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Innovation in Recessions

thick_arrow_up_5575Successful innovation in recessions was examined in a Harvard Business Review article, Roaring Out of Recession, by Ranjay Gulati, Nitin Nohria and Franz Wohlgezogen.  They looked at increases in sales and earnings during a recession, and the strategies that were employed.  The goal was to determine the best strategy during a recession.  The strategies were grouped into four general categories:

 

  1. Prevention-focused,
  2. Promotion-focused,
  3. Pragmatic, and
  4. Progressive organizations.

Prevention-focused organizations focus on cost cutting and avoiding losses–a purely defensive strategy.  Within this category, the authors examined two major subcategories:  employee reduction and organizational efficiency.  These types of organizations are risk-averse, and will “batten down the hatches” when a storm approaches.  As a general strategy, prevention is the worst, however, organizations that pursued organization efficiency (vs. employee reduction) were more successful in this category.

Promotion-focused organizations focus on building assets and marketing–a purely offensive strategy.  The thought is that during a downturn, by investing in your core assets and building your branding, you’ll hold onto your current customers and build new ones.  Compared with organizations that pursue the prevention-focused strategy, they tend to do better.   The authors divided this category into market building and asset building.  In general, building marketing worked more effectively than building assets.

Pragmatic organizations do everything.  The pursue both offensive and defensive strategies, in essence, throwing everything they have at the problem.  This strategy is significantly better than either defense or offense alone, but is still not the most optimal.  In this case, they don’t “fine tune” the amounts of each type of strategy, and waste resources.

Finally, there are the pragmatic organizations.  They too pursue both offensive and defensive strategies, however, they only pursue operational efficiencies (with respect to prevent-based methods), and pursue both marketing and asset/capital investment with respect to promotion-based methods.  With this strategy, the financial outcome compared with the next best method, as measured by sales improvement is nearly 40% greater, and the improvement with respect to earnings is nearly 160% greater.

So, the bottom line is you keep your employees, and make capital investments that improve operational efficiency and marketing development–two areas that are best addressed with innovation.  Your people are your best asset, again.