How mid-size growth companies outperform others
Washington — Fast-growing middle-size companies - those with sales between $25 million and ignoring conventional wisdom about business management. That is the conclusion of what apparently is the most comprehensive study to date on how and why such companies succeed. The two-year-long research program was conducted by McKinsey & Co., a management consulting firm.
Mid-size growth companies often contradict conventional business wisdom by:
* Creating and developing small niches rather than concentrating on finding and penetrating huge markets.
* Innovating rapidly rather than focusing on economies of scale and doing the same thing better and cheaper.
* Emphasizing product value and often charging premium prices rather than fighting for a larger share of the market and competing on price.
* Being run by individuals who are ''obsessed'' with the company rather than by cool, rational, professional managers.
* Continually seeking improvements rather than abiding by the adage ''if it ain't broke, don't fix it.''
Fast-growing mid-size companies ''contribute disproportionately to job creation, innovation, exports, national wealth, and overall business vitality,'' asserts Dimitri V. d'Arbeloff, chairman of the Millipore Corporation, a company that specializes in separation technology used in making a variety of pharmaceutical, chemical, and electronic products. Mr. d'Arbeloff also heads the research task force of the American Business Conference.
The ABC paid for the study, which involved wide-ranging interviews with 60 ABC member companies as well as extensive use of various computerized data bases. Its members have sales between $25 million and $1 billion and have grown at least 15 percent a year for the past five years.
The new findings seem to support Mr. d'Arbeloff's claims for emerging growth companies. The 13,000 mid-size nonfinancial companies in the US are only 1 percent of the total number of companies in the nation. But they account for 25 percent of the sales, 17 percent of assets, and 19 percent of all private jobs, the McKinsey study says.
This disproportionate contribution to the economy is at least partly explained by the performance of the fastest-growing mid-size companies. Among the top 25 percent of the companies in terms of sales growth, sales soared at a 43 percent annual rate last year, vs. a 12 percent rate for the average mid-size company.
And the fastest-growing mid-size companies enjoyed a return on equity of 14 percent in the 1981-82 period, vs. a 10 percent return for the average mid-size company.
In the growth of both sales and return on equity, these sprightly mid-size businesses significantly outperformed the fastest growing of the 250 largest companies on Fortune magazine's list of industrial concerns.
Companies can achieve robust performance without being involved in high growth or glamour industries. ''While some of the winners we studied are leaders in high technology, energy, and communications, others succeeded in bicycles, machinery, doughnuts, and textiles,'' says Arthur Levitt Jr., chairman of the American Business Conference and chairman of the American Stock Exchange.
''High-growth mid-size companies, those with sales growth rates in excess of 25 percent per year, are present in all 58 industries that we studied,'' the report's authors, Donald K. Clifford Jr. and Richard E. Cavanaugh, say.
Rather than being dependent on the type of industry, success seems to be dependent on the ''strategic, organizational, and leadership characteristics they develop and maintain as they face the challenges of growth,'' the authors say.
Those qualities are usually directed at market niches or smaller segments of larger markets, partly out of necessity. Most small and mid-size firms do not have the resources to compete across the board with giant concerns, the report notes.
But they can beat larger competitors in small markets through perseverance and dedication to service. ''Mid-size growth companies have prospered by creating and developing small market niches,'' Millipore's Mr. d'Arbeloff says. For example, General Electric withdrew from the microporous membrane market after attempting to compete with Millipore.
In addition to having to pay attention to business fundamentals and customer needs, fast-growing small companies put top priority on developing and motivating people, the report says. One way of ensuring high levels of motivation is to give workers an ownership stake in the enterprise.
Growth company ''employees act more like owners because they are owners,'' Mr. Levitt notes. ''On average they hold close to 30 percent of their company's stock.''
Of course, not all of today's growth companies will keep growing at a rapid clip, the study predicts. Of the 100 fastest-growing ones in the 1966-1971 period that have survived, only half were able to sustain growth rates in excess of 15 percent during the next two five-year periods.