Middle market firms reported earning an average profit of 26% on their most recent innovations, according to a recent study, Organizing for Innovation in the Middle Market, by the National Center for the Middle Market (NCMM) and accounting firm Cherry Bekaert. For the manufacturers that comprise nearly a fifth of the middle market, a successful approach to innovation and R&D can be the difference between a banner year and stagnant or even negative growth.
The power of innovation to move a company is particularly evident among manufacturers, our study found. Just one in four industrial firms that identify as less innovative manage to reach or surpass 10% annual growth.
Despite the significance of innovation and R&D in the sector, however, 40% of middle market industrial companies lack a formal innovation process. This can be a major weakness—almost without exception, the most innovative middle market manufacturers have established structures to shape and processes to guide their efforts. But even those companies that do have a formal process often overlook opportunities to innovate better. Here are three:
- The grass beneath your feet may be very green.
In a world where Google is getting into automotive and Apple is fast encroaching on healthcare, the idea of innovating within your existing business area can seem less exciting. For middle market firms, however, nearly half of both revenues and profits are driven by innovation in firms’ “known space.”
The advantages of pioneering new developments for existing customers are obvious. You know them; you know the market dynamics; you need not worry about educating your customers about you or your products.
J-B Weld, the nearly 50-year-old Atlanta-based epoxy company, presents a great example of success in innovating close to your core business. In 2008, the company undertook expansion into a number of areas outside of its current product line, but by staying within the adhesive category with the launch of the Original Cold Weld two-part epoxy system, which provided strong, lasting repairs to metal and other surfaces, J-B Weld’s innovation experienced a higher than usual rate of success in market.
- Think outside the lab.
The strongest middle-market innovators cast a wide net when seeking and evaluating ideas. Then they consult broadly within their company, engaging in cross-functional, interdepartmental conversations about products, markets, and ideas.
The NCMM-Cherry Bekaert study revealed that top innovators are particularly likely to seek input from marketing and finance. An engaged CFO can be an enabler of innovation, not an obstacle to it. By integrating your CFO early on in the innovation process, particularly at the ideation phase, you can focus your efforts on profitable innovation and better define success for particular projects.
Top innovators are also more likely to crowdsource, to conduct focus groups with customers, and to have conversations with frontline and shop floor employees. It is also important to consider the role your CFO is currently playing in the innovation process.
Idea fairs, a tactic embraced by firms like 3M, can be great ways for middle market companies to take advantage of the thinking of all employees, not just those working in the dedicated innovation function. In middle market companies, a large percentage of employees have regular contact with customers or hands-on experience with operations. Their ideas are likely to be practical as well as creative.
- Get the right amount of process: not too much, not too little.
While middle market industrial companies surpass other sectors when it comes to how much they are spending collectively on R&D, they are surprisingly less likely to have an innovation process in place. Forty-two percent of middle market industrial companies don’t have a formal idea selection process, versus just 26% of middle market firms in the health and life sciences sector and 32% of middle market technology firms.
The implementation of a formal process for innovation can have a huge impact on both the quality and quantity of ideas your company is able to successfully develop. Well-constructed processes add rigor without adding bureaucracy, and can make sure that innovation and strategy are aligned, to the benefit of both.
Rubicon Global, a waste and recycling company called “the Uber for trash,” has placed a high priority on internal innovation. The company, which launched in 2008, has experienced rapid growth through effectively channeling its innovations in the areas of logistics, waste and recycling and materials.
As middle market industrial firms continue to lead America’s manufacturing Renaissance, a mastery of the art of innovation will be essential to continued success and long-term growth.
Whether your company’s approach to innovation is high stakes or risk averse, there are significant opportunities to make it better. By taking an accurate assessment of your firm’s unique skills, risk appetite and capabilities in the marketplace, you can more appropriately assess the potential for innovation beyond your current strategy.
About the Authors
Thomas A. Stewart is the Executive Director of the National Center for the Middle Market, the leading source for knowledge, leadership and research on mid-sized companies, based at the Fisher College of Business and in collaboration with The Ohio State University and GE Capital. Stewart is an influential thought leader on global management issues and ideas: an internationally recognized editor and publisher, authority on intellectual capital and knowledge management, and a best-selling author.
Dawn Patrick is a leader of THInc, Cherry Bekaert’s specialty practice focused on guiding growth through innovation. Clients in the Technology, Health & Life Sciences, and Industrial sectors depend on her to help them maximize opportunities for innovation. She is also an Industry Leader of the Firm and leads Cherry Bekaert’s Corporate Tax Solutions group, which specializes in serving the complex tax needs of large multinational corporations. Prior to joining Cherry Bekaert, Patrick spent 22 years with a Big Four firm, including almost ten years as a tax partner in the Lead Tax Services area and three years with a large Atlanta firm.
