What you can learn from history about innovating during a crisis

The companies that grew the most during the 2008 financial crisis were those that invested in innovation. Is that true always? Here are some of our suggestions for your strategy based on information from previous crises.

When a big external change happens, be it the 2008 financial crisis or the Covid-19 pandemic, it’s no secret that companies take all non-essential projects, crinkle them up, and toss them in the trash.

Business owners have reacted this way since the very first free market. It’s a human response – the cognitive triggers that make us behave like that are ingrained in our brains.

Don’t get me wrong; heuristics can serve us well – in the wild. However, with everything that’s happening these days, it’s easier than you would expect to go into a strategy meeting buzzed on a heady cocktail of mixed biases including loss aversion, false causality, projection bias, and ambiguity bias, only to slash projects that, though risky, could be the key to your company’s long-term survival.

Unfortunately those biases are ingrained in how we make decisions. In a situation of uncertainty, we are less willing to invest in the long-term or take risks. Just look at the savings rate in the US. In April, it spiked to 33% – an absolute record high.

Yet, with every crisis comes an opportunity. We looked into the 2008 financial crash to see what organizations’ responses can teach us.

Firstly, we uncovered some bad news for most corporate innovation teams at large organizations. The Birbeck Center for Innovation Management Research at Birbeck ran a study on the crisis of 2008 called, “The Impact of the Economic Crisis on Innovation: Evidence from Europe.”

It showed that the 2008 crisis substantially reduced the number of firms willing to increase their innovation investments, from 38% before the crisis to 9% after. By itself, this result isn’t surprising. However, what’s interesting is the composition of the remaining 9% that were still expanding their investments.

The researchers noticed that established companies were more likely to reduce their growth activities, while newcomers tended to spend more in order to innovate and gain momentum.

In addition, the newcomers tend to:
  • Collaborate with other businesses
  • Explore new market opportunities
  • Use methods of technological appropriation
  • Be less likely to compete on costs

What did that increase in innovation investments lead to? Unfortunately, Birbeck’s study didn’t go that far. However, research papers published by Gartner, Bain & Company, and Strategy& (previously Booz & Company) indicate a promising outcome. The companies that grew the most during the 2008 crisis were those that invested in innovation.

Some time ago, Harvard Business School’s Nitin Nohria joined forces with its business administration professor Ranjay Gulati looked into the financials of more than 4,700 public companies over three global recessions: 1980, 1990, and the 2000 bust.

Their results were brutal. 80% of companies endured a painful recovery, with only 9% of the sample group improving their performance and outdoing rivals in their industry.

So which companies make up this 9%? Were they the organizations increasing their innovation investments, as with the study of the 2008 financial crisis? Not necessarily. According to Gulati and Nohria, “Businesses that boldly invest more than their rivals during a recession don’t always fare well either. They enjoy only a 26% chance of becoming leaders after a downturn. And companies that were growth leaders coming into a recession often can’t retain their momentum; about 85% are toppled during bad times.”

So if investing in innovation during a downturn isn’t the key to success, what is?

Harvard Business School came to the same conclusion we did. The secret is striking the right balance between defense and offense. Successful companies are those that cut costs to survive while simultaneously investing in future growth.

Some cost-cutting strategies are better than others

When it comes to reducing expenditure, the research suggested that it’s better to work on improving operational efficiency rather than opting to fire staff, which can lead to dips in morale, problems scaling up, and additional costs down the line when rehiring.

Instead, we’d suggest the following strategies based on information from previous crises:
  • Re-configure your supply chain to cut out the middleman
  • Change how your teams are organized and give them more decision-making power
  • Set targets with a special emphasis on cutting costs
  • Research what new entrants in your competitive arena are doing and what you can learn from them. By now, you should be looking at competition beyond your industry. If that’s not the case, do it now!
  • Co-create solutions with your partners to improve efficiency
  • Use capacity from underperforming units to help other parts of the business

To go on the offense, you basically want to do two things. Firstly, change as customer needs do. To achieve that, you’ll need to empower and protect your service design, user experience, and customer research teams. 

Secondly, use the insights your team gathers to host a massive opposite thinking exercise – this will enable you to spot non-obvious opportunities.

A few offensive strategies that proved effective in previous crises include:
  • Taking advantage of depressed prices to expand in new markets and increase your asset base.
  • Increasing investments in R&D and marketing to put yourself at an advantage when the crisis is over. The resources saved by improving operational efficiency (as we mentioned earlier) and the extra capacity you have lying around should help you finance much of this expenditure.
  • If you must prioritize projects, focus on exploring business model innovations rather than shiny new technologies. Statistically, an ingenious business model is more likely to give you a competitive advantage as it will be harder to copy.
  • Again, I can never stress it enough, stay closely connected to changes in consumer behavior and their needs. Use customer insights to guide your investments and strategies.

Balancing defensive and offensive strategies

As you might imagine, doing these two things at the same time is not that easy – we’re just hairless monkeys, after all. You’ll have to explain to your team why some are asked to bear the burden while others are spending where no immediate benefits are apparent.

Target handled it well. During the 2000 recession, Target worked hard to reduce costs and improve efficiency. For instance, it was one of the 12 founding retailers of the WorldWide Retail Exchange; a marketplace meant to facilitate trading between retailers and vendors. In January 2001, the company also consolidated the brands Dayton’s and Hudson’s under Marshall Field’s.

Target’s offensive strategy had different angles. Their capital expenditures increased by 50%. They opened 160 new stores, added 58 new SuperTarget locations, and re-designed them to place extra emphasis on essential products like food. Their marketing and sales expenditures increased by 20%. They ramped up credit-card programs and expanded into new merchandise segments. Finally, they set up partnerships with Amazon and asked well-known designers to create new products.

By combining these two strategies, Target managed to grow its sales by 40% and raise profits by 50% over the course of the recession. Their profit margin increased as well, from 9% in the three years before the recession to 10% after it.

Takeaways

Nobody enters a recession knowing what’s going to happen, even less so when there’s a pandemic involved. The best you can do as a leader is to set up a portfolio of activities designed to improve efficiency and take advantage of opportunities. You’ll need closed feedback loops to move with agility.

For guidance when it comes to striking the right balance between defensive and offensive strategies, I’d recommend reading Dual Transformation by Scott D. Anthony, Clark G. Gilbert and Mark W. Johnson.

But if you need to get your hands dirty and begin making moves now, get in touch with us for a strategy sprint. In 3 days, you’ll have an actionable strategy that you can begin implementing immediately.

Thanks for reading!
I’m Marco Bar Goria, Innovation Consultant @ Board of Innovation. At 20 years old I tried to run my own start-up together with some friends. It crashed spectacularly!
Since then, however, I learned a lot about design and the practice of creating new businesses.Today I use that knowledge to help fortune 500 companies to solve the right problems in the right way.

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