How Should You Approach Innovation in a Downturn?

These days it shouldn’t be too much of a stretch to imagine this: you’re managing a company in the middle of an economic downturn.  There are obviously financial pressures to cut costs, so what should you do about innovation?

A very common answer is “cut it.”

The Boston Consulting Group’s annual innovation report from 2009 shows exactly how this happens.  They surveyed more than 2700 global executives about a wide variety of innovation issues.  When asked where innovation ranked in terms of strategic importance, 25% said it was their top priority, while another 39% said it was in their top three.  And yet, a large percentage of these same executives said that they were planning to reduce spending on innovation in the coming year.

This is bad strategy.  Innovation is cultural – and this means that you can’t just turn it on when you think you need it and keep it turned off the rest of the time.

Four Strategic Responses to Tough Times

This is demonstrated in a terrific piece of work by Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen in HBR called Roaring Out of Recession.  In it, they outline four possible strategic responses to a downturn:

Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.

Promotion-focused companies, which invest more in offensive moves that provide upside benefits than their peers do.

Pragmatic companies, which combine defensive and offensive moves.

Progressive companies, which deploy the optimal combination of defense and offense.

The ones that cut innovation are prevention-focused.  Cutting costs often leads to lower quality, which leads to lower customer satisfaction.  You can see how that isn’t the smartest place to end up in a recession.  The stats from Gulati, Nohria and Wohgezogen show that this is the worst strategy to follow in a downturn.

But going the opposite way – being promotion-focused – doesn’t work much better.  This is a strategy where you basically go all in on innovation and growth in a downturn.  In some respects, this makes sense.  If everyone else is cutting back, then there are opportunities.  But the risk here is that if you don’t improve efficiency at least a little bit, you’ll get priced out of the market.

The strategies that work best combine some strategic cost cutting with investment in innovation.  Here is their table of results:

It’s a bit hard to read, but what it’s saying is that you get the best results coming out of a recession if you combine improvements in operational efficiency with market development initiatives and capital investment.  And the financial outcomes from pursuing this strategy are nearly double those of the strategies that are merely good, and massively better than the bad strategies.

And if you think about this, both operational efficiency and market development are innovation-based.  In other words, the thing to do in a downturn is to invest in innovation, not cut it.

It Wasn’t Raining When Noah Built the Ark

There are several important points here:

• Innovation should be continuous.  We had a Brisbane Innovation Network meeting last week, and one of the topics we discussed was the observation that everyone is looking for innovation now after cutting it four years ago.  You can’t do this.  Innovation is forward-looking, and it takes time to see the benefits from your investment in it.  It is particularly hard to realise these benefits if your innovation efforts are stop-start all the time.  As Howard Ruff said: “It wasn’t raining when Noah built the ark.”  Innovation is a competency that will prepare you to survive tough times, and it will enable you to thrive when things get better.
• Short-term thinking kills innovation.  Jeffrey Phillips makes this point in a recent post:
  

  Businesses today are captivated by quarterly results, and activities or investments that don’t help achieve the quarter are candidates for defunding or simply eliminated. If a person or an activity doesn’t contribute to making the quarter, either by cutting costs or bringing in new, immediate revenue, many executives can’t fathom why they’d bother. We’ve built highly efficient organizations structured by rewards which accrue based on quarterly results. There’s no time like the present now has an ominous ring, since there doesn’t seem to be time to think about the future or lay the foundations for future products and services.

• You have to balance small-scale innovation with big thinking: this is one of the ten tensions in innovation.  The benefit of the operational efficiency focus is that it helps us get better at what we’re currently doing.  At the same time, market development initiatives help us find new ways to grow.  It’s exploitation versus exploration, and if you can manage both at the same time, you’re an ambidextrous organisation.  It shouldn’t surprise you by now to hear that research shows that firms that manage ambidextrous innovation are more successful than those that focus exclusively on either incremental innovation or breakthrough innovation, and that all three do better than firms that don’t innovate at all.  The three horizons approach is one tool that can help you maintain a good balance.

If innovation is one of your top strategic priorities, then you have to invest in it.  You need to invest in innovation not just when things are going well, but also when times are tough.  This has benefits: it leads to a sustainable innovation effort, which in turn drives superior returns.

And in tough times, that’s important.