Thank You

You are now registered for our Rouse Insights Newsletter

Innovation at the tail of Covid-19

Published on 25 Jun 2020 | 6 minute read
The coronavirus-induced financial crisis has changed, and will continue to change, the world as we know it.

In the wake of a health crisis, the Covid-19 pandemic, we are facing a financial crisis which will have long term consequences. Financial crises, like this one, can be dangerous and chaotic. They can, however, also be catalysts of change, creating new competitive landscapes and reshaping old ones. Capitalizing on the opportunities while containing the potential downside is, and will remain, key to corporate survival in times of crisis. What are the key lessons we need to learn to adapt and survive in a post-Corona world?

Contrary to common belief, or at least sensational journalism, financial crises do not emerge out of the blue. There is a significant body of research and data indicating that financial crises in reality are quite predictable, at least in terms of a chain of events. The golden nugget, however, is not understanding if a financial crisis is emerging, but rather to understand what will push the economy over the cliff (i.e. identifying the “triggers”). Researchers continues to struggle with this particular aspect of the financial crisis.

The last financial crises we faced back in 2008-2009 was to a large extent driven by the US subprime loans, but was globally triggered by the crash of Leman brothers. And, at least to the most of us, that one felt like it came out of the blue. These trigger factors are created as a result of an economic paradigm, which often ends at the eruption of a real financial crisis, giving rise to a new paradigm. Understanding the economy, the way people work and how they innovate, is therefore key to predicting the next crisis. As we are currently in the midst of a global pandemic that most likely will have significant and long-term effects on our economy, reflecting upon the long-term impact on innovation is an interesting exercise.

A plausible approach to understanding the effects and implication of the Covid-19 pandemic on innovation is to review historic events of similar character. However, in this case we are quite limited. There is no perfect data or reference case, as society has evolved beyond the societal structures of previous pandemics (e.g. the Spanish flu[1], the Black Death). If we, despite its inconsistency and limited nature, do look at some of the available data from USA during the Spanish flu pandemic in 1918 (Economic Effects of the 1918 Influenza Pandemic, 2007, Thomas A. Garrett) we can see the following main patterns:

  • Severe impact, i.e. double-digit loss in revenue for service and entertainment businesses,
  • increased revenue for healthcare and certain commodity suppliers,
  • shortage of labor and associated rise in labor costs in the mid-term perspective,
  • socio-economic status of societal groups had significant impact on mortality rates rendering long-term enhanced inequalities and associated economic effects.

Some of these patterns can be seen in the current COVID-19 pandemic as well, with some aspects potentially strengthened (or weakened) effects given 2020’s higher degree of globalization. So, the economic pattern experts so far have been able to identify in relation to COVID-19 remains, at least superficially, true to the economic patterns of the Spanish flu of 1918.

It is hard to predict the future, though a rather safe assumption is that at the tail of COVID-19 and the severely hit industries, businesses and value chains we will see a surge of innovation – not unlikely at the same level as the surge of innovation after 2008-2009 financial crisis.

Estimated Impact of Covid-19
The estimated economic impact of COVID-19 is very much a moving target and depends on a number of factors (typically attached political policy and decision-making processes). However, certain patterns can be seen. According to a recent article in Forbes magazine, the impact of COVID-19 can be summarized in the table below, where each industry is mapped in relation to 4 major factors including Personnel, Operations, Supply Chain and Revenue. From this analysis we can conclude that COVID-19 will have a significant impact on revenue and personnel factors across the board of relevant industries.

The most severely hit industries in this analysis include manufacturing, retail, travel, and transport. A crisis typically renders change, at least hypothetically, and this analysis would indicate that these industries will be forced to change out of necessity. A result of such shift, or change, is likely to new render new innovations and new value chains, superseding the old ways of operation and established value creation in productivity.

Potential areas of innovation for retail and manufacturing post-crisis

Retail innovation
Customer Experience – The retail industry has struggled for some time to attract customers into physical stores and more and more revenue is generated by online vendors. A likely area for further innovation and development, fueled by Covid-19, is the customer experience and the connection between physical and digital retailing.

Storytelling – Another area of innovation that is not new in retail, however underutilized both in the physical stores and in most current online experiences. By using compelling stories, it is likely that retailers can improve sales in both physical and digital channels.

Product Focus – the product (i.e. the socks, t-shirts and jeans) seems to be of less and less interest for many retailers. Focus has shifted away from product to operational models in retail in order to create scale. Refocusing on the product and innovation targeting the product such as material, quality, recycling (partly driven by consumer shifts in norms and opinions) is a likely area of high impact innovation going forward for retail. E-Commerce – This one goes without saying. E-Commerce is likely to continue to evolve and there is plenty of room for continued innovation in this space, including areas such as logistics and customer customization.

Manufacturing innovation
Flexible/decentralized logistics models – Covid-19 has highlighted how interconnected our world is. It is not unlikely that this crisis will give rise to more decentralized logistics models and accelerated development of technology supporting a higher degree of flexibility throughout the supply chain, including IoT-technology and optimization technology, such as machine learning and AI.

Decentralization and autonomous production models – Production is another area of relatively high degree of centralization and global interconnection. In order to foster future resilient production, a next generation of production models for decentralization and autonomy is likely to emerge. Scalability of production is still very much subjected to traditional operational models, however post COVID-19 we will potentially see a high degree of innovation in new decentralized and autonomous production models driven and accelerated by technologies such as additive manufacturing, digital twins and next generation modular frameworks.

Digital platforms – Again, a fairly obvious area of innovation, however not less important. It is likely that we will see an increase in innovation and higher investments in digital platforms, in a broad sense. Innovation in this area will not unlikely target digital twins and interconnected systems, supporting more dynamic and resilient manufacturing capacity and capabilities going forward.

Innovation equals new competitive landscape
The offsetting economic effects of Covid-19 are likely to trigger a new competitive landscape in many industries, and that certain value chains will be highly exposed to disruptive forces (Sector Impact, Deloitte 2020), rendering both negative and positive effects. As the saying goes, one man’s meat is another man’s poison.

In all industries, and especially those more severely impacted by the pandemic, it is time to seize the new opportunities and innovate beyond existing practices. Often there will be a need to balance established practices and new practices, but for some industries the current pandemic will reshape the competitive landscape completely. In these cases and when it comes down to corporate survival, like in nature, the game is all about adoption-capabilities. Thus, for companies heavily impacted by COVID-19, in order to charge on and excel in the potentially new competitive landscape, being able to answer the following questions is going to be key:

  • How do we generate value today and in the future for our customers and/or end users?
  • How do we compete today, and can we compete in the future given our capabilities?
  • How can we sustain our current and future competitive advantage over time?

The coronavirus-induced financial crisis has changed, and will continue to change, the world as we know it. No one company can change this, they can only react to it. Whether the change comes in the shape of a rise in decentralized logistics networks or new business models centered on storytelling is yet to see, but it is coming. By creating and maintaining an organization which is self-aware, capable of sensing change and adapting to it, a crisis can be turned into an opportunity. That organization can make use of the creative destruction and innovate throughout the crisis by leveraging its old (timeless) toolbox in the new environment, regardless of its shape and form.

30% Complete
Sweden Country Manager & Principal, Rouse Consultancy
+46 734 304 824
Sweden Country Manager & Principal, Rouse Consultancy
+46 734 304 824