Monday, November 14, 2011

Some Lessons from the 1930s

by Virgil Carter

Is there anyone who hasn’t become aware of the turmoil and uncertainty in global financial markets, and the impact on the economy and consumer confidence?  These conditions have generated a great deal of interest in the U.S. Great Depression in the 1930s.

Can we learn useful lessons from the 1930s?  In an article in the McKinsey Quarterly, author Tom Nicholas writes that, if history is our guide, even the “deepest downturns can create huge opportunities for organizations with money and ideas”.  Nicholas goes on to say, “For investments to promote innovation, the answer may be yes”.

Is the typical behavior of executives—act cautiously and delay investment projects until confidence returns—the wise course?  According to Nichols, many companies hesitated to innovate during the 1930s.  On the whole, corporate executives considering plans for research investments preferred to wait and see.  “From 1929 to 1937, for example, there were five years of GDP growth and four years of GDP contraction. Patent applications generally followed the same pattern, lagging behind by one year: the number of patent applications increased during years following GDP growth and decreased during years following GDP contraction, with two exceptions: 1934 and 1935”, Nichols describes.

 “Yet several successful companies did not delay such investments. One was DuPont. In April 1930, a noted DuPont research scientist, Wallace Carothers, recorded the initial discovery of neoprene (synthetic rubber). Although the company’s price levels and sales fell by roughly 10 and 15 percent, respectively, that year, DuPont boosted R&D spending to develop the new technology commercially. Neoprene, which DuPont publicly announced in November 1931 and introduced commercially in 1937, became one of the 20th century’s major innovations.”

Nichols goes on to say, “DuPont isn’t the only such example. Many new technology companies—for instance, Hewlett-Packard and Polaroid—that became leading innovators later in the century were established as entrepreneurial start-ups during the 1930s”.

“Of course, these examples don’t mean that aggressive investments for innovation would have been wise for every company during the 1930s or are universally wise today. But taken together, the patent research and the experience of successful innovators in those years suggest that although delay is the natural response to uncertainty, some companies should continue innovating even in an extraordinarily deep economic downturn—especially with technologies that take a long time to commercialize after discovery”, Nichols concludes.  “Companies that delay these investments may forego significant growth opportunities when uncertainty subsides and the economy recovers.  For companies with cash and ideas, history shows that downturns can provide enormous strategic opportunities.”

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