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February 27, 2024

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Balancing Innovation and Profitability During Challenging Economic Times

In times of financial uncertainty, innovation can become a lifeline for businesses. Discover strategies for balancing the pursuit of innovation with the need to generate revenue and maintain profitability. Necessity is the mother of invention, after all.

Introduction

Economic threats often lead companies to cut innovation resources, a phenomenon known as ‘the threat rigidity effect’. In today's rapidly changing business landscape, the role of innovation has never been more critical.

In this article, we explore practical strategies and frameworks that can guide leaders in embedding innovation at the core of their business operations, ensuring not just survival but sustainable growth and competitive advantage.

A Culture of Innovation

We often talk about innovation and its importance, but why does it actually matter in business? Let’s consider the COVID-19 global pandemic and its subsequent economic downturn. Though challenging, it presents unique opportunities for innovation.

Many companies have had to readjust their business models and pivot quickly to adapt to new customer needs.

This is more easily achieved if a culture of innovation already exists, motivating individuals to engage in activities like risk-taking, idea recombination, prototyping, and testing. An innovative environment allows for the incubation of new concepts, which are vital for long-term success​​. Innovation is needed to succeed in a time like this.

A lack of innovation can make organisations rigid rather than adaptive, inhibiting agility and the ability to adapt to new circumstances. This type of culture can lead to a decline in innovation and new concept introduction, affecting performance. While such responses may prevent immediate failure, they can be detrimental in the long run.

Studies in Innovation

The Great Depression

In some cases economic crises can be catalysts for big changes. A recent study by Kellogg Insight explores the impact of the Great Depression on innovation, focusing on the shift from independent inventors to firm-based innovation.

Researchers found a steep decline in independent inventors’ patents, driven by a lack of local funding due to the economic crisis. But large companies weathered, and in some cases actually benefited from the tough economic situation. Independent creative thinkers didn’t disappear; many of them moved to companies, where they continued to innovate.

Economic situations can force a shift in how innovation is organised and accelerated by circumstances, as in the case of the Great Depression.

The Great Recession

It can be tempting to reduce spending in times of trouble. Cutting costs in areas like innovation might seem like a good idea, but is it really?

McKinsey research shows that in the three to five years that followed the recession of the late 2000s, companies that had continued or increased their investment in innovation during the global downturn generated three times more growth compared with their industry peers. In many cases, these companies actually leapfrogged their competitors.

A crisis doesn’t mean that customer needs suddenly stop evolving. In fact, such evolutions often accelerate during trying times.


The European Commission’s Joint Research Centre found that in 2020, innovative firms faced a drop in performance that was only half as big as for non-innovative ones, underscoring the importance of innovation in times of crisis​​.

Strategies for Balancing Innovation and Profitability

McKinsey’s Eight Essentials of Innovation is a useful strategic framework to help leaders navigate crises, in particular economic downturns. By focusing on the key areas below, leaders can effectively navigate the crisis, adapt to rapidly changing market conditions, and position their organisations for future growth. These essentials are designed to help businesses rediscover customer needs, evolve business models, prioritise resource allocation, and ultimately emerge as innovation leaders in the post-crisis era.

Discover

Focus on understanding changing market dynamics and customer needs. Leaders should encourage teams to gather insights from various touchpoints and rapidly synthesise this information to identify valuable problems to solve. This involves prioritising research, analysis, and direct customer engagement.

Evolve

Adapt business models to meet new market realities. Leaders should evaluate which aspects of their current models are less effective and explore new approaches. This may involve experimenting with alternative business models and challenging previous assumptions.

Choose

Reallocate resources towards the most promising innovation opportunities. Leaders should critically assess their innovation pipeline, discontinuing or pivoting initiatives that are less relevant in the current context, and redirecting resources to areas with higher potential value.

Aspire

Set a new strategic direction or ‘North Star’ that aligns with post-crisis realities. Leaders should redefine their business aspirations based on the evolving market landscape and internal capabilities, ensuring that these are communicated clearly across the organisation.

Accelerate and Scale

Increase the pace at which new ideas are brought to market and ensure that operational capabilities keep up with these innovations. Leaders should foster an environment that supports rapid development and scaling of successful ideas, leveraging agile methodologies where appropriate.

Extend

Develop external partnerships to extend the organisation’s reach and capabilities. Leaders should seek collaborations with other companies, including competitors or firms from different industries, to jointly pursue innovation opportunities and share risks.

Mobilise

Create an agile culture and working model that supports innovation. Leaders should ensure that the organisation has the right talent, incentives, and organisational structures to execute on innovation plans effectively.

Aspire (again)

After focusing on the immediate needs through Discover, Evolve, and Choose, leaders should revisit the Aspire essential to ensure the company's long-term vision and aspirations are aligned with the new market context.

Lessons on Innovation from a Crisis

It seems easier to develop new ideas and drive change during an emergency. So what about when there’s no crisis? Can we apply the same ideas and learn to innovate in the absence of a crisis? Absolutely!

A crisis teaches us:

A Sense of Urgency

Crises create a real sense of urgency that focuses attention and action. In non-crisis times, organisations can approximate this by proactively recognising future threats and opportunities.

Singular Focus

During a crisis, organisations can drop all other priorities and focus resources on solving the immediate problem. Leaders in non-crisis times should be disciplined in setting clear priorities.

Diversity of Perspectives

Crises bring together diverse teams, unleashing greater creativity. Leaders should encourage diverse perspectives and set specific parameters to focus innovation efforts.

Legitimation of Experimentation

The urgency of a crisis legitimises experimentation and learning, allowing for more risk-taking. Leaders should value projects for the learning they provide and create slack in the organisation to encourage experimentation.

Time-Bound Intensity

The temporary nature of a crisis allows organisations to commit to intense efforts. In normal times, leaders can create similar conditions by setting deadlines and maintaining engagement throughout the innovation process.

Conclusion

Innovation in the face of adversity is not just about survival; it's about setting the stage for future success. As we've seen through various historical lenses and strategic models, those who embrace innovation during economic downturns position themselves for remarkable growth and competitive advantage. It's time for businesses to rethink their approach to innovation, turning challenges into catalysts for transformation and growth.

Sources:

MITSloan Management Review – What a Crisis Teaches Us About Innovation
EY – How can manufacturers place innovation at the heart of transformation?
McKinsey – Innovation in a crisis: Why it is more critical than ever
McKinsey – Designing out of difficult times
Insights@Questrom – Why Companies Should Continue to Innovate in an Economic Downturn
Kellogg Insight – What Happens to Innovation During an Economic Crisis?
European Commission’s Joint Research Centre – Innovation helps companies perform better during economic downturns
Tags:
AgileLeadershipStrategy
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