Innovating During a Recession

When your competition is running scared, you want to seize the opportunity for new business and new ideas

By G. Michael Maddock and Raphael Louis Vitón

"Be fearful when others are greedy, and be greedy when others are fearful."—Warren Buffett

Last March, we wrote an article titled "The Upside of a Recession." (BusinessWeek.com, 3/13/08). We said: During tough economic times, when your competitors are running scared, you want to be opportunistic. As proof we pointed out that the iPod, MTV (TWX), and Trader Joe's were all invented or started during recessions.

The article generated many negatives comments. Not about the advice—but about predicting an economic downturn. Recession? No way, e-mail after e-mail told us.

Last March, to many the idea of a recession was like the relative that keeps saying he is going to visit, but to your relief, never does. Well guess what? Weird Uncle Greenspan is here, and he brought lots of clothes.

So, now that the recession (in all perhaps but name) has arrived, has our advice changed? Yes. You need to be even more aggressive than you were eight months ago.

Don't Retreat. Attack

Conservative companies are acting as predicted: slashing marketing budgets. hunkering down, talking about line extensions. The people in charge of their innovation efforts are trying not to look like overhead. Case in point: Earlier this month we were sitting in a financial services roundtable at a research conference. Not a happy room. Leaders from a dozen or so firms were discussing how they planned on handling the economic downturn. What we heard over and over again was the usual talk about belt tightening and layoffs. Not a single person who spoke talked about how when everyone else is retreating, they planned to attack.

But they should have. And so should you.

Think about it. If you have a competitors that have stopped innovating, they are going out of their way to help you. They are inviting you take some of their market share. Their silence makes it easier for you to be heard in the marketplace. Their timidity is giving you the perfect opportunity to really listen for the new choices customers need when they are low on cash and high on fear.

Let us give you two ideas to help you capitalize.

Innovation Strategy No.1—Win It Now, Expand It Later

This is for the bravest among you. It gives you a chance to gain substantial market share. It works best if you are not under pressure to meet short-term financial hurdles. If you are a privately held firm, your ears should have just perked up. And if you are part of a big, publicly traded firm, you should be very afraid. (As we warned in an earlier column (BusinessWeek.com, 9/23/08), when it comes to innovation, David almost always beats Goliath. We know you don't want to hear it, but it is true.)

The win now, grow later strategy has little to do with short-term profit and everything to do with long-term growth. It has been well-documented that maintaining marketing and innovation spending during recessions creates a major bounce effect once the market stabilizes, so if you gain market share now—even if it costs you money—your growth will be exponentially larger when the market recovers.

Here is a simple illustration. Late last month, we learned that many mothers are buying baby formula at the beginning of the month, as soon as they get paid, thinking they may run out of money.

Obviously, that is a bad sign for the economy. But it would seem to us to represent a huge opportunity for a company that already sells to new mothers to enter the market with a low-price baby formula. If our mythical company provided an extremely high-quality product at a low cost today, it would absolutely win share and loyalty from these worried moms.