Do You Have a Line Item in Your Budget for Innovation? Your Success Depends on it!

It’s that time of year to create a winning plan for next year. To create an annual plan, you will be reviewing last year’s successes and failures. As part of that exercise, I encourage you to analyze your products or services and the margins on each. It’s good if you compare this to last year’s analysis to see if your margins are beginning to slip or if they are stable. If you are not introducing enough fresh offerings or incrementally improving your existing offerings, you will likely see your margins eroding. I would also ask you to do an audit of how many new products or services you brought to market successfully last year and what percentage of your total sales they make up. Hopefully, it’s at least 5-10%. If not, there is an opportunity for improvement.

Why am I asking you to do the exercise above? Because if you do not focus enough on innovation, you are going to experience the problems that a lack of innovation creates such as:

• Pressure from competition
• Lost market share
• Pricing pressure
• Lower margins
• Loss of key people
• Trouble attracting the best talent

The Ultimate Innovation Definition: “Executing an idea which addresses a specific challenge and achieves value for both the company and customer.”  Ideas to Value.

I work with a lot of companies that tell me they need to be innovative and introduce new offerings. When I ask what the budget is for doing this, more often than not, there is not one. Being innovative is expensive, because failure is a lot more common than success. But it is only through these failures that we develop some of the best new ideas.  So, as you create your budgets for the coming year, create a line item for innovation, and develop a key initiative to drive your efforts. 

I am a big proponent of allocating resources for innovation, and it’s more than just dollars—although, that is a key component. So here are a few things to get you thinking about what you need to allocate to be successful.

2. Create a budget for innovation – Innovation costs money. You need to plan for it and do it while you are profitable. I have seen too many companies realize they need to innovate when it’s too late and they are struggling.

In a fairly recent HBR article, a sampling of key people across various industries were asked what percentage of their budget they spend on innovation by category and the results were:

• 5% on incremental improvements that produced faster, cheaper, better sameness
• 5% on small, sustaining innovations
• 5% on big, disruptive innovations

When these same participants were asked what they should spend they answered:

• 5% on incremental improvements
• 10% on sustaining innovations
• 10% on big, disruptive innovations

Your mix may vary, but I think these are good guidelines to get you started as you create your budget.

Your future success and profitability are directly proportional to the amount of time, effort and resources you commit to innovation. Too little and you will experience the problems I listed above. But with the right investments, you can join the ranks of elite companies like 3M, Rubbermaid and Amazon who take innovation seriously and reap the rewards of doing so.

Good luck and innovate in 2018! 

Alan 

HBR Source: https://hbr.org/2014/09/how-to-prioritize-your-innovation-budget