It’s not surprising that innovative companies are successful companies. It’s not conjecture, either. Multiple research projects by academics, practitioners, and the National Center for the Middle Market arrive at the same general conclusion: innovative companies outperform their less pioneering peers. In the middle market in particular, the Center’s research has shown that fast-growing mid-sized firms place more emphasis on innovation than their slower-growing counterparts.
So if innovation points down the path to success, then what is the best way for middle market businesses to pursue innovation? That’s where the research is less clear-cut. In fact there appear to be multiple paths to generating, funding, and implementing profitable and successful innovative ideas, and it’s up to your firm to choose the road that’s right for you.
Prudence pays off for many middle market companies.
For the middle market as a whole, innovating within areas of expertise that already exist and in markets that are already served is hands-down the most popular route. These “close to home” initiatives not only receive the greatest share of most firms’ innovation investment dollars; they are also twice as likely to be successful as more adventurous projects, at least in the executives’ point of view.
What’s more, such conservative projects appear to be quite profitable. The Center’s recent research shows that on average, companies investing in this “known” space put about $1 million toward their last completed innovation project and received an average of $2.6 million in revenues and $1.2 million in profits—a healthy return on investment by any measure.
Since middle market firms are likely to be somewhat limited in the investment dollars they have available, as well as the number of projects they can realistically pursue, it’s no surprise that many middle market firms choose to stick with what they know. This is especially true since these safer initiatives are probably easier to implement, more likely to be successful, and pay off well.
On the other hand, risk can be well worth the reward.
Despite the fact that middle market innovators appear to have plenty of low hanging fruit from which to choose, the companies that consider themselves to be the most adept at innovation are almost twice as likely as their peers to head out onto the open road and explore new knowledge and new markets. These high-talent innovators also generate a greater percentage of their revenues and profits from their “blue ocean” initiatives—about twice as much as less effective innovators. Finally, such firms are among the fastest-growing middle market firms, with past year revenue growth of 10% or more.
And their risks pay off. However, those companies that invested in new knowledge in existing markets reported an average initial investment of $1.6 million with a return of $5.2 million in revenues and $2.7 million in profits for their last completed innovation project. Per dollar invested, that’s 100% more revenue and 125% more profit than companies received when they innovated more conservatively. (There is insufficient data for analysis of the profitability of innovations in the new market/new knowledge territory.) Clearly, developing new knowledge is lucrative business. But such forays are more expensive to launch and come with a higher risk of failure.
Which innovation route is right for you?
So if you’re looking to reap the rewards of innovation, do you play it safe and look at opportunities that leverage expertise you already have? Or do you venture further beyond your comfort zone in pursuit of greater rewards?
The answer has much to do with what you can afford to invest (and, potentially, to lose). It should also be based on your firms’ innovation capabilities and the degree to which you are willing and able to build processes to identify, manage, and exploit risks. If you consider your company to be highly skilled in the innovation arena, then it might make sense to take a bigger risk. But if you’re feeling less confident in your capabilities, you can still achieve significant innovation success by concentrating on the green grass under your feet.
Either way, to learn more about the habits of middle market innovators, be sure to view the Center’s full research report, Organizing for Innovation in the Middle Market.