Innovating During a Recession: A Key Strategic Move

Jon Marshall, president

Innovation Frameworks LLC

   Faced with the sobering realities of our economic climate, many companies and organizations have had to scale back and take protective measures to ensure continued survival. During times like this, it’s natural to cut what we perceive as non-essential activities and initiatives to protect the core of our businesses.
   However, history has repeatedly shown that those who exhibit creativity and courage during tough times enjoy a strategic advantage as the economy inevitably swings back into a more prosperous state. Leaders who can keep their cool and think strategically under the pressure of a down economy can lead their companies to discover and exploit opportunities their nervous and reactionary competitors miss. Somehow, they find the resources to leverage those opportunities into a competitive advantage.
   As American Express CEO Ken Chenault said in Fortune magazine: “A difficult economic environment argues for the need to innovate more, not to pull back.”  The question for most of us is how to pull that off given the diminishing resources, layoffs, and pressure to perform inherent in the current economic reality?
   One approach is to focus tightly on high-leverage innovations while deferring or discontinuing less strategic aspects of your business. This begs the question: what are the highest-leverage innovations we can pursue?
   The answer to that question presents some interesting choices. For some companies, business model innovation is the right answer. Your business model addresses five building blocks of business success:  who you serve, what you provide (values and customer outcomes), how you provide it, how you make money at it, and what differentiates you from your competition. Each of these five basics can be improved, or even revolutionized, through innovation. For example, you might be able to broaden the client base you serve through marketing innovations, or by adding value in adjacent areas. Expanding “How you provide it” might be as simple as offering certain products that were previously available only through classical distribution methods via the internet.
   When pondering “How you make money,” consider this: most ink-jet printers are sold at cost, or even at a loss. The real profit is made on the sale of ink which, ounce for ounce, costs more than gold. The manufacturer essentially regards the printer as a vehicle to sell ink – counter-intuitive, but an excellent business model. Can you apply a similar idea to your products?
   In considering “What we provide,” the temptation is to be literalists: for example, “We sell peaches.” But in fact, customers are buying more than peaches. Why do they buy your peaches, rather than your competitor’s? The answer is customer-service experience, quality and outcome. Learning what service experience, qualities and outcomes customers require from your products can help you add customer-pleasing features, products and services.
   The fifth element of the business model – how you differentiate yourselves from your competitors – is one of the most fruitful areas to apply innovation, particularly during a recession. Customer values and needs change during tight economic times. People will always need food. But their needs have likely changed. For example, raw cost may become a more important decision factor than premium quality. But most companies and people are still working, and they need all the help they can get to function more efficiently and with less waste.
   Here that foundational tenet of economics, the benefit/cost ratio, supplies guidance. How can you apply innovation to increase benefit and reduce cost?
   Particularly during a recession, there is more to this ratio than meets the eye. A more complete way to look at it is (benefits + reduced non-value) to (cost + increased non-costs). What does this mean?
   First let’s look at the top line. “Reducing non-value” means focusing innovation on the things that really matter, rather than squandering resources on non-essentials. In this economic climate, people are looking for basics, not delighters. For most of us, just keeping our job or our company will be delightful enough.
   Now let’s look at the bottom line of this ratio. “Increasing non-costs” is not the same as reducing costs. It means finding ways to add value by employing low-cost but high-value resources. The distinction is important. When you cut costs, you cut capabilities. What we’re talking about here is finding innovative ways to retain key capabilities at a reduced cost. A great example is using open-source software instead of expensive purchased software – a Java-based office suite is free, while the alternative costs hundreds of dollars.
   Another way to “increase non-costs” during economic downturns is by making better use of the brainpower that already exists in our organizations. It may be tempting for managers tend to introvert and closet themselves with other executives to try to plan there way through the recession. The most common outcome of such top-down discussions is cost-cutting ideas that result in employee layoffs.
   But if you don’t ask your employees to help, you’re cutting yourself off from an invaluable source of innovation creativity. People are smart, especially when their financial survival is on the line. Seeking ideas from the broadest possible intellectual base within your company or organization, rather than restricting the discussion to a limited pool of executives, can open up surprising avenues of innovation. Managed effectively, it’s a powerful tool to help you innovate your way through a recession.
   To feed this fertile source of creativity, you’re going to need to ask the right questions – or to put it another way, you’re going to need to create the right challenges. The thought and effort you put into crafting focused innovation challenges that will elicit new and useful ideas is the key to a successful outcome.
   The first part of the recession challenge is to use innovation to keep your company healthy and growing. Next, focus on the opportunities inherent in a recessionary business environment. These opportunities include:

• The ability to hire key talent lost by other companies
• Market niches made available by retreating and failing competitors
• Rapidly changing customer values open up new opportunities for product and service innovation
• The chance to consolidate critical resources by eliminating marginal businesses and projects

   Many companies don’t realize the devastating long-term impact of losing key innovation talent until it’s too late. To maximize your organization’s creative and innovative capacity, it’s crucial to retain the top innovative talent in your company. By doing everything you can to keep key creative talent on the payroll, and by demonstrating that you value innovation even during difficult economic times, you will enjoy a competitive advantage that will pay dividends now and in the future, and help you out-last and out-smart your competition.

   No one would argue that recessions are painful and dangerous. But they also present opportunities for those who can maintain a strategic view and provide positive and optimistic leadership for their company. Finding ways to balance innovation with economic survival will provide you with a powerful advantage once more optimistic economic conditions return. You’ll find your competitors scratching their heads and asking “How’d you do it?”