Incremental Improvement or Innovative Changes?

by Tim Smith, PhD, November 2005

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Every budget tells a story. They begin with dreams that rise in spite of challenging conditions. Line items are characters with specific actions and motives. The characters leverage each others strengths to address their common challenge. When the items coalesce, the challenge is slain and the characters live to fight another day.

If budgets are like stories, then what kind of story is your company going to tell with your budget? More to the point, what kind of story does it need to tell? Does your company need to tell a story of building on the past to address the next period of competition? Or, does it need to tell a story of embarking on a mission to change the rules of the game and embrace a new strategy?

This is the heart of the dilemma in choosing a budgetary paradigm. At one end of the spectrum lie budgets that tell the story making incremental improvements on past efforts. At the other end lie budgets that tell the story of taking innovative changes.

Where a company should lie on the incremental to innovative spectrum is dependent upon factors inherent in its competitive, industry, and corporate dynamics. As such, guideposts which signal where a company should lie derive from examining the relevancy of the current market strategy. This leads to asking questions along the following lines:

• Can the current market strategy deliver the desired results?
• In what ways can changes in the value offering increase your relevancy to customers and prospects?
• What challenges do competitors face when they attempt to copy the current strategy?
• Which new entrants and substitutes are nuisances and which are threatening?
• What governmental regulations under current consideration are likely to change the rules of the game?

Business's that percieve no challenges from the above questions typically choose to seek incremental improvements in their budgeting. Alternatively, companies that are challenged by one or more of the above issues are driven to undertake more innovative changes.

Of the above questions, the area that most deserves probing is that related to the relevancy of the company to its market. Customer demands change due to numerous factors. On the negative side, customers are sometimes under duress to change their strategy in a manner which adversely affects their purchases of a business's output. On a positive side, businesses that understand their customer's challenges are better positioned to create offerings that improve their market relevancy.

Incremental Improvement

Incremental improvements assume that that last years budget was basically correct but there were areas around the edges that can be improved. Budget that are incrementally improved will differ little from past year's budgets. A pure historic-plus-projection budget will derive from forecasting future demand, reviewing the historic budget, and adjusting the current budget proportionately. Further improvements are gained by considering individual line items, their effectiveness, and adjusting these items accordingly.

Incremental improvement usually means changing a few items. This may mean adding a few efforts at the expense of deleting others. Change creates the opportunity to attempt specific actions that were perhaps passed over in the prior year or take advantage of new opportunities in relating to your market.

Typical areas to examine in making incremental improvements focus on dropping poor performing activities in order to create space to attempt new activities. These usually require tradeoffs concerning the following issues:

• Conference exhibit venues
• Trade magazine advertising venues
• Case studies
• Logo design, corporate colors, booth designs
• Website design and information flows
• Direct mail
• Market communications
• Sales force training
• Sales force design
• Sales force size

One of the more dramatic changes that became apparent in this decade of zero's is the shift from marketing communications to public relations. Experts have said that marketing communications, in the form of advertising, is largely ignored and ineffective. Meanwhile, pubic relations, in the form of encouraging third parties to speak positively of the offering, are widely acknowledged and effective. To put this in the business marketer's space, companies are decreasing their spending on advertising in favor of courting the press and analyst.

Some new areas to explore relate to the way that the internet is continuing to change the marketing communications paradigm. The internet has accelerated the decline of the "broadcasting" paradigm in favor of the "narrowcasting" paradigm. For instance, corporate sponsored email newsletters have become entrenched within our business culture and only laggards have yet to establish a monthly or quarterly publication. Other areas where the internet is ushering in changes include:

• Online meetings used in the sales process to replace face-to-face meetings.
• Webcasting, i.e. inviting a number of prospects or customer to meet with your corporate executives over the web and telephony to discuss new offerings or other changes.
• Supporting customer blogs to enhance the feeling of a positive "experience" with your company and to capture insights about their demand for your output.
• Advertising within a Podcast, Online Blog, or E-Publication that addresses your target audience. (Usually, cost-per-thousand impressions in any of the online media are less than that for the legacy media.)

All of these line-item budgetary items are incremental improvements in nature. They assume that your offering is of relevance to your market. They also assume that your marketing message is relevant to your market. And, they assume that your key challenge is in improving your effectiveness in reaching your market and capturing customers.

Innovative Changes

Innovative changes assume that that last years approach is fundamentally inadequate. Budgets that seek innovative changes will differ from prior year's budgets in one specific manner. They will utilize proprietary and competitive insight into customer demand to embark on activities that differ from the norm.

One case study after another demonstrates that companies holding exclusive and factual evidence regarding customer needs are able to change the competitive landscape in their favor. This kind of evidence only derives from proprietary market research.

Many companies use market research to change their marketing communications message from focusing on their features to focusing on the customer's aspirations. Some companies use market research to change their sales approach from telling prospects about their offering to asking prospects about their need. A specific company changed their offering from that of providing surgical utensils to that of providing complete surgical solutions. And, others use market research to change their pricing mechanism.

In each case, specific customer insight led to dramatic changes in the company's approach to the market. This, of course, means budgetary changes.

Market research creates informational asymmetry. It allows the sponsoring company to gather information to which their competitors do not have access. With this information, the company is in a position to change their approach to customers. Even, perhaps, increase their market relevancy.

Yet innovation is not risk free. It implies making changes based upon research that indicates a possible solution to a market challenge, but does not ensure a positive outcome. Using market research to drive a sales and marketing agenda may require sacrificing "sacred cows" in favor or adding new budgetary items. Organizational challenges to these changes may be significant.

The happy balance

And hence, we return to the reason that highly innovative changes are as uncommon as purely incremental improvements: Despite the rhetoric, most people perceive the center of markets as changing slowly while the periphery of the market as changing rapidly. As such, budgets strive to find the balance between supporting evolutionary improvements and embracing disruptive change.

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Author
Tim Smith, PhD, Directorial Editor of The Wiglaf Journal and Adjunct Professor of Marketing at DePaul University.

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