As we seem to be living in a constant economic downturn, leaders find themselves between a rock and a hard place, trying to reduce costs and foster growth at the same time. This dichotomy delivered by the financial pressure is unfortunately pushing many leaders and top managers towards suboptimal decisions that tend to focus more on survival and not enough on investing in the future. And for good reason: cutting cost is predictable, whereas future growth isn’t.
We have seen this happening during the last economic crisis, when merely 10% of companies performed better at the end of the crisis than they did before it. Understandably, finding the best ways to cope with financial pressure while investing in the future during difficult times is one of the biggest challenges for companies.
We’ve also seen all around us how ventures deemed risky or experimental are shut down during tough times and how attention is diverted to areas that can deliver immediate results. Innovators are forced to give up on initiatives, projects, and resources. The downside of this approach is that those immediate results will patch things for survival, but in the long run the organization suffers.
In this context, innovators wonder how to get ideas across, how to continue projects, what back-up solutions to find and how to keep innovation afloat.
To answer these questions and help you better deal with the situation, we wrote this article that aims to explain why innovation in an economic downturn is key not just for survival, but for long-term success, and how to go about it. We’ll also provide a series of practical tips and examples that can help address the changes, embrace new opportunities, and navigate these challenging times.
So, without further ado, let’s get to it.
Table of contents
Why is innovation essential during an economic downturn?
As most of you might know, innovation is a risky business so doubling down on innovation in a downturn, sounds counterintuitive. Giants like Apple, Google or Samsung can obviously afford to invest massively in innovation even in an economic downturn. They know they will reap the benefits without risking as much as smaller organizations.
Yet, most organizations don’t have the resources of these giants so for them this solution is not so evident. However, even if doubling down on innovation is not yet feasible for small and medium organizations, it doesn’t mean they should sacrifice their future because of some rash decisions.
Innovation is still feasible and should still play a role in your strategic priorities, even in a downturn. In fact, constraints can turn into great opportunities for innovation, so frugality can actually work to your advantage. As CFOs will scratch their heads trying to come up with the best solutions for next year’s budget, you’ll have to find ways to support their decisions and work around those constraints.
Now, you might ask yourself: is it worth it? Why shouldn’t you just give up on innovation when times are tough? Here are just a few of the arguments that explain why commitment to innovation can bring great results even when you’re facing financial difficulties.
In all circumstances, leaders will and should have strategic priorities on top of their minds. A downturn can easily change your operating environment, so if you want to stay in the game and thrive, you need to find ways to adapt to that new environment, while keeping your eyes on the prize and focusing on the future.
Usually, you need innovation for that, which means that you either adapt to current challenges or lag behind the competition. As not all organizations are willing to take the risk to shift gears and change direction, that’s where you can outperform competitors.
Previous recessions showed that companies that invested in innovation through crisis outperformed their peers. In fact, there is proof that effective capital allocation plays a big role in the outcome.
As McKinsey points out, organizations that focused on innovation even during the 2009 crisis, outperformed the market average by 30% and their growth continued to accelerate the following years as well.
Additionally, an Accenture study revealed how technology leaders, companies that invested heavily in technology during the COVID-19 crisis, have been growing at a faster rate than their competitors. These leaders were shown to adopt innovative technologies sooner and to reinvest more frequently as they redirect their IT budgets to innovation.
Companies that outperformed their competition even after an economic downturn, understood where the world was moving at that time, and how innovation would help them surpass the crisis. Sometimes, moving ahead in an economic downturn also means to cut costs, but that should always be done while considering long-term priorities.
For example, Delta Air Lines, one of the leading airlines, managed to get back to their leading position even after bankruptcy. They successfully emerged from the crisis in 2007 through a series of bold decisions from leaders who embraced innovative thinking.
They incentivized employees through a profit-sharing program and stock-ownership plan, they forged new partnerships and consolidated existing ones, and maybe the most unconventional decision in their industry, they bought an oil refinery which down the line, decreased the fuel costs for the company. Of course, a lot of tough decisions were also made as they had to restructure the organization from the ground up. Even so, when they did this, they considered the long-term success, not just the quick wins.
Speaking of short-term and long-term initiatives, this takes us to the next point: the balancing act organizations need to master when it comes to investment for short-term and long-term projects.
Long-horizon projects keep the innovation portfolio balanced
The three horizons of growth is a model created by McKinsey to better manage and structure innovation projects in the short-term and in the long-term. We covered the topic of an innovation portfolio and how to best manage it, so we won’t go into too much detail here.
In short, the idea of the three horizons model, is that it allows you to create a portfolio to manage innovation as an asset which enables long-term growth. The long-horizon innovations that we talk about here, are basically the projects in the horizon three, that are expected to produce results in more than three years.
Working simultaneously on projects within all three horizons allows companies to maximize their growth potential. However, as the Harvard study suggests, less-mature companies find it more difficult to invest in long-horizon projects, as financing projects that could take years to bring results puts them in a more vulnerable position.
This is especially true when they face economic pressure. The long-horizon projects are the first to go and this leads to an unbalanced innovation portfolio. This leaves them with the short-term projects, the quick wins that usually bring lower, incremental results compared to the long-term innovations.
Maintaining a balanced portfolio in a crisis becomes even more difficult. As the financial pressure changes the dynamic of the organization and the context in which it operates, new priorities need to be set as well as a change in resource allocation.
Instead of a 70-20-10 model, it might be that you will have an 85-10-5 model. Even if you might have to kill some of the long-horizon projects due to financial consideration, you can still think of alternatives that will ensure long-term growth.
The Harvard study cited above also advices that alternative ways to balance portfolios are needed. Organizations should make changes in their strategy, governance, engagement, and incentives.
David Arnoux, Growth Tribe CEO and co-founder explains how they adapted the McKinsey model to create their own resources and align both business innovation and business growth as well as balance their innovation portfolio.
In short, they allocate 75-90% of resources to optimize the H1 projects, 5-15% to H2 project and 1-2% to H3 projects. To reach this percentage allocation, they use a scoring system that allows them to test and validate ideas, to analyze the impact, execution risk and financial impact these projects could have.
Playing offense, the winning strategy for midsize companies too
The first reaction in times of crisis is to play defense. The pressure of the unknown as well as the expectations from stakeholders can turn into less-than-optimal decisions. The different studies presented here so far showed that playing offense and investing in innovation, is in fact the winning strategy.
In defensive mode, when they face a lot of external pressure, leaders reduce operational costs, shrink budgets for all departments, restructure, and postpone investments in training, tools, or new talent. All this can ultimately lead to a drop in the morale of employees, which in turn can affect their performance and capability to execute their day-to-day job, let alone come up with innovative ideas.
On the other hand, to play offense would mean that leaders and finance departments are still prudent, but don’t affect the areas that are essential for future growth. And this can be done in organizations of all sizes. You don’t have to be Apple or Google to invest in innovation in times of crisis.
Obviously, this is easier said than done. The important questions arise: how to prioritize investments, where to cut what, and what strategy works best? You might have guessed that it depends on the industry, market, and specifics of the organization. Still, based on our research and experience, we can provide a list of practical advice that can help you keep innovation afloat even during difficult times.
Best practices to keep innovating in an economic downturn
Even with the recession news looming over our future, there is still some good news. So far, each recession has been followed by a period of growth and prosperity. This is not to say we should rest on our laurels. Each crisis came with its own challenges and opportunities, and ultimately, each path requires different decisions too. Optimism could do us good, but the tough decisions are ahead of us, and part of these decisions should involve some innovative thinking too.
So, we’ll next look at some of the best practices that can help you keep innovation afloat despite the difficult times.
Turn constraints into opportunities
You don’t have to build everything by yourself, and that holds true even more in a downturn. If some projects are threatened to be shut down or they are affected by restructuring or savings, you can look for solutions outside the organization.
Facing financial struggles can bring a series of constraints, but as mentioned before, these can be opening doors to new opportunities. Maybe now it’s the time to discover collaboration opportunities that were not possible before. As other organizations might be facing similar threats, they could be also looking to support their projects through partnerships.
For those that are in the position to do it, there is also the option to acquire new ventures and small companies. In a crisis, the valuation usually goes down and that can be a good opportunity to expand your portfolio or find products or services that can complement yours.
For example, AstraZeneca, the pharmaceutical giant, made quite a few of these strategic moves recently. In 2022 they acquired biotech firm TeneoTwo to broaden their hematology portfolio, teamed up with Alveofit for lung disease management, and started a collaboration with Thorne HealthTech for innovative AI-driven technologies.
While smaller organizations might not be in the position to make acquisitions, they can still look for suitable partnerships, by creating or adhering to local innovation ecosystems or through various open innovation initiatives. There is also an opportunity in committing to deliver innovative results to customers, which in return can help share the costs and keep the project alive.
Focus on strategic priorities
With each decision, leaders (should) have in mind strategic priorities that will move the organization forward. If you want your ideas and projects to be part of those priorities, you have to make sure that the innovation efforts align with the overall business goals.
When COVID-19 hit, many organizations changed gears and invested massively in digitization, as that was the new priority that mattered in that context. However, in a financial downturn the direction might not be as clear for all organizations. What should they focus on, what are the new priorities, how to best overcome the situation?
Innovators need to align the innovation strategy with the business goals by working closely with top management. Through close collaboration they can shape the vision for the future and find ways in which innovation can support that vision. Innovation shouldn’t be the end goal, but rather the means to an end, the tool that can help achieve greater things. Through open collaboration and transparent communication, innovators will also gain the trust of decision makers.
Working closely with top management can turn your innovation initiatives in different direction that initially intended, especially during a tough economic situation. An innovation strategy is meant to guide your action towards areas that have the greatest business impact, but it should also provide enough flexibility to adapt to new situations.
So, you need to review and fine-tune the existing innovation strategy to match the new priorities. You could, for example, focus more on solutions that save costs and solve inefficiencies, if that is a priority. Or you can take advantage of this situation to suggest ideas that under normal circumstances would not have been popular.
A leader might not be willing to cause that internal havoc when business is going well, but when the pressure is rising for everyone, it’s easier to make those tough decisions.
As innovation managers or as someone working with innovation, it’s essential to discuss with leadership and show how your work and the projects envisioned for the organization can help achieve the goals even in the new context.
For example, when the economic crisis hit in 2008-2009, Samsung was leading the consumer-electronic market, but it was lagging behind in technological advancement. In times of crisis, consumers cut on spendings deemed unnecessary like technology. However, they also become more aware of the price/quality ratio and choose long-term investments over cheap ones that can last less.
To get a competitive advantage, Samsung shifted their focus to technical innovation and R&D, investing heavily in improving the quality of LCDs, semiconductors, and cellphones. As their business strategy and business goals evolved, so did their innovation strategy. During the crisis, they spent over 7 billion dollars on research and development, with 25% of employees involved in R&D work, which allowed them to remain competitive.
Involve employees in cost-cutting decisions
The focus on innovation doesn’t take away the need to reduce costs or cut down on investment in other areas. Sometimes there is no way around it. However, you can uncover new opportunities when you consult with your employees as they can bring up some ideas on how to cut or spin out resources that are no longer strategic or relevant.
There are also situations when you need solutions for specific problems and your employees might have the answers. For example, KLM was struggling for years to find the best way of reducing the turnaround time of their aircrafts without additional costs. A shorter turnaround time means maximizing the plane’s capacity to fly. However, decision makers and teams involved in the process could not get aligned on how to best go about this.
So, instead of taking a top-down approach they went for the bottom-up one. They brought together employees who were actively involved in the process to work on an action plan. Their ideation process, testing and implementation led to a successful outcome which reduced the turnaround time from 50 minutes to 35 minutes without any additional investments. This resulted in a positive financial impact and the model of working on this problem was later implemented for other aircrafts.
If a small team had such a big impact on such a large organization, imagine what you can do when you scale such initiatives throughout an entire company. Working face-to-face, like KLM did in this case is essential, especially in smaller teams. However, when the scale, structure and urgency of the situation change, you will need more efficient tools like an idea management software that can also scale with your needs.
There seems to be an ongoing debate on whether we already are in a recession or not. The answer depends on where you live, and whom you ask. Regardless of the point of view, in the end it’s a matter of “how worse it will get and when”.
So, understandably, cost reduction is already top of mind for many leaders. However, it’s not just about leaders who need to take action. Innovators across organizations also have to figure out how to support CFOs in reassessing priorities.
If we look at a recent Gartner survey we see that 85% of CEOs plan to prioritise investment in digital capabilities and 94% want to maintain and accelerate the digital transformation driven by the pandemic. Such actions can help companies reduce the costs of doing business and enables them to explore disruptive innovations.
So, the question is what innovation strategy would best align with these priorities. Is there a project that can be altered to act as a safety net, or are there any ideas that could help diversify the sources of revenue?
For example, Amazon created the Amazon Web Services business through which companies rent servers from Amazon data centers, providing the company with another rapidly growing and profitable source of revenue. E-commerce is always one of those industries hit harder during recession, so naturally Amazon was also bound to be affected by the 2008-2009 economic crisis.
However, AWS nicely complemented the company’s growth. What used to be an additional stream of revenue has now become the most successful cloud infrastructure company, with more than 30% of the market.
Some of the most obvious solutions might be right in front of you, but it’s not always easy to access that information. Here’s where an idea management software can again help you.
You could, for example, organize idea campaigns and challenges to uncover new opportunities to improve processes or products, save resources, reduce waste, costs, or errors, find new revenue models, differentiation methods, new markets or services, and much more.
To help you out, we created an extensive list with 35 ways you can use an idea management software to drive business results. You can revisit this whenever you feel like you might need the input of employees, but you’re not sure how to approach the topic.
To end on a positive note, let’s remember that all crises and recessions have been followed by a period of prosperity and growth. So, take a closer look at the behaviors that led to success after recession and see how you can act strategically to survive, adapt, and hopefully, thrive.
The survivors of the dot-com bubble Netflix, Facebook, Nvidia and others, became the greatest wealth creators of our days because they seized opportunities and remained flexible. Those 10% of companies that performed better at the end of a crisis had several things in common. They took advantage of the situation, they adapted to maximize opportunities, they focused on strategic matters, and they had a healthy balance of making thousands of tough decisions while keeping their eyes on the prize through investments in the future.
Can you name highly successful organizations that haven’t allocated any resources to innovation when the times were tough? We can’t think of any.
If you want to learn more on how to make innovation happen and navigate the challenges, we created The Innovation System program together with our customers who work daily on innovation. The online course is a coaching program that dives deep into all things corporate innovation through 26 video lectures, exercises, tools and templates.
If you want to learn more about the uses of an idea management software and how it can benefit the future of your organization, book a demo with one of our team members!