Now is the Time to Innovate!

recession Now is the Time to Innovate! This is the second recession since Steelwedge was founded. The first was at the beginning of the “new century” and was prompted by the telecom crash and dotcom bust. While that recession was mild in comparison to what we face today, the combination of a technology crash, a significant recession, and a generation of business leaders who had spent their professional lives in a period of wild exuberance was unique.

This time businesses are responding very differently. Although the emotional trauma of the financial meltdown has continued, the response is more measured this time around and reflects a level of thoughtfulness that didn’t exist that last time around.

Unfortunately, the instinctive reaction to cut costs across the board is still prevalent. Many companies are doing that even though there is plenty of evidence telling us this is not the best approach. At this critical juncture, the greatest mistake a company can make is to walk away from providing a great product or service and instead commoditize their offering.

But how does one spend precious cash reserves during these difficult times? The Depression was actually the birthplace of many great companies that became market leaders because they invested wisely. For example, Henry Luce, who co-founded Time magazine in the boom times of the 20’s, launched Fortune magazine in 1930, the beginning of the depression. He recognized that people wanted to experience business news in a way very different than the dry, black and white, facts and figures journals of the day. Luce gave them insight to the people, thought and issues behind business, and delivered it as a sensual, visual, literary experience. And he commanded a price premium – one dollar per issue.

A few years later, in 1936, the middle of the depression, Luce began publishing Life. The beginning of photojournalism in the United States, Life drew together reporting and publishing tools that already existed, but by using them in a different manner, crafted an entirely new and compelling way to experience the news.

This sort of success is not just accidental — in a study of the early 90’s recession, McKinsey & Co learned that successful leaders (businesses that started and remained in the top quartile of their industries) did so in part by increasing their R&D spending dramatically – more than double their pre-recession spend.

Successful challengers followed similarly contrarian strategies, and displaced former leaders who did not, taking their places in the top quartile. In fact, the challengers grew their businesses by 10.4%, while their former peers declined by 15.0%. At Steelwedge we have recently upped our R&D budget by 20% precisely because we see this is an opportunity to innovate to better satisfy our customer’s needs.

Obviously, simply being contrarian and spending aimlessly through a recession is not the recipe for success. The McKinsey study gives us some guidance, and Kellogg Professor Andrew Razeghi puts greater detail to it with data from the PIMS study, which tells us that supporting the costs of innovation and meeting user need generally ends up benefiting the business, while the cost of fixed capital tends to hurt the business.

So how do we innovate – provide new and better services without significant investment? Inspired design, deep customer feedback, flawless planning, effective execution. Incorporating new product planning into your sales and operations planning process. Recognizing that new product introductions are tied to excellence in planning. Creating and managing demand in accordance with new product strategies. These are critical tenets.

If the value of getting experience a design right is magnified in a recession, then the cost of getting it wrong can be catastrophic. Starbucks founder Howard Schultz recognized exactly this problem when he wrote, “Stores no longer have the soul of the past and reflect a chain of stores vs. the warm feeling of a neighborhood store.”

Excessive expansion and unfocused innovation had stripped Starbucks of the third-space experience that their customers valued, placed them in competition with McDonalds and Burger King, and set them up for costs of around $330 million as they try to regain what they lost.

So why does this recession feels different from previous ones? Great companies are still engaging in R&D. Companies that are investing wisely will be the ones that come out ahead when the recession ends.

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