Research and development spending by U.S. businesses finally has begun increasing robustly as the economic recovery has continued, reaching an all-time high of $499 billion in 2015—the most spent by any nation in a single year. And the business sector’s share of those outlays rose to a record 69%.
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 and other limitations. Yet, a number 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% 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.
“Market leadership cannot be achieved OR retained from imitation, but only through 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 Purely 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% of companies identified by the National Center for the Middle Market as the biggest gainers over time. Outsized dedication to R&D helped these champions produce consistent revenue growth of more than 10% a year.
The most successful mid-market companies are 32% more likely to consider investments in new products and services to be essential and 28% 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 organization that studies the U.S. middle market.
Mid-market companies that grow the most spend double the average on R&D—6% of revenues versus just 3%—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 Co-CEO Georg Tacke.
The obstacles to depending on internal-innovation strategies are enormous for mid-market 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.
And because mid-market outfits on average are about 30 years old, according to the National Center for the Middle Market, 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,’.”
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.
The common denominator of success? A devotion to R&D and internal innovation of whatever stripe.
For detailed case studies of five mid-market R&D innovators, see the September/October 2017 issue of Chief Executive magazine.