During her tenure as CEO of global luxury fashion house Burberry, Angela Ahrendts once remarked: “I was taught to never waste a good recession.”
Her advice is on point today as businesses hunker down and get prepared for an anticipated economic downturn. While no one can predict with complete accuracy when or if a recession will hit, it’s clear the end is near for our near-decade-long burst of economic growth. A recent survey conducted by Duke University
concluded that a recession in 2019 was looking “likely.” Nearly half of the executives surveyed believe that the United States will enter a recession by the end of 2019, and 82% expect that a recession will happen by the end of 2020.
Too often, organizations respond to downturns by slashing resources, shutting down long-term innovation investments and instead focusing only on short-term priorities. But a challenging economic environment calls for the need to innovate more
, not less. Business leaders should look to capitalize on recessionary cycles to set a strategic course for sunnier days.
In good times---and especially in bad---innovation remains a critical lever for organizations to achieve their long-term strategic objectives. But when the economy tumbles, it is especially important that companies approach innovation in a strategic and thoughtful way because the margin for error decreases as times get tough. A strategic innovation plan will help companies do more with less and continue to move forward.
Creativity loves constraints
The good news is that those organizations that make innovating in a downturn a priority will find that a constrained environment can actually foster creativity that leads to powerful waves of long-term growth.
Indeed, following the recession of 2008, Richard Florida who served as Atlantic
senior editor at the time, noted that companies would do well to think of an economic downturn as a ‘reset”, facilitating innovations spurred by hard times to drive a post-recession economy. “It is not just a period of economy decay; a reset is a chance to start over,” he suggested.
However, too often, organizations put innovation on the back burner during economic downturns. In 2009, Michael Mandel, a chief economist for Business Week
, wrote a cover story
that included an astounding statistic. His research during a three-year, pre-recession period (2006-2008) revealed that only nine percent of public and private companies were engaged in either product or service innovation of any kind. Even if that number improved six times over a decade later, it would mean that half of companies would still be disengaged when it came to innovation.
Organizations that fail to focus on innovation during this next anticipated downturn do so at their own risk. Preetesh Sewraj
, CEO and chief innovation analyst at Product of the Year, suggests that in an economic downturn, brands would do well to push the innovation agenda. “Too often, the immediate response to an economic downturn is to be overly cautious, which is understandable,” he explained. “However, brands that invest in themselves and offer more value will not only retain existing customers but will create opportunities to gain new ones. The opportunity cost of not investing in innovation during a recession will far exceed any short-term cost savings.”
Back in 2011, marketing guru and author Seth Godin coined the term “Forever Recession
.” The concept suggests that apart from the cyclical recession that inevitably comes and goes, we are living in a continuous state of crisis as businesses are challenged by constant disruption and a fast-changing economy. And that can be a very good thing because it forces companies to change and adapt faster, invest more effort in upgrading skills, knowledge and focus and figure out how to do something impactful that will meet their customers’ needs. In short, crisis can make people more innovative and productive.
“It strikes me that nearly every startup that has made it to greatness started in a proverbial – sometimes actual – garage,” said JT Kostman, Grant Thornton managing director, Applied Artificial Intelligence. “They started when times were lean and hard. It’s been said that “necessity is the mother of invention” – and the need to eat has driven more than a few hungry entrepreneurs. Recessions can offer the benefit of reintroducing hunger to established organizations. If channeled properly, that hunger can become a powerful fuel to drive innovation and intrapreneurs.”
“It’s been said that “necessity is the mother of invention” – and the need to eat has driven more than a few hungry entrepreneurs. Recessions can offer the benefit of reintroducing hunger to established organizations. If channeled properly, that hunger can become a powerful fuel to drive innovation and intrapreneurs.”
JT Kostman, Ph.D
Managing Director, Applied Artificial Intelligence
Grant Thornton, LLP
Economic downturns often can signal the emergence of a new competitive landscape. While such periods can be a death knell for some companies, others use it to their advantage. To ensure that the next economic downturn coincides with an innovation upturn for your business, consider these 12 action steps:
A dozen action steps to take now 1. Drive the innovation agenda.
Truly successful innovation efforts always start at the top. CEOs must drive the innovation agenda during and through a downturn. Rather than slashing innovation budgets in a recessionary economy, CEOs should encourage management and teams to deliver market-leading products and services.
2. Innovate with purpose.
When facing a downturn, organizations would do well to prioritize investments in a way that moves beyond just profitability and centers on its core purpose. A report
by the Economist Intelligence Unit revealed a distinct connection between purpose and innovation. Sixty-three percent of executives from across three global industries believed that having a sense of purpose and aspiration beyond their day-to-day commercial mission made their company more innovative and more able to disrupt or respond to disruption.
3. Be ruthless in prioritizing.
When it comes to prioritizing innovation investments in a downturn, be strategic. When resources are scarce, avoid “walking dead” projects and instead be ruthless when it comes to making decisions on when to pull the plug. Leaders should be asking key questions such as “How much risk remains?”, “What’s the upside potential of the investment?” and “What is the true cost of the next round of tests and what learning will they provide?” Conduct a portfolio scan to uncover projects that are over budget, support unprofitable product lines, or are just not a good match with current or future customer needs.
“Innovation isn’t just about creativity and generating new ideas. It starts by aligning innovation investments with the firm strategy – critical when making priority decisions and outcomes that matter to clients and the bottom line. And during an economic downturn, firms that continue disciplined investment in innovation, grounded in measurement and rigor are able to fuel outsized business growth.”
Managing Director, Innovation
Grant Thornton, LLP
Avoid the temptation to prioritize short-term efforts that promise immediate payback over longer-term efforts with more questionable payback. Potential rather than performance alone is the right guide for innovation decisions. Focusing solely on the immediate, core business can lead companies to diminishing returns from investments while missing great growth opportunities.
As Katrina Teague, Grant Thornton’s managing director, Innovation noted, “Innovation isn’t just about creativity and generating new ideas. It starts by aligning innovation investments with the firm strategy – critical when making priority decisions and outcomes that matter to clients and the bottom line. And during an economic downturn, firms that continue disciplined investment in innovation, grounded in measurement and rigor are able to fuel outsized business growth.”
4. Focus on “adjacency innovation”.
In a downturn, business leaders must figure out how to do more with less which requires different thinking about innovation management. Rather than make big bets on a single, radical innovation, companies can consider allocating resources to an “adjacency innovation” which can be less risky but still generate good pay-offs. Doing so requires using core competencies to move beyond the current business into a space that is adjacent. Examples include taking an existing product to a new customer segment or serving an existing customer with a new product.
5. Move with your customers.
Challenging economies expose unmet customer needs, making it a good time to identify opportunities for product or service development. Use this time to listen closely to the market and respond with innovation and research and development efforts where the market is speaking most loudly. Consider the case of Apple which continued to invest in 2003, when the Dow was at historic lows over a 10-year period. At the time, CEO Steve Jobs explained his decision: “What has happened in technology over the last few years has been about the downturn, not the future of technology. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets. And that’s what we’ve done.”
Economic downturns can shift customer needs and buying habits which may or may not be permanent post-economic recovery. As a result, relying on self-reported data garnered by traditional consumer research may not provide enough insight. Instead, make sure your innovation strategy includes building and testing scenarios that elicit unstated and as-yet-unrecognized customer needs in the near and long terms. Use the insights to shift investments to projects that help customers address their pain points, and position your offerings to satisfy their needs in the upturn. In short, make sure your company is a problem solver in tough times.
6. Explore new markets.
When casting your net in down cycles, remember to fish where the fish are. Consider the case of Groupon which launched its platform in November 2008 that allowed companies to reach consumers with easily accessed promotions and deals. Successfully filling a need for both consumers and businesses, Groupon effectively created a new category by seizing on a cultural and economic flashpoint, which resulted in one of the largest public offerings at the time.
7. Apply process innovation to reduce costs.
Don’t limit your innovation thinking to new products or business models. Recessionary cycles can also be a good time to focus innovation efforts on reducing operating costs. Process innovation can improve production or delivery methods or result in significant changes in techniques, equipment and software. Increasing service while increasing margins can help you prepare for post-recession growth.
8. Fail cheaply.
It is a given that companies that are truly innovative will fail. Those who don’t are simply playing it safe. If you are going to fail, make sure you do it as cheaply as possible. During a downturn, it’s especially critical to embrace the “build it, try it and fix it” mentality.
9. Expand partnerships.
In Asia, they use a great expression: “Before you can multiply, you must first learn to divide.” The idea is that if you want to grow your business, you must learn to partner with others and give them a vested interest in your success. Downturns demand a more collaborative approach to innovation. Partnerships with universities, innovation partners, suppliers, research labs, governments and even customers offer good opportunities to share costs, spread risk and combine resources.
10. Invest in technology to drive repeatable innovation.
The innovation process should be sustainable, not accidental, especially during a downturn. Using the right technology, companies can ensure their innovation is a repeatable process. Aggressively scout technology and develop a broader partner and supplier network to identify and vet opportunities. Consider using short-term or ad-hoc teams to scan opportunities across your business ecosystem.
11. Closely track Return on Innovation.
In a sluggish economy, organizations have less room for error. Measuring closely the return on innovation efforts is critical to ensure any investments yield results that meet customer demand.
12. Address innovation gaps.
Now is the time to undertake a sober assessment of the strengths and weaknesses of your innovation system. Fix the capability gaps now so that you can launch projects with fewer resources. When the upturn comes, this work will also pay dividends in terms of speed to market, quality of execution, and capacity.
With the next economic downturn likely around the corner, now is the time for companies to unleash its creativity. Innovation thrives when faced with no other choice. In fact, history has proven that necessity truly is the mother of innovation. When faced with challenges, it’s human nature to want to hunker down and just protect the nest. But businesses intent on achieving long-term growth objectives need to build it bigger by innovating in
a downturn. Those companies that emerge from recessionary cycles stronger and ahead of their competition understand the true value of innovation. Use this time to widen the gap.
Managing Director, Innovation
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