South Africa in recession
On 4th September Stats SA announced that the country's real gross domestic product contracted by 0.7% in the second quarter of 2018. This followed a revised fall of 2.6% in the first quarter of the year. This means that South Africa is in its first recession in 9 years.
On the news the Rand immediately plunged from R14,90/$ to R15,20/$ and there is a risk that South Africa will have a further downgrade by the rating agencies.
The question that I am asking in this blog is should companies be allocating money to innovation when it seems that it might be better using the money elsewhere?
The financial crisis in 2008
In 2008 the world experienced the worst financial disaster since the great depression. As the world was going through turmoil, companies where asking themselves if they should continue to invest money into innovation.
The Department of UK Trade and Investment investigated this and produced a report titled “Innovation in a recession”
Here is an extract from this report (I have highlighted the areas I believe are of most importance):
Most companies understand that innovation is crucial to their long-term viability, alongside good management practices across technology, people, planning and operations. Without this investment in culture, research and development (R&D) and related activities, there are no new products and services and this becomes a huge disadvantage as companies look ahead to the end of the current downturn.
Yet despite recognising the need to keep up the momentum on their R&D efforts, many companies find it difficult to put this into practice. Senior executives may champion the need for innovation, but risk aversion and fear of failure further down the organisation can thwart their best intentions. For many companies, cost-cutting and efficiency are the new corporate mantras, and this sits uneasily with a culture of bold experimentation.
This natural response to withdraw commitment to innovation goes against the grain of both academic thinking and history. As has been shown time and again, a downturn is a good time to innovate, and spending on R&D must be maintained in preparation for better times. “Cost-cutting is undoubtedly important at a time like this, but many companies also respond by cutting innovation, and this is absolutely the wrong thing to do,” says Vijay Govindarajan, Earl C. Daum 1924 Professor of International Business and founding director of the Center for Global Leadership at Tuck Business School, in the US. “A period of expansion always follows recessions and usually lasts for at least three times as long. Innovation must continue throughout a recession to prepare for this period of expansion and secure the long-term viability of the firms.”
The report states some interesting facts for companies during the 2008 recession:
Despite the need for widespread cost-cutting to ensure survival, innovation budgets were usually the last in line for reduction and innovation budgets actually grew 6.9% in 2008
A downturn can spur companies to greater heights and there is a long list of innovative products and business that have been launched during a recession.
Recession is a great time for a company to clear dead wood from a company’s innovation portfolio.
Adjacent innovation becomes important which means taking an existing product to a new customer segment or serving existing customers with a new product. This is a much less risky form of innovation.
During a recession companies need to focus more on the customer than ever before and innovate to meet the needs of their customers.
Another article from the 2008 recession is titled “6 ways innovation can recession proof your business” by Steven Shapiro. In it, he suggests the companies use innovation to:
Reduce R&D costs: Extend innovation from an innovation team to include employees, partners and even customers.
Reduce operating costs: Use innovation to reduce costs while at the same time improving responsiveness to their customers.
Match supply and demand: Finding creative, and hopefully temporary, solutions to match the ups and downs of the economy.
Improve your customer’s business: During a recession your customers will probably reduce spending which will hurt your business. Search for innovative ways that you can assist your customers to solve their pains. If a company can assist their customers to be successful during a recession, then this will solidify the relationship and prepare to reap the benefits when the economy recovers.
Improve your supplier’s business: When the market gets tight your suppliers might struggle more than you but if you help them to be successful then you might find that you are more successful.
Leapfrog the competition: While others are tightening their belts, truly successful companies use the recession as a chance to leapfrog their competition.
We might feel that innovation is a luxury that we can’t afford during a recession but in fact the opposite is true. We need to hold the line and invest in introducing new products and services, reducing operating costs and focusing on the needs of customers and suppliers.
Perhaps you can use the recession that South Africa finds itself in to innovate and leapfrog the competition?
In case you need more persuasion to push forward with your innovation projects, below are a few other articles to read.
The Cost of Not Innovating – Jeffrey Baumgartner
Innovating During A Recession - Forbes
As always, your thoughts on this are gratefully received.
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