by: Issues: July / August 2009. Tags: Innovation. Categories: Innovation.

Downturns present enormous opportunities for innovation. But steering initiatives through the channels of an established corporation presents distinct challenges. Senior leaders must anticipate the specific organizational dynamics that will confront them. Those that do so have a chance of reaping unusually large rewards for their efforts.

Times of crisis breed introspection, even a fundamental reexamination of core assumptions and beliefs. When executives are of such a mindset, they are more likely to make major changes and try breakthrough new solutions.

While times of crisis spur demand for innovation, however, they also dampen supply. Faced with declining revenues and diminishing profits, business leaders naturally shift their focus from spurring innovation to shoring up ongoing operations.

This combination of heavy demand and limited supply should be tantalizing — at least for those established companies that have resources to spare. They have the opportunity to reap unusually attractive rewards from innovation.

Choosing to allocate funds to a promising idea, however, is only a start. To move from idea to fruition, leaders of large enterprises must recognize that innovation initiatives and ongoing operations make strange bedfellows. Few initiatives succeed without careful attention to the interplay between the two.

That interplay is different in a weak economy. If senior executives wish to create conditions conducive to innovation in a downturn, they must anticipate five key changes (See Figure 1). And, they must make an extra effort to: a) inject ambition, b) capture rare opportunities to build new capabilities, c) put slack resources to work, d) mediate innovation budget wars directly, and e) isolate forums for reviewing the progress of innovation initiatives. This article discusses what senior executives must do to adapt to and capitalize on these five changed circumstances.

Figure 1

The Change The Response
Downturns deflate aspirations. Inject ambition.
The market for talent softens. Capture rare opportunities to build new capabilities.
Employees have more free time. Put slack resources to work.
Cash is tight. Mediate innovation budget wars directly.
Internal politicking intensifies. Isolate forums for reviewing the progress of innovation initiatives.

1. Nothing without optimism

The Change: Downturns deflate aspirations
The Response: Inject ambition

Prescriptions for innovation can be complex, but the starting point is simple. Innovation begins with ambition — sometimes, an ambition that seems beyond the realm of the possible. Only rarely, after all, do innovation endeavors exceed the greatest hopes of their leaders.

In good times, ambition thrives. It feeds on itself. In the late 1990s, for example, in the heat of the dot-com boom, there was hardly any shortage of ambition. Each success bred ever greater confidence, and ever higher aspirations. Few innovations, if any, failed for want of a dream.

In established organizations, ambition also feeds on the success of ongoing operations. Thus, these days, ambition is scarce. Senior executives interested in sparking innovation must start by redoubling their efforts to manufacture high aspirations.

With a confident call to action, many people will jump to help solve problems that are inherently worth solving. There is certainly no shortage of critical societal problems that need to be solved through private sector innovation. How about reinventing our transportation and energy infrastructures for a cleaner, greener, and more sustainable world? How about developing health care systems that keep people healthy, rather than treating people once they become sick?

Critically, these are problems that are too big for the entrepreneurial community to tackle on its own. Though venture capitalists and start-ups were the dominant players in the internet revolution, the innovation challenges of the next few decades will demand much more from large corporations. In fact, the best way for the corporate sector to regain the public’s trust and confidence is to deliver game-changing innovations that solve our most vexing global problems.

If bold calls to action fall on deaf ears, then senior leaders can push aspirations upwards from beneath. They can ask: Where is the pride? Do doctors hide in the closet when the emergency room is overwhelmed? Do prosecuting attorneys back away from their jobs during outbreaks of urban crime?

In times of crisis, business people need the occasional reminder that innovation is the mission. Innovation is what business is all about. Companies that solve critical problems through innovation push humanity forward. Companies that sit idle, on the other hand, have no claim to anything other than keeping the wheels of the economy turning.

2. Build the organization of the future

The Change: The market for talent softens
The Response: Capture rare opportunities to build new capabilities

Innovation efforts in established organizations often require building new capabilities. Old-world retailers, for example, needed to dramatically build up their muscle in internet technologies to compete in an e-commerce driven world. The established pharmaceutical industry faced the critical task of strengthening its biotech capabilities to keep up with new competition from startups. And the fate of incumbent energy companies will, over the long-run, depend on their ability to create new products and services for the coming age of clean-tech.

In good times, building new capabilities is actually harder. Competition in the employment market is intense, and acquisitions are expensive. And, companies often make the hiring task even harder by being inflexible about their compensation policies. Consider the challenge the OnStar unit at General Motors faced when trying to attract top technologists from Silicon Valley to Detroit on the long-standing GM salary schedule — in the midst of the dot com boom. Meanwhile, insiders are eager for opportunities on innovation teams, hoping for opportunities to advance their careers.

Given the relative ease of choosing insiders, companies typically settle for the skills they already have. They often pay the price in the long run. Success or failure in creating new competencies not only makes or breaks the innovation initiative, it is in many cases critical to the long-term vitality of the company as a whole.

In a downturn, the dynamic reverses. Getting insiders interested in innovation projects is more difficult. Employees protect their jobs by avoiding risk. The employment market, on the other hand, is wide open. Building the capabilities of the future is never easier than it is during a downturn. It is also a terrific time to seed innovation projects by acquiring small companies — often a more expedient way of hiring a group of outsiders with an unusual skill set.

3. Demand More

The Change: Employees have more free time.
The Response: Put slack resources to work.

The resources available for innovation are equal to the total resources less the resources consumed by ongoing operations. This simple equation explains several common innovation dynamics in established companies. It explains, for example, why companies tend to launch innovation initiatives in slow seasons, only to see them lose momentum in busy seasons. And, it explains why winning startups that have advanced into the steady-growth stage often seem to lose the innovative spirit that made them successful in the first place. Even if ambitions remain high, they simply have no free time to do anything beyond keeping up with business.

In a downturn, the equation changes. Financial resources decline along with revenues, but slack human resources rise. As recent headlines vividly demonstrate, some companies will eliminate the slack through layoffs. However, most companies, anticipating an eventual economic rebound, accept the necessity of operating below full capacity.

As a result, employees have more free time, free time that shouldn’t be wasted. It should be put to work on innovation. But it is important to understand how the free time is distributed — generally, in small chunks spread throughout the organization. Each employee controls a tiny bit of a valuable commodity.

What can be done with this resource? At a minimum, in a downturn, every company should insist that each employee do more to improve the productivity of the work processes in which they are directly involved. Companies that make the greatest progress while business is tranquil will be best positioned for growth when the economy normalizes. While it is usually counterproductive to hold individual employees accountable for the desired result, namely improved productivity, each can be held accountable for effort. Each can be required to document his or her involvement in specific improvement projects.

Free time can be used for more ambitious projects than continuous process improvement efforts. But to do so, the free time must be consolidated into more useful — that is, larger — chunks. There is some possibility that employees will, on their own, establish ad-hoc teams to push innovation initiatives forward. As fashionable as “bottom-up” innovation may sound, however, this approach quickly reaches a practical threshold. It is very hard to informally coordinate the use of more than a few small chunks of free time.

Slack resources are more likely to be utilized productively if they are deliberately consolidated through formal changes in job responsibilities. Rather than having 100 people each working at 75 percent capacity and wasting the other 25 percent why not reduce the number of people focused on ongoing operations to seventy five and dedicate the remaining twenty five to innovation?

The reallocation is, of course, temporary. The 25 innovators will all likely be recalled to ongoing operations once the economy picks up again. But that does not preclude limited duration projects such as, say, advancing a few half-baked ideas into fully-fleshed out business plans, or running small experiments to assess whether or not a bigger innovation project has potential.

4. Conflict is Inevitable

The Change: Cash is tight.
The Response: Mediate innovation budget wars directly.

Perhaps the first law of innovation is that the effort is always in conflict with ongoing operations. Those conflicts tend to be sharpest at points of interface between teams working on the innovation initiative and those responsible for ongoing operations.

One possible response is to eliminate the interfaces, but doing so is usually impractical. Most every worthwhile innovation project is justified by the ability to leverage an existing asset — such as a brand, a group of technical experts, or relationships with customers.

Thus, the interfaces remain and the conflicts persist. Unfortunately, in battles with ongoing operations, innovation is undermanned. The established business is larger, more powerful, and more entrenched. Its arguments are for nearer-term needs. It has long-running customer relationships to protect. And, it has much more quantifiable rationales for its needs. The innovation team, by contrast, can only counter with a long-term aspiration.

The fiercest conflicts are over resources. If senior executives are not directly involved in mediating these conflicts, ongoing operations will win every time. Thus, a senior executive that invests money in an innovation project but does not subsequently follow through to make sure that the investment is supported at operational levels has likely wasted the investment.

In a downturn, cash is scarce. As such, the most intense fights are budgetary. Wherever the innovation team relies on a budget allocation controlled by the ongoing operations team, senior executives must pay particularly close attention.

For example, consider a company that creates a special product development team to design a new offering for existing customers. The company’s plan, once the product is ready for launch, is to let the exiting commercialization team take the new product to market. The transition period, from product development to commercialization, is critical for the innovation effort. In a tight-budget environment, the marketing leaders may see it as in their interest to support the immediate certainty of existing products rather than the longer-term uncertainty of the new product. As such, they may restrain the marketing and promotional spend for the innovation. To give the innovation the best chance at success, the senior team must remain committed and directly evolved at every step in the process.

5. What Happened to my Promotion?

The Change: Internal politicking intensifies.
The Response: Isolate forums for reviewing the progress of innovation initiatives.

It is much harder to get promoted in a slow-growth environment. This has a predictable but unfortunate effect, one which sees collegial work relationships become competitive, competitive work relationships become combative, and every manager faced with a higher probability of finding a knife in their back.

In such an environment, performance perceptions become much fought-over political game pieces. Want to get that promotion? You’d better do whatever you can to make your own unit’s performance shine while making your colleagues’ look sickly.

This is particularly dangerous for innovation initiatives. The performance of an innovation project is much harder to assess than that of ongoing operations. There are no simple benchmarks or comparison points. Instead, leaders of innovation initiatives must assess this question: Are we, or are we not, on a trajectory to long-term success? It is a question riddled with ambiguity.

For those eager to win power battles with innovation leaders, ambiguity is a welcome gift. It opens the door for spin. It is usually not too hard to invent a tale about why an innovation initiative is destined for failure. What matters is not the validity of the argument, but the likelihood that it will have currency within the organization. A typical tactic — and an effective one —is to emphasize the poor showing of the innovation project on traditional company performance metrics — even where those metrics have questionable relevance for the innovation.

Such politicking clouds judgment. It makes it less likely that innovation teams will learn and adjust as their uncertain projects proceed. A healthy response is to create a special forum for discussing the innovation initiative, one isolated from the forums for evaluating ongoing operations. The forum should encourage discipline and detachment, and the testing of assumptions in the innovation plan as rigorously and efficiently as possible.

Winning in downturns

For companies with access to capital, downturns present enormous opportunities for innovation. But shepherding innovation initiatives through the machinery of an established corporation presents distinct challenges in downturns. Senior leaders that are ready to take a risk must anticipate the specific organizational dynamics that they will be confronted with. Those that do so have a chance of reaping unusually large rewards for their efforts.

About the Author

Chris Trimble is Adjunct Associate Professor of Business Administration; Executive Director, William F. Achtmeyer Center for Global Leadership, Tuck School of Business, Dartmouth College.