Don’t Fear Innovation Risk—Learn to Manage It.
In its latest study of innovation among mid-sized companies, the National Center for the Middle Market found that many middle market companies prefer a conservative approach to innovation. By concentrating their innovation efforts on markets and technologies they already know, these firms achieve a high rate of project success and a healthy return on their investment.
Why, then, should middle market leaders bother to look beyond familiar territory and risk venturing out into unmapped blue oceans? Because, our research shows, smart risk taking can generate greater revenue and profitability growth. But it’s important to have the capabilities in place to manage such risks before you take them.
When the risk pays off.
On average, middle market firms allocate only 15% of their total innovation spend to projects focused on new markets and requiring new knowledge. These projects enjoy a 20% rate of success compared to an almost 50% success rate for projects that stick to knowledge and markets that are already known.
But when the Center looked at companies that consider themselves highly effective at innovation compared to companies that rate themselves as less skilled, the numbers tell a different story. Effective innovators are almost twice as likely as their peers to invest in the new knowledge/new market space, and they generate about double the revenues and profits from these projects as their colleagues do.
What makes a good risk taker?
Those firms that do take risks typically rate themselves as highly effective innovators. They are likely to be among the fastest-growing middle market firms: 43% of middle market companies that rate their firms as very innovative experience revenue growth of 10% or more compared to just 32% of less innovative firms.
In addition, several other key capabilities set these businesses apart:
- Risk takers are much more likely than their peers to have formal processes in place for, generating, selecting and implementing innovative ideas. Processes can include programs that incentivize employees for coming up with new ideas; the use of decision-making tools such as innovation portfolios, real options logic, or stage-gate processes; formal monitoring, evaluations, and checklists used during the implementation process.
- Companies that successfully venture into unchartered innovation territory devote substantial top management time to the innovation process. Specifically, top innovators heavily involve senior managers, including the Chief Financial Officer, Chief Marketing Officer, and Chief Technology Officer, at every stage of innovation-- idea generation, idea selection, and idea implementation. These leaders offer invaluable perspective that can align innovation efforts with company strategy and with customer wants and needs.
- Talented innovators embrace open innovation. The best innovators are much more likely to open up the innovation process to people outside of their own companies. They ask their suppliers and customers to weigh in on innovative ideas and implementation strategies, and they are more inclined to hire outside consultants to help with the process.
A more robust innovation structure can expand your innovation comfort zone.
If your company is interested in striking out into more adventurous innovation projects, you can hedge your risks by putting some structure around your innovation practices and processes. By honing your innovation capabilities, you’ll be much better prepared to journey a bit further from home and to reap the rewards of greater growth and profitability when you do.
To learn more about what sets the top middle market innovators apart, see the Center’s full research report, Organizing for Innovation in the Middle Market.