In an Economic Downturn like This, Smart Companies Will Do Different Things and Do Things Differently. It's Called 'Innovation'.

by on 19 September, 2008 - 19:46

by: Idris Mootee

In today’s chaotic world of business (that's a true and accurate description), traditional management consultants have little to offer beyond cost cutting and consolidation, the adv agencies are keen to remind you to keep your media spend and the technology consultants continue to lure you to outsource your whole company to a low cost country, you are almost guaranteed to fail if you do all of these.

I can say for sure. It was once said that  “Winners don’t do different things, they do things differently”, my advice today is “Winners do different things, and they do things differently.” So how?

This is the perfect storm for two things 1/ innovation 2/strategic acquisitions. Am I crazy? No, organizations often behave in counterproductive ways when hit with bad news. They get conservative and systematically switch to a defensive mode. As revenues slow and margins get squeezed, companies naturally switches its focus to cutting costs and outsourcing. The company protects its balance sheet—an approach leading to the deferral of growth and of low-priority investments, the shelving of innovation and acquisitions and its competitive advantages eroded.

When times get tough, senior management’s reaction may inadvertently lead to the creation of an innovation-stifling culture. The insistence on short term results can have potentially devastating effects on a company’s innovation culture. The winners take a different approach. They see a downturn as a time to increase their leads and make acquisitions. They pounce on the opportunities it creates with an alacrity that is the stuff of legends: think of GE’s speedy dispatch plane load of strategist and dealmaker to Asia right after the Asian financial crisis in 1998.

Why did so many great companies and products come from the Great Depression? While there's no question that a bad economy makes it tougher to raise capital and launch new products, the reality is that good ideas executed well always have room to succeed. A different way to look at it, a shrinking wallet means that more attention is given to every purchase, and therefore the best customer value equation have a better chance of success during a downturn.

Companies are quick to cut discretionary spending and claim to have no budget but actually have then committed to the wrong (non-strategic) activities. When times are tough, companies have to be ruthless innovating their way out. You can cost-cut your companies to greatness. Many great ideas are prematurely dropped.

Smart companies will do different things and do things differently. Many complain about the shortermism of Wall Street and its negative impact to innovation. Two academics Gerard J. Tellisand and Ashish Soog researched on the full impact of innovation. They set out with this research to help managers better understand and quantify the investments they are making in innovation. The research reveals that, of the three sets of innovation activities, returns to the development activities are consistently the highest across and within categories. 

According to Sood, “The big surprise was that the markets actually react more to the development phase than the commercialization phase, which shows that the stock market is not so short-term in its outlook. Because the stock markets reward firms for making announcements in the development phase, it is in the firms’ interest to be open to the market and to update progress on an innovation project. When people complaint that there’s no reaction from the market when they made an announcement on an innovation undertaking, it is probably due to the quality of innovation. A credible innovation story can boost your stock price, even before you invested in the project. Now that's quick ROI.

Original Post: http://mootee.typepad.com/innovation_playground/2008/09/in-an-economic-downturn-like-this-smart-companies-will-do-different-things-and-do-things-differently-its-called-innovatio.html