How leaders can challenge thinking for innovation

Over the past three years we have seen the strongest bull market in history and more venture capital deployed than in any other period. Fed by a steady diet of cheap capital, businesses happily adopted a “growth at any cost” mentality, ultimately becoming reliant on access to future funding to sustain momentum. Even established businesses and blue chip companies began to feel the pressure of being compared to hyper-growth companies as their valuation multiples began to pale in comparison. During this period, the concept of profitability was barely a thought, dismissed like outdated generational advice from one’s grandparents.

But early this year, the pendulum swung hard and fast in the other direction. We call it a “market correction,” but this sterile and somewhat academic phrase does not do justice to the ensuing chaos experienced by businesses of all sizes. This impacted everything from supply chains to external marketing and the many employees tasked with keeping everything operational. Many industry darlings across sectors went from feeling invincible to grappling with rising inflation, facing supply chain shortages to inventory excess, and from fighting for talent to managing layoffs. 

While chaos is naturally unsettling, it is sometimes exactly what leaders need to shake things up and make room for innovation.  Don’t let the whiplash caused by recent market volatility cloud your vision of the future. Now is the time to revise your playbook to one that is focused on the kind of enduring innovation that is born out of necessity and tough choices.  

Here are four ways to challenge your thinking.

Get comfortable with discomfort— we’ve seen this before

A record-breaking 9.7 million businesses were launched across 2020 and 2021. Until January of this year, these companies have only known one paradigm: intense, but steady growth. Whether this is your company’s first downturn or the memory of a previous economic decline has faded, this is a reminder to get comfortable being uncomfortable. 

While we would all prefer to be sailing on a nice, clear day, the intensity we must bring to navigating stormy waters is the same approach we must bring to our businesses during these volatile times. Now is the time to prepare your entire organization to get comfortable with being uncomfortable. Challenge your team to rethink everything. Pick apart your budgets, rethink aspirational plans, and layer a healthy amount of realism into your work. But do so with a tone of optimism and innovation, rather than fear and doom.  

Prioritize operational discipline

Consider the adage, “haste makes waste” as you evaluate your current state of operational discipline. If you are like many companies, the recent growth frenzy may have inadvertently saddled your operation with a number of inefficiencies from sloppy processes to forgotten investments to high-cost inputs for the sake of expediency. The “old-fashioned” concept of profitability has suddenly reemerged with authority, and “unit economics” is all business leaders are talking about. 

In reality, a focus on profitability and operational discipline for businesses should be evergreen and is a critical attribute of being built to last. Take this opportunity to rethink your entire operation and look for ways to maximize cash and extend your runway. Do you need to revise your customer payment terms to see if more flexibility can smooth out your revenue stream?  Can you find new partners that will pay faster to try and improve your working capital position? Consider renegotiating with your vendors to reduce inventory accumulation. Examine your tech stack to see if you can cancel underutilized services. Operational discipline must be a constant mindset with everything regularly examined for the potential to extend the longevity of your business. 

Treat ROI as your North Star

Even with improved operational discipline, you must find ways to deploy your precious resources and prioritize decisions to deliver the highest ROI possible. As you consider opportunities, pressure test them to see how likely they will promote capital-efficient growth and support your company’s ability to accelerate when the economy rebounds. 

For example, real estate and people are two of the most capital-intensive items for a company. While both may provide value for a business, cutting valuable talent may be far more costly than reducing real estate expenses in the long run, given the competitive labor market and the outsized contributions top talent provides. 

Similarly, rationalizing your marketing budget should be done with the future in mind. Encourage your teams to distinguish between branding expenses and budget for direct response initiatives that can drive measurable ROI at scale. Regularly scrutinize your advertising spend, rebalance your budgets toward the highest-performing platforms, and leverage data to drive efficiency in targeting your ideal customers. At a minimum, use your own data to identify your best-performing customers and look to mirror them on paid advertising platforms. If possible, make investments in emerging technology solutions to ensure you’re getting the best return on your advertising dollars to combat recent disruptions in the digital advertising ecosystem.  

Seek out opportunities to innovate

Since January of this year, the stock market has taken us on a wild ride, with economists struggling to make sense of simultaneous low growth and low unemployment. While this may all feel unprecedented, what is not new is the concept of economic volatility. 

As economists continue to debate if we are in a bear market, a bull market, or a bear in a bull, business leaders need to remember that chaos creates historic opportunities to innovate. Business leaders should evaluate the product market fit of their core value proposition and determine just how differentiated their offering is from the competition. 

By leveraging their existing knowledge and expertise, they should explore tangential markets and opportunities where their existing competitive edge can translate into new areas of growth. It is critical to consistently allocate resources and budget towards “innovation bets” each year, even in these challenging times, to ensure that your company is not left behind and grasping onto market share in a dying category. 

Just the way Cisco emerged stronger after the crash in 1987, Google and PayPal after the 2000 dot-com bust, Airbnb and Stripe shortly after the 2008 financial crisis, and DoorDash in 2020 during the pandemic, economic downturns force a survival- of- the- fittest mentality such that many of the greatest innovations are born from the most turbulent times.  

The late, great Formula One driver Ayrton Senna once said, “You cannot overtake 15 cars in sunny weather…. but you can when it’s raining.” Use this moment to rise to the occasion and build something truly remarkable. 

Regardless of the economy, leaders must embrace and sustain a disciplined mindset. Monitor your cash flow, stay nimble as you grow, and remain mindful as you build out operational processes to deploy resources towards the highest-return opportunities efficiently. The markets will reward companies that remain measured during uncertainty, manage their operations effectively, take calculated risks to seize opportunities, and produce innovations that enable a business to stand the test of time. 

Alex Song is the Founder and CEO of Proxima.

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