Business Innovation in a recession drives profit

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 USĀ  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.

Innovation – The time is now!

I have been talking with several business owners about prospects given the uncertainty in the current marketplace. The instinctual reaction is to cut back on spending on Innovation, customer needs investigation and product development. However we feel that now is the best time to Innovate and this can actually decrease risk. Why?

  • the cost is relatively low, given that there very talented people on the market to lead these initiatives
  • it is easier to get teams to focus on one or two very important Innovation initiatives (after companies re-commit to their strategy, making sure they are well positioned for the conditions)
  • customer needs analysis when the market conditions are tough will unearth needs that are more core to customer’s lives and this insight will help define more enduring products
  • when the market picks up, concepts are ready to be fast-tracked to development. Those products and service are those that differentiate companies and customers will pay a premium for them.

Perhaps not all companies would benefit from a concentrated effort on Innovation, but for those companies who do not just want to compete on price, it is key to maintain focus on Innovation. Investment, not cuts are necessary to keep this focus because cutting talent fosters a bunker mentality. This turns the rest of the company inward concentrating on cutting in all areas to “follow the leader” instead of focusing on growth opportunities.

Proctor and Gamble has put Innovation at the heart of their strategy, focusing on the consumer and the CEO A.G. Lafley even going so far as to call Innovation a “team sport” because “Innovation doesn’t spring fully formed out of the head of one man or woman.” Keeping the right social climate for an innovative culture is part of how they are re-inventing the company.

Apple certainly understands this and as Steve Jobs said in an interview with Fortune:

“We’ve had one of these before, when the dot-com bubble burst. What I told our company was that we were just going to invest our way through the downturn, that we weren’t going to lay off people, that we’d taken a tremendous amount of effort to get them into Apple in the first place — the last thing we were going to do is lay them off. And we were going to keep funding. In fact we were going to up our R&D budget so that we would be ahead of our competitors when the downturn was over. And that’s exactly what we did. And it worked. And that’s exactly what we’ll do this time.”

Not only can Innovation help with growth opportunities, because it is centered around customer needs, it can actually help retain customers through difficult times. In fact you could argue that Innovation decreases risk as a company that retains customers can maintain cash flow on the one side and develop new ideas for increasing growth without see-sawing back and forth between inward and outward focus.

Just as financial discipline is part of the way leading companies operate, Innovation should be part of a company’s strategy not only in good times but also in challenging times.

Print3D- How will you use it?

There is a great post on the Ponoko blog, that talks about a disruptive shift in the way consumers will represent everything from maps to parts. Its called 3D printing and could be as important a change in the way we think about form as the shift from dot-matrix printers (remember those?) to laser printers.

The reason is because a company called Desktop Factory has dropped the price of the individual units to below $5000. While not exactly a staple on everyones Christmas list, they have gotten to the range that the Apple LaserWriter was in about 1985. I remember using one of these around that time and apart from the outrageous price per page (I was using it in school or at Kinkos) I knew after I saw the output that there was no going back to dot-matrix. It was like seeing a movie in colour, then again in black and white; there was no comparison.

Although dot-matrix printers continued to improve in quality and speed, the flexibility of laser printing quickly changed the way that people thought about putting graphics and text on the page. In theory consumers were able to compete with publishers with the availability of these new tools. But the reality was not quite as profound.

What I remember was that there were quite a few newsletters, posters etc. that looked like they had been assembled from a whole bunch of different sources and thrown down on paper. (Which reminds me of what is currently happening with interactive applications and Web 2.0, but that’s a whole other post.) What struck me at the time was that there still needed to be some design involved to make sense not only of the detail but of the overall picture.

You could see this about a decade later when the first html pages were created. (Anyone remember rainbow lines and scrolling status bar text?) Even though the palette of choices and tools was limited, those skilled web designers could make great looking pages even in those early days.

So maybe 3D printing will bring a new way of envisaging information to the masses. But it will still take talented designers to really make the information usuable to the masses.

(An interesting sideline to this discussion, RepRap makes a printer that (although not as esthetically nice as other commercially available machines) has successfully replicated (or cloned) itself by making its parts. Available under GNU, there are documents online so you can make one yourself.)

Design in use

We are considering getting some work done on our house and in order to help us make any work run smoothly, we brought in a pro; an Interior Designer. What was interesting is that the first thing she did was asked us what we liked and disliked about the current situation. She also had a long questionnaire that she went through with us in detail to get a feeling for how we live in the space. She also saw how we demonstrated a few problems with the layouts. After that exercise, she gave us magazines to go through to identify ideas, and prototypes that we found interesting.

It seems to me that this is an interesting way to approach product development in other fields: there is a process to understand how customers are using products; and there is then some building blocks brought in to help ground the discussion as well as show what is possible. This is something that we at Brandsential also try to do.

To really bring value to the area of product development in organizations we bring in the best and brightest in an organization to determine what is possible then mash that up with what we find with customer discovery sessions. What is does is allow a company to use its existing assets to better address the deep customer needs that drive successful products.

Customers and willingness to pay

In order to launch successful products a basic requirement is to know what your customers want and how much they are willing to pay to get your product.

Some products have a very low value to a set of customers; some have a high value to a set of customers but without talking to your customers, it becomes very hard to understand what they want to do and why they should buy your product over others… This is where Brandsential can help.