Transcript
Speaker: Growth, it's not who you are, it's what you do. Listen as we reveal the secrets behind middle market growth. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: I'm Tom Stewart, Executive Director of the National Center for the Middle Market, located at the Ohio State University Fisher College of Business. And I'm Doug Farin, Managing Director of the Center. On our first episode of this podcast, we talked about the role that middle market companies play in the U .S. economy, some of its characteristics, some examples of these companies, the fact that they're
Speaker: contributing a third of private sector jobs in GDP but a much bigger piece of economic growth. Trevor Burrus And we're going to double down on that growth bit today. We're going to really look more at growth, just a random number from 2016.
Speaker: Mid -sized companies, the middle market grew its top line at a 6 .9 % rate in 2016, which compares to 4 .4 % for the S &P 500 for the big companies. So I mean more than 50 % faster growth in the middle market than in big companies. And that's what we're going to look at. Why is it that mid -sized companies produce most of the growth in the economy?
Speaker: It's not what you'd expect. All the attention gets paid to small companies, startups growing, or when big companies move jobs and facilities into or out of a state or a city. That gets the headline, but there's all this growth in the middle that people don't see.
Speaker: We have this legend that small business is the big source of job growth, but that legend, well, there's truth to that part. There's a lot of job creation in the middle market, but a lot of job destruction. We just saw some numbers that showed that the average brand new startup company
Speaker: actually becomes a net shedder of jobs after its first year. So they start up, they scale up, and 365 days later, they're saying, whoops, and I'm sorry, we gotta let you go, or we've gotta cut, or some of them, of course, shut down altogether. So they create lots of jobs, but they kill a lot, too. And in the middle, there's this sort of sweet spot between resilience and growth. They're small enough to have lots of running room, but big enough to be able to take a punch and keep on going.
Speaker: So would you say, Tom, that's a little bit of the why, and we've been able to take a look at the how? Yeah.
Speaker: So I'm going to share a little bit of our early discoveries. Early on in the center, we recognize that there were a special set of middle market companies that grow faster than their peers. They're typically reporting double digit revenue growth year over year. They are performing better than their peers. And we really wanted to know why we wanted to investigate whether these companies were in a
Speaker: magical industry in a segment of the country that seems to be doing well for some reason, but what we've actually found is a common set of behaviors that are consistently exhibited by these fast -growth companies, high flyers, or what the center likes to call
Speaker: growth champions. So I think, Tom, maybe we'll just have a discussion on each of these five characteristics and kind of share some thoughts. So I want to talk about the first characteristic, which is running a great shop, essentially operational excellence. What we see are the fastest growing middle market companies having very tight operations, they're very disciplined in their systems, and they're focused on cost and service. And
Speaker: of the things we're going to share today, maybe this idea of operations excellence is the one that we see most frequently or is the most intuitive. Would you agree? Yeah, but it's also the least glamorous. I mean one of the things that I think is interesting is, you know, and it happens more with big companies, is you get, you know, a big deal was struck, you know, XYZ company buys ABC company or so on and so forth.
Speaker: blocking and tackling what the great late Woody Hayes used to call four yards in a cloud of dust of operational excellence is extraordinary. First of all, you can produce a better product for less cost. I mean, that's just good. You are not wasting resources. But another thing that's really interesting for these companies is that
Speaker: I mean, it seems to me that if you have operational excellence, you are also finding your own money to invest. So it's not like you have to go to the bank to raise capital. You can raise capital because you're being more efficient, because you got less inventory, because you're just operating the place better so you can produce more with less, and that means free capital. I mean, a classic example of that is the company that goes all lean.
Speaker: and suddenly has so much less inventory that they don't need as much factory space or warehouse space. So they just bought a building, you know, with their own money without – and actually they didn't buy a building. They just discovered a building that they already had. So Tom, you just mentioned Lean. Some people might be thinking, are these companies employing Six Sigma? Are they implementing Lean? Is that always the case? Do you think that's necessary? You know, we did a study, Peter Ward, who is on the faculty at the Fisher College of Business.
Speaker: and runs a Center for Operational Excellence, founded the Center for Operational Excellence at Fisher, worked with us on a study of this and here's one of the things that I thought was so interesting. We did a compare -contrast on operational excellence between big companies and mid -sized companies.
Speaker: And the big companies were much more likely to have a theory. We are lean. We're total quality management. We're Toyota production system. We're this. And they would apply that theory. This is our toolkit. This is how you use it.
Speaker: The mid -sized companies were a little less likely to actually have a well -developed toolkit. They sort of said, oh, I see a nail. I think I got a hammer here. And, you know, they would sort of apply the right tool. I mean, it's interesting because
Speaker: It struck Peter and struck us that there's an opportunity for these companies to get even better at operational excellence if they could bring some of that book learning to them. But the other thing, and Doug, remember the stuff we found there about sweeping things under the rug? I was just going to bring that up.
Speaker: pretty common practice of management by walking around. Whereas at big company, you might see operational issues get swept under the rug or kind of held back from management. There's no rug, right? There's no place for these companies to really hide the issue. And when you have such an engaged senior leadership team who are walking around and keeping their eye on the day -to -day operations, it's much
Speaker: more difficult for an organization to hide those problems. So what they do is they tend to address them immediately. The other thing we found that I thought was fascinating and this will get to one of the second growth levers, everybody when they look at their operations and whether it's the factory or the back office, I mean it doesn't matter whether this is manufacturing or services, everybody has ops, right? But when they're looking at their operations, they are looking for cost
Speaker: and they're trying to measure, did I save money? I do an improvement project, did I save money? How much money did I save? The bigger companies
Speaker: were like nose to the grindstone focused on costs. Cost was the thing they thought about. In the mid -sized companies, what we found was that cost was a big deal but it was almost as much. They wanted to measure improvement in customer satisfaction. So it's not just did I cut costs but did I improve my operations in such a way
Speaker: that my customers got stuff faster, got stuff on time, got the right, there were fewer errors in the order. I mean that customer satisfaction was as important a measure of back office improvement as cost was. And I mean one of the reasons I think is there's a shorter distance between the back office and the customer in a mid -sized company. It's not like you're rolling this up through 10 factories and you know it's a whole separate division. It's the customer,
Speaker: You know, somebody at the lathe can smell the customer just on the other side of the wall. So that's part of it. But I think it's also – is to this growth secret, which shouldn't be a secret, of customer focus. Yeah, that's a great segue. So our second characteristic of growth for ambient companies is a relentless focus on the customer. It may seem obvious.
Speaker: The ability to attract and invest in attracting new customers to their business is clearly a differentiator for these firms. What are a couple of examples of those? One would be
Speaker: excellence in marketing and communications capabilities, the ability to share their story, to reach out to customers in new and different ways. An example of that could be proficient in social media. We've come across middle market companies who don't do this at all, some who are very, very adept at it. And clearly for those fast growers, I think this is a thing that sets them apart. And as some of our research has shown, these companies are more likely to be
Speaker: with domestic growth, but also with global growth. A lot of mid -sized companies, as we mentioned on the first episode of this podcast, are suppliers to bigger companies. So they are the ones who supply the pump that goes on the dispenser for the detergent or the hand purifier or something like that. And they may grow with their clients, with their customers.
Speaker: engaged in digital strategies. Any thoughts there?
Speaker: One of the best ways in the world to grow is to have growing customers and grow with them. And if your customer's growing, and if your customer's growing, you want to be their preferred supplier. You want to be the one they go to, so they say, hey Doug, grow with me. Come to China with me. Come to Dayton with me, wherever it might be. Expand with our business. I was talking to a,
Speaker: baker in Chicago who supplies buns to McDonald's and various other fast food restaurants. And this is a classic example of being able to expand because his
Speaker: company's work for McDonald's was so good that they were inviting him in to get bigger and bigger pieces. I was going to say bigger and bigger pieces of the pie, but that's not quite right for McDonald's, but to get bigger and bigger pieces of the opportunity that McDonald's provided for him.
Speaker: Great. Let's move on to our third characteristic of growth champions, and that's a focus on innovation. In our first podcast, we shared the fact that the average number of innovation projects at a middle market firm is three per year.
Speaker: not a lot of choices maybe to move forward with. Another piece of information, the average growth champion company is investing two and a half times more in R &D per sales dollar than the rest of the middle market. So what we're seeing is a consistent focus on primarily innovating in products and services, but it may be back office innovation as well. Do you remember that work that we did on the innovation types?
Speaker: I'm trying to think of the different types of innovation. This was fascinating because one of the things that I think is interesting is when – especially I mean back in my consulting days when I was at Boozing Company, now called Strategy and we did some stuff about innovation strategies and we discovered that even in big companies, often the company may have a strategy but innovation does not.
Speaker: There's like a bunch of guy real gear losers running around in the lab saying, I got an idea and it's not necessarily linked to strategy. So we started working with a colleague of ours named Gretchen Goff on some ideas about how to focus innovation to recognize that every company has a sort of an innovation style or an innovation type.
Speaker: And, you know, everybody likes, you know, alliterative things in business. So we came up with five types. There was the first, the frequent, the focused, the fast, and the – what's the fifth?
Speaker: Oh, and the fat. And the first, that's the company that says, I'm going to be out there on the bleeding edge of technology. I am really going to be out there. You know, I'm going to be inventing the next big thing. I do have crazy guys going in the lab inventing something saying, I wonder if we can sell this, right? That's, that's, that's the ones who want to be first to market. The focused tend to be very focused on a market niche. We are the leaders in roto tillers for your lawn, or we are the leaders on something like this and we are going to go deep.
Speaker: I mean a beautiful example of that, it's not a middle market company, but it's the USAA insurance company, which is absolutely focused in on a set of customers, military customers. There's an ad agency which is a middle market company called GSW.
Speaker: That is the health care ad agency and they're very so they're focused on a set of customers the frequent guys are Often are people who just do it over and over and over and over and over again where the speed is really important Fast food is an interesting example of that You know you won't keep going to Wendy's unless they have the new try at this time You know the the bacon peanut butter burger whatever whatever the specials you know so you have to have that capable
Speaker: To that point, Noodles & Company is a middle market company that we've done some work with. And as you were saying, Tom, in the restaurant industry, it's important to frequently be introducing new menu items and new products. And as we know, Noodles has been doing that throughout their existence. Yeah, I think that the head of R &D for that said something great to us, which is we
Speaker: They actually have a cadence where they set up a, you know, we want to have some stuff, we have to sort of work in six month things. What's on trend now, what's staying slightly ahead of trend, what's being cooked up in the kitchen that will be rolling out in a few months because we need to have a regular rhythm. And then of course there are the guys who are riding on past glories, the fat ones. And that's a difficult process and it can be a difficult process
Speaker: Sometimes for family businesses where the founder, the founder's CEO is getting on and is really happy with the business right now, but may lack the creative juices or even the strategic intent to try to say, gee, what am I going to do for an encore because she or he may not be thinking.
Speaker: Let's talk about the fourth element of high growth, which is talent management. This is an evergreen topic, something that's at top of mind for all businesses. We know there's a fierce battle out there right now for top talent.
Speaker: And growth champion companies are winning this battle, both in attraction and retention. So the idea of having a strong employee brand, a compelling employee value proposition made up of elements like not only salary, but benefits, development,
Speaker: opportunities, culture, and maybe just alignment with values. I'm teaching a class right now at Fisher College of Business on middle market companies. I'm actually seeing this perception among current business students starts to change, whereas before they may have been chasing that big company, now they're starting to see there may be some employee value propositions within middle market companies that make a lot more sense for them.
Speaker: And sometimes it's just a better quality of life. And you may have – I mean there are a lot of them. One could be the disadvantage is there are fewer rungs on the career ladder. So it may be harder to get a promotion. The advantage is each promotion is bigger and I have a broader span of control in each job. So my job in a big company, I might be in this tiny little – you know,
Speaker: box and it gets slowly bigger. But in a middle -sized company, it's going to be larger. I remember talking to a woman in Atlanta who was the head of HR for a software company who was, that you haven't heard of and I'm not going to mention the same, and that was their problem. She said, we need to get, I need to get computer scientists who are graduates of Stanford and computer science. That's the quality of employee I want. I need, but I can't get them because they all go to Google.
Speaker: And then she said, but I keep track of them because when they have a kid, then I can get them because they're no longer interested in playing foosball in the office till 3 o 'clock in the morning. They will come to me. And so it's really interesting. There's a very strong value proposition.
Speaker: But it also, and this woman's story is an example, you can't just wait for them to come to you because they don't know who you are. So you have to have sort of a proactive talent strategy to be out there looking for the people you want and putting your story in front of them. And when you do, it's a pretty good story.
Speaker: So last but not least, the fifth characteristic would be geographic expansion. Looking for opportunity beyond your local or regional market where your middle market company is located is really the key. We've been
Speaker: on this, I guess, message path for a few years now that it's really not wise to play defense. Eventually the competition is going to come to you. So you need to be looking not only at domestic expansion, but potentially international expansion opportunities as well. And we've been able to do a few research projects in this regard. What do you think some of the big things for middle market companies would be when thinking about expansion?
Speaker: You know, all these things are related, right? So talent and operations and innovation and these are all related to each other. If you're going to expand, whether it's from Pittsburgh to Palo Alto or from Palo Alto to Patagonia, I mean if you're – whatever it is, there's an expansion in capabilities.
Speaker: So you're going to have to have the talent. You're going to have to think about not just do I have a market out there, but how do I staff it? How do I get there? Do I have my own resources? Do I ally with people? Are my operations sufficient? Do I have the right products? Do I have to innovate in the products or services? So they're connected. And I think often for mid -sized companies, it's a big jump.
Speaker: The staffs are lean. There are no windowless cube farms full of newly minted MBAs who are clicking and clacking and analyzing the market for widgets in Lower Slovenia. They're big steps and they're big capability steps. So I think that one of the key things is
Speaker: Know your product, know your customer, follow your customers if you possibly can but also get help. Whether it's your banker or your lawyer or your accounting firm or the Department of Commerce or your university, local university or your friends. I mean that's the other thing is. I mean there's no better advice than the advice that you can get from fellow CEOs.
Speaker: who have been through it before. Those things matter a lot and for mid -sized companies, every bet is a big bet. So it's not like you can afford to lose a lot of bets. So you have to have that – remember we were talking at the beginning about the sweet spot between resilience and opportunity.
Speaker: So this sort of geographic expansion tests that because you can't make a lot of moves that you're going to fail out. So you want to make sure those steps work. But if you don't take those steps, you're shooting yourself in the foot. Sure. There's a middle market retailer that we work with at the center. They're actually based in Columbus called Omage. And as they've been thinking about their expansion of brick and mortar, one of their criteria is our next shop needs to be within a day's drive, 300 miles.
Speaker: If there's an inventory issue, if there's a management issue, we don't want to have to wait to hop on a plane and fly out to California. And, you know, that's the way we heard Les Wexner say that that's how he got started with Victoria's Seek with L Brands is figuring out he wanted everything to be within a couple of hours by car or by truck or by plane so that he could manage it.
Speaker: Every great journey begins, every journey of a thousand miles begins with a single step and that's a really good example. We're going to have to come back. I mean there's so much story, there's so much richness in the growth story and we're going to be coming back to that in other episodes of this podcast. But if you want to find that story about middle market growth champions,
Speaker: You can find it on our website which is middlemarketcenter .org. What's the title of that piece?
Speaker: It's caught me on the spot there. But yeah, you're right. It is about all of these specific steps. I would say that— Oh, it's called—no. You can find it on middlemarketcenter .org. The title of the piece is Blueprint for Growth. And you can find that there. We'd love to hear from you. So go to the website, check out Blueprint for Growth, but also tweet to us at middlemarketcenter. We'd love to hear from you, and we'll be back.
Speaker: i with future episodes of the market that moves america thanks a lot
