The Growth Potential Framework

Seven Traits of MidMarket Leaders

The MidMarket Growth Company has developed a framework called the Growth Potential Framework for measuring a medium-sized business’ ability to grow.  It has been developed from extensive research into successful medium-sized enterprises in the UK and Germany, and describes the traits of leading medium-sized businesses.

The seven traits are shown in the diagram and explained in brief below.

• Market Focus.  Market Focus describes a company’s market strategy.  Leading companies select focused, high growth markets and/or very tight, highly specialised niches, which they then seek to dominate. They also have a very clearly defined point of differentiation.
• International Expansion.  International Expansion describes a company’s ability to expand internationally either by export, development of international sales and distribution networks and/or moving elements of production abroad.  Leading medium-sized companies have exploited globalisation within their niche.
• Sales Engine.  Sales Engine describes the go-to-market strategy of and processes that the company has in place to generate predictable revenues.  Best practices in this area include use of both inbound and outbound marketing, tight integration between sales and marketing functions, disciplined use of strategic account management and a multi-channel sales strategy that maximises market coverage.
• Closeness to the Customer.  Closeness to the Customer describes a company’s ability to maintain and develop long term customer relationships.  The leading medium-sized companies have developed interesting and innovative ways of creating “stickiness” with their most valued customers.
• Innovation.  Innovation is critical for developing niche market leadership and maintaining above-average margins.  Leading medium-sized companies typically spend more than average on R&D, work closely with their largest customers to develop new solutions (products or processes) and are often able to sell on value & quality rather than price.
• Funds for Growth.  Growth can be expensive, so medium-sized companies need to have access to sufficient capital to fund their growth.  The very best medium-sized companies adopt very conservative financial policies in order to fund their own growth and are therefore self-funding.
• Leadership and Skills.  Strong, consistent growth requires clear goals, ambitious leaders, professional governance and access to the right skills.  Sometimes, medium-sized companies in the UK are accused of not having ambitious goals.  Leading mid-market firms not only have aggressive goals for growth, but also make decisions for the long term and are able to find and attract the people they need.

How do you use Growth Potential Framework?

The framework can be used by medium-sized businesses to audit their companies’ growth strategies.  The MidMarket Growth Company can work with you to review your performance in each area of framework We will use case studies and examples to compare your company performance against best practices and to help you to develop plans for growth.

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Defining the Medium-Sized Business

Introduction

The definition of a medium-sized business (MSB) has been subject to a fair amount of debate.  The traditional definition has been based on company sales or revenues, with the debate then being about where the upper and lower limits lie.  The lower limit tends to be sometimes £25M per year and usually above £10M.  The upper limit seems to vary from £100M to £500M or even more.  So does a business cease to be a middle-sized business once it’s revenues exceed that number? Hardly. The M Institute, a body focused on lobbying on behalf of MSBs, has defined medium in other terms.

UK Government Definitions

The UK Government defines Medium-Sized Businesses (MSBs) as having revenues between £10M and £100M.  Using this definition, MSBs represent 0.2% of the companies in the UK and 17% of the revenues.  This definition has been used as the basis of the recent CBI research into the sector and is now the official definition being adopted by the Department of Business Innovation and Skills.  For the purpose of being able to measure progress in the sector, it is certainly useful to have a hard definition.  However, are other ways to identify a medium-sized business?

Sales is not all that matters

The M:Institute conducted research into medium enterprises and identified a number of attributes that distinguished them from small or large businesses.  Not all them are always true, but here some examples:

• Ownership.  Medium-Sized Enterprises have often progressed beyond being family owned and managed.  They have usually adopted professional management rather than being owner-managed (at the small-end).
• Employee empowerment. Whereas in a small business, employees are likely to be micro-managed by an owner-manager, medium-sized businesses have grown to a point where employees are more empowered.
• Process maturity and standardisation. Processes are more likely to be formally defined and standardised than in a small business, though not formalised to the extent of this in a large firm.
• Size of customer base. Medium-sized businesses are more likely to hundreds and thousands of customers, rather than tens.
• Funding. Medium-sized businesses are more likely to have access to short funding that exceeds what would be available to small businesses, but they would not have the choice available to large firms.

Conclusion

Medium-sized businesses can be distinguished by attributes other than size.  It is useful to understand these softer attributes, as a sense check to ensure that you are dealing with a medium-sized company as opposed to, say, a small company that has extraordinary revenues.  However, hard measures will always be needed for the purposes of measurement and comparison.  the Government’s definition is useful, but rather narrow.  We prefer the range of £25M to £500M in turnover.

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Growth? In a recession?!

UK Economy in Double Dip Recession

As the UK officially steps back into recession, there have been a lot of articles in the press trying to gauge the level of optimism or otherwise.  The general view seems to be that, whilst the UK might officially have had two quarters of (slightly) negative growth, nothing has really changed.  The UK economic environment “on the ground” amongst medium-sized businesses remains tough, but there are still opportunities.

How are mid-sized company leaders responding? 

Most of the research and commentary amongst medium-sized companies seems to indicate a fair amount of optimism.  For example, in an interim update to their annual growth survey, ECI Partners announced in March 2012 that nearly 80% of companies surveyed expected growth in turnover of >6% in the next 12 months, with 50% expecting growth of 10% or more.

Similarly, analysis of the Top Track 250 over the past year showed that, despite the tough economy, 86% had increased their sales over the past year.  If we can agree that the economy is not significantly harder (though definitely not easier) than last year, then is there any reason to assume that the results will not be just as equally encouraging this year?

Impact of the troubles in Europe

One significant change over the past year or so, however, is the emergence of the debt crisis in Europe.  Many, if not the majority, of medium-sized companies see international expansion as their main source of growth (close to 70% of the companies in ECI’s survey).  Furthermore, evidence suggests that medium-sized companies, especially in the technology sector, prefer more mature markets like US, Germany and Austria to emerging markets such as Brazil, Russia , India and China.  So the challenges in Europe may well have a significant impact on results this year.

So are there alternative sources of growth?

Given the challenges of European markets in particular, companies will need to respond in a number of ways:

• Develop existing customers.  The first place to start in all growth strategies is the existing customer base.  Mid-market companies should stay very close to their most valuable customers, improve service levels of maximise customer retention and then seek opportunities for growth in the current customer base  (eg. through price increases and cross-sell/up-sell opportunities).    
• International Expansion outside Europe.  To counter the issues in Europe, companies may respond by expanding into non-European markets.  Lord Green’s recent trade mission to Turkey provides an example of a market that is seen as being a great opportunity.  Whilst the BRIC markets may be seen as difficult and/or risky to penetrate in the short term, other opportunities may exist in the Far East through “safer” markets such as Singapore or Japan
• Fine-tuning the Sales engine.  Markets are very competitive, which puts additional pressure on sales channels.  An effective sales operation, supported by a strong supply of Marketing-generated leads, is a pre-requisite for growth.  It may even be time to look at the sales channel strategy to evaluate whether the current sales strategy ois covering the market opportunities effectively.
• Product innovation. Lastly, growth can come from product development and innovation. In tight economic conditions, it is often tempting to pull back on product development, but continual investment in this area will be essential over the next few years.

Optimism is the only option

Despite the gloomy news every day, the only sensible response seems to be an optimistic one.  Opportunities do exist, but they will be more difficult to find and harder won.  Mid-sized company leaders will need to re-evaluate their growth strategies and plans to ensure that they are achievable in the current environment. To quote a currently popular phrase, we need to … “Keep Calm and Carry On!”

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Lessons from Germany’s “Hidden Champions”

In the 1990’s, Hermann Simon conducted pioneering research into the success of Germany’s “Mittelstand” companies – a group of medium-sized, highly successful companies that he called the “Hidden Champions”. The Confederation for British Industry (CBI) made a reference to this term in their “Future Champions” research last year, which stressed the importance of investing in the UK’s medium-sized business sector. The interesting question is: what lessons can the UK’s Future Champions learn from Germany’s Hidden Champions?

Who are the Hidden Champions?

The Hidden Champions are a group of medium-sized German companies that have achieved market dominance, but they often have low profiles. Many enjoy world market share of 70-90% in their given market and are ‘truly global’ firms. They are typically family-owned businesses and have proven that medium-sized businesses can out-perform other firms in the private sector. Germany’s Hidden Champions have certain characteristics in common that could provide useful lessons for UK firms.

What do they have in common?

Extensive research has been conducted into the performance and characteristics of Germany’s world-leading Hidden Champions, most notably by Hermann Simon himself, but also by others such as Prof. Dr. Berndt Venohr of the Berlin School of Economics.
In 2008, Prof. Venohr summarised the characteristics of what he calls the “Mittelstandt Champions” into three primary areas: 1) a clear strategy of pursuing Global dominance in narrowly defined niche markets; 2) operational effectiveness through deployment of world class processes; and 3) a family-based governance modeldescribed as “enlightened family capitalism”, as shown in the diagram below.

What questions does this raise for UK firms?

The framework raises some interesting questions for leaders of UK medium-sized firms.
• Firstly, are you following the right strategy? The research shows that the Hidden   Champions follow a global-niche strategy. If medium-sized companies try to operate in mass markets, they will find it difficult to compete with the scale of larger firms. The Hidden Champions select a clearly defined customer group and engage very closely with those customers to meet their needs on a global scale. They cooperate with their customers to develop innovative products and services that meet their customer needs, with a focus on high performance rather than low price. Closeness to the Customer is a key source of competitive advantage.
• Secondly, how effective are your operational processes? The Hidden Champions focus on improving the efficiency of their business and operational processes. They actively seek better ways of doing things and have processes in place for sharing best practices across geographic and organisation units. They also have a strong focus on target setting & performance management. Lower value added activities are often candidates for outsourcing to lower cost economies such as China.
• Lastly, do you have the right governance in place? Many of the Hidden Champions are family-owned businesses, but with externally recruited, professional management. This provides the right balance of the benefits of family ownership and the experience of professional managers. The result is that the Hidden Champions have a strong culture, with loyalty amongst their employees and an ability to make decisions for the long term.

Conclusion

Germany’s Hidden Champions offer some powerful clues for how a company can become one of the UK’s Future Champions. Companies should start by reviewing their strategy, examine whether in fact they have strayed into mass markets and investigate whether there are opportunities to expand internationally to fuel growth. Another immediate priority will be to evaluate their business’ customer relationships. Many companies have become complacent and aren’t in fact as close to their customers as they should be. Then, the focus can turn internally towards process improvement, organisation, culture and governance. Will your company be a Future Champion?

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Market Strategy: Staying focused

What market strategy should a medium-sized company pursue? The answer to this depends much on the particular circumstances of the company in question. We explore here the basic principles that CEO’s of mid-sized companies should follow when faced with the need to make strategic decisions about how to define their markets.

The need for differentiation and/or focus

Medium-sized players will struggle to compete head-on with large companies in mass markets.  They will find it difficult to realise the economies of scale needed to compete on price and will often not have the relationships or “clout” to compete on other grounds.  So success relies on avoiding the mainstream competition and/or identifying a niche market to dominate. In terms of Michael Porter’s Generic Strategies, medium-sized companies need to create either an industry-wide “Differentiation” or “Focus” on a narrow market niche.  Only these strategies will generate higher than average earnings and deliver the cash needed to fuel further growth.  More often than not, the most successful mid-sized companies will follow a “Focus” strategy because sources of differentiation can often be eroded.

The winning strategy of mid-sized leaders

Our work has identified three lessons learnt from the strategies of market-leading mid-sized firms. These are as follows:

1. Focus on a micro-niche. Many of the most successful mid-sized companies operate within very tightly defined markets with highly specialised offerings.  They seek to do one thing only and to be the best at it.  They aim to dominate their sector, often with market shares in excess of 60%. Take a look at the following: Martin-Baker (ejector seats); Andor (scientific digital cameras); Vinten (accessories for TV cameras); De La Rue (money printing); Westwind (air bearings) and Xaar (industrial inkjet printheads).  This is just a short list out of hundreds of such companies we could mention.  They are all fascinating, successful, world leaders that are well respected in their field.
2. Define your market by both customer and product. These market niches are usually defined by a combination of both customers and products, rather than one or the other.  The approach is one of: “this is who we serve and this is how we do it”. This gives the company a clear route for growth: identify new customers that fit the ideal customer profile and develop new products/services to meet those customers’ needs more deeply than anyone else can. Often, this means developing value added services beyond the basic product.
3. Expand Globally. By definition, micro-niche markets are limited in size. So, international expansion is a necessary route to growth.  As an example, 80% of the above-mentioned Martin-Baker product’s are sold abroad. International expansion will be the subject of separate posts in this blog, but, suffice to say, global expansion is a critical part of a mid-sized firm’s strategy.

Leaders of medium-sized companies or business units can define their markets using these principles so that they can achieve market leadership within their niche. A market strategy based on these three principles is a proven recipe for success (and higher margins).  The approach is well documented in “Blue Ocean Strategy” and is also the main strategic thrust of Germany’s Hidden Champions.

Choose a focus and stick to it

The right market strategy is necessary, but not sufficient, for success. You will have to support the strategy with other traits of market leaders, such as constant innovation, closeness to the customer and strong leadership, to deliver above average returns and growth. Jack Welch famously took this approach with GE’s business units – divesting any business that wasn’t either 1 or 2 in its market. The micro-niche strategy is not without its risks (which we will discuss in future posts), but if you apply the above principles, you will establish a firm foundation for success.  The main challenge, though, is to firstly choose a focus and then secondly to stick to it!

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