Organizing for Innovation: Where Middle Market Companies Should Place Their Chips in the Great Game of Innovation
Management writers who study innovation tend to focus on how companies get the most from individuals and from teams. Such insights are valuable but don't address the larger picture: the innovation infrastructure. Yes, companies want employees and teams to be prolific creators. But where in the organization do these creators reside? Who funds their activities? Who chooses among projects? What are companies' overarching innovation goals?
To the extent these subjects receive attention, the focus has been on major corporations and small, entrepreneurial companies. The middle market is largely neglected. That's despite the fact that many of the country's most innovative businesses fall squarely in the $10 million to $1 billion range that defines the mid-sized segment. Middle market companies have found ways to field new-to-market and even new-to-world products and services without the massive R&D infrastructure of large companies or the green-field advantages of startups. And unlike startups, middle market players have generally enjoyed enough time and success to thoughtfully design optimal processes and policies in support of innovation.
To learn about those processes and policies, NCMM fellows Michael Leiblein and Justin Miller recently surveyed hundreds of middle market companies--close to three-quarters of them service firms and the remainder manufacturers.* They asked those companies questions on a broad swath of topics, ranging from how innovation is funded and staffed to what types of innovations are pursued to how value is protected and extracted. The responses suggest, among other things, that middle market companies are deploying deep wells of expertise to develop new-to-firm offerings for specific customers and user groups.**
Leaders of middle market companies should take these findings into account as they seek to optimize their own innovation infrastructures. Below are some highlights from their research.
Domain experts, innovation departments, and senior leaders dominate
Middle market firms encourage idea generation from all parts of the organization, but have not formalized widespread contributions. More than a third of service firms and over half of manufacturers actively engage fewer than 10% of employees in the idea generation and selection process. For the most part, idea generation is the purview of those whose responsibilities include innovation or overall company strategy. Domain experts do most of the heavy lifting: 88% of service firms and 69% of manufacturers rely on those specialists for much of their innovation. Another indication that specialized expertise is paramount is that most innovations emerge from discrete functions - such as chemistry or manufacturing - rather than from multidisciplinary efforts.
However, middle market companies are starting to open up their idea sourcing. Internal innovation contests help 43% of service firms to generate ideas and 27% to select them. For manufacturers, those numbers are 35% and 28%, respectively.
Functional areas are the main sources and recipients of funds
Middle market companies look to multiple sources and recipients for innovation project funding. Roughly half of manufacturers and 40% of service firms fund projects through functional-area budgets and allocate money to functional areas. Corporate budgets are also frequent sources of funding, but fewer middle market companies allocate money there. R&D budgets fund projects in roughly a third of companies and are the recipients of 38% of funds. Middle market firms are deliberative about their spending, with 73% of service firms and 67% of manufacturers reporting formal processes to provision funds.
Projects typically target existing customers, markets and technologies
Middle market companies are particularly eager to innovate with and for specific customers or groups of customers, both existing and potential. Such projects tend to be less risky than others because demand is easier to quantify. In addition, many mid-sized companies owe their scale to successful, often long-term customer relationships that make excellent platforms for joint or targeted innovation efforts. Innovation addressing basic research or the understanding of future consumer needs receives less attention. In addition, both service companies and manufacturers devote significant financial resources to innovating in existing markets with existing technologies.
New-to-firm innovations provide the most value
Virtually all respondents reported quantifiable benefits from their innovation efforts, although roughly three-quarters of manufacturers and two-thirds of service firms said that, in a given year, only less than 20% of their sales, profits, or efficiency gains are produced by new offerings. Both types of firms were most successful launching products and services they had never before offered but that exist somewhere in the market. New-to-world products - the true breakthroughs - contribute 20% of sales at roughly a third of service firms and roughly one-quarter of manufacturers. In part, those outcomes reflect the much higher investment allocated to current markets and technologies.
*Middle market status was self-reported by survey participants, based on their understanding of firm size.
**The statistical results reported in this paper are based on a preliminary analysis of survey data. Reported statistics for the service industry are +/-5.7% and for manufacturers are +/-8.9%