Chartered Management Institute: In my Opinion

A downturn is just the time for creativity and innovation, argues Jonathan Kestenbaum, CEO of the National Endowment of Science, Technology and the Arts (Nesta), and a Chartered Management Institute Companion.

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Last Updated: 09 Oct 2013

A major economic downturn evokes a range of responses from business leaders and senior managers. It would be easy for companies to retreat to safety in such conditions and just focus on cutting costs. I saw in the last recession how some businesses tried to weather the storm by battening down the hatches. But the truly far-sighted firms learnt to treat the instability not only as a dangerous time, but also as a period of opportunity.

The Czech economist Joseph Schumpeter wrote in the 1940s about the importance of what he called 'creative destruction' to drive economies. He argued that periods of economic turbulence can be associated with technological and procedural transformation - such as the spread of mass production between the wars.

Schumpeter had a strong case. Recessions can provide platforms for innovation and economic growth. Two decades ago, Finland was hit by what many regarded as the most severe economic downturn experienced in any OECD country since the second world war. Yet look at how the country responded, using the changes in its economy as a stimulus to turn around its fortunes. Today, Finland is one of the world's leading technology specialist economies.

Businesses must resist the temptation to think there's a tension between driving efficiencies and supporting innovation. Innovation is about creating a culture that promotes and rewards strategic planning. As this economic turmoil unfolds, what are the long-term implications that businesses must consider?

The world has changed since the last downturn. We're in the midst of the first 'networked recession', where our ultra-connected world links millions of us together as never before. Events a thousand miles away can affect us almost immediately. Thus, sub-prime mortgage defaults in the US brought down Northern Rock, and the collapse of Iceland's banking system threatened public services across the UK.

These intricate linkages once helped drive economic growth, but now seem to have turned against us. Demands to pull up the drawbridge and retreat from our connected world are growing. But severing our links to the globalised world would merely pull us further down. We will emerge stronger from this turbulence by understanding and exploiting our super-connected economy - and the key to exploiting this interconnectedness is innovation.

Nesta, the National Endowment for Science, Technology and the Arts, works with start-ups, SMEs and multinationals. What we have seen is that companies seeking to capitalise from the networked economy have realised tangible benefits from doing so. As the economic turmoil unfolds, businesses that are better connected will be the ones that are better at innovation and will be the ones that survive and grow.

The vast majority of good ideas come from outside the business. Earlier this year, we set up the Procter & Gamble Corporate Open Innovation Challenge to help P&G to identify imaginative ideas from small firms outside its own research labs. Its Connect and Develop strategy has provided a wealth of ideas and now produces 35% of the company's innovations, yielding billions of dollars in revenue.

It is vital in today's economy that companies understand the importance of thinking about their position in global networks - and therefore being connected to global markets. This includes harnessing innovations from users. A recent Nesta report, The New Inventors: How users are changing the rules of innovation (available free from www.nesta.org), found that companies such as Apple and Nokia depend on 'lead users' across the globe to help them come up with new product ideas. This 'user-led' concept is yet another powerful and unusual partnership in innovation.

Within Nesta's portfolio, we've seen that the small businesses that are able to attract early-stage investment, even at this difficult time, share similar attributes: a management team that can absorb ideas from different sources to help product development and is adaptable and flexible to changing environments.

These examples provide a glimpse of how businesses are using connectedness to drive innovation. The notion of 'creative destruction' is as alive today as it was in Schumpeter's day. A crisis creates a platform for brilliant new ideas - ideas that can have a transformational impact on our economic, social and environmental wellbeing.

At crisis points, the innovation economy comes into its own. In an ultra-connected world, successful innovation is less about silver-bullet breakthroughs than being able to respond quickly to challenges, taking on board new ideas and then moving to exploit new opportunities.

Now is not the time to stop investing for the longer term, but to learn to respond flexibly and creatively to the challenges brought on by the economic downturn. Those companies with a relentless focus on seizing the potential of the innovation economy, wherever those opportunities come from, are the ones most likely to come out fighting-fit.

CV - Jonathan Kestenbaum is chief executive of Nesta, the National Endowment for Science, Technology and the Arts, which is the largest source of finance for innovative ventures in the UK. Previously, Kestenbaum held CEO positions in the private, public and voluntary sectors, as well as a variety of non-executive roles in some of Britain's most successful companies. He is a board member of the Design Council, the UK's Technology Strategy Board and the Royal Shakespeare Company.

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