With pricing in freefall in many industries right now due to the tough economic times, companies are opting to take the losses from price cuts out of the R&D budgets. This is a huge mistake. Let me explain why.
First, brands are strengthened with innovative new products, not price cuts. Apple’s brand without its continual stream of new iPods, the majority of which today can view video, is the catalyst of their branding strategy. Investing in R&D during an economic down cycle is an investment in a brand. GM is a brand that is caught in a tough spot right now. In December, 2007 they were giving $5,000 to every dealer that sold an SUV. This had been going on since gas prices started creeping up. Still, GM threw down big money to dealers and hasn’t yet turned the corner on their product strategy. Why? They put the short-term band-aid on the long-term problem.
The U.S. dependence on foreign oil is another example. The brand is the U.S.economy, and while we pay lip service to R&D for alternative energy or even being energy independent we’re forced in the meantime to go ask for price cuts. As a nation we’ve got to find an innovative way out of being so dependent on foreign oil and quit hoping the price curve doesn’t impact us too much. Like any company struggling to survive a recession we’ve got to quit hoping and start making our own breaks by accelerating innovation in the field of energy (I will get off my soapbox now).
Second, lack of sales is mostly due to a lack of innovation. Put bluntly, many companies aren’t getting new sales because their products just aren’t that useful anymore. Studies from AMR Research and others have shown that sales slowdowns during recessions in the software industry are less to do with uncontrollable factors, and a whole lot more to do with controllable factors.
The controllable factors are as follows. First, companies believe the brand is stronger than it is and delivers value despite pricing strategies. Second, seeing pricing as the “panic button” differentiator. Third, missing a major shift in how customers solve the problem your products are created to address. Fourth and most significant, the inability to transform innovation into cash either by cutting back on R&D or having an inordinately slow new product development process is a major culprit of declining sales.
Third, cutting R&D changes who you are as a company. There’s a ton of research out in academia that comes out during the capstone dissertation class I teach on marketing strategy showing how easy it is for companies to lose who they are when they quit innovating. The effort and intensity required of companies to develop and launch new products keeps them together. In case study after case study in my classes, you see it: lose the intensity to innovate and you die. It doesn’t happen over night but it happens.
Bottom Line: In tough times it’s easy to cut back on projects that have due dates into late 2008, 2009, even 2010. But cutting these is like cutting your brand. The companies who will roar out of these interesting economic times are those staying true to who they are and re-committing themselves to creating products that earn business so they won’t have to buy it on price.