Wednesday, May 29, 2013

Why CEOs Should Prevent Cuts Of The Innovation Budgets

It happened many times before. Small company found its market niche and successfully filled it thanks to understanding deep customer needs and being very flexible and customer friendly. Company was fast in bringing new highly relevant products and services to the market; it quickly gained respect and popularity among customers and business partners. Success brought not only profit, but also increasing number of employees and growing byrocracy. Success became the Holy Grail; everything was adjusted short-term according to that. The company lost sight of the surrounding environment, the risk of losing competitive advantage was underminded. Nobody wanted to change something, what works currently and pays the employees´ salaries. When the economical crisis came – savings pressure was added towards this fear of change.Inovative agenda lost priority and consequently the company got into troubles. Either it was lucky, that some competitor or investor bought it, or one day it disappeared completely.

We start to see this scenario more and more often - current uncertain times are intensified by economical crisis. And it does not have to be that way. The ability to constantly innovate no matter what the short-term financial results bring differentiates the successful companies from the failing ones. That si why the valuations of a brand and of a company are based not just on the growth of turnover, profit and return on investment, but also based on the indicator of added value brought by innovation. The role of CEO in the innovative process is irreplaceable. Successful CEO gives priority, a green line to the agenda of innovation, not just to the amount of money allocated to the innovation investments. He or she creates such company culture that serves as a good base for generating new ideas and for their fast implementation.

The worldwide research and development budget of top 500 companies decreased overall only once – in the year 2009, until companies learnt that they do not want to lose their competitive advantage during the most vulnerable times. And also because some companies even increased their share – e.g. Samsung that keeps growing fast – that can be partically attributed to its innovation budget reaching 6% of turnover, amount that is about three times bigger than Apple’s. The question remains – will this low percentage of investment be sufficient for Apple to keep its innovative icon status? Will Apple keep its first place in the WW Most Innovative Companies rank, especially when the innovation and marketing guru, Steve Jobs, no longer runs this company and other competitors like Google and Microsoft allocate around 13% of their turnover?

Innovations allow companies to bring consumers a defined premium that can be reflected not just in the area of justified higher prices. Innovations and image help companies to increase its market share on declining markets, to differentiate self and thus survive in the long-term.
But even the biggest budget for innovation will not be sufficient, if companies use it for the wrong ideas, just to impress its stakeholders by the number of innovation projects in the pipeline instead of by the end financial effect the innovations bring. Innovations have higher chance for success if the new product/service idea resonates with the higher purpose of a company in the area of improving the world for its customers. A company can be successful with the innovation agenda only if it employs the best talents and enables them to creatively breathe and make clever decisions. Only then the CEO can decrease the anyhow high probability of failure.

This article was written for the magazine Obchod & Finance (Mlada Fronta E15) April 2013 issue - double click to download the original.

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