Having worked on both the agency and corporate sides of the desk, I can attest that most companies are more comfortable sticking to last year’s budget allocations than changing them. There are a variety reasons for this.
One reason is that the budget for the previous year was approved, so it’s logical to think maintaining this course will help them in the next year. The problem with continuing a budget year-after-year is it makes it difficult to establish and track specific results, and it usually does not bring growth gains that nearly all budgets state as a primary goal.
Consider two companies, each with a different set of brands and strategic initiatives. Company A spends most of its budget on direct-to-market campaigns aimed at a specific customer demographic and adjusts its budget in micro-increments after business results area analyzed. The company adjusts its mini-campaigns based on the results. Sounds pretty smart, right?
Now consider Company B, which invests in specific business divisions that perform at their highest projections and rewards them for their performance. Major changes are made to the company’s budget allocations as success is achieved based on the division’s earning potentials.
Over a number of years, which one of these companies would you suppose would end up the winner? If you guessed Company B, you would be right. That’s because, as time goes along, the larger investment in the strongest brands based on performance will outperform weaker brands that have been propped up with incremental budget support.
Over the years, I have found companies much more comfortable with taking “small steps” because they felt they were taking on less risk. After all, if they guessed wrong, they only hurt themselves in a small way.
Therein lies the major strategy misstep that companies fall prey to in the budgeting process. They train their executive management—and, therefore, their staffs—to not look for big opportunities, but ‘safe’ ones instead. So over the years, a company can underspend itself out of business, particularly if it applies this same strategy to product development.
It’s sad to say, but many companies are in a downward spiral this year because they can’t break out from what they did last year.
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