The Covid-19 pandemic and its unprecedented economic fallout are testing how successfully many companies can react to changing market conditions. As the business models of entire industries are upended, the ability to innovate rapidly and smartly is not just a competitive advantage, it could be what decides which companies thrive and which will falter in the post-Covid economy.
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But determining a company’s innovative potential is not always easy. Here are five signs that a company is poised to pivot.
It Backs Potentially Game-Changing Ideas
Disruptive companies build products and business models that are not just new, but the first of its kind. Many startups fit this category, but having an initial spark does not ensure the innovation fire will keep burning. To continue to grow, a company must commit to innovation over the long term—even if it means disrupting itself. Netflix pivoting to streaming as its DVD rental business tanked is a classic example, as is Apple’s bold decision to discontinue making most iPods and focus on iPhones, remaking the music industry along the way.
It Creates Space for Disruptive Innovation
Disruptive innovation does not just happen, employees need time and space to focus on ideas and prototypes that can extend the business’ market value. Many companies, such as Lululemon and CVS, have built dedicated “innovation labs.” These are often deliberately sited away from the corporate head offices and in creative locations, such as near a university or startup hub, where employees can be exposed to new ideas and collaborate with people outside the business. These specialized labs work: in three years, Target’s product design lab has developed six in-house brands worth $1 billion each.
It Has a Robust Innovation Management Process
Innovation begins with a culture open to ideas and iterating, but it needs structure to ensure great ideas are pursued and funded. Organizations that connect with a diverse stakeholder ecosystem are much more likely to excel at innovation, so structures need to be in place that encourage, collect, and evaluate ideas from employees across the company, as well as from vendors, customers and partners. These may include insight programs that bring in ideas from vendors, customer intelligence platforms or employees tasked with overseeing and managing an innovation strategy.
It Invests in the Future
Innovation does not happen overnight or without financial commitment. R&D funding is not a true proxy for innovation, but how much a company invests in it and how successful its pipeline has been can be telling. Amazon, for instance, spends more than $20 billion a year on R&D. Corporate venture capital is another area to watch. There are more than 1,500 corporate venture funds, which companies use to scout for new technologies and seed ideas in startups. These funds are essentially peering into the future to determine which new technologies represent opportunities and threats to the parent company. During the 2008-2009 downturn, many corporates reduced their venture investments, so those that stay the course this time are signaling a strong commitment to continuous innovation.
It Balances Risk and Reward
The truth is that disruption requires risk-taking, and failure is a necessary part of the innovation process. The key is for companies to find the right balance between risk and reward. Many startups adopt a strategy of “failing fast” in order to experiment rapidly, learn from mistakes and progress towards breakthrough innovations. That approach has traditionally been harder for established companies. However, in the post-pandemic economy, disruption will be the new normal for the foreseeable future. That changes the risk-reward calculus. Indeed, in such uncertainty, choosing not to be bold and innovate could be the biggest risk of all.
About the Author
Ludwig Melik is CEO of Planbox,a provider of agile innovation management software.
Based on some comments, it appears we scared a few people with A Crisis Is Coming. Our article warns, “A financial crisis will likely follow the Fed’s “higher for longer” interest rate campaign.”We follow the article with more on financial crises to help calm any worries you may have. This article summarizes two interest rate-related crises, Long Term Capital Management (LTCM) and the lesser-known Financial Crisis of 1966.
We aim to convey two important lessons. First, both events exemplify how excessive leverage and financial system interdependences are dangerous when interest rates are rising. Second, they stress the importance of the Fed’s reaction function. A Fed that reacts quickly to a budding crisis can quickly mitigate it. The regional bank crisis in March serves as recent evidence. However, a crisis can blossom if the Fed is slow to react, as we saw in 2008.
Before moving on, it’s worth providing context for the recent series of rate hikes. Unless this time is different, another crisis is coming.
LTCM’s Failure
John Meriweather founded LTCM in 1994 after a successful bond trading career at Salomon Brothers. In addition to being led by one of the world’s most infamous bond traders, LTCM also had Myron Scholes and Robert Merton on their staff. Both won a Nobel Prize for options pricing. David Mullins Jr., previously the Vice Chairman of the Federal Reserve to Alan Greenspan, was also an employee. To say the firm was loaded with the finance world’s best and brightest may be an understatement.
LTCM specialized in bond arbitrage. Such trading entails taking advantage of anomalies in the price spread between two securities, which should have predictable price differences. They would bet divergences from the norm would eventually converge, as was all but guaranteed in time.
LTCM was using 25x or more leverage when it failed in 1998. With that kind of leverage, a 4% loss on the trade would deplete the firm’s equity and force it to either raise equity or fail.
The world-renowned hedge fund fell victim to the surprising 1998 Russian default. As a result of the unexpected default, there was a tremendous flight to quality into U.S. Treasury bonds, of which LTCM was effectively short. Bond divergences expanded as markets were illiquid, growing the losses on their convergence bets.
They also wrongly bet that the dually listed shares of Royal Dutch and Shell would converge in price. Given they were the same company, that made sense. However, the need to stem their losses forced them to bail on the position at a sizeable loss instead of waiting for the pair to converge.
The Predictable Bailout
Per Wikipedia:
Long-Term Capital Management did business with nearly every important person on Wall Street. Indeed, much of LTCM’s capital was composed of funds from the same financial professionals with whom it traded. As LTCM teetered, Wall Street feared that Long-Term’s failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system.
Given the potential chain reaction to its counterparties, banks, and brokers, the Fed came to the rescue and organized a bailout of $3.63 billion. A much more significant financial crisis was avoided.
The takeaway is that the financial system has highly leveraged players, including some like LTCM, which supposedly have “foolproof” investments on their books. Making matters fragile, the banks, brokers, and other institutions lending them money are also leveraged. A counterparty failure thus affects the firm in trouble and potentially its lenders. The lenders to the original lenders are then also at risk. The entire financial system is a series of lined-up dominos, at risk if only one decent-sized firm fails.
Roger Lowenstein wrote an informative book on LTCM aptly titled When Genius Failed. The graph below from the book shows the rise and fall of an initial $1 investment in LTCM.
The Financial Crisis of 1966
Most people, especially Wall Street gray beards, know of LTCM and the details of its demise. We venture to guess very few are up to speed on the crisis of 1966. We included. As such, we relied heavily upon The 1966 Financial Crisis by L. Randall Wray to educate us. The quotes we share are attributable to his white paper.
As the post-WW2 economic expansion progressed, companies and municipalities increasingly relied on debt and leverage to fuel growth. For fear of rising inflation due to the robust economic growth rate, the Fed presided over a series of rate hikes. In mid-1961, Fed Funds were as low as 0.50%. Five years later, they hit 5.75%. The Fed also restricted banks’ reserve growth to reduce loan creation and further hamper inflation. Higher rates, lending restrictions, and a yield curve inversion resulted in a credit crunch. Further impeding the prominent New York money center banks from lending, they were losing deposits to higher-yielding instruments.
Sound familiar?
The lack of credit availability exposed several financial weaknesses. Per the article:
As Minsky argued, “By the end of August, the disorganization in the municipals market, rumors about the solvency and liquidity of savings institutions, and the frantic position-making efforts by money-market banks generated what can be characterized as a controlled panic. The situation clearly called for Federal Reserve action.” The Fed was forced to enter as a lender of last resort to save the Muni bond market, which, in effect, validated practices that were stretching liquidity.
The Fed came to the rescue before the crisis could expand meaningfully or the economy would collapse. The problem was fixed, and the economy barely skipped a beat.
However, and this is a big however, “markets came to expect that big government and the Fed would come to the rescue as needed.”
Expectations of Fed rescues have significantly swelled since then and encourage ever more reckless financial behaviors.
The Fed’s Reaction Function- Minksky Fragility
Wray’s article on the 1966 crisis ends as follows:
That 1966 crisis was only a minor speedbump on the road to Minskian fragility.
Minskian fragility refers to economist Hyman Minsky’s work on financial cycles and the Fed’s reaction function. Broadly speaking, he attributes financial crises to fragile banking systems.
Said differently, systematic risks increase as system-wide leverage and financial firm interconnectedness rise. As shown below, debt has grown much faster than GDP (the ability to pay for the debt). Inevitably, higher interest rates, slowing economic activity, and liquidity issues are bound to result in a crisis, aka a Minsky Moment. Making the system ever more susceptible to a financial crisis are the predictable Fed-led bailouts. In a perverse way, the Fed incentivizes such irresponsible behaviors.
The tide is starting to ebb. With it, economic activity will slow, and asset prices may likely follow. Leverage and high-interest rates will bring about a crisis.
Debt and leverage are excessive and even more extreme due to the pandemic.
The question is not whether higher interest rates will cause a crisis but when. The potential for one-off problems, like LTCM, could easily set off a systematic situation like in 1966 due to the pronounced system-wide leverage and interdependencies.
As we have seen throughout the Fed’s history, they will backstop the financial system. The only question is when and how. If they remain steadfast in fighting inflation while a crisis grows, they risk a 2008-like event. If they properly address problems as they did in March, the threat of a severe crisis will considerably lessen.
Summary
The Fed halted the crises of 1966 and LTCM. They ultimately did the same for every other crisis highlighted in the opening graph. Given the amount of leverage in the financial system and the sharp increase in interest rates, we have little doubt a crisis will result. The Fed will again be called upon to bail out the financial system and economy.
For investors, your performance will be a function of the Fed’s reaction. Are they quick enough to spot problems, like the banking crisis in March or our two examples, and minimize the economic and financial effect of said crisis? Or, like in 2008, will it be too late to arrest a blooming crisis, resulting in significant investor losses and widespread bankruptcies?
After a yearlong and extensive nationwide search, the American Society for Metabolic and Bariatric Surgery (ASMBS), the nation’s largest professional organization of bariatric and metabolic surgeons and integrated health professionals, has named healthcare association veteran Diane M. Enos MPH, RDN, CAE, FAND, to serve as its new executive director.
Credit: ASMBS
After a yearlong and extensive nationwide search, the American Society for Metabolic and Bariatric Surgery (ASMBS), the nation’s largest professional organization of bariatric and metabolic surgeons and integrated health professionals, has named healthcare association veteran Diane M. Enos MPH, RDN, CAE, FAND, to serve as its new executive director.
Before joining ASMBS, Enos, a registered dietitian and certified association executive with a master’s degree in public health from the University of Texas Health Science Center in Houston, was Chief Learning Officer of the Academy of Nutrition and Dietetics, the country’s largest organization of food and nutrition professionals. Enos was with the group for more than 20 years in various leadership positions and remains a Fellow of the Academy (FAND). Previously, Enos was Manager of National Consumer Communications for the USA Rice Federation.
“Diane brings a wealth of experience, a track record of success and new insights that will help strengthen our organization at a time of rising obesity rates and new thinking on how best to treat the disease and when,” said Marina Kurian, MD, President, ASMBS. “We expect increased utilization of metabolic and bariatric surgery and growing demand for the new class of obesity drugs to usher in a new era of obesity treatment that could transform public health.”
According to the ASMBS, more than 260,000 people had metabolic or bariatric surgery in 2021, the latest estimates available. This represents only about 1% of those who meet the recommended body mass index (BMI) criteria for weight-loss surgery. CDC reports over 42% of Americans have obesity, the highest rate ever in the United States.
“I’m looking forward to working with our team and our members to grow the specialty and increase the role of metabolic and bariatric surgery in the treatment of obesity,” said Enos. “Obesity remains the public health issue of our time and we owe it to our patients to remove barriers to treatment and help them navigate the new treatment landscape so they can turn their concerns about the dangers of the disease into action.”
Earlier this year, the ASMBS released a survey published in SOARD that found more than 6.4 million people thought about having bariatric surgery or taking obesity drugs for the first time amid the pandemic due to concerns over the link between obesity and severe outcomes from COVID-19.
Enos becomes only the second executive director in the organization’s history succeeding Georgeann Mallory who retired from the role in 2021. Kristie Kaufman, who has been with ASMBS for more than 20 years, served as interim executive director between 2021 and 2023, and has been promoted to Vice President of Operations.
About Metabolic and Bariatric Surgery
Metabolic/bariatric surgery has been shown to be the most effective and long-lasting treatment for severe obesity and many related conditions and results in significant weight loss.The Agency for Healthcare Research and Quality (AHRQ) reported significant improvements in the safety of metabolic/bariatric surgery due in large part to improved laparoscopic techniques.The risk of death is about 0.1%,and the overall likelihood of major complications is about 4%.According to a study from Cleveland Clinic, laparoscopic bariatric surgery has complication and mortality rates comparable to some of the safest and most commonly performed surgeries in the U.S., including gallbladder surgery, appendectomy and knee replacement.
About ASMBS
The ASMBS is the largest non-profit organization for bariatric surgeons and integrated health professionals in the United States. It works to advance the art and science of metabolic and bariatric surgery and is committed to educating medical professionals and the lay public about the treatment options for obesity. The ASMBS encourages its members to investigate and discover new advances in bariatric surgery, while maintaining a steady exchange of experiences and ideas that may lead to improved surgical outcomes for patients with severe obesity. For more information, visit www.asmbs.org.
From LTCM To 1966. The Perils Of Rising Interest Rates
Based on some comments, it appears we scared a few people with A Crisis Is Coming. Our article warns, "A financial crisis will likely follow the Fed’s…
Based on some comments, it appears we scared a few people with A Crisis Is Coming. Our article warns, “A financial crisis will likely follow the Fed’s “higher for longer” interest rate campaign.” We follow the article with more on financial crises to help calm any worries you may have. This article summarizes two interest rate-related crises, Long Term Capital Management (LTCM) and the lesser-known Financial Crisis of 1966.
We aim to convey two important lessons. First, both events exemplify how excessive leverage and financial system interdependences are dangerous when interest rates are rising. Second, they stress the importance of the Fed’s reaction function. A Fed that reacts quickly to a budding crisis can quickly mitigate it. The regional bank crisis in March serves as recent evidence. However, a crisis can blossom if the Fed is slow to react, as we saw in 2008.
Before moving on, it’s worth providing context for the recent series of rate hikes. Unless this time is different, another crisis is coming.
LTCM’s Failure
John Meriweather founded LTCM in 1994 after a successful bond trading career at Salomon Brothers. In addition to being led by one of the world’s most infamous bond traders, LTCM also had Myron Scholes and Robert Merton on their staff. Both won a Nobel Prize for options pricing. David Mullins Jr., previously the Vice Chairman of the Federal Reserve to Alan Greenspan, was also an employee. To say the firm was loaded with the finance world’s best and brightest may be an understatement.
LTCM specialized in bond arbitrage. Such trading entails taking advantage of anomalies in the price spread between two securities, which should have predictable price differences. They would bet divergences from the norm would eventually converge, as was all but guaranteed in time.
LTCM was using 25x or more leverage when it failed in 1998. With that kind of leverage, a 4% loss on the trade would deplete the firm’s equity and force it to either raise equity or fail.
The world-renowned hedge fund fell victim to the surprising 1998 Russian default. As a result of the unexpected default, there was a tremendous flight to quality into U.S. Treasury bonds, of which LTCM was effectively short. Bond divergences expanded as markets were illiquid, growing the losses on their convergence bets.
They also wrongly bet that the dually listed shares of Royal Dutch and Shell would converge in price. Given they were the same company, that made sense. However, the need to stem their losses forced them to bail on the position at a sizeable loss instead of waiting for the pair to converge.
The Predictable Bailout
Per Wikipedia:
Long-Term Capital Management did business with nearly every important person on Wall Street. Indeed, much of LTCM’s capital was composed of funds from the same financial professionals with whom it traded. As LTCM teetered, Wall Street feared that Long-Term’s failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system.
Given the potential chain reaction to its counterparties, banks, and brokers, the Fed came to the rescue and organized a bailout of $3.63 billion. A much more significant financial crisis was avoided.
The takeaway is that the financial system has highly leveraged players, including some like LTCM, which supposedly have “foolproof” investments on their books. Making matters fragile, the banks, brokers, and other institutions lending them money are also leveraged. A counterparty failure thus affects the firm in trouble and potentially its lenders. The lenders to the original lenders are then also at risk. The entire financial system is a series of lined-up dominos, at risk if only one decent-sized firm fails.
Roger Lowenstein wrote an informative book on LTCM aptly titled When Genius Failed. The graph below from the book shows the rise and fall of an initial $1 investment in LTCM.
The Financial Crisis of 1966
Most people, especially Wall Street gray beards, know of LTCM and the details of its demise. We venture to guess very few are up to speed on the crisis of 1966. We included. As such, we relied heavily upon The 1966 Financial Crisis by L. Randall Wray to educate us. The quotes we share are attributable to his white paper.
As the post-WW2 economic expansion progressed, companies and municipalities increasingly relied on debt and leverage to fuel growth. For fear of rising inflation due to the robust economic growth rate, the Fed presided over a series of rate hikes. In mid-1961, Fed Funds were as low as 0.50%. Five years later, they hit 5.75%. The Fed also restricted banks’ reserve growth to reduce loan creation and further hamper inflation. Higher rates, lending restrictions, and a yield curve inversion resulted in a credit crunch. Further impeding the prominent New York money center banks from lending, they were losing deposits to higher-yielding instruments.
Sound familiar?
The lack of credit availability exposed several financial weaknesses. Per the article:
As Minsky argued, “By the end of August, the disorganization in the municipals market, rumors about the solvency and liquidity of savings institutions, and the frantic position-making efforts by money-market banks generated what can be characterized as a controlled panic. The situation clearly called for Federal Reserve action.” The Fed was forced to enter as a lender of last resort to save the Muni bond market, which, in effect, validated practices that were stretching liquidity.
The Fed came to the rescue before the crisis could expand meaningfully or the economy would collapse. The problem was fixed, and the economy barely skipped a beat.
However, and this is a big however, “markets came to expect that big government and the Fed would come to the rescue as needed.”
Expectations of Fed rescues have significantly swelled since then and encourage ever more reckless financial behaviors.
The Fed’s Reaction Function- Minksky Fragility
Wray’s article on the 1966 crisis ends as follows:
That 1966 crisis was only a minor speedbump on the road to Minskian fragility.
Minskian fragility refers to economist Hyman Minsky’s work on financial cycles and the Fed’s reaction function. Broadly speaking, he attributes financial crises to fragile banking systems.
Said differently, systematic risks increase as system-wide leverage and financial firm interconnectedness rise. As shown below, debt has grown much faster than GDP (the ability to pay for the debt). Inevitably, higher interest rates, slowing economic activity, and liquidity issues are bound to result in a crisis, aka a Minsky Moment. Making the system ever more susceptible to a financial crisis are the predictable Fed-led bailouts. In a perverse way, the Fed incentivizes such irresponsible behaviors.
The tide is starting to ebb. With it, economic activity will slow, and asset prices may likely follow. Leverage and high-interest rates will bring about a crisis.
Debt and leverage are excessive and even more extreme due to the pandemic.
The question is not whether higher interest rates will cause a crisis but when. The potential for one-off problems, like LTCM, could easily set off a systematic situation like in 1966 due to the pronounced system-wide leverage and interdependencies.
As we have seen throughout the Fed’s history, they will backstop the financial system. The only question is when and how. If they remain steadfast in fighting inflation while a crisis grows, they risk a 2008-like event. If they properly address problems as they did in March, the threat of a severe crisis will considerably lessen.
Summary
The Fed halted the crises of 1966 and LTCM. They ultimately did the same for every other crisis highlighted in the opening graph. Given the amount of leverage in the financial system and the sharp increase in interest rates, we have little doubt a crisis will result. The Fed will again be called upon to bail out the financial system and economy.
For investors, your performance will be a function of the Fed’s reaction. Are they quick enough to spot problems, like the banking crisis in March or our two examples, and minimize the economic and financial effect of said crisis? Or, like in 2008, will it be too late to arrest a blooming crisis, resulting in significant investor losses and widespread bankruptcies?
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