New report: Middle market execs see bright future, but concerns abound on hiring and regulation

Published: October 9, 2012

MIT Sloan Professor Arnoldo HaxMIT Sloan Professor Arnoldo Hax

The middle market of the U.S. economy is big. It contains more than 100,000 companies, generating $6 trillion in annual revenue and employing more than 30 million Americans.

A new report from financial services company CIT Group, with guidance from MIT Sloan professor Arnoldo Hax, surveyed and interviewed 300 U.S. middle market executives for a view of their world.

The full report, CIT Voice of the Middle Market: Perspectives from the Heart of America’s Economy is available for free on the MIT Sloan Management Review website. Here, Hax explains survey highlights and what they mean for middle market executives.

Middle market executives believe they are important to the economy, poised for growth, and are satisfied with access to credit. How surprising are these findings?

Middle market companies have a very strong view of themselves and the role they play in our society. They believe they are the economic engines and the barometers of the U.S, economy, the drivers of innovation, and the incubators of big businesses.

The majority of the companies interviewed were from a very broad base, companies from all over industries and geographic locations. The majority—53 percent—say, “We are stronger, we have emerged out of this recession a better company.” Only 23 percent stated that they are weaker.

That is quite an optimistic assessment, given the severe nature of the recession. It can be explained because initially they were forced to layoff a significant number of people, which they have not rehired. Now that they have reached sales at similar levels they experienced before the recession, they are doing it with much less personnel, which results in a significant gain of productivity.

Over 80 percent of the respondents to the survey expressed satisfaction with the financial environment, in terms of access, cost and financing alternatives. That is indeed surprising after we have been exposed to news making us believe that credit was extremely limited, even for well-qualified potential borrowers.

With regard to the lessons learned from this recession the issues on the top of the list were: need to continue to change; companies should be leaner; and make strategic planning a higher priority. It is this last requirement that the survey identified as the one that was lacking in about one quarter of the companies surveyed.

Leaders in companies with strong strategic management have a higher opinion of the potential for impact on the U.S. economy. Yet many executives surveyed say they lack strategic management.

Strategy, structure, performance, rewards, and culture are the components of strategic management, which constitutes a very important framework to analyze the quality of management in an organization. All of these processes need to be properly aligned and congruent with one another for the firm to reach a high level of excellence. The survey was very thorough in the way we address this critical issue. In rough numbers, about 40 percent of the companies interviewed enjoy fairly effective strategic management capabilities, which is quite commendable. However, more than 20 percent have serous deficiencies in this important capability.

Strategic planning is to decide what to do. Strategic management is “What do you do after that?” It seems that these companies do not know how to do it, how to develop this integration that allows you to pull your act together. In there was the greatest divide. The big companies seem to be much more comfortable than the smaller companies.

What some lack is a sort of professional development, a sophisticated way of understanding what is required to put strategic management in place.

What is causing these executives the most concern?

When asked about the challenges that the executives are facing in the next twelve months, they cited the economic uncertainty at the national level, compliance with regulations, and their ability to attract and retain managers.

This last issue is quite puzzling since in an economy with significant unemployment levels, one could not expect to face difficulties in hiring and retaining personnel. The feeling of uncertainty about the economy is also a matter of great concern and is part the lingering disposition of most executives. As a result of all of this, only 42 percent of those interviewed indicated a resolve to increase their workforce in the coming year.

I think the issue of regulation is a very critical, very subtle, and conflicting. On the one hand, businesses—particularly the smallest ones—don’t have much power to bargain and influence the environment. They believe there are so many rules and obstacles and travails that the regulatory process presents them with. So there is a claim that we are overdoing this stuff, we should be much more flexible, that we should allow the private sector to be more free to operate effectively.