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The art of innovation budgeting: Maximizing returns through strategic growth allocation

Updated: Apr 5

To create real growth, it is important to have a clear understanding of its source. It is crucial to intentionally decide which ways to grow rather than relying on luck. With finite innovation budgets, allocating scarce resources should reduce risk and focus on the best bets. This balance is critical for maximum returns, similar to how a retirement fund needs to balance high and low risks and rewards.


Six simple categories of growth


I have learned that every organisation needs to grow year over year, and the first step to generating real growth is understanding where it comes from. Growth does not have to be complicated, and it can be broken down into six simple categories: new processes, new experiences, new features, new customers, new offerings, and new models. Apple provides corresponding examples for each category:


The Art of Innovation Budgeting: Maximizing Returns through Strategic Growth Allocation | The Globetrotting Investor | Stock Analysis

New processes - Sell the same stuff at higher margins by cutting production and delivery costs, automating for efficiencies, and optimising the supply chain.


New experiences - To increase sales and keep customers loyal, focus on building strong connections with your current customer base and retaining their loyalty. This can be achieved by offering them more of the same products or services and enhancing their overall experience with your brand. Apple's store experience is an example of this, which many would argue is as compelling as the company's products.


New features - Sell enhanced stuff to the same people by adding improvements that drive incremental purchases. An example of this is every new phone Apple release, with better cameras and so on.


New customers - Sell more of the same stuff to new people by introducing the product to new markets with needs similar to your core, or to markets where it might address a different need. For Apple, this goes back to reaching the mainstream rather than the design community.


New offerings - Make new stuff to sell by developing a new product, not just enhancements. Identify untapped needs within established markets or allocate resources towards exploring new market segments. Think HomePod.


New models - Reinvent the approach to selling by exploring novel methods of generating income, channels, and value creation, thereby transforming the way of going to market. This can be as simple as moving to a subscription model, or as transformative as Apple's creating iTunes.


Allocation model example


Making deliberate decisions on how to grow should not be left to chance. When working with limited innovation budgets, it is essential to allocate scarce resources strategically to minimise risk and concentrate on the most promising opportunities. It is crucial to balance the innovation budget to achieve the greatest possible returns. An allocation model, such as the one below, serves as an example of how to achieve this balance:


  • New processes fall outside the innovation portfolio, hence, no budget allocation

  • New experiences and new features are in the evolutionary quadrant (about 40%-60% of the budget)

  • New customers are in the fast fail quadrant (about 10%-20% of the budget)

  • New offerings are in the differentiation quadrant (about 10%-20% of the budget)

  • The combination of both new customers and new offerings is in the revolutionary quadrant (about 5%-10% of the budget)

  • New models can fall anywhere in the portfolio


The Art of Innovation Budgeting: Maximizing Returns through Strategic Growth Allocation | The Globetrotting Investor | Stock Analysis

The same allocation model applies to investments in growth. Some ways to grow are easier than others.


Conclusion


It is important to understand where growth comes from in order to allocate innovation resources effectively. It suggests that companies should focus on maintaining relevance to their core market, reaching new customers with what they already know how to deliver, developing new offerings before the competition, and pursuing high-risk opportunities with new offerings to new customers. In addition, it is important knowing which growth initiatives to pursue and how, rather than placing random bets on silver bullet solutions. By taking a strategic approach to innovation, companies can generate real growth and achieve success.

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