Many companies find it hard to simultaneously cut costs while bringing cool, new stuff to market. Even if they can get a new product onto the shelves, there's doubt that cash-strapped customers will buy it - at least for now.

Herein lies the conundrum and a potential trap for many organizations. They may put innovation on the back burner until markets improve, but finding new customers and markets usually means some kind of innovation.

So, today's leaders need to find the proper balance between tightening belts and innovating in their organizations, a task that's none too easy in a panicky economic environment often dominated by short-term thinking. This is a time when, according to i4cp research, cost cutting and making profits are among the chief concerns for organizations.

Consider the fiscal plight of entrepreneurs. Howard Anderson, a founding partner of Battery Ventures, notes, "We and others are funding start-ups as slowly as possible, or not at all." He points to the example of a hand-held device that restaurant patrons could use to order their meals, potentially boosting the productivity of wait staff, and he notes that "the prototype just sits there" (Uchitelle, 2009).

It isn't just entrepreneurs who are seeing changes in funding for innovation. Overall, R&D expenditures will be flat in 2009, following two consecutive years of growth, according to a survey of member companies of the Industrial Research Institute (IRI). The biggest problem IRI member companies expected to have in 2009 was "growing the business through innovation" (Cosner, 2009).

There could be something of a "bean counter" prejudice against innovation. That is, financial analysis tools traditionally used to evaluate investments in new initiatives can result in a "systematic bias against innovation," according to experts from Harvard Business School. For example, using discounted cash flow and net present value leads to "underestimat[ing] the real returns and benefits of proceeding with investments in innovation" and leaning on earnings per share "diverts resources away from investments whose payoff lies beyond the immediate horizon" (Christensen et al., 2008).

Some even think that the U.S. economy is losing its traditional strength in the area of innovation. Although the U.S. ranks sixth among 40 nations and regions in terms of innovation and competitiveness, its progress has slowed to a crawl in these areas, suggests a recent report by the Information Technology and Innovation Foundation. The study reports that "all of the 39 other countries and regions studied have made faster progress toward the new knowledge-based innovation economy in recent years than the United States" (Atkinson & Andes, p. 1).

That study looked at 16 indicators, such as corporate investment in R&D, venture capital investment, the number of science and technology researchers per 1,000 employed, the global share of scientific/technical publications, and productivity. The countries ranking ahead of the U.S., according to the study, are Singapore, in first place, followed by Sweden, Luxembourg, Denmark and South Korea.

"The trend is very troubling," said Robert D. Atkinson, president of the foundation (Lohr, 2009).

But not everyone buys into the idea that the situation is so dismal. Last year, the RAND Corporation published a study and argued that the U.S. continues to be the leader in science and technology. It noted, "The United States accounts for 40% of the total world’s spending on scientific research and development, employs 70% of the world’s Nobel Prize winners and is home to three-quarters of the world’s top 40 universities" ("U.S. Still Leads," 2008).

Even slow or no growth in R&D spending may be a good sign. The Battelle Memorial Institute forecasts that cumulative spending by "companies, government and universities will rise more than 3%" in 2009, according to the Wall Street Journal. A Journal analysis of large companies indicates that they spent about the same amount on R&D in the final quarter of 2008 as they had in the same period in 2007. Such flattened R&D spending could be a good sign in light of plummeting revenues, and the Journal reports, "Big R&D spenders say they've learned from past downturns that they must invest through tough times if they hope to compete when the economy improves."

Of course, not all R&D spending is created equal, and types of R&D spending are likely to change during this downturn. For example, the IRI research suggests that member companies are honing R&D to support new-business projects and cutting back on research targeted to existing businesses and to basic research.

So, organizations seem to be in a good news/bad news scenario. The good news is that there's a genuine effort to refrain from hacking away at R&D spending and a desire to focus on new business. The bad news is that, nonetheless, there's a "treading water" effect, with overall spending on R&D fairly stagnant and some signs that the great U.S. innovation machine is stalling in comparison to other nations.

Recommendations: First, even if organizations can't afford to throw a lot of new funds at innovation, they should nurture a culture of innovation. For example, they could allow employees to spend some time on invention. They may also want to name a chief innovation executive who helps develop an innovation strategy along with the processes, governance and measures to support it (Alon, 2009).

Second, firms should boost communication with their customers. Prof. Andrew Razeghi (2008) of Northwestern University believes companies should use recessions as a time to "get closer to your customers," providing them with greater value, relevant products, and increased communications. Innovations can take the form of things such as more effective CRM programs and better customer segmentation decisions.

Third, companies should keep in mind that innovation can be, in itself, a cost-reduction tool. That is, organizations can focus on innovations that provide quicker time-to-market, more effective operations or more efficient employees (Alon, 2009).

Fourth, where needed, they should invest energy in learning how to become better strategic thinkers. "Outthinking the competition is a learnable skill," according to Kaihan Krippendorff, president of Strategy Learning Center and a presenter at a strategy conference sponsored by i4cp. Krippendorff (2008) posits that "strategic advantage comes from seeing patterns and sources of advantage that others miss." If organizations can truly spot the advantages in the marketplace, they will have considerably more success at the innovation game.

Documents used in the preparation of this TrendWatcher include the following: