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How Innovation Helped Save A Company

A lesson in surviving the perfect storm. A case study.

As seen on Forbes.com

It is always nice when a business principle reserved only for the bravest leaders proves itself to be true under the worst possible conditions. Let me tell you about one example.

The year was 2008. I was in a closet in downtown Chicago, staring into a TV camera. In my right ear, I could hear the voices of Erin Burnett and Mark Haines of CNBC, questioning me about an article I’d written for Bloomberg Businessweek entitled “The Upside of a Recession.”

The point of the article was that industry and economic downturns represent golden opportunities for leaders to double down on their strategies, particularly when they involve creating new products and services. In fact, many famous innovations and brands including the iPod, Microsoft Office and even Hershey’s Kisses were launched during recessions.

Since my own business was launched during a recession—and I also like to double down on innovation when the stakes are highest—I was speaking from experience. More important, my company was in the middle of helping leaders in four leading financial services companies reinvent their own offerings—even while Rome was burning.

Dr. Martin Luther King Jr. famously said, “The ultimate measure of a man is not where he stands in moments of comfort, but where he stands in times of challenge and controversy.” Most leaders take strategic risks when times are good. I was arguing that the best of the best innovate even when times get tough.

In business, there is no better proof of this than USG Corporation, a leading manufacturer of construction materials such as drywall and ceiling tiles. SHEETROCK is one of its brand names.

USG Corp_Vertical

USG is a company that was born in a recession, having been founded in 1901—a year of a stock market crash. It had managed to weather 21 recessions before the latest one nearly put them down for good.

I recently spent some time with their CEO, Jim Metcalf, and COO, Chris Griffin, and heard firsthand why leaders must innovate, especially in the worst of times.

Jim Metcalf was just months into his role as COO when in 2006 he helped bring USG out of a Chapter 11 bankruptcy caused by lawsuits related to asbestos cases. Until 1976, USG had some products with small amounts of asbestos and became one of roughly 40 companies that used Chapter 11 to manage the growing asbestos litigation costs. Mass tort lawyers were lining up at its door.

Berkshire Hathaway Inc. stepped in to back a $1.8 billion offering, guaranteeing that they would buy all the new shares not purchased. The offering allowed USG to pay bank lenders, bondholders and suppliers in full with interest.

The USG leadership team helped create a $4 billion settlement to pay out the lawsuits. It was a victory for the company; and with the litigation behind them, the leadership team was ready, willing and able to face a future where they could focus on business instead of lawyers.

Then the bottom fell out of the residential real estate market.

U.S. housing starts went from 2.2 million to 550,000 in three years, something no one could have predicted. Commercial real estate and remodels were no better. And the banks were going through the financial crisis, too, so the credit market was no refuge. It was what many in business would call a Black Swan event.

Housing Starts

Stop for a moment. What would you do if you were the leader of a construction supplies company at this moment in time? I suspect most of us would cut every conceivable expense and then look for more things to cut.

“Great leaders are almost always great simplifiers, who can cut through argument, debate, and doubt to offer a solution everybody can understand.” —General Colin Powell

After cutting north of $500 million in expenses—including many people he had worked with for years—Metcalf asked his R&D team a simple question: “What’s the most important thing we should be working on right now?” The answer: Project Avalanche; a top-secret initiative to cut 35 percent of the weight out of their flagship drywall product without sacrificing any of the product’s strength.

This type of innovation would lower shipping and installation costs (because the product would be easier to work with) while increasing margins because customers would pay a premium for those benefits. Metcalf also understood that this innovation initiative was a cost he could easily cut if he wanted to. He simply could stop the development efforts and rationalize it by saying who knew if the new product would find market acceptance.

But he knew what all great leaders know: When you get pushed, you push back. He focused all R&D resources on Project Avalanche, and the team delivered the company’s game-changing product SHEETROCK Brand UltraLight Panels.

The product was a drywall breakthrough. Retailers agreed to sell it at a higher price. Customers loved it, and today more than 62 percent of the drywall that USG sells is the stuff designed in Project Avalanche—an initiative that many CEOs would have delayed or killed in an effort to stop the bleeding.

Fourth quarter 2014, SHEETROCK sales were the strongest they’ve been since third quarter 2008, so the initiative has been an overwhelming economic success. But there were other unexpected benefits. First, USG was able to enter Southeast Asia, where lighter drywall was the perfect solution to high humidity because it was less prone to sagging. More important, company employees got to see that even in the toughest times, their leadership kept focusing on creating a brighter future.

Today, USG is stronger than it has been in decades and continues to feed its pipeline of innovative building products and solutions.

The lessons here are simple. Anyone can spend money on research when things are going well (although most don’t), but when things aren’t going so well, the best leaders double down on innovation while the worst ones look at it as an unnecessary expense.

Perhaps Winston Churchill put it best: “If you are going through hell, keep going.”

Follow me on Twitter @theideamonkey or read my Forbes blog here.

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