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Innovation, Recession-Style

By Scott D. Anthony, David Duncan, Richard N. Foster

For companies passionate about growth and innovation, the unprecedented market events of the last two months seem to portend nothing but dark clouds. As financial titans fail Wall Street trembles, Main Street freezes, consumers panic, and everyone seems to hesitate while waiting for stability to return. The notion that innovation must be entering a period of dormancy seems inevitable.

We disagree. As an analogy, consider the effects of a raging forest fire. Sure, there is destruction, but the soil left behind is fertile, helping to create the next generation of giants. Fires can remove dead wood and tangled brush that constrained growth. Plants requiring direct sunlight can prosper.

Similarly, we see at least three categories of companies that should see a silver lining amid today's economic conditions. Each can benefit from making strategic moves that build on their unique advantages.

1. On-the-Brink Attackers Innovators that have been quietly circling the fringes of a market can take advantage of stumbling giants to burst into the mainstream. For example, as the dot-com bubble burst and the September 11 terrorist attacks left most companies catching their breath in 2000 and 2001, disrupters like Google, Netflix, Ryanair, and the University of Phoenix—which is owned by the Apollo Group—surged.

As these companies have begun to level off, it's natural to ask about the next wave of attackers that could thrive in today's downturn. One group to watch: clean-tech companies that are following disruptive approaches like those of Enernoc, First Solar, Konarka, and Better Place (although Enernoc and First Solar have seen stock price declines of 90% and 60% this year, respectively). Larger companies employing disruptive strategies based on low price points, such as General Electric's, with its low-cost ultrasound device, should also hit a sweet spot in today's market.

Businesses on the brink of breaking through can improve their chances of success by focusing on strategies shared by the most successful disrupters. One critical component: making sure that decisions about product performance thresholds and trade-offs are driven by a laser-sharp focus on how the customer defines quality. In tough times, is it essential to avoid over-engineering products in ways that are meaningless to customers, the equivalent of adding a 53rd button to a remote control.

The tightening up of capital markets also reinforces the mantra of the most successful disrupters to be "patient for growth and impatient for profits" to buy time for iteration. One way to do this: testing critical assumptions in low-cost ways such as virtual prototypes, online market research, or Internet-based distribution.

Read the full article on Bloomberg BusinessWeek

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