Medium enterprises are suddenly getting a lot of attention, here in the UK as well as in other parts of the world. M Institute co-founder Jyoti Banerjee lays out some home truths about midsized business that should not be forgotten as new players jump on to the medium enterprise bandwagon.
I have taken part in more meetings about medium enterprises in the last two months than across the previous three years. These meetings cover government departments, membership organisations, academics, researchers, event organisers and business people.
It looks like medium enterprise, the long-hidden secret of economic growth in western economies, is not going to be hidden any more. In fact, it is going to come leaping out into the open, particularly once the UK government announces its Growth Review in the autumn, which focuses on the opportunities in the medium business segment.
Thanks in part to its inclusion in the Growth Review, medium enterprise is suddenly hot property among all the agencies that want to influence policy thinking in the UK. Who does not want to know best, and to be seen to know best, when the policy-makers ask for help.
But it is not just the UK where this is happening. In the next few weeks, M Institute will be announcing partnerships with international organisations that want to play roles in reaching medium enterprises, and enhancing their performance. One is based in Australia and the other one is global.
So the medium enterprise contagion is spreading. And that is a good thing, from my perspective. In fact, as I reflect on all the newbies jumping on to what has essentially been our very own bandwagon, I can quote Mr James Brown directly and say, "I feel good." When we set up M Institute (my colleague Paul Druckman is co-founder), we did so because we felt that the power, stability and growth that medium enterprises bring to an economy are largely hidden because people failed to distinguish medium business from SMEs. Now that everybody else is getting involved, we can feel vindicated.
But, and there's a big but here, I would like to reiterate what we have learned over the last five years or so of delving into medium enterprise because we see some common errors being made in people's understanding of midsized business. Some of the home truths about medium enterprise are easily missed, especially to people coming in from the cold. So, for the benefit of all, here are some things that we recommend all the new players in medium business pay attention to.
1. Medium business is not about size
This may seem counter-intuitive and it still loses many newcomers to this space, but being medium is not about the size of your revenues or the numbers of employees. To think about numbers is to denude medium enterprises of their power, even before you have got started. Sure, governments think this way, partly because number-based enterprise definitions are baked into the bureaucracies of European states, but also because they want to look at large data sets of companies and size boundaries are convenient when it comes to data analysis in this context.
But be very careful in using size based definitions of medium enterprise, because we found that being medium was much more about attitude and behaviour than it was about revenue numbers. Being medium is about putting an approach to business into play, and we at M Institute define that approach with the use of nine behavioural criteria. We think that the behavioural criteria are much more insightful about medium business than size-based definitions.
2. Executive talent is a serious M bottleneck
Defining scalable processes is a key behavioural issue for medium enterprises. As a result, it is not a surprise that finding and developing executive talent to match changing business processes is a serious problem for medium enterprises, as well as the ability to build competitive organisational structures appropriate to those processes. 88% of medium businesses believe that their success is contingent on the quality of the leadership / management, in the context of which it is interesting that the development of both staff and management is seen to be the single most important success factor for a medium organisation.
3. Growth is the key pre-occupation of medium enterprises
We have to consider growth for medium enterprises from two different dimensions: regional leadership and diversification of the customer base. Medium organisations have the same significance at regional level as the largest 300 organisations have on a national scale. Though very few medium enterprises are national champions, we do have a sprinkling of them who are world champions, with chip maker ARM being a fine example.
Also, 46% of medium organisations have less than a fifth of their annual turnover from their top five customers, compared with 23% for small businesses. Many medium business leaders feel that growth is their key challenge – if they are not growing, they are probably slipping backwards.
4. Access to finance holds back countless medium enterprises
While there are more funding options open to medium enterprise than there are to small business, there are certain circumstances where medium enterprise finds that funding opportunities are very limited. Asa result, employing suitable financing strategies and instruments to facilitate diversification of the owner base and to enable the attainment of the organisation’s chosen growth strategy are substantive challenges for medium enterprises.
A recent Harvard study found that large enterprises that deliver comprehensive CSR reporting are less likely to suffer capital constraints, compared to those that don't. Really what the study's authors are saying is that investors are keener to invest in companies they know more about. Let's face it: medium enterprises don't deliver CSR reports, and many of them have inadequate financial reporting, and most potential investors or lenders know very little about them. If they are digital businesses, things are doubly worse for medium enterprises as they are unlikely to have the sort of collateral that financiers usually use to plug their knowledge gaps.
We have a long way to go to solve the problem of access to finance, but one concrete next step for government here is to facilitate the establishment of a new kind of ratings agency, that focuses on medium enterprises, and goes beyond traditional finance measures because traditional measures don't help. On approach could include the rating of relationship capital.
5. Technology and innovation are significant in medium enterprises, but not for growing employment
Successful medium businesses find ways to exploit technologies, innovation and intellectual property that support and enhance their working. Most medium enterprises recognise that technology and innovation play a key role in two ways. The first important issue is managing diverse technologies in the interactions with customers, suppliers and partners. Secondly, it is the introduction of new innovations in products and processes that enable an organisation to derive competitive advantage.
The curious thing is that becoming more innovative and using more technology often enables a business to become more productive, particularly when it comes to labour. So let's be clear about this. The most innovative mid-sized businesses have less employees. We need to think about this particularly in the context that many policy-makers have high hopes for employment in medium enterprises. Growth in employment only comes when the innovation which increases productivity enables a firm to make more money, and then hire more to grow the opportunity available to them.
6. Medium enterprises operate in a bubble, with very little external input
There is very little external help available to leaders of medium enterprises. Yet, these businesses are much keener than small firms in getting relevant outside professional help in all sorts of areas covering innovation, brand management, market research, creative input, growth strategy, process management, tax and non-executive input. They can also afford it.
7. Medium enterprises bear the biggest load when it comes to regulatory compliance
The received wisdom is that it is small businesses that bear the burden of regulation. I certainly bought into that story when I was a member of the Better Regulation Task Force. But look at it this way: Small businesses either fail to meet red-tape thresholds or use outside services from accountants, etc to provide coverage in regulatory areas; large businesses usually employ professionals to cover every regulatory area themselves; medium businesses struggle to cope with the burden of regulation and compliance, as they usually cross every threshold, and have to deal with these issues themselves.
Of course, medium enterprises do not care a jot for government, and are convinced that if government is involved, they probably need to steer clear of anything coming their way. Policy makers with plans for the medium space, please note...
8. Medium enterprises fare better with foreign inward investment than with export assistance
A lot of attention is given to the sort of export help government can give to medium enterprises. My opinion is that it is often a waste. Instead, we should concentrate on feeding the biggest driver of growth in the growth regions around the world: foreign direct investment (FDI). The more we have FDI, the more we attract to our regions a combination of money, technology, processes, equipment and the best brains from across the world.
The companies that will benefit the most from this will be medium enterprises in the region receiving the FDI. and the curious thing is that it is the existence fo a strong ecosystem of medium enterprises in our regions that will make them stronger candidates for FDI.
Overall, I must say it is great to see a new emphasis on medium enterprise from a raft of interested parties. Welcome, I say to all of you. Of course, it is possible that next year's growth agenda / fashion bandwagon may be different, and you may well move on. That is fine. But while you are around, let's see what we can do to recognise and enhance the power, vitality and creativity of our medium enterprises.
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