Wednesday, November 24, 2010

Why innovation matters now

As the economic downturn settles in for its second year and promises to hang around like a slacker twenty-something on the couch, there is a growing divide between the innovation haves and have nots.  Firms that were relatively innovative before the economic slowdown have for the most part sustained a high level of innovation investment.  That's not uniformly true, however.  You can easily find firms that were investing more heavily in innovation before the downturn that have significantly reduced that investment.  However, the firms that weren't investing in innovation activities previous to the downturn are now even more unlikely to start a program or initiative until they see the faint rays of light at the end of the downturn tunnel.

This means that the innovation winners - firms that get all of the attention like P&G, Apple, 3M and so forth - will continue to pull away from their nearest competitors and gain more market share and higher returns, not to mention better market returns.  When the economy turns a corner and begins to rebound, the differences in product and services offerings will become even more apparent, as firms that have been cutting and "holding on" won't have much new on offer.  Their only real opportunity will be to cut costs to attract customers as they can't compete with new products or services, so will become a permanent second class.

History also tells us something about recovery from recessions or depressions.  These downturns inevitably spawn many new startups.  You've heard previously about many leading companies, Dupont for example, that were created in the dark days of the Great Depression.  These firms are birthed in the most difficult and trying times, and they are optimized to thrive in the dark days, and have their finger on the pulse of customer needs in a way that only a firm struggling to offer one product or service in a downturn can achieve.  Right now, all around the globe, thousands of people are being asked to leave their jobs in large, established firms and are pursuing their dreams or passions out of either vision or desperation, and those individuals are creating innovative new products and services, born out of the ashes of this downturn.  Some will make it, some won't.  But what's true and has been demonstrated before is that these innovators will take a significant portion of the market as it recovers.  That means the firms most likely to be successful in the next few years are firms that are heavily investing in innovation now, and firms we aren't even aware of right now, the new innovators.

If this logic holds, then innovation is the key to survival for larger firms, and the driving force for growth for new firms.  Coming out of the recession - and it will end - those firms with an active passion for innovation will accelerate away from the firms too focused on efficiency and cost cutting.  Innovation is the competitive advantage.

We can also predict a few other things based on history and downturns.  Coming out of the recession, many things will change.  Out of any major downturn, people will question the status quo, what was received wisdom before and during the downturn.  For example, look no further than the size of the average house in the US.  Recent surveys indicate that respondents believe they can be happy with a house over 20% smaller than what was indicated just before the downturn.  Out of any downturn people recalibrate their needs and expectations and shift their behavior.  We can expect that there will be a return to thrift, a demand for more meaningful experiences and less conspicuous consumption for quite some time after the recovery.  Firms that understand these shifts - those firms in existence today and those just getting started now - will move quickly to position themselves to offer innovative products, services and experiences that meet these customers in their new expectations.  Firms that are right now holding on and cutting investment in innovation will offer products and services that were deemed appropriate before the downturn to customers with new expectations and wonder what went wrong.

Innovation is also important for our state and federal governments.  After several years of spending on a number of important new programs and foreign wars, the growing deficit and looming federal debt are forcing us to consider changes in policy and programs.  Currently most of the response is tinkering around the edges - we aren't in enough pain yet.  But it's not hard to forecast that what's happening to Greece and Ireland can happen to us, especially if many countries continue to proceed down the path to what lead to the Great Depression - currency devaluation and trade sanctions.  Our state and federal governments need new thinking and innovation to reset expectations and offer the appropriate services within budgets we can afford.

In the US, our university system has been the envy of the world, but over the last decade or so seems to have lost its way.  The fundamental lack of innovation in entities that should be a crucible for innovation is astonishing.  Many universities are facing severe cutbacks in state funding and are forced to raise tuition, while the overhead and administrative costs have grown dramatically.  Many have fought the advent of distance based education and "for profit" universities, while many students have sought out these more innovative solutions.  Universities need to turn the focus inward to consider how to innovate their models, which for the most part are unchanged from the 11th century.  Costs rising twice the pace of inflation are simply unsustainable, and with an average four year graduation rate dropping as low as 50%, these are investments that aren't worth the cost.  Universities should be open, dynamic, flexible organizations for innovation and change.  Instead they've become closed, fixed, inflexible machines that sustain long tenured administrators and faculty at the expense of new ideas and growth. 

To a certain extent, all the major organizations of our economy are standing around, waiting for something to emerge, a savior from the distance.  The solution is here, right in front of us, for every industry, academic program or institute of higher learning.  We need innovation in our businesses, in our governing institutions and in our academic settings.  The needs are obvious, the demands only rising.  Rather than scanning for longer term impossible solutions, let's get busy with something we know that works.  Innovative thinking and applied creativity translated into new products and services for businesses, new programs and new ways to govern for political entities and completely new ways to teach and to learn for academic institutions.  This isn't a pipe dream - it's a requirement.  The amount of pain we endure is based on how long it takes us to understand that innovation will be what creates the new value propositions that we need.

And yes, I'm guilty of asserting that many of our needs can be solved with just one tool.  If that makes me a snake oil salesperson, I'll wear it with pride.  Einstein, quoted here many times before, said that you can't solve new problems with old ways of thinking.  To solve new problems, you need new ways of thinking.  We aren't asserting the solutions, just challenging everyone to assert new ways of thinking to create the new solutions.  It's time to get innovative people.
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posted by Jeffrey Phillips at 7:09 AM

3 Comments:

Anonymous The IT Skeptic said...

It may be time for organisations to innovate, but that doesn't mean everyone should be innovating.

Innovation involves trial and error, which equates to risk, loss and inefficiency. Innovation should come form a small number of people and.or a small percentage of people's efforts. The rest of you the rest of the time get back to keeping things working.

11:39 AM  
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