The Middle Path to Innovation

The United States is facing an innovation crisis. Many firms, both large and small, need to innovate, leading to unresolved problems, uncreated technologies, and missed opportunities for meaningful job creation. Between 2006 and 2018, lost productivity cost the U.S. economy over $10 trillion, roughly equivalent to $95,000 per worker.

One primary cause of this crisis is companies' polarized approach toward innovation. On one end, corporations focus their R&D efforts on product refreshes and incremental upgrades. This strategy maintains revenue streams and market share while minimizing R&D budgets. These incremental innovations protect profitability and generate modest growth with lower risk. On the other end, venture capitalists pursue high-risk “transformational” innovations to disrupt industries and yield substantial returns. They rely on a few successful innovations to offset numerous failures. To achieve an eventual M&A or IPO, entrepreneurial teams behind these innovations must invest considerable time and energy into building operational capabilities.

However, this approach could be more efficient. It would be more economically sound if established companies did more in-house innovation rather than paying hefty prices to acquire start-ups. Hence, we suggest targeting the large gap in the middle of the innovation spectrum, where large firms are best positioned to execute their innovation efforts.

In this article, we introduce the growth driver model, a new approach to innovation. We use the case study of Cordis, a large medical device technology firm, to illustrate how this model revived innovation and demonstrate its applicability across various sectors.

The Growth Driver Model

Our model consists of three stages. First, a corporation partners with an external investor to identify where riskier innovations are needed and how these fit into the firm’s strategy. Second, the corporation and investor establish an off-balance-sheet “accelerator” company to develop the innovation projects. Finally, the innovations are developed, with the accelerator identifying and building products and services to generate long-term revenue growth.

This model works best when an active partnership between a corporation and an external investor, typically a private equity firm. Private equity firms are more suitable partners than venture capital firms, as they are more experienced in working closely with large corporations and managing the necessary scale of investments.

Stage 1: Identifying the Opportunities

In the first stage, corporate decision-makers and their investment partners target innovations that fall between incremental corporate R&D and transformative VC innovations. These include augmented and synergistic innovations. Augmented innovations significantly improve existing products, offering better cost or functionality. Synergistic innovations derive value from their adjacency to existing products, often bundled into existing sales, marketing, and manufacturing processes.

The growth driver model aligns the interests of corporations and investors, overcoming obstacles to growth. Corporations have a list of desired products but are wary of the risks, while investors have funds but must search for profitable opportunities. By working together, they can prioritize needs, evaluate trade-offs, and develop a target list for innovation.

Stage 2: Creating an Innovation Accelerator

In the second stage, the corporation and external investors create an off-balance-sheet accelerator to develop target products. Corporate decision-makers and accelerator leaders collaborate to identify needed innovations and their integration into the firm's strategy. The corporation acts as the customer for the accelerator’s innovations.

The development budget and acquisition prices are determined, ensuring the quality and fit of products within the corporate portfolio. The acquisition price is set based on the anticipated value created, providing a superior value proposition for both parties compared to internal R&D or traditional M&A.

This arrangement leverages the corporation’s operational capacities while fostering an entrepreneurial environment at the accelerator. It ensures that funding for innovation will not fall victim to corporate cost-cutting and that the accelerator has the assurance of acquisition. The accelerator’s management team collaborates with, but does not report to, the company’s leadership.

Stage 3: Developing the Innovations

In the third stage, the accelerator’s leadership team recruits critical management and technical talent to develop products, offering incentives to ensure they align with the corporation’s strategic aims. Working in an accelerator allows innovative people to focus on designing and engineering new products without the distractions of building operational infrastructure or engaging in extensive fundraising.

The accelerator attracts talent by offering a fast-paced entrepreneurial climate and removing funding and acquisition risks. It builds a bullpen of best-in-class talent and develops a network of development companies, each working on multiple products. The predetermined transfer price of successful products ensures that team members receive a more significant return than they would at a large corporation, with more certainty than in a VC-backed start-up.

Overall, the growth driver model produces innovations at lower cost and more incredible speed through collaboration between the company and multiple development companies fueled by external investment. Engineers can focus on their projects, and coordinated teams can produce multiple innovations simultaneously, custom-designed for integration into the existing product portfolio.

The Innovation Spectrum

This table compares three points along the innovation spectrum: internal innovation, the growth driver model, and external innovation.

The Model in Practice

Medical technology is a $500 billion industry with significant barriers to internal innovation. Large med-tech companies often focus on incremental innovations, while VC-funded start-ups pursue high-risk, transformative projects. In 2021, Ajax Health, with investment firms Hellman & Friedman and KKR, acquired Cordis, a med-tech company, to revitalize its stagnant product line. They established an accelerator, Cordis-X, to develop new products, leveraging Cordis’s manufacturing and sales capabilities.

This partnership allowed Cordis to initiate new product development quickly, leading to significant revenue growth. By recruiting experienced innovators and creating a dynamic network of development teams, Cordis-X successfully filled gaps in Cordis’s product portfolio and improved its market position.

Conclusion

The growth driver model leverages a firm’s capabilities to unlock new revenue streams by tapping into innovators’ creativity and agility. Incumbent firms develop a sustained innovation capability, reducing reliance on costly M&A efforts. Executives can better develop corporate strategy, investors unlock more significant value creation, and entrepreneurs focus on innovation. This model benefits society through job creation, efficient resource use, and innovative products that enhance quality of life.