The Tao of Innovation

Insights for the modern business samurai

Breaking Away

Getting ahead of the pack in bad times.
There's a saying that "entrepreneurs are like teabags - you never know how strong they are until you put them in hot water." Well, we're all in hot water now. The next year or two should provide us with a remarkable opportunity to test our mettle.

The funny thing is, despite all the grumbling that accompanies a capital crunch, lean years are actually good for new companies. Many major brands like 3M, General Motors, IBM, General Electric, Microsoft, and Sun Microsystems all got their start during the lean times of recession. The worst recession since World War II was from 1973 to 1975, when the country's gross domestic product dropped 3.1 percent. This is when both Microsoft and Apple were founded.

One of the reasons why better companies come out of recessions can be explained by the structure of the human brain. A group of people - working together - will sometimes mimic the underlying functionality of the human brain. There's a term in neurophysiology called plasticity. Neuroplasticity refers to the brain's capacity to modify its organization, pertaining to the acquisition of new skills and learning.

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Several decades ago, the consensus was that the neocortical areas were immutable after a certain stage of development. However, recent studies have determined that environmental changes could alter behavior and cognition by modifying neuron connections in adults. Therefore, the adult brain is not static, but rather, can be reshaped by experience.

In this research, it was determined that stress is the key factor in altering plasticity in the nervous system. The research indicates that the application of mild to moderate levels of stress actually facilitates neuroplasticity, but on the other hand, severe and/or prolonged stress will impair hippocampal- dependent plasticity.

In other words, when the going gets tough, the tough start adapting and making new connections. The brain says to itself: "Oh, my survival is at risk, so I'd better start adapting and learning really hard right now." It's only when you have skin in the game that you'll really focus and learn.

Similarly, groups of brains will react in the same fashion. Under the stress of a recession, those groups of brains called companies sometimes react with an immediate urge to retract and contract, attempting to avoid becoming victims of natural selection.

But those groups of brains that respond by expanding their innovative capacity will probably not only survive but will strengthen their skills of adaptivity through the experience, likely to reap extraordinary returns during extraordinary times.

So the normal corporate knee-jerk reaction to immediately lay off staff, cut marketing costs, and postpone innovation initiatives - in other words, to batten down the hatches - may not be a surefire strategy for survival or success. Actually, there's a pretty good reason for courageously increasing your innovation and strategic marketing efforts during a recession.

The reason is similar to the rule that Lance Armstrong uses to win Tour de France competitions - you always make your move on a hill.

In competitive biking, all riders begin together as part of the peloton - i.e., the bunching of riders formed during a cycling road race. Because riders remain tightly grouped in the peloton, only the few who are in the front at any one time face the full effects of wind resistance. Those drafting behind, like a school of fish or V formation of birds, can more easily maintain the peloton's pace.

Usually, it is very difficult for those lead riders to escape the peloton, except when encountering a steep hill. This is because as the riders slow, the effect of drafting is lessened, giving a chance for the strongest riders to break away and outdistance the peloton.

The same goes for business, you often need a hill - in this case a recession - to breakaway from the herd and strengthen your brand. And there's evidence to support this strategy. There was a study by McGraw Hill that found that advertising during a recession yields an amplification of sales growth for those gutsy enough to make their move, compared to competitors who cut back. The gain, or lift as they call it, was found to be 135% to 275% better if you stepped up advertising, rather than cutting it back. This means that advertising packs twice the wallop during a recession.

The most famous example of contrarian thinking comes from Adolph Ochs, the publisher of The New York Times during the early 1900s. Following the stock market crash in 1929, he issued a memo to his staff: "We must set an example of optimism. Please urge every department to go ahead as if we thought the best year in the world is ahead of us." Sending out a memo like this today would likely cause the Board to have the CEO committed.

It wasn't easy for Ochs. Although major advertisers cancelled their contracts, Ochs mitigated employee layoffs opting to use a vital $12 million surplus he had built during the roaring 1920s to pay salaries. More important, he attempted to improve the editorial quality of the paper, even though advertising had fallen off. Amusingly, the paper also became a "better product" because it contained fewer advertisements.

Finally, he focused on positive stories rather than spinning the financial horror story of the day. For example, he declared the most important story of 1929 to be Admiral Richard Byrd's successful exploration of Antarctica. What an optimist, huh?

When the Great Depression finally ended, The New York Times found itself enjoying more readers than any other newspaper in the country-which translated into higher advertising rates. By the way, when Ochs bought the paper, it was only the eighth largest newspaper in New York. Ochs had the courage to breakaway and go for the gold.

So, do you have what it takes to breakaway? Remember, it's a difficult but effective tactic, and the best time to attempt it... is up a steep hill. The steeper the better. And so, a recession is actually an opportunity... an opportunity not only to outpace the competition but to prove what you're made of! So man up and go for it.

 

Moses Ma is a partner at Next Generation Ventures.

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