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Wondering where the next hot food ... hit toy ... big band ... miracle drug will come from? Chances are, from entrepreneurs just like you who are furiously creating new products for the country's biggest corporations. Are small companies America's new RD labs?

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Innovation: Part III

If you've shopped for a golf bag lately, you've no doubt checked out Callaway. After all, the leading golf-club maker ought to sell a good, sturdy bag to lug around those Big Berthas. What you couldn't have seen when you hoisted that Callaway bag to your shoulder was the label "Ogio Engineered" hidden inside a pocket. Today about 90% of Callaway golf bags, in fact, carry the Ogio moniker -- a quiet testament to the little Bluffdale, Utah, company that sold the big company on its innovative ways.

Partnering with leaders like Callaway is a crucial part of the game plan at Ogio, which grew nearly 500% from 1997 to 2001. Although the company also sells its own branded products (sports-gear bags), Ogio has found a lucrative niche helping big companies enhance theirs. The "Ogio Engineered" division has helped fuel the company's stellar rise in sales. Five years ago Ogio took in just $8 million, but by last year sales had skyrocketed to $47 million. The Engineered division kicked in 25% of the company's revenues in 2001. "We're innovating for ourselves, but in order to keep Callaway happy we're innovating for them, too," says David Wunderli, Ogio's president.

Now, Callaway doesn't seem like a company that needs much help being innovative. It was almost a dozen years ago that Callaway's unconventional driver with the big sweet spot took the golf world by surprise. Callaway continues to delight duffers with its deviously inventive designs, but even the $800-million juggernaut can't stay abreast of every technical wrinkle in every product line.

Enter Ogio. The company targets commodity or "sleeper" product categories it can "ogioize" -- a term coined by Michael Pratt, the company's inveterate-tinkerer founder and CEO -- by applying its multipatented gear-bag technology. And then it finds market leaders to partner with. Or the large-company partner finds Ogio, as Callaway did four years ago. For the golf bags that Ogio designs and manufactures for Callaway, for example, the Utah company holds no less than half a dozen patents -- patents for how the bag's sling sits on your back and how the balls pop out of the dispenser when you pinch the neoprene sleeve. "We basically innovate what no one thought was worth innovating," says Wunderli.

Companies like Ogio are the Ginger Rogers to the big company's Fred Astaire. Ogio makes Callaway look better. The smaller company shares its technology with Callaway and even develops patents specifically for Callaway's use in certain products while retaining ownership of the patents for its own future application.

For entrepreneurs who pride themselves on their ability to innovate over and over again, the partnering model is compelling: Do what you do best, and let the big company handle the rest. Ogio has learned that its partners crave freshness and will pay for it, even if they already employ teams of new-product developers. "We're a little irreverent," says Wunderli. "That's what caught Callaway's eye. The big companies are valuing authenticity."

Some of the greatest research-and-development powerhouses of our times (think Procter & Gamble) regularly harvest big ideas from innovators outside their own walls. A range of small companies -- from invention labs and industrial-design firms to all kinds of entrepreneurs, from independent record labels to consumer-goods manufacturers -- are behind corporate America's newest products. And not just in industries you'd expect, like trend-dependent toys and R&D-intensive pharmaceuticals. It's a phenomenon happening everywhere, from high tech to hip-hop.

In many ways, Gregg Latterman, 34, is the prototypical entrepreneur, a guy so passionate about new music that he started his own independent record label. He never intended to become a de facto R&D lab of a major record label. It just turned out to make sense.

In 1993, Latterman, then a Boston accountant, shucked his secure job, took out a $10,000 bank loan, and founded Aware Records, producing from his apartment a compilation album featuring new rock musicians. Over the years, Aware has built a brand by releasing nine compilation albums, popular with sophisticated music aficionados who buy the CDs directly from the company's Web site. But in addition to being that rarity -- a successful independent record label -- Latterman's seven-person company is the little-known engine behind Columbia Music's gold- and platinum-selling artists Train, Five for Fighting, and John Mayer, among others. In an arrangement still unusual in the pop-music business (though common in hip-hop), Columbia funds Aware's overhead and shares its profits with the small company.

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