The third article in a series based on the National Center for the Middle Market’s in-depth research report, The DNA of Middle Market Growth: The Three Types of Growth Champions and the Factors that Drive Their Success, this post explores the importance of various managerial actions and how they factor into a company’s growth story.
Middle market companies grow faster than their larger and smaller peers. Some of that growth can be attributed to factors that affect all companies, regardless of their size, such as overall economic conditions or the health of a specific industry. But in large part, middle market executives wield the power to build their companies through the decisions they make and the strategies they choose to follow in areas including finance, talent, and operations.
By completing a full Bayesian network analysis of company performance data collected from 20,000 different businesses over a five-year period (2012-2016), the Center and its partners identified seven specific actions that drive growth. We determined the weight of each of these seven factors in the growth equation and how the factors interact with each other. By understanding the factors and how they come together in a model for middle market growth, companies can better deploy their available resources to pursue and reach their individual growth objectives.
Factor 1: Market Expansion
In many ways, market expansion is growth for middle market businesses. For the majority of growing companies, market expansion through the pursuit of new customers, new geographies, or both, has the only direct connection to revenue growth. Market expansion, which requires an effective salesforce as well as sound marketing and communications activities, accounts for nearly a quarter of the overall growth story for most businesses.
Factor 2: Formal Growth Strategy
Setting formal annual growth targets for each fiscal year and putting processes in place to communicate those targets enterprise-wide and track progress is critical to growth. (For a subset of companies that grow primarily through efficiency, formal growth strategy is the leading factor in the growth equation.) For many businesses, the formal growth strategy drives expansionary activity, which ultimately results in revenue growth.
Factor 3: Investing and Innovating
Investment and innovation in areas including new products and services, business processes, and facilities and equipment, drives market expansion, which in turn, drives growth. Additionally, our analysis reveals connections between investment and innovation and each of the remaining four growth factors (financial management, cost efficiencies, and the two talent factors). The model indicates that decisions leaders make about where to invest and how to innovate influence virtually every other aspect of the business.
Factor 4: Attracting and Retaining Talent
In several past reports and studies, the Center has clearly documented the critical role of talent in the success of middle market businesses. This study reinforces those findings, illustrating once again that the ability to recruit and keep high quality people, and especially top-notch managers and executives, is crucial to growth. The analysis shows that good people help direct the market expansion activities that pave the way to growth.
Factor 5: Financial Management
Making money is one thing. But companies must be able to manage their funds well in order to achieve sustainable growth. There is a strong connection between financial management and a company’s ability to expand: A talented CFO who implements solid working capital management practices and can access affordable funding when necessary can help her company take advantage of opportunities to reach new customers and move into new territories.
Factor 6: Cost Efficiencies
Per the growth model, cost efficiencies are almost equally as important as financial management, making a good COO as critical to growth as an astute CFO. Cost efficiencies are primarily driven by operating efficiencies, however, internal policies and procedures and the ability to maintain margins also weigh into this growth driver.
Factor 7: Staff Development
For companies that wish to grow, it’s not enough to find and keep good people; companies need to develop their talent as well. While investing in training and development is important, the most critical action companies can take to maximize the value of their human capital is to provide clear career pathing for their people.
See the complete analysis and how the fastest-growing firms put the factors to work.
To learn more about the model for growth in the middle market, how different types of growers leverage the factors, and the interactions between the growth drivers, download the Center’s full research report, The DNA of Middle Market Growth: The Three Types of Growth Champions and the Factors that Drive Their Success
Next in this series
Post 4: Innovator Growth Champions: Always Going for More
Post 5: What Middle Market Growth Champions Do Best: 7 Ways the Fastest Growers Set Themselves Apart