At a glance
- It can be hard for business owners to find time to think about innovation, especially during an economic slump – but it’s often necessary for survival or to maintain your company’s value.
- Innovation doesn’t necessarily have to be costly. Effective techniques include harvesting ideas from your employees, undertaking inexpensive research and stepping back to look at your business and the market through fresh eyes.
- Expert financial advice can help you understand how best to free up funds that can be dedicated to innovation.
Maintaining a culture of innovation is an important way for SMEs to survive tough economic conditions and turn them to their advantage. Rather than falling down the priority list during a downturn, ongoing innovation is critical to avoid losing out to more agile and creative competitors who view the slump as an opportunity to grab market share.
In this context, it’s surprising that only 44% of SMEs are ‘innovation active’, compared to 58% of larger firms, according to the latest UK Innovation Survey from 2021, conducted by the government’s Department for Business, Energy & Industrial Strategy1. ‘Innovation active’ means introducing new or significantly improved products, practices, structures, concepts or strategies, or investing in training, research and development, acquisition, or external knowledge or equipment linked to innovative activities.
According to Harvard Business Review2, economic slumps generate big opportunities for firms to innovate. Above all, they create the right conditions for game-changing offerings: great examples of innovation during a downturn are Airbnb and Uber, which appealed to thrifty travellers following the 2008 recession.
Challenging economic times can enable firms to introduce simple, affordable solutions that connect with hard-pressed consumers – as McDonald’s did following the Second World War, for example. And slowdowns can also be a good time for established companies to make bold strategic moves, such as IT firms shifting from packaged software to cloud-based, pay-as-you-go software-as-a-service.
Kevin Petley, Business Growth Adviser at Elephants Child, says we saw the same effect during the COVID-19 pandemic. It forced many SMEs to reassess their business models and operations, in a bid to make their company more efficient and competitive.
“During tough times, the natural market buoyancy that can support a business disappears,” he says.
“You have to create your own luck and find ways to stand out from the competition and add value for customers. Those who did this during the pandemic came out of it in much better shape than those who just hunkered down and hoped it would go away.”
Why innovation is important in a downturn
Many new businesses fail in the first few years. This is often because they launch on the back of a shallow idea. It might appear to work in a buoyant market, but a downturn exposes its flaws. Many young businesses need to build resilience by researching and innovating in order to improve their product or service and boost efficiency.
Conversely, if your business is more mature and you’re considering your exit soon, potential buyers will look at the past three years’ trading figures and the projected future performance and opportunities to value it. One bad year could make a huge difference to your sale price. You can’t afford to let those metrics slip during a downturn, and ongoing innovation should help you maintain them.
Also, demonstrating a clear pipeline of future innovation will show it’s a natural part of your business and that you have scalability, which should support your exit price.
How to innovate cost effectively
Innovation does not necessarily require lots of time and expense. As the UK Innovation Survey indicates, it’s not just about designing new products or processes, but also improving existing ones.
Kevin says that one of the best ways to keep innovating cheaply is to harvest ideas from your employees. “It’s amazing how many good ideas come from within the team,” he says. “But they may not have the confidence to tell the boss, ‘You’re doing this wrong.’ You have to invite and create the conditions for honest feedback.
“Setting up innovation groups, forums and workshops for your staff will also help boost employee engagement, because they feel their opinions matter. Such improvements in your firm can make a huge difference to your sale price.”
You could also look to create a culture of innovation, in which teams are constantly testing new ideas, accepting failure as part of the process, and moving on quickly from anything that’s not working.
Do more research
Customer and market research needn’t be expensive, but they can quickly bring insights that lead to innovative improvements.
You could also employ university undergraduates or recent graduates to do desk research, saving money on expensive marketeers and focus groups.
“I’m working with a business that creates innovative ingredients for beauty products,” says Kevin. “They’re working with a local university that is taking up one area of research as a project. That’s not free, but the cost may be less than for other types of product-research work.”
Another potentially cheap way to boost innovation is to free some of your and other managers’ time for creative thinking. Stepping back from daily operations may help you see opportunities, such as a new product design, or ways to become more agile, reboot your technology, delegate better or pivot the business to adapt to market conditions.
Stepping back could also give you time to explore some different approaches, such as marketing strategies or deploying new software.
“Don’t be afraid to test things, even during difficult times,” says Kevin. “You only have to get one of them right to make a huge potential difference to the business.”
Freeing funds for innovation
Sometimes, investment in innovation is unavoidable. To find the money during difficult times, you may have to rethink budgets and reallocate resources from other departments. You could also explore the many government schemes that support development3, or alternative sources of finance such as crowdfunding.
If you need to free up money for innovation, help from an accountant and a financial adviser could be invaluable. Speaking to us can help you explore how to get more from existing revenue streams and make your money work harder. We can help you optimise your tax affairs, restructure your business and manage your resources more effectively.
We can also help you work out if you qualify for research and development tax relief, which is another great incentive to innovate.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1Department for Business, Energy & Industrial Strategy, ‘UK Innovation Survey 2021: Report covering the survey period 2018 to 2020’, May 2022
2Harvard Business Review, ‘3 ways to innovate in a downturn’, July 2022
3 Gov.uk, ‘Get help and support for your business’, accessed July 2023
We work in conjunction with an extensive network of external growth advisers and SME specialists, such as Elephants Child, who have been carefully selected by St. James’s Place. The services provided by these specialists are separate and distinct to the services carried out by St. James’s Place and include advice on how to grow your business and prepare your business for exit and sale.
Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
SJP Approved 05/07/2023