Essec Business School

With Ashwin Malshe and Nicolas Glady

One major revelation of the economic crisis has been the inherent weaknesses of many large corporations: their often cumbersome hierarchies, sluggish decision-making, over-fixation on short-term profits and neglect of long-term innovation goals. It also made obvious the weaknesses of many small businesses that just didn’t have the capital to outlast the recession. But what did the crisis teach us about medium-sized firms?

Despite being previously overlooked by many analysts, a recent study written by Ashwin Malshe, in partnership with GE Capital’s academic advisory board of cross disciplinary specialists from leading academic institutions in France, the UK, Germany and Italy, and with the participation of Nicolas Glady, reveals the extent to which mid-market firms set themselves apart during the crisis by their resiliency, their commitment to innovation and above all their unparallel ability to contribute to the GDP of their respective national economies.

“It’s clear that big firms have been put at a disadvantage in a world where innovation has become a key economic factor and reaction times to changes in the market must be as short as possible,” explains Professor Glady. “While big firms still have great economic importance, we feel it’s time to give the agile and efficient mid-market firms the recognition they deserve.”

Glady and Malshe’s study took an original approach by focusing on this fairly homogeneous group of business across four European countries – France, Italy, Germany and Great-Britain. What they defined as mid-market were the businesses that brought in about 50 million euro per year and employ roughly 200 employees. The findings of their research – based on detailed business demographics from more than 5m companies, 1,642 board-level interviews and 800 hours of recorded conversation – illustrate the weight of mid-market business while also identifying the key factors of their success and the obstacles that may be blocking further growth.

Above all, this study reveals that mid-market firms were able to thrive and sustain growth, despite the crisis. And it’s this competitiveness in the face of adversity that has allowed them to become a major source of growth for their respective economies.

According to the findings, six key factors set successful mid-market firms apart:

• Their ability to maintain balanced business strategies, anchored in local markets while also branching out globally,
• Their customer-oriented focus on organic growth,
• Their long term investment strategies,
•  Their focus on innovation,
•  Their international reach,
•  And their agile management teams,

“We identified these key contributors to success but we’re really talking about a combination of factors acting in concert to generate growth,” explains Professor Malshe. “If you’re looking at consumer focus on its own for example, it’s not surprising that it drives growth. But this growth cannot be sustainable if there is no innovation.”

With this in mind, it’s not surprising then that many mid-market firms are family-owned. Free from the need to demonstrate short term profitability to their shareholders, these family-owned mid-market firms almost systematically favor a long term investment strategy. “

This long term investment strategy often includes investment in research and development,” adds professor Glady. “For example, despite their relatively small size, this study reveals that mid-market firms generated some 499,000 Germany, 270,000 British, 217,000 French and 143,000 Italian patents.”

“With the recession, suddenly a lot of firms were forced to cut their investment in research and development (R&D),” continues Professor Malshe. “Mid-market firms proved that they were much more flexible and in some cases were even able to increases their investment in R&D and marketing, which would have been tough for a big, publicly listed firm.”

“More than just profitability, the success of mid-market firms is defined by their contributions to local economies,” Ashwin Malshe

All-in-all, it’s important to note that the success of mid-market firms is defined by more than just profitability which remains the bastion of large corporations. The success of mid-market firms lies in their freedom to focus on the long term, to innovate and to grow, all the while contributing to the GDP of their local economies.

Strikingly, these companies in France, Germany, Italy and the UK together make up one of the top 10 global economies with $1.48 Trillion in Private Sector GDP.

Furthermore, mid-market firms protect local economies as they are far less likely to cut jobs compared to their larger counterparts. Professor Glady goes on to explain that many of these firms are what they termed local champions in that they source their suppliers from the local economy and thus have a bigger impact on local economic growth.

Another category of mid-market business that emerged – the growth champions – were set apart by their impressive growth rates upwards of 10%. Looking at the years 2010 through 2011, the study identifies 12% of German mid-market firms, 11% of British, 8% of French and 7% of Italian as growth champions. “

Several key elements contribute to the impressive expansion of growth champions,” explains professor Glady. “these businesses benefit from a combination of factors that contribute to their success: a solid global reach, a focus on investment in long term objective and a drive to innovate. Growth champions are often family owned firms whose investment strategy focuses on the long term.”

“What’s remarkable about the French case is that, unlike their German, British and Italian neighbors, French mid-market businesses are confronted with several serious challenges. It’s important now that we address these.” Nicolas Glady

Looking at the French case in particular, this study identified three major challenges that face mid-market business leaders: financing, regulation and recruitment/retention of talent, areas where larger firms tend to be at an advantage.

Considering the financial crisis, the banking crisis and growing public debt, it’s not surprising that financing is a major concern for French mid-market businesses. Overall, this limits their ability to branch out internationally and recruit the best talent.

“The keyword ‘competitiveness’ is omnipresent in French political and journalistic discourse today,” adds Nicolas Glady. “This raises the question of interactions with regulatory powers. The French situation is very particular in this regard in that large corporate business leaders often hail from the same alma mater as those charged with defining policy. In my opinion, the French elitist system doesn’t encourage the success of innovative mid-market businesses since these firms are generally less connected to world of politics and less capable of retaining top talent.”

“Nevertheless, this situation is set to change. Political actors are today becoming more aware of the challenges faced by mid-market firms. Start-up incubators, designed to grow the French entrepreneurial culture of innovation, have been launched at several French business schools, including at ESSEC. Business clusters are popping up to support the most innovative firms, and the government has shown small and medium-sized businesses a growing amount of attention.”

Overall, the report recommends that mid-market firms get the support that they need – from the government or elsewhere – allowing them to branch out internationally while also maintaining their local focus.

“In France especially, many of these types of reports and recommendations have been made, encouraging more support and a change of approach,” says Professor Malshe. “The problem is, these reports tend to stay on the shelf to gather dust. Results are already encouraging and we can only hope that this latest contribution will have an impact and lead to change.”