Recessions and Innovation are Funny Things
Recessions are funny things – on the one side economic horror story on the other harbinger of an explosion of innovation opportunities – sort of a “is the glass half full or half empty” coin toss really.
I always find it interesting to watch how companies react during bad times – their reactions, whilst perfectly understandable from a human emotion standpoint – can be dreadfully short sighted at times. In fact – it’s this over reaction towards short term thinking that triggers the economic horror stories out there as people get laid off, companies post ever lower profits, and economic doom and gloom dominates the newspaper headlines.
For example – take this typical strategical cycle that typifies corporate recessionary behavior:
In a non-recessionary environment, people are employed; stability reigns, and people feel comfortable enough to part with their hard earned cash on non-essential items. And when times are really good – people approach their purchases in a more “cavalier” attitude looking at a wide array of factors beyond whether or not it simply “does the job” – and happily paying for things like extra “coolness”, the right brand, or a color that matches those shoes you bought last week. In this environment, companies can lazily throw low-level innovations at the market with impunity to capture a fickle market that carefully matches their purchases with their lifestyle and changes frequently because of the easy availability and reliability of cash to the consumer. For the last seven years or so (and some might say longer as the 2001-2002 recession was a short one) we’ve been facing just such a market.
In a recessionary environment, consumers get jittery about spending their money as stability is no longer guaranteed – consumer mentalities change and so do their buying preferences. Top of the list of consumer preferences are now two simple elements:
- Whether or not the product can do the core job needed
The net effect of that, on most markets, is to essentially commoditize all the products within because the incremental differences between competing products are no longer valued individually. As a result, the companies able to provide the least expensive goods that still do the job begin to take on market share.
In order to compete, companies likewise begin to compete on price, initially by reducing their operating costs (i.e. headcount), which allows them to be able to maintain margins and profits on lower demand. Then eventually they begin to sacrifice margin for increased market share in a bid to make up the reduced margins with increased volume. Whilst these moves result in short term gains, they only last as long as it takes for competitors to do the same, which usually isn’t long.
Eventually companies reach a point at which they are operating at minimal margins that barely cover their costs – and go on to the next stage – a battle of bank balances as companies continue to reduce prices at the cost of the business until only one remains….
Sound familiar? It should, the car industry pretty much just followed this model of competition to its demise, and current bid to be bailed out by the US Government. There are several other similar cycles as the failure on one group of companies resonates up and down their value chains to affect the entire economy.
Yet out of every major recession, several companies emerge as winners. Companies that have somehow found a way to separate them-selves from competition, found new ways to do business, or capitalized on new markets that no one new existed before. Home Depot, the iPod, the PC, even MTV have all triumphed from past recessionary environments. In a recessionary world it really is “He Who Dares,Wins” (read this McKinsey Quarterly article for a fantastic quantification of this).
It’s easy to overlook the big obvious solution to the whole problem and get caught up in all the doom and gloom that dominates our media headlines as so many other commentators have.
Recessions result in one certainty – BIG CHANGE – and the longer and deeper the recession, the more change there is – in your consumer/client, in your market, in your industry, in global business as a whole.
Big Change is scary – but Big Change is good. Big change means BIG OPPORTUNITIES. Opportunities to change the game, to take advantage of weaker competitors, to find new and novel ways in which to not only survive, but to thrive.
Innovation is all about realizing and capitalizing on the opportunities available to your company, and it’s the way out of vicious cycles like the one described above.
The great news is that companies intent on winning the game are now forced to look at innovation with a sense of urgency previously unseen. They will look towards innovation to revisit past assumptions, norms, and directions in a bid to become different from the competition in the eyes of the consumer/client. To no longer be able to be compared on a like for like basis, and to compete in a market of one instead of many.
Winners emerging from this downturn in the economy will develop an innovation strategy that looks at innovation in a very unique way from most companies. They will see innovation as something that can impact all parts of the business, in short and medium, as well as long-term time frames.
1) Short Term Innovation Strategies
In the short term, winning strategies look to help companies with their short-term goals of increased efficiencies. They do this by developing new and novel ways for the company to achieve cost reductions, process improvements, and business model changes that can catapult them into a new league of efficiencies that are impossible with old-school models. The more sophisticated the efficiency developed, the more defendable and long lasting that innovation will become. This will give the company a short term cost edge on its competitors, which is more conducive to the long-term health of the business than simple cost cuttings and harder to emulate. Dell’s development of their unique business model in the 90’s is a classic example of the type of base changes that can propel a company into a market of one.
Embracing the creative potential of their employees, GE is currently using Imaginatik’s software to drive their DMP (Direct Material Productivity) Work Out process. This looks at reducing overall costs through design changes whilst maintaining or improving quality and customer acceptance. The results will directly impact the short-term productivity of GE’s business units.
Another client I worked with had the interesting idea of creating a marketplace to drive efficiencies in the way the company used external consultants. Rather than individual bids or blind RFP processes – they invited all the consultants into an online system (with company names suitably anonymised) where they could not only see everyone else’s proposals, but could also add on to other company’s proposals. This allowed the client company to pick and choose the best combination of services to fit their need – and to negotiate pricing in a very transparent process!
The key here is to focus on short-term strategic objectives, and on areas that will result in ideas developed and implemented. In many cases this means not looking to create new projects, but rather to enhance existing funded projects by providing them with new and novel solutions to the problem they are already addressing.
For example, why not play into Six Sigma and Lean projects? They’re all about increasing efficiency in company processes – however all of them rely on small teams of people studying a process at length and then brainstorming between themselves to come up with a more efficient process. In today’s technology literate and collaborative environments, it seems awfully short sighted to not involve hundreds or thousands of people in the process to come up with better ideas.
Georgia-Pacific was a great example of this. One of their cost reduction initiatives I worked on zeroed in on shaving the cost of the cardboard tubes inside rolls of paper towels. By embracing the collaborative innovation infrastructure at their disposal, mill workers from among the company’s 16,000 North American employees quickly responded with little changes that shaved about $1.2 million a year, or roughly 4%, off the cost of the tubes – not too shabby, eh?
2) Medium Term
When looking at the medium term you can start looking at how to take advantage of some of the more obvious changes in the changing marketplace.
I loved one story I read about how Starbucks are doing just that. They’re currently testing out new pricing strategies to try and overcome the recessionary effects on their consumers that are much more price sensitive nowadays, and no longer want to be spending $4 on a daily “Grande pumpkin spice vanilla latte (hold the cream, it makes me fatter)”. One idea they’re piloting at the moment offers consumers small bottomless cups of coffee (i.e. free refills, not that the cups don’t actually have a bottom, that would be just silly…) for $1. The move ensures that Starbucks customers return to Starbucks for their daily fixes regardless of household budget changes. It also provides Starbucks with opportunities to up sell them additional products like music and baked goods that will contribute to the overall margin per customers that they achieve while satisfying new needs for the customer.
Several clients I’ve worked with have also had fantastic results in the medium term by looking for adjacent markets for existing products. One performance chemicals company I worked with found a multi-million dollar new market for their existing waterproofing wrap used in the construction industry. This was found when one curious sales person found that his client was buying the product to rapidly waterproof boats they were manufacturing instead.
Bayer, another Imaginatik client did something similar, collecting 147 ideas from their employee base for alternative uses and markets for one of their existing products. This resulted in Bayer being able to enter a brand new market area with a new application in less than a year.
Finally, when looking at the medium term, don’t underestimate the benefits of working with your business partners. One large tech company ran one event over a 30-day period on optimizing their supply chain with select partners. The resulting ideas picked for implementation realized over $2 Million in benefits and saved them over 3000 man-hours! I think the correct terminology for those kind of benefits in my current US homeland is “There’s gold in them’ hills”!
3) Long Term
Long-term strategies are all about changing the game – finding new products, new markets and taking advantage of concepts such as Blue Ocean Spaces, Disruptive Innovations, or Lead Adopters (depending on whom you choose as your academic guru of choice). There’s no shortage of proof of the potential that a good innovation program and process can deliver to your business. Whether it’s the ability to take your business to new heights (i.e. Apple or Google for several over publicized examples of innovation programs of different sorts at work), or more importantly, its ability to provide longevity to your business, even if that means changing the nature of the business (i.e. Nokia– originally a forestry company, then rubber products (they still make tires bizarrely), and now a telecoms giant – what could be next?).
However, success in the long term has to be driven by success in the short and medium term. Their ability to drive real value will give you the credibility and time to drive the big changes that will propel your company into the next generation.
After all, winners emerge from recessions and innovation is what will make you one of those winners.
Boris Pluskowski is the Founder of The Complete Innovator where he regularly shares new ideas and best practices on how big companies can harness Innovation, Collaboration and Social Media to drive new sources of value throughout the enterprise.
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