Recession business mentality

In our last post, we wrote about innovation in the economic quagmire. This time we will focus on how the financial crisis and economic downturn impact the way we think about doing business.

It is safe to say that optimism has been replaced with caution. Costs are cut, investments cancelled, and innovation is viewed with skepticism by many managers. Product, sales and marketing departments face new challenges with what we call “the recession business mentality:”

• Risk aversion – everyone is afraid of making wrong decisions, both personally and for the business as a whole. When people are advised to wear white shirts to avoid sticking out in the next round of downsizing, finding someone willing to take large risks can be difficult.
• Demand for visible results – investments require visible return in the form of reduced risk, increased revenue and/or lower costs. Results need to be perceivable and quantifiable. Projects, services and products that fail to deliver visible results face tough times.
• Demand for quick results – cost cuts can quickly impact the bottom line. Now investments require quick results, often within a year or even within a quarter. Managers face strict requirements to cut costs and improve results within short time frames.
• Long decision-making processes - decisions that were up until recently made by empowered employees and single managers now drag on as more people become involved in decision-making processes. The larger the investment, the longer it takes.
• Budgets are slim – in many companies it is currently not room for large investments, or there is an investment freeze altogether. Expensive products and services are categorically refused, and price negotiations can be tough.

So, how can struggling companies adapt to the recession business mentality? To begin with, businesses should evaluate their product and service range to determine whether they fulfill the criteria almost required to do business during the recession. We have compiled a list of requirements, and the more criteria a product or service meets, the more likely we predict it is to succeed during the economic downturn.

The optimal product is one that:

• Entails low risk to the business and buyer
• Provides tangible value
• Provides quick return
• Can increase revenue and reduce costs
• Can circumvent inefficient decision-making processes
• And finally, it should be low cost

A low-cost product can entail low risk for the buyer and can circumvent long decision-making rounds and investment restrictions. If it is easy to provide tangible results, lower costs and increased revenue, it is easy to measure return on investment. Of course, many products or services don’t meet all these criteria, but the ones that do – or that can be adapted to do – have an edge when facing the recession business mentality.

Innovation in the economic quagmire

The global economy is a quagmire and we are all sinking.
Daily we hear stories about companies downsizing, dramatically cutting costs and slashing their revenue projections. Aggressive growth strategies are replaced by more defensive strategies and many promising projects are cancelled.

But what will these companies do after the reorganizations are completed and daily business is all that remains? Essentially they are holding on to a branch to avoid sinking deeper into the economic quagmire, but it won’t help them to get out. And if they don’t do something, companies will see competitors climbing out of the pits while they remain stuck.

We say the time has come to focus on innovation. By now companies should have corporate cultures that are cost-focused and stricter requirements for return on investment should be in place. Building on this fundament, innovation needs to be quick, low-cost and potential return on investment should be identified early. It is also important to remember that not all innovations will be successes. Scott D. Anthony, author of The Innovator’s Guide to Growth: Putting Disruptive Innovation to Work, reminds us that companies should also focus on decreasing the cost of failures.

Based on the above criteria, we have come up with a few simple rules to improve innovation performance - which frankly should apply regardless of economic cycles, but are particularly in the spirit of the now. We think it is just what companies need to get out of the quagmire.

1. Prioritize ideas by costs and potential return on investment. Already at an early stage ideas should be evaluated for potential. Many times, low cost ideas are just as good as high cost ones – and they entail lower risks.
2. Accept that 80% is good enough. Those last 20% can be very costly and you can achieve more and reduce risks by spreading your resources on multiple innovation initiatives.
3. Use agile development techniques. You gain flexibility to make changes along the way without having to discard or make substantial changes to detailed product specifications.
4. Test your ideas on a user group. Testing need not be expensive. Especially for qualitative feedback, a small group tends to come up with many of the same comments a larger group would do. If customers are too expensive to get hold of, use internal user tests.
5. Increase pace of decisions. This does not mean making uninformed decisions, but advocates avoiding long decision-making rounds. Cancelling flawed projects early reduces costs and allows you to focus on the best ideas (Thanks to Scott for this one).

In the eyes of Joseph Schumpeter (1883-1950), the entrepreneur spirit is that which drives progress, and the actors that drive innovation and the economy are big companies which have the resources and capital to invest in research and development. If Schumpeter was still around, he too would likely have advocated that the way out of the economic crisis is through innovation. Food for thought, big companies.