Newport Board Group, a CEO Advisory Firm, Warns CEOs of Four Hurdles Facing Middle Market Businesses in 2013 and Five Ways to Avoid Them

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Defy the odds facing middle market businesses

The statistics are that only 1 in 10 will ever grow larger than 100 employees and 7 out of 10 will eventually disappear. But why?

Over the last decade, the U.S. has seen unprecedented growth in the private sector as compared to large companies. The number of smaller companies grew 79% from 2000 to 2010. The number of larger companies decreased 2% for the same period.

According to the latest Middle Market Indicator (MMI), a survey of 1,000 middle market executives conducted by the National Center for the Middle Market (NCMM), middle market revenues are expected to increase greater than 5% for the next 12 months.

Despite all of the growth in the middle market, many companies, most companies will stagnate or go out of business. The statistics are that only 1 in 10 will ever grow larger than 100 employees and 7 out of 10 will eventually disappear. But why?

Small companies often end up in a sort of “No Man’s Land,” the place where growth has slowed or stopped for a variety of reasons:

  • Market – the management team struggles to do for customers what the founder had successfully done when the company was small.
  • Management – the company has been unable to develop a high-capability management team that can take the company to the next level.
  • Model – the company does not have a profitable economic model at a higher scale, and it has not created an infrastructure to support growth and to compete successfully with larger companies.
  • Money – the company does not have capital to fund the anticipated level of growth.

Companies can often move out of “No Man’s Land” or avoid stagnation by focusing on key aspects of what makes the business successful.

Number 1 – Engage the Companies Management Team with Probing Questions

Assess where the business is today and where it should be:

1. Where is the business today? Why is it where it is? Is the team satisfied?
2. Where does the business go from here?
3. Is it on track to get there? What tools are needed?
4. What do our customers need and expect from the company and executives?

Number 2 – Adopt a Market Driven Approach

Companies can often avoid stagnation by adopting clear and precise growth strategies.
However, it often takes the loss of a major client or a client crisis to ring the alarm. Consultants are brought in, people are replaced, costs are cut and more mistakes are made with the opposite intended result.

Companies that have solved this problem generally follow two rules:

1.    All teams within the company, management, R & D, finance, marketing, service and production adopt an immediate customer focused strategy to stem the loss of clients or the perception of bad service.

2.    Objective information needs to be obtained to fully understand the problem-internal blame and disillusion and failure to acknowledge responsibility are fatal.

Number 3 – Adopt a New Growth Strategy

Many companies fail to adopt their product and service mix and business model to the new order. Often they have a product that is selling well but fails to innovate and find that a new competitor has taken over the market. New growth strategies are needed.

1.    Core Strategy – a basic strategy is to expand the company's core product offering either geographically or to new customers and markets.
2.    Adjacency Strategy – are there “adjacent” areas around the company’s core products or services that are natural extensions of the core?
3.    Extension Strategy – extensions involve the concept of the “extended enterprise.” Consider reaching beyond natural adjacencies to product or service extensions that might position the company for growth beyond the core business
4.    New Market Strategy – consider entering new markets through alliances, partnerships, mergers or acquisitions or even franchising your product.

Number 4 - Consider New Ways to Finance the Business

Public companies have alternatives for financing growth through big banks and Wall Street. For private, middle-market companies, the main traditional sources of growth capital have been internal capital generation from profits and bank lines of credit.

Private companies will need to mimic public companies by expanding their sources of capital and creating a backup plan in case current sources become unavailable.

Many capital sources are available to private companies. Examples include Asset Based Lending, SBA loans, receivables financing, sale/leaseback, lines of credit, fixed term debt, and emerging crowdsourcing financing. All have different costs, restrictions and availability. Smart CEOs and CFOs need to be familiar with all of them.

Number 5 – Identify and Manage Risks

According to a 2011 RIMS survey,

  •     Fifty-four percent of companies have partially or fully implemented Enterprise Risk Management (ERM) programs. But forty-six percent have not.

The reason why more companies have not implemented a risk program can best be explained by how the function of risk management is viewed by some CEOs, particularly in private companies. Many believe that ERM is an unnecessary expense that does not promote sales or growth but in fact can impede the growth of a private company. As a result, many private companies find themselves in “No Man’s Land” a point where growth slows or stops because they did not anticipate the risks associated with a formerly fast growing company.

Identify key business risks, attach probabilities to each risk, incorporate risk mitigation (insurance is only a small part of the solution) and continually monitor key business risks.

By adopting these key business strategies, the company will be positioned for continued success.

Michael Evans ((415) 990-1844) is Managing Director of the Northern California practice of the Newport Board Group.

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