Innovating out of a recession

For any manufacturer, innovation is the mantra. Why then are so few doing it? Why is more spoken about than implemented? And does the downturn present new opportunities for innovation?

Data from the Australian Bureau of Statistics is a stark reminder of the problem. In 2006-07, less than a third (32.4 per cent) of Australian businesses reported implementing an innovation. Generally, innovation was more likely to happen in larger businesses. Significantly, the manufacturing sector had some of the highest proportions of innovative practices.

Still, the types of innovation undertaken also fell short of the mantra. Only 17 per cent of innovating firms reported expenditure on design, planning and testing activities and only 15 per cent of innovating businesses reported any R&D expenditure. Most of the innovation expenditure (47.8 per cent) was on buying machinery, equipment or technology.

Why does this happen? A London Business School study done nine years ago found most businesses were erratic and irregular innovators. The author, economics professor Paul Geroski, showed that the path of innovation was more a random walk than linear. Commercially successful breakthroughs and patents tended to be arbitrary, with a firm typically innovating every once in a while, and long periods between successful developments. The result: unpredictable growth spurts. Geroski found that innovation was erratic because companies hate cannibalising previous investments, innovations and brand management.

This suggests there are two big reasons why managers don’t innovate. The first is that most managers do not see themselves as inventors. Nor are they trained to be. Their job is simply to deliver more of the same, but more efficiently.

This in contrast to innovative giants like Nokia that are constantly overhauling their processes. For Nokia, the status quo is complacency. Many companies only recognise that too late. Addressing the Nokia annual general meeting in Helsinki in May 2008, Olli-Pekka Kallasvuo, expressed it thus: “Some have asked why Nokia reorganized when our business has been going so well. In other words, ‘if it ain’t broke, why fix it?’ More often, companies reorganize only when they are forced to, long after a shift in the marketplace has made their business model obsolete.”

Second, managers see themselves as pragmatic, hands-on deliverers of services, not as dreamers and innovators. And finally many executives doubt that bold innovative breakthroughs happen that often, or are even possible.

But with the global recession, the need for innovation is even greater today. A downturn gives companies even more impetus to understand customer needs and drivers. And while R&D budgets are being slashed, innovation can play a key role in cost management by focusing on operational efficiencies. In a recession, management innovation becomes critical.

Examples would include companies like Google which has been developing a management system that values adaptability of its employees.

Or Toyota which had a management system that enrolled employees in problem solving exercises in the pursuit of efficiency and quality. Although Toyota has been the world’s most profitable car company by a long shot, it recently reported the biggest annual loss in its history at $US6.9 billion ($A8.5 billion). But its new president Akio Toyoda, a grandson of the founder, says the company will innovate to recover. In a recent interview with Fortune, Toyoda said there was a need to reorganise and reinforce dedication to one of the pillars of Toyota’s production system: genchi genbutsu, or “go see for yourself” where employees have to check out the situation to come up with a solution.

“We may have to slightly change some of the ways of doing business, depending on the changes of the market,” Toyoda said. “Some of the good things we did, and also not-so-good things we did, may not completely fit the situation. So while preserving our good DNA, I would like to have the courage to change some things if those things have to be changed. Our philosophy of ‘Customer first’ has to be stronger.”

It’s an approach that takes enormous courage because it means undoing previous investments and systems.

Indeed, the customer can drive much of the innovation. Infosys research lab personnel, for example, meet with customers.

What are some of the methods used in the downturn?

Some companies turn to diversity and sharing knowledge. Indian IT specialist HCL Infosystems, which manufactures laptops and devises networking solutions for a variety of industries such as telecommunications and power companies, has an annual HCL Innovation Day, where groups huddle together and try and come up with new technology solutions for businesses. One idea at the last event involved iris and fingerprint recognition. It gave birth to a whole new security solutions division.

Consumer-products giant Procter and Gamble has a "Connect and Develop" strategy, where managers seek to identify and team up with other companies, universities, academics, retirees and individual inventors who have ideas or expertise that could help the company develop new products, technologies, packaging, design, business models or manufacturing processes. More than 40 per cent of its products have an externally sourced component.

There are strong echoes here of C.K. Prahalad and Venkat Ramaswamy's excellent 2004 book The Future of Competition, which introduced us to the concept of "co-creation", where more companies and consumers were working together, Diversity is important because the combined intelligence and input of a group of people always beats the experts.

The other key is to keep focusing on research. Melbourne based nanotechnology specialist Micronisers, for example, has a deliberate strategy of keeping a lid on its profits so that it can keep investing in the company’s research and development for its unique product lines. “Depending on what stage your business is at, you’re either at the investment stage, the milking stage or the plateau stage,” Micronisers chief executive officer Ken King says. “We’re still in investment. Nanotechnology is evolving so fast that you have to continue to spend.”

Innovation, whether it’s of management systems or products, is more critical now than ever before. For many companies, it will be the only way companies to ride out the storm.