Feb 22, 2024
Feb 22, 2024
Economic downturn or economic crisis is the ideal time for organizations to invest in innovations and new technological trends. ‘Crisis’ literally means a “turning point.” This global economic crisis is in fact, a ‘turning point’ for businesses worldwide to steer their organizational ship in a different direction and chart new, unexplored paths. In an economic downturn, smart companies will do different things, and also do things differently. During tough times, most companies may stifle the innovation culture, but successful companies adopt a ‘different’ approach. They view downturn as the best time to leverage their leads and make acquisitions.
For instance, Ryanair bought a fleet of jets during an aviation downturn. Similarly, Apple Computers demonstrated to the world that it can innovate during downturn too, when it launched its iPod at the end of the downturn in 2002. Likewise, in 2003, when the Dow was at historical lows over a 10-year period, Apple continued to invest in R&D. Apple has a long history of remaining relevant during the most difficult of times because it has always chosen to innovate through recession. Today, Apple’s products and revenues are enviable.
Good ideas that are executed well always have a great scope for success, irrespective of a downturn. A company that shelves or discards investments in research and innovation, and shies away from acquisitions loses its competitive advantage in the long-run. As Warren Buffet said, organizations “have to be fearful when others are greedy, and greedy when others are fearful.” If a company waits until upturn to increase spending on innovation, it misses the opportunity that the downturn offers in securing a head-start competitive advantage during upturn.
During downturn or recession, the innovation-related risks seem to magnify causing an “innovation paralysis.” As Advertising Age notes, “Recessionary times provide ripe opportunities for innovation, especially product innovation. If we are indeed entering into a recessionary cycle, remember it's just that: cyclical. There will be an end, and you'll want to be well positioned when times turn around." 1
Lessons From Previous Downturns
Downturn provides a great opportunity for innovators, as scarcity promotes new ideas and drives innovation. Says A.G. Lafley, Chairman and CEO of P&G, “I think it’s more essential to innovate through a recession to sustain new brands and products and offer the customer a little more value." 2 The earlier downturn in 2001-02 taught many lessons to the corporates worldwide. 2001 proved to be a breakout year for Google, who introduced cost-per-click (CPC) advertising. Organizations looking for a more effective way to advertise discovered that buying ads on search engines was easy, measurable, and more profitable, as the CPC was low. Says Ronan Harris, Director of online sales for Google’s European operations, “Companies that outperform the market are the companies that invest and capitalize in a downturn." 3
Linux, too, took off in 2001. Business enterprises found Sun servers unaffordable and wanted to do something about it. They experimented with Linux and found its performance to be better. IBM and other organizations observed this trend and invested in Linux to promote their own solutions. The key to profitable growth after a downturn is to introduce new innovation, product development and engineering techniques, and state-of-the-art technologies. ‘Sustained organizational efforts towards innovation leadership,’ and ‘focus on product innovation as a process’ are two of the most crucial steps that any organization should take to tide over a downturn and emerge successful during the upturn.
Restructuring of the organizational structures and processes in a way that spurs innovation is also one of the vital factors to be considered during a downturn. This includes having the right organizational culture that promotes innovation and enables ordinary people to do extraordinary things. Innovation drives performance, market growth, and stock market valuation.
Companies that exploit the online presence will reap benefits from the migration of consumer buying power online. This will enable businesses with strong web presence emerge stronger when there is an upturn in the economy.
What Successful Companies Did
History tells us that some of the world's strongest economies established their economic fortunes during their darkest times by connecting through key markets. A crisis can be a powerful stimulus for brilliant ideas and new opportunities, but an organization must be flexible and use innovation strengths, if it is to come out of the recession stronger. CNN, Japanese cars, Southwest Airlines, generic products, IBM personal computers are but a few of the products that were either created or launched during a grim financial landscape.
According to Paresh Vaish, Senior Principal, McKinsey & Company, even during downturn, companies can make most of the opportunities and can increase earnings from anywhere between 50-100% by leveraging technologies and processes in operational improvement such as supply chain management (SCM) and related diversification. In SCM, Vaish feels that companies can reduce working capital by 25-50%, leading to significant increase in net income and cash flow.
It is possible for a company to grow during recession by adopting the following strategies:
Diversifications & Acquisitions
Downturn offers great opportunities for acquisitions, as many companies become vulnerable to cost and performance pressure and sell them. It is a wise investment for companies that have the cash to buy out the companies that are available.
Acquire the best talent
Recession offers an opportunity for companies to poach talented individuals into their organization, who can create enormous value.
Companies can perform well by exploring various possibilities in related industries that are not very capital-intensive. Successful companies often stretch beyond their existing line of business to other related businesses that offers great sales and revenue potential. For instance, IBM moved from conventional hardware into IT services.
A company that is trying to implement new technology initiatives during a downturn has to save money. Innovative hardware manufacturers of computers such as Dell recognize this business opportunity and target such companies. Dell understands that it has to help companies buying its laptops justify their purchases by minimizing their cash outflow. Towards this initiative, Dell implemented sliding term leases, enabling extended rollouts with consistent lease terminations. This allowed companies to integrate hardware to the lease at the existing price instead of buying all the equipment in advance.
Researchers from Accenture Institute for High Performance Business interviewed some senior industry executives who witnessed the 1990-91 global recession. The interviews revealed that most successful post-recession organizations consolidated their financial muscle during upturn by amassing liquid assets, limiting their debt, and focusing on cash flow to remain flexible and devoid of any encumbrance. They also adopted a conservative approach to financial management, which enabled them to emerge stronger from the recession. These successful organizations prepared themselves well strategically during the upturn by designing resilient strategies that could work both during upturn and downturn. Instead of widening their business portfolios, these organizations narrowed them further, and focused on areas where they could establish a clear lead. They gave more preference to profitable internal growth than acquisitions. But, whenever they were in a position to consolidate operations through acquisitions, they never flinched from it.
The companies that emerged strongly out of the recession as winners showed transparency in innovative practices on existing knowledge, tools, and relationships. In addition, the winning companies, took the following decisive actions (not taken by other companies) that strengthened their strategic position:
Setting priority based on value-creation of the company
The winning companies not only cut costs, but they cut the right costs and diverted the resources to ‘actual’ value-creating activities. The leaders and other employees in these winning companies clearly understood the company’s revenue model. They understood how their products performed against their competitors, why customers liked them, and what they had to do to turn over a profit. This kind of knowledge at various levels of the organization ensured that the right recommendations and decisions were made about budgets, and a lucid understanding about the prospective impact was developed.
High-performance unique information systems
The winning companies invested in technology and information systems that armed them with the ability to gain insights into their key value drivers and manage them efficiently. The poorly performing companies in the post-recession did not have access to such responsive information systems.
Collaboration with customer for enhanced value proposition
The winners of recession reached out to their customers to understand their challenges more closely and gathered information on the precise customer needs. This enabled them to gain critical customer insights and create new products and services uniquely suited to the customer requirements during the downturn.
Pricing for Profitability
The winning companies ensured that they were in a profitable cost position during upturn, and used their pricing flexibility to garner market share in a downturn. Moreover, during downturn, winning companies refused bad businesses, while losing companies accepted them. In a bid to hold on to their current market share, the losing companies accepted unprofitable sales during downturn.
Downturn – A Catalyst For The Future
Every organization is scared of the downturn, but it offers umpteen opportunities for growth, only if properly identified and exploited. As Bill Gates remarked, “We are in an economic downturn but an innovation upturn." 4 Hal Fass, a Consultant, revealed in a CMO Strategy article in February 2008, that slowdown provides rich opportunities for innovation, especially product innovation. More importantly, he cited a British study of 1,000 businesses during the last three decades that discovered that companies that spent more on innovation during the downturn witnessed a 23.8% increase in the return on capital employed (ROCE) during the recovery, compared with 0.6% for those that slashed spending.
In 1929, La-Z-Boy introduced its iconic reclining chair just months before the stock market crash. But, its sales continued as customers bartered everything from wheat to coal to farm animals for their own chair. The company’s founders did everything they could to keep their customers seated in their products: extended better terms, serviced their accounts more rapidly, and helped them stay afloat. By the end of the Depression, not only had La-Z-Boy collected a wide-array of farm animals, it had also amassed unparalleled customer loyalty for its service and quality.
During a recession, several organizations grow. After a recession, some organizations grow faster than the competition. This is more likely if they have new products that fit customer needs better, engage people who creatively collaborate, an absence of unhelpful assumptions, and a streamlined business.
Contrary to popular belief that R&D and innovation goes hand in hand, Booz Allen and Hamilton’s study of world’s top 1000 R&D spending companies proved that R&D spending had no impact on sales growth, bottom line, or shareholder returns. The study concluded that it is effectiveness of spending that is very crucial. According to them, the best R&D spenders do the following:
Align innovative strategy with business/organizational strategy
Manage the product development with speed and efficiency
Create an innovation-driven organizational structure and incentive system, and
Take the right risks and manage the product development by balancing feasibility with prospective payoff.
To overcome the downturn, companies should ensure the following:
Be clear on strategic objectives
The organization should have a crystal-clear idea of their strategic objectives. Tough decisions such as choosing between high shareholder returns or sustaining existing profit margins will have to be made. The management should be clear and align its objectives with the strategic objectives of the organization. Understand brand, price, and competition well
The organization must thoroughly understand their brand, and its ability to charge a price premium, and the competition it confronts. The following 2x2 matrix can help the organization in taking a wise decision:
Value Brand Offering
Premium Brand Offering
Widen/Build your category
Offer great deals/discounts
Build the brand
A research study by management consulting firm, McKinsey & Co., released in early 2008, revealed that 40% of the organizations leading the markets were not adequately prepared for the 2001 downturn, and fell from the top quartile in their respective industries. However, 15% of the organizations who were not industry leaders before the downturn, catapulted into leading positions during the downturn. Upon further research, McKinsey discovered that “strategic flexibility” – that comprised the following three factors – significantly contributed towards the laggards catapulting to leading positions during the downturn.
1. Financial Flexibility
Organizations that emerged on top during the downturn had anticipated the downturn, and ensured that they had more cash in hand and minimum debt. This gave the organizations the flexibility to leverage the benefits of balance sheet. The debt-to-equity ratios of the post-downturn industry leaders were half compared to the organizations which were industry leaders before downturn. The leading organizations spent 15% more on capital expenditure and 7% more on mergers and acquisitions. Moreover, most post-downturn organizations had lot of cash on their balance sheets.
Ensure that debt levels are low and explore ways of raising finance internally within the organization.
2. Operating Flexibility
The organizations that emerged as market leaders post-downturn focused on cost-reduction without affecting the long-term growth of the organization. They ensured that their overhead and operating costs were minimum and flexible before the downturn actually struck. These organizations had a flexible workforce comprising of mostly part-time or contractual employees instead of full-time/permanent or salaried employees. This strategy enabled them to save on the benefit costs to the full-time employees, which tend to rise every year. Moreover, while other companies cut their R&D and advertising sharply, the successful organizations advertised more than the overall industry sector, with focused targeting of marketing and advertising towards customers groups offering highest sales potential.
Anticipate downturn and focus on cost-reduction while keeping the long-term growth of the organization in mind. There should be focused advertising and marketing, targeting customers with high sales potential during downturn.
3. Diverse Product Offerings
Successful organizations expanded their ability to serve customers in terms of diverse product offerings and wider geographic presence. McKinsey’s research revealed that the market leaders were approximately twice as diversified by segment compared to the companies that fell out of the industry leader positions.
Explore ways of expanding geographically and target market segments/customer groups that have the highest spending capacity/potential.
Great visionary leaders and the organizations they lead transform uncertainties into opportunities, where they not only streamline operations, but also innovate. Economic downturns make innovation not only more important, but it actually makes the process of innovation easier to manage and much more cost-effective. More importantly, the products of innovation are more valuable during tough times. As we endure this period of economic turbulence, the question we need to ask ourselves is not whether or not to innovate, but how to innovate! There is no better time than now to widen the gap between you and your competition. As Russell Luckock, the Chairman of AE Harris, a UK-based engineering firm that successfully survived ten recessions, said, “When there have been bad times, there have always been good and very lucrative times just round the corner. You just have to survive and stay patient." 5
More by : P. Mohan Chandran