Strategy Matters

What do your budgets really say about your future? – and why it matters?

We have entered Spring, a wonderful season of new growth, promise for the year ahead – and just as in nature in business – budgets that have been finalised ready to be invested, forecasts ready for the variance analysis – and it has been known in some organisations to re-forecast after just one month!

Financial statements are the narrative, the historical story telling of what has past – the ‘truth’ to the strategy and an insight into some of the cultural drivers and enablers of what the future may hold.

Whilst financial data is the last of the lag indicators (Kaplan & Norton Balanced cause and effect within the Balanced Scorecard) it also has the tell-tale of lead indicators in its midst. The most important predictor of sustained organic growth is investment in R&D followed by training and development and marketing. (Please note that good sense dictates that there is a plan that sits behind the budget spend in these – as in any areas – all tied to the delivery of the strategy).

Setting an objective to deliver 25% of revenue from products less than 3 years old (3i’s key strategic innovation objective from the 1990’s) typifies a business that knows that sustained success is about balancing investment in growth (creating the Stars (hopefully not too many dogs)) whilst extending the life of the cash-cows. To do only the latter obviously drives short term results. A healthy pipeline of innovations – be it products, services or technologies is built on a front facing view of the future needs* of customers whilst keeping a eye on the competitors and potential new entrants.

One approach to help you think differently is to adopt the stance of a ‘disruptor’ and consider how to make your own existing proposition ‘redundant’. What would be required to replace your product / service / technology? This immediately highlights some of the difficulties organisations face when approaching (unrelated) innovation – pursuit of excellence can often narrow perspectives and shadow other options to the point that they are not considered –‘You can’t select an option you’ve not thought of’. This is one of the reasons why Toyota sites its R&D facilities away from all of their other plants.

One of our most successful clients has a very long history of ‘balance’, investing in the key enablers – recruiting high calibre research specialists, working closely with Universities and customers to identify the high cost problems for which they need a high value solution. Investment in high calibre people also means investment in the facilities where they work – and investment in continuing professional development – to keep them both high calibre and engaged. For this company, it is not enough to focus on organic innovation – it has a separate strategy for the ‘fast-moving stars’ of the future – and this is where exponential growth is being propagated.

It would be remiss not to mention that R&D is supported by the Government in respect of reduction in corporation tax – but that is not why innovation must be a strategic priority. Its pride of place in the strategy map of your organisation (with an appropriate Board level lead) is to ensure that your business has a profitable future past the lifecycle of your current product / service portfolio.

Back to the budget, if you’d like to see how innovative your business will be, cast your eye over the relevant headings in your budget for the next year. What investment are you making – and what is the desired outcome? You could also look at that tell-tale indicator – % of revenue from products / services less than 3 years old.

*Knowing the needs of your customers before they do is not an exact science – some companies excel at creating need by establishing new markets – Apple are the most obvious example.

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