2012 middle-market-outlook-rpt-1

CIT Voice of the Middle Market:

Perspectives from the Heart of America’s Economy

September 2012

cit.com/middlemarketoutlook

ACKNOWLEDGMENTS

CIT and KRC Research would like to

acknowledge Dr. Arnoldo Hax, Alfred P.

Sloan Professor of Management Emeritus

and a Professor of Technological Innovation,

Entrepreneurship and Strategic Management

at the MIT Sloan School of Management for

his insights and contributions throughout

this research process.

From the onset of the research, Dr. Hax

played an integral role helping CIT and the

research teams narrow the study’s focus. Dr.

Hax provided counsel on the development of

the research instruments, including specific

guidance related to the topics covered in

the survey instrument. His expertise also

informed the development of the questions

related to strategic management of middle

market companies. Once the research was

complete, Dr. Hax participated in discussions

about the findings and their implications,

offering guidance on the key lessons learned

from in-depth interviews as well as the online

survey of middle market executives.

I am pleased to share with you the findings from our 2012 Voice of the Middle Market survey. This

comprehensive research report highlights the outlook of middle market executives today, as

well as the important role their companies play in the United States economy.

As a company that has served the middle market for more than a century, CIT has a unique

vantage point in understanding the vital role these businesses play in our economy. We

also understand that in order to truly serve this sector, we must have a clear view of the business

climate these companies face today — both the challenges and opportunities — and what we can

reasonably expect in the future.

This research report reflects our continued commitment to serving the middle market

thoughtfully and thoroughly — and, through our support of these businesses, to supporting

the growth of our nation’s economy.

We hope you find the perspectives and research contained in this report valuable. Thank you to

the many business leaders who provided the candid insights that form the basis of this

important work.

Sincerely,

John A. Thain

Chairman and Chief Executive Officer, CIT

Letter from the Chairman and Chief Executive Officer

Introduction 1

The Middle Market: Speaking with a Unified Voice 3

Economic Outlook and Looking Ahead 4

Growth Prospects and Financing 8

Challenges Ahead 11

The Backbone and Barometers of the U.S. Economy 12

Looking Toward the 2012 Presidential Election 14

The Middle Market: Where Leaders Diverge By Management Capacity 16

Evaluating Strategic Management Capacity 16

Perspectives on the Role of the Middle Market 23

Appendix 26

Middle Market Growth Index 26

Middle Market Strategic Management Index 27

Methodology 28

Table of Contents

1

INTRODUCTION

Middle market companies are the backbone of the U.S. economy1; they drive growth and

generate $6 trillion in annual revenue. The middle market includes more than 100,000

companies nationwide that employ more than 30 million Americans.

CIT has long understood the economic impact and importance of the middle market and

has been committed to providing lending, leasing and advisory services to middle market

businesses for more than 100 years.

CIT sponsored this research to better understand middle market executives’ perspectives

on the state of the economy, their companies and their industries. This research is especially

instructive as middle market companies and the United States more broadly look to move

past the Great Recession.

Several key themes emerged from this research.

k Where the Middle Market Converges

There are several areas of widespread consensus among middle market leaders, even

given the diversity of middle market firms represented (by industry as well as range

of revenue).

k Economic Engines: In particular, middle market executives share a strong

consensus about the middle market’s vital importance to the U.S. economy. Most

say that the middle market has a major effect on the U.S. economy and that

middle market companies are economic engines of the economy.

1 Revenue and employment figures are from the U.S. Census.

2

k Middle Market Companies Poised for Growth: Many middle market leaders report

that their companies are poised for growth in the coming months; many plan

to expand into adjacent markets and enter other geographic regions. Moreover,

a sizeable number (42 percent) expect to increase their workforce in the

coming year.

k Satisfaction with Financing: Thinking about financing, middle market executives

are satisfied with their companies’ access to credit. In fact, about 8 in 10 are

satisfied with both their company’s access to financing and the cost of financing.

k Challenges Ahead with Economic Uncertainty and Federal Regulations: Middle

market executives largely agree about several challenges ahead, including

continued economic uncertainty at the national level and their ability to hire and

retain top talent. In addition, a majority say they are concerned with the cost of

complying with federal regulations. Two-thirds believe that federal legislation and

regulations impede growth at their companies.

k Strategic Management Is an Area of Disparity

On other issues, middle market leaders cannot be viewed as a monolithic group,

most notably when it comes to the strategic management capacity of middle market

companies.

k Strategic Management Index: Using survey data and leaders’ self-reported

assessments of strategic management, the researchers developed an index to

rate these companies’ management capacity. Only a minority of middle market

companies received a strong rating on this index. The rest have either an average

or lacking/weak strategic management capacity.

k Differences among Middle Market Executives Based on Strategic Management

Rating: Parsing the data by this management index reveals differences between

leaders whose companies are rated highly and those who fall into a lower tier

relative to their company’s strategic management capacity.

This report begins with the areas where views converge among middle market leaders. The

section on strategic management follows and includes a more detailed explanation of the

variables used to create this index for middle market companies.

Additional materials from CIT’s middle market research can be found at

cit.com/middlemarketoutlook.

3

enter new markets in the coming year, as well

as grow their workforces. More generally,

they express confidence in the power of the

middle market relative to the U.S. economy

overall, including their role as job creators.

At the same time, there are challenges ahead

related to continued economic uncertainty at

the national level, compliance with regulations

and talent management. Finally, most

leaders expect the outcome of the upcoming

presidential election to substantially influence

the health of the economy as well.

ccording to the U.S. Census, the group

CIT defines as the middle market

comprises more than 100,000

companies, all of which have

revenues between $25 million and $1 billion.

From revenue to number of employees to

industry sector, these companies are diverse.

To reflect this diversity, the CIT Voice of

the Middle Market survey was administered

to executives who represented a range of

industries and sizes. Still, on many economic

issues, the leaders of the middle market

speak with a single voice.

Middle market executives are optimistic

about the strength of their own companies

and their growth potential. Many expect to

The Middle Market: Speaking with a Unified Voice

4

ECONOMIC OUTLOOK AND LOOKING AHEAD

Even with economic uncertainty at the

national level, many middle market firms

appear on solid ground; half say they are

stronger today, having learned a number of

lessons coming out of the Great Recession.

Although middle market executives

believe that their individual companies and

respective industries are on solid ground,

economic uncertainty at the national level

Concerns in the Upcoming 12 Months

0%

Very concerned Somewhat concerned

The ability to hiretop talent

The ability to retaintop talent

The ability to train and

develop employees

Access to capital

Continued economicuncertainty at the

national level

Compliance withregulations

Management capacityto lead coming out of

the Great Recession

Over reliance on keycustomers

and accounts

20% 40% 60% 100%80%Total

Low

Medium

High

Total

Low

Medium

High

Total

Low

Medium

High

Total

Low

Medium

High

Total

Low

Medium

High

Total

Low

Medium

High

Total

Low

Medium

High

Total

Low

Medium

High

remains a lingering concern. Specifically,

more than 80 percent of middle market

leaders cite economic instability as a top

concern. Other concerns, such as hiring and

retaining top talent, fall into a second tier. The

majority of executives also worry about talent

management, but they show less concern

about hiring and retaining talent than they do

about continued economic uncertainty.

Concerns in Upcoming 12 Months

Throughout the report, middle market firms are often split by revenue, in particular Low, Medium or High Revenue. Those classified as Low Revenue have an annual revenue of between $25 million and $50 million; those classified as Medium Revenue have an annual revenue of between $50 million and $100 million; and those classified as High Revenue have an annual revenue of between $100 million and $1 billion.

5

“The economy is kind of in a

malaise right now. That’s my

feeling. But while there has

obviously been some optimism

here recently, I don’t see enough

in the fundamentals that actually

says this is necessarily sustainable.” – Middle Market Executive

(General Manufacturing, Annual Revenue: $25-$100 million)

Notwithstanding the widespread concern

about the U.S. economy, many middle market

executives remain optimistic about their own

companies. Firms with higher revenue figures

are more likely than those with revenue

below $50 million to describe their company

as strong, even the majority of executives

from companies with revenues between $25

million and $50 million are confident as well.

Overall, few—fewer than 1 in 10—say that their

company is weak right now.

Perceived Strength of Company

15%

11%

9%

21%

49%

47%

56%

46%

Total

Low Revenue

Medium Revenue

High Revenue

Very strong Strong

64%

58%

65%

67%

Perceived Strength of Company

6

There is also momentum coming out of the

Great Recession of 2008. Half of middle

market leaders say that their company is

stronger now compared to before the Great

Recession. Only a minority describe their

firms as weaker, with four percent saying they

are significantly weaker. About one in four

describe their company as unchanged since

before the Great Recession.

Strength of CompanyCompared to 2008

13%

23%

4%

40%

18%

53%

22%

Stronger

About the same

Weaker

Significantly stronger

Significantly weaker

Stronger

Weaker

Strength of Company Compared to 2008

7

Middle market leaders learned a number of

lessons during the Great Recession, lessons

they carry with them as they move forward.

A majority of these leaders learned the

importance of challenging the status quo

and said that they identified greater

efficiencies around operations in order to

have a leaner company.

“The ones that are left [are stronger].

Well, I’m sure they had to develop

the skills and those kinds of

things to be quick on their feet, to

respond in ways that have allowed

them to survive.”

– Middle Market Executive

(Healthcare, Annual Revenue: $101-250 million)

Lessons Learned From the Great Recession

51%

50%

43%

32%

31%

27%

24%

19%

17%

7%

7%

6%

Need to continue to change

Company can be leaner

Make strategic planninga higher priority

Closely monitor our pricing tomeet customers’ needs

Diversify our business

More customer-centric

Need to save more money

Find ways to increase ourdistribution channels

More careful about navigatingthe lending environment

Look to o�shore for more of ouroperations and/or production

Look to return more of ouroperations/production to the U.S.

Look to oursource more of ouroperations/production

Lessons Learned From the Great Recession

8

Expected Growth in Next 12 Months

29% 36%

Increasing range of products/serviceso�ered in current markets

Expanding into adjacent markets

Entering other geographic regions

Assuming responsibilities previously performed by customers

Assuming functionality previouslyperformed by a supplier or distributor

Related diversification, entering into a newbusiness that is familiar to your company

Unrelated diversification, entering into anunrelated business for your company

Very likely Somewhat likely

65%

16% 42% 58%

10%

10%

25%

23%

36%

33%

15%

6%

34%

14%

49%

20%

Horizontal Growth

Vertical Growth

Diversification

23% 31% 54%

GROWTH PROSPECTS AND FINANCING

Middle market executives are optimistic about

several types of growth, including increasing

the range of products and services they offer

and entering other regions. These leaders are

also satisfied with their access to financing,

which can support their growth plans.

As middle market firms move through 2012

and into the coming year, signs of growth

are emerging. During the next 12 months, the

majority of leaders representing the middle

market report that their companies will likely:

k Increase the range of products and

services offered in current markets;

k Expand into adjacent markets; and

k Enter other geographic regions.

Other types of growth—both vertical

integration and diversification—are less likely.

During the next 12 months, fewer than half of

leaders representing the middle market say

that their company is likely to experience:

k Vertical growth—Assuming

responsibilities previously performed by

customers;

k Vertical growth—Assuming functionality

previously performed by a supplier or

distributor;

k Related diversification—Entering a

new business that is familiar to their

company; and

k Unrelated diversification—Entering an

unrelated business.

Expected Growth in Next 12 Months

9

Using survey data collected about different

types of growth, researchers developed a

growth index to rank companies on their

growth prospects and to further review middle

market executives’ stances on the future in

relation to growth.

(Please see the Appendix for a more detailed explanation

of the growth index.)

A sizeable number of middle market

executives (4 out of 10) report that they

expect their workforce to grow. Only a

small number think that they will have fewer

employees during the next 12 months. The

plurality say the size of their workforce will

remain unchanged during the next year.

Expectations for Size of Workforce

42%

11%

47%

Size of workforce will increase

Size of workforce will decrease

Size of workforce will stay the same

Expectations for Size of Workforce

Middle Market Growth Index

15%

46%

26%

14%

High Growth

Moderate Growth

Low Growth

No Growth

Middle Market Growth Index

10

Satisfaction with Financing Environment

18%

23%

23%

61%

58%

58%

79%

81%

81%

I am satisfied with mycompany’s access to financing

I am satisfied with mycompany’s cost of financing

I am satisfied with the varietyof financing alternativesavailable to my company

Strongly agree Agree

As the middle market considers growth

opportunities in the coming year, financing

will also play a role. Currently, middle market

leaders express satisfaction with different

variables related to financing. Approximately

80 percent report that they are satisfied not

only with their company’s access to financing

but also the cost of credit. Most (79 percent)

also say that they are satisfied with the

variety of financing alternatives available to

them. However, intensity is low; fewer than

25 percent strongly agreed with any of the

measures related to financing.

Satisfaction withFinancing Environment

11

CHALLENGES AHEAD

While the middle market seems poised for

growth and these companies’ leaders are

satisfied with financing options, there are

also challenges ahead.

Although middle market executives are largely

optimistic about the coming year, certain

obstacles loom. Looking ahead to the next

12 months, middle market executives express

concern with economic uncertainty and talent

management. Regardless of firm revenue, the

majority of executives worry about federal

regulations, and more than half worry about

compliance with regulations in general.

Similarly, two-thirds of middle market

executives say that federal legislation or

regulations impede growth within their

company. Only a minority of respondents

report that federal legislation and regulations

support growth, and 18 percent believe that

legislation and regulations both impede and

support growth.



0%

The ability to hiretop talent

The ability to retaintop talent

Continued economicuncertainty at the

national level

Compliance withregulations

20% 40% 60% 100%80%Total

Low

Medium

High

Total

Low

Medium

High

Total

Low

Medium

High

Total

Low

Medium

High


Perceived Impact of Legislation and Regulations

18% say

16% sayregulationssupportgrowth

67% sayregulations

impedegrowth

regulations both support and impede

company growth

Gro

wth

Gro

wth

Percieved Impact of Legislation and Regulations

12

Impact of the Middle Market on the U.S. Economy

71%

28%

1%

Medium Revenue

62%

35%

4%

High Revenue

Major impact Moderate impact Little to no impact

76%

22%

2%

Low Revenue

“I think the middle market is the

lifeblood of the U.S. economy; it’s

where most jobs are created.”

– Middle Market Executive

(Travel, Annual Revenue: $251-$500 million)

THE BACKBONE AND BAROMETERS OF THE U.S. ECONOMY

According to the U.S. Census, the middle

market generates $6 trillion in annual revenue

and employs more than 30 million people.

Unsurprisingly, then, middle market leaders see

their companies as the economic engines of

the U.S. economy. Many of these leaders also

think that the middle market will play a leading

role in getting the U.S. economy back on track.

The views of middle market executives

converge even more clearly when it comes to

the role these companies play relative to the

U.S. economy. Consistent with the qualitative

in-depth interviews with middle market

leaders, the survey shows consensus among

middle market leaders that the middle market

positively affects the U.S. economy, both

overall and with respect to job growth.

Almost 7 in 10 executives say that the middle

market has a major impact on the U.S.

economy, while another 29 percent think

that middle market companies have a

moderate impact.

Impact of the Middle Market on the U.S. Economy

13

On the topic of job creation, almost all

middle market executives agree that job

growth among middle market companies will

significantly strengthen the U.S. economy.

Middle market leaders express clear unanimity

on that point, even across companies in

different revenue brackets.

Similarly, 97 percent of leaders describe the

middle market as a source of job creation, a

belief felt consistently across all companies

regardless of revenue size. In addition to

praising their role as much-needed job

creators in the U.S., middle market leaders

also use other favorable descriptors for the

middle market. They emphasize in particular

how the middle market not only drives the

U.S. economy forward but also serves as a

guide for the health of the U.S. economy.

They characterize the middle market as

barometers and economic engines as well as

drivers of innovation. In total, more than 90

percent agree with these descriptions of the

middle market, and a third or more strongly

agree with each of these descriptors.

To a lesser extent, most middle market

executives also say that middle market

companies are incubators of big business,

but the intensity of that belief is lower; only

18 percent strongly agree.

Agreement Middle Market Companies Will Have Significant Impact on

Strengthening Economy

57% 41% 98%

58% 41% 99%

63% 33% 96%

53% 46% 99%

Total

Low Revenue

Medium Revenue

High Revenue


Agreement Middle Market CompaniesWill Have Significant Impact on Strengthening Economy

Agreement “Job Creators” Describes the Middle Market

49%

49%

58%

44%

48%

47%

41%

52%

97%

96%

99%

96%

Total

Low Revenue

Medium Revenue

High Revenue


Agreement “Job Creators” Describesthe Middle Market

Agreement Attributes Describe the Middle Market

38%

34%

34%

18%

56%

62%

57%

62%

95%

95%

91%

81%

Economic Engines of the U.S. Economy

Barometers of the U.S. Economy

Drivers of Innovation

Incubators for Big Business


Agreement Attributes Describethe Middle Market

14

LOOKING TOWARD THE 2012 PRESIDENTIAL ELECTION In this time of continued economic uncertainty

and instability, middle market executives

expect that the upcoming presidential election

will affect the economy. Nonetheless, they say

that their businesses are not discussed enough

on the stump by the presidential candidates.

Middle market leaders draw a connection

between the outcome of a presidential election

and the health of the U.S. economy. The vast

majority say that the outcome of a presidential

election affects the health of the economy, and

38 percent say it has a major impact. One in six

think that the election only has a small impact,

and very few believe there is no connection

between the outcome of a presidential election

and the economy.

Impact of the Presidential Election on U.S. Economy

38%

43%

16%

3%

A Major Impact

A Moderate Impact

A Little Impact

No Impact at All

81%

Impact of the Presidential Electionon U.S. Economy

15

While most middle market leaders will likely

follow the current presidential election closely,

they are dissatisfied with the attention that

the candidates currently devote to both small

businesses and the middle market. Seven in

ten middle market executives think that the

presidential candidates do not spend

enough time talking about middle market

companies. Similarly, about two-thirds

share the sentiment on the subject of

small businesses.

In contrast, the majority think the candidates

devote too much time to big business. The

presidential candidates’ perceived inattention

to the middle market exposes a disconnect

between middle market leaders’ impression

of the importance of their businesses and

national economic discourse.

Amount Presidential Candidates are Discussing…

13%

66%

21%

Small Businesses

Too much Too little Just the right amount

55%23%

22%

8%21%

Middle Market Businesses

Big Businesses

71%

66%

Amount Presidential Candidates Are Discussing…

16

EVALUATING STRATEGIC MANAGEMENT CAPACITY

With guidance from Dr. Arnoldo Hax, Alfred

P. Sloan Professor of Management Emeritus

and a Professor of Technological Innovation,


at the MIT Sloan School of Management, this

research was also used to assess the strategic

management capacity of the middle market.

Researchers developed a strategic

management index by looking at the

answers to a number of questions about the

respondents’ management strategy at

their individual firms. A closer review of

this index reveals key differences among

middle market firms based on their strategic

management rating.

The Middle Market: Where Leaders Diverge By Management Capacity

17

The CIT survey of middle market leaders

included a series of questions to evaluate the

strategic management capacity of middle

market companies. In particular, the questions

covered the following topics:

k Their company’s strategy, including the

extent of communication and level of

consensus among key executives;

k The degree to which the organizational

structure of the company supports

the implementation of the company

strategy;

k The level of understanding regarding

the responsibilities and authorities

within the organizational structure;

k The effectiveness of the different

departments of the organization,

including: finance/accounting, human

resources, technology/IT services,

operations/manufacturing, marketing/

sales, research and development;

k The degree to which systems are

in place for appraising, measuring

and rewarding performance at their

company; and

k The characterization of the

organizational culture at the company,

as participative, consultative,

benevolent authoritative or exploitive

authoritative.

"Strategic management is a way

of conducting a firm that has as the

ultimate objective of developing

corporate values, managerial

capabilities, organizational

responsibilities and administrative

systems that link strategic and

operational decision making at all

hierarchical levels and across all

businesses and functional lines of

authority in the firm…”

– Dr. Arnoldo Hax

(MIT Sloan School of Management)

18

When assessing their company’s strategy,

a third say they have a clear strategy in

place reached through the consensus of

key executives that addresses short- and

long-term implications. Another 43 percent

say their company has a clear strategy that

was dictated mainly by top executives. The

rest—about one in four—express a lower

assessment of their company’s strategy.

Middle market executives give their

companies similar marks when it comes to

organizational structure:

k Thirty-four percent say that there is

a clear assignment of responsibilities

and authorities and a full

understanding of the underlying

decision making process.

k Forty-four percent think their

companies clearly assign

responsibilities but lack some

clarity about the overall decision

making process.

k The rest rate their companies lower,

either citing a great deal of ambiguity

in the assignment of responsibilities

and authorities or claiming difficulty

in understanding how the organization

is structured.

Company Strategy

12%

12%

43%

33%

Company has a clear strategy in place,reached by consensus of key executives,it has been communicated, and itaddresses short- and long-term implications

Company has a clear strategy in place,dictated mainly by the top executives, andit has been communicated

Company has a clear strategy in place,but it has not been comunicated

Company has no clear strategy in place

Company Strategy

Organizational Structure

2%

20%

44%

34%

Clear assignment of responsibilties andauthorities, with full understanding of theunderlying decision making process

Clear assignment of responsibilties andauthorities to each individual, butsome lack of clarity about theoverall decision making process

There is a great deal of ambiguityon the assignment ofresponsibilities and authorities

It is hard to understand how the organization is structured

Organizational Structure

19

When comparing company strategy to

organizational structure, middle market

executives express greater agreement about

how well their companies’ organizational

structures support implementation of

strategy. Twenty-five percent strongly agree

their company does so well, and another

60 percent agree.

The survey also asked middle market

executives to rate the effectiveness of

primary functions at their company, including

finance/accounting, operations/manufacturing

and research and development, among

other functions.

k Leaders are most positive about

the effectiveness of their finance/

accounting units; 94 percent described

those functions as effective.

k Research and development scored

lower, but a majority nonetheless

described those functions as effective. Organizational Structure Relative to Company Strategy

25%

60%

14%

2%

Stronglyagree

Agree Disagree Strongly disagree

Agree: 85% Disagree: 15%

Organizational Structure Relative to Company Strategy

E�ectiveness of Primary Functions

39%

25%

23%

21%

12%

6%

61%

75%

77%

79%

88%

94%

Research and Development

Human Resources

Marketing/Sales

Technology/IT Service

Operations/Manufacturing

Finance/Accounting

Net E�ective Net Ine�ective

Effectiveness of Primary Functions

20

Middle market companies receive mixed

reviews for performance and reward. Again,

roughly one-third (31 percent) fare well;

executives believe that comprehensive

and formal systems are in place. Forty-one

percent report some systems for appraising,

measuring and rewarding performance.

Another 29 percent say that their companies

have either an informal system or no system

for measuring and rewarding performance.

7%

22%

41%

31%

There is no system in place for appraising, measuring and rewarding performance

There are comprehensive and formal systems inplace for appraising, measuring and rewardingperformance, and these are clearly understoodand accepted by everybody

There are some systems in place for appraising,measuring and rewarding performance, but these systems lack comprehensiveness and formality

The process for apprasing, measuring andrewarding performance is totally informal,depending on each individual supervisor

Performance and RewardPerformance and Reward

21

Lastly, the survey asked middle market leaders

to rate the culture where they work. Only

a minority describe their firms’ culture as

participative, the highest rating on the scale.

About half characterize their organizational

culture as consultative—a system that provides

an environment for upward and downward

communication. The rest fall under one of

two types of authoritative culture—either

benevolent authoritative or exploitative

authoritative. The graph below includes full

descriptions of the four culture types.

7%

22%

48%

23%

Participative:

Consultative:

Benevolent Authoritative:

Exploitive Authoritative:

Organizational Culture

a system that provides an environment with more emphasis on self-regulation and mutual support,

openess and trust, high performance goals,and more involved participation at all levels

a system that provides an environment havingupward and downward communication, supporting

leadership, a certain degree of self-regulation, and consultative goal setting

a system that provides an environment where thereis low motivation, little interpersonal support and

participation, only downward communication, andauthoritative control, but it is exercised with a

pateranalistic feeling, that is with a sense of carefor those who are part of the organization

a system that provides an environment where there is low motivation, little interpersonal support and

participation, only downward communication, andauthoritarian control, with no paternalistic feeling

Organizational Culture

22

“The strategic management index

is a number that measures the

quality of strategic management

in an organization. It assigns

values to the perceived quality

of the basic components of

strategic management: company

strategy, organizational structure,

assignment of responsibilities,

effectiveness of primary

functions, appraisal system, and

organizational culture…These

concepts were captured in our

survey and were reported in our

findings. These important matters

are of great centrality for every

company, but are particularly

critical for the Middle Market

given the imperative that relies

upon them to achieve a proper

managerial quality.”

– Dr. Arnoldo Hax

(MIT Sloan Schol of Management)

Researchers aggregated the answers to all of

the management-related questions to develop

a strategic management index that classified

middle market companies as having strong,

solid, weak or lacking strategic management

capacity. In total, most companies fell short

of the strong strategic management category;

only one-third could be characterized

that way.

(Please see the Appendix for a more

detailed explanation of the strategic management index.)

Ranking According to Strategic Management Index

26%

42%

32%

Strong strategic management

Solid or average strategic management

Weak/lacking strategic management

Ranking According to Strategic Management Index

23

PERSPECTIVES ON THE ROLE OF THE MIDDLE MARKET

In the first section, we explored the

consistencies in perspectives among middle

market executives across different revenue

ranges, sizes and industries. Creating an

index for strategic management capacity

and reviewing responses based on this rating

expose greater disparities in perspectives

among middle market executives. The

distinctions prove most stark among

leaders at companies with strong strategic

management compared to those with a lower

strategic management rating.

Middle market leaders with strong strategic

management believe that the middle market

has a strong impact on the U.S. economy

and, perhaps more importantly, on the

creation of jobs. Seventy percent of those

with strong strategic management strongly

agree that middle market companies will

play a significant role in strengthening the

U.S. economy; only 56 percent of those with

solid strategic management and 46 percent

of those with weak or lacking strategic

management shared those beliefs.

The majority of leaders with strong strategic

management strongly agree middle market

companies are job creators and the economic

engines of the U.S. economy. Fewer than half

of companies with a weak or lacking strategic

management organization share this view.

In addition, leaders from companies with

strong strategic management are also more

likely to characterize their company as in a

favorable position today, both generally and

relative to the Great Recession.

Agreement Middle Market Companies Will Have Significant Impact on

Strengthening Economy

57%

70%

56%

46%

41%

29%

43%

49%

Total

Strong Strategic Management

Solid Strategic Management

Weak/Lacking Strategic Management


Agreement Middle Market CompaniesWill Have Significant Impact onStrengthening Economy

Strong Agreement Attributes Describe the Middle Market

59%

57%

53%

53%

35%

48%

34%

34%

26%

11%

42%

28%

17%

27%

14%

Job Creators

Economic Engines of the U.S. Economy

Drivers of Innovation

Barometers of the U.S. Economy

Incubators for Big Business

Strong Solid Weak/lacking

Strong Agreement AttributesDescribe the Middle Market

24

Overall, leaders of companies that excel in

strategic management have a more positive

outlook on the past, current and future

strengths of their companies as well as

the middle market as a whole. Those who

represent companies with a strong strategic

management rating are more likely to classify

their current company as strong (more than 8

in 10), while only 52 percent of the companies

with weak or lacking strategic management

share that view. Moreover, two-thirds say

that their company is stronger now than

before the Great Recession. These positive

sentiments also extend to perspectives on

their industries; middle market executives

who represent companies with stronger

strategic management positions are more

likely than their counterparts to describe

the current state of their industry as strong.

Only 40 percent of companies with weak or

lacking strategic management say that they

are stronger than they were before the Great

Recession. In contrast, almost two-thirds of

those with a strong management capacity say

they are stronger now.

Middle Market Companieswith Strong State of Company and

Stronger Now than Before the Great Recession

84%

65%

61%

56%

52%

40%

Strong now

Stronger than 2008


Solid strategic management


Middle Market Companies with Strong State of Company and Stronger Now than Before the Great Recession

Agreement that Individual Industry and Company are Both Strong

31%

42%

30%

24%

Total




Agreement that Individual Industry andCompany Are Both Strong

25

The Great Recession imparted lessons as

well. Leaders from companies with a strong

strategic management rating were particularly

receptive to two lessons:

k There is a great need to challenge the

status quo; and

k Strategic planning needs to be a higher

priority for companies.

The lessons these leaders learned stand

out especially relative to those with weak

or lacking strategic management. Their

adaptability and willingness to learn from

the Great Recession may partly explain

why leaders from companies with a strong

strategic management capacity worry less

about their managers’ capacity to lead

following the Great Recession.

Concern of Management’s Capacity to Lead Coming Out of the Great Recession

15%

14%

10%

21%

25%

16%

27%

31%

Total





40%

30%

37%

52%

Concern of Management’s Capacity toLead Coming Out of the Great Recession

Strong Strategic Management Recognizes the Need to Change and to Make Strategic Planning a Priority

62%

54%

52%

44%

48%

34%

We need to continue to make a changebecause the status quo isn’t acceptable

We need to make strategic planning a higher priority


Solid or average strategic management


Strong Strategic Management Recognizes the Need to Change and to Make Strategic Planning a Priority

26

Appendix

MIDDLE MARKET GROWTH INDEX

Middle market executives who completed the

CIT survey were asked to report the likelihood

that their company would experience several

types of growth, particularly with respect

to horizontal growth, vertical growth and

diversification. Researchers used their answers

to create a growth index and, in turn, to

categorize the growth prospects at middle

market companies. The following types of

growth were included in the survey:

k Horizontal Growth

k (a) Entering other geographic

regions

k (b) Increasing the range of products

and services offered in current

markets

k (c) Expanding into adjacent markets

k Vertical Growth

k (d) Assuming responsibilities

previously performed by customers

k (e) Assuming functionality previously

performed by a supplier or

distributor

k Diversification

k (f) Related diversification by entering

into a new business that is familiar to

their company

k (g) Unrelated diversification by

entering into an unrelated business

The index was based on responses to the

items above. The growth rating is outlined in

the table to the left.

Growth Index Rating

Growth Criteria

High Growth 6-7 types of growth from the list are likely

Moderate Growth 3-5 types of growth from the list are likely

Low Growth 1-2 types of growth from the list are likely

No Growth 0 types of growth from the list are likely

Table 1: Prospective Growth IndexTable 1: Prospective Growth Index

27

MIDDLE MARKET STRATEGIC MANAGEMENT INDEX

Using data from the survey among middle

market leaders, researchers developed an

index to assess the management capacity

of middle market companies. They assigned

an index score based on answers to six

questions, and the table below outlines the

questions and distribution of points.

Table 2: Strategic Management Index

Range of PointsAnswer Choices and Points AssignmentQuestion Text

0-14 points

0-14 points

0-14 points

0-30 points

0-14 points

0-14 points

• Strong Strategic Management:

76-100 Points

• Solid/Average Strategic Management:

51-75 Points

• Weak Strategic Management:

26-50 Points

• Lacking Strategic Management:

0-25 Points

Table 2: Strategic Management Index

Q31 “Which of the following statements best describes your company’s strategy”?

• Clear strategy in place – 14 points• Clear strategy in place dictated by top executives – 8 points• Clear strategy but not communicated – 2 points• No clear strategy – 0 points

Q32 Do you agree with the following statement: “The organizational structure of my company e�ectively supports implementation of the company’s strategy”?

• Strongly agree – 14 points• Agree – 8 points• Disagree – 2 points• Strongly disagree – 0 points

Q33 Which of the following best describes the organizational structure of your company?

• Clear assignment, full understanding – 14 points• Clear assignment, lacking some clarity – 8 points• Great deal of ambiguity – 2 points• Hard to understand - 0 points

Q34 How e�ective are each of the following primary functions at your company?

• Very e�ective – 5 points/function• Somewhat e�ective – 3 points/function• A little e�ective – 1 point/function• Not at all e�ective – 0 points

Q35 Which of the following best describes the systems in place for appraising, measuring and rewarding performance at your company?

• Comprehensive and formal – 14 points• There are some systems – 8 points• Informal process – 2 points• No system – 0 points

Q36 How would you characterize the organizational culture at your company?

• Participative – 14 points• Consultative – 8 points• Benevolent Authoritative – 2 points• Exploitative Authoritative – 0 points

28

METHODOLOGY

This research, conducted by KRC Research

and commissioned by CIT (NYSE: CIT) –

a leading provider of financing to small

businesses and middle market companies,

occurred in two phases:

k In-depth telephone interviews

with middle market executives; and

k An online survey of middle market

executives.

The in-depth interviews explored preliminary

topics that affect the middle market,

including economic outlook, growth plans

and challenges ahead. The findings from

these initial conversations helped guide

the direction of the online survey, which

was used to more specifically quantify

the views of middle market executives on

the state of the middle market economy

and current economic events, as well as

to establish baseline metrics around the

perceived strength of the middle market

executives’ respective firms, including plans

for horizontal, vertical, diversification and

employment growth.

The research was conducted with guidance

from Dr. Arnoldo Hax, Alfred P. Sloan

Professor of Management Emeritus and

a Professor of Technological Innovation,


at the MIT Sloan School of Management.

MIDDLE MARKET IN-DEPTH INTERVIEWS

In total, KRC Research interviewed six

executives from middle market firms across

the country. The interviews were conducted

over the telephone and each lasted

approximately 30 to 45 minutes. CIT was

never identified as the sponsor of this research

during the recruiting or scheduling of subjects

or during the actual interview.

MIDDLE MARKET SURVEY

KRC Research administered an online survey

to 300 U.S. middle market executives who

represented a range of industries. The survey

included middle market executives from

the following industries: Apparel, Textiles,

Furniture/Home Furnishings and Footwear;

Commercial Real Estate; Communications;

Energy; Entertainment, Gaming and Sports;

Finance; Food, Beverage and Agribusiness;

General Manufacturing; Healthcare; Industrials;

Information Services and Technology; Metals,

Mining and Metals Fabrication; Restaurants;

Retail; Technology and Business Services; and

Transportation.

The team conducted fieldwork during the

summer of 2012. To be eligible to participate

in the survey, respondents had to serve in a

leadership role at firms with revenues between

$25 million and $1 billion, the majority (50

percent +) of whose employees were based

in the United States. The survey defined

leadership roles as Owner, Board Member,

C-Suite Executive (Chief Executive Officer,

Chief Operating Officer, Chief Financial

Officer, Chief Information Officer, Chief

Investment Officer or other C-Suite title) or

SVP/VP/Director.**Percentages may not sum as whole numbers due to rounding.

2012 middle-market-outlook-rpt-1

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