We are currently in a recession and in the past, CEOs have made serious mistakes in trying to cope with a slowing economy. Here is a list of What Not to Do. All of them hurt innovation. Unless you really want to compete on price, the ability to do sustained innovation is the one competitive edge left. Innovation is the driver of performance, growth and stock market valuation.
Here are the 10 worst mistakes you can make in a recession that will hurt innovation:
- Fire Talent
Because of America’s accounting laws, investments in talent are expensed, not capitalized, so cutting back on people, especially really smart, high-priced people, is a quick way to cut costs. The accounting rules only hurt companies who follow them. Talent is the single most important variable in innovation.
- Cut Back on Technology
Xerox and others report that companies are already curbing investments in technology to save money. Banks especially. The rise of social networking and consumer power means that companies have to be part of a larger conversation with their customers. This means big money spent on IT.
- Reduce Risk
Innovation requires taking chances and dealing with failure. Recessions push managers to be more conservative. They need to fight this instinct.
- Stop New Product Development
Saving money often means cutting back on new products and services during an economic downturn. This hurts companies when growth returns and they have fewer offerings in the marketplace to attract consumers.
- Boards Replace Growth-Oriented CEOs with Cost-Cutting CEOs
Sudden declines in revenue and profit often leads boards of directors to search for managers with experience in pinching pennies. Boards forget that most recessions last only two or three quarters and, these days, are relatively shallow. Penny-pinching CEOs don't have the skills to grow, when growth returns.
- Companies Retreat from Globalization
It's expensive to expand globally and managers often save money by cutting back on emerging markets. It's a big mistake. Emerging markets are sources of new revenue, business models, and talent.
- CEOs Replace Innovation as Key Strategy
By turning defensive, top managers take innovation off the top of the official agenda and replace it with systems management and squeezing costs. The entire organization follows. It is extremely hard to reverse this when growth returns.
- Performance Metrics are Changed
To save money and cut costs, managers shift employee evaluations away from rewarding riskier new projects toward sustaining safer older goals. Risk-averse behavior follows. Again, this is hard to change.
- Hierarchy is Reinforced Over Collaboration
Sudden drops in revenue and profit often lead companies to panic and mobilize to stem the decline. The need for fast decision-making often leads to a return to command-and-control management. This alienates creative-class employees, young Gen Y and X’ers and stops the evolution of corporation organization toward a flat, collaborative, open source model.
- Retreat Into Walled Castles
Cutting back on outside consultancies is seen as a quick way to save money. Yet one of the key ways of introducing change into business culture is to bring in outside innovation and design consultants. They know what companies across a broad range of industries around the world are doing to promote change. Not receiving this information can hurt a company's global competitive position.
Winners always emerge out of recessions and they almost always beat their competition on the basis of something new. Apple worked on iTunes, iPod and its retail stores during the last recession and came out swinging once growth returned to destroy its competition. Apple didn't make any of the top 10 innovation mistakes. Your company shouldn't either.