By Joe Evans
Innovate or Cost Cut? The Business Strategy Dichotomy
“Innovate or die.”
A widely accepted rule of business states that if a company fails to continuously innovate it will fall behind and eventually die. From this, common wisdom says that organizations must gear their business strategy toward continually increasing customer value.
The trouble is, for many executives the innovation-minded strategy falls to the wayside amidst the real and intense pressure they face to deliver short-term bottom line results. As such, when the economy goes through a down cycle and sales slow, cost-cutting ensues and takes over as the prevailing strategy. And the dichotomy lives on.
Who Has Time for Patience?
Investors want to see strong quarterly results and share price increases … and they want them now, if not yesterday. Add to this the brief tenure of most CEOs, and the formula gets interesting. Where does this leave the organization’s strategic priorities pertaining to value creation and the chief executive’s passion for championing the strategic long-range corporate goals? The answer: in jeopardy. Why? The primary reason organizations steer away from strategic investment in value creation and move toward short-term overhead reduction is, wait for it … impatience. That pesky feeling that is part of human nature rears its ugly head and makes us far too willing to sacrifice what we know is essential to survival. If your strategy was sound to begin with, trust it and stick with it. We should be building realistic assumptions into business plans for goal achievement. If we are not meeting them, then reactive cutting is the wrong move. Fixing the problem and tweaking the execution of a valid and viable strategy is the correct one.
The Strategic Struggle
Investment in innovation requires an appetite for risk. It does not always bear fruit and can drain resources at a time when every dime in the business counts. It’s also a cornerstone of survival in most business models. Cost reduction and innovation both have relationships to profitability and both are valid necessities. Nevertheless, there forms a strategic struggle in the executive suite for the two strategies to coexist. Cost cutting provides quick bottom-line results that are desperately wanted and, often, needed. Crowded markets scream for differentiation, and that requires innovation. Board members and investors want profit. Reducing costs inherently contradicts the investment mindset that spurs innovation and expansion. The struggle is real. But is it really warranted?
Can’t We All Just Get Along?
Strategic goals and programs that relate to trimming, streamlining and reducing cost structures can indeed coexist with strategic activity aimed at investment towards value creation through innovation and R&D. They can. They just normally do not. With the right business strategy and operational plan in place, the two seemingly opposing goals can be met. How?
The answer ultimately boils down to the quality of the strategy, but it certainly also rests on factors such as the size, culture and operational efficiency of the business. Larger organizations can usually afford to invest longer without R&D breakthroughs paying out dividends, but they also must support huge operating cost models. Small companies cannot invest in innovation indefinitely without risk of business insolvency, but they also run leaner and can more easily focus their limited resources on strategic goal accomplishment.
Strategy is about surveying the limited resources available to you and determining how to use them to your advantage. You must analyze the landscape, searching for advantageous use of everything at your disposal while juxtaposing allocation of those precious resources with the productivity of your business, then calculate the risk tolerance for investment. As a colleague said in an online strategy group discussion, “Supplies in Patton’s hands resulted in far greater battlefield success than the same supplies in the hands of lesser generals.”
Originally published: Sep 11, 2011