From the April 2005 issue of Entrepreneur

In 2005, the mantra inside many companies remains simple: Cut costs and push the hottest, high-margin sellers. But there's been a quiet casualty in the quest for cost containment and selling more, faster. R&D is suffering. A recent International Survey Research Corp. study on American managers found that nearly 40 percent thought their companies weren't doing enough to develop new products. Compare this to 1991, when only 21 percent of managers felt their companies lagged in R&D.

Now, companies' views of R&D are changing. It used to be that you were only as good as your last project; these days, you're only as good as your next idea. Kraft Foods Inc. co-CEO Betsy Holden was demoted in 2003 surrounding talk that the company wasn't generating new products to counter the obesity epidemic. Pharmaceutical giants such as GlaxoSmithKline are re-energizing new product development to counter Wall Street analysts' claims that their product pipelines are running dry. McDonald's, meanwhile, is finding it must continually introduce new menu items to remain competitive.

What's the Big Idea?

"New products aren't an option anymore--they're an absolute requirement," says Craig Stokely, who worked in the specialty retailing division of General Mills and is founder of The Stokely Partnership, a Wayne, Illinois, marketing and research consulting firm. Instead of being a drain on the bottom line, R&D can help small companies improve profit margins when prices are as low as they can go. "If it's unique, you can command a higher price for it," Stokely says.

Entrepreneurs excel at creating new ideas, and that's a big advantage, says Luda Kopeikina, who worked on reducing cycle times for new products at General Electric Co. and is now president and CEO of Equanex Corp., a Bedford, Massachusetts, consulting firm that advises companies on innovation processes. "Very rarely do you see large companies good at innovation, creating ideas and ramping them up," she says. "That, by its nature, creates opportunity for small companies."

At Signalscape, a Cary, North Carolina, company that makes audio and visual forensics and surveillance tools for law enforcement, new product ideas are generated from customer surveys, says CEO Jhan Vannatta, 43. But resource allocation is a big challenge for the 35-employee company; it concentrates on just one or two new ideas a year. "If none becomes a winner, [we] have a problem," Vannatta says. "But since we're small, we can quickly move on."

When it comes to R&D, smart companies are holding their own feet to the fire. Gillette, for example, aims for 40 percent of annual sales to be generated from products less than five years old. This system forces the company to think about innovation instead of how to wring more out of a cash cow. "It's a perfect way to do it," Stokely says. "It's an attitude, a commitment, and a daily and weekly discipline."

Think about dedicating a percentage of your company's annual sales to R&D--Signalscape dedicates about 20 percent annually. Don't skimp when hiring talented people who can generate good ideas, suggests Vannatta. And stay focused on your main customer base, because it's easy to get sidetracked by the needs of small clients who want features or services that can be added later. Vanatta says, "Focus on one idea, get it done, then move on to the next." This kind of focus netted Signalscape $5.2 million in sales last year.

Think long term, and forge partnerships to enhance existing designs and scale your products, says Kopeikina. Don't neglect inventors who want to pitch you ideas, either. All you need are a few new ideas every year to spur collaboration and keep your product pipeline plentiful.

Learning the right way to brainstorm makes a difference, too. Most company meetings consist of bringing up an idea, then shooting it down. Instead, generate a list of ideas before analyzing each one. You'll open the gates to thinking creatively by separating imaginative thinking from critical thinking, says Gregg Fraley, a partner with Chicago marketing and product development consulting firm D.S. Fraley & Associates. He also suggests having a 15-minute meeting once a week where product and service ideation is the only item on the agenda.

Having a chief innovation officer will take on new importance as globalization, customization and technology increase the competition for a constant stream of new products and services over the next decade. For many companies, it might be time for a new mantra.