Crisis and Creativity
Downturns Are a Good Time to Innovate
"I'll be happy to give you innovative thinking. What are the guidelines?"
© The New Yorker Collection 2005 Leo Cullum from cartoonbank.com. All Rights Reserved.
Rahm Emanuel, President Obama’s chief of staff, recently echoed Machiavelli when he said, “You never want a serious crisis to go to waste.” He’s correct. Now more than ever is the time for innovative managers and entrepreneurs to come up with ideas that lead to opportunities to launch new ventures.
There is considerable anecdotal evidence that crises can be catalysts for creativity. The iPod was launched within six weeks of 9/11 and during an economic downturn. My colleague, HBS associate professor Tom Nicholas, has found that while the pace of patent applications slowed during the Great Depression, some contrarians pressed ahead with innovation, including DuPont with its investments in neoprene and nylon. Hewlett-Packard and Texas Instruments were also launched during this time. In fact, the odds on the success of an appropriately directed new venture during a downturn may be higher than in a competitive boom.
Entrepreneurs — inside and outside of corporations — must articulate their distinctiveness on the three fundamental decisions for any business: where to play, how to deliver, and how to win.
Where to Play. Entrepreneurs must target downturn needs such as superior value relative to existing players or provide good substitutes for the necessities that consumers have to forgo. Low-cost airlines Southwest, JetBlue, and Ryanair all grew during recessions, as did Charles Schwab, Home Depot, and Trader Joe’s.
A second customer hook is affordable indulgence. As consumers pare back, they also need ways to entertain themselves and indulge in small luxuries and distractions. A large number of new media launches, from People magazine to CNN, happened during downturns, as did the growth of cosmetic companies such as Estée Lauder and Revlon.
How to Deliver. A common outcome of downturns is an abundance of underutilized resources that may be available at a relatively low cost. Take, for example, an expanded talent pool. Many Web 2.0 developments, including blogs and social networking, grew out of the large number of talented Web-literate workers who lost their jobs after the collapse of the Internet bubble.
In addition, technologies and materials rendered superfluous by the downturn can be directed to new uses. A slowdown in semiconductor demand post-2001 made it possible for the solar industry to take off by using excess polysilicon and silicon wafers.
How to Win. In a downturn, getting to the breakeven point for a new venture and then to profitable growth is crucial. The most common response is to shed employees, assets, and noncore businesses. Often, these measures lead to the loss of valuable resources, alienation of key customers, and erosion of capabilities for the longer term. This makes the firm less competitive and probably less profitable.
This conventional response to tough times creates an opening for entrepreneurs who can meet the profitability challenge by reexamining the whole business model — a process that might involve customer acquisition or retention, or pricing innovations.
It is only fitting for the downturn to precipitate a fresh round of entrepreneurship and innovation in a new set of industries. It would be a shame, after all, to let a serious crisis go to waste.
—HBS senior lecturer Bhaskar Chakravorti is a partner at McKinsey & Co. Reprinted from The Wall Street Journal, March 18, 2009, and edited for length.
