From Innovations, a website published by Ziff-Davis Enterprise from mid-2006 to mid-2009. Reprinted by permission.

During the great dot-com collapse of 2001/2002, I had the good fortune to work for a company that swam against the tide. The Internet startup was in its third year of fighting a battle against big and entrenched competitors. It was a David-and-Goliath story to begin with, and as the markets tanked, some people took on a sense of gathering gloom.

But their fears never came to pass. During a two-year period in which our competitors’ businesses shrank by over 40%, my company actually grew by half, albeit from a much smaller base. The reason is that our investors made a conscious decision to invest in the business at a time when that seemed like the last thing we should do. They believed that by providing customers with superior price/performance at a time of rampant budget-cutting, we would break from the pack. When the recovery arrived, we zoomed forward faster than we had ever thought possible.

It’s hard to think about investing right now. Conventional wisdom holds that a recession is a time to back off on investment and play it safe. Many big businesses will do that during the next few months.

But the problem with the conventional wisdom is that it’s so, well, conventional.  If everyone does the same thing, then nothing changes very much.  Markets are only transformed when businesses take advantage of competitive dislocation and redouble their efforts to change the rules.  The history of the IT industry is filled with examples.

In the last great US economic downturn in the early 1990s, companies like Oracle, Microsoft, Novell and Dell burst out of the pack with value propositions that were superior to those of much larger competitors.  At the time, corporate America was growing weary of custom solutions and wanted to buy more technology off-the-shelf.  Innovative companies answered that demand with attractively priced products that were acceptable, if not ideal alternatives to the more expensive leaders. They timed the market right and quickly reached positions of leadership.

Beating the Bubble

The bursting of the Internet bubble a few years back was no fun for anyone, but it triggered the remarkable rise of Google and a host of web-based services that created new platforms for innovation.  Customers had grown tired of maintaining shelves full of the software they didn’t use and on-demand platforms gave them an attractive alternative that was good enough and considerably cheaper than what they had previously used.

Even large companies can benefit from the self-examination that lean times bring. IBM confronted its own mortality in the recession of the early 90s and decided to transform its business.  Sure, the company went through plenty of cost-cutting, but it also maintained a commitment now to draw down its investment in research and development.  As the economy recovered in the mid-90s, those innovations investments paid off in a stream of new products competitors couldn’t match. The company also took advantage of recession to adjust its culture to delivering value in a few markets instead of dominating them all.

In all the cases above there was one constant: hard times created a need for new value.  The companies that benefited where the ones that invented ways to deliver “good enough” value at significantly lower cost.  There’s no reason to believe this time will be any different. Citi Investment Research is forecasting that corporate IT spending in the U.S. will drop 10% to 20% in 2009. This pullback hurts established players most, but it’s an opportunity for upstarts.

If you compete with giants, I can guarantee you that they are now hunkered down in their foxholes waiting for this whole mess to end.  They’re playing defense, focusing on protecting their business and sustaining their profitability.  One thing they’re not focused on is you.  In fact, at times like these the last thing businesses tend to think about is their competitors and their customers.  That’s what makes now such a great time to move against them. For entrepreneurial businesses with the right attitude, the next year could be the best they’ve ever had.

I’m not trying to make a case to go on a spending spree. Hard times demand discipline. But they are also an opportunity to think of new ways to meet customers’ needs on a thinner budget. A rising tide lifts all boats, but a receding tide draws attention to the sailors who are bold enough to leave the harbor.