Focusing your innovations during down times is key to survival. You need to keep on innovating to differentiate and grow, but also innovate on products and services your customers would be more willing to buy to stay profitable.

As I mentioned before, the profitability equation is quite simple: when a firm’s revenue from selling its product or service is greater than the cost of offering it, then it is concluded that the firm is profitable on that given offering. This same equation holds true for your customers’ business as well: the benefits of the product or service outweigh the cost of acquiring it.

Profits = Revenues – Cost 
During downturns, clearly demonstrating how your new product or service contributes to the profitability of your customers’ business is the key. Analyzing your own and your customers’ value chains can be the inspiration for your focused innovation strategy. Here are 6 key areas that will help focus your innovation strategy.

Reduce Costs

As the profitability equation demonstrates, the ultimate goal of a firm is to offer products with differentiated attributes that customers are willing to pay high prices for, while keeping costs and competitors out. Costs come in the form of:

• product attributes: materials, features, complexity, usability all contribute to the cost of the product;
• production costs: including manufacturing, labor, supplier, packaging, shipping;

Learn where to focus next by analyzing your existing costs and their impact in the dimensions of quality, labor, production processes, materials, environmental impact, replacement costs, energy costs, and customer service. Do the same analysis from your customers’ perspective with regards to their cost of doing business. Look at ways that you can reduce their labor costs through workflow automation, reduced need for skilled workers and job training through better usability, or with reduced energy and raw material usage.

As you lay out your cost improvement projects, don’t just go for small incremental changes. Incremental improvement will not be enough for your customer to buy or upgrade to your product, especially during economic hard times. Look for creative solutions that enable you to innovate in multiple dimensions, such as reducing complexity and materials while improving usability and building on your brand image.

In your quest for cost reduction, also remember to look for areas where costs can be completely eliminated, such as retiring product lines, removing functionality that is impacting support costs, getting out of markets that are not profitable, or fully automating existing processes, removing the need for any manual labor.

Drive Revenues

Revenues are derived from the quantity of the product/service sold at a price that the customer is willing to pay. The price is based on the attractiveness of that product or service to the customer, i.e. its attributes. You can improve profitability through:

• increased revenues by enabling new products and services;
• enabling new business models;
• increasing the value of the existing product and thereby commanding higher prices;

For growth, investigate product line extensions, potential new add-on products and services, changes to your existing business models, as well as entry into adjacent markets. Recently I noticed Dremel extended their tool line into the pet care marketplace. In your analysis make sure to look for growth markets and solutions that allow you to build upon the strength of your core business in order to minimize risk.

In the same manner, investigate how you can increase the revenues of your customers. Look for ways where they can easily and cost effectively extend their offerings, such as through an online presence, and making themselves more attractive to their customers.

Work Backwards

Perhaps there is no better time to evaluate and question your existing processes that during the slow times. Your first step could be as simple as asking yourselves “what is the dumbest thing we do” (from the Think Differently blog) to kick-start the inquisition of the reasoning: ‘cause we’ve always done it this way.

Starting with the customer and understanding what they want will put you on the path to building attractive products. Anthony Ulwick describes his outcome-driven method to innovation in his book What Customers Want: Using Outcome-Driven Innovation to Create Breakthrough Products and Services. As he indicates, customers buy products and services to help them get jobs done: faster, more conveniently, more efficiently, more cost effectively. At the same time, customers use a set of metrics (performance measures) to judge how well a job is getting done and how a product performs. However, rarely does the customer understand or accurately voice their desired outcomes for a given job. So, understanding and effectively addressing these unserved or under-served expectations is key to the firms’ innovativeness.

Also, incorporating agile development methodology and tools into your development processes will help your team to effectively deal with undeterministic resource challenges. Of course, agile development provides more benefits to your innovation process, as I outlined before.

Enhance Your Brand and Ecosystem

Your brand can benefit you in many ways:

• enabling you to charge premium prices;
• sell more of your products, allowing you benefit from economies of scale;
• provide greater acceptance of radically different offerings, reducing your sales cycle;

Disappearing into the void because of reduced marketing budget is no excuse for putting your brand on the backseat. Look for creative ways to strengthen your brand and have fun doing it.

In addition, building your ecosystem would help you gain preference over your competitors as well as expanding your customer reach, such as with NetFlix extending their on-demand streaming service with Roku, XBox, TiVo and others. Keep on the lookout for these strategic partnerships and alliances to build your brand and ecosystem.

And, Remember to Execute

You might have your strategy down, but your ability execute is the the final key to your success. Robert Neiman’s Execution Plain and Simple: Twelve Steps to Achieving Any Goal on Time and On Budget is a valuable resource for anyone in the leadership role. Below is his 12-step process.

1. Take responsibility – Who me?
2. What’s that again? Define your assignment in writing
3. Organize your core team and create a strategy
4. Get input and support from key players: refine the strategy
5. Hold a compelling kickoff event to create momentum
6. Make all the pieces fit. Use plans, schedules, budgets and controls
7. Yes, I really mean it. Make demands effectively
8. Follow up like crazy without driving people crazy
9. Use political skills to win constituents and overcome opposition
10. Use creative problem solving to overcome unforeseen risks, delays and obstacles
11. Energy flagging? Manage an intense push to get the final results and rewards
12. Capture and spread what you learn

Use metrics to really focus on your results, but remember to avoid common metrics mishaps that undermine your intensions. Good luck!

Update: Also check out the Interview With Jana Matthews by Robin Fray Carey on MyVenturePad for advice on what to do and more importantly what not to do in a downturn.

Technorati Tags: innovation, economic downturn, profitability

Related Posts:

Innovation Strategies for the Global Recession from Innovation Weblog

Resources: Connectivity and technology adoption around the world

Eight definitions of innovation

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