Service innovation in times of economic downturnby Carlos Martin-Rios
Many nations, companies, and individuals are still reeling from the negative effects of the financial crash that began in 2007 and then ground on through the years, affecting many economies around the world, particularly in the eurozone. While many studies have focused on the effects of the downturn on manufacturing, my co-author, Professor Susana Pasamar, and I decided to investigate how the service sectors, including travel and leisure, had responded to the economic woes.
The central question at the core of our forthcoming journal article is: which is the best overall innovation strategy in a downturn – expansion or retrenchment?
Our study found substantial differences in the outcomes of the two strategic renewal pathways in terms of net sales and operating profits over the three years that we analyzed. In our comparison of the strategies employed by 97 leading service firms located across Europe, including nine from travel and leisure, we found that a substantial number of these firms took a somewhat unexpected, forward-looking strategic approach during the downturn and had actually expanded their businesses through M&A activities, increasing R&D budgets and hiring more staff.
Since our sample brings together only the most innovative service organizations (as measured by their uninterrupted investment in R&D), there was no identifiable effect from the expansion strategy on sales or profits. However, despite that, these firms actually achieved better results in terms of net sales and operating profits than those that retrenched staff, as the latter saw a significant drop in sales and profits during the three-year period of our analysis.
A third group of companies took a more balanced approach: retrenching staff while still investing in innovation, in terms of research and development.
To assess the outcomes of the firms’ responses to the recession, we analyzed the compound annual growth rate (CAGR) of the firms’ net sales and operating profits. We are not aware that any other study has isolated these outcomes to economic distress by service businesses, and we believe the implications of these findings are valuable for leaders of all service firms.
The 97 firms in the analysis were selected by extracting data from the EU Industrial Research and Development Investment Scoreboard. It seems reasonable to argue that these firms are among the most innovative in Europe, given that they remained in the sample for the entire period of our study in the face of a challenging economic situation. To gauge the nature of these firms’ responses during the study period, we also examined news accounts of the firms’ merger or acquisition activities, as listed on the NEXIS database.
The industry sectors that were represented in the study included banks, computer services, food and drug retail, general retail, health-care equipment, life insurance, media, and support services. Sectors with the greatest representation were health care equipment, banks, and support services.
We identified 45 companies out of the 97 as having been committed to strategic decision-making as they chose to invest in R&D and hire more staff. Many of the firms in this cluster are in health care equipment and services, support services, banking, and computer services.
We also identified a group of 32 cost-oriented firms that reduced expenditure on R&D and cut headcount as a reaction to the recession. Most operate in support services and general retail.
In addition, we identified a third group of 18 resource-balancing firms that used both approaches simultaneously. We found a number of banks, media, and travel and leisure firms in this group. (Indeed the latter accounted for approximately 17 per cent of the total – the same as media firms – but lagging behind banks at about 28 per cent.)
In conclusion, we found that leading service firms that attempted to maximize recovery through strategic expansion actions, such as spending more on R&D, increasing the workforce or relying on strategic M&A, obtained better results in terms of net sales and operating profits than those that retrenched staff.
Dr. Carlos Martin-Rios is an Assistant Professor in Innovation and Human Resources at Ecole hôteliere de Lausanne (EHL) and is a fellow of the Lausanne Hospitality Research Center (LHRC).
Susana Pasamar is Associate Professor and Director of the Master’s in Strategic Human Resource Management at the Department of Business Organization and Marketing at Universidad Pablo de Olavide, in Seville, Spain.