Middle Market Strategy

This is the second in a series of articles focused on understanding and implementing business transformation.  See the first article in the series here.


Strategy, particularly in the middle market, is under attack from many sides.  The pace of disruption in many industries and sub-sectors and the threat of disruption in those corners in which the status quo remains dominant, has consumed the business press, investors and board members.  As a result, executives hear a steady drumbeat suggesting that the future is unknowable and that they must do something.  Such an environment is nothing short of toxic for productive decision-making.

The zeitgeist may be inimical to the measured development and execution of strategy, but the payoff for a well-designed and expertly executed strategy for middle market companies is as robust as ever; and may actually be trending upward.  Leadership teams able to discern, bolster, and exploit areas of competitive advantage while steering away from segments in which a company has no advantage will be able to attract the capital needed to pursue their growth opportunities; while companies that muddle along will find themselves capital constrained.  Executives understand that while we live in an age of abundant capital, that abundance has come with increasingly strict accountability from operationally savvy capital providers who are interested in results, not excuses.  A robust strategy offers leadership, boards of directors, investors, and other stakeholders a framework for filtering out the noise of the moment and remaining focused on the optimal value maximization path for an individual company.

What is Strategy?

Strategy is dying in the middle market due to neglect and underinvestment, which has resulted in a vicious cycle of poor outcomes leading to further neglect and underinvestment, etc.  One of the primary drivers of the current level of underinvestment in strategy across the middle market is a fundamental misunderstanding of what strategy is, can be, and historically has been.  Many of history’s most successful strategists have embraced a view of strategy as a vehicle for offering a clear-eyed path to the realization of a well-defined end goal through the adoption (or development) of a business model that maximizes a company’s idiosyncratic strengths.  Such a strategy must, simultaneously, be developed with an eye toward resource constraints, an embrace of the reality of uncertainty and volatility, and support for the tactical flexibility that will be necessary to address immediate implementation challenges. 

Strategy is dying in the middle market due to neglect and under-investment

Strategy Embodies:

  • A Goal: Plan to achieve an objective outcome or set of outcomes that incorporates resource limitations, known obstacles (competitors, market volatility, etc.) and the likelihood of unknown challenges. 
    • Example: Alfred Sloan organizing General Motors to offer a car for every price point, leading to a century of dominance in the U.S. auto market (“a car for every purse and purpose”).
  • A Business Model: Testable hypothesis of the key drivers of a business and a commitment to foster continued improvement in those drivers. 
    • Example: Jorgen Vig Knudstorp’s turnaround of Lego Group.
  • Self-Awareness: A value creation mindset focused on an understanding of the character of a business. Having the right question while knowing that the answer is likely to change.
    • Example: Satya Nadella repositioning Microsoft for a cloud-centric future.

Today, strategy for too many middle market companies is developed in a time-constrained, under-resourced, closed process featuring too little information pertaining to market factors, competitive strengths and weaknesses, methodology and cadence for testing key assumptions, etc.  This sad state of affairs has come about because strategy has erroneously been reinterpreted into a strategic planning exercise that is invariably poorly understood or entirely unknown outside the c-suite.  Insufficient thought is given to key assumptions (both implicit and explicit) and neither leadership nor investors are well-positioned to properly assess performance as validating or invalidating any element of the plan other than the financial forecast (the review of which is of limited value without reference to key assumptions).  These plans, which often look impressive, quickly fall apart as it becomes apparent that the resulting document is neither strategic, nor a plan. A wish list of objectives followed by a 5-year projection may yield an impressive presentation, but when faced with the challenges of competing and winning in an ever-shifting market landscape, such a plan quickly becomes a millstone around the necks of leadership. 

Strategy is a process, not an endpoint, and embracing that sensibility will consistently yield superior results to those willing to make the necessary investments in time and attention.  A robust strategy will address the ambiguity and volatility inherent in any business endeavor through rigorous and systematic testing.  Variance reporting, standard for the majority of middle market companies, can be repositioned to serve dual roles: reporting on both financial performance while also serving as a running commentary on the soundness of the assumptions underlying organizational strategy.  The process of developing, reporting, testing and refining key assumptions is a pathway to a virtuous cycle of improvement, as leadership gains greater insight into a company’s unique set of capabilities and positional advantages, while also providing insight into how best to address evolving competitive dynamics.  Successful strategy is an iterative process, and today’s flawed assumptions, once tested and refined, offer the prospect of a more robust strategy tomorrow.

While strategy can begin as a shared hypothetical construct, it must ultimately be put in motion.  As a result, the challenges of implementation must be carefully considered in strategy development.  Put simply, strategy is not tactics, and tactics are not strategy.  But either one in the absence of the other will yield disappointing results over the long-term.  Strategy should guide tactics without being overly prescriptive.  When launching a new strategy, leadership should emphasize tactical flexibility as the optimal approach to addressing emerging threats and opportunities within the overall framework of a value maximizing plan.

The key decision makers in a business usually reach their positions through careers marked with far more successes than failures.  This common background can and often does blind leaders to a key facet of strategy: the model is wrong.  Financial forecasts, though robust and always striving for accuracy, are realistically going to be, at best, directionally correct.  Middle market business leaders must keep in mind that a model is simply an analytic framework for thinking about the current and future state of a business.  When viewed through this lens, the key insight can be restated as follows: models are generally wrong, but good models are useful.  Explicit assumptions and regular review of same will help drive an increasingly nuanced view of the business as actual performance is measured and assessed against the forecast (focusing not only on what was wrong, but why). 

Companies seeking to maximize value should impose on themselves the discipline of a rigorous approach to not only developing but iterating their strategy.  The strength and potential advantage to a middle market company inherent in any strategy is that its strategy represents a testable and revisable hypothesis regarding the optimal value maximizing path for that company, and that company alone.  Strategy is a company’s plan to win, and nothing about today’s market dynamics suggests any diminishment in the value of such a plan.

The Challenge of Disruption

There are few phrases more time-worn, and more likely to be proven foolish, than “This Time It’s Different”.  Change is certainly all around us, but in the embrace of change and innovation it is easy to lose sight of the things that endure.  The planes that we fly in and the cars that we drive are based on principles well-known and understood a century ago.  Equity and bond issues to fund new enterprises were familiar in the time of Isaac Newton.  Double-entry bookkeeping is over 500 years old.  Organized research and development efforts are at least as old as Archimedes’ lab, and likely far older.  And the interplay of trade with national ambition surely dates back to a time long before the advent of recorded history.  A disciplined approach to strategy embraces the insight that while we may be surrounded by change, many technological, philosophical, and organizational innovations have endured for a surprisingly long time.  The powerful force of change must be judged against a silent backdrop of an equilibrium consisting of a number of surprisingly enduring innovations. 

Disruption in the popular lexicon is often associated with technology, but more important than new technology, the pairing of technology with business model innovation is the engine that powers industry-shaking disruption.  This pairing is especially challenging to market incumbents as it often forces them to prioritize and accelerate their investment in technological acumen while simultaneously fighting a rearguard action to preserve the viability of their business models.     

Source: London School of Economics

Change is, by its very nature, Janus-faced, with new capabilities and business models on one hand, and dislocation and value destruction on the other.  While the pace is uncertain, change is inevitable; and when change does come, there are warnings.  The tragedy is that few incumbents are able to sift through the noise, overcome their skepticism, and recognize the severity of the threat before significant value destruction becomes inevitable.  An organization with a holistic approach to strategy is far better equipped to identify disruption early, assess risks objectively, and respond appropriately.

Source: Wikimedia

When an organization finds itself in the midst of disruption, it is easy for all stakeholders to lose perspective.  This is due to the fact that disruption represents very different, but equally terrifying, threats to the varying constituencies in a company:

  • Leadership: Challenges ability to achieve performance goals
  • Capital Providers: Threatens to undermine investment thesis, resulting in significantly diminished upside or outright losses
  • Employees: Endangers career prospects as opportunities for advancement shrink
  • Suppliers: Imposes significant opportunity costs through lost growth prospects
Source: McKinsey & Company

Like all boogey-men, disruption is most frightening when it is least examined.  The fear of many executives is that change will fall upon them with no warning, and considerable value will be destroyed before a response is possible.  Upon more careful examination, disruption is revealed to be a serious, though manageable, threat.  Research indicates that attentive and agile incumbents can deliver significant value to investors by identifying and being responsive to disruptive threats early.  Incumbents seeking to initiate preemptive disruption upon themselves may act with urgency, but to be effective, their efforts must be guided by a well-considered strategy.

Source: BCG Henderson Institute

Sound strategy is grounded in an understanding of one’s relative advantages and disadvantages, and as such, any discussion of disruption must be accompanied by an acknowledgment of incumbent advantage.  Technology and business model disruption is threatening to incumbents exactly because it seeks to undercut advantages built and bolstered over time, but those advantages do not give way all at once.  Rather, the example of Walmart illustrates that incumbent advantages, when coupled with prudent preemptive disruption efforts, can extend and expand the market dominance of incumbents. All strategic advantages are temporary, and no business model is perpetually viable.  In a sense, disruption should be regarded as inevitable; but that fact should not give rise to fatalism.  A robust strategy, envisioned by leadership as an evolving understanding of the business that will incorporate new insights while providing a guiding framework to maximize value, is a powerful bulwark against the challenges imposed by disruption.  Though change via disruption is inevitable, it is within the power of a leadership team to determine how an organization will face change, when and in whatever form it comes.

Strategy is a company’s plan to win, and nothing about today’s market dynamics suggests any diminishment in the value of such a plan.


When strategy becomes an item on the agenda for a leadership team, something crucial is lost.  Strategy should be the lifeblood of an organization, a guiding star along an idiosyncratic path of value maximization.  Moreover, strategy is best embodied in a mindset, a view of an organization that embraces the unknowable and the uncontrollable but maintains that what is known is sufficient to divine an optimal path. And while the contours of that path may change, the process by which the path has been chosen, and the tools employed to assess progress and test assumptions, is robust.  When strategy is embraced as a mindset, leaders are empowered to filter out the noise of the moment, capital providers can take comfort that value creation does not rely solely on favorable market conditions, employees understand that their organization has a view of itself and its place in the market, and suppliers and other outside partners understand that they are partnered with an organization focused on being its best self and never a pale imitation of a competitor.  This is a vision of strategy that is enduring, and one that will lead every organization down a bespoke path of optimization and value creation, regardless of the nature of the competition.

Disruption threatens in every market niche, either as a grim reality or as an overdue but fearfully expected visitor.  However, while disruption, i.e. change writ large, may be inevitable, the winners and losers are not.  Disrupters can be right but early, incumbents can accurately discern a disruptive threat and neutralize it, and/or incumbents can reposition themselves in an altered ecosystem.  When viewed through this lens, disruption is not a threat to strategy but a proof of its utility, as only a holistic view of a company’s optimal value maximizing path can permit a reasoned and objective assessment of disruptive threats and inform responses that are appropriate in size and scope.

Strategy is more than strategic planning.  Organizations that invest in a holistic and rigorous approach to strategy are positioning themselves for long-term success and value creation, regardless of threats. 

About the Author

David Johnson (@TurnaroundDavid) is Founder and Managing Partner of Abraxas Group, a boutique advisory firm focused on providing transformational leadership to middle market companies in transition.  Over the course of his career David has served as financial advisor and interim executive to dozens of middle market companies.  David is also a recognized thought leader on the topics of business transformation, change management, interim leadership, restructuring, turnaround, and value creation.  He can be contacted at: david@abraxasgp.com.