You Can Innovate in Hard Times: Beyond Short-Term Actions, Re-Examine Products and Services, Look for Non-Traditional Innovation Sources, and More-But Start When Times Are Good!

Notwithstanding the broad acknowledgement of the importance of innovation (1-6), a review of pertinent literature over the past quarter century reveals consensus among researchers and practitioners that very few firms have been able to sustain an innovation culture over an extended period of time. Moreover, the preponderance of empirical and experiential literature on innovation offers little comfort for those trying to find ways to foster and sustain innovative activities during hard times. During such times, the tendency has been for companies to deliberately focus on opportunities that promise short-term returns. Longer-term, more innovative, and thus more risky initiatives enjoy scant support. Firms commonly employ conventional practices aimed at achieving rapid real or apparent growth in earnings and share price. Many of these steps are painful, causing what Hamel and Valikangas referred to as the trauma of time, expense, and emotional energy (7). Employee layoffs, cost cutting, acquisitions, share buybacks, and so forth, are common responses, yet either have a finite capacity or have proven to be of dubious benefit. Ideas and Their Enemies The business unit imperative In most firms, financial performance, not technology, drives corporate strategy. Budgets, more than innovation, dictate behavior. In hard times, companies look to sustain their core, heritage businesses, seeking quick access to revenue streams and profits and not sustained innovation. As one venture capitalist told Business Week, Everyone wants to be a [venture capitalist]--invest for a few years, then cash out.... Long-term research needs steady hands, steady financing over very long periods of time (8). Organic innovation is difficult at any time, but especially so in hard times. Neither business planning nor the financial budgeting process offers much hope for innovation; business planning is a backward-looking and legacy-heavy approach that leads to over-investment in mainline businesses at the expense of new (9), while budgeting allocates fixed resource amounts that often serve as financial straitjackets. Permitted (funded) innovations are often so closely tied to product enhancements that they seldom transcend the level of incremental improvement. Hard times, then, bring a greater reliance on organic growth of core business units at the expense of innovation. When even organic growth is stifled, companies frequently try to buy their way out of trouble or into innovation, either by acquiring large competitors or by making more strategic acquisitions of smaller firms with innovative technologies. Research shows that big competitor buyouts seldom succeed (10), while the latter typically require paying a high premium. Acquisitions of any size are risky and expensive, yet firms persist in believing them to be a faster route to profitability than internal (organic) innovation (9). Executives confident in their ability to manage any organizational entity are more comfortable with acquisition than with innovation. Reallocating resources is difficult. Organizational power is typically a function of budget size and number of subordinates, and losing resources to speculative ventures dilutes power. Managers will right to preserve their organizational empires, often displaying little altruism about what is best for the firm. Organizational tensions and barriers The most effective way to manage business unit pressures is by making innovation an integral part of the firm's organization and management DNA, in much the same way as good accounting and financial management practices are. Innovation should not be viewed as a luxury to be indulged in when times are good and firms can afford to commit risk money. Viewing innovation as a discrete activity rather than as a basic management philosophy cannot sustain innovation, for when hard times hit it is relatively easy to cut funding for what are perceived to be discretionary or even extraneous activities. …

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