The Base of the Pyramid

This article originally appeared in Business Insider and TMA Midwest Blog

There is a palpable sense of impatience in the business press when discussing our tepid recovery.  People are anxious to start up the music and resume the party and are seemingly resentful of those who point out that however much we might wish to be done with the Great Recession it is not done with us.

One area that has been receiving too little attention is the wide divergence in outlook between large (national and multi-national) companies and those in the middle market (here defined as companies with less than 500 employees; the two sides of that divide having an approximately equal number of U.S. employees as of 2008).  Companies in the S&P 500 are enjoying historically high levels of profitability (often driven by robust sales to emerging market countries) and sitting on a veritable mountain of cash.  Meanwhile, middle market companies are hard pressed to find growth domestically and many lack the financial and managerial strength necessary to exploit growth opportunities in emerging markets.

The divergence between the upper and middle markets is not limited to growth prospects:

  • Operations: Larger companies have aggressively taken advantage of globalization to remake their organizations in the past 15 years.  They have seized on labor force arbitrage opportunities, remade their supply chains and outsourced non-core business functions.  Companies in the middle market are woefully behind the curve, and as a result have both higher costs and lower operational flexibility.  Taking full advantage of globalization to remake operations is not solely a matter of finding the lowest cost.  Issues such as order lead times, strength of native labor pool, legal environment, etc must be taken into account as well.
  • Commodities: While commodity prices received considerable attention in 2011 the reality is that broad macro factor point to upward-trending prices and considerable volatility as the new normal.  For middle market companies this will necessitate considerable effort to preserve gross margins, in particular the adoption of hedging strategies and a revamped approach to purchasing.
  • Systems: All the buzz around Big Data tends to obscure the fact that many companies have yet to implement ‘small data” initiatives such as KPI dashboards and other simple yet highly effective business intelligence tools.  I have been on numerous client engagements at companies with sales up to $1 billion that have lacked the ability to identify their most profitable product or sales channel.

The opportunities inherent in the U.S. middle market are enormous, but many of the bullish pronouncements in the general business press ignore the challenges these companies face.  Many are considerably behind their larger competitors in enjoying the fruits of globalization.  The path to profitability and growth for this sector of the economy will be a focus on basics.  Rationalizing SKUs, firing bas customers, identifying and increasing investment in high-return sales channels and shutting under-performing locations/divisions are the kind of unsexy blocking and tackling operations that will drive middle market profitability through the current decade.

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: