Tough Times Call for Disruptive Innovation
he inevitable constraints this tough economy imposes on companies provide fertile ground for innovation because necessity truly is the mother of invention. Companies that learn to innovate more quickly, cheaply and with less risk will emerge from the downturn stronger than ever.
To succeed, smart executives will need to adopt a different mindset and effective frameworks to determine what to start doing, stop doing and do differently. Consultant and author Scott D. Anthony prescribes "disruptive innovation."
A Historical Perspective
Many successful companies have been launched during recessions. Grim economic times can highlight previously hidden problems or cause old problems to intensify. When a deep-seated customer problem emerges, search for novel ways to address it.
National Cash Register was founded in 1884, the year of "the Great Panic." At a time when investments from coal and railroads were sharply declining, the Patterson brothers decided to commercialize the mechanical cash register. At the time, they invested $6,500. Today, NCR has more than $6 billion in annual revenue.
Thirteen of the 25 companies on the Dow Jones Industrial Average, as of December 2008, were formed during an economic downturn, including 3M, General Electric, Microsoft and Walt Disney.
Disruptive Innovations
Instead of trying to best their competitors, disruptors change the game. They typically transform existing markets or create new ones by focusing on convenience, simplicity, accessibility or affordability.
Harvard Business School Professor Clayton Christensen, author of The Innovato's Dilemma, describes disruptive innovation as a corporate effort to redefine quality, adopt new technologies and anticipate customers' future needs. Subsequent research has indentified more than 200 disruptive developments over the last 50 years, across a range of industries.
Some disruptions reshape existing markets:
- Discount retailing (Wal-Mart)
- Low-cost automobiles (Toyota)
- Steel mini-mills (Nucor)
- Digital music (Apple)
Other disruptions create entirely new markets:
- Personal computers (Apple, IBM)
- Online advertising (Google)
- Online auctions (eBay)
You would think recessionary times would be particularly hard on up-and-coming disruptive companies that haven't yet broken into the mainstream. History suggests otherwise.
The innovation research company Innosight analyzed how up-and-coming disruptors (those with revenues of less than $1 billion) performed in the face of the last three U.S. economic downturns (as dated by the National Bureau of Economic Research to cover 1980–1982, 1990 and 2001).
In 1979, 11 companies, including Intel, Home Depot, Nucor and Southwest Airlines, fit these criteria. Their revenue grew at a compound annual rate of 22 percent between 1979 and 1982.
Between 1989 and 1991, the sample of 11 up-and-coming disruptors, which included Best Buy, Cisco and Charles Schwab, grew revenues by 33 percent. The pattern continued in the 2001 downturn. Between 2000 and 2002, 23 up-and-coming disruptors like Google, Amazon.com and Research In Motion (maker of the BlackBerry product line) grew revenues by 32 percent.
If you work for an operating company that is debating whether to postpone innovation efforts until better times arrive, be cautious. You may miss powerful growth opportunities. Furthermore, by waiting, you create space for competitors to step in with novel advantages in tomorrow's growth markets.
The Abundance Paradox
Abundance is actually the root cause of many corporate struggles with innovation. Too much time or money often leads companies to continue following fatally flawed strategies. Their leaders create overly complicated solutions that overshoot customer needs.
In contrast, constraints often enable innovation in the retail industry. Over the last century, there have been numerous significant business-model innovations:
- Wal-Mart's discount model
- Costco's warehouse club model
- Inditex's Zara fast fashion model
- Amazon.com's collect-cash-before-you-contact-suppliers model
One explanation for the retail industry's inventive business models is scarcity. The constrained retail environment leads them to funnel creativity to where it can best be applied.
Entrepreneurs are another example of flourishing innovators. They have no choice; if they fail to rapidly adapt, they run out of money. Bad times force discipline.
The Transformation Imperative
Survival really comes down to change or die. In the Great Disruption, companies have two choices: Live with shrinking profits and increasing chances of extinction, or follow a completely different approach.
To develop a disruptive mindset, managers must master four areas:
- Liberate resources for promising innovations by prudently shutting down dead-end projects and declining businesses.
- Drive fresh growth by re-featuring existing products and services and reinventing outdated processes.
- Mitigate risks by conducting strategic experiments and forging alliances with customers, competitors and suppliers.
- Appeal to value-conscious consumers and fend off low-cost attackers by delivering "good enough" offerings at an affordable price.
The Executive Challenge
Systematizing disruptive innovation is a different beast. Senior executives must think and act in ways that run counter to everything they have done to succeed in their careers. How do you simultaneously manage two different instincts: one operational, the other entrepreneurial?
Executives who encounter tough times naturally become more conservative. It's hard for them to tolerate creative thinking when they face the prospect of downsizing. But companies that play it too safe can wind up in trouble down the road, and frustrated managers may quit, leaving their firms ill-equipped to function effectively once the downturn ends.
Innovation practitioners need to strengthen their creative muscles by:
- Developing an awareness of themselves and others
- Creating a personalized program of developmental leadership with an executive coach
- Striving to improve their ability to spot hidden opportunities and act in more entrepreneurial ways
- Scheduling regular excursions to observe how certain customers use a product or service
- Attending a conference in a different industry
- Learning to ask more "what if..." questions
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