5 ways to innovate through an economic downturn

Nathan is a partner at Treehouse Innovation where he specialises in helping organisations build cultures of innovation. A seasoned designer, facilitator and public speaker, Nathan has helped organisations around the world, including Sky, Oxfam, Freudenberg and Generali use human-centred design to become more innovative. In his past life, he set up and ran four new businesses at world-renowned design and innovation firm IDEO.

Economic downturns can be challenging for businesses, but they also create unique opportunities for innovation. In this post, we explore the strategies businesses can use to innovate in an economic downturn and provide examples of companies that have successfully implemented them.

1. Focus on streamlining operations and customer-centric innovation to innovate cost-efficiently

During an economic downturn, businesses must focus on cost-efficient ways to innovate. Doing this means identifying areas where they can reduce costs while improving their products or services. One strategy is to focus on streamlining operations and eliminating inefficiencies. This can involve automating processes, reducing waste, and finding ways to do more with less.

For example, during the 2008-2009 financial crisis, McDonald’s focused on cost-cutting measures, such as reducing energy consumption, streamlining operations, and simplifying menu offerings to drive efficiencies and cut costs.

Another strategy is to focus on innovation directly tied to customer needs. By understanding what customers want, businesses can focus their innovation efforts on delivering products and services that are relevant and valuable, which can reduce costs associated with innovation that may be less relevant to customers.

By using a human-centered design approach to innovation, leaders can better understand the latent needs of the market and reduce the risk of investing in offerings that don’t solve a real human need.

In response to the COVID-19 pandemic, Airbnb, a company famed for its use of design thinking, shifted its focus to long-term stays and local travel, which helped the company to maintain revenue while reducing marketing costs and other expenses associated with traditional travel.

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2. Balance cost-cutting with long-term growth to ensure sustainability

While focusing on cost-efficient pathways to innovate can help businesses to weather an economic downturn, there are trade-offs to consider. For example, cost-efficient innovation may only sometimes lead to breakthrough products or services that set a business apart from its competitors, limiting its ability to differentiate itself in the market and stand out from competitors.

In the early 2000s, Dell focused on cost-efficient production and became known for its build-to-order model, which allowed it to keep inventory low and reduce costs. However, over time, this focus on cost-cutting led to a decline in customer satisfaction and innovation, which hurt the company’s long-term growth prospects.

A cost-efficient focus may only sometimes lead to long-term success. While it can help businesses to survive in the short term, more is needed to sustain growth over the long term. Leaders must be careful to keep innovation high, as this can lead to stagnation and, ultimately, decline.

Back when I was working at IDEO, it was in the 2008-9 financial crisis that OpenIDEO.com was born. The idea was already in play, but it was in our most critical moment in IDEO London, in the midst of losing a third of our staff and two thirds of our office space, that we took the time to invest in creating a new, disruptive business model, one that would lead to not one, but three new businesses further down the line, and a massive change for IDEO’s brand presence.

3. Invest in future-proofing innovation to lower the risk of post-downturn disruption

As mentioned above, investing in innovation that is directly tied to customer needs, is key to ensuring customers continue to see value in what the business offers, and avoiding post-downturn disruption.

During the 2008-2009 financial crisis, General Electric did this by focusing on energy efficiency and clean energy. Their approach helped the company to emerge from the downturn with a new line of business that ultimately became a significant growth driver.

Another way to lower the risk of post-downturn disruption is to invest in technology that can improve efficiency and reduce costs—for instance, investing in automation, machine learning, and other technologies that can help businesses to streamline their operations and reduce waste.

For example, in response to the COVID-19 pandemic, some retailers, such as Target and Walmart, invested in technology that improved efficiency and reduced costs, such as robotics and automation in warehouses and delivery.

4. Manage innovation teams during cutbacks by prioritising retention and external partnerships

During an economic downturn, businesses may need to reduce their innovation teams, leading to a loss of expertise and a slowdown in innovation. To manage innovation teams during cutbacks, leaders need to be strategic in their approach.

One approach is to focus on retaining key innovation team members. By identifying the most valuable members of the innovation team, businesses can prioritise their retention and ensure that they have the expertise and knowledge they need to continue innovating.

For example, during the COVID-19 pandemic, some companies, such as Google and Microsoft, focused on retaining their key innovation team members by providing additional support and resources, such as flexible work arrangements and mental health support.

Another approach is to outsource innovation to external partners. This way, businesses can access expertise and knowledge they may not have in-house without needing to maintain a large innovation team during a downturn.

During the 2008-2009 financial crisis, IBM outsourced some of its innovation to external partners to reduce costs while maintaining its focus on innovation. This allowed the company to continue developing new products and services even during a downturn.

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5. Take advantage of the unique opportunities downturns create

While economic downturns can be challenging for businesses, they also create unique opportunities for innovation. One example is focusing on sustainability and environmental innovation. As customers become more environmentally conscious, companies offering sustainable products and services will likely be in high demand.

In response to the 2008-2009 financial crisis, Tesla launched its first electric car, the Roadster, which helped the company to differentiate itself from traditional automakers.

Another opportunity is to focus on digital innovation. As more customers move online, businesses that can offer innovative digital products and services will are also likely to be in demand. This can include everything from e-commerce platforms to software solutions for remote work.

During the COVID-19 pandemic, Zoom became a key player in digital innovation by offering a user-friendly video conferencing platform that met the needs of remote workers and students. This helped the company to achieve unprecedented growth and become a household name.

In conclusion, economic downturns can be challenging, but they also create opportunities for businesses to innovate and grow. By focusing on cost-efficient pathways to innovate, investing in innovation directly tied to customer needs, managing innovation teams during cutbacks, and taking advantage of unique opportunities that downturns create, businesses can emerge from a downturn more robust and resilient than ever before.

We work with businesses around the world to help them keep innovating through times of change. Schedule a call with one of our team to discuss how we can help you build fearless, change-ready teams, and drive growth in unpredictable times.

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