Hunker down or push forward? What businesses should do with innovation in the current economic climate Featured

9:01pm EDT August 31, 2011

With the volatility and uncertainty in today’s economy, should you push ahead with innovation efforts or wait out the turbulence? This is a common problem. After all, innovation has a mountain of uncertainty associated with it, and the current economic climate just adds to the risk.

To make sense of this issue, Smart Business spoke with Dr. Frank Navratil, Professor of Economics and Finance, Boler School of Business at John Carroll University, for an academic perspective. Chip Gear, a master member of the John Carroll University Entrepreneurs Association, provides his perspective as President of The Technology House — which specializes in product development, prototyping and production processes. They offer their views on the economy and their recommendations for other organizations.

Is the volatility in the economy indicating we should hold off on innovation or move forward?

Navratil: There is a lot of psychological pessimism about the future right now and the question is how much of that pessimism is really warranted?

The economy is definitely struggling:

  • The debt crisis in the U.S. is a critical variable in the future strength of the U.S. economy and Washington, D.C. certainly isn’t giving us a lot of confidence about that right now.
  • In Europe, Italy and Spain are in serious fiscal difficulty, which is putting tremendous pressure on Germany and other economically stronger countries in Europe.
  • Here in the U.S. there are signs the economy is slowing: unemployment claims are up and capital spending is down.
  • Funding for expansion is scarce because banks are in a very conservative lending mood.

On the other hand, unlike the last economic disaster that started with the real estate crash, nothing in the current economy is really broken — these problems can be turned around. The real message here is that the current challenges can present opportunities for businesses. Innovative thinking that solves problems is what customers need right now. Adopting a position of cautious optimism and moving ahead with innovation seems warranted, assuming the business has the resources to do so.

How do you recommend businesses handle their innovation efforts in this economic climate?

Gear: Although the economy is messed up, somebody is really going to have to break it to make it worse. I think cautious optimism is the best perspective to have right now. Having said that, based on my experiences during the 2008-2009 slow down, I think that in this economic climate protecting your cash flow is critical.

If the innovation effort is going to significantly increase an organization’s debt burden, then I might suggest holding off. You have to evaluate your financial position in light of the possibility that, if the economy gets worse, some of your customers could push out their production orders six months or more. If you have increased your debt burden, this can crush your cash flow.

On the other hand, if the innovation is focused on new processes or new technology that makes manufacturing more efficient, then push ahead. Customers continue to want innovative solutions to their problems, so you have to think through how to provide those solutions without a substantial increase in risk exposure. Cautious optimism is a matter of moving forward while evaluating the potential impact of a downturn.

What strategies do you suggest for enhancing an organization’s innovation efforts in this economy?

Gear: There are five strategies that can really have an impact on the bottom line in this economy.

1.     Build a ‘warchest.’ In this economic climate, cash is imperative. You have to have enough of it to be able to respond to potential crises.

2.     Build your employee engagement. When you are getting crunched, you have to have your employees engaged in the decision-making process. I gather my employees together on a regular basis and say, ‘Here’s the situation — how can we make this work?’ The collective wisdom among employees has significantly improved efficiency in our company and has resulted in some really innovative solutions for our customers. An engaged and loyal employee base is critical if the economy takes a downturn.

3.     Strengthen your point of differentiation. You have to identify the most important thing that will bring customers to you instead of your competitors and do that one thing really well. We spent considerable time and effort earning a number of certifications for quality that some of our competitors don’t have. This is one of our sustainable competitive advantages that attract customers to us.

4.     Pursue new markets. Diversifying your customer base is a great hedge against economic volatility and encourages everyone in the organization to think innovatively about the products or services being provided.

5.     Form strategic alliances with competitors. These alliances allow one company to produce more than its capacity without increasing its investment in plant and equipment and the other company to fill its production capacity to gain efficiency. Obviously, this takes some careful selection of alliance partners and due diligence in evaluating each partner’s capabilities.

Dr. Frank Navratil is Professor of Economics and Finance, Boler School of Business at John Carroll University. Reach him at navratil@jcu.edu. Chip Gear is President of The Technology House, which specializes in product development, prototyping and production processes. He is also a master member of the John Carroll University Entrepreneurs Association. Reach him at chip@tth.com.