News Release: Finance and Economics

Apr. 17,  2009

Why Innovation Will Revive the Tech Sector

From Knowledge@Emory

It was only a matter of time before the sub-mortgage crisis that nearly destroyed Wall Street would also slam into Silicon Valley.

That crash arrived early this year.

Nearly a year after the bottom fell out of the housing market and three months after the collapse of Bear Stearns and Lehman Brothers, the American technology industry suffered its own collapse. In January, firms across the industry began announcing the same huge cutbacks and sweeping layoffs that previously had been witnessed in the nation’s manufacturing, automobile and financial sectors.

According to some estimates, more than 300,000 tech jobs at more than 400 companies have been lost.

Certainly, the industry has seen better days, and given the widespread job carnage across Silicon Valley, it would be easy to assume the tech industry is now a shell of its former self—a less powerful, less robust, and less intelligence-driven industry that, having cast off some of its brightest minds, has rendered itself incapable of achievement in the area in which it must succeed most: innovation.

But according to top experts from Emory University's Goizueta Business School, challenging times, especially in the tech industry, promote innovation.

In fact, these experts say history shows that tough times often push the tech industry to its greatest heights. With their backs to the wall, staffing slashed and the economy tight, top tech companies have shown over the years a remarkable ability to survive and thrive during economic recessions.

Faculty at Goizueta expect the same to happen with this crisis.

“It's in these periods of recession that we've seen the new innovation happening,” says Benn Konsynski, a chaired professor of information systems & operations management. “Yes, the cutbacks will dampen some channels of innovation, but I also think other opportunities will open up. We’ve seen this happen in the past, as companies we recognize as innovators today emerged during times of financial peril. Generally speaking, I think in times like these there are as many doors opened as there are doors closed.”

According to Konsynski, the following are a few examples of American firms that rose out of the ashes of a crisis: Procter & Gamble (the Panic of 1837); General Electric (the Panic of 1873); IBM (the long depression of 1873-1896); the aerospace company United Technologies Corporation (in 1929, at the start of the Great Depression); and Fed Ex (during the oil crisis of 1973).

Internal innovation first

“It is often suggested,” adds Ramnath Chellappa, “that times like these are actually the good times to innovate.”

But Chellappa, an associate professor of information systems & operations management at Goizueta, is quick to add one more point: Innovation takes on many forms.

And some of it can be painful.

Before companies can deliver innovative new products and technologies to the marketplace, he explains, they must first innovate internally.

Certainly, to some extent the cutbacks and layoffs seen over the past year were inevitable. When the economy tanked, corporations tightened their spending and consumers lost confidence, too. Demand for tech products waned, profits dropped and tech firms found themselves saddled with more expenses than they could possibly bear. Layoffs were merely a means of survival.

But now that these firms are leaner, they have the opportunity to implement innovative new processes to make their operations more effective, nimble and profitable moving forward. As Konsynski notes, many companies are already taking steps to “renew themselves and reposition themselves, because this is a time for repositioning.”

Chellappa sees the same.

“In times of cutbacks, there is a lot more operational and profit innovation that takes place,” Chellappa says. “These companies sometimes get to the point where it’s more about sustaining the workforce. But when the workforce becomes leaner, you see more profits and more operational innovation—meaning, they figure out how to get the job done more efficiently and effectively. This is a time to figure that out.”

It’s also important to note, Chellappa says, that among all industries, none is more capable of dealing with boom-and-bust cycles than the tech industry.

Besides, he says, these cycles have been around since the earliest days of the industry—and the industry has always survived.

“The high-tech industry is very cyclical,” he says. “You have this background cycle of hiring and layoffs depending on what the market is, and that competency [the ability to endure change] has always been here in this industry.”

Better products on tap

According to Ashish Sood, assistant professor of marketing at Goizueta, layoffs often have an impact in two seemingly disparate ways: The total number of new products being developed will likely fall—and the number of truly great products will likely rise.

“Traditionally, in lean times the quantitative productivity of firms declines and the number of new product innovations becomes less,” says Sood. “However, the quality of these product innovations typically increases as resources are used more carefully, on more promising projects.”

In other words, Sood explains, the firms that succeed in the months and years to come will be the firms who can most quickly reorganize and redirect their energies toward the products with the greatest potential for success.

In times as lean as these, the products that have the greatest potential are those products that can deliver a great functionality at low costs.

Simply put, frills are out. Practicality is in.

Although some long-established firms may be able to pull off this transition, Sood says he actually expects it will be the upstarts and entrepreneurs--and not the tech stalwarts--that are likely to grab hold of that market share.

“Incumbents are more likely to lose market leadership and new entrants are more likely to grasp higher market share in such times,” observes Sood. “We may see changes in market leadership across many industries in the next few years.”

Dark present, bright future

Konsynski agrees, pointing to such promising technologies as short messaging systems (embodied by the ultra-trendy Twitter) and so-called “cloud computing” (a means of leveraging resources ‘outside the firewall’ and across the Web) as areas in which up-and-comers could crab a share of the market and spur the industry forward. “I would submit that we will be seeing even more innovation in the next few years,” he says.

Chellappa agrees, but expects some of the industry’s longtime leaders to continue their run of success, too.

Intel made big news in February with the announcement that it would spend $3 billion to upgrade its Chandler, Arizona facility—a move that preserved thousands of jobs and offered a glint of hope for the rest of the tech industry.

Then there’s IBM, a company that has slashed its North American workforce by more than 4,500 but also appears on the cusp of acquiring struggling Sun Microsystems. The purchase would galvanize IBM’s position as a tech leader and also give the company an opportunity to do with Sun’s products what it’s always done so well with its own: Tweak, improve, modify.

That’s innovation, too, Chellappa says

“IBM is a firm that has seen an awful lot of ups and downs,” Chellapa says. “It’s one of the oldest firms out there. It’s such a large company yet it’s continually changing. They realize there are a lot of products they can support.”

Chellappa says he expects IBM, and others, to begin moving forward on innovation soon. They have no choice, he says.

“I tend to think about these kinds of things sequentially,” he says. “You have revenue and you have costs. So [after a downturn] the first thing you do is cut costs to stay profitable. That’s the first focus. But these firms cannot stop there, because the market will change very soon and they have to be ready for that. And typically that’s when it’s time to get back into product innovation mode, where companies really need to come up with an innovative product in order to keep consumers excited about them.”

Indeed, Goizueta's Konsynski is less concerned for the tech industry's ability to rebound than he is for America's struggling financial industry.

Says Konsynski: "The financial community is tooled toward areas where everything is hurting. The tech industry is involved in the refurbishing of skills and the remixing of skills. It’s a remix industry. So many of these skilled people are just repurposing themselves in a new ways, and I don’t think the tech industry’s woes are comparable in any way to the financial industry’s woes."


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