Innovation, Recession-Style

Savvy energy outfits are among those businesses with a silver-lining potential for success amid the crisis. Here's the formula theyand possibly youshould follow

For companies passionate about growth and innovation, the unprecedented market events of the last two months seem to portend nothing but dark clouds. As financial titans fail Wall Street trembles, Main Street freezes, consumers panic, and everyone seems to hesitate while waiting for stability to return. The notion that innovation must be entering a period of dormancy seems inevitable.

We disagree. As an analogy, consider the effects of a raging forest fire. Sure, there is destruction, but the soil left behind is fertile, helping to create the next generation of giants. Fires can remove dead wood and tangled brush that constrained growth. Plants requiring direct sunlight can prosper.

Similarly, we see at least three categories of companies that should see a silver lining amid today's economic conditions. Each can benefit from making strategic moves that build on their unique advantages.

1. On-the-Brink Attackers Innovators that have been quietly circling the fringes of a market can take advantage of stumbling giants to burst into the mainstream. For example, as the dot-com bubble burst and the September 11 terrorist attacks left most companies catching their breath in 2000 and 2001, disrupters like Google (GOOG), Netflix (NFLX), Ryanair, and the University of Phoenix—which is owned by the Apollo Group (APOL)—surged.

As these companies have begun to level off, it's natural to ask about the next wave of attackers that could thrive in today's downturn. One group to watch: clean-tech companies that are following disruptive approaches like those of Enernoc (ENOC), First Solar (FSLR), Konarka, and Better Place (although Enernoc and First Solar have seen stock price declines of 90% and 60% this year, respectively). Larger companies employing disruptive strategies based on low price points, such as General Electric's (GE), with its low-cost ultrasound device, should also hit a sweet spot in today's market.

Businesses on the brink of breaking through can improve their chances of success by focusing on strategies shared by the most successful disrupters. One critical component: making sure that decisions about product performance thresholds and trade-offs are driven by a laser-sharp focus on how the customer defines quality. In tough times, is it essential to avoid over-engineering products in ways that are meaningless to customers, the equivalent of adding a 53rd button to a remote control.

The tightening up of capital markets also reinforces the mantra of the most successful disrupters to be "patient for growth and impatient for profits" to buy time for iteration. One way to do this: testing critical assumptions in low-cost ways such as virtual prototypes, online market research, or Internet-based distribution.

2. The Innovation "Systematizers" Companies that have already placed their bets on innovation can double down, creating multiyear growth gaps over their competitors. For example, Procter & Gamble (PG), Johnson & Johnson (JNJ), General Electric, Cisco (CSCO), and IBM (IBM) have all made public commitments to growth through innovation. And all treat innovation like any other operating process, setting targets, measuring performance, allocating resources, and actively managing portfolios.

While these companies— particularly GE—have been affected by the recent turmoil, focusing on innovation as a process allows them to go beyond the creation of one-off successes to churn out wave after wave of blockbuster growth businesses.

The systematizers should look closely at their portfolios and ask questions such as: Do we have enough projects that, if half or more of the projects fail, we could still hit our revenue and profit targets? Which of the ideas should we accelerate? Decelerate? Shut down? Do the projects in our portfolio have meaningfully different strategic intents (e.g., feature- or function-based vs. packaging- and promotion-based)?

3. The Streamliners. The final class of potential beneficiaries includes companies that can use current conditions to accelerate efforts to truly change at the pace of the market without losing control. One area to accelerate: dispassionately discontinuing business activities that have passed their expiration date.

While we certainly advocate pruning the corporate portfolio before being forced to, we acknowledge that an economic downturn can be an excellent catalyst to shed businesses, product lines, brands, and projects that were nearing their expiration date anyway.

Companies need to be sure that they don't accidentally jettison businesses with untapped or hidden potential. They should carefully consider whether a business unit or brand has headroom for future expansion or whether it has an asset that can be extended into new markets.

The fundamentals of creating compelling growth businesses haven't changed: a problem that haven't been adequately solved, a solution the customer considers better than current alternatives, and an attractive, sustainable economic model and expansion plan. Yes, things are going to get tougher, and the bar for success is going to get higher. But there remain ample opportunities to be seized by those who don't freeze.

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