The Problem with Recessions: Businesses Should Continue to Innovate

The price for a long run bull market has finally come. Since the spread of COVID-19 this year, most countries have had a devastating blow to their economies. This current global economic contraction is expected to be the worst since the Great Depression.

What does the current recession mean for new start-ups and mature companies?

While many companies choose to restrict investment in new ventures, R&D, and marketing during economic downturns, this may not be the best strategy to adopt. There is evidence suggesting companies that continue to invest, while balancing operational efficiencies, may better survive economic downturns than rivals who exclusively focus on budget cuts. The intuition is straightforward: while cost control strategies ensure some financial viability in the short term, they are not effective for ensuring long term revenue growth.

Recessions create fertile ground for market disruptive opportunities, since downturns tend to result in permanent changes to what was previously considered normal consumer behaviour. For example, during this current COVID-19 recession, the market for remote working equipment and software is growing, and will continue to expand, as the future of work moves towards more flexibility and decreased health risks.

Recessions also force consumers and businesses alike to streamline costs, necessitate greater efficiencies and productivity, extend consumption utility, and ultimately innovate. Companies that can quickly address significant problems in the new economic landscape will have a higher probability for success. It is a time to test the resiliency and value proposition of products, services, and business models.

Companies that can succeed during economic downturns, may even be better positioned for greater longevity and sustainability.

A study sponsored by the Kauffman Foundation in 2009, found that over 50% of companies on the 2009 Fortune 500 list originated during an economic downturn. Furthermore, nearly half of the businesses on the 2008 Inc. 500 list of the fastest-growing companies in the United States also began during bear markets. The probability of a company being part of a public IPO post-1975 was independent of whether the company began during a recessionary or growth period. Bear markets facilitate innovation, efficiencies, and entrepreneurship through necessity. Companies launched during economic downturns must have streamlined operations, address a significant market problem to convince consumers and businesses to spend, and be able to adapt quickly to market uncertainty and fluctuating preferences. Bear financial markets demand more realistic valuations. Companies and start-ups are required to build healthier balance sheets and make wiser expenditure decisions. The stress tests are greater during these times, and companies that learn these harsh early lessons are better positioned for long term success.

There is a formidable list of iconic companies that were launched during bear markets, which further supports this hypothesis:  General Electric, Tabulating Machine Company (one of the four amalgamated companies that eventually formed IBM), Walt Disney Productions, Burger King, Microsoft, Apple, Groupon, Uber, MailChimp, WhatsApp, and Airbnb. Netflix is a similar example. Although the company launched in 1997, Netflix managed to significantly grow its business during the financial crisis of 2008. Arguably, Netflix’s current success was built on changing consumer preferences during that pivotal period.

To overcome the lack of consumer/business confidence during economic downturns, companies should fully comprehend their target market’s systematic problems. Businesses must adapt operational models, strategic products, or ventures accordingly. Many of the companies listed above identified and fully understood a significant problem facing consumers, businesses, or an industry, such as: sourcing supplemental income and reducing costs for end users enabling more “gig” economies; adapting technological applications to grow businesses more cost-effectively; developing technology that enabled economical entertainment alternatives; evolving PC technology to enable ubiquitous access for homes and offices for increased productivity; or developing disruptive industry advancements (electricity grid, tabulating machines, film sound technology).

Mature firms that have taken risks to fund new ventures or products during recessions have also reaped benefits.

There is a significant body of evidence and research on the advantages of strategic investing in R&D and marketing during recessions. Articles published in The Journal of Strategic Marketing, International Journal of Research in Marketing, Journal of Business Strategy, International Journal of Research in Marketing, Business Horizons, and Harvard Business Review  have investigated firm and marketing strategies during recessions. There is empirical evidence that strategic investing gives attentive firms the ability to increase their competitive advantage over firms that have a short-term focus and cut costs blatantly. Furthermore, the opportunity cost to utilize resources for R&D is lower in downturns when current operations may not need to be operating at full capacity and resources can be diverted without giving up significant revenues. In addition, credit is usually cheaper and government programming for innovation is often generous during these times.

There are many recognizable product innovations that have been launched during recessions to help prove this point: Fortune magazine, Spalding basketballs, Miracle Whip, Monopoly, Scotch Tape, Ketchup, Fluorescent Light Bulbs, Diet Coke, and Crest Whitestrips. Apple Inc. commissioned a group of engineers to prototype a new personal music player (the iPod) during the recession of 2001. This R&D investment into the consumer electronic device market paid great dividends for Apple despite launching in an economic downturn. In fact, Apple’s current CEO Tim Cook has said, “We believe in investing in downturns”. 

Start-ups, mature businesses, or any other type of organization, all tread carefully during economic downturns. Disruptive innovation requires investment. Leaders with a disruptive mindset are focused on making money, not saving it. Divesting in innovation projects helps the short-term balance sheet but not the long run income statement, and leaders need understand the benefits of balancing cost savings with investment for the future. The large number of successful companies and products that originated and were launched during recessions demonstrate the rewards to be gained. Businesses must pause, reflect, adapt accordingly, and ultimately evolve. Organizations must carefully and thoroughly understand new market problems and seize the opportunities.

Larry Smith is the Director of the Problem Lab and adjunct Associate Professor at the Conrad School of Entrepreneurship and Business. Specializing in forecasting and the economics of innovation, Larry has worked with governments, financial institutions, professional associations, and companies developing new markets or new products. 

Ruma Sondhi is the primary contact for external partnerships, working with corporate partners to provide Problem Lab resources for problem analysis training, as well as large scale problem research projects. Ruma has over 17 years of experience in a variety of product and marketing management positions in technology and telecommunications.