R&D Is Fueling Innovation Culture

Research and development spending by U.S. business has finally begun increasing robustly as the economic recovery has continued, reaching $499 billion—the most spent by any nation in a single year—in 2015, the most recent year for which data is available. What’s more, the business sector’s share of those outlays rose to a record 69 percent. For mid-market companies, there’s even bigger news: Many are contributing more than their fair share to the R&D boom.

It’s always been a struggle for medium-sized enterprises to innovate apace with larger rivals because of resource constraints R and other limitations. Yet, a bunch of middle-market outfits are demonstrating that a strategic approach, tight focus and dedication to success in R&D starting at the top and extending down through the ranks of the organization can produce stunning results, making these progressive companies competitive with larger rivals and blessing them with an innovation pipeline that helps them remain profitable players for the long haul.

Ariens, for instance, is an old-line Midwestern maker of mowers and snowblowers that has achieved five years of 20 percent compound annual growth largely because of new products and features that stem from its commitment to innovation. That R&D orientation is evident in a decision to build a $10 million new R&D center and design studio, as well as an ongoing internal conversation via social media about innovation.

“For us, innovation is an everyday activity,” says CEO Dan Ariens. “It’s not something that we just decided, where we’re going to engage in an innovative direction. And innovation is an ongoing, moving target. You’re never there; you’ve never arrived.” Internal innovation also helps Dr Praeger’s Sensible Foods, a New Jersey-based maker of better-for-you frozen foods, to lead change in a rapidly evolving market by ensuring creation of its own new menu items rather than farming out R&D.

A similar dedication enabled Brillio, a New York-headquartered tech consulting company, to develop a new services group that zoomed from nothing to eight-figure revenues in just two years. In fact, an outsized commitment to investing in innovation is a major distinguishing characteristic of “growth champions” of the mid-market—those 10 percent of companies identified by the National Center for the Middle Market (NCMM) as the biggest gainers over time. Outsized dedication to R&D helped these champions produce consistent revenue growth of more than 10 percent a year.

“Where a mid-market company succeeds in making its own R&D a differentiator, there’s usually a visionary CEO behind it.”

The most successful mid-market companies are 32 percent more likely to consider investments in new products and services to be essential and 28 percent more likely to feel the same way about investments in new processes, according to Center research.

“This is investment not just in new products and services but also in their own internal processes and just innovating how they do things as a company,” says Doug Farren, managing director of the Columbus-based NCMM, which studies the U.S. middle market.

Innovation ROI

Mid-market companies that grow the most spend double the average on R&D—six percent of revenues versus just three percent—compared with the average for their industries, according to research by Simon-Kucher & Partners, a monetization consulting firm. “Market leadership cannot be achieved and also not retained from imitation, but only through innovation,” says Georg Tacke, co-CEO.

The obstacles to depending on internal-innovation strategies are enormous for midmarket companies. Without the scale and size of Fortune 1000 outfits, often they are forced to make choices between significant investment in R&D and other, more urgent needs such as new equipment, a fresh IT platform or more employee training. They may be complacent with a steady sales-growth rate of several percentage points off existing products.

Because mid-market outfits on average are about 30 years old, according to the NCMM, they often have a built-in risk aversion “where they’re not willing to bet the whole company on a product or service where the payoff may be great, but the risk is just as great,” Farren says.

This is where leadership comes in. Where a mid-market company succeeds in making its own R&D a differentiator, there’s usually a visionary CEO behind it. “The companies that drive and recognize and foster it,” Farren says, “have recognition at the highest level that innovation is going to be ‘something we do,’ and they drive it and foster it.”

But perhaps surprisingly, success with internal innovation doesn’t require mid-market CEOs to go uncomfortably far afield from what has made their companies hum. Focusing innovation on familiar markets and employing institutional knowledge, rather than venturing out into unmapped “blue oceans,” results in similar profitability and value capture as riskier initiatives, according to the Center for the Middle Market.

So the common denominator of success is a devotion to R&D and internal innovation of whatever stripe. Here’s how the five innovative mid-market companies referenced above do it:

Ariens:  An “Out There” Approach

Innovation has been a pillar since Henry Ariens and his three sons invented the first American-made rotary tiller in 1933, dramatically improving farmers’ ability to aerate soil and raise plants. Then Brillion, Wisconsin-based Ariens created a residential version of the tiller to tap into suburban demand for both grass mowers and snow blowers.

Ariens’s fourth-generation CEO nurtures an innovation culture so Ariens can stay ahead of the monsters of his business such as John Deere and Toro. “We have to be nimble and quick and so we must be much more motivated to come up with brand new things,” he says. “We let our people freely think and go way out there, and when we need to pull it back in and ask, ‘Does this thing become real or not?,’ we pull it back in.”

Proof of this operating philosophy lies in Ariens’ decision more than a decade ago to engineer a huge improvement in the mechanics of its snow blowers by increasing the size of its impellers and improving the integration of the throwing mechanism with pulleys and the engine. Market share lurched upward.

After falling behind in “zero-turn” lawn mowers, the most popular type with American consumers, Ariens redoubled its R&D over the last couple of years and came up with a worthy new zero-turn platform that is the basis of 20 new products that the company launched for the 2017 season. “We’ll get some share back,” Ariens vows.

An unfortunate example of the flip side of Ariens’ “out-there” attitude toward innovation was the company’s early and failed foray into all-electric products about a decade ago. “We were too soon on the market and on the technology,” he muses. The company has an internal blog, open to all employees, for sharing ideas for R&D advances. “Encouraging intellectual curiosity” is crucial, the CEO says. “When your universe of employees is engaged in the discussion and in meeting the challenge, you get a whole lot more return for your invested resources.”

Brillio:  Commitment, Customer, Culture

This Jersey City, New Jersey-based company’s business is to work with clients in a number of industries to help them innovate with and monetize digital technologies for business advantage. But CEO Raj Mamodia knew his company could do a much better job of innovating for itself after Brillio was spun off from parent Collabera in 2014.

“We’re in the business of innovation, so it was extremely crucial for me to figure out a way to make internal innovation an ongoing process,” he says. “After all, we use disruptive technology to help our customers compete and innovate better.”

In boosting Mamodia’s own R&D, Mamodia applied three “c’s.” “Commitment of capital” requires a “focus on making progress on those ideas” where Brillio wants to innovate; a “customer” filter means “all the innovation and R&D has to be addressed to customers’ concerns;” and the internal “culture” must allow “the ability to fail,” but also the capacity “to learn from it.”

Results followed: A new digital and analytics services group created internally from nothing in 2014 already contributes eight figures in in annual revenues for the nine-figure company, a substantial contribution to Brillio’s top line. “Many companies get to that kind of revenue only after seven or eight years,” Mamodia says. “And we figure double those revenues” in 2017.

Dr. Praeger’s Sensible Foods: Pioneers in Processed Foods

One of the pioneers of vegetarian processed fare nearly a quarter-century ago, Elmwood Park, New Jersey-based Dr Praeger’s Sensible Foods plans to super-charge its growth to more than 30 percent a year from the recent 20 percent-plus range after diversifying into gluten-free foods such as a mushroom risotto veggie burger, all developed internally and included in a recent spate of 11 new SKUs.

Being headquartered near New York City gives the company access to lots of new ideas about veggie cuisine sprouting from the local foodie scene. Then Dr Praeger’s turns its development experts loose. It recently hired a new R&D director: Jeff Dworzanski, now director of innovation marketing, previously with Popcorn Indiana. Vertical integration of its manufacturing also helps tighten product cycles and maximize the advantages of internally based R&D.

“R&D is the lifeblood of the company,” says Larry Praeger, CEO of the company founded by his late physician father. “If you don’t have cutting-edge items coming out, you’re not going to survive. But you must have the capabilities in-house to create them. That way we can be sampling a new idea within a week, and another week for production and then we’re traying it—versus a three-month wait to go outside and have someone else develop the idea.”

Graeter’s:  CEO-Driven Innovation

The Cincinnati maker of premium ice creams has never strayed from its smallbatch “French pot” process that’s akin to making ice cream at home, giving it the richness of more cream instead of more air, though it has spread geographically in the Midwest outside its Queen’s City origins.

At the same time, the $50 million, 146-year-old company has become an industry leader in creating new varieties, eliminating artificial colors and flavors and introducing a lower-calorie product using a natural sweetener. And Graeter’s has done so by amping up internal R&D compared with a few years ago.

Much of the difference has been that Bob Graeter, a scion of the family-owned company and director of quality assurance, has shed other duties to focus on product innovation. His biggest project was spending countless hours reformulating Graeter’s vanilla for consumers’ new “all-natural” sensibilities, working with ingredient vendors to get just the right new recipe.

He also came up with a new flavor, Cheese Crown, based on a best-selling cheese Danish that Graeter’s also produces under an auxiliary baking business. “That never could have come from someone outside the company,” Graeter says.

The advantage of internal R&D is amplified by Graeter’s ownership of 41 ice-cream stores around the Midwest, as well as the presence of 12 franchised stores, “giving us a lot of feedback on new ideas,” he says, “that’s quick and efficient.”

Penton:  Reintroducing Risk

David Kieselstein arrived at the helm of New York City’s Penton in 2012 “with a mandate to turn the company into an innovative professional services provider” from a traditional business-to-business publisher and media company with iconic titles such as Industry Week magazine. “So creating a consistent culture of innovation,” he says, “was going to be important.”

It worked: Informa, a UK-based company in similar segments, acquired Penton in November of 2016 for £1.2 billion, citing how its purchase would add “breadth and balance” to Informa’s own portfolio. Kieselstein left Penton at that point. But part of what attracted Informa was how he had redefined Penton’s bailiwick as “any information that could appear on a smart phone” of its B2B user base. Penton had doubled its capital expenditures budget; turned over 60 percent of its staff; set up a shared-services model for technologies while retaining customer-facing marketing operations; and encouraged staffers to just throw new ideas at Penton’s 100 product lines.

Kieselstein also says he began celebrating “every win and every innovation” at the same time that he “reintroduced the idea that we could take risks,” reinforcing the new innovation culture at quarterly “town halls.” New products and platforms flowed, ranging from a tool for tracking global inventory of airplanes available for purchase, to the Equipment Watch app, which Kieselstein calls “the Cars.com for big yellow equipment.” And Penton’s margins have improved by more than 50 percent for the company that had a $388 million annual run rate.