Product innovation during recession: new value without new investment

For months now, analysts and forecasters have been weighing in on the likelihood of an economic downturn in the coming year. Nobody knows for sure what 2023 will hold, but we do know for certain that there are recessions in our future, just as there are recoveries and boom times and snow storms and heatwaves.

And whether it’s the recession of 2023 or 2008 or 2056, innovation during a recession is one of the surest ways to stay successful when times are tough and emerge in a strong position when the economy recovers.

That’s because, as research from Bain shows, an organization’s actions during recessionary periods have outsized impacts: mistakes tend to cost more and successes tend to lead to bigger upsides compared with times of economic growth.

But how can an organization achieve successful product innovation during a recession, when the focus shifts to core business operations? You’re about to find out.

During a recession, embrace innovation as optimization

Embracing innovation is hard in any economy. Most businesses are not set up to innovate; they’re set up to produce whatever they sell.

Because of that, many business leaders balk at the idea of innovating during a recession. When they hear “innovation,” it often sounds like “throwing money at some unknown (and unproven) thing.”

Or maybe they hear something like “launching a new product nobody can afford.”

But those aren’t the only ways innovation can manifest. One loose definition of innovation is creating something new that drives value and gains adoption. Working from that definition, optimization becomes a form of innovation.

And optimizing your business model is one of the most valuable things an organization can do during a recession. More efficient processes mean work gets done faster (often more accurately) and employees have more time and energy to dedicate to the ideation-type work that really moves the needle.

A more efficient business model also tends to benefit customers in noticeable ways.

For example, when the initial wave of COVID-19 triggered lockdowns around the world, restaurants were hit hard. But McDonald’s, thanks to investments in product development and improving existing products in the years leading up to 2020, was well-positioned to pivot. Among the pre-COVID innovations that set McDonald’s up for success:

• Drive-thrus (including the drive-thrus themselves and digital order screens in drive-thrus)

• A mobile app that let customers order and pay online, without any physical contact

• Delivery

• Digital touch screens in restaurants that let customers order without interacting with employees

When COVID closed down in-person dining, McDonald’s decided to differentiate itself by better meeting its existing customers’ needs. To that end, it pared down its menu to “core” items, made order screens in drive-thrus dynamic, and adjusted staffing to accommodate the new pandemic reality. The result: the organization cut 30 seconds from average drive-thru order time and saw Q4 2020 same-store sales hit 99 percent of Q4 2019’s.

Three things about this masterful innovation during recession are worth highlighting:

1. McDonald’s had a competitive advantage going into the COVID recession because it had laid the groundwork for innovation with ongoing improvements over the years. The mega-chain had a running start, if you will. It was used to trying new products and new features, evaluating their effectiveness, and adjusting as needed.

2. McDonald’s made investments across the organization: not only in technology but also in operations, personnel, and more. That’s essential for innovation to function: the entire business model needs to support innovative practices.

3. McDonald’s measured success in terms of impact on customer experience. It’s possible to invest in technology and operations in ways that don’t meet customer needs––and those are generally not good investments to prioritize.

How can you bring this innovation-as-optimization to your organization?

Conduct user research by talking to your employees. Ask what processes are most inefficient, what work they hate doing, which tasks are most mindless. Gather this insight from across the organization, review answers to identify the most inefficient processes, and then identify ways to improve. In many cases, you’ll be able to boost efficiency through automation. (By the way, this process is called user-centered design.)

When it comes time to prioritize which initiatives to tackle first, consider making a cost vs. business impact grid: changes in the lower right quadrant (low cost, high impact) are a great place to start (see Figure 1).

Even relatively small process changes can make a meaningful difference to profit margins and add new value.

For example, is there a report that’s currently updated manually that employees dread doing? Do they procrastinate and then end up rushing? Does this create inaccuracies? Does it prevent decision makers from getting (accurate) information when they need it? Does it make that employee listen when a recruiter reaches out on LinkedIn? Sounds like a great opportunity to incorporate some automation.

Or maybe your call center workers have to toggle between three systems to get customer data they need. If you aggregated data into a single source of truth, how much more quickly would they be able to handle calls? And how much happier would that make customers? And how much would that lack of frustration improve your call center team’s daily life? And how much would that increase retention?

On a one-off basis, that kind of incremental innovation can improve their daily experience and ripple outward to all the work they do.

On a macro level, when you build a habit of continuous discovery to identify areas where you can improve, you demonstrate that you listen to your users (in this case, employees) and make changes based on their feedback. When you do this, employees will be more engaged, happier, more productive, and less likely to leave.

All of those impact your profit margins: by some estimates, it costs about a third of an employee’s annual salary to replace them. (If you’re curious about what turnover actually costs your organization, try this cost of turnover calculator.)

Innovation is a core operation

Maybe, during previous recessions, you’ve heard from your executives a version of “We can’t afford innovation right now; we've got to stay laser focused on core operations.”

But here’s the thing: innovation helps keep the lights on.

And if it doesn’t today, you’re going to be out of business soon, regardless of what competitive advantages you have today and when the next financial crisis happens.

That’s because we are in a moment where the rate of change is extremely fast––and it’s only accelerating. Businesses that aren’t serious about innovation strategy are effectively driving while looking out the rearview mirror.

Here’s why: in many cases, the reason businesses lose customers and employees is not that one thing went terribly wrong (though that happens about 17 percent of the time). More often, it’s death by a thousand cuts. No one frustration would be enough to push someone out the door, but over time, the problems cost you.

That’s doubly true if your competitors are constantly innovating (as McDonald’s is) while you hunker down on maintaining existing products for your existing market.

Let’s return to that customer care example to understand why.

Your customer care team has to pull customer data from three systems: an inventory database, a CRM, and a billing system. They’re often not synchronized. The inventory system is notoriously out of date. And the billing system takes forever to load.

For a while, that’s just the way things are. But eventually, customers yelling at your customer care team for getting their information wrong will grate. And customers will yell: they know, as you and I know and as your customer care team knows, that there is software out there that can do all of these things in one place.

The technology exists to synchronize and speed up systems.

But you’re not investing in it.

Worse, maybe you’ve never even thought to ask what your team needs, which means they understand that they are powerless to change the status quo and their only way to work in an environment that lets them meet customer needs is to work somewhere else.

Or else a longtime customer buys something from a competitor of yours on a whim––and the experience is far superior. Good luck getting that customer back.

Real-world example: Innovation that keeps the lights on

During the recession of 2001, Honeywell hunkered down. It laid off about 20 percent of its staff and then struggled to rehire and train when the economy picked back up, stunting its recovery. After all, it’s hard for brand-new employees to do things efficiently: their main job for the first several months is learning how the company operates.

When the 2008 recession hit, Honeywell took a different approach. Instead of mass layoffs, it furloughed workers for various amounts of time, some with partial pay. The result: the company’s recovery outperformed not only its previous post-recession performance but also the performance of its competitors (see Figure 2).

To put this in product innovation terms, Honeywell…

• Examined its existing recession layoff policy.

• Observed that that approach led to weak post-recession recovery.

• Developed a new layoff policy (we hope based on user research).

• Recovered from the recession better than its competitors.

To summarize: innovation during an economic crisis can look like developing new processes to improve efficiency and overall performance. It also offers another benefit: by embracing innovation during a recession, you can set the stage for additional types of innovation efforts in the recovery stage.

Create momentum for innovation in a recession

Successful product innovation is hard. That’s because it’s not just a one-off improvement to an existing product or service; at its core, it’s a value system that aims to continually create new value by balancing three things (Figure 3):

1. User desirability: What do your customers need or want?

2. Technical feasibility: What is it possible for your existing systems to do?

3. Business viability: What will work in the context of your existing business model and resources?

Product innovation is most successful when organizations embrace it as an ongoing way of working. But that’s easier said than done, because, again most organizations are not set up to innovate. They’re set up to maintain the status quo.

Innovation requires investing time in things that aren’t directly tied to day-to-day business functions, which means many organizations struggle to loop innovation into their existing operations.

(Pro tip: if your organization finds itself in this situation, you might benefit from working with an innovation consultant.)

When you start innovating in the context of process improvement and optimization, however, you learn to flex the innovation muscle. You may find small wins that lead to value gains and market differentiation––and whet the appetite of leadership for more.

What's more, the conversations you have as part of the idea generation will also reveal other problems employees and customers are experiencing. These act as catalysts to create new value: by solving a problem, you make life better for the people affected, and that creates new value.

As for how to solve those problems, product innovation provides a framework: continuous discovery. In the first part, teams diverge and then converge to identify which problem to solve; in the second, they diverge and then converge to identify the best way to solve it.

One of the beauties product innovation is that it creates its own momentum: by creating an environment where everyone’s voice matters, you not only ensure you’ll have a steady supply of innovation opportunities (i.e., problems to solve to make people’s lives better) but also that your organization is a place where employees feel valued and so want to stay.

Why (and how) to prioritize innovation during a recession

Maybe the best framework for internalizing the value of innovation during a recession is to think about pruning a tree. Left to themselves, trees will grow toward sunlight and nutrients. That doesn’t always lead to growth that maximizes fruit production.

The goal of pruning is to identify growth that isn’t productive and remove it so the tree can focus its energy on growth that does yield fruit. But you have to know what you’re doing. Cut the wrong parts of the tree––or cut too much at once––and you can seriously hamper growth (and even kill the thing!).

That’s exactly the mindset businesses need to have during a recession: how do you cut in such a way that you produce more?

Businesses, like trees, are constantly evolving entities. If you aren’t actively managing the way your business evolves, it won't necessarily evolve in ways that optimize growth.

Product innovation helps ensure that your business evolves toward growth because it involves checking in with stakeholders (employees, customers, partnerships, etc.) on a regular basis. When you’re continually examining the various parts of your business, you’ll begin to recognize inefficient processes, underutilized services, and outdated KPIs––all of which can be cut to refocus growth.

And, again, if this approach is unfamiliar, working with an experienced innovation consultant can help ensure you make the right cuts.

Lessons from businesses that mastered innovation during a recession

One reason it’s unwise for businesses to “hunker down” during a recession is that doing so can cost them a prime opportunity to forge meaningful connections with their customers. Because customers also have changing needs and values in a recession.

For example, in a 2022 study, J. D. Power found that retail banking customers’ satisfaction with banks’ advice and guidance dipped three percent from a year before, largely because they were experiencing greater financial distress and wanted and needed more guidance.

In other words, the banks didn’t do anything different from one year to the next––and that was the problem. Customer satisfaction decreased because the banks didn’t adjust to their existing market’s changing reality.

Now let’s look at some businesses that mastered innovation during a recession to see what we can learn.

Netflix

In 2007, Netflix introduced its streaming service and brought it to scale in time for the Great Recession––perfect for the many unemployed Americans who were looking to cut back on entertainment spending. By making a night in both entertaining and inexpensive, Netflix offered exactly what the Great Recession called for.

The takeaway: Offer something new to your existing customers (this is called “radical innovation”). If that thing solves a real problem they have, you will likely attract new revenue and customers as well.

Warby Parker

The glasses frames startup launched during the Great Recession and offered an innovative idea: glasses frames could be stylish and inexpensive––and buying them could be convenient. The company’s original model, which included no physical locations, let them reduce operating expenses and pass those savings on to customers.

The takeaway: Look for inefficiencies in existing markets. In this case, the existing market for glasses frames was dominated by a single player that was able to keep prices unnaturally high. Warby Parker’s founders decided to try disrupting the market by creating frames themselves and selling them with less markup. (Spoiler: it worked.)

Revlon

Launched during the Great Depression, Revlon illustrated one of the truisms of recession living: brands that sell small indulgences tend to do well, as people look for small, inexpensive ways to treat themselves.

The takeaway: Emotions matter. When people have to cut back on discretionary spending, small treats can have a big impact on their state of mind. If your company can find ways to make customers feel like they’re getting a little taste of luxury, they’ll feel fondly toward you and stay loyal.

Bonus takeaway: “Luxury” can be a matter of branding: position your customer service or your above-industry-average uptime as a way you pamper your customers, and they’ll be more likely to consciously appreciate those offerings.

Airbnb

Another brand launched during the Great Recession, Airbnb was one of the great examples of solving problems to create new business models: canonically, Airbnb’s founders needed to make rent money, and so rented out their couch for cheaper than people could get a hotel nearby. A recession-times win-win.

The takeaway: Focus on how you can meet customer needs better during the recession, and you’ll survive difficult times and thrive after.

Innovation during a recession is key to achieving success after

Creating new business value without new investment is challenging, but it’s doable. It requires getting to know your organization, familiarizing yourself with the tenets of product innovation, and applying those tenets to your business on an ongoing basis.

When you embrace this way of working and make a habit of listening to people from many parts of your organization, you start to uncover new opportunities to improve your internal processes, optimize resource allocation, and ultimately improve your products and services.

In the process, you’ll also create a more rewarding work environment for your employees, which will help improve retention and reduce the costs of recruitment and training.

If all of that sounds great but you’re not sure where to start, get in touch. We’d love to talk through your situation and help you prioritize which change to make to start adding new value without requiring any new investment. In any economy, that’s a recipe for long-term success.