In the current economic situation, corporate managers and executives face the dilemma of whether to reinforce innovation efforts or cancel them and reallocate resources in more traditional areas of the company such as sales and operations. Is innovation considered a nice‐ to‐have for the organization or is it considered to be a key instrument in not only survival but preparation for the time the economy turns around?
A panel discussion “Innovating Through a Downturn” organized by The Center for Innovation, Leadership and Excellence (IXL Center) was held to better understand the challenges and solutions to these challenges. The panel consisted of leading industry representatives including Dr. Stephen J. Hodges (President of the Hult International Business School) and Dr. Makarand Chipalkatti (Corporate Innovation Manager of Osram Sylvania) and innovation experts Kevin Bolen (Senior Director at Innosight) and Ronald Jonash (ex‐Head of Innovation at both the Monitor Group and Arthur D. Little). The moderator of the discussion was Dr. Hitendra Patel (Director of IXL Center and a Professor at the Hult International Business School).
Dr. Patel initiated the discussion with the observation that “the global economy is now in a vicious circle.” As the credit squeeze tightens further, capital becomes harder to find and companies start to slash costs through layoffs and production cuts. Because of the fear of layoffs, people consume less to save money exacerbating companies’ woes as revenues decline. Stock markets plummet and reduced growth expectations contribute even further to the worsening situation. Global business is currently on hold and no one knows what is going to change in short term. The risk of failing is just too high now, but companies must continue to innovate to survive and succeed.
Dr. Patel began with three questions confronting businesses:
1. What innovation strategies should companies be pursuing?
Dr. Chipalkatti: “This is a question on everyone’s minds right now. Most CEOs look at innovation as a nice to have and not as a key factor to survival. You have to show the organization the value proposition of innovation projects and understand the opportunity costs of not having them. Innovation managers have to evaluate the project portfolio, and make a proposal on which projects to push forward. Projects which will give results in the near or mid‐ term should be pushed forward while the rest should be suspended. Good risk management is crucial in picking the right projects to continue.”
Ron Jonash: “Companies have to understand that innovation does not equal R&D and technological invention. Innovation managers and CEOs have to find ways to invest in real options and innovative processes with minimal investment in time and capital to add value for the company. In addition, companies consider their partners and their employees. Companies that are in a better position in the upturn as compared to competitors are those that treat their partners the best. One has to find the best partners and leverage their products and knowledge instead of trying to reduce costs by cutting off relationships. As for employees, the crisis provides the opportunity to rethink the relations with unions. This would be the time to evaluate and renegotiate contracts as people are likely to become more amenable to company requests due to the fear of layoffs.”
Dr. Stephen Hodges: “In this economic recession, there are two types of companies: those with cash and those without. For companies with huge cash reserves, now is the time to lean forward and grab market share through acquisitions, having better and newer products and not backing off from marketing. Unfortunately, for most companies the key word is “survival” which requires companies to reduce size and cost while focusing only on proven products and proven customers. The result may not be long lasting, but these will keep them going in short term while the storm is over.”
Kevin Bolen: “Now it is a perfect time to be in an innovation driven business. Managers must look for changes in customer behavior as a result of the crisis and try to leverage those opportunities. A good example is Hyundai’s assurance program. People who would normally buy a Toyota or Honda would now consider a Hyundai given the recession as they can return it if they lose the job. With innovation, the company has managed to reposition itself to capture new market segments. Additionally, managers have to be proactive and choose those 2 or 3 key projects to reduce costs and still drive forward their initiatives. They should go to their superiors and voluntarily shut down those projects that aren’t productive or will not generate value in the short term. By shrinking back to a smaller scale, the company will be able to push those best ideas stronger and achieve a fitter condition than its competitors.”
2. What can/should innovation managers do to keep innovation as a strategic imperative and avoid being deprioritized?
Dr. Stephen Hodges: “Innovation should fit with the business strategy. If it is focusing on providing cash flow, the return on innovation projects has to be quick. Stakeholders have to ask themselves “What can I do today to meet today’s problems?” and deliver the answer. This is the only way to avoid projects being deprioritized”.
Kevin Bolen: “Focus on those projects that you can commercialize today, hold on with the longer projects for 6 months and decide on the medium term projects on a case‐to‐ case basis. Apply the same cash‐based metrics on the projects so that you can measure which ones are going in the right direction and kill all those from your portfolio that you know are just taking away the money without any near‐term benefits.”
Dr. Chipalkatti: “In a company wherein innovation is not part of the culture, start with the word “Innovation” with management and you are in trouble. Managers should realize that the whole company is suffering as a result of the crisis. Look for commonality in interests and strategic alignment, and team up with other projects to benefit from synergies. In this way, you can avoid shutting down projects that you know are of value to the company.”
Ronald Jonash: “In this situation, it is critical to do process innovation not only product innovation. For many companies, innovation is still important, but not that urgent anymore. Although it is right to focus on urgent matters companies should not forget about the important ones. Think about them, pursue them in the long run but do not wipe them away“.
Hitendra Patel (comment): “Financial pressure is huge and cash is king. Thus, what is going to happen in 3‐4 years is just not the thing CEOs want to hear about now. Focus on now and on short‐term results.”
3. How do you get employees support innovation at a time when colleagues, friends and neighbors are being laid off?
Dr. Stephen Hodges: “Employees are extremely responsive in this situation. Making changes is easier than it has ever been. Companies can now get high performing employees at a much lower cost and get them to do what you need to do. It is a good time to create the innovation and transformation incentives to gain advantage.”
Kevin Bolen: “People in the core business are losing jobs, so mood often turns against the innovation managers or “thinkers” who don’t produce value immediately. While it is only right to empathize, do not apologize for your job and focus on delivering results. The organization has to understand that the ideas of today will be the core business of tomorrow. The companies who are going to survive the crisis need these new ideas.”
Dr. Chipalkatti: “People with nothing left to lose are more risk taking, and are therefore more innovative. It is like wartime now and people have to start thinking out‐of the box while managers have to provide a supporting atmosphere to them. The core employee base is the biggest asset. Perhaps managers have to be hard on them now to make them understand why they need to innovate but once they see the value in this initiative those managers will earn respect.”
Ronald Jonash: “For organizations now is the time to allow people to be creative. Those who are truly innovative, the best people, still work on the core business during the day but in the weekends and evenings they invest in the future of the company by trying to figure out new processes and products to keep the company alive. It is time to go to the garage like how Hewlett‐Packard was formed in the great depression and figure out the new best ideas. People are willing to shine before the CEO to save the company. Now is their time and they should have the chance to bypass the middle management and present their break through ideas to the executives of the company.”
4. There is incredible talent available now on the market. Do you believe that it is a good idea to get the talent now, while you have to lay off others companies especially considering the disruption time that it causes in the work?
Dr. Chipalkatti: “Yes, it is a good time to refurbish the talent pool and align the resources with future needs”.
Ronald Jonash: “The clean house aspect is very important. Now it is time to clean up the old wood and pick up young energetic rising stars. You have to provide them with proper career development to make them devoted. This will also broadcast the important message that you are investing in people despite the financial difficulties.”
5. Where do you think the innovation groups should be in the organizational structure?
Kevin Bolen: “It depends on your business model and on your market. If your core business may be disrupted, then you have to place the innovation team at a distance to avoid killing the core business. Otherwise it is better to integrate them for people to have a better connection to embrace the new ideas.”
Dr. Chipalkatti: “Some companies have not yet realized that innovation does not equal technical invention and R&D. It has a different role. You can have a central innovation group that comes up with the great ideas but then people won’t embrace them, or a deeply embedded innovation group that is not effective coming up with really new ideas. It is better having a blend of both. Thus, you can get innovative ideas and deliver change with the help of the senior management.”
The panel discussion provides a set of perspectives from innovation experts and from industry practitioners on innovating in the current environment. These perspectives begin from common ground: CASH IS KING and SURVIVAL INSTINCTS must be heeded. Like the panel members, most leaders and advisors agree that if you have cash, now is the time to distance yourself from your competitors. Such Industry leaders will acquire new assets and capabilities at fire sale prices.
The challenge of surviving without cash, as most companies must confront, can be a critical departure point for experts and industry practitioners, alike. While the panel members agreed that innovation is important to a company, opinions differed on how and to what degree innovation can help organizations survive the current crisis.
However, a consistent theme does emerge. Those leaders and firms that confuse survival with complete retrenchment will do so at their own peril. Indiscriminate cost cutting, particularly related to innovation will only delay the day of reckoning as companies and managers are ultimately caught off guard by empty innovation pipelines, forgetting that most or all innovation projects and the people responsible for generating and managing them were killed in the name of cash conservation.
Generating cash to weather the storm is critical. And the companies that most failed to properly manage and risk adjust their innovation strategies, processes and pipelines in better times have been the first to falter. But the current environment provides an opportunity to innovate in the right way to achieve the primary cash generation objective and provide real advantages versus competitors during and after the downturn. Refocusing your innovation strategy, processes and pipeline today is crucial. Those firms that quickly revive innovation programs now and effectively expand them during the recovery will win.
In summary, the panel members’ responses provide a starting point with some valuable suggestions that go beyond the conventional wisdom (reducing size and costs, cutting partners, etc).
1. If you have cash, lean forward
For companies with good cash positions, this is an opportunity to do low‐cost acquisitions, aggressive marketing and rapid product launches to distance themselves from less solvent competitors. Bank of America is acquiring competitors and channels at bargain prices, P&G’s CEO A.G, Lafley is increasing his marketing and sales efforts and Apple is accelerating new and exciting product launches. These companies are leaning forward and gaining unprecedented market share.
2. If you are cash strapped then conserve cash
The mantra “Cash is King” cannot be truer for companies with nominal cash positions and shrinking credit‐lines. Companies should review their innovation portfolios and prune (kill) some projects. These projects are sacrificial lambs but helps communicate that the innovation organization is being prudent. The company should delay (not kill) projects that are important for the future of the firm but not urgent. These projects should be re‐ prioritized once the company’s cash position improves Resources freed by killing or pausing projects could be deployed to accelerate important/urgent projects. Many of these projects will be near‐term, incremental or focused around process improvement or cost reduction and it is OK to shift your portfolio during hard times. For top‐line projects, companies should prioritize low capital‐intensive projects. Often it is the re‐packaging of existing solutions like Hyundai’s promotion to drive sales through its warranty to take back a car if you get fired is such an example. These innovations are more around business model and service innovation.
3. Expect more from your Employees and Ecosystem
During economic downturns, everyone is fearful of losing their job. Employees complain less, work harder and offer to do more willingly. Companies that ask their employees will be surprised and could get some transformative results. The US Auto Industry and the Unions are having the most productive negotiations to date around tabooed topics and getting remarkable gains. We also see positive win‐ win dialogs emerging between a company and their suppliers or channel partners.
4. Upgrade your Talent Pool and Partners
The market is full of high‐performing talented individuals who have been let go not because they were bad but the business could not support them. This is a perfect time to upgrade your talent pool by shedding poor performers and grabbing exceptional talent in the market. GE has been doing this for years, now so can you. This same argument applies to your partners. . Why not get rid of poor performing partners and add new partners with robust business models. Clearly, the question is not whether to innovate but how to innovate. Apply these four key insights and you are on your way to innovating during these difficult times.
- Kevin Bolen, Senior Director at Innosight
- Makarand Chipalkatti, Ph.D., Corporate Innovation Manager of Osram Sylvania
- Stephen J. Hodges, Ph.D., President of the Hult International Business School
- Ronald Jonash, Senior Partner at the IXL Center
- Hitendra Patel, Ph.D.
- Julius Bautista
- Szabolcs Patay