Whole Foods, the natural and organic foods supermarket, will soon begin rolling out pilot “Wellness Clubs” at five of its stores. Through that initiative, consumers who join and pay a fee will receive nutritional education, membership in a dining club, and discounts on foods that meet certain dietary criteria. Although it’s far too soon to tell whether that program will lead to a major new line of business, Whole Foods should be commended for continuing to innovate during the current economic doldrums when many companies have instead retrenched by making across-the-board cutbacks, even in product R&D.
From 2008 to 2009, the computing and electronics industry reduced R&D expenditures by 6.7 percent in step with revenue declines, and leaders of other industries similarly shrank R&D budgets. In the hardest hit industries, cuts in R&D spending actually outpaced revenue decreases. Take the global auto industry for example, where 2009 revenues declined by 12.7% compared to the 14.3% decrease in R&D spending: some auto companies slashed innovation budgets by as much as 32 percent.
Indeed, far too many executives have taken their feet off the innovation gas pedal with plans of recommitting themselves to various R&D initiatives once confidence in future of the global economy returns. But this badly misjudges the relationship between business downturns and product “S-curves,” which depict the S-shaped way in which revenues for a successful new offering tend to build slowly, then ascend rapidly, and finally taper off. The simple truth is that economic slowdowns tend to squash down product S-curves, stifling revenue and margin growth because of reduced demand and increased discounting. But they don’t change the time scale of those curves. S-curves do not conveniently stretch over time as conditions improve. A company’s current offerings have a certain window of opportunity that does not lengthen in accordance with economic conditions. Instead, that window stays constant because it’s constrained by four implacable forces:
Technology: Unfavorable economic conditions can slow the introduction of new technologies, but not for long. Consider the ebook market, in which Amazon’s Kindle, Barnes & Noble’s Nook, and Apple’s iPad have been in a technological arms race that has been oblivious to any economic slowdown.
Intellectual property: Patent offices don’t put years back on the clock just because a company’s sales might have tapered off in a bad economy. In 2009, the FDA approved more than 100 first-time generic drugs, while at least two dozen top-selling brand-name drugs (with combined sales of over $8.7 billion in 2007) went off-patent. This cycle of patent expiration followed by the introduction of FDA-approved generic drugs is a recurring, relentless pattern that marches to its own drummer, not to the beat of any economic cycle.
Competition: Companies continue to learn and develop better business models, thus intensifying competition in an industry no matter the economic climate. Blockbuster used to be the king of movie rentals, but then competitors Netflix, Redbox, and even TiVo quickly capitalized on the high-speed Internet, iPhone apps, and self-service trends. Blockbuster was never able to right itself after being leapfrogged, and it eventually filed for bankruptcy protection and was acquired by Dish Network Corp.
Consumer tastes: Novelty inevitably wears off, regardless of the health of the economy. For example, most cell phones have a market life cycle of less than a year, according to David Chamberlain, principal wireless analyst for In-Stat Research. Wireless carriers in the U.S. shrewdly encourage the consumer desire for novelty by subsidizing the costs of new cell phones for those customers who agree to one- or two-year contracts.
For those and other reasons, companies need to continue innovating even when the economy heads south. It was during a previous downturn that Apple was busy working on iPod, iTunes, and a new business model for selling digital content, and when the economy eventually rebounded those innovations helped transform an industry. Likewise, the foundations for tomorrow’s winners are likely being built today. As Bill Gates once famously said, “The only big companies that succeed will be those that obsolete their own products before somebody else does.” And that applies in good times as well as bad.
