|Websites for Professionals
Take control of your online presence
with your own professional website!
Downturn – An Opportunity For The Future
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:
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:
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:
To overcome the downturn, companies should ensure the following:
Organizations should never cease innovating, and should refrain from devaluing their existing brands, as both these may send wrong signals to their shareholders, the market, and the competitors. Strategic alliances and joint venture partnerships enable an organization to expand its customer base with minimum expenditure. Focus should be on marketing what is most popular and profitable to the customers during downturn.
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.
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.
 As quoted in the article, “Innovate through the Downturn,” by David R. Butcher, http://news.thomasnet.com, April 29, 2008.
 As quoted in the article, “Innovating through Recession,” http://d.scribd.com.
 As quoted in the article, “Google Europe Boss Says Innovation will Guide Firms through Downturn,” by John Kennedy, www.siliconrepublic.com, October 9, 2008.
 As quoted in the article, “Innovate in the Downturn – 7 Things You Must Do,” www.lifehack.org, June 12, 2008.
 As quoted in the article, “The Recession-proof Business,” www.news.bbc.co.uk, October 23, 2008.
Additional Readings & References
Many more articles in Competitive Strategy in The CEO Refresher Archives