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Innovating Through Recession: How Bold Ideas Thrive in a Down Business Cycle

Moments of economic turbulence provide the unique opportunity to start new businesses, launch disruptive new products and strengthen customer loyalty — often at a discount. During these challenging times, here are a few pointers on what to do, why to do it and what to avoid. But first, a little motivation is in order and, borrowing from Charles Dickens, we offer a tribute to organizations that have successfully innovated through the "worst of times."

When the going gets tough, the tough innovate. Here's how.

Great leaders and the organizations they lead translate moments of uncertainty into moments of opportunity to not only streamline operations, but also to innovate. Economic downturns make innovation not only more important, but one could argue that the process of innovation is actually easier to manage and much more cost effective during economic downturns. More importantly, the products of innovation are more valuable during tough times.

As we ride out this period of economic turbulence, the question is not whether or not to innovate. The question is how to innovate. There is no better time to widen the gap between you and your competition. Here's how and why.

One: Listen to the market. It's quieter when it's less crowded.

First, difficult economic times expose unmet needs in the market, making it much easier to identify opportunities for new product development. Rather than pull back on innovation in new products, consider how you might best use this time to create and launch your most disruptive ideas. If you think it can't be done, consider this.

On Oct. 24, 1929, panic selling began on Wall Street. By Oct. 29, margin calls wiped out thousands of accounts. The Great Depression was in full swing. Between 1929 and 1933, 15,000 banks failed, unemployment reached 25 percent, corporate profits plunged to less than zero, farm prices were cut in half and GNP fell 45 percent to 1916 levels. In spite of the hazy forecast, many of America's most successful innovators navigated this period of time not through cost-cutting, but through innovation.

First up: Henry R. Luce. In February 1930, four short months after the stock market crash, Luce launched an audacious, irreverent and vibrantly colored arsenal of human interest stories in the form of new media product called Fortune. Not only did he have the gall to launch a new magazine in the shadow of the Great Depression, he launched an expensive new product. At the outrageously lofty price of $1 per issue, Fortune launched with only 30,000 subscribers. By 1937, the magazine netted a half-million dollars on its circulation of 460,000. By the end of the decade, Fortune had become required reading on Wall Street.

In 1933, Kraft Foods launched its iconic salad dressing and sandwich spread, Miracle Whip — again, not in spite of the Depression, but because of it. Although Kraft had an existing mayonnaise business, its sales had slipped as a result of the economic conditions. Named after the machine that created it, Miracle Whip allowed the company to start a new conversation with its consumers about its products. Launched at the Century of Progress Chicago World's Fair in 1933, this new miracle mayonnaise spread had instant appeal to Depressionweary consumers who had grown tired of the boring taste of vegetables, salads and sandwiches.

Not only was Miracle Whip a one-of-a-kind new product, it was relevant. Innovation is not a "good times only" exercise. Innovation always matters. It must, however, be relevant to the needs of the market. In the case of Kraft, within six months of its initial launch, this uniquely relevant new idea outsold all other brands of dressing and mayonnaise and went on to become a mainstay in refrigerators across America.

Like innovators before us, use this time to be aware of the market, not afraid of it. The great mistake many organizations make during turbulent times is that they quit listening to the market. They pull back on research and development precisely at the moment when the market is speaking most loudly. Now is the time to listen to your customers. Now is the time to get out into the market and identify those elusive unarticulated needs you've been searching for. Listen to the market. It's speaking to you. Unmet needs abound.

Two: Invest in your customers when they need you most.

Downturns provide the opportunity to strengthen relationships with customers, thereby improving customer loyalty. At a time when consumer sentiment is nearly at an all-time low, rather than reduce customer service, use this time to get closer to your customers, connect with them on a deeper level and show them what's possible — what the future will hold.

In 2003, when the Dow was at historic lows over a 10-year period, Apple continued to invest. When asked why he hadn't reduced research and development spending when others in the industry had experienced a slow down, CEO Steve Jobs recalls: "What has happened in technology over the last few years has been about the downturn, not the future of technology. 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. And that's what we've done. We've been turning out more new products than ever before, and Apple is one of the only two companies making money in the PC business. We're not making a lot, but other than Dell, we're the only one. Others are losing money — a lot of money."

Apple has a long history of remaining relevant during the most difficult of times. Of course, like most contemporary organizations, Apple also has a history of downsizing and restructuring, but it has also chosen to innovate through recession. Through innovation, Apple has not only kept its pipeline robust, but — more importantly — it has remained in front of its customers. Apple always has a story to tell. And it tells that story through new products. During these times, remember that your customers are as worried as you are. Stay close to them. Help them get what they want and they'll remember you over the long haul: They will "continue to open their wallets."

Three: Rather than reduce price, offer more value to your customers.

During difficult economic times, customers use greater discretion in making purchasing decisions. Every dollar matters and therefore every decision a customer makes is examined more closely. Given the scrutiny that customers place on decision-making in turbulent times, the knee-jerk reaction among some companies is to reduce price. However, before you reduce price, consider how hard you've worked to "get the price." Moreover, consider how much time and effort has been invested into getting you to where you are. Certainly your sales are hurting, but there is something much more valuable at stake, and that is your brand. In some cases, price reductions in the absence of innovation have led to the implosion of the entire enterprise. Consider the fate of Vlasic, the famed pickle company. Not only did Vlasic slash the price of its products, it loaded them up into gallon jars and sold the oversized products at Walmart for $2.97 — that's less than the price of a quart of Vlasic sliced pickles found at grocery stores. The product worked for Walmart insofar that it garnered the attention of consumers. The big jar-o-pickles screamed value to Walmart's customers.

Although, the fact that it was only a jar of pickles didn't really matter. What mattered was that it was a big, cheap jar of pickles! After all, who needs that many pickles? It could have been a big, cheap jar-o-socks; a big, cheap jar-obatteries; or a big, cheap jar-o-peanut butter. Although the gallon jar fiasco wasn't solely responsible for Vlasic's demise, it certainly helped the company find its way to bankruptcy much more quickly. Its earnings evaporated. The lesson is that price reductions do more than compromise earnings. They compromise customers' perceived value of your products and services (your brand), which ultimately affects the long-term equity of the franchise. Therefore, rather than look to price reductions, add greater value to your customers. Extend them better terms. Improve the purchasing process. Get your products to them more quickly. Increase your cooperative marketing activities. Show them ways to better use your products and improve their lives. Do anything but reduce price. four: Increase communication with your customers.

In addition to staying close to customers, use this time to increase your communication with them. In times of trouble, the worst thing you can do is hide. From a marketing perspective, this involves cutting back communications. This is particularly salient advice for consumer products companies where new products and marketing are its lifeblood. Consider the evidence. In a study of 600 businesses, McGraw-Hill Research found that businesses that maintained or increased their advertising expenditures during the 1981 and 1982 recession averaged higher sales growth during the recession and in the three years following. By 1985, sales of aggressive recession advertisers (those that either maintained or increased spending) had risen 256 percent over those that cut-back on advertising. Likewise, in 2001, another study found that aggressive recession advertisers increased market share two-and-a-half times the average for all businesses in the post-recession economy. In 2002, the Strategic Planning Institute illustrated that, in contrast, during economic expansion, although 80 percent of businesses increased their advertising spending, there was no improvement in market share simply because everyone else had increased spending. Now is the time to increase communication, not cut back.

The worst thing you can do is to disappear, from a marketing perspective. For example, an organization I know well made the decision not to attend a key industry trade show during a difficult economic period in order to save money. However, what they didn't consider was the inadvertent message this action would send to their customers. The news — rather, gossip — was that the business must be in trouble since it was "always at the show." As it turned out, their absence was their greatest presence. As a result, some customers decided to seek new proposals from vendors for fear that this particular supplier was in trouble. It became a selffulfilling prophecy.

Five: Move longer-term projects forward, not back.

Downturns provide the opportunity to widen the gap between you and your competitors. While others cower, now is the time to grab market share. Rather than compromise the integrity and quality of your product or service by paring back ingredients, eliminating features or stripping it to its most basic offering, consider using this time to improve the quality of your products, invest in new opportunities and make key acquisitions in line with corporate strategy. It is critical to stay the course.

Consider the success of "All the News That's Fit to Print." Following the stock market crash in 1929, Adolph Ochs, publisher of The New York Times, issued a memo to his staff: "We must set an example of optimism. Please urge every department to go ahead as if we thought the best year in the world is ahead of us." Although 15 advertisers cancelled their contracts with Ochs in a single week, he mitigated employee layoffs by opting to use the $12 million surplus he had built during the roaring 1920s to pay salaries. He also maintained the editorial quality of the paper even though advertising had fallen off. So, in effect, the paper became a "better" product insofar that it contained fewer advertisements, but still had the same editorial and news coverage. Once the Great Depression had ended, the Times had more readers than any other newspaper in the country which, in turn, translated into higher advertising rates. Ochs stayed the course and emerged triumphant.

Like Ochs' decision to invest in turbulent times, in a study of 1,000 companies over an 18-year period (1982 to 1999), McKinsey & Co. found that those companies that retained or gained market leadership during the recession of 1990 and 1991 invested cash reserves on strategic acquisitions and opted to pursue new opportunities that fit its overall corporate strategy rather than focusing on reducing operating expenses. They stayed the course. It sounds logical, but it requires discipline.

When in trouble, typical human behavior is to hunker down and protect the nest — not to build it bigger and fly away in search of more food. However, as it turns out, those who stay in the market and invest ultimately reap the benefits. Actions such as these are why some companies emerge from recessions stronger and farther ahead of their competitors. Use this time to widen the gap.

Six: In recession, not all costs are created equal.

Profit Impact of Market Strategy (PIMS) studied 1,000 businesses during the period between the 1970s to the 1990s with the intent of understanding how they fared during periods of recession. In order to separate winners from losers, PIMS considered three measures: return on capital employed (ROCE), change in profitability during the first two years of recovery and change in market share during the first two years of recovery. PIMS' a-ha moment was this: not all costs are created equal. In other words, there are "good costs" and "bad costs."

Good costs yield improvements to these measures. Bad costs do not. Good costs are those that should be increased during recession. Bad costs are those that should be cut. It should also be noted that PIMS also included an "it depends" costs category, which allowed for understanding specific costs relevant to specific businesses given their strategic direction at the time the recessions began. "It depends" costs include things such as outsourcing, retaining spare capacity and even aggressive pricing should the category or market situation support such moves.

PIMS' findings and recommendations are clear. Innovation, like marketing and customer service, is a good cost. In recession, dare to invest in good costs.

Seven: If you don't have the money, at least spend the time.

Finally, realize that creativity loves constraints. Innovation thrives when it has no other choice. In this way, innovation is the most basic and primal of human experiences. We do it best when we have to. It may sound cliché (because it is), but necessity is indeed the mother of invention.

Consider the birth of the world's first instant coffee: it too is a Depressionera baby. In 1930, the Brazilian Coffee Institute had a problem: it was sitting on a huge surplus of coffee beans. Thinking, correctly, that a new product could help increase consumption, the Institute contacted Nestlé's chairman with a request to develop "a coffee that was soluble in hot water and retained its flavor." If you want to sell a lot of coffee really fast, conventional wisdom suggests that it be quick to make and to consume.

Alas, seven years after the initial request, Nestlé's scientists emerged with the solution and by 1938, Nescafé was launched in Switzerland. Shortly thereafter, it became a staple beverage of consumers throughout the world — most notably among the U.S. Armed Forces. The next 60 years stood witness to variations on the theme of every new, big and bold idea in what I call the "New Product Waltz:" new packaging, new flavors (dark roast, light roast, decaf), new sizes and — today — a range of specialty coffees. It's all very au courant, yet it's not at all. Nonetheless, it works.

Now is the time to unleash corporate creativity. The greatest mistake you can make now is to mortgage your future by failing to innovate. Remember, you don't need a lot of money to think, but you do need time. And if you are already in the process of tightening your belt anyway, you might as well consider investing in a new pair of pants.

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