Reframing Recession: Staying Innovative During a Downturn PDF Free Download
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Reframing Recession: Staying
Innovative During a Downturn
Discussion Group
Date: 11 September 2008
Venue: IDEO
Chair
James Moed, Strategist, IDEO
This article is based on the proceedings of a recent meeting of members of
the Criticaleye community. They gathered to discuss reframing recession:
staying innovative during a downturn – a subject proposed by one
member of the group. To encourage open debate, the meeting was held
under the Chatham House Rule. This article, therefore, identifies no names
or companies, but nevertheless presents the distilled insights and
conclusions from the session.
To instigate or to be part of future discussions in this area, to initiate a
connection with other interested members or to request research from our
affiliate and academic partners, please contact your Relationship Manager.
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Summary
Criticaleye members agreed on the necessity of companies being innovative
and creative during times of economic downturn. However, they felt the
stress should be on constantly improving companies’ core practices and
finding ways to “do what we do, but better” rather than making abrupt and
large-scale changes. Practical issues were stressed, with a particular focus
on making sure that innovation went beyond the theoretical and was allowed
to permeate the whole business, from boardroom to line managers.
Other topics discussed included:
• How to keep staff positive in a difficult economic situation
• Is innovation a cliché?
• Are innovation and stability incompatible?
• Small improvements or paradigm shifts?
Introduction
As the economic downturn begins to bite, companies tend to look to ways to
‘batten down the hatches’; R&D budgets are cut, new ventures are
discouraged, risks are minimised. Our day’s host argued that in fact this was
the time for companies to become more innovative and turn the challenges of
recession into opportunities.
Historically recession forces consumers to be more nimble with their
spending; the example was given of the rise of the humble potato. Once a
product used mainly for animal feed, the crop failures of the 1790s saw
consumers substituting potatoes for wheat in their diet, changing the market
entirely. This kind of consumer shift, not driven by advertising or marketing
but by consumer necessity, is common during downturns.
Our current economic problems are more likely than ever to throw up these
kinds of changes. The rise of economic information online (price comparison
websites, etc) gives consumers more opportunity to change spending habits,
and a willingness to switch between traditionally incompatible high-end and
low-cost retailers makes for an increasingly changeable market.
The day’s hosts stressed that in economic downturn, consumers’
fundamental needs don’t change, but the ways in which they fulfil them do.
He gave the example of a couple, who rather than renovate their house
decide to spend money on decorating. Their needs (security, variety etc) are
unchanged; their ways of meeting them are new.
If consumers will innovate, can companies learn to be as innovative as their
customers?
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The host said that unfortunately, in times like these, companies succumbed
to a kind of ‘organisational paralysis’. Workers are fearful, and try and stick to
the rules as much as possible. Companies become insular and lose touch
with both their competitors and their consumers. Just when creativity and
openness are most vital, entrenchment and ‘hunkering down’ are more
common.
How to make things happen
One of the problems of innovation during a downturn is that employees may
have priorities that are more pressing. An attendee from the recruitment
sector explained some of the problems that he’d faced. His company had
initiated some wholesale changes, trying to differentiate themselves from
their competitors. However, he’d found that in this difficult climate employees
were more concerned with protecting their core business and ‘getting on with
the day job’ than innovating.
A member from financial services explained the problems in his sector:
“We’re committed to lots of lending, but suddenly the people we’re borrowing
from don’t want to lend us as much, or at the same rates.” Bankers were
being forced into working harder at borrowing money and going out and
chasing customers. He said, “There’s been a huge problem changing the
behaviours of people who are used to meeting borrowers once a year, and
being in control.” To meet weekly with clients and have to persuade them to
lend to the bank is a huge, and difficult, culture shift.
The banks’ responses had been mainly “knee-jerk weak management” and
lower-level staff were reluctant to take control. He said bankers had said to
him “I know this isn’t the best solution for the bank right now, but I’m going to
do it, because at my end-of-year report, that’s what I’m paid on”.
The question was put; “How do we foster a culture of innovation in the very
times that make people more cautious?”
How do you foster a culture of innovation?
A Criticaleye representative stressed that the message from top-level
management has to be positive. Managers have to show their faith in the
power of innovation, and communicate to their staff that the company is
willing to be bold and brave in the recession. It’s also vital to make sure that
innovation is recognised and rewarded. As another member said; “Fear is an
inept way of managing.”
The danger is that short-term targets become more vital and innovations that
might keep the company healthy in the long-term are being overlooked. A
delegate gave an example of her own company, where managers who hit
their sales targets won a luxury cruise, while those who introduced an
innovation won an iPod.
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Staff members need to be encouraged to be more creative. A delegate gave
an example of a bank that asked its staff which rule they had broken that day,
encouraging employees to break company rules if they found it improved
business and customer satisfaction. The recession, she said, was a good
time to reduce over-design in companies and discard rules that were no
longer helping.
Does innovation come from the top down, or bottom up?
An attendee from the recruitment sector talked about his experiences in
putting together a strategic project group, including quite junior staff, to look
at the customer experience. He argued that British workers especially could
be cynical of innovations that came from above. There was a suspicion that
innovations were for the benefit of managers, rather than the company as a
whole. The project group were doing their own analysis and learning though,
and came up with a whole range of innovative solutions. As important as the
solutions however was the way that the project empowered the staff and
produced ‘agents for change’ at all levels of the company.
The group agreed on the importance of giving junior staff some level of
control. Often the most negative aspect of a recession is not the financial
one, but the fact that it leaves staff feeling powerless. People are being
shifted around the company to profitable areas, unsure of their jobs. Morale
is particularly hard in companies in the public eye. One delegate said that his
company had suffered from being “splashed all over the front page of the FT
every day.” This is when honesty and openness are important
One way to empower staff is to change the way you reward people. If short-
term profit is the only thing employees get rewarded for, innovation will suffer.
Delegates agreed that it was important to give recognition throughout their
companies, and not just to those people making short-term profits. Staff who
innovate, or put plans in place for long-term growth, or who improve the
customer experience should all be rewarded.
A member from a financial services company said his company were
investing in training sales training, but it had been very hard to get approval.
He’d been asked, “Do you really need to do it this year?” He’d had to fight to
get lower-level staff trained in an economic downturn, even though he
thought it was vital to keep investing in staff at these times.
“Freedom in the execution, clarity in the strategy”
A member argued that while it was important to foster a culture of innovation
throughout the company, nothing would be achieved without strategy.
Management must allow staff to take more control in a downturn, but it
needed to be done within the framework of clear direction. If top-level
managers can give a clear, positive direction for change it gives staff the
freedom and confidence to innovate.
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Innovation is useless without implementation
A delegate said: “You can have great ideas but if you don’t deliver them it’s
worthless.” New ideas are only of use if they are actually put into effect. An
attendee gave the example of a competition at his bank where groups of
junior employees were asked to come up with a new idea for the company,
with the promise that the winning entry would be put into practice. The
chosen idea was a new green bank account where interest was used to
offset the customers’ carbon footprint.
Unfortunately, organisational inertia meant that the idea never spread to all
parts of the company, and the idea was abandoned. This was damaging in
two ways; firstly, a potentially innovative new product never came to the
market. And, as importantly, lower-level staff found that they were unable to
effect change in their company. As he said, “Senior managers within one bit
of an organisation weren’t able to push an agenda in another bit of the
organisation which sends the wrong message to these junior guys.”
Contrast this with the success of the Bank of America’s ‘Keep the Change’
programme. Their innovation team scoured the country, trying to understand
customers’ responses to the economic downturn. Finding that customers
regularly rounded up the price of regular purchases for speed and
convenience, they introduced a new account where purchases bought on a
BOA Visa card were rounded up, and the difference was transferred to the
customers’ saving accounts. It attracted 2.5 million customers and launched
a million new BOA savings accounts.
A note of caution was sounded by an attendee from the professional sevices
organisation. He said he was a big fan of continuing to invest through
recession, but that we have to accept that that money would have to come
from bonuses and salaries at a time when staff were already nervous about
their financial situation.
A representative from Criticaleye stressed that companies must make better
use of the resources they have. In the case of banks, they have excellent
staff and unparalleled economic information. A downturn is the time to find
new ways to use those resources.
Innovation vs. Efficiency
An attendee from the financial sector sounded a note of caution. He worried
that ‘innovation’ was simply a buzzword and genuine inventiveness is
incompatible with stability. Spending more on R&D and innovation in a
depressed economy is hard if the company has shareholders who are more
concerned with protecting their investment than long-term growth. Similarly, it
is unlikely that managers who are worried about losing their jobs want to see
cash diverted away from bonuses and towards more long-term innovation
projects.
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Innovation in itself is not the end goal, he said; innovation is a tool to help
business growth. Some companies, like Google or Citibank, while having a
reputation for innovation, were actually quite conservative in the way they
worked day-to-day. For many companies, he argued, constant innovation is
incompatible with stability and keeping shareholders happy.
He also had a problem with how we measure innovation. “What is the
measure of innovation?” he asked, “because what you can’t measure doesn’t
get done.” His is a company heavily reliant on ‘scorecards’ and he felt that
qualities like innovation were impossible to measure in such ways. In a
company like his, with a conservative culture and a stress on the value of
scorecards, innovation had to come in a different way.
For some companies a conservative culture has been the basis of their
success. For many ‘follower’ companies it’s this stress on consistency and
efficiency that has got them where they are today. These companies find it
harder to have innovation coming from throughout the staff, because it’s not
a quality that has been stressed.
Because markets value short-term results, these companies prefer to
innovate through acquisition, buying innovative companies and incorporating
them in the company structure. He argued that for such companies,
innovation is more about improving their day-to-day business than making
innovative shifts. Discussion then hinged on what innovation really was.
Large-scale change of direction? Bravery to keep spending and engaging
with the market? Or doing what we do, but better?
Doing what we do, but better
There was widespread agreement that one of the most important ways to
survive an economic downturn was to make small, but constant
improvements to one’s core business.
An attendee praised the Japanese culture of kai-zen; continuous
improvement in every aspect of a business. He also gave the example of the
successes of the British cycling team at the Olympics. The cycling coach
claimed the marked improvements over the last games was due to a form of
kai-zen, saying that they’d improved by doing “100 things 1 per cent better”,
rather than making huge paradigm shifts.
A delegate from the housing sector echoed these comments, saying that
through her salespeople making one extra networking phone call a week,
they would increase their business network by 20,000 people a year. Small
changes can yield big rewards. She went on to talk about how her company
had landed a big account through rigorous preparation; “Rehearsing,
rehearsing and rehearsing again, and then presenting in front of people who
were critical.” This, however, is just the first step. It’s equally important to
make sure these successful strategies get spread throughout the whole
company.
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A delegate from the health sector spoke of his experiences in trying to wipe
out a £50 million deficit in a hospital budget. They’d identified that if they
could find a way to make each patient stay just one day less in their hospital
bed they could make the necessary savings in three years. However,
attempts to make these changes failed. However much senior management
stressed the need for the change, there was no change in behaviour at ward
level.
Their solution was to involve their staff more fully. Once examples of savings
had been given, and control handed to the ward managers, the savings were
forthcoming. The important factor had been to “hand the problem over to
people who know what they’re doing.” A banking delegate agreed. His
definition of innovation was “A freedom to problem-solve, outside of any
existing rules, and pushed down to the lowest possible level.”
This was echoed by other attendees. It was felt that senior managers want to
be the ones with the solutions, directing the change. But real change has to
come from at levels of the company structure. The line managers who
actually have to change behaviour need to be involved and trusted. It’s not
enough to have innovative ideas. In a climate where employees are fearful
about their jobs, a culture of innovation needs to be built. Lower-level
mangers have to feel that they are being recognised and rewarded for
innovation.
What if your core business is being eroded?
A delegate argued that though improving core practices was important, a
problem comes with companies that, however efficient they are, face a
market that’s disappearing. He gave an example of the railroad companies
who made up 40 per cent of the UK stock market at the turn of the century.
“How many of them innovated their way out of the Depression?” he asked.
Nokia were mentioned as a company who nimbly operated in a variety of
business models to suit changing times. They started as a boot
manufacturer, changing to focusing on telephone handset manufacture to
catch the mobile phone boom. In recent years, anticipating price competition
in this sector from Chinese manufacturers, they’ve altered focus again, now
putting the emphasis on providing software.
Opportunites
Nokia is a good example of the opportunities of economic downturn. The
need for creativity in building business meant an opportunity to ‘un-design’
outmoded working practices.
One opportunity is for companies to make new use of the resources they
already have. The example was given of Amazon, a company with huge
capacity for back-end services to cope with the glut of orders that peak
around Christmas. In recent years, it has increasingly become a provider of
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these back-end services to smaller companies. Using excess capacity brings
in extra revenue and expands business.
A delegate from a law firm underlined the importance of acting this way. In
the last economic downturn, when business was slow, his firm had deployed
some of its staff to the emerging markets of Eastern Europe. Although this
innovation was driven by economic necessity, it had been a hugely
successful move. Years later, the firm is now the leading player in that
market.
A banker agreed. He’d been working on a new and complex trade. In better
economic times, he’d have been too busy to devote time to this kind of new
business, but the economic slowdown had given him the time to move the
company towards a new, and possibly lucrative, direction.
Engaging the market.
Years of economic growth have lead to companies becoming complacent
about how they do business. A banking sector attendee said that banks have
got used to business being easy, and custom coming to them. Managers who
are used to being in control suddenly find that they have to go out and sell
themselves and their company.
With consumers changing their behaviour in response to a downturn,
companies need to be ‘out there’ in the market. Insularity and ‘battening
down the hatches’ mean that business opportunities will be missed. Proctor
and Gamble, for example, continue to spend throughout economic downturns
and change in response to customers’ needs.
“In professional services,” one attendee said, “making it happen is all about
making people who used to wait for the doorbell to ring, to get out there. You
have to be much more attuned to what clients want.” This was echoed
around the room. In a changing market, companies need to be making sure
they are meeting customers’ new needs. There’s a real danger in spending
too much time discussing what clients might do, rather than getting out and
finding out what they are actually doing.
Members agreed that customers should be aware of how a company is
meeting the economic downturn – it’s not enough to innovate, innovation
must be sold. A lawyer said, “We can be the best lawyers in the world, but
unless we get out there and sell it, then it’s a waste of time…and during a
recession one must flog even harder.”
Conclusions
• It is crucial for staff to feel free to innovate, but with strategy and
management directing that innovation.
• Openness to the market, but also to the customer
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• Understanding what employees’ real incentives are. Recognition,
variety and control are as important as pay
• Understanding that consumers’ basic needs don’t change, only how
they meet them
• Doing 100 things 1 per cent better can be the best strategy
• The idea that senior management may be the least likely to innovate
because they are stuck in their ways and have little incentive to do so
• Innovation can be making things happen rather than smart ideas
• Let’s make more of our fundamental assets rather than being
defensive
• The importance of rewarding long-term improvements, not just short-
term profits
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