This is the fourth in a multi-part series on the “End of Globalization” and its impact on the Middle Market.
Many Middle Market businesses were already struggling with the disruption caused by COVID-19 when the Russians invaded Ukraine. Combine that with the impending economic vibrations coming from waves of Chinese shutdowns and Russia’s global wheat shipping games, and you’ll find that globalization is facing its biggest challenge in the post-Cold-War era. Not to mention the shockwaves that will result when Russia runs out of the critical components it requires for its consumers and defense.
What happens to your business when the world aligns in two blocks, and the “low-cost production countries” are in the one you’re not? Regardless of your position on the future of globalization, the weaponization of the dollar, inflation (or potentially stagflation)…none of it bodes well for advancing the capabilities to increase Middle Market valuations.
So, what are you to do? How do you create enterprise value in your business “now” when you weren’t pleased with your valuation before all this “Macro Mess” kicked off?
Growing Middle Market companies with a solid customer base often assume they can continue to grow without changing much. Past success makes them confident, and they get stuck in habits from the go-go stage of their development—habits that impede sustainably increasing enterprise value.
The Go-Go stage is a rapid-growth stage where Sales are still king. The founders believe they can do no wrong. Because they see everything as an opportunity, their “naivete” makes their businesses vulnerable to flagrant value-sacrificing policies and behaviors.
They organize their companies around people who adhere to a “how we’ve always done things” pattern rather than thoughtful processes, and to their staff’s consternation, the founders persist in interfering with most decisions. Let’s not forget that only 8% of business leaders are good at strategy and execution!
Middle market companies that stay stuck in the “how we’ve always done things” culture cannot survive, much less thrive in today’s new world order. Given that 70% of strategic and enterprise-value-focused change initiatives fail, perhaps it’s better stated “how we’ve always failed at change.”
According to Harvard Business professor John Kotter, well over 50% of companies fail immediately after beginning a transformation process. And while that was back in 1999, the complexities that Kotter referenced have only increased in the time since. Today, failure is even more likely as the end of globalization takes effect. Let’s break down Kotter’s ‘reasons for failure’ as they relate to today’s Middle Market environment.
Successful change begins when an individual with credibility and influence (usually an owner or a senior executive) takes the initiative to communicate the insight that “how we’ve always done things” is holding the company back—and encourages a coalition to address it.
Kotter’s prescient words still land mainly on deaf ears, “more change always demands more leadership.” And the dramatic rise of sponsor-owned businesses (PE & Family Office) in the last twenty years has only served to greatly increase the number of over-managed and under-led businesses in the Middle Market.
If you’ve developed a convincing message on the need for change, the next step is building the coalition to support those efforts. But who should participate in the coalition?
Top-down changes are determined by upper management, whereas open-source changes are a cooperative process where employees and management are both involved in creating a change initiative and ensuring it is embraced. By using an open-source process, the rate of lasting success jumps up to 58%, compared to just 34% for top-down changes. (Gartner, 2020)
Change efforts are unfocused and confusing if they lack a single clear Vision with a credible Strategy to make the Vision reality. In other words, you will be shocked at how fast your people will embrace and adopt change in your business if they understand what you want to change, have the opportunity to play a substantive role in the planning of that change, and clearly understand what exactly they need to do differently and why.
Credible Strategy includes:
Change efforts can quickly lose momentum if employees don’t experience wins quickly. Just ask your neighbors who work in large publicly traded companies, “how many of the brilliant musings from the supremely rare and extraordinarily intelligence McKinsey and Bain Consultants ACTUALLY GET IMPLEMENTED?…”
The coherent action steps in the strategy (i.e., the tactical plans) must include short-term projects that have a meaningful impact on progress toward the Vision. Tying progress to accountability-based compensation rewards demonstrates a commitment from the top. Bottom Line: Communicate and reward the success of change efforts early and often to maintain credibility and create commitment.
The final and most challenging barrier to sustainable change is making it part of the DNA of the organizational culture.
Culture combines behavioral norms, habits (including use of data), and lexicon. These dimensions of culture reflect the desired shared values. So while an organization may have developed a list of core values in the past, seeking change requires reevaluating whether the same values reflect this transformation.
Once the shared values are defined, they become a reality through an engineered process that includes leadership behavior (culture is a reflection of leadership), decisions around employee development (Key Performance Indicators/Measures, training, career pathing hiring, firing, promotion), and compensation. All are the reinforcers of cultural values.
It’s no small feat! Successfully leading a Middle Market firm’s enterprise-value-focused change initiatives to a state of sustainable increasing enterprise value fails 70% of the time.
But if the firm does not make a move, everyone will lose. Valuations tend to be a little lower in the Middle Market due to company size, customer concentration, low customer lifetime value, lack of managerial support, and inadequate procedures and controls. But the lowest valuations will go to those that stick to “How we’ve always done things.” And the companies that have the hardest time recruiting new talent are those same “How we’ve always done things” companies.
The answer lies in a shift to transformative value-creating strategy. Rather than focusing on defining and solving problems related to a specific (or multiple) issue(s) such as marketing strategy, operations, systems, technology, etc., Middle Market leaders need to focus on scale strategy. Not to say that those ‘issue areas’ aren’t important—they are—they just should not be the driver of the strategy. In fact, those issue areas may need to be improved – they may need to be changed. And change should be done with a global lens and scale-centric perspective.
The challenge is that the resolution of just the issues only moves you to standard industry returns, and industry returns don’t deliver sustainably increasing enterprise value. Especially in this socioeconomic climate.
You need a protocol that enables your team to discover, get excited about, build, and own its sustainably increasing enterprise value journey. Especially if you want your business to go from “Family Business” to “Enterprise Family Asset,” you need to establish and implement an Accelerator process in your business.
An Accelerator is a proven, exponential growth catalyst that teaches your organization to identify, for themselves, insights and non-obvious connections that unlock exponential value creation. Catalysts help innovative business leaders and their organizations improve perspective, sharpen how they think about enterprise value creation, and focus on how they act. The leaders that engage with Accelerators want to move forward in groundbreaking ways, build collaborative execution capabilities that craft magnitudes of value for their stakeholders, and achieve exponential corporate value growth.
Middle Market participants in Accelerators experience acceleration in profits, revenues, and competitive advantage. They implement a holistic approach to achieving sustainably increasing enterprise value that includes:
An Accelerator emphasizes the importance of clear, concise, and consistent strategy and communication of priorities across the business. It is critical that all levels of personnel take coordinated actions that are aligned around a shared set of values, goals (with metrics for evaluating success), and clear priorities so that implementation will be successful. When your business establishes a truly Scale-focused, Customer-centric, Measurement Driven Culture, it unlocks the full potential of the organization and opens up opportunities for business model and ecosystem repositioning—increasing resilience and providing you the opportunity to manage your business more proactively through cycles of inflation and deglobalization trends. The stability and efficiencies it creates allow you to better manage through macro and micro disruptions that will be occurring at an accelerated rate as we advance into the future amidst all this geopolitical cycle unrest.
Businesses looking to disrupt a market often need outside help. The FortéOne Accelerator is a hands-on, multi-year program in which businesses can leverage startup strategies to disrupt not only their own business, but the market, maximizing their enterprise value. Our Operating Partners have led countless businesses through significant transformation to help them reap the rewards often reserved for large organizations, well-funded startups, or private equity firms. By entering the Accelerator and adopting a disruptive mindset, business owners can achieve the growth they never thought possible.
Have you missed any of ‘The End of Globalization’ series?
At FortéOne, we’ve been on the forefront of change as thought and implementation leaders for more than 20 years. Our mission is to help Family and Privately Held Business owners as well as Private Equity and Family Office investors become performance leaders in their respective industries. We are more than consultants—we are problem solvers who work side-by-side with you to deliver a business transformation that improves performance and accelerates change in your middle market company.