Economic downturns present a critical juncture for businesses, forcing a reevaluation of innovation strategies. While knee-jerk reactions often lean towards defensive budget cuts, a more strategic approach is essential to navigate the uncertainty and emerge stronger.
In reaction to an economic shock many companies react defensively, implementing across-the-board budget cuts. They cut R&D budgets, freeze hiring, delay product launches, and pull back on marketing.
Others find economic downturns are one of the best opportunities to innovate. This is the argument that proposes downturns offer cost advantages in talent, materials, and advertising. Competitors have likely cut R&D and are delaying new launches – creating further market opportunities. All this creates opportunities to improve the return on innovation and emerge from a recession in a much stronger position.
I’ve looked into both approaches for the companies I’m working with. In every case the most effective innovation strategy is more nuanced, a hybrid approach prioritizing essential operational improvements, strategically delaying product launches, refocusing consumer insights and reducing the innovation portfolio risk.
The Flaw in Conventional Wisdom:
I understand how cutting innovation during a downturn is a smart thing to do. But not for the bottom-line reasons most companies do it. However, why cut innovation when they are generally very short lived. Most experts agree that the average length of a recession in the U.S. is about 10 to 11 months. Even the Great Recession only lasted about two years, from 2007 to 2009, which is also about the duration of a single product cycle for most consumer products. Slowing innovation doesn’t just put a company behind competitors by a product cycle, it puts them at least two cycles behind. When a company that cut innovation launches their first post-recession product, their competitors might be on their second or third iteration. In an extended recession the competitive disadvantage of cutting innovation just gets greater and greater.
The flaw I see in investing in innovation during a downturn is the assumption that the consumer, the market, even the world will look largely the same once the downturn has passed. I’m not talking about the types of technology, consumer and market changes that are constantly occurring. I’m talking about fundamental and unpredictable changes. The changes that led to the explosion of D2C commerce after the Great Recession, the growth of conscious consumerism and the shifts in purchasing we’ve seen in Gen Z. Cutting innovation is smart strategy because it resets the company’s innovation strategy to align with a new post-recession reality. There is no point in investing in innovation that will be irrelevant as soon as they are launched.
A Hybrid Approach:
This might sound like a cop-out, but my clients are implementing both strategies.
Since I don’t know if this is a structural change, one that might be modified in a few years, or a few months I’m hesitant to stop R&D altogether. This doesn’t change today’s financial reality that budgets need to change. However, in budgeting I am doing the minimal R&D cuts I can afford. New products projects are being delayed while operational and cost-savings innovation projects are being funded and prioritized. This is not to reduce costs to address potentially short-term changes in purchasing behavior. It is because I am looking long term and the benefits of those projects will be realized regardless if the economy shrinks or grows.
Strategic Shifts in Innovation:
The changes to the innovation strategy for new product development (NPD) are more extensive. I am delaying, and in some cases canceling, new product launches – especially those planned for the next six months.
The area I continue to invest in is consumer, market and competitive research. I am maintaining, and in some cases increasing, consumer insights (CI) projects. However, there is a shift in the insights I am looking for. Instead of focusing on predictable shifts like delayed purchases and brand switching, I’m interested in research that delves into the deeper, psychological impacts of the downturn. I want to investigate how evolving economic pressures are reshaping consumer aspirations, risk tolerance, and family dynamics. This involves employing qualitative research methods to uncover ‘unknown unknowns’ – proprietary insights that can yield a sustainable competitive edge. For example, are consumers shifting towards more communal living, or are they prioritizing increased personal security? These types of shifts, if discovered early, can lead to long-term ownable advantages.
The third strategic shift is a de-emphasis on first-to-market projects for those that are fast-followers. This is purely to manage the amount of risk in the innovation portfolio. Being first to market, which is very risky in general, is obviously far more so during times of uncertainty. I believe giving up the advantages of being first-to-market is the right tradeoff to conserve budgets and increase the probability of a positive return on innovation. I am more concerned about avoiding losses and generating profitability, even if the return is smaller than it might have been if it were first.
Navigating the turbulent waters of an economic downturn requires a dynamic, data-driven strategy that balances fiscal prudence with strategic foresight. By prioritizing operational efficiencies and selectively delaying high-risk new product launches, I am trying to secure their immediate stability. Simultaneously, a deepened investment in consumer research—probing beyond surface-level behavioral changes to uncover fundamental shifts in values and aspirations – has the potential to yield proprietary insights to fuel future winners. Embracing a fast-follower approach, while strategically relinquishing the benefits of first-to-market ventures, further mitigates uncertainty. I believe that the organizations that survive this shock and will emerge strongest from this period will be those that can adapt quickly with a nuanced and multi-pronged approach to innovation budgeting and strategy.