Strategic innovation counters short-term thinking
Posted by JeffreyVeffer on Jan 30, 2009
Many executives find themselves facing difficult decisions these days in light of the challenging economic conditions. Short-term results are often scrutinized closely by the market as a way of determining a company’s financial health and direction. Although this can be a viable way of judging whether corporate strategy is translating into market success, what often happens is that short-term thinking permeates the organization leading to a starvation of resources for longer-term initiatives like new products and services.
One can see this happening at large companies in different sectors as they announce cutbacks in spending on innovation to meet customer needs. As the former CTO of Cisco notes, America is facing an “Innovation Crisis,” and needs to find “new ways of funding fundamental research.”
She cites the fact that Bell Labs announced late last year that it was discontinuing basic science research to “align the research work in the Lab closer to areas that the parent company is focusing on.”
The problem is that with these expense reductions, there is a tendency to pull back customer facing programs in order to conserve cash and “reduce” risk. As in an earlier post, I maintain that this may actually be a riskier strategy over the long term as competitors who continue their innovation program will be in better shape once the economy returns to normal growth.
Arguably, innovation can be seen as an “assembly” of tools, techniques, or assets to meet those deep customer needs. But without the foundation of basic research, it is very difficult to source assets to put into a solution. Of course there are grey areas within both fields, but I believe these days it is becoming increasingly difficult to justify investments in basic research which makes partnerships with universities an interesting way to explore getting access to more fundamental work.
In my opinion, innovation (which I define as meeting stated or unstated customer needs) is different than basic research or invention. While both are important, it is harder to make the case in today’s corporate environment for basic research, which is why I believe that many corporations are reducing their investments in these areas to (hopefully) concentrate more on innovation and getting more value from their existing assets. Keep in mind that the best way to use these assets is understanding the needs and taking a simple (but not dumb) approach to serving them.
In this economic climate, we at Brandsential work towards this goal by using “Value Extraction;” to leverage what’s inside the company to satisfy deep customer needs. And as I’ve said before, now is a perfect time to develop and innovate with these existing assets to make sure the company is well positioned to lead the market once the economic climate improves.
Innovation in the Auto sector?
Posted by JeffreyVeffer on Dec 18, 2008
With all the talk lately around how to bail out the Big 3 automakers, there have been many comments on how to administer / police the firms that receive government bailouts. Which is all well and good: many of these firms have been less than successful in adapting to the needs and realities of the current market. As a condition of a bailout, the taxpayers should have some measures to ensure that their “investment” is being properly used to rebuild a stronger more responsive industry.
But in talking to a colleague with a long history in the automotive industry, they mentioned that this has been coming for a long time based on the structure and bureaucracy rampant in the firms. One example they recalled was that resources were not allocated to the projects with the best chances of success, but those which were championed by persuasive leaders in each silo of the company. So one has to ask; will this bailout give the firms a chance to re-organize for success or just continue along the same path? I believe that what can tip the balance towards the former is a belief from the top down in product/service innovation.
Looking back to the late 1979 and Chrysler’s last brush with insolvency we can see fundamental differences between today’s market conditions, industry players and other elements that make direct comparison difficult. But there are a few notable items to highlight that point toward why they were successful in making it through their earlier crisis.
At the same time as the company asked the U. S. government for $1.5B in loan guarantees former Ford executive (and “car guy”) Lee Iacocca was brought in to lead the company. A persuasive leader, he was able to rally the public behind the comeback and by to some extent, bashing the Japanese imports that were selling in greater numbers in the U.S. (It also helped the company’s cause that the U.S. Military bought thousands of Dodge pickups to bring into service.) Iacocca also brought in quality improvements on the assembly line which made the vehicles more reliable and the factories more efficient.
However what I believe gave the company its most significant boost was the development of the (at the time) innovative models, the K-car and the Minivan. As Iacocca believed in the products, the entire company could see that from the top down, product innovation was being given the support it needed to flourish. (What was interesting is that both of these concepts had been initially investigated at Ford and rejected.) Coming after the oil crisis of the late 70’s, the front-wheel drive K-car platform sold extremely well paving the way for the introduction of the Minivan.
Introduced in late 1983 (a three-year development cycle, which was unprecedented in the U.S. auto industry at the time), the minivan concept met customer needs for a vehicle with the space of a van, but could fit in a residential garage and have a low step-in height for small children. It continues to be the best selling minivan in the industry with over 12 MM units sold to date.
So although there are few direct comparisons that can be made between the two situations, I fear that unless the companies start to do a better job of really listening and responding to deep customer needs, we may be extending the automakers a few more months or years of struggling sales and poor performance.
Business Innovation in a recession drives profit
Posted by JeffreyVeffer on Dec 12, 2008
As we become more entrenched in recession, many companies are thinking that any spending is risky to the health of their companies and are battening down the hatches to cut expenses wherever they can. However, this behavior may actually be contributing to a long-term decline in competitiveness in their industries compared to companies that actually spend strategically during a recession on Innovation to accelerate growth.
An article by McKinsey suggests that companies that invest during a recession actually do significantly better than their peers who choose to cut back. They studied about 1,000 mainly US corporations from 1982-1999 and identified attributes that industry leaders (top quartile performers) or challengers (those that moved into the top quartile) possessed. Including a contrarian approach to M&A (top performers actually increased M&A during periods of uncertainty), they had quite a different strategy when it came to spending.
Successful challengers actually spent significantly more cash than their more conservative peers during a recession. But what is most striking is their approach to expense spending: with greater focus, these challengers spent more on selling, general and administrative (SG&A) than those competitors that lost market share. In addition, relative to their competitors these successful companies more than doubled their spending on R&D during the recession.
The reward for this approach showed as market conditions improved after the recession as the successful companies’ market-to-book ratios were 25% higher than their unsuccessful competitors.
As part of responsibly managing a company, leaders have to look beyond current conditions
and see that a careful scrutiny of expenses is necessary to assess if all parts of the organization are moving in the right direction. But leaders have to be sure that they are not taking on more risk by failing to invest in the right areas now, to pay benefits later.
