This blog first appeared as Steve Wunker's piece for Harvard Business Review
By Steve Wunker
When stock markets gyrate and growth prospects darken, it’s tempting to rein in innovation programs and hoard cash. The S&P 500 did exactly that during the Great Recession, increasing their cash levels by over 50% to nearly $1 trillion today. As it looked like the economic storm clouds were dissipating (ah, the good old days…) the prospects for company growth looked barren, which is what will happen after firms have locked their cash away. So we saw a wave of mergers and share repurchases as companies found they had few programs in-house that could profitably absorb all that cash quickly. Rather than carefully watering a set of growth crops, companies had a fire hose of cash that they turned off and on. This is no way to nurture the growth prospects of tomorrow.
While businesses shouldn’t react to economic uncertainty in knee-jerk fashion, the recent tumble in equity prices cannot be ignored. Companies can do five things to hedge their bets in turbulent times while opening up options for the future:
1. Re-visit big, inflexible projects — The 80/20 rule often applies to corporate innovation portfolios; a few projects consume the lion’s share of cash. If those projects can adjust to the potential consequences of another economic dip, then there is no reason to change this allocation. However many big projects become inflexible, travelling on rails to a fixed destination. Management has made promises to senior executives about what a project will achieve, and fixed costs have built up because they looked prudent in comparison to planned revenues. For these projects, consider how to enhance adaptability through slowing development, turning fixed costs into variable ones (for example through using third-party contractors), or removing expensive features that could be added to successive generations of products.
2. Buy vowels — In the television game show Wheel of Fortune, contestants have the option of solving a word puzzle (a potentially risky move that can generate quick winnings) or buying a vowel (spending a bit of their cash to improve their knowledge about what the puzzle says). Uncertain economic times present an excellent vowel-buying opportunity. By learning more about consumer needs, investing small amounts in technologies emerging from academia, or trialing new ideas in modest test markets, companies can build their understanding about growth options and position themselves to take bolder and riskier moves as the economy brightens.
3. Add services — One of Procter & Gamble’s most vaunted consumer brands is Mr. Clean. The company has invested in this brand’s innovation in many ways. Some new products under this umbrella, like the Mr. Clean Magic Eraser, were breakthrough hits, but they probably cost a good deal to develop. On the other hand, the company has trialed putting the Mr. Clean name on a handful of car washes. This move builds the visibility and image of the brand, generates new sources of potential revenue, and was likely quite cheap to execute. Services can cost far less than products to develop, they can expand businesses into new directions, and they can dovetail well with product offerings to make a compelling combination.
4. Experiment with new business models — When the Great Recession hit, many airlines responded by reducing flight frequencies, introducing new service charges, and generally discovering new ways to irritate hard-pressed passengers. JetBlue opted to try out a new business model, an “All You Can Jet” pass that let travellers pay a fixed fee for unlimited use of the airline from a major airport for a set period of time. The company created a fixed number of these passes, limiting the amount of risk it took in case people got a bit too enthusiastic with their travel. Business model innovations can cost very little to execute, and they can tell companies a lot about potential avenues for growth. Many companies, particularly those that produce physical goods, will have product innovation processes. Quite few have a business model innovation process, or even a single person dedicated to this function.
5. Shape a portfolio plan — For personal investments, stock market dips are times to prove the mettle of portfolio plans. Perhaps equities have declined, but the appreciation of the portfolio’s small holding of gold has helped to balance out the impact. Good portfolio plans will balance the types of risks assets are exposed to, and they may have holdings with different levels of liquidity. It is strange that individuals will tend carefully to these plans, and then come to work and lack any such plan for their company’s innovation investments. Instead, these investments may be agglomerated through a series of one-off decisions as ideas have been sold up the food chain. A solid plan would take account of the underlying drivers of program success or failure, and it would diversify risks, balance the time frames in which returns are expected, and ensure an appropriate balance between prudent investments and chancier ventures.
Taken together, these five steps are simple, cheap, and have little downside. If only stocks could make that boast!