Mid-size firms using low-risk innovative initiatives produce valuable returns, but the most adept companies with an aggressive innovation profile grow more quickly, according to the results of a new survey.
The National Center for the Middle Market (NCMM) research institution and growth-oriented CPA firm Cherry Bekaert LLP “Organizing for Innovation in the Middle Market” report is drawn from the results of a survey of 400 middle market leaders and senior managers who share in responsibility for innovation at their companies. They were asked specifically about best practices used by the most innovative and fastest growing middle-market companies. The U.S. middle market is made up of firms from all industries with yearly revenues between $10 million and $1 billion.
I was interested to see that 43 percent of the respondents who rate their companies as “very innovative,” said their company sees annual revenue growth of 10 percent or more. That stands in contrast with replies from 32 percent of respondents who said their companies are “less innovative.” In innovation-intensive industries such as healthcare, technology and industrial, only about a quarter of less-innovative firms experience revenue growth above 10 percent.
“Because the middle market constitutes one of the major engines of the U.S. economy, it’s incredibly important to understand the role of innovation among these firms,” says Thomas A. Stewart, executive director, NCMM, which is a partnership between GE Capital and The Ohio State University Fisher College of Business. “The numbers show that even the smallest innovations support significant growth numbers. While the middle market tends to be overlooked as major innovators, we’ve found that the strongest firms are savvy about how they innovate.”
When it comes to innovation, the study found middle-market companies capture high returns by investing in fewer and more conservative projects, with each project having a high success rate. The data shows that firms earned a 27 percent profit on their most recent innovation based on an initial investment of $1.5 million, according to the study.
Middle-market executives indicate that 57 percent of innovative ideas generated in 2014 went to market, a success rate consistent with innovation by companies of all sizes. These high success rates are likely attributed to the tendency of middle-market firms to manage innovation risk carefully. Indeed, as the report notes, middle-market companies’ choice of innovation projects is often skewed in a conservative direction, with firms focusing on existing markets and employing existing knowledge, with more than half of firms employing a formal process for generating ideas internally.
“Through formal processes and a commitment to problem-solving and innovation within the areas these firms know best, middle-market firms have created a successful, low-risk, higher reward innovation system,” says Dawn Patrick, partner with Cherry Bekaert.
On the other hand, firms which venture into new markets to develop and deploy innovative projects assume greater risk and are managed by a distinct process for ideation, selection and execution.
“Middle-market companies that go off the beaten path and have a more aggressive innovation profile generally are well equipped with off-road capabilities,” says Stewart. “By bringing in C-suite executives and ensuring the appropriate resources and tools are in place, middle-market firms are more quickly rewarded for riskier innovations.”
I was interested to see so many companies considered “very innovative” see annual revenue growth of 10 percent or more. Then again, there is significant growth potential for aggressive companies able to make calculated innovations into new areas.
What are your thoughts on managing risk during innovation, regardless of a company’s size?