CIT Voice of the Middle Market:Perspectives from the Heart of America’s Economy                                      Septe...
ACKNOWLEDGMENTSCIT and KRC Research would like toacknowledge Dr. Arnoldo Hax, Alfred P.Sloan Professor of Management Emeri...
Letter from the Chairman and Chief Executive OfficerI am pleased to share with you the findings from our 2012 Voice of the...
Table of ContentsIntroduction	                                                       1The Middle Market: Speaking with a U...
INTRODUCTIONMiddle market companies are the backbone of the U.S. economy1; they drive growth andgenerate $6 trillion in an...
k	 Middle Market Companies Poised for Growth: Many middle market leaders report                         that their compani...
The Middle Market: Speaking with a Unified Voice      ccording to the U.S. Census, the group    enter new markets in the c...
ECONOMIC OUTLOOK AND                                     LOOKING AHEAD                                     Even with econo...
“The economy is kind of in a                                               Notwithstanding the widespread concern         ...
There is also momentum coming out of theGreat Recession of 2008. Half of middlemarket leaders say that their company isstr...
Middle market leaders learned a number of                                                               lessons during the...
GROWTH PROSPECTS AND FINANCING                                                                   Middle market executives ...
Using survey data collected about different                                                           types of growth, res...
Satisfaction withAs the middle market considers growth             Satisfaction with                                      ...
CHALLENGES AHEAD                                                                                       While the middle ma...
“I think the middle market is the                                     THE BACKBONE AND BAROMETERS                         ...
On the topic of job creation, almost all                                                  Agreement Middle Market Companie...
LOOKING TOWARD THE 2012                            Impact ofof the Presidential Election                                  ...
Amount Presidential CandidatesWhile most middle market leaders will likely                           are Discussing…      ...
The Middle Market:Where Leaders DivergeBy Management CapacityEVALUATING STRATEGICMANAGEMENT CAPACITYWith guidance from Dr....
Strategic management is a way                  The CIT survey of middle market leaders                                    ...
When assessing their company’s strategy,         CompanyCompany                                                        Str...
When comparing company strategy to               Effectiveness of Primary Functions Functions                             ...
Middle market companies receive mixed             Performance and                                              Performance...
Lastly, the survey asked middle market leadersto rate the culture where they work. Onlya minority describe their firms’ cu...
“The strategic management index                Researchers aggregated the answers to all of                               ...
PERSPECTIVES ON THE ROLE OF THEMIDDLE MARKETIn the first section, we explored theconsistencies in perspectives among middl...
Middle Market Companies                                              Middle Market Companies with StrongOverall, leaders o...
Concern of Management’s Capacity to Lead                                                 Concern of Management’s Capacity ...
AppendixTable 1: Prospective Growth IndexTable 1: Prospective Growth Index                                    MIDDLE MARKE...
MIDDLE MARKET STRATEGIC                                                                                            MANAGEM...
METHODOLOGY                                                  MIDDLE MARKET IN-DEPTH                                       ...
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2012 middle-market-outlook-rpt-1

  1. 1. CIT Voice of the Middle Market:Perspectives from the Heart of America’s Economy September 2012 cit.com/middlemarketoutlook
  2. 2. ACKNOWLEDGMENTSCIT and KRC Research would like toacknowledge Dr. Arnoldo Hax, Alfred P.Sloan Professor of Management Emeritusand a Professor of Technological Innovation,Entrepreneurship and Strategic Managementat the MIT Sloan School of Management forhis insights and contributions throughoutthis research process.From the onset of the research, Dr. Haxplayed an integral role helping CIT and theresearch teams narrow the study’s focus. Dr.Hax provided counsel on the development ofthe research instruments, including specificguidance related to the topics covered inthe survey instrument. His expertise alsoinformed the development of the questionsrelated to strategic management of middlemarket companies. Once the research wascomplete, Dr. Hax participated in discussionsabout the findings and their implications,offering guidance on the key lessons learnedfrom in-depth interviews as well as the onlinesurvey of middle market executives.
  3. 3. Letter from the Chairman and Chief Executive OfficerI am pleased to share with you the findings from our 2012 Voice of the Middle Market survey. Thiscomprehensive research report highlights the outlook of middle market executives today, aswell as the important role their companies play in the United States economy.As a company that has served the middle market for more than a century, CIT has a uniquevantage point in understanding the vital role these businesses play in our economy. Wealso understand that in order to truly serve this sector, we must have a clear view of the businessclimate these companies face today — both the challenges and opportunities — and what we canreasonably expect in the future.This research report reflects our continued commitment to serving the middle marketthoughtfully and thoroughly — and, through our support of these businesses, to supportingthe growth of our nation’s economy.We hope you find the perspectives and research contained in this report valuable. Thank you tothe many business leaders who provided the candid insights that form the basis of thisimportant work.Sincerely,John A. ThainChairman and Chief Executive Officer, CIT  
  4. 4. Table of ContentsIntroduction 1The Middle Market: Speaking with a Unified Voice 3 Economic Outlook and Looking Ahead 4 Growth Prospects and Financing 8 Challenges Ahead 11 The Backbone and Barometers of the U.S. Economy 12 Looking Toward the 2012 Presidential Election 14 The Middle Market: Where Leaders Diverge By Management Capacity 16 Evaluating Strategic Management Capacity 16 Perspectives on the Role of the Middle Market 23 Appendix 26 Middle Market Growth Index 26 Middle Market Strategic Management Index 27 Methodology 28
  5. 5. INTRODUCTIONMiddle market companies are the backbone of the U.S. economy1; they drive growth andgenerate $6 trillion in annual revenue. The middle market includes more than 100,000companies nationwide that employ more than 30 million Americans.CIT has long understood the economic impact and importance of the middle market andhas been committed to providing lending, leasing and advisory services to middle marketbusinesses for more than 100 years.CIT sponsored this research to better understand middle market executives’ perspectiveson the state of the economy, their companies and their industries. This research is especiallyinstructive as middle market companies and the United States more broadly look to movepast the Great Recession.Several key themes emerged from this research. k Where the Middle Market Converges T here are several areas of widespread consensus among middle market leaders, even given the diversity of middle market firms represented (by industry as well as range of revenue). k Economic Engines: In particular, middle market executives share a strong consensus about the middle market’s vital importance to the U.S. economy. Most say that the middle market has a major effect on the U.S. economy and that middle market companies are economic engines of the economy.1 Revenue and employment figures are from the U.S. Census. 1
  6. 6. k Middle Market Companies Poised for Growth: Many middle market leaders report that their companies are poised for growth in the coming months; many plan to expand into adjacent markets and enter other geographic regions. Moreover, a sizeable number (42 percent) expect to increase their workforce in the coming year. k Satisfaction with Financing: Thinking about financing, middle market executives are satisfied with their companies’ access to credit. In fact, about 8 in 10 are satisfied with both their company’s access to financing and the cost of financing. k Challenges Ahead with Economic Uncertainty and Federal Regulations: Middle market executives largely agree about several challenges ahead, including continued economic uncertainty at the national level and their ability to hire and retain top talent. In addition, a majority say they are concerned with the cost of complying with federal regulations. Two-thirds believe that federal legislation and regulations impede growth at their companies. k Strategic Management Is an Area of Disparity On other issues, middle market leaders cannot be viewed as a monolithic group, most notably when it comes to the strategic management capacity of middle market companies. k Strategic Management Index: Using survey data and leaders’ self-reported assessments of strategic management, the researchers developed an index to rate these companies’ management capacity. Only a minority of middle market companies received a strong rating on this index. The rest have either an average or lacking/weak strategic management capacity. k Differences among Middle Market Executives Based on Strategic Management Rating: Parsing the data by this management index reveals differences between leaders whose companies are rated highly and those who fall into a lower tier relative to their company’s strategic management capacity.This report begins with the areas where views converge among middle market leaders. Thesection on strategic management follows and includes a more detailed explanation of thevariables used to create this index for middle market companies.Additional materials from CIT’s middle market research can be found atcit.com/middlemarketoutlook. 2
  7. 7. The Middle Market: Speaking with a Unified Voice ccording to the U.S. Census, the group enter new markets in the coming year, as well CIT defines as the middle market as grow their workforces. More generally, comprises more than 100,000 they express confidence in the power of the companies, all of which have middle market relative to the U.S. economyrevenues between $25 million and $1 billion. overall, including their role as job creators.From revenue to number of employees to At the same time, there are challenges aheadindustry sector, these companies are diverse. related to continued economic uncertainty atTo reflect this diversity, the CIT Voice of the national level, compliance with regulationsthe Middle Market survey was administered and talent management. Finally, mostto executives who represented a range of leaders expect the outcome of the upcomingindustries and sizes. Still, on many economic presidential election to substantially influenceissues, the leaders of the middle market the health of the economy as well.speak with a single voice.Middle market executives are optimisticabout the strength of their own companiesand their growth potential. Many expect to 3
  8. 8. ECONOMIC OUTLOOK AND LOOKING AHEAD Even with economic uncertainty at the remains a lingering concern. Specifically, national level, many middle market firms more than 80 percent of middle market appear on solid ground; half say they are leaders cite economic instability as a top stronger today, having learned a number of concern. Other concerns, such as hiring and lessons coming out of the Great Recession. retaining top talent, fall into a second tier. The majority of executives also worry about talent Although middle market executives management, but they show less concern believe that their individual companies and about hiring and retaining talent than they do respective industries are on solid ground, about continued economic uncertainty. economic uncertainty at the national level Concerns in Upcoming 12 Months 12 Concerns in the Upcoming Months 0% 20% 40% 60% 80% 100% Total Continued economic Low uncertainty at the Medium national level High Total Low The ability to retain top talent Medium High Total Compliance with Low regulations Medium High Total The ability to hire Low top talent Medium High Total Over reliance on key Low customers Medium and accounts High Total The ability to Low train and Medium develop employees High Total Low Access to capital Medium High TotalManagement capacity Lowto lead coming out of Medium the Great Recession High Very concerned Somewhat concerned Throughout the report, middle market firms are often split by revenue, in particular Low, Medium or High Revenue. Those classified as Low Revenue have an annual revenue of between $25 million and $50 million; those classified as Medium Revenue have an annual revenue of between $50 million and $100 million; and those classified as High Revenue have an annual revenue of between $100 million and $1 billion. 4
  9. 9. “The economy is kind of in a Notwithstanding the widespread concern about the U.S. economy, many middle marketmalaise right now. That’s my executives remain optimistic about their own companies. Firms with higher revenue figuresfeeling. But while there has are more likely than those with revenue below $50 million to describe their companyobviously been some optimism as strong, even the majority of executives from companies with revenues between $25here recently, I don’t see enough million and $50 million are confident as well. Overall, few—fewer than 1 in 10—say that theirin the fundamentals that actually company is weak right now.says this is necessarily sustainable.” – Middle Market Executive Perceived Strength of Company Company Perceived Strength of (General Manufacturing, Annual Revenue: $25-$100 million) Total 15% 49% 64% Low Revenue 11% 47% 58% Medium Revenue 9% 56% 65% High Revenue 21% 46% 67% Very strong Strong 5
  10. 10. There is also momentum coming out of theGreat Recession of 2008. Half of middlemarket leaders say that their company isstronger now compared to before the GreatRecession. Only a minority describe theirfirms as weaker, with four percent saying theyare significantly weaker. About one in fourdescribe their company as unchanged sincebefore the Great Recession.Strength of CompanyCompared to 2008Strength of Company Compared to 2008Stronger 13% 40% 53%About the same 23%Weaker4% 18% 22% Significantly stronger Stronger Significantly weaker Weaker 6
  11. 11. Middle market leaders learned a number of lessons during the Great Recession, lessons they carry with them as they move forward. A majority of these leaders learned the importance of challenging the status quo and said that they identified greater efficiencies around operations in order to have a leaner company. Lessons Learned From“The ones that are left [are stronger]. Lessons Learned Recession the Great From the Great RecessionWell, I’m sure they had to develop Need to continue to change 51%the skills and those kinds of Company can be leaner 50%things to be quick on their feet, to Make strategic planning a higher priority 43%respond in ways that have allowed Closely monitor our pricing to meet customers’ needsthem to survive.” 32% Diversify our business 31% – Middle Market Executive (Healthcare, Annual Revenue: $101-250 million) More customer-centric 27% Need to save more money 24% Find ways to increase our distribution channels 19% More careful about navigating the lending environment 17% Look to offshore for more of our operations and/or production 7% Look to return more of our operations/production to the U.S. 7% Look to oursource more of our operations/production 6% 7
  12. 12. GROWTH PROSPECTS AND FINANCING Middle market executives are optimistic about several types of growth, including increasing the range of products and services they offer and entering other regions. These leaders are Expected Growth in Next 12 Months Expected Growth in Next 12 Months also satisfied with their access to financing, which can support their growth plans. Increasing range of products/services offered in current markets As middle market firms move through 2012 29% 36% 65% and into the coming year, signs of growth are emerging. During the next 12 months, the Expanding into adjacent markets majority of leaders representing the middleHorizontal Growth 16% 42% 58% market report that their companies will likely: Entering other geographic regions k Increase the range of products and 23% 31% 54% services offered in current markets; k Expand into adjacent markets; and Assuming responsibilities previously k Enter other geographic regions. performed by customers 10% 25% 36% Other types of growth—both vertical Vertical Growth integration and diversification—are less likely. Assuming functionality previously performed by a supplier or distributor During the next 12 months, fewer than half of 10% 23% 33% leaders representing the middle market say that their company is likely to experience: Related diversification, entering into a new business that is familiar to your company k Vertical growth—Assuming 15% 34% 49% responsibilities previously performed by Diversification customers; Unrelated diversification, entering into an k Vertical growth—Assuming functionality unrelated business for your company 6% 14% 20% previously performed by a supplier or Very likely Somewhat likely distributor; k Related diversification—Entering a new business that is familiar to their company; and k Unrelated diversification—Entering an unrelated business. 8
  13. 13. Using survey data collected about different types of growth, researchers developed a growth index to rank companies on their Middle Market Growth Index Index Middle Market Growth growth prospects and to further review middle market executives’ stances on the future in High Growth 15% relation to growth. (Please see the Appendix for a more detailed explanationModerate Growth 46% of the growth index.) A sizeable number of middle market Low Growth 26% executives (4 out of 10) report that they expect their workforce to grow. Only a No Growth 14% small number think that they will have fewer employees during the next 12 months. The plurality say the size of their workforce will remain unchanged during the next year. Expectations for Size of Workforce Expectations for Size of Workforce 47% 42% 11% Size of workforce will increase Size of workforce will decrease Size of workforce will stay the same 9
  14. 14. Satisfaction withAs the middle market considers growth Satisfaction with Financing Environment Financing Environmentopportunities in the coming year, financingwill also play a role. Currently, middle market I am satisfied with my company’s access to financingleaders express satisfaction with differentvariables related to financing. Approximately 23% 58% 81%80 percent report that they are satisfied not I am satisfied with myonly with their company’s access to financing company’s cost of financingbut also the cost of credit. Most (79 percent) 23% 58% 81%also say that they are satisfied with thevariety of financing alternatives available to I am satisfied with the varietythem. However, intensity is low; fewer than of financing alternatives available to my company25 percent strongly agreed with any of themeasures related to financing. 18% 61% 79% Strongly agree Agree 10
  15. 15. CHALLENGES AHEAD While the middle market seems poised for growth and these companies’ leaders are satisfied with financing options, there are Perceived Impact ofPercieved Impact of Legislation Legislation and Regulations also challenges ahead.and Regulations Although middle market executives are largely optimistic about the coming year, certain 16% say obstacles loom. Looking ahead to the next regulations 12 months, middle market executives express 18% say Growth support concern with economic uncertainty and talent growth regulations management. Regardless of firm revenue, the both support Growth majority of executives worry about federal and impede 67% say regulations regulations, and more than half worry about company growth impede compliance with regulations in general. growth Similarly, two-thirds of middle market executives say that federal legislation or regulations impede growth within their company. Only a minority of respondents report that federal legislation and regulations support growth, and 18 percent believe that legislation and regulations both impede and support growth. Concerns in the Upcoming 12 Months Concerns in the Upcoming 12 Months 0% 20% 40% 60% 80% 100% TotalContinued economic Low uncertainty at the Medium national level High Total Low The ability to retain top talent Medium High Total Compliance with Low regulations Medium High Total The ability to hire Low top talent Medium High Very concerned Somewhat concerned 11
  16. 16. “I think the middle market is the THE BACKBONE AND BAROMETERS OF THE U.S. ECONOMYlifeblood of the U.S. economy; it’s According to the U.S. Census, the middle market generates $6 trillion in annual revenuewhere most jobs are created.” and employs more than 30 million people. Unsurprisingly, then, middle market leaders see – Middle Market Executive their companies as the economic engines of (Travel, Annual Revenue: $251-$500 million) the U.S. economy. Many of these leaders also think that the middle market will play a leading role in getting the U.S. economy back on track. Impact ofof theMiddleMarket Impact the Middle Market The views of middle market executives on the U.S. Economy on the U.S. Economy converge even more clearly when it comes to the role these companies play relative to the Low Revenue U.S. economy. Consistent with the qualitative 2% in-depth interviews with middle market leaders, the survey shows consensus among 22% middle market leaders that the middle market positively affects the U.S. economy, both overall and with respect to job growth. 76% Almost 7 in 10 executives say that the middle market has a major impact on the U.S. economy, while another 29 percent think Medium Revenue that middle market companies have a 1% moderate impact. 28% 71% High Revenue 4% 35% 62% Major impact Moderate impact Little to no impact 12
  17. 17. On the topic of job creation, almost all Agreement Middle Market Companies Agreement Middle Market Companies Will Have Significant Impact on on Will Have Significant Impactmiddle market executives agree that job Strengthening Economy Strengthening Economygrowth among middle market companies willsignificantly strengthen the U.S. economy. TotalMiddle market leaders express clear unanimity 57% 41% 98%on that point, even across companies in Low Revenuedifferent revenue brackets. 58% 41% 99% Medium RevenueSimilarly, 97 percent of leaders describe the 63% 33% 96%middle market as a source of job creation, a High Revenuebelief felt consistently across all companies 53% 46% 99%regardless of revenue size. In addition topraising their role as much-needed job Strongly agree Agreecreators in the U.S., middle market leadersalso use other favorable descriptors for the Agreement “Job Creators” Describes Agreement “Job Creators” Describesmiddle market. They emphasize in particular the Middle Market Market the Middlehow the middle market not only drives theU.S. economy forward but also serves as a Totalguide for the health of the U.S. economy. 49% 48% 97%They characterize the middle market as Low Revenuebarometers and economic engines as well as 49% 47% 96% Medium Revenuedrivers of innovation. In total, more than 90 58% 41% 99%percent agree with these descriptions of the High Revenuemiddle market, and a third or more strongly 44% 52% 96%agree with each of these descriptors. Strongly agree AgreeTo a lesser extent, most middle marketexecutives also say that middle marketcompanies are incubators of big business, Agreement Attributes Describe Agreement Attributes Describe the Middle Marketbut the intensity of that belief is lower; only the Middle Market18 percent strongly agree. Economic Engines of the U.S. Economy 38% 56% 95% Barometers of the U.S. Economy 34% 62% 95% Drivers of Innovation 34% 57% 91% Incubators for Big Business 18% 62% 81% Strongly agree Agree 13
  18. 18. LOOKING TOWARD THE 2012 Impact ofof the Presidential Election Impact the Presidential Election on U.S. Economy on U.S. EconomyPRESIDENTIAL ELECTIONIn this time of continued economic uncertainty A Major Impactand instability, middle market executives 38%expect that the upcoming presidential election 81% A Moderate Impactwill affect the economy. Nonetheless, they say 43%that their businesses are not discussed enoughon the stump by the presidential candidates. A Little Impact 16%Middle market leaders draw a connection No Impact at Allbetween the outcome of a presidential election 3%and the health of the U.S. economy. The vastmajority say that the outcome of a presidentialelection affects the health of the economy, and38 percent say it has a major impact. One in sixthink that the election only has a small impact,and very few believe there is no connectionbetween the outcome of a presidential electionand the economy. 14
  19. 19. Amount Presidential CandidatesWhile most middle market leaders will likely are Discussing… Amount Presidential Candidates Are Discussing…follow the current presidential election closely,they are dissatisfied with the attention that Small Businessesthe candidates currently devote to both smallbusinesses and the middle market. Seven in 13% 21%ten middle market executives think that thepresidential candidates do not spendenough time talking about middle market 66%companies. Similarly, about two-thirds 66%share the sentiment on the subject ofsmall businesses. Middle Market BusinessesIn contrast, the majority think the candidates 8%devote too much time to big business. The 21%presidential candidates’ perceived inattentionto the middle market exposes a disconnectbetween middle market leaders’ impressionof the importance of their businesses and 71%national economic discourse. Big Businesses 22% 55% 23% Too much Too little Just the right amount 15
  20. 20. The Middle Market:Where Leaders DivergeBy Management CapacityEVALUATING STRATEGICMANAGEMENT CAPACITYWith guidance from Dr. Arnoldo Hax, AlfredP. Sloan Professor of Management Emeritusand a Professor of Technological Innovation,Entrepreneurship and Strategic Managementat the MIT Sloan School of Management, thisresearch was also used to assess the strategicmanagement capacity of the middle market.Researchers developed a strategicmanagement index by looking at theanswers to a number of questions about therespondents’ management strategy attheir individual firms. A closer review ofthis index reveals key differences amongmiddle market firms based on their strategicmanagement rating. 16
  21. 21. Strategic management is a way The CIT survey of middle market leaders included a series of questions to evaluate theof conducting a firm that has as the strategic management capacity of middle market companies. In particular, the questionsultimate objective of developing covered the following topics:corporate values, managerial k Their company’s strategy, including the extent of communication and level ofcapabilities, organizational consensus among key executives; k The degree to which the organizational responsibilities and administrative structure of the company supports the implementation of the companysystems that link strategic and strategy; k The level of understanding regarding operational decision making at all the responsibilities and authorities within the organizational structure;hierarchical levels and across all k The effectiveness of the different departments of the organization,businesses and functional lines of including: finance/accounting, human resources, technology/IT services,authority in the firm…” operations/manufacturing, marketing/ sales, research and development; – Dr. Arnoldo Hax k The degree to which systems are in place for appraising, measuring (MIT Sloan School of Management) and rewarding performance at their company; and k The characterization of the organizational culture at the company, as participative, consultative, benevolent authoritative or exploitive authoritative. 17
  22. 22. When assessing their company’s strategy, CompanyCompany Strategy Strategya third say they have a clear strategy inplace reached through the consensus of Company has a clear strategy in place, reached by consensus of key executives,key executives that addresses short- and it has been communicated, and it addresses short- and long-term implicationslong-term implications. Another 43 percentsay their company has a clear strategy that 33%was dictated mainly by top executives. The Company has a clear strategy in place,rest—about one in four—express a lower dictated mainly by the top executives, and it has been communicatedassessment of their company’s strategy. 43%Middle market executives give their Company has a clear strategy in place, but it has not been comunicatedcompanies similar marks when it comes to 12%organizational structure: Company has no clear strategy in place k Thirty-four percent say that there is 12% a clear assignment of responsibilities and authorities and a full understanding of the underlying Organizational Structure Organizational Structure decision making process. k Forty-four percent think their Clear assignment of responsibilties and companies clearly assign authorities, with full understanding of the underlying decision making process responsibilities but lack some clarity about the overall decision 34% making process. Clear assignment of responsibilties and authorities to each individual, but k The rest rate their companies lower, some lack of clarity about the either citing a great deal of ambiguity overall decision making process in the assignment of responsibilities 44% and authorities or claiming difficulty There is a great deal of ambiguity on the assignment of in understanding how the organization responsibilities and authorities is structured. 20% It is hard to understand how the organization is structured 2% 18
  23. 23. When comparing company strategy to Effectiveness of Primary Functions Functions Effectiveness of Primaryorganizational structure, middle marketexecutives express greater agreement about Finance/Accounting 94%how well their companies’ organizational 6%structures support implementation of Operations/Manufacturingstrategy. Twenty-five percent strongly agree 88% 12%their company does so well, and another Technology/IT Service60 percent agree. 79% 21%The survey also asked middle market Marketing/Sales 77%executives to rate the effectiveness of 23%primary functions at their company, including Human Resources 75%finance/accounting, operations/manufacturing 25%and research and development, among Research and Developmentother functions. 61% 39% Net Effective Net Ineffective k Leaders are most positive about the effectiveness of their finance/ accounting units; 94 percent described those functions as effective. k Research and development scored lower, but a majority nonetheless described those functions as effective. Organizational Structure Relative Organizational Structure Relative to Company Strategy to Company Strategy Agree: 85% Disagree: 15% 60% 25% 14% 2% Strongly Agree Disagree Strongly agree disagree 19
  24. 24. Middle market companies receive mixed Performance and Performance and Reward Rewardreviews for performance and reward. Again,roughly one-third (31 percent) fare well; There are comprehensive and formal systems in place for appraising, measuring and rewardingexecutives believe that comprehensive performance, and these are clearly understoodand formal systems are in place. Forty-one and accepted by everybodypercent report some systems for appraising, 31%measuring and rewarding performance. There are some systems in place for appraising,Another 29 percent say that their companies measuring and rewarding performance, but thesehave either an informal system or no system systems lack comprehensiveness and formalityfor measuring and rewarding performance. 41% The process for apprasing, measuring and rewarding performance is totally informal, depending on each individual supervisor 22% There is no system in place for appraising, measuring and rewarding performance 7% 20
  25. 25. Lastly, the survey asked middle market leadersto rate the culture where they work. Onlya minority describe their firms’ culture asparticipative, the highest rating on the scale.About half characterize their organizationalculture as consultative—a system that providesan environment for upward and downwardcommunication. The rest fall under one oftwo types of authoritative culture—eitherbenevolent authoritative or exploitativeauthoritative. The graph below includes fulldescriptions of the four culture types.Organizational CultureOrganizational Culture Participative: a system that provides an environment with more emphasis on self-regulation and mutual support, 23% openess and trust, high performance goals, and more involved participation at all levels Consultative: a system that provides an environment having upward and downward communication, supporting 48% leadership, a certain degree of self-regulation, and consultative goal setting Benevolent Authoritative: a system that provides an environment where there is low motivation, little interpersonal support and 22% participation, only downward communication, and authoritative control, but it is exercised with a pateranalistic feeling, that is with a sense of care for those who are part of the organization Exploitive Authoritative: a system that provides an environment where there is low motivation, little interpersonal support and 7% participation, only downward communication, and authoritarian control, with no paternalistic feeling 21
  26. 26. “The strategic management index Researchers aggregated the answers to all of the management-related questions to developis a number that measures the a strategic management index that classified middle market companies as having strong,quality of strategic management solid, weak or lacking strategic management capacity. In total, most companies fell shortin an organization. It assigns of the strong strategic management category; only one-third could be characterizedvalues to the perceived quality that way.of the basic components of Ranking According to Strategicstrategic management: company Ranking According to Strategic Management Index Management Indexstrategy, organizational structure,assignment of responsibilities, 32% 26%effectiveness of primaryfunctions, appraisal system, and 42%organizational culture…These Strong strategic management Solid or average strategic managementconcepts were captured in our Weak/lacking strategic managementsurvey and were reported in our (Please see the Appendix for a more detailed explanation of the strategic management index.)findings. These important mattersare of great centrality for everycompany, but are particularlycritical for the Middle Marketgiven the imperative that reliesupon them to achieve a propermanagerial quality.” – Dr. Arnoldo Hax (MIT Sloan Schol of Management) 22
  27. 27. PERSPECTIVES ON THE ROLE OF THEMIDDLE MARKETIn the first section, we explored theconsistencies in perspectives among middlemarket executives across different revenueranges, sizes and industries. Creating an Agreement Middle Market Companies Agreement Middle Market Companiesindex for strategic management capacity Will Have Significant Impact on Will Have Significant Impact onand reviewing responses based on this rating Strengthening Economy Strengthening Economyexpose greater disparities in perspectivesamong middle market executives. The Totaldistinctions prove most stark among 57% 41%leaders at companies with strong strategic Strong Strategic Managementmanagement compared to those with a lower 70% 29%strategic management rating. Solid Strategic Management 56% 43%Middle market leaders with strong strategicmanagement believe that the middle market Weak/Lacking Strategic Managementhas a strong impact on the U.S. economy 46% 49%and, perhaps more importantly, on the Strongly agree Agreecreation of jobs. Seventy percent of thosewith strong strategic management stronglyagree that middle market companies will Strong Agreement Attributes Strong Agreement Attributesplay a significant role in strengthening the Describe the Middle Market Market Describe the MiddleU.S. economy; only 56 percent of those withsolid strategic management and 46 percent Job Creators 59%of those with weak or lacking strategic 48% 42%management shared those beliefs. Economic Engines of the U.S. Economy 57%The majority of leaders with strong strategic 34% 28%management strongly agree middle market Drivers of Innovation 53%companies are job creators and the economic 34% 17%engines of the U.S. economy. Fewer than half Barometers of the U.S. Economyof companies with a weak or lacking strategic 53% 26%management organization share this view. 27% Incubators for Big BusinessIn addition, leaders from companies with 35% 11%strong strategic management are also more 14%likely to characterize their company as in a Strong Solid Weak/lackingfavorable position today, both generally andrelative to the Great Recession. 23
  28. 28. Middle Market Companies Middle Market Companies with StrongOverall, leaders of companies that excel in with Strong Stateand Stronger Now State of Company of Company andstrategic management have a more positive Stronger Now than BeforeRecession Recession than Before the Great the Greatoutlook on the past, current and futurestrengths of their companies as well as Strong nowthe middle market as a whole. Those who 84%represent companies with a strong strategic 61%management rating are more likely to classify 52%their current company as strong (more than 8 Stronger than 2008in 10), while only 52 percent of the companies 65%with weak or lacking strategic management 56%share that view. Moreover, two-thirds saythat their company is stronger now than 40%before the Great Recession. These positive Strong strategic managementsentiments also extend to perspectives on Solid strategic managementtheir industries; middle market executives Weak/lacking strategic managementwho represent companies with strongerstrategic management positions are morelikely than their counterparts to describethe current state of their industry as strong. Agreement that Individual Industry and Agreement that Individual Industry andOnly 40 percent of companies with weak or Company are Both Strong Company Are Both Stronglacking strategic management say that they Totalare stronger than they were before the Great 31%Recession. In contrast, almost two-thirds of Strong Strategic Managementthose with a strong management capacity say 42%they are stronger now. Solid Strategic Management 30% Weak/Lacking Strategic Management 24% 24
  29. 29. Concern of Management’s Capacity to Lead Concern of Management’s Capacity to Coming OutOut the Great Recession Lead Coming of of the Great Recession Total 15% 25% 40% Strong Strategic Management 14% 16% 30% Solid Strategic Management 10% 27% 37% Weak/Lacking Strategic Management 21% 31% 52% Very concerned Somewhat concerned Strong Strategic Management Recognizes the Strong Strategic Management Make Strategic the Need to Need to Change and to Recognizes Planning Change a PriorityMake Strategic Planning a Priority and to We need to continue to make a change because the status quo isn’t acceptable 62% 52%The Great Recession imparted lessons aswell. Leaders from companies with a strong 48%strategic management rating were particularly We need to make strategicreceptive to two lessons: planning a higher priority 54% k There is a great need to challenge the 44% status quo; and 34% k trategic planning needs to be a higher S priority for companies. Strong strategic management Solid or average strategic managementThe lessons these leaders learned stand Weak/lacking strategic managementout especially relative to those with weakor lacking strategic management. Theiradaptability and willingness to learn fromthe Great Recession may partly explainwhy leaders from companies with a strongstrategic management capacity worry lessabout their managers’ capacity to leadfollowing the Great Recession. 25
  30. 30. AppendixTable 1: Prospective Growth IndexTable 1: Prospective Growth Index MIDDLE MARKET GROWTH INDEX Growth Index Growth Criteria Middle market executives who completed the Rating CIT survey were asked to report the likelihood High Growth 6-7 types of growth from the list are likely that their company would experience several types of growth, particularly with respect Moderate Growth 3-5 types of growth from the list are likely to horizontal growth, vertical growth and Low Growth 1-2 types of growth from the list are likely diversification. Researchers used their answers to create a growth index and, in turn, to No Growth 0 types of growth from the list are likely categorize the growth prospects at middle market companies. The following types of growth were included in the survey: k Horizontal Growth k (a) Entering other geographic regions k (b) Increasing the range of products and services offered in current markets k (c) Expanding into adjacent markets k Vertical Growth k (d) Assuming responsibilities previously performed by customers k (e) Assuming functionality previously performed by a supplier or distributor k Diversification k (f) Related diversification by entering into a new business that is familiar to their company k (g) Unrelated diversification by entering into an unrelated business The index was based on responses to the items above. The growth rating is outlined in the table to the left. 26
  31. 31. MIDDLE MARKET STRATEGIC MANAGEMENT INDEX Using data from the survey among middle market leaders, researchers developed an index to assess the management capacity of middle market companies. They assigned an index score based on answers to six questions, and the table below outlines the questions and distribution of points.Table 2: Strategic Management IndexTable 2: Strategic Management Index Question Text Answer Choices and Points Assignment Range of Points Q31 “Which of the following statements • Clear strategy in place – 14 points best describes your company’s strategy”? • Clear strategy in place dictated by top executives – 8 points • Clear strategy but not communicated – 2 points 0-14 points • No clear strategy – 0 points Q32 Do you agree with the following • Strongly agree – 14 points statement: “The organizational • Agree – 8 points structure of my company effectively • Disagree – 2 points 0-14 points supports implementation of the • Strongly disagree – 0 points company’s strategy”? • Clear assignment, full understanding – 14 points Q33 Which of the following best describes the organizational structure • Clear assignment, lacking some clarity – 8 points 0-14 points of your company? • Great deal of ambiguity – 2 points • Hard to understand - 0 points Q34 How effective are each of the • Very effective – 5 points/function following primary functions at • Somewhat effective – 3 points/function 0-30 points your company? • A little effective – 1 point/function • Not at all effective – 0 points Q35 Which of the following best describes • Comprehensive and formal – 14 points the systems in place for appraising, • There are some systems – 8 points 0-14 points measuring and rewarding performance at • Informal process – 2 points your company? • No system – 0 points Q36 How would you characterize the • Participative – 14 points organizational culture at your company? • Consultative – 8 points 0-14 points • Benevolent Authoritative – 2 points • Exploitative Authoritative – 0 points• Strong Strategic Management: • Solid/Average Strategic Management: • Weak Strategic Management: • Lacking Strategic Management: 76-100 Points 51-75 Points 26-50 Points 0-25 Points 27
  32. 32. METHODOLOGY MIDDLE MARKET IN-DEPTH INTERVIEWSThis research, conducted by KRC Research In total, KRC Research interviewed sixand commissioned by CIT (NYSE: CIT) – executives from middle market firms acrossa leading provider of financing to small the country. The interviews were conductedbusinesses and middle market companies, over the telephone and each lastedoccurred in two phases: approximately 30 to 45 minutes. CIT was k In-depth telephone interviews never identified as the sponsor of this research with middle market executives; and during the recruiting or scheduling of subjects or during the actual interview. k An online survey of middle market executives. MIDDLE MARKET SURVEYThe in-depth interviews explored preliminary KRC Research administered an online surveytopics that affect the middle market, to 300 U.S. middle market executives whoincluding economic outlook, growth plans represented a range of industries. The surveyand challenges ahead. The findings from included middle market executives fromthese initial conversations helped guide the following industries: Apparel, Textiles,the direction of the online survey, which Furniture/Home Furnishings and Footwear;was used to more specifically quantify Commercial Real Estate; Communications;the views of middle market executives on Energy; Entertainment, Gaming and Sports;the state of the middle market economy Finance; Food, Beverage and Agribusiness;and current economic events, as well as General Manufacturing; Healthcare; Industrials;to establish baseline metrics around the Information Services and Technology; Metals,perceived strength of the middle market Mining and Metals Fabrication; Restaurants;executives’ respective firms, including plans Retail; Technology and Business Services; andfor horizontal, vertical, diversification and Transportation.employment growth. The team conducted fieldwork during theThe research was conducted with guidance summer of 2012. To be eligible to participatefrom Dr. Arnoldo Hax, Alfred P. Sloan in the survey, respondents had to serve in aProfessor of Management Emeritus and leadership role at firms with revenues betweena Professor of Technological Innovation, $25 million and $1 billion, the majority (50Entrepreneurship and Strategic Management percent +) of whose employees were basedat the MIT Sloan School of Management. in the United States. The survey defined leadership roles as Owner, Board Member, C-Suite Executive (Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Information Officer, Chief Investment Officer or other C-Suite title) or SVP/VP/Director.**Percentages may not sum as whole numbers due to rounding. 28

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