From Innosight, an Innovator’s Survival Guide

By Scott Anthony on October 21, 2008. Source: Harvard Business Publishing

The following was written by Innosight Senior Director Kevin Bolen:

Innovators, are you feeling a bit lonely at the moment? Don’t take it personally. During turbulent economic times, companies naturally tend to turn inward. Talking about the core business that everyone understands and can predict is like eating comfort food on a dreary day — a temporary escape to a better time and place.

Unfortunately, these sentiments alienate those focused on the “new and different” and prolonged isolation can lead to rash, unproductive behavior. Don’t fall into this trap. A more thoughtful response during such times can actually accelerate and expand the returns on your innovation initiatives.

To help you make the right decisions, we offer a brief list of actions that innovators should and shouldnot be doing in today’s skittish climate. We focus on the two main areas most likely to evoke the wrong behavior: the call of the core and the scarcity of funds.

In terms of working with colleagues and leaders in the core business, Innovators should accept the realities of the marketplace and lend a hand. Innosight’s research has shown that innovation can only succeed when the core business is stable so innovators should look for ways their team and personal expertise can help right the ship.

One way to support the core is to temporarily suspend “nice but not necessary” market trials and reallocate resources to research efforts around core clients. Also, innovators can use the toolkit they have developed pursuing new growth businesses to help the core:

• Understand how the jobs-to-be-done for consumers are changing in light of the economy and align your value proposition accordingly

• Conduct a disruptive threat assessment to analyze and counteract the actions of emerging competitors

• De-feature existing offerings to meet just the basic needs of consumers at a lower price point

Innovators should not react to this internal focus of core leaders by trying to cram disruptive offerings into the core business. Trying to force-fit technology or service offerings through traditional business models will not only deprive the concept of the time and freedom it needs to evolve successfully, it will confuse your existing channel and consumers at a time when they too are seeking familiarity and stability.

In short, offer your help and expertise to the core, but don’t offer to assimilate.

Turning our attention to budgets, it is expected that as capital tightens and revenues become less predictable, many across the organization will seek to defend what they have. Instead, Innovators shouldembrace scarcity. Pre-empt the inevitable discussion and voluntarily scale back your line items. You will like find that a sharper focus actually increases your ability to innovate. Ways you can consider “giving back” include:

• Release any part-time team members back to their “day jobs” in the core business – two or three dedicated people will accomplish far more than 30 people spending 10 percent of their time

• Prune your portfolio – prioritize concepts based on anticipated time to profit and upside potential, and temporarily shelve smaller and slower ideas

• De-feature your concepts – look for performance areas where you may be overshooting customer needs and eliminate them. Be ruthless here as consumers will not pay for performance they don’t need.

• Revisit your research approach – make do with small sample sizes, social media input, and low cost interviews to get directional information versus pursuing perfect data

• Reduce the cost of your field trials – start with what you would do if you had no funds then move up gradually from there. Use a 3-D illustration instead of a prototype. Have consumers request samples via a website instead of in-store trials.

Innovators should not respond to the threat of budget cuts by inflating the business case for their ideas. You goose the size of the target market by 15%, reduce production costs by 20%, bring the release date ahead 9 weeks and “Presto!” you are suddenly helping the bottom line! It is your job as the good innovator to resist this siren song as leaders will be looking for any plausible reason to avoid making difficult cuts. The core business must respond diligently to their economic challenges and your new concepts must be allowed to develop at the pace of their market. Attempts to “go big” quickly to save a company rarely, if ever, succeed.

Finally, innovators should respect their role in turning around the economy. The core business you are trying to save today started as an innovation. The core business of tomorrow is a “new and different” idea today. It’s symbiotic. Help the core stabilize during this period and your company will emerge from the downturn faster, stronger and better positioned to innovate than your competitors.

How Recession Will Accelerate Consumer Downsizing

By John Quelch on October 15, 2008. Source: www.discussionleader.hbsp.com

 

Watch out for a new brand of consumer in 2008: the middle-aged Simplifier. She finds herself surrounded by too much stuff acquired. She is increasingly skeptical in the face of a financial meltdown that it was all worth the effort. Out will go luxury purchases, conspicuous consumption, and a trophy culture. Tomorrow’s consumer will buy more ephemeral, less cluttering stuff: fleeting, but expensive, experiences, not heavy goods for the home.

The economic boom of the 1990s fuelled consumption and democratized access to a wider than ever spectrum of goods transforming former luxuries into “must-have” necessities. Millions played the lotteries or aspired to what they viewed on “Lifestyles of the Rich and Famous”. As they grew richer, pressure increased on those below to trade up. And, as they traded up, pressure increased in turn on the well-off to buy even more–the second home, the big screen TV and the latest sport-utility vehicle. Enter the big houses that measured success in thousands of square feet of floor space, topped by the 40,000 square feet, $50m palace that Bill Gates has built outside Seattle. In 2006, 35% of new homes exceeded 2,400 square feet in floor space compared with 18% in 1986. Ironically, these mansions, many owned by business people on the road half the time, grew in number as the size of the average American household declined.

These huge houses had to be filled with more stuff, good news for the home-appliance and home-furnishing industries. Even grocery manufacturers benefited. Larger homes with bigger refrigerators can absorb more inventory. Flat birth rates in developed economies have put pressure on durable consumer-goods companies desperate for top-line growth. Product quality improvements mean these goods break down less often. So durable-goods sales depend on two things: the launch of new, higher-priced, higher-featured, often customized products that persuade consumers to trade in their existing appliances before they break down (think cell phones), as well as household penetration of products such as fax machines and printers previously used only by businesses.

As the world economy slumps, one consumer segment will grow faster than ever. The Simplifiers have four characteristics.

First, they perceive that they have more stuff than they need. Sure, they may collect something specific like porcelain figurines as a hobby, but they are the opposite of the pack rats who fill their attics and basements with “you-never-know-when-you-might-need-it” stuff.

Second, they want to collect experiences, not possessions. And they give experiences rather than goods as gifts to friends and relatives. Experiences may seem ephemeral. They cannot be inventoried except in the form of “Kodak” moments; but they do not tie you down, require no maintenance, and permit variety-seeking instincts to be quickly satisfied. Dining out, foreign travel, learning a new sport will prove more resilient than expected in the face of recession.

Third, their stuff embarrasses them. Their Range Rovers no longer tell the world that they are sophisticated town and country socialites. There are simply too many of them on the road to offer much social status. Worse, they now signal the irresponsible selection of a gas-guzzler.

Fourth, they have wealth that is so assured that it no longer requires conspicuous display. They lease their cars, rent other people’s holiday homes, and would happily outsource other aspects of their lifestyles. They reject the marketer’s continual pressure to spend more money on possessions rather than on education, health care, and other social goods.

These are the consumers who are now trading in their sport-utility vehicles. They include the empty-nester baby-boomers, less confident than before, who are tired of heating unused spaces in cavernous mansions, now preferring smaller houses with architectural character and intimate spaces, more charm and less maintenance. Their families are scattered, unable to share conveniently the family holiday home and often unwilling to inherit the burden of something they will never use. The new economy has made it even easier for consumers to get rid of their stuff. The high-tech equivalents of the yard sale, electronic auction sites, bring Simplifiers together with those who are yet to catch the habit.

This growing segment of Simplifiers presents a challenge to marketers. These are well-off people who value quality over quantity and do not buy proportionately more goods as their net worth increases. Their increasing reluctance to consume will dampen expected demand growth in developed economies further and therefore slow economic recovery, requiring consumer-goods multinationals to further focus their efforts on emerging markets where stuff will still be king.

American corporate profits: A turn for the worse

Sep 11th 2008 | NEW YORK | From The Economist print edition

THE second quarter of this year was the most profitable ever for Big Oil: the six largest Western oil companies reported a 40% jump in profits, to a combined $51.6 billion. Exxon Mobil, the biggest of them all, banked $11.7 billion, the highest-ever quarterly profit reported by an American firm, beating its own record. But nobody expects a repeat of such feats of capitalism in the quarter soon ending, thanks to the tumble in the oil price from its peak of $147 in July. And given all the recent talk about levying windfall taxes on them, the oil giants may think that is just as well.

However, anyone tempted to hope that falling energy costs will mean higher profits for other  american firms should think again. To the extent that oil prices are falling because of slowing global growth-the likeliest explanation, despite the flap earlier this year about the role of speculators-then they are likely to be an indicator of falling profits across the board. As oil prices tripled between 2002 and 2007, aggregate corporate profits doubled. Both reflected strong global demand, points out David Rosenberg, an economist at Merrill Lynch.

He says the recent decline in energy prices is a “symptom of demand destruction” that has dire implications for overall profitability. Mr Rosenberg has just written a gloomy report identifying “four horsemen” that will do their worst to American corporate profits: thinner profit margins; paying down debt as tighter financial conditions take their toll; lower energy prices; and a combination of slowing growth outside America and a stronger dollar. He predicts 7% falls in profits for firms in the S&P 500 both this year and next.

Until recently corporate profits have held up fairly well, even in America-except in financial services, where profits have been wiped out by the subprime-mortgage crisis and the credit crunch. Overall profitability for the S&P 500 was down by 31% on a year earlier in the fourth quarter of 2007, and by around 27% in the first half of this year, the second-worst three-quarter performance since the second world war, notes Martin Barnes of Bank Credit Analyst, a research outfit. (The worst was during the recession in 2001.) Yet, excluding financials, profits in the rest of the S&P 500 were actually up by 4.6% in the year to the second quarter of 2008.

This relative health was largely due to high energy prices, which benefited energy firms such as Exxon Mobil. They now account for 20% of S&P 500 profits, up from around 5% five years ago. Profits have also been buoyed up by strong demand from overseas, especially emerging markets. Domestic-based American non-financial firms have seen their profits decline at an annualised rate of almost 14% during the past six quarters, says Mr Barnes. But the profits of overseas subsidiaries of American non-financial firms have risen for 22 consecutive quarters, typically showing double-digit annual gains; they now account for 50% of the total profits.

Already countries that represent half of American exports, including big trading partners such as Japan, Canada, Germany and France, have posted at least one negative quarter of GDP growth, says Mr Rosenberg. As the global economy slows, the boost from abroad seems likely to weaken. Add to that the fact that the dollar has been rising like a homesick angel ever since The Economist’s Big Mac Index pronounced it too cheap in July, and it seems certain that this will be a disappointing quarter for many internationally leaning American firms. Moreover, several economists predict that the recent rise in the dollar is the start of a long-term trend. “American companies are simply not prepared for this,” says Wolfgang Koester of FiREapps, a provider of software for managing currency risks. “They took the free ride on the falling dollar, and by and large are not hedged against its rise.” The more the dollar rises, the more it will help foreign firms that export to America, which have had to work hard in recent years. For instance, Airbus, Europe’s aviation giant, has struggled because it relied on dollar revenues to cover its euro costs.

If the dollar stays where it is until the end of the year and global growth in industrial production slows to 2% from 4.5%, the growth in overseas profits of American firms would slow to 2.5% in 2009 from 21% this year, Mr Barnes calculates. If the dollar were to rise by another 5% in trade-weighted terms, and global growth were to fall to zero, overseas profits would drop by 7%. Mr Rosenberg is gloomier than most economists because he expects America’s GDP to shrink over the coming year, whereas the consensus is that it will continue to grow, albeit modestly. Wall Street’s equity analysts, by contrast, predict an increase of more than 20% in S&P 500 profits in 2009. They assume that the fortunes of

financial-services firms will improve and America’s economy will grow. But profit growth of over 20% is typically associated with a rise in GDP of around 4.5%, and it has never occurred with GDP growth of less than 3.2%, which is roughly twice the consensus forecast for next year, says Mr Rosenberg. He suspects that equity analysts, who are having one of their least accurate years ever, are too busy trying to forecast profits for this quarter to correct their outlook for 2009.

Although Exxon Mobil can live with earning profits at a slightly slower rate, a growing number of firms are struggling to turn any sort of profit or even to bring in enough money to pay their debts. Moody’s, a rating agency, recently raised its forecast of defaults on high-yield corporate bonds to 7.4% over the next 12 months. The actual default rate over the past year is 2.65%-and 4% at an annualised rate so far in 2008-up from a low of 0.96% in 2007. The number of debt issues that are distressed (ie, are yielding at least 1,000 basis points more than Treasury bonds of a similar maturity) has soared to 27% of those in the main Merrill Lynch high-yield index, up from 1% last year.

The list of troubled firms has now extended far beyond the housebuilders and building-supplies firms that were the first casualties of the subprime-mortgage crisis to include retailers, casinos, publishers and cable-TV companies, points out Martin Fridson, a veteran observer of corporate bonds. Companies with distressed debt now include such household names as Delta Air Lines, Clear Channel, Toys “R” Us and Reader’s Digest. There would already have been more high-profile bankruptcies, points out Mr Fridson, except that at the peak of the credit bubble some of today’s more troubled firms managed to borrow “covenant lite” debt that makes it harder for creditors to demand their money back. But that seems likely to delay only briefly the arrival of the Grim Reaper.