Middle-Market Firms Wary of Smaller AI-Driven Rivals

In the business realm, the word “startup” conjures up the garage as innovation lab, the bootstrapping and scrapping micro-firm that has the potential to disrupt an industry and grow into a behemoth. Apple comes to mind, and so does Microsoft. Social media platforms were once only a twinkle of a college student’s daydream mused upon in a dorm room.

For middle-market companies and especially those with $100 million to $1 billion in sales — which means that they are already well-established — the smaller players in their respective industries, particularly within the services verticals, are gaining currency as formidable competitors.

As detailed by PYMNTS Intelligence in the “Navigating Uncertainty: How Middle-Market Executives Adapt, Compete and Innovate,” 60 heads of product said that the development and tech-driven businesses they help steer are finding that the competitive landscape is shifting.

Among middle-market firms, 42% consider innovation a primary or significant factor in their competitive strategy. But 13% of middle-market product leaders now see startups as their biggest competitive threat, a 2.6x increase from six months ago.

Among the reasons that these smaller players are able to pose new challenges: They may be outstripped by their larger brethren in terms of sales, but they also have the key edge of being nimble, and quite often they harness artificial intelligence (AI) to improve their operations and to innovate in new ways.

Large corporations remain the most frequently cited rivals for the middle-market companies, though the trend has been declining a bit, as the share of middle-market companies stating that these juggernauts are the biggest competitive threat has declined (in favor of smaller companies) from 33% to 27%. Rival middle-market businesses also saw a slight uptick in being named top competitors, rising from 12% to 15%. Private equity-backed competitors seen as a concern were lower among middle-market companies, inching lower from 10% to 6.7%.

Drilling Down Into Service Industries

The competitive shift is most keenly felt in service industries like real estate and finance. In those fields, 16% of leaders now view small businesses or startups as their main competitors, up from 11%.

There’s awareness among all middle-market firms that innovating — in a bid to joust with the smaller challengers — has the beneficial effect of improving their own fortunes. The data shows that, in particular, heads of product prioritizing tech-driven strategies report 54% fewer instances of high uncertainty.

Innovation leads to product differentiation and better perceptions of their brands in their respective marketplaces. In just the past half year, the share of middle-market firms citing technological advancements as a competitive challenge has risen fivefold.

Innovation Is Key to Competitive Strategy

We found that the firms that make innovation a primary or significant factor in their business development roadmaps are likelier to emphasize industry shifts (36%) and customer demand for more advanced solutions (24%), enabling them to pivot faster and reduce uncertainty.

But the road to tech-driven innovations is no straight line. With technological advancements also emerging as a greater challenge — rising from 3.3% to 20% — middle-market firms must balance policy compliance with innovation to avoid falling behind in a complex business landscape.