Innovation: the key to business success

30 May 2018

Staying ahead of the competition

A few years ago, we were invited to review a business plan prepared by a start-up company with an innovative idea. The company had been declined investment by a venture capitalist. A good deal of market research had been carried out, key potential customers had indicated their interest, and the company’s bankers had offered some support. The business plan predicted exponential growth over a five-year period, resulting in phenomenal revenues and vast profits. Therein lay the problem. The venture capitalists (VCs) had spotted a fundamental flaw. If the new product was so good competitors would have found ways to imitate it well within the five-year plan, so the VCs needed to know what other innovative products the company was planning to keep ahead of the competition.

Using innovation for business success

The American company 3M, known for post-it notes and scotch tape, is a byword for innovation. Its most famous business principle is the 30% rule: ‘30% of revenues must come from products introduced in the last four years.’ It also has a 15% rule: ‘Our engineers and scientists should spend 15% of their time pursuing projects of their own choice’. 6% of the corporation’s sales revenues are spent on research and development and this has made it one of the world’s great corporate successes. Over the last 20 years its gross margin has averaged 51% and its return on capital employed has been 29%. It consistently features in the top 20 list of Fortune Magazine’s ‘America’s Most Admired Corporations’. What we learn from 3M is that successful businesses innovate and keep innovating.

The UK’s business environment and culture

The USA is a favourable environment for business start-ups and new ideas, with ready availability of venture capital, but the UK is not far behind. The 2018 Global Entrepreneurial Index (compiled by the Global Entrepreneurial and Development Institute) ranks the UK fourth in the world, after the USA, Canada and Switzerland. The criteria of this index are: opportunity perception, start-up skills, risk assessment, networking, cultural support, technology absorption, human capital, competition, product innovation, process innovation, high growth, internationalisation and risk capital.

However, despite the UK’s high ranking as a favourable country in which to do business, when it comes to innovation the picture is less rosy. The Bloomberg Innovation Index puts South Korea at the top and the UK fails to appear in the top ten. Amongst others, this index measures R & D intensity, manufacturing value added and patent activity. If you would like to know what these terms mean visit Bloomberg.

We ought to point out that innovation is hard to define and to measure. Using different criteria, The World Intellectual Property Organization placed the UK third in its 2016 innovation league table, after Switzerland and Sweden.

Innovation needs more than just ideas; it flourishes in a favourable economic environment, supported by funders and advisers, and benefits hugely from academic input. In 2017 more than £1bn was invested in university ‘spin-out’ companies.

Government assistance

The Government thinks that UK companies, large and small, need to concentrate more effort and funds on innovation. Firms are becoming more aware of Research and Development tax credits, but so much more is available. The Government’s innovation agency, Innovate UK, has provided £2.2bn of funding in the last decade, assisting 8,000 companies and creating 70,000 jobs. It is now tasked with implementing the Industrial Strategy Challenge Fund, which is offering a total of £4.7bn of investment in research and innovation over a four-year period.

Innovate UK aims to help businesses to identify the potential in new technologies. It supports businesses by providing funding for the development of the new products, processes and services that will meet or define the markets of the future, and by connecting – to bring businesses together with the right partners, expertise, facilities, financiers and influencers that can help them bring their ideas to market. There are four sectors that it particularly aims to stimulate:

  • Emerging and enabling technologies – including high potential technologies just emerging from university or other research, and cross-cutting technologies and capabilities such as digital, satellite applications, sensors, robotics and design.
  • Health and life sciences – including health and care technologies, agriculture, food and biosciences.
  • Infrastructure systems – including connected transport, energy systems and supply, and urban living.
  • Manufacturing and materials – including new manufacturing and materials technologies, processes, business models and systems, resource efficiency and exploitation of digital approaches.

It also has an open programme to provide grants to any UK company working in any high-value innovative technology, business model or process in any area of the economy.

Assistance is available from Innovate UK in the following ways:

  • Knowledge Transfer Network – to connect with other businesses.
  • Various competitions – for funding development projects.
  • National Contact Points – to help with exporting.
  • Enterprise Europe Network – to facilitate working with European partners.
  • Horizon 2020 competitions – to obtain European Funding.

The future of the last two is uncertain as UK businesses will soon become ineligible for EU funds, although the Government has pledged to continue such financial support until 2020.

Currently, however, Innovate UK can assist with funding of between £25,000 and £10m. Applications are dealt with on a competitive basis.

Now is the time to act

Innovation is an essential route to business success. If you have an idea for a product or process and need to develop it and find a route to market, or you need to collaborate with other organisations, there are a number of routes to explore. You should certainly consider approaching your local university and visit the Innovate UK website. Your local UHY partner can advise you on sources of capital, preparing applications for funding, assist you with a business plan and advise on available tax relief. Most importantly, this is not something to put off until later. Apart from losing your competitive advantage you will also find that some sources of funding and other support will not be available for much longer.

For further information about this topic, please speak to one of our accountants in Newcastle, Jarrow or Sunderland.

As one of the leading firms of accountants in the North East, with offices in Newcastle, Sunderland and Jarrow, we have the expertise to advise you on a wide range of tax related issues.  If you would like to speak to one of our local experts, please contact us.