Recession: the catalyst of innovation

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Roundtable Stanford

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At the Stanford 2009 roundtable, renowned speakers seemed to agree that innovation will be the means by which the US will come out of this recession. In fact, voices were very hopeful of a recovery:

We have seen the worst.  And the way out of the current economic crisis lies in America's gift for ingenuity and innovation – and more transparency in the financial sector. Saying that, many economists expect this to be a very slow and protracted recovery:

"A number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions," Bernanke said.

Most analysts seem to agree that it is not regulation but innovation that will have to show the path to recovery for the US. Some argue that in a globalized economy where overseas wages and products are always cheaper, the only way developed nations can truly get an edge is by innovating technology, financial models, production, etc. Others are even so bold to claim that a recession is perhaps the best period to start innovating. After all, some of the most successful corporations today (such as the Disney Corporation or Microsoft) were founded during recessions.

When we examine the conditions during a recession, it is not so hard to understand why some start-ups and innovations thrive in this period. After all, operating costs tend to be lower during recessions, it is easier to hire talent at affordable wages because of the high number of layoffs that occur during recessions and competition is subdued due to a shrinking pool of competitors and restricted budgets. Studies have also shown that companies that vigorously market themselves during a recession and keep their focus on innovation tend to see their profits dwindle during a recession, but usually quash the competition when the economy rebounds, because they come out far ahead of the game, having grown both awareness and services where other companies litterarly stagnated and minimized their marketing activities.

The big winners of recessions: innovators

During recessions, budgets will suffer. Some executives simply choose to scale back on activities, where others try to maintain the same level of 'output' at lower 'input'. Meaning that instead of doing less with less in a recession, they seek to trim the fat, to identify wastage and find ways to do more with less. As a result, a whole new sub-economy is created where cutting edge companies work together to improve products, services, internal processes and customer service and eventually produce new markets, products and revenue streams that will become the new champions of the future economy.

"Recessions can be the spark that sets the flame" says Anna Anderson, President of Online Design Bureau, a Dallas, Texas web design agency. "During the good times businesses tend to be conservative: they know what works, why change a winning formula? But in the downturn business can not be acquired or maintained during the usual, and that is the spark that sets the flame of creativity. Granted, companies like Apple keep innovating all the time, but most companies will only get creative when they are under serious pressure."

Online Design Bureau had previously helped the Hilton Group streamline their offers during a takeover by the BlackStone Group. When the recession hit, they took their technology, originally developed to help FTSE 500 corporations like the HallMark Channel and CGI and reconfigured it to be helpful to American SME's in Texas. The idea was to make marketing more affordable and more environmentally friendly by using the companies website as the main promotion vehicle. Online Design Bureau's technology allows SME's to edit their own sites online, run forums and blogs without any technical skills, run marketing campaigns straight from an intranet dashboard and measure the effectiveness of both online and offline marketing efforts, helping them to spend their money wiser in the future. "The idea was simple: how can we adapt complex systems that help FTSE 500 thrive, and adapt them to the needs of small businesses and find a way to make the technology scalable in order to suppress cost" says President Anna Anderson.

"In a recession, you can innovate to be more efficient," says John Kao, author of the book Innovation Nation and the head of Deloitte's Institute for Large Scale Innovation.

"A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets." says Steve Jobs, CEO of Apple Inc. "Innovation distinguishes between a leader and a follower."

For a detailed report on how innovation has helped businesses to find new ways to thrive in recessions, read the Business Week special report on innovation in a recession.