Theory To Practice

“LESS FOR LESS”

It’s the key to innovation during a recession.

by Michael E. Raynor

Aphorisms are sticky because they capture an essential truth. But they rarely capture the whole truth — anything that fits on a bumper sticker is almost always glossing over inconvenient but essential detail. That can lead to trouble: We often end up filling in the missing pieces with inaccurate and damaging assumptions.

Take, for instance, the notion that the best time to buy is when everyone else is selling. From Baron de Rothschild (“The best time to buy is when there is blood in the streets”) to Warren Buffett (“Be greedy when others are fearful”), so many have espoused a contrarian investing strategy that it now qualifies as conventional wisdom. Who could question the sagacity of buying up fundamentally sound assets trading at depressed prices thanks to the prevailing panic?

Still, the tempest lashing the economy has inspired many of us simply to hunker down. If you’re like the managers in most companies I know, you are focusing more intensely than ever on your best customers, even at the cost of forgoing investments in promising new accounts. You’re hanging on to your proven performers even if, however reluctantly, you have to let go of your recent additions. You’re focusing your innovation efforts on projects that offer near and clear short-term results. What you absolutely, positively aren’t doing is trying anything that is new and unproven or that takes you beyond what you know best. In short, the recession has completely extinguished any attempt at meaningful innovation.

Such a response is entirely understandable. Decades of research have shown that the keener the crisis, the more vigorously we commit to familiarities. Known as “threat rigidity,” our need for stability in an unstable environment drives us — often against our better judgment — to do only what we know best. Worse still, this response leaves us largely unable to perceive new information, even though that’s just what we might need to do to find a way through the turmoil.

It’s a pity more of us can’t escape this reflex of our reptilian brain. The convulsions that surround us now are creating opportunities for companies of all stripes to change the game and position themselves for growth and prosperity that would be otherwise almost impossible to realize. In more munificent times, the effort needed to unseat dominant incumbents is herculean, and the time required is often measured in decades. But dislocations in just about every industry have shaken loose the old orders, opening up unexpected gaps in enemy lines that create rare chances to steal a march.

So you should simply close one eye, put a patch over the other, and take the plunge, right? After all, contrarianism tells us that if everyone else is staying out of the pool, time to dive in.

If only it were that easy. At least two pitfalls await every would-be contrarian. First, investing against the grain requires cash at the ready, but most of us just don’t have it. The general lack of liquidity is what makes this a financial crisis, after all. Buffett might be able to invest a few billion in Goldman Sachs, but when General Electric has to sell equity at fire-sale prices, chances are you’re a bit strapped yourself. That’ll make it tough for you to advance your long-term M&A strategy no matter how attractive the prices might be.

Second, our instincts often lead us to pursue contrarian strategies in self-destructive ways. Our standard assumption is that innovation amounts to “more for more” — that is, better value but at higher prices. When customers are unable or unwilling to pay for increased value, we find ourselves unable to do better than slap on a “20% off” sticker and offer “the same for less.” In short, we cut prices to grab share.

This is innovation’s equivalent of Wile E. Coyote shooting at the Road Runner only to have the blunderbuss explode in his face. For example, it’s been reported that in the wake of the U.S. government’s initial $85 billion bailout of AIG, other commercial insurers began taking a run at the company’s most lucrative commercial-insurance customers. Not surprisingly, AIG girded for battle, and you can expect that even if they were to run out of bullets, they’d be ready to pack their muskets with rusty nails. The result has been a price war for customers who are already price-sensitive. It’s hard to imagine this is doing much to burnish anyone’s results.

If managers are to take advantage of the current malaise, we need a new contrarianism, one that allows you not simply to kick the enemy when he’s down but to kick the enemy when you’re down. Attacking successfully from weakness without courting disaster requires a way to both shake loose the money needed to invest and apply those resources to bona fide strategic opportunities. This is the “new contrarianism,” the “unconventional wisdom,” summed up in the notion of “less for less.” Seen through this lens, the current environment is awash in promise.

Take, for example, the telecom industry. Major landline providers have long been losing customers to wireless services. In a recession, this trend will only accelerate, potentially eroding the profitability of a capital-intensive, scale-sensitive business. Making lemonade out of this serving of citrus requires bold moves. Since the wireline business is in decline anyway, why not shift the business model to align better with marketplace realities? Turn voice services from a core offering into a by-product of a much-improved infrastructure focused on video and data services. The quality of the video need not even be as “good” as cable, for now, because stretched consumers might willingly overlook less cutting-edge solutions (e.g., fewer high-definition signals) in exchange for à la carte, channel-bychannel subscriptions or other accommodations that many cable companies have been reluctant to offer.

The finishing blow could be bundling video service with wireless telephony: By amplifying, rather than resisting, the wireline- to-wireless shift, telcos could use it as a fulcrum for levering themselves into a better position in the video market.

Better yet, the pressures of a recession provide legitimate grounds for securing any concessions from regulators needed to accelerate de-emphasizing wireline and overcoming entrenched interests within the telecom industry. Into the bargain, the telcos would be freeing themselves from a nineteenth-century business model even as they position themselves for growth.

Another “less for less” opportunity lies with high-end retailers that have a chance to re-make their model for the masses. Whole Foods, for example, has defined the market for organics. The company’s historical growth rates might be in jeopardy, however. As belts tighten, the organic arugula might be the first to go.

The “more for more” response is to find distressed sales at good locations and expand, either now or when the economy recovers. That’s tough to do when credit is hard to come by and you don’t have a mattress stuffed with cash. The “same for less” response is to scale back investment and cut prices to hold share. That just digs you into a deeper hole.

The “less for less” response is to forge a new model optimized for the current reality. Why not offer organic olives — just not twenty-five varieties? How about smaller, less expensive, more focused stores with limited operating hours? Hold less inventory and tolerate more frequent stock-outs by wrapping it in a “treasure hunt” ethos, and shift to more self-service. This not only protects the bottom line today, but it also creates a model with broader appeal that is well positioned for growth when the clouds part.

These suggestions might seem fanciful, but they are not without precedent. Toyota’s econoboxes gained credibility during the 1970s oil crisis and set the company on a thirtyyear growth trajectory. Thanks to the rationing of World War II, women’s silk stockings were prohibitively expensive and in short supply. In that scarcity, DuPont found the first market for its new polymer, nylon. (And now you know why they’re called “nylons.”) And during the Great Depression, Kellogg’s transformed inexpensive cold cereal from an unwelcome substitute for eggs into “part of this complete breakfast.” Each of these began life as a “less for less” offering that grew into a market-defining product.

“Buy when others are selling” is sound advice, but it is often impractical or dangerous. One can’t sally forth, confident of victory, simply because the outlook is grim. The key to successful strategic contrarianism is “less for less” thinking. Only then can you take the rest of Baron de Rothschild’s advice and buy not only “when there is blood in the streets” but “even when it is your own.”

MICHAEL E. RAYNOR MICHAEL E. RAYNOR is with Deloitte Consulting LLP. In addition to applying theory, he occasionally tries to create some; BusinessWeek named his most recent book, The Strategy Paradox, one of the top 10 books of 2007. He can be reached via www.michaelraynor.com.