Robert Sher, author of Mighty Midsized Companies, identifies and discusses what he characterizes as “six factors in the DNA of midsized companies that set them apart from both larger and smaller companies and give rise to the distinctive challenges they face.”
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Those six factors are:
- A low tolerance for risk
Midsized firms have much more to lose than startups. They have many more employees that depend upon them, and their owners have a larger portion of their personal wealth at stake. Midsized companies just aren’t big enough to survive too many missteps. Their investors keep tight watch on profits and growth to fuel investment value. Startups, by contrast, are all about risk. If they fail, everybody goes out and gets a new job. Their investors know the risks and, in the case of venture capital, have diversified portfolios to manage them. Deep-pocketed Fortune 500 companies, of course, have the resources to experiment with new products and even new business models. They can assume great risks because they can write off multimillion-dollar failures. But in bootstrapping their small firms into midsized companies, many midsized company executives have survived hard times by being frugal. Such frugality makes them risk-averse and often holds them back from getting to the next level. That often includes avoiding making risky but crucial investments in talent, infrastructure, R&D and brand building.
- High barriers to internal collaboration
Midsized companies typically have more than a single office, and their dispersed teams must communicate in order to conduct business. Yet they aren’t so large as to be able to afford taking their managers away from their daily tasks to attend the off-sites or all-hands meetings like larger companies. Nor are they rich enough to pay for in-house organizational development teams or the other tools that big businesses use to keep top management in sync. Startups, on the other hand, typically have all their people in one place, focused on the same or closely related tasks at the same time, brewing their coffee in the same kitchen. Collaboration is easy when you’re gathered around one water cooler. Midsized firms are caught between critical mass and unencumbered nimbleness.
- Few ways to develop talent
Midsized firms (especially those growing quickly) typically don’t have large HR functions to develop leaders, or the cash to invest in successor positions or training the way large corporations do. In slower-growing midsized firms, top managers can’t (or won’t) create adequate opportunities for advancement for younger talent, their future leaders. Midsized companies without multiple business units can’t give aspiring leaders P&L responsibilities. In just about all midsized companies, it is rare to find executives who can spend time mentoring. Everyone is too busy doing his or her own job, making the business run.
- Less investor patience for leaders learning on the job
When venture capital or a private equity firm backs a business, there’s a hard horizon for an expected return. Investors typically believe that the leaders of the businesses they put their money behind should have the skills they need to succeed. They’re not interested in waiting for them to develop. If the leaders don’t produce within the investors’ timeline, they will be replaced. This can lead to a turnover rate at the top levels not experienced by smaller businesses (often run by their owners) or larger companies (in which leadership training is a core activity).
- Less strategic thinking
Big firms have chief strategy officers and teams dedicated to strategy, M&A and corporate development. Startups have a central belief in one opportunity they race to embrace. Midsized firms, however, busy working to make the business they already have run profitably, often have to do their strategic thinking on the fly, with the part-time efforts of the CEO. Maybe, once or twice a year, they’ll have an offsite at a nearby hotel. In general, midsized firms don’t have the time, inclination and skills to consistently think strategically.
- Less seasoned talent
In midsized companies, a high percentage of owners, CEOs, and other leaders began at the bottom. They rose with the business, which means they may never have acquired or got the chance to polish the executive skills you see in Fortune 500 companies: disciplined planning, financial acumen, relationship building both inside and outside the business, talent development, mentoring and Take any one of my law firm clients: great lawyers but no business training or experience. Or a retail client who started a business in college and grew it to over $300 million revenues in 12 years, without ever holding more than a summer job as a teen.
In Mighty Midsized Companies, Robert outlines seven silent growth killers affecting midsized companies along with strategies for detecting and surmounting each growth killer.