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Creative streak

Creative streak

When the going gets tough, the successful get innovative.

Many companies find that a downturn is the mother of invention. Warren Buffet advises investors to "be fearful when others are greedy

and be greedy when others are fearful".

In the same way, business owners that launch products and chase market share in a recession can

steal a march on fretting rivals.

Apple launched its wildly successful iPod digital music player amid

the wreckage of the dotcom bust in 2001. Four years earlier, another

United States company, network-equipment maker Cisco Systems, pushed

deeper into Asia during its financial crisis and has led that market

ever since.

Between 1990 and 2003, the correlation in a given year between the

growth of the US economy and the number of companies formed or

innovative products launched was a weak 0.17 (where one equals a

perfect correlation), consulting firm Innosight reports.

What accounts for this apparent paradox?

First, recessions cull weaker players and their competing wares from

the market, so advertising a new product becomes cheaper and more

likely to reach consumers.

Lifting advertising spending during a recession increases earnings and

company value more than additional advertising in good times, a

Marketing Science Institute study involving 2662 companies confirms.

Cash-strapped businesses can take heart from a further finding that

decreasing advertising in a recession erodes financial performance

temporarily but only for firms selling industrial products.

Luxottica Asia Pacific chief executive Chris Beer is betting the same

logic applies to new business models too. The Italian eyewear maker

and retailer is pushing on with a plan to launch 100 to 200 franchised

stores locally next year, on top of an existing 970 company-owned

outlets.

The booming economy attracted plenty of "cottage people" to the

industry, Beer says. "I think there will be a consolidation of those

models that are shallowly built."

Second, talented staff released from failed - and flailing - firms in

a recession can be snapped up for less than they would have commanded

during the years of plenty. For instance, the calamity in the

financial sector is sending tens of thousands of former banking

employees onto the employment market.

Of course, companies may be reluctant to hire these and other

cast-offs on a permanent basis in the current environment so human

resources practitioners advise putting them through their paces on a

short-term contract until the economic outlook becomes clearer.

Third, consumers reconsider many of their purchasing decisions to get

more bang for the fewer bucks coming in. During the 2001 downturn, for

example, people switched from professional teeth-whitening treatments

costing hundreds of dollars to the newly launched Crest WhiteStrips

costing just tens of dollars.

Business customers will be on the lookout for savings too, says

entrepreneur Joe Cincotta, who recently established SaaS Mentor to

help small businesses move business software online.

Cincotta says the timing for software-as-a-service is ideal. "People

want to have the opportunity to continue to do business and find

efficiencies in their business, but capital investments are out of the

question."

He adds: "This whole approach is being able to deliver

enterprise-class software via the internet. And the key piece of this

puzzle is that it is 'as a service', which means it is based on small,

ongoing fees as opposed to big, upfront capital investments and

licensing fees."

Finally, recessions force companies to do more with less, making

innovation almost a matter of survival. As the founder of the world's

biggest online retailer, Amazon.com, Jeff Bezos, explains: "Frugality

drives innovation, just like other constraints do. One of the only

ways to get out of a tight box is to invent your way out. When we were

[first] trying to acquire customers, we didn't have money to spend on

advertising budgets. So we created the associates program, [which

lets] any website link to us, and we give them a revenue share. We

invented one-click shopping so we could make check-out faster. Those

things didn't require big budgets. They required thoughtfulness and

focus on the customer."

Indeed, far from a paradox, this is the way capitalism is supposed to

work, the chief economist at Deutsche Bank, Tony Meer, says.

The rising economy that lifted even poorly run firms and indifferent

products is ebbing, he notes. These face imminent extinction "because

that's what recessions do".

"The survivors [will be] good businesses ... that actually make things

or provide services that people want to use and will pay for," Meer

says. "They will do very well over the next five years."

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