Companies that innovate find new ways to thrive and keep ahead of trends

August 26, 2019
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This article was written and published in Spanish and has been translated into English via Google Translate. Click here to read the original article.

Innovation is in fashion. It has become a mainstream term and companies strive to get on that wave so as not to miss the boat. Innovation has become in its own right the differential value that allows a company to remain competitive. There is no third way: innovate or disappear. However, dazzled by the glamour of the concept, sometimes it is forgotten that beyond trends there are powerful economic reasons that support the need to innovate.

Contrary to what happened a few years ago, we live in a time when access to financing is no longer an odyssey for companies. In fact, as the authors Michael Mankins, Karen Harris and David Harding recently pointed out in a Harvard Business Review article (How the strategy changes in times of very abundant capitals), we live in an era marked by the overabundance of capital. According to Bain & Company’s Macro Trends Group, global financial capital has increased threefold in the last 30 years and already accounts for 10 times the world GDP.

The implications of this change of scenery are numerous. Without going any further, it means that it is much easier and cheaper for a company to obtain financing, whether it is through the issuance of debt, or if it opts for a capital increase. With the lowest interest rates of recent years, financing costs are much more affordable overall.

Under these new conditions, the strategies of companies based on capital accumulation no longer make much sense. Filling the box at all costs should not be the focal point of business strategies. Because the management of available financial capital has ceased to be a competitive advantage alone.

In the HBR article, analysts demonstrate that in times of abundant capitals, what the stock market and shareholder most value is generating growth and innovation, not operational efficiencies. The study generated shows how the stock market value of a company that grows its EBITDA by 1% due to growth and innovation, generates more and more times an increase in the intrinsic value of the company than a company that generates the same 1% by efficiency.

In times when capital is abundant and cheap, investors are looking for risky companies with the capacity to generate new wealth and growth, not just companies focused on doing well what they have been doing for years.

Just think of the five most capitalized companies in the world and we realize that they all have an innovative and growth profile. When was the last time we saw an Amazon efficiency plan in the newspapers or at its board of investors?

Another good example is found in the tourism industry. To a traditional hotel chain, each new opening forces you to bring out your huge financial muscle and make a huge effort in terms of resources. All to obtain, at best, a 10% return at the end of the year. However, a company in the new economy such as Airbnb is able to generate profits up to ten times higher without owning a single apartment owned by those operating in its network.

The investors themselves, little given by nature to risk, are disappointed with the results of manual bets and demand new lines of action. Companies need to figure out new ways to get value from that financial capital. And that new path that opens up on the horizon is called innovation.

The most innovative companies have understood that their most precious value is not the money they are able to accumulate, but their ability to generate solutions to real problems of their customers and bring them to the market in an increasingly short space of time.

But if capital is not scarce, what is that other hard-to-find factor that can determine success? Without a doubt, it is talent. And in what way can I attract talent? Here the only answer is with excellent leadership. The new approach demands a change of mindset. Innovation involves shifting the focus of a few short-term insurance projects, to thinking in the long term and to more diversified bets, with a higher risk factor and less time travel. It assumes, as the CEO of Sanitas, Iñaki Ereño, says, to manage two schedules: one to three months and another to ten years.

It means moving from aspiring to having a healthy company today to having a sustainable company tomorrow.

This article was written and published in Spanish and has been translated into English via Google Translate. Click here to read the original article.

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August 26, 2019

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