Even though the economy in general has been solid the last few years, there are a few market sectors that are struggling. Large conglomerates like Procter & Gamble have seen their profits lag. Low oil prices have hurt oil production companies. My own industry--public higher education--is also having some trouble, because many states have cut back significantly on their support of state university systems.
A typical reaction to difficult times is to hunker down, cut costs, and wait for the economy to pick up. Many companies (including Procter & Gamble) have cut costs by offering employees early retirement and replacing these more expensive workers with younger and lower-cost employees. Oil companies have furloughed employees with the expectation that they will be rehired when energy prices rise.
When money is tight, one of the first things that goes by the wayside is innovation. Companies scale back to focus on core elements of their business. Innovation requires extra resources that are just not available when a company or market sector is struggling.
And if a company is so cash-strapped that it may not survive a slow period, then finding a way to keep the lights on and the doors open is a priority.
But, many organizations that are hurting during a slowdown are not in dire straits. Some--like P&G--may continue to be profitable, even if they are not hitting the numbers that Wall Street expects. Others--like those in the energy industry--may be losing money, but not at a rate that threatens the existence of the company.
And that makes a slowdown a great time to innovate.
Solve longstanding problems
When the economy is good, companies recognize problems they have, but are not strongly motivated to fix them. For one thing, when business is booming, there is too much work to be done (and often too much money to be made) to consider making fundamental changes to processes that might slow down production or customer service.
When times are slower, though, a change to a production or service process has fewer implications for current profits. It turns out to be a great time to solve difficult problems to prepare for the next upswing.
Consider the energy industry. Improvements in techniques for exploration like hydraulic fracturing have made it possible to extract oil and gas from fields that did not yield fossil fuels in the past. However, many of these fields are located in regions that are more populated than the remote regions that were the source of oil in the past. As a result, there has been an increase in road traffic surrounding drilling sites. In addition, disposal of wastewater has been linked in studies to an uptick in seismic activity.
Traffic, road wear, and small earthquakes can all erode the social license to operate that energy companies require to avoid stringent government regulations. At the point that the public gets fed up with side-effects of energy exploration, they will push for additional government oversight of projects. Indeed, some cities in Texas have tried to stop hydraulic fracturing projects in their towns.
While oil prices are low, producers should be exploring the science related to seismic activity to ensure that disposal wells do not trigger earthquakes. They should be focused on ways to reduce truck traffic and noise associated with drilling projects. This focus would solve key problems before energy prices rise again and new drilling projects are started.
Find ways to diversify
One reason why organizations experience slowdowns is that their core business is often focused on primary mode of delivering a product or service. Slow periods are a great time to think about ways to increase the breadth of offerings an organization provides in ways that help to insulate it from downturns in the future.
This strategy was carried out effectively over the past five years by my own organization--the University of Texas. Five years ago, the university was struggling due to a combination of the poor economy following the financial collapse, long-term decreases in the funding provided to the University of Texas system by the state legislature, and a Board of Regents that rejected tuition increases.
The College of Liberal Arts saw this difficult time as an opportunity. They convened groups to think about ways to serve the community differently that might add new education offerings. Ultimately, the university put resources behind a number of new programs including the masters program in the Human Dimensions of Organizations that I direct. This program brings the humanities and the social and behavioral sciences to business in order to create experts on the people problems organizations face.
These programs have brought a number of new students into the university. They have provided sources of additional revenue to supplement state funds and tuition from traditional students. They have also helped to demonstrate the relevance of the liberal arts to problems in the modern world.
Prepare for the future
A fundamental problem for any successful business is that the world is dynamic. Strategies that were successful for turning a profit will not continue to work. The pace of change in business can be rapid.
In the 1990s, a number of companies (like Dell, Compaq, and Hewlett-Packard) discovered ways to lower the prices of computers and allow buyers to configure new machines to their specifications. This competition ultimately lowered profit margins on products and helped to turn computers from a specialty item to a commodity.
The companies whose business model remained focused on hardware have had a difficult time growing. By 2001, Compaq merged with HP. A decade later, Dell took itself private in order to refocus its business. The companies that fared best were ones that took the opportunity to focus on the future rather than optimizing current business. IBM is a great example. They elected to get out of the hardware business and to focus on providing business services.
The key lesson from all of these examples is that innovation is not a luxury good. When economic times are good, there is often a focus on maximizing profits and taking advantage of success. The old saying, "Necessity is the mother of invention" needs to be taken to heart. The slowest periods are a great time to focus on doing something new.