• Friday, March 29, 2024
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Midsize Companies Are Growing, but Struggling to Earn Profits

Midsize Companies Are Growing, but Struggling to Earn Profits

According to our research, a midsize firm today is approximately four times bigger and has been around 7.6 years longer, on average, than a similar firm in 1999. In the same period, however, we’ve also seen a decline in the number of medium firms, due to the large-scale delisting of precarious companies, first during the dot-com bust of the early 2000s and then during the Great Recession of 2007-2008. The decrease in the number of medium firms, coupled with the increase in their aggregate market capitalization from $434 billion in 1996 to $2,083 billion in 2017, means that average firm size quadrupled, despite adjusting for inflation.

Our data also show that the gross margins of medium-size firms steadily rose from the late 1990s to 2017. At the same time, these companies showed a steady decline in sales growth. It seems that medium-size firms now pursue less aggressive growth strategies than they did in the late 1990s, and this could indicate a growing maturity of firms’ business models.

So what’s happening with these medium-size firms? Are they enjoying the quiet life now or are they more unstable than ever?

The data show that today’s medium firms are larger and older than at any other time in the past 35 years. Yet an increasing percentage of midsize firms incur losses and have lower profits and lower growth, despite spending larger amounts on experimentation and innovation.

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These findings have several implications. First, despite their larger size, midsize firms appear to be struggling and must constantly reinvent themselves to survive. Second, the role of experimentation, normally associated with smaller startups, must increasingly be taken up by medium-size, middle-aged firms. Their business leaders must increasingly manage like they’re steering a startup, with relentless innovation, just to keep their heads above the water. There’s little hope now for living the quiet life of a maturing firm.

(Vijay Govindarajan is a professor at Dartmouth’s Tuck School of Business. Anup Srivastava is an associate professor at the University of Calgary, where Luminita Enache is an assistant professor.)