Trick or Treat: Investing in Innovation During a Recession

2022 Halloween is going to be much spookier for many companies than before. Just recently Moody’s lowered UK’s economic outlook to “negative”. Many experts are talking about a recession and warning about a recession. The Bank of England has already warned that “the UK may already be in a recession”, and it may be a long one.

It is not surprising then that many businesses are concerned about economic uncertainty. A recent report by Sapio Research shows that a staggering number of global businesses, 95%, worry about a potential recession, with 45% of US businesses are “highly concerned”.

What do you do in a recessionary environment? Some companies are driven by ‘FEAR’ with a follow-up knee-jerk reaction – cut, cut, cut (headcount, marketing and innovation budgets, hiring etc.). However, this typically is not a winning strategy, as in-depth studies of previous recessions showed, such as the one published by Harvard Business Review in 2010. That study found that the companies who flourished after a slowdown (only 9% of all companies) had a different strategy. The winning recipe was to find the “elusive balance”, “the optimal combination of defense and offense”, by focusing “simultaneously on increasing operational efficiency, developing new markets, and enlarging their asset bases”.

While there is no simple way to find the “elusive balance”, it is even more difficult for a company to operate in fear. Hence, the first step is to set aside the fear of recession. Only then you will be in a position to make strategic decisions, for example, decisions about innovation investments.

Trick or Treat – Your Strategic Options for Innovation Investment in Recession

Now when the fear of recession no longer occupies your mind, you can evaluate the situation more clearly and see whether your company is badly affected (or is likely to be badly affected) by a recession. Some companies may actually find that they are not affected, in which case they should ‘TREAT’ innovation – continue to invest focusing on most promising opportunities.

To define those opportunities you should come up with a set of clear criteria rather than just rely on your gut feeling. There are various frameworks out there, which can help with selecting innovation projects, but the best of them have one thing in common – they assess projects from both internal and external perspectives. Typically, the assessment criteria take into account an alignment with business strategy, financial potential and other value creation, market positioning and trends (considering customers, competitors and product offering), company’s technical capability and capacity.

If, however, the reduction of your innovation budget is inevitable (since you need to preserve capital and reduce debt to face the coming tough economic climate), then you should ‘TRICK’ innovation – review your innovation portfolio, but not just from the perspective of what projects to freeze; consider reallocation of funding to projects that are more likely to succeed and deliver differentiation.

It might be tempting to invest more in incremental innovation projects, as such projects bear the lowest risks. Still, you should resist that temptation since incremental innovation, while necessary, does not help secure high margins or provide strong competitive differentiation. Instead, focus your innovation efforts on projects, where you have a solid, in-depth understanding of customers’ needs (meaning that such projects will have relatively low risk of not meeting customer expectations and requirements).

When evaluating innovation portfolio and choosing projects to invest in you should also take into account the expertise of your team (such as technology and project delivery).  This way not only will you delight your customers, but also make your internal innovation team feeling strong and optimistic.

In summary, the key takeaways here are simple – never operate in fear and continue investing in innovation even during a recession. Prioritise innovation projects, which promise to deliver competitive advantage at lower risk while providing the highest margins and satisfying customers’ needs.

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