges that many will not be able to overcome. On the other hand, we believe that a new wave of smaller, nimbler and entrepreneurially minded innovators will emerge to solve the new challenges using the 3-D model.11. The Increased Focus On Sustainable Cost And Business ModelsAs the pandemic’s economic shockwaves continue to grow and spread more and more innovators will feel the pain. Despite that fact that there is significant cash and dry powder sitting on the sidelines, financing and raising new funds will become more difficult as the investors will be looking for viable businesses with Sustainable Cost Models and business models that can actually turn a profit. This means that at least in the short term we will witness a shift from the “startup model” to a more traditional “small business model”. The former refers to the model that a company is created with the sole purpose of growing big fast via external financing with the ultimate goal of a successful exit. Hence, the main focus of the founders is to build a company that is attractive to investors. As a result, they are more focused on appealing to investors rather than building a sustainable and self-sufficient business.On the contrary, a small business model advocates building a self-sufficient business without relying on external financing. These businesses are financed through their revenues. To achieve this goal the focus of the founders is on providing significant value to their target market and customers so that they can build a sustainable business and generate sufficient revenues and profits. 12. Unusual Decoupling Of M&A Activity From The Broader EconomyConventional wisdom holds that mergers and acquisitions (M&A) activity likely will plummet in an economic downturn. In fact, history provides ample proof. We witnessed a significant drop during the 2008 recession, the dot-com bust of 2001 and many more recessions before them. We are witnessing a similar trend right now as a result of the Covid-19 pandemic and its impact on the economy. According to analysis from Dealogic, the value of M&A activity in the first quarter of 2020 was significantly lower than the last quarter of 2019. Globally, it was down 35% and in the U.S. it was down 39%. According to their report $618 billion worth of deals were completed in 2020 compared with $956 billion by this time last year. Overall, the value of worldwide M&A activity fell 25% from last year, totaling just $730.5 billion in the first quarter of 2020, according to data from Refinitiv. So far, U.S. has suffered a relatively more severe decline with a 50% decrease year over-year in overall M&A value. Deal making for U.S. targets totaled just $256 billion during the recently ended quarter—hitting a five-year low, Refinitiv says. According to their report, only four of the top 10 worldwide deals announced during the quarter took place in the U.S., bringing America’s overall share of global deal making to 35%, down from 52% a year ago—the lowest level since 2012.What does all this mean? Well, according to the conventional wisdom we should expect a significant demise in the M&A market for years to come. However, as the recent research by PWC reveals the expectations of M&A’s demise may be exaggerated. In fact, the current situation is very different from the previous crises. What is unique this time is a decoupling of the of M&A activity from the broader economy. While in the past the M&A activity always followed the economic cycles, there are reasons to believe that this time around the M&A trends may follow a different path. According to PWC a structural shift in deals and capital is causing this decoupling. Contrary to the previous cycles that M&A activity dropped primarily because the cash needed to undertake these activities dried up, this time around there is significant cash in different forms available for new transactions. Further, there are other contributing factors that differentiate the current situation from the previous ones. According to the report the following factors are driving expectations for an increased deal flow levels:
Private equity: referred to as “dry powder”, currently $2.5 trillion money raised but not invested is sitting on the sidelines that can be deployed rather quickly. This represents the highest amount ever. Wall Street Journal (WSJ) in January 2020 reported that $276B was raised in 2019 which was triple the amount that was raised in 2012. 2019 represented a seventh consecutive year of growth.Recent reports also suggest that Private equity firms are actively seeking deals across the struggling travel, entertainment and energy industries, according to a half-dozen investment bankers. “They have been waiting for this type of market dislocation,” the head of mergers at a major Wall Street firm said;
Corporate cash: Harvard Business Review (HBR) in January 2020 reported that U.S. non-financial corporations are sitting on just over $4 trillion dollars in cash, according to the latest Flow of Funds estimates, up from $2.7 trillion a decade ago and just $1.6 trillion in 2000. Although some of this cash has been used up as a result of losses in the past few months, there is still a significant amount available for investment;
Interest rates: currently, the US federal funds rate is at the lowest level as compared to the previous down-turns. It’s currently around 0-0.5%;
US corporate tax rates: at 21% this rate is the lowest since 1930s.
Given these factors, the market is ripe for activity as it is flush with cash. Fundamentally, the economy is resilient enough to spur new levels of M&A activity. In other words, unlike the previous crises that weak financials resulted in the demise of the M&A activity, this time around we’ve a strong financial foundation that can drive the M&A activities. However, what is slowing the activity levels are fear and psychological factors that increase the uncertainty and risk about the future performance of the markets. As Cornelia Andersson, head of M&A and Capital Raising for Refinitiv predicts, “It’s likely that the impact of the coronavirus on M&A and capital raising is a story of a delayed effect, where we’ll see activity pushed back to the last two quarters of the year.” The combination of dislocated targets—declined valuations, deflated and undervalued assets, cash strapped innovators—and cash rich investors with strong ability to buy are likely to drive up the activity for bargain hunting and acquisitions.Finally, many observers and analysts predict that cash rich players will use M&A as a growth strategy to broaden their research and outperform rivals. This will help them to produce more impactful innovations. Buying small innovative firms and struggling rivals instead of innovating internally will enable them to increase the breadth of their technological search and mitigate their risks. This increased M&A activity in turn will heighten the interest in developing and investing in new innovations to solve the rapidly emerging challenges. 13. Divestitures, Deal Drivers And Other Potential Headwinds For Technology DealsApart from COVID-19, several other factors will affect deal activity in 2020. According to Deloitte, divestitures are expected to be a key feature of M&A activity as companies hope to make the most of high valuations and to reposition assets ahead of any significant downturn.Deloitte’s ‘State of the Deal – M&A Trends 2020’ report notes that 75 percent of corporate respondents expect to pursue divestitures in 2020, the second highest level in the past four years. Primary reasons included changes in strategy, financing needs, and divesting technology that no longer fits with a company’s business model.The US presidential election is also on the horizon. As a result, acquirers tend to wait for calmer waters after the election. It would not be surprising to see some deals pushed back to 2021, when the political situation may be less complex and the global economy on the road to recovery.As for activity relating to innovation, sectors which very likely will benefit are technology including energy, telecommunication, education and especially institutions involved in distance learning, remote work and collaboration, and the other enabling virtualized economy solutions like telehealth. 14. The Personal Becomes DangerousA global lockdown that may continue for months to come is already reorienting our relationship with many aspects of our lives from personal relationships to work and the way we will plan any activity in the future. While long-term socio-behavioral impact is still unknown, we can already see that this pandemic has created new opportunities for the technology sector. As personal touch becomes more dangerous, more and more organizations and people will use more technologies and plan their activities in a manner that will reduce personal contacts. Over long-run this will have a lasting impact on every aspect of our lives from lifestyle changes to the way we learn, work and entertain ourselves.
Succeeding through M&A in uncertain economic times, PWC Research and Insights
Coronavirus Will Change the World Permanently. Here’s How, POLITICO MAGAZINE, March 19, 2020
How will coronavirus change the world? Simon Mair, BBC, 31st March 2020
What Our Post-Pandemic Future Looks Like. Bloomberg, May 12, 2020
‘We can’t go back to normal’: how will coronavirus change the world? Peter C Baker, The Guardian, March 31, 2020
All the things COVID-19 will change forever, according to 30 top experts, Adele Peters, Fast Company, April 4, 2020
These are the new hot spots of innovation in the time of coronavirus, Catherine Clifford, CNBC, April 15, 2020
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Ron Dabbagh – Founder & CEO, Cenergim
Ron is a seasoned marketer, strategist, and entrepreneur with over 25+ years of experience in developing and marketing 20+ innovative technology solutions with a variety of startups and global market leaders. He is also a serial entrepreneur who has a passion for identifying market inefficiencies and building solutions to address them.