Innovation helps companies get through a downturn

Daniel Saunders

Chief Executive Officer

Innovation helps companies be agile, not fragile in a downturn

According to The World Bank, the chances of a global recession in 2023 continue to rise. As market confidence wanes, company executives switch from growth to crisis strategies, kiboshing projects and cutting costs wherever possible. This is the “threat rigidity effect” at work. When faced with difficulty, firms become stiff rather than adaptive. As a result, innovation suffers as businesses cut spending for developing new ideas and instead double down on what’s previously worked.

Severe cost-cutting can do more harm than good

Sometimes, when the going gets really tough, you must make difficult decisions for the business to survive. But more often, I witness drastic cost-cutting initiatives that cause more harm than good. 

It’s like a ship’s captain ordering their crew to toss everything overboard after learning that a storm is heading their way. The storm passes without doing much damage, and the crew starts to celebrate. But they quickly discover they are now without food supplies or navigational equipment. They survived the storm, but they won’t be able to endure more than a week at sea without supplies.

This heavy-handed cost-cutting can harm the company’s chances of long-term success. Sure, you might make it through the storm, but what condition are you in after it passes?

Why should you protect innovation budgets during challenging times?

Continuing to invest in corporate innovation presents leaders with three advantages; 

1. With innovation, you are likely to drive radical efficiency, which is needed during difficult trading conditions.
2. With innovation, you will likely develop new business models, products and services. This is needed more than ever during volatile market conditions where customers’ wants and needs quickly change. For example, imagine you are an established vehicle brand that has cut innovation budgets. You continue to produce your most profitable gas guzzler, but the ongoing cost of living and energy crisis cause sales to plummet suddenly. Without innovation, you’ll fall behind competitors that are creating models catering to the new environment. 
3. Recessions tend to provide fertile ground for disruptive startups. Keeping your innovation practices going can protect you from new market entrants. 

Most innovations fail. Reporting such outcomes to the board can be difficult, especially during a downturn. But failure is an essential part of innovation. So how can executives continue to invest in innovation during a recession? It comes down to failing fast. 

The key to innovation is failing fast 

Many businesses test new ideas by fully developing them, which often takes months or years, and only then validating if they work. In this scenario, you invest heavily in time and money only to discover whether it’s a success or failure at the last stage. 

The alternative is to follow the agile methodology, where you break an idea down into smaller, testable hypotheses that can be validated in a matter of weeks. Working in this way lets you quickly assess whether a concept is valuable enough to warrant further exploration. 

One of the critical tenants here is to conduct well-planned experiments allowing you to measure how well the MVP (Minimal Viable Product) performs. This method enables you to fail fast and move on quickly if it doesn’t work. Investment is also needed in smaller waves and only continues if an idea passes specific criteria. 

Therefore, leaders who appreciate that failure is a necessary step can prevent significant amounts of money, time, and resources from being wasted by implementing an agile experimentation approach to innovation. 

Putting in place the right experimentation process to fail fast 

When I refer to the “right” experimentation approach, I mean one that is repeatable and tailored to the needs and risk tolerance of the organisation. What criteria, for instance, should the innovation team use to prioritise various ideas? With a clear framework, the innovation team can quickly establish answers to such questions without delay.

It is also crucial to select an appropriate experiment design based on each hypothesis so you can conduct tests that deliver conclusive results. Say, for instance, that you want to determine whether it is economically feasible to create and market the new product X. So, you question 100 people asking if they would purchase product X.

But there’s an issue. Asking questions about willingness to “buy” can introduce biases, and the sample size is too small to apply to the whole market. Thus you can’t reliably say whether there’s enough demand to make product X economically feasible. 

Instead, you could run an A/B test on your website by creating a mockup of product X and showing it as available for purchase. If users try to buy product X, they are told it’s not yet launched. If you’re shrewd, you can ask such users to provide their email addresses, giving you a list of potential customers to approach when product X launches. Additionally, you can enlist them in further experiments or feedback sessions. Since these customers were unaware that this was a test, the “painted door” experiment provides more precise purchase intent data over a more extensive data set (if your website has high traffic volumes.) Therefore, this experiment will more likely provide you with data you can confidently use to validate the idea.  

Conclusion

Funding innovation during a recession can drive operational efficiencies and ensure your company stays relevant to customers during turbulent times. The secret is to adopt an agile experimental approach to innovation that allows you to fail and succeed fast. Businesses that continue to invest in innovation, understanding the short and long-term benefits, will fare considerably better during a recession and long after it has ended.

18/01/2023