Monday, July 20, 2009

Event or Condition Based innovation

I see in the blogs and tweets and other data streams a lot of discussion about whether or not a firm should increase or decrease innovation spending during an economic downturn. This seems reasonable on the surface, but if you think carefully about the question at hand it seems more like asking whether water and air are more important to humans on Mondays or Fridays.

Let's define a set of stipulations. First, innovation is important for new products and services. Second, new products and services attract new customers and retain existing customers, and the absence of new products and services often results in the loss of customers and revenue. Third, the driving factor for most firms is an increasing share price, which is typically driven by increasing revenue streams.

You can choose to accept that simple sequence of stipulations or not - your choice. I suppose you could argue that during an economic downturn, revenue is going to fall since customers will buy less. But then the argument should be that when customers spend, they want the absolute best for their money. Given a tradeoff between a new, innovative product or service and a tired, traditional product or service when spending is limited - most people still want the product that delivers more "bang" for the buck. Or I suppose you could argue that people will just stop spending all together so there's no need for new products and services. I've been to the malls and shopping centers, and there are clearly fewer shoppers - but last I looked the GDP is still at 95% or so of what it was a few years ago, so there's a lot of spending still going on. Or perhaps you could argue that you'll simply "wait it out" and start innovating again when the economy improves. As we've discussed before, the time it takes most firms to gin up an innovation program will mean that you'll be at best late to anything you do, and at worst an also-ran.

If innovation is important, should we treat it like tap water, than can be turned on and off when circumstances, economic dips and swings and other events force us to re-evaluate our business? Does your firm stop purchasing raw materials, or stop paying employees in a downturn? These are "lifeblood" issues, right? Well, if you stop innovating in a downturn, what does it say about the importance of innovation to your business? Not a "lifeblood" activity?

If innovation is predicated on the economic cycle, then when is the appropriate time for innovation? Clearly many people believe we shouldn't innovate when the markets and economy are 'down', and one could argue that innovation isn't all that critical when the markets and economies are "up" because there's a lot of product out there for money to chase. We certainly will run into obstacles spending money on innovation when the market is deteriorating, as people will want to "reach the bottom" before investing. So that leaves us timing the market on the way up, and possibly innovating while the market is hot. In other words, many people believe in innovating much like momentum investors.

There are a couple of problems with that. First is calling the market. Is your team smart enough to call the market bottom and top correctly? Second is cultural and inertia. If you stop, then try to start again, the corporate inertia will drag you down. The third is speed. Even if you can get started, can you get up to speed quickly enough? The fourth is a pipeline problem. Most firms take several months to generate and shape a good idea, and anywhere from 4 to 18 months to develop, commercialize and launch. That means if your pipeline is bare, you may be in the next downturn by the time your ideas get through the pipeline. Finally, the start and stop model sends a signal to your people that your team isn't seriously committed, so they'll be very hesitant to commit to an innovation program the next time around.

Until innovation becomes a core capability that is active through thick and thin, it isn't a capability at all.
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posted by Jeffrey Phillips at 1:48 PM


Anonymous Phil Goldie, thinkGROWTH said...

Couldn't agree more - you don't have to look far for examples of companies that innovated (either in product or service development, or business model) during the downturns and enjoyed great success on the other side. More fundamentally though, the question of whether innovation even can be "turned off" during harder times would suggest that many companies still see innovation as solely linked to product pipelines and most likely as discrete efforts rather than embedded organisational capability.

6:54 PM  
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