Is The Pricing Paralysis In The Debt Markets Hurting Innovation And Design?

Posted by: Bruce Nussbaum on August 7, 2007

The freeze-up in the credit markets is causing some companies to put their innovation and design projects in the deep freezer, I hear. Not good. In fact, it’s terrible.

The sub-prime mortgage crisis has spread to the entire debt/credit market space and beyond. Banks and investment houses don’t know how to price their debt. For sellers, they’re not sure how much to cut the prices of bonds and securitized loans. For buyers, they don’t know how much to offer for this paper. Even in the mundane mortgage market, rates are bouncing around when they are quoted—and there are few quotes. Everyone is waiting.

The big freeze is underway in the housing and art markets as well. No one knows, given the freezeup in the credit markets, how to value real estate or art. No one knows just how much to cut prices.

In the corporate world, the fear is that all this means lower consumer spending, lower consumer wealth and lower prices for stuff. Some managers are taking this as a reason to lower costs by cutting “extra” projects—such as innovation and design. This has been the pattern in past economic cycles.

Today, such moves undermine the long-term competitiveness of companies. Cutting back on innovation now means starving investment for the future. This is precisely the time to increase invesment in innovation. Certainly huge sums of money are going into innovation in Asia and Europe at this moment. If US companies start cutting back, they will have a very dim future. Detroit anyone?

Reader Comments

Adam Richardson

August 8, 2007 5:22 AM

This is actually an interesting point following on from the Nardelli/Chrysler announcement, on which I concur with your assessment. It's going to be all focused on bottom-line cost-cutting and battening down the hatches, and not focusing on top-line growth. As consumers deal with a spreading credit crunch and tighten their belts, the way to grow market share (which the "Big 3", ahem, need to do in spades) is by grabbing attention with evocative, innovative vehicles.

The two things which have saved Chrysler in the past were go-for-the-fences innovations: The minivan (platform innovation) and the Viper (brand innovation). These gave the company the revenue and brand lifts in the 80's and 90's, and were done in concert with cost-cutting and efficiency programs. You can't have one without the other. Something like a Prius doesn't get made with Six Sigma.

James Todhunter

August 8, 2007 3:09 PM

You are spot on with your final observation. This is exactly the time to invest in innovation and next generation product development. As consumers hunker down economically, companies will need to entice them with new responses to their wants and needs. It is only by pursuing new innovation aggressively that companies can hope to show contrarian growth in what is forecast to be a flat or shrinking ecomonic climate.

bourgogne allard

August 14, 2007 12:47 AM

Reading the financial tea leaves and making connections to the design sector may well be the sole substance of future blog entries for you Mr. Nussbaum. As the US becomes more irrelevant in design I look for your blog entries to shed more light on the influence of economics on design. Over here in China it is clear that world bankers see growth and profits. It is time to put the storybooks down and get to work designing things like pickup trucks that accommodate fruit and vegetable vendors, handbags that accommodate tap water bottles, eyewear that is both fashionable and protective while assembling a computer chassis, as well as bicycles that charge your cell phone on the way to work at the factory...

Blogengeezer

August 16, 2007 3:20 AM

After reading about the future of Innovative Design for most of my life, Popular Science, Popular Mechanics, Just for starters. I have come to watch modern reality stun me to my senses. After spending several years as 'A Car Guy' and seeing how the ridiculous, out dated, "Tort" (lawyer gets at least 30%) legal profession attacked every innovation with massive liability lawsuits, (Corvair)? (Pinto)? Others anyone? I now see why the 'Big 3' are looking to other progressive countries for their next neccessary profits without the arcane liability for any 'Innovation' attempted. Our US politicians are almost all, 'Lawyers' by trade and will never upset their own system of 'gluttony' by using the system that the UK has done away with. (they still have plenty of other problems) Thankfully the rest of the fast developing world has not allowed 'Tort Law' to flourish and stunt the growth of their economy. Our GDP grows by only the amount of inflation in the past years. Massive legal settlements are nothing more than 'Zero Sum' economics in action.

Bill Ross

August 20, 2007 10:00 PM

- "Certainly huge sums of money are going into innovation in Asia and Europe at this moment. If US companies start cutting back..."

This is the right way to pitch this issue, Bruce; to get the people's attention, you've got to explain how otherwise someone's going to eat their lunch. It's an old, sad story how long-term needs -- meaning, requirements that will show up in good time -- get sacrificed when things are short today.

Last week in our blog, the Heart of Innnovation, Farrell Reynolds talked about when innovation is considered,"…a 'soft' science, nice to have around but not a 'must have' part of the operation. These types of activities are usually the first to go when budgets get trimmed, and are never given the gravitas and respect they deserve."

His point is that it's got to be approached as a science, offering focused answers to the question, "What does it take to have Innovation looked at as an essential part of the operation of a company, as a hard science that can be applied and practiced?" ("The Science of Innovation," 8/16)

rszpe

September 11, 2007 2:38 AM

page 78, sept 17, 07 businessweek shows the Trek lime bike. It reminds me of the Raleigh bike I purchased in the 1970's for my daughter, except that her bike carried a tire pump, and a tire repair kit behind the saddle. Best of all, in addition to the sturmey-archer 4 speed hub with trigger shift, it was equipped with a coaster brake in the rear and a side pull caliper brake in front. For safety, a large bell to warn wobbly pedestrians in our streets (no sidewalks) and a generator set with headlight and taillight.
I could have expected the Easy rider to use LED lighting technology to reduce the drag of the generator, but this was not mentioned, therefore probably not available. \
My daughter's Raleigh bike had a chain guard and rear reflector plus handgrip reflectors. Shimano may have subsumed Sturmey-Archer, but using the trigger shift was probably just as easy as waiting for the shifts on the Easy-Rider.
There is nothing new under the Sun.

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Want to stop talking about innovation and learn how to make it work for you? Bruce Nussbaum takes you deep into the latest thinking about innovation and design with daily scoops, provocative perspectives and case studies. Nussbaum is at the center of a global conversation on the growing discipline of innovation and the deepening field of design thinking. Read him to discover what social networking works—and what doesn’t. Discover where service innovation is going and how experience design is shaping up. Learn which schools are graduating the most creative talent and which consulting firms are the hottest. And get his take on what the smartest companies are doing in the U.S., Asia and Europe, far ahead of the pack.

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