How to innovate during an economic recession
How will the world look like after COVID-19? Read why and how you can strengthen your market position in times of recession.
Business cycles shape innovation capabilities and innovating during a recession can help companies improve their positioning on current and/or new markets. During an economic downturn, continued by the first few months of growth, companies have an opportunity to better position themselves against competitors by innovating. The challenge though is navigating increased uncertainty and financial risks that complicate such innovation investments.
Here’s why and how you should adapt to the Low Touch Economy.
innovating for the low touch economy
Let’s dive deeper into the following to better understand how and when your business should double-down on innovation.
- Defining an economic recession and depression
- Tips & action points on how to innovate during a crisis
- Innovation examples during a recession
Definition of a recession and economic depression
1. Recession definition
A recession, or economic recession, is a period of economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. With the COVID-19 public-health crisis we already experienced reduced activity in Q1 and are well on our way to have a second decline in Q2 of 2020.
Waiting for more clarity on when and how this crisis will be resolved, is virtually impossible for economists to predict the endgame of this economic crisis at this point. Also the socioeconomic impact about how people will behave in the coming weeks and months remains unclear.
2. Depression definition in current context
In economics, a depression is a long-term downturn in economic activity in one or more economies. It is more severe than a recession described in the above definition.
Depressions are characterized by their length, by abnormally large increases in unemployment, falls in the availability of credit, shrinking output as buyers dry up and suppliers cut back on production and investment, more bankruptcies, significantly reduced amounts of (international) trade and commerce, as well as highly volatile relative currency value fluctuations. Price deflation, financial crises, stock market crash, and bank failures are also common elements of a depression that do not normally occur during a recession.
Depending on the fact that the public-health crisis is under control we could project a global growth for 2020 to fall to -3 percent. This is a downgrade of 6.3 percentage points from January 2020. This would make this recession the worst recession since the Great Depression, and far worse than the Global Financial Crisis.
Assuming the pandemic fades in the second half of this year and that policy actions taken around the world are effective in preventing widespread firm bankruptcies, extended job losses, and system-wide financial strains, the IMF projects global growth in 2021 to rebound to 5.8 percent.
3. Shifting to a Low Touch Economy
The overall socioeconomic impact is still uncertain. But we can already validate assumptions as increase in remote working, higher demand for e-commerce and overall home deliveries, increase in E-health systems, higher attention for hygiene,… The Low Touch Economy is our post-pandemic economy, where we see behavioral shifts and company pivots due to low touch habits and higher precautions to avoid additional pandemic impacts. This economy is highly digital, brings less people physically together and has adapted safety and health standards for day to day physical interactions.
Tips & action points on how to innovate during a crisis
1. Why take action during an economic downturn
By developing an innovation strategy that anticipates a recession, you can help your enterprise weather the storm and even uncover lucrative ways to gain a competitive edge. This includes: going from defense into offense mode to strengthen your position in the market; growing into the Low Touch Economy organically; or by acquiring businesses “on sale.”
The 100 most innovative companies spent even more on R&D during previous recessions, while others stalled. In the long run, those investments have paid off in profitability & growth.
Gartner looked at 30 F1000 companies that accelerated during the crisis of 2008. All of them invested in new growth options instead of just cutting costs. Also, Bain & Company came to a similar conclusion after analyzing 5,000 companies over 10 years. Growing outside of the core business was named as one of the key strategies to win.
2. Checklist for innovation teams
- Assess the impact
- What is the Low Touch economy, and how will it impact my business and industry?
- How will my customers, market, categories, and business overall be impacted in the mid to long-term?
- Develop the strategy
- How can I grow in the Low Touch economy and outperform competitors?
- Pivot your portfolio. How should I repurpose my investments to the right growth initiatives?
- Go on offense
- Develop a short-term pipeline of new business opportunities, driven by new customer behaviors.
- Develop a M&A roadmap, scan for inorganic growth opportunities
- Make it happen
- Run weekly sprints.
- Launch a new proposition or business model. Design, develop, and launch a new proposition to market.
- Hire a growth team: hire on-demand reinforcements for your teams
Innovation examples during an economic recession
Plenty of companies are now shifting their focus. It’s remarkable how many entrepreneurs are already building a new Low Touch Economy to get our society back up and running. Some examples of innovations during this recession are the following.
1. B2B examples of crisis innovations
- During the recession, Sanofi, the French pharmaceutical company, increased its absolute R&D expenditure from €950 million in 2000 to €1.3 billion in 2003, to keep its product pipeline robust. The company gained market share and outperformed its peers in the stock market. Afterwards, the company was well positioned to acquire Aventis, a much larger Franco- German pharmaceutical company, after a takeover battle, in the economic upswing of 2004. (HBR)
- Cosmetics company Lin Qingxuan was forced to close 40% of its stores due to Covid-19. The company redeployed its 100+ beauty advisors from the stores to become online influencers who leveraged digital tools, such as WeChat, to engage customers virtually & drive online sales. As a result, its sales in Wuhan achieved 200% growth compared to the prior year’s sales. (HBR)
2. B2C examples of crisis innovations
- Fashion, packaging companies, alcohol producers that are providing masks, gowns or sanitizers. Often these new product lines are provided at costs or at minimal profit margins. Once the urgent health need is gone, many will drop these products again from their portfolio. From a business strategy point of view, these innovations are the least interesting to track.
- Airbnb Experiences: Announced beginning of April, Airbnb Online Experiences takes the Experiences arm of the business and turns it into a primary offering during the coronavirus outbreak. While Airbnb’s standard Experiences, which include options such as cooking lessons, walking tours and exercise classes, were positioned as an add-on to trips, Airbnb Online Experiences are designed to be stand-alone. Accessed via a video call, Airbnb Online Experiences provide similar offerings to their real-world counterparts, but without requiring the guest to leave their living room.
3. Innovation examples during previous recessions
- The outbreak of SARS was a pivotal moment that put Alibaba on its path to becoming a $470 billion e- commerce behemoth. (CNBC)
In our shared google sheet, we listed already several organizations that altered their business model in some way. Today, you mainly see the smaller companies changing course, but soon large companies will follow.
Bonus: discover our list about ingenious innovations triggered by chaos.