Middle Market Manufacturing
I have examined these four challenges in separate articles on the Business Resource Center. You can click on the section header to read more in depth on each subject. In this article, however, we'll just review the four challenges briefly.
The business value proposition must be scalable (profitable at a higher volume) to navigate ‘No Man’s Land.” Most manufacturing companies know that fixed costs grow as capacity grows. They also likely know the resultant challenge presented both by financing this effort, and absorbing the initial higher costs in the financial results. The investment in advance of revenue poses a serious challenge for middle market companies. In my article on this subject (linked above), I wrote about how an Austin electronics manufacturing company solved a model problem. They were able to do this by moving away from an export driven two step distribution program to a single step distribution. In addition, the company side-stepped its cash constraint by accessing bank financing for its customers through a leasing approach.
A simple definition of Market Alignment is when a business consistently delivers a compelling value proposition to a customer. In my original article on this topic (link above), an Upper New York State footwear manufacturer broke away from the 100 year vertical integration approach. In doing so, they solved for one of the segments of their business. Profitability (as measured by EBITDA) for one segment zoomed from 0 to $29 million as it gained alignment. For the other segment, bankruptcy and business closure awaited. For companies traversing the middle market divide, there are no guarantees of success.
Almost by definition, middle market companies have higher risk profiles. They experience unique challenges to raise equity, and in particular borrow the necessary finance. Growth in sales is unlikely to be financed by profits from those sales. It is not always intuitive to entrepreneurs that success in sales growth can lead to bankruptcy. Read the original article (linked above) to see how this challenge arises, and how to prepare well ahead of time for an equity or borrowing event.
As the middle market company moves to professionalize its management group, a number of challenges emerge. Fortunately, we have a few management navigation rules. The first is that, in order to navigate through "No Man's Land," the Founder/CEO must hire at the top first, not the middle. The second is that as we professionalize management and push for change, we have to be mindful of the culture of the company. When long-time company personnel consider their company to be unique, new managers need to be mindful of the corporate culture. The most difficult challenge to address is the long-time, loyal employee who cannot rise to new challenges and needs to leave. In the original article (linked above), I share two examples: one where the transition went well, and one where it did not.
If you are a manufacturing company, we take it for granted you are fully immersed in Lean approaches. As you grow, looking across at technology companies and how they maintain simplicity and agility can be helpful. Logistics and the supply chain management are truly important. Nevertheless the four strategic challenges above need to be kept to the forefront as you traverse through “No Man’s Land.” You do not want to be the low cost producer with closed doors.