Innovation in hard times

Businessweek has this article on companies using innovation to forge ahead during the downtimes.

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9 Apr 09

Is Innovation Too Costly in Hard Times?

BusinessWeek's list of the World's Most Innovative Companies shows not all are reining in R&D

Not that long ago, innovation was a must-do priority for business. Now research and development might seem more like vacation homes and new cars—luxuries that will have to wait for better times. "Innovation is an easy target," says Vijay Govindarajan, a professor at Dartmouth's Tuck School of Business. "R&D dollars by definition lead to uncertain outcomes. Companies don't want failure during difficult times."

In an annual survey of top executives by Boston Consulting Group (BCG), which provides the foundation of BusinessWeek's 25 Most Innovative Companies list, more respondents said that innovation spending will be flat or down than since the ranking began in 2005. On the other hand, after focusing on shorter-term, lower-risk projects, a majority said they're satisfied with their returns on innovation investments.

But recession and market meltdown aside, many of the corporations on the 2009 ranking are finding ways to forge ahead. Some, such as Procter & Gamble (PG) (No. 12) and Vodafone (VOD) (No. 25), are teaming up with outsiders to share costs. Others, such as India's Tata Group (No. 13), are taking greater advantage of in-house experts. And a few, such as BlackBerry maker Research in Motion (RIMM) (No. 8), are even increasing their R&D staff.

IBM (IBM) (No. 6) illustrates yet another way. The information technology giant is shifting more jobs to low-cost places like India while broadening its services through acquisitions. "Some may be tempted to hunker down, to scale back their investment in innovation," says Chief Executive Samuel Palmisano. "While that might make sense during a cyclical downturn, it's a mistake when you're going through a major shift in the global economy."

But some previous winners clearly can't afford to spend on R&D for the long term now. General Motors (GM) ranked 18th in 2008. This year, as it struggles to survive, it didn't even make the Top 50.

Perennial top vote-getters shouldn't take their positions for granted either. Apple (AAPL), which has always held the survey's top position, had 33% fewer votes this year than in 2008, while Google (GOOG), consistently the list's No. 2, had 31% fewer. Why? Wrote one respondent of Apple: "Their products are improvements on previous technology. Their execution is flawless, but they are not necessarily innovative." Another respondent had the same criticism of Google: "Resting on past glory (search). Spending a lot on new things but no new breakthroughs."

In contrast, Jeffrey R. Immelt, CEO of recently battered General Electric (GE) (No. 17), nominates Southwest Airlines (LUV) (No. 45) as the most innovative company in the world. "They are always trying new ideas," he says. Risky? Of course. But success doesn't come any other way.