The U.S. middle market is made up of firms from all industries with yearly revenues between $10m and $1bn. These companies account for one-third of the U.S. private-sector GDP and employment and generate $10tr in annual revenue.
The NCMM / Cherry Bekaert innovation study reveals that the 43 percent of middle market executives who rate their firms as “very innovative” experience annual revenue growth of 10 percent or more, compared to just 32 percent of firms who rate themselves as “less innovative.” In innovation-intensive industries like 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 is incredibly important to understand the role of innovation among these firms. The numbers show that even the smallest innovations support significant growth numbers,” said Thomas A. Stewart, executive director, NCMM, a partnership between GE Capital and The Ohio State University Fisher College of Business. “While the middle market tends to be overlooked as major innovators, we’ve found that the strongest firms are savvy about how they innovate.”
Success Rates of Innovation
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 $1.5m.
Middle market executives indicate that 57 percent of innovative ideas generated in 2014 made it 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.
Innovation Tends to Be Homegrown
Middle market companies rely heavily on internally generated innovation, with 72 percent relying on their own teams—either dedicated R&D teams or teams within a specific business unit or function--to identify innovation projects.
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,” said Dawn Patrick, partner with Cherry Bekaert LLP.
Still, middle market executives believe that 25 percent of projects that venture into new markets and/or require developing new knowledge areas can be deemed a success. While these innovations can carry greater risks due to their scale, size and complexity, potentially large opportunities for growth exist for firms that make calculated innovations into new areas.
Aggressive Innovators Grow Fastest
Firms that venture into new markets to develop and deploy innovations 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,” added 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.”
The “Organizing for Innovation in the Middle Market” study surveyed 400 middle market leaders and senior managers who share in responsibility for innovation at their companies to identify best practices used by the most innovative and fastest growing middle market companies. Additional responses from 50 leaders in each of three innovation-intensive industries—health and life sciences, industrial, and technology—augmented the findings.
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