Innovating through a recession
September 9th - 2008 Oakland Posted in Open innovation |
For companies, innovation is a risky and expensive activity and recessions are about survival. Consequently, many companies react to recessions by slashing innovation budgets and focusing on cost cutting and their core competencies. Yet there is a strong body of opinion that investing in innovation is more important than ever during a recession.
The main argument behind this view is that companies without a healthy innovation pipeline will fall behind the competition as soon as the economy turns upwards again. Additionally, the constraints imposed by a recession may inspire greater creativity, and being forced to prioritize innovation strategies may provide the impetus needed to overcome the common reluctance to “kill” fruitless projects, meaning that companies invest their R&D dollars more wisely.
However, for all but the strongest companies, a recession will inevitably provoke a change of focus in innovation strategy to improve survival chances. One approach is to increase investment in open innovation while reducing internal R&D investment. Another is to focus innovation more heavily on processes than on products: the cost savings from streamlined processes will benefit the company and its customers in good times as well as in bad. Perhaps only a minority of companies will be in a sufficiently strong position to continue to invest in innovation in a similar way during a recession as during easier economic times, and those few are the ones that are likely to leapfrog the competition as soon as the economic cycle begins to recover.
If recession is approaching in Europe, should we expect that companies in the FMCG sector are likely to change the focus of their innovation towards cost-cutting, process innovation, and perhaps open innovation? Which companies will be affected the most strongly? Is it the largest companies that are likely to have sufficient reserves to be able to continue to invest in scoping diverse new areas? Alternatively, is company size or strength a relatively insignificant factor relative to the effect of industry sector, with some industries hit very much harder than others by an economic downturn?
September 11th, 2008 at 12:57 am
FMCG-type companies might still feel the need to innovate as much if not more than in better times. If the market size is static or even in decline the big players have to fight hard to grow their share of the market if they are not to see a decline in the income it generates for them. This could be achieved by various approaches:
1 - Concentrate on selling more of the same (not especially good for innovation)
2 - Create better (this could be higher performing, cheaper more accessible etc) products
3 - Innovate around the business model
4 - Innovate around process to reduce costs and increase returns
We often concentrate on 2 when we talk about innovation but it may be we see more of 3 and 4 instead or as well.
October 27th, 2008 at 2:42 pm
Taken from the BBC website:
http://news.bbc.co.uk/1/hi/business/7682919.stm
“In the present climate it’s the best time to be innovating - so long as you give customers what you want,” says Guinness UK brand manager, John Roscoe.
“Innovating is difficult but the worst thing you can do right now is batten down the hatches.”
November 16th, 2008 at 2:40 am
Recession is indeed not good news, but it depends on how the firm deals with it. Let’s revisit the classic five forces of Porter, and how they may affect the firm in a recession:
Suppliers: Given that the same constraints on business activity are applicable to suppliers of the firm, and that they will be fiercely competing against each other for survival in a shrinking economy, it will become much easier to negotiate favourable terms. (Tesco is a current example)
New entrants: A recession makes it harder for new entrants to get going, and in addition in the current case of the meltdown of the financial system, raising funds for a new venture is even harder.
Substitutes: Cheaper substitutes will to some extent threaten market share of the incumbent firm, but very often this has its limits and as the initial pressure of the downturn wanes this threat starts easing off.
Inter-industry rivalry: In the case of inter industry rivalry innovation around business models and process innovation (mentioned by Michael Zeitlyn) will help to get ahead of the pack regarding operational costs and profit.
Customers: Remain the hardest to crack. It is all about convincing customers to part with their money in an uncertain economic climate. Common sense predicts that customers will be more conservative with their choices.
The first four factors affect companies, depending on their size and stage of growth differently. However, customers will remain the same problem for all irrespective of size.
Therefore, although innovation should and will continue (as suggested in the main article), it is a safer bet to be selective on development and product launch costs.
See the BBC article mentioned by Nigel Bailey:
November 17th, 2008 at 6:05 pm
It is interesting to observe that for large corporations the most immediate impact of the recession is a widespread travel ban. It would be interesting to reflect on the impact that this will have on companies abilities to innovate!
November 17th, 2008 at 10:46 pm
The 15th Nov edition of “The Bottom Line”, chaired by Radio 4’s Evan Davis, discussed which businesses are likely to do well in a recession. The contributors agreed that the quality and efficiency of the business are far more important than industry sector (HMV was quoted as an example of a business that is doing well because it has a clear proposition and is very well run – though its products would be expected to be less popular during an economic downturn). “This recession is fundamentally different – since the capital market is still frozen, all businesses with a growth rather than an improvement mentality will suffer”. Additionally, the contributors commented on the great opportunities for “knowledge creators” in an economic downturn – because capital follows ideas. Such comments explain why focusing on volume during a recession is doomed to failure and support the view that innovation is even more critical to survival in this recession than in previous ones.
The podcast is available on http://www.bbc.co.uk/radio/podcasts/bottomline/