Strategy in a recession - global innovators keep investing

Another cracking (though detailed) research report on the strategies of global innovators has arrived in my inbox. Booz & Company’s 5th annual survey of 1,000 leading global players has some fascinating insights into the strategic response to the recession. I have summarised some of the key learning points for students below.

So far as spending on R&D is concerned, the report paints a perhaps surprising picture. The intuitive response to the global economic downturn might be to take the knife to costly and cash-hungry R&D programmes. That’s not what has happened.

The study of the world’s biggest corporate R&D spenders finds that most companies have stuck with their innovation investment despite the recession—and many are boosting spending to compete more effectively when the global economy gather strength.

Booz & Co found that primary reasons that companies were reluctant to cut innovation spending during difficult financial times was because many companies saw the recession as an opportunity to build their advantage over their competitors, particularly weaker ones that may have had to reduce R&D for in order to conserve cash.

Another reason was that companies across most sectors were typically committed to product development cycles that extended for many years- well beyond the length of an average recession. In other words, the business has to plan product development over the long-term, whereas a recession is, by definition, a relatively short-term phenomenon (contrast with a “depression” - which is a longer-term weakness in the economy).

Finally, innovation has become a core part of overall corporate strategy, which resulted in the study finding no correlation between reduced profitabilty and reductions in R&D spending.

However, the sustained investment in R&D doesn’t mean that firms are leaving their spending unchanged in terms of focus. There is evidence that innovators are tyring to “spend smarter”.

For example, Booz & Co found that companies are performing less pure and applied research. Instead, they are concentrating their R&D budgets on product development and engineering. Nearly 40 percent of firms surveyed said their companies are shifting resources from basic research in order to prioritise new product launches. Getting innovative products to market quicker gives such firms the best opportunity to take advantage of an upturn in the economy.

Firms are also looking to improve the return on investment in R&D - both in the short-term and the long-term. Many survey respondents claimed that their management were getting better at killing off the weaker R&D projects that might previously have passed investment appraisal tests. More than a third of companies said that they were ending R&D projects which did not have a specific timeline to new product launch. Overall, the recession has encouraged innovators to look at fewer, bigger ideas.