With my company cutting budgets, how can I still accomplish my innovation goals for 2023?”
The global economic outlook for 2023 is not great. According to the IMF, global inflation will fall in 2023, but economic growth will be subpar. Among other factors, Russia’s war in Ukraine continues to add uncertainty to the global economy. Economists expect mild recessions in the United States and Europe, with the UK facing the worst and most prolonged recession among the G7 countries.
This global economic downturn is having an impact on a lot of companies. A good example is the Big Tech companies experiencing a post-pandemic correction in valuations. The combined value of the five most prominent tech companies—Apple, Amazon, Alphabet, Meta, and Microsoft—dropped by 38% at the end of 2022, resulting in massive cost-cutting and layoffs within the technology sector.
This cost-cutting is not limited to the Big Tech companies. We are seeing this happen across many of our client companies as well. Budgets are getting cut across the board, and innovation budgets are not immune to this. While these budget cuts can demoralize innovators, they are inevitable given the economic crises that most company leaders face.
It would be unreasonable for innovation leaders to resist cuts in their budgets in the current economic climate. Rather than lament the inevitable, innovation leaders should consider how they might use the crisis to create more value for their company and establish the legitimacy of innovation going forward. The constraints of the current situation provides an opportunity to be more strategic with our innovation efforts.
First things first — don’t stop innovation
During a crisis, there is a temptation among corporate leaders to stop investing in innovation altogether, which is a mistake. Research shows that companies that continue to invest in innovation during a crisis experience superior growth and performance post-crisis. Strategic investments in innovation during economic crises can help a company perform better than competitors who scale back their investments.
A case in point is Airbnb, which during the Covid-19 pandemic saw its bookings drop by over 70% and its company valuation cut in half. This crisis forced CEO Brian Chesky to institute a cost-cutting exercise that resulted in 1,900 people losing their jobs. Beyond the cost-cutting, Airbnb focused on innovating its business model.
Since there was no travel for business or across borders, Airbnb worked with their hosts to run a campaign called “Go Near.” They pivoted the company to serve customers who wanted to travel locally, meet with family, and have extended stays. They also worked with the former U.S. surgeon general Dr. Vivek Murthy to develop an enhanced cleaning protocol to address customers’ fears around Covid-19.
These innovative changes put Airbnb in a position to emerge from the crisis in a strong position. The third quarter of 2022 was Airbnb’s most profitable quarter ever, with revenue of $2.9 billion and an adjusted EBITDA of $1.5 billion. This was a 32% increase from the same period in 2021. The Airbnb case study shows that with the right focus, innovation can be used to help the company survive the crisis and position itself for future growth.
So how can innovators navigate the inevitable budget reductions by being more strategic in their innovation efforts? By taking extra care to create value, and investing in both the short-term and long-term.
Getting a reasonable return on investment (ROI) always matters, but in a financial crisis, it matters more. The expected time horizons for getting those returns also become shorter. The best way to create value is to acknowledge that innovation sits on a continuum ranging from efficiency, sustaining, and transformative innovation.
- Efficiency Innovation focuses on improving the core business. Typical examples include technologies that generally improve operations, distribution, or processes. It may also include process innovations that help make an organization more effective.
- Sustaining Innovation explores opportunities that build on a company’s existing business model. This is typically about new products and services for existing customers. They may also involve new distribution channels, production technologies, or geographical expansion.
- Transformative Innovation helps a company create substantial growth from radically new opportunities. This typically involves exploring new value propositions or business models.
When budgets are reduced, innovators must accept the reality that they can’t do everything. They’ll need to prune their portfolios to liberate resources for more promising initiatives.
Invest in the short-term
What will help companies accomplish their goals immediately is investing in efficiency and sustaining innovation. In conversations with leaders at a global energy company, Strategyzer CEO Alex Osterwalder was made aware of efficiency innovation projects in the pipeline that could result in billions of dollars of increased revenues or efficiency savings. This shows that efficiency innovations are particularly great at producing high and immediate returns for a company.
Similarly, sustaining innovations can produce strong short-term results for a company. As shown by the Airbnb example, opportunities that build on a company’s existing business model are likely to succeed and present fewer risks or untested assumptions. Prioritizing these innovations and accelerating their rollout can create significant value.
Another good example of this concept in action comes from building tool manufacturer Hilti, which in 2003 started pilot-testing a business model shift from selling tools to fleet management. Instead of buying Hilti tools, construction companies would pay a monthly subscription for access to the tools they needed when they needed them. When the 2008 financial crisis hit the construction industry, ramping up this innovative new business model helped Hilti overcome the crisis. They have continued to grow since.
Innovators can help a company in the short term by applying their methods and tools to pressing challenges within the core business. For each product, service, or innovation project that is struggling, innovators can apply business model design, testing, and iterating to maximize its potential. In successfully implementing efficiency and sustaining innovations, they not only create value, but they build credibility and relationships with the key leaders in the business.
Invest in the long-term
As innovators work on short-term projects, they should not neglect to invest in the future. Companies want to avoid emerging from crises with unbalanced portfolios of only efficiency and sustaining innovations. Innovators can take a small proportion of the resources allocated to innovation and continue to invest in transformational innovation (i.e. 5-10%).
These limited resources will force innovators to make the strategic choice to focus investments on the transformational innovations that are closest to finding success. They can pause work on promising innovations that still have a long way to go before they succeed, and kill zombie projects that have been running for a while but are not showing traction.
To identify which projects to keep investing in, innovators need a comprehensive system of metrics capable of showing where each project is on its journey. Rather than treat innovation as a black box, innovators should be able to identify which projects are on track to finding a value proposition that resonates with customers and a business model that is profitable and scalable.
A few years ago, I worked with Duncan, the leader of an innovation lab that is run by a global manufacturing company based in Amsterdam. He had invested in several innovation teams testing various business ideas. But now he faced budget cuts, which meant he could not continue to invest in all the innovation projects in the lab.
Duncan needed to choose which innovation projects to keep funding and which ones to stop. After several conversations, I convinced him and his team that they should make their decisions based on how close each project was to finding a successful business model. The decision would be based on evidence rather than conjecture or projections in a business case. This would ensure that Duncan and his team did not select their pet projects or ideas that seemed cool.
Duncan and his team used an early version of the Strategyzer Innovation Project Scorecard to make their decisions. This tool helps leaders evaluate how much evidence innovation teams have to illustrate the potential of their ideas. The scoring favors teams that have evidence from more than one experiment for each of the key elements of their business model. Teams get the highest possible scores if some of those experiments involve getting customers to perform desired behaviors, such as signing up or placing an order.
With this tool and process, Duncan was able to evaluate how much progress each project had made toward success. This assessment led him and his team to stop working on half of the projects and focus their resources on the projects closest to finding business model success.
Once an innovation team has identified the right projects to work on, it is time to be disciplined around the use of innovation methods and tools. They can optimize their innovation processes to do more with less, and get better at running cheap experiments that produce the most significant amount of progress. This will help them quickly demonstrate the value of the transformational innovations they are working on.
A final thought
Wherever possible, innovators should take advantage of the crisis to change some elements of their company’s management processes around innovation. If leaders are interested in getting results quickly, they can leverage that interest to create new processes that help innovation projects move faster. Lowering the barriers to innovation can help achieve the leaders’ ROI goals quickly.
Just remember to build something that lasts. Do not simply focus on pushing individual projects through, but think about putting processes in place for future projects. The most beneficial process improvements for innovation are typically around finance, legal and compliance, procurement and IT backlogs. Work with colleagues in these departments to drive lasting changes that you can leverage post-crisis.
Even in the face of budget cuts, innovators can accomplish their innovation goals for 2023 by focusing more on activities that will produce results for your company. Below is a summary of the key highlights from this article:
- It’s possible to create value for a company within the constraints of lower budgets.
- Companies that continue to invest in innovation during a crisis experience superior growth and performance after the crisis.
- The best way for innovators to proceed is to understand that innovation sits on a continuum of efficiency, sustaining and transformative innovation.
- Investing in efficiency and sustaining innovation will help companies accomplish short-term goals. These innovations can yield high and immediate returns for a company.
- Innovators should also take a small proportion of the resources allocated to innovation and continue to invest in transformational innovation (i.e. 5-10%).
- We recommend focusing on transformational innovations closest to finding success.
- Use the Innovation Project Scorecard to identify these.
- Finally, innovators should take advantage of the crisis to change some elements of their company’s culture around innovation.