Why Innovation Thrives in the Middle Market

Why Innovation Thrives in the Middle Market

Small businesses signify the American Dream, and start-ups are the movers and shakers, embodying entrepreneurial spirit. Then there are the large, billion-dollar enterprise corporations – household names with deep pockets and broad influence. As a country, we’re enamored with both ends of the economic spectrum, but it’s time to pay attention to the middle. At the intersection of resilience and growth, the U.S. middle market is a formidable force for job creation and competitiveness, says Thomas Stewart, a top thought leader on global management issues and ideas.

The country’s midsized companies – there are more than 200,000 of them, defined as having annual sales between $10 million and $1 billion – are “unsung heroes of American capitalism,” according to Stewart, executive director of the National Center for the Middle Market (NCMM). In the last year, the middle market added jobs more than twice as fast as big business and 50 percent faster than small business. Sales are up too (7.4 percent versus 2.9 percent for the companies in Standard & Poor’s 500 Index), generating $10 trillion in annual revenue.

How do they do it? In a word: innovation.

According to recently released findings from “Organizing for Innovation in the Middle Market,” a study conducted by NCMM and growth-oriented CPA firm Cherry Bekaert, middle market companies capture high returns by investing in fewer and more conservative projects.

“It’s incredibly important to understand the role of innovation among these [midmarket] firms,” says Stewart, who gained an extraordinary view of world class industries and leaders from his former careers as chief marketing and knowledge officer for Booz & Company (now Strategy&), and editor of Harvard Business Review and Fortune. “The numbers show that even the smallest innovations support significant growth.”

They innovate in unique ways; after all, “you can’t just take practices from a Fortune 500 shop, lop off two zeros, and apply them,” according to Stewart. And there’s much to be learned from the middle market’s proven low-risk, higher reward innovation system, including these four key takeaways highlighted in NCMM’s report:

  • Profitable innovation ideas exist close to home. Contrary to conventional wisdom, which suggests riskier projects are typically more profitable, close-to-home initiatives generate about the same amount of profit as those that delve into newer territory.
  • Look beyond the R&D team, but within your four walls. It’s not always necessary to hire outside contractors or consultants, or to tap into crowdsourcing to generate your next big idea.
  • Formal processes help propel successful innovation. Simply putting a little structure and definition around a company’s innovation approach can lead to more and better ideas, and higher rates of success.
  • A greater appetite for risk should go hand-in-hand with more capabilities for managing it. Firms and industries do benefit from riskier innovations, but largely because of superior capabilities.

You might also be interested in Stewart’s Smart Business column, which further details the middle market’s “sweet spot,” as well as a compelling infographic that offers “A Guide to Successful Innovation in the Middle Market.”

Stern Strategy Group: