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Using technology to turbocharge innovation in a downturn

By Jacques Bughin, Angela Hung Byers, and Michael Chui

6 August 2009

Amidst the pain of an economic downturn, comes an overlooked competitive opportunity for companies: during recessions, only major innovations pass the test of success. These are the kinds of innovations that can sweep away older business models, creating a foundation for major growth that will endure long after the downturn has passed and a New Normal has taken hold . ¹

The history of recession is also the story of technology advances that overturned the existing competitive order. Digital computers were born during the Great Depression, the Ethernet during the 1970s oil crisis, the IBM personal computer in the early 1980s recession, and the World Wide Web, which emerged from the recession of the early 1990s. And it was during the last recession, in the early 2000s, that innovative companies began staking out new leadership positions via the Internet. Apple, for instance, changed the business model in the music industry when it launched its popular iPod music player, synched to its online iTunes music store. Amazon.com pioneered commercial “cloud computing” by selling Web services that tapped its huge in-house base of servers and other IT infrastructure. Google, meanwhile, became an online industry leader by linking its search engine to advertising.

Though companies are tempted during a downturn to manage for survival, recessions in fact reveal periods when the competitive pecking order changes dramatically. Research by our colleagues shows that nearly 40 percent of leading US industrial companies tumbled from the top quartile of their sectors during the 2000–01 recession, as did a third of leading US banks. In many cases, these stark reversals of fortune result from disruptive innovations as companies adopt new ways of doing business. ²

In the here and now, new technologies and technology adoption is setting the stage for novel business models that portend disruptions as great as those of past downturns. While the internet was at the heart of the dot.com bubble and the ensuing recession earlier this decade, this time around it is giving rise to innovations that will set the stage for a new era of growth. Among these are the expansion of broadband data networks and of social applications—both wired and wireless—which have become nearly ubiquitous; the development of tiny, embedded sensors that are built into products and that help create sources of new data across these expanding networks; and a breadth of powerful analytic software that is creating new business opportunities from these vast streams of information.

The network of all

We see two broad areas of innovation taking form as a result of these advances. The first of these is in what we call the “Internet of People.” Broadband technology is linking individuals across the globe as never before. Many of the interactions in which these people participate are for enjoyment. However, a significant and growing number use this technology to connect professionally with other individuals, share knowledge, and collaborate on work projects. At the same time, new digital platforms are multiplying throughout this digital firmament, establishing new locales for this online collaboration. Think of them as “digital workplaces”—or even “factories”—where individuals and organizations can gather to co-create content, products, and services. It’s also important to note that while these new workspaces can be extensive and complex, they can also be highly efficient, providing a virtual marketplace that matches specific individual effort to the discrete tasks at hand. (a specialist, for example, signing on to create a challenging software component) As a result, they increase the possibility of radically reducing the cost of innovation and allowing much more talent to be brought to bear in creative work.

One place to see the application of these advances in action is in the mobile phone market, where manufacturers and service providers are tapping creative capabilities to increase their competitive firepower. In this case, the platforms are new applications stores. In these virtual labor markets, software developers—mostly third parties—create programs, or “apps,” which cell phone users can download directly to their smart phones. They allow users to play games, locate nearby restaurants or friends, identify songs, and access countless sources of specific information, as well as a wealth of other activities, limited, it seems, only by the imagination of the application developers. During the current downturn, highly skilled and sometimes underemployed individuals, among others, are earning money by designing these programs. They are also enhancing their reputations and future marketability in the broader programming community. And, as the applications become more popular, these application stores attract even more developers, who in turn create better applications, creating even more benefits from the Internet business model.

The attention and interests of digital communities can be channeled in other ways as well. Many companies now invite their customers to rate products and recommend improvements. Not only is this a good way to keep customers engaged with the brand, but these streams of data also give companies powerful new insights on how to position products, create new ones and decide on pricing strategies.

This new connectivity is expanding at an ever faster pace and on an ever broader scale. New devices, some of them cheaper, from stripped down netbooks to smart phones, are expanding the ranks of the connected. And even cheaper connectivity may be in store thanks to disruptive models in emerging markets. India’s Novatium, for example, is a startup that uses low-cost hardware and a bare-bones subscription software model. It provides the Net connections and the experience of a standard PC at 60 percent less than what it could cost in the developed world.

When objects become smart

The second innovation nexus is what we call the “Internet of Things,” which arises from the tiny sensors, computers, and other microdevices that can be built into physical objects and connected through wireless networks. The results are objects that become “smarter” and more interactive, with the potential to transform traditional business models. Goods and services that self-monitor can be sold in much finer slices and much more efficiently. Rather than buy a product outright, or sign a long-term service contract, sensors can track actual usage, enabling customers to pay only for what they consume or even the value they receive. In some cases, what was once a weighty capital expenditure is transformed into a lighter-weight operating expense, when products are transformed into services.

The new logic of paying for value is creating an array of novel business models. Take aircraft engines, where manufacturers are selling “thrust” as a service—rather than engines as a product—since they now are able to track the usage and performance of their engines electronically. At the same time, airplane manufacturers are offering contracts that guarantee “uptime” of their products, using embedded sensors in airframes that are able to determine when preventative maintenance is needed. Similarly, auto insurance companies now are experimenting with networked sensors installed in cars that allow them to price insurance based on actual driving behaviors (such as distance, speed, and where the car is driven) rather than blunter demographic characteristics (such as age or where a customer resides).
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Many of these technology building blocks also are helping companies navigate
through the current downturn: video conferencing is reducing travel costs, the Web is furthering collaborative efforts and increasing the effectiveness of workers, and many companies are mining and analyzing their unused data to find new customers and better serve existing ones. To be sure, these are critical survival tools for tough times. But it is by thinking through the recession that business leaders will discover how technology will once again enable the successful business models of tomorrow.

¹ Ian Davis, The New Normal, McKinsey Quarterly, March 2009.

² See Richard Dobbs, Tomas Karakolev and Rishi Rai, Preparing for the next downturn, McKinsey Quarterly, April 2007.

Comment [32]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

It is true that in great despair lot of innovation happens. New ways and methods are searched for making the use of limited resources. It is also an opportunity for organization to look beyond conventional idea and start innovating.

Posted 18 September 2009, 05:19 by Rahul
The writers of this piece say,

“Amidst the pain of an economic downturn, comes an overlooked competitive opportunity for companies: during recessions, only major innovations pass the test of success.”

Holy Smoke! Why do they suggest that we overlook competitive opportunities during an economic downturn? I don’t think we do. Innovation, the process of making things happen, often is stimulated when times are tough as well as during good times. And the idea that only major innovations pass the test of success is a false observation. How about the locking gas cap on cars and trucks. That’s a minor kind of invention. It doesn’t reakky amount to much. It won’t influence your car-buying decision. But there are millions of them around. No big thing — innovation nonetheless. Why do we have to complicate the discussion about innovation. It’s really a straight forward process. Ya gotta sell your idea or it won’t happen.

Norbert Aubuchon
nib1@verizon.net
www.theanatomyofpersuasion.com
610-444-5440

Posted 8 September 2009, 11:10 by Norbert Aubuchon
I considered this article very appropiate for the research that i am doing right now regarding co creation the new model of business. Internet will be one of the plataforms to iniciate the dialogue between consumers and producers. As well it will be the common place to review and to receive the feed back of the final output

Posted 6 September 2009, 19:20 by MARIA
I’d like to respond to some of the questions raised, as well as comments on this article.

First, we agree with the comments on the “causes and effects” thesis, ie, innovations happen no matter what. The examples we use are more generic than true “cause and effect,” but some elements are clearly driven by how innovation is turbocharged in a downturn. Our most recent Web 2.0 firm innovation survey (to be published next month in the Quarterly) makes some of the same points that companies that envision competitive advantage are aggressively buying and integrating Web technologies to gain a competitive advantage. Nearly all the others meanwhile, are cutting costs wherever they can, reducing their investment in Web 2.0 platforms, and not looking ahead to safeguard any value options from Web 2.0 innovations for future growth.

Second, we are not suggesting that the “Internet of People,” and “Internet of Things” are new phenomena. The point we’re making is that, during the recession, the overall ecosystem for innovations is changing, particularly to the benefit of companies revving up innovation. Again, regarding the “Internet of People,” our forthcoming Web 2.0 survey shows that only a small number of companies are aggressively using technology and increasing spending to create open collaboration platforms to propel innovation—these companies also report material impact from fueling innovation in metrics such as revenue growth, better innovation output, and claim that they gain competitive advantage as a result. This also applies to the “Internet of Things“—it has been around for some time but whether the market opportunity takes off will depend on eliminating bottlenecks in various elements, such as development of scalable solutions, cost of chips, better user service, and so on. Typically these tend to be complex problems and as a result, companies often don’t push forward as they focus on surviving the downturn. However, those that keep focused on future options will continue to invest and create first mover advantage. Nokia, for instance, is looking at NFC/RFID (near field communication/radio-frequency identification) as a real UI (user interface) service for mobile. By pushing these developments, Nokia is preparing itself to compete better in the mobile data market.

Third, a question was raised about the correlation between recession and innovation—whether it is causality, reverse causality, or simply correlation? Example of the latter is that in times of market volatility, capital funding is restricted, and, the long lead time that is beneficial for innovation and permitted during times of prosperity, is no longer valid. The focus instead is on short paybacks, thereby stifling the innovation cycle . Of course, this could be one of many drivers for the correlation between innovation and a downturn. We only suggest a causal link (but by no means exclusive) where some companies are gutsier and driven to be anticyclical in their innovation as a way to create first mover advantage before markets start taking off again.

Finally, I’d like to emphasize the comments that attribute innovation success to having good infrastructure. This is the real reason why the Web is such a turbocharger of innovation. It was invented to provide connectivity with NO business model in mind, but instead as an open global infrastructure. Healthy infrastructure has allowed for some of the most vibrant innovative platforms—companies such as Google, Facebook, became global brands in just a span of a few years. Lack of standardized global infrastructure is one of the reasons why the “Internet of Things” has not taken off. Today, for example, much of the “Internet of Things” ecosystems is verticalized by industry, and by geographies—with different bandwidth spectrum available in each country, different legal frameworks for data protection, and limited cross-industry standardization. Therefore, today, the market is mostly composed of closed loop B2B operations, but will definitely need to move toward a broad-based global marketplace infrastructure to truly reach its potential. This is exactly where new types of companies, such as security and search aggregators, will come in and appropriate new market value . Time will tell when this evolution will take place, but governments, like the European Commission, have acknowledged the infrastructure bottlenecks, and are creating official groups to develop policies in standardization and spectrum uniformization.

Posted 25 August 2009, 11:15 by Jacques Bughin
i think in the times of downturn an innovative idea or a technological innovation can prove to be quite beneficial for the future.As we have experienced in the past…the great depression led to coming up of digital computers and so on…the basic problem of a downturn is the lack of resources and it is only then that we are compelled to think for better cost saving and innovative models and that can only be accompalished using the latest technology.

Posted 24 August 2009, 14:31 by alisha
Reply to:

A real personal car is a concept that could lead to some exciting new possibilities in transportation. Yes, we should look at the best way to enable individuals to quickly move from respective distributed living sites to respective distributed working sites and get away from the car as an egocentric product.

The biggest mistake that many seem determined to make is to impose mass transit systems on a public that clearly does not want the kind of clustered living and working arrangements that would make mass transit work.

.—————.

Look at the US, the biggest city is 700 km long with New York in the middle as a small neighborhood, the coal energy output is down since ten years ago (not tons removed, not waste, now the US is importing anthracite), the US oil output is down since the 1971,… Do you want the American way to the rest of the world?, Do you think that’s sustainable? (Look Lisbon or Toronto with google maps)

Do you think that the US people is happier than the people from Munich, Denmark or Stockholm?!, come and see, you have services, you can visit the parks (not 100km away), you can have lots of time outside the car, you can go everywhere (to enjoy the life). Even in the train the time is not a waste of time, you can read, surf Internet, learn, talk,.. (and also it’s faster, you don’t go by car at 300 km/h). Incredibly, the UK government recommend 1,5 h sport-time per day (do you do that?!), to use the bike to go to the workplace is the best deal with your health.

The people want more, more place, more house surface, more garden, more…, but when all the people is trying that your outdoor bath place is not a suitable swimming pool or a beach or a lake, you have no park or natural place near you, and the services+beautiful places are hours away, only the very rich have easy access to this topics,. So the nightmare starts with the desires from all the people (more…), if you can choose between more parks and more m2 indoor, what are you going to choose?

And if you want so, there is a traditional proverb to these case: “be careful with your desires!, it could be a reality”.

Can you choose between collective and individual actions?

We can dream, we can dream in a place where we ride our SUVs, where we conquer the land, living in the nature, riding our SUVs to the freedom and to save our time to be with our people in beautiful places, but…, but when all the people dream no one is awake, we live far away from the nature (and from everywhere), we ride hours our SUVs to go to work, and to go home, all the concrete is no more nature or a farm resource, and the same it’s with the waste of materials and energy. We can, we can find a way to live, to find the way to our children and to their children,… we can find a place in which resources and nature are available in one hundred years.

We can find a better place to live in.

Posted 21 August 2009, 06:02 by Pablo Fernadez Sierra
While the thesis linking economic downturns to innovation is debatable, the secondary point of discussion relating to currently ongoing innovation, especially on the smart object side is definitely on point. For the interested reader, we recently briefly profiled a semiconductor startup called Kovio that specializes in printed silicon using silicon based ink. This company might very well be on the forefront of integrating silicon into just about anything you might imagine.

http://www.chipcrunch.com/Blogs/Startup.Blurbs/Kovio.printed.silicon.and.maybe.a.semiconductor.renaissance.html

Posted 14 August 2009, 12:21 by Maciej
Looking back it seems clear that the personal computer was simply due to recognition that people really wanted to control the way they worked. It was quite a discovery that the Information Processing Departments had become such oppressive bureaucracies that real use of computers was minimally effective and maximally unpleasant. Somehow cloud computing reminds me of this horror of the past.

But in a different but parallel field, we might look forward to a personal car solution that would enhance the already entrenched and favored way we use cars as individuals. The biggest problem with cars is that they are not built to meet the need for individual transportation. Most cars on the road continue to provide an empty right front seat. Eliminating this idiocy should be our first priority.

A real personal car is a concept that could lead to some exciting new possibilities in transportation. Yes, we should look at the best way to enable individuals to quickly move from respective distributed living sites to respective distributed working sites and get away from the car as an egocentric product.

The biggest mistake that many seem determined to make is to impose mass transit systems on a public that clearly does not want the kind of clustered living and working arrangements that would make mass transit work.

Posted 13 August 2009, 03:29 by Jim Bullis
Nice article!

For a great video on “when objects become smart” I recommend Kevin Kelly on The next 5,000 days of the web, at www.ted.com

//Anders
The Business Model Database (tbmdb.com)

Posted 13 August 2009, 02:40 by Anders
In the turism sector we are already seen inovation in the way travel packages are selled. The fact is that are no money to travel or take a vacation due to the downturn. Not fisical branches and more internet branches. Allow the traveller choose what he realy likes to do an doesn’t pay what he doesn’t like.

Posted 12 August 2009, 15:47 by Henry

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