Open Innovation and the Middle Market
In my last blog entry, I described the emerging technology partnership between GE Global Research and GE Capital where we’re connecting our scientists and engineers with our network of middle market technology companies. Today, I’m going to dive a bit deeper into the endeavor by taking a close look at the middle market and the unique role it plays in open innovation.
Open vs Closed Innovation
In the traditional “Closed Innovation” paradigm, a company invents, designs, and manufactures a product nearly entirely in-house. R&D is done by the company, for the sole purpose of making products for the company. Vertically integrating the product development processes can be very effective. For one, the company can leverage its experience and directly infuse these learnings into each stage. What’s more, it can create a harmony of purpose throughout development as each process can be optimized for the product’s success.
That said, Open Innovation offers new opportunities to generate technology by working with other companies in the field, with complementary know-how and interests. Per Prof. Henry Chesbrough of UC Berkeley, it is “the use of purposive inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation, respectively.” New ideas can be sourced externally and ideas the company generates could also be sold to others. After all, we currently live in an era where knowledge is more widely distributed, specialized, and easily exchanged than ever before. So when artfully executed, not only can such collaboration increase the chances of internal innovations being successful, it ensures the best ideas get to market faster and that the company can capitalize on more of its advances.
It should be noted that GE Global Research is, in many ways, an open innovation center – given the wide variety of GE businesses it supports, not to mention all the universities, government agencies, and companies with whom we already collaborate.
So, what IS this middle market?
Definitions on what is represented here vary, but most often, as per the National Center for the Middle Market (NCMM), these are companies that earn between 10 million and 1 billion dollars in annual revenue – so neither mom-and-pop shops and start-ups nor megacorporations. Companies here span a tremendous range of industries – from fitness clubs and real estate developers, to semiconductor device manufacturers and energy service providers.
For many countries, the middle market is the engine for growth and employment. This is certainly the case in the US where, despite representing only 3% of companies, it contributes 30% to the domestic product (or about 5 trillion dollars) and one-third of all jobs. Taken alone, this sector would be the 5th largest economy in the world.
What does the middle have to offer?
Now, we can find technology at all ends of the spectrum: from nascent technology at universities, to burgeoning venture capital-backed start-ups, to multi-billion-dollar industrial giants. They each have amazing things to offer. Start-ups often are great catalysts for disruptive innovation, offering the potential for cutting-edge technology and/or alternative business models. Big companies, on the other end, typically have the size, experience, and reach to move the market in significant ways. When considering technology development partners, we may not always immediately think of the companies in between. That said, there are many unique advantages of working with the middle, as exemplified by some of their attributes:
- Track Record & Resilience. Being multi-million dollar companies, they’ve demonstrated the feasibility of their product, technology, and business models at significant scale over long periods of time. So the risk of their technology failing can be lower, compared to those just starting out. While some companies are fairly new, 70% have been operating for over 20 years. Furthermore, through the last economic downturn, while the economy generally contracted, this segment continued to grow – today, it is still outperforming the S&P average by 5-to-1.
- Focus & Expertise. Companies in this segment usually target a few specific markets with a distinct range of products. This affords them great ability to deliver highly specialized solutions and take big swings to shore up or gain market position. It also gives them deep knowledge of their products, their customers’ needs, and the markets they serve.
- Adaptability & Growth Potential. Several companies here may be in “growth mode” – by that I mean looking to sell more of their existing products, expand to new markets, and/or build new products & capabilities. In the case of developing something new, mid-sized companies often offer an attractive balance of the proven capabilities to innovate at scale and the nimbleness to adapt to new circumstances on the other. Business with that predisposition are often more willing to take on new challenges
So just as they sit between big corporations and small companies in revenue, they also may combine some of each groups’ attributes.
To sum up
There are great opportunities for big companies like GE to work with the middle market, in the spirit of open innovation and collaborative R&D. Together, we can leverage each other’s strengths to maximize each other’s technical and commercial potential, with greater speed and reduced risk. So next time you’re looking for a technology partner, definitely look high & low, but don’t forget the middle. We certainly won’t.
For more information, please feel free to check out the following resources:
- University of California-Berkeley Open Innovation Center
- GE Ideas Lab
- Alexy et al. “Does IP Strategy Have to Cripple Open Innovation?” MIT Sloan Management Review. Fall 2009
- Christensen, et al. “The Industrial Dynamics of Open Innovation — Evidence from the transformation of consumer electronics.” Research Policy, 34, 10 (December): 1533-1549.
- Huizingh, E.K.R.E., “Open innovation: State of the art and future perspectives.” Technovation. 2010
- National Center for the Middle Market (NCMM), The Ohio State University
- “Inspired for Growth, Lessons from Middle Market Companies”. Forbes Insight, 2012.
- Sniderman, B. “Three Things Mid-Size Companies Do Better.” Forbes Staff
- Eyring et al. “New Business Models in Emerging Markets.” Harvard Business Review. January 2011
- “The Growth Gang: Mighty Middle Market.” CNBC.