PwC Says Ambitious Growth Objectives Became Innovation Trigger for Middle-Market Firms

As more privately held companies escalate their investments in sales and marketing, new innovative initiatives are beginning to mushroom across the lower middle market. Middle-Market Executive recently spoke to Ken Esch, a partner with PwC’s Private Company Services practice, who shared some recent insights from PwC’s Trendsetter Barometer — a quarterly study that tracks the activities of privately held firms. According to Esch, when growth is on the agenda, innovation advances forward.

MME: What’s really behind all this talk of innovation inside privately held firms?

Esch: The question we’re hearing is, “What’s next?” These firms are saying, “We’re not going to be able to save our way to prosperity, so what we are going to do now to grow the top line?” What we learned from the survey is that there are two main drivers that companies favor when growing the top line. One is growing market share in markets where they already reside, and the second is expansion into new geographic markets. Often, we’ve seen two groups of companies emerge. The first is a company that is comfortable with the status quo: “Let’s just maintain our expenses and see if we can get a little inflationary growth along the top line and continue to do better incrementally.” Meanwhile, the other group consists of firms we would classify as leaders, and these companies are doing things like taking advantage of record-low interest rates and a strong balance sheet to borrow money and acquire other businesses and expand into new markets. Some of those expansions can come through an acquisition of another company that is maybe doing well in an area in which you may want to expand, or perhaps it’s some sort of joint venture with a supplier or distributor that can help you gain a larger footprint in a new geographic market. There are more ways to achieve growth, but those are the two main areas we have found companies to be looking at. Meanwhile, we have found that those companies that are involved in the international marketplace are much more aggressive with respect to identifying new products and services and trying to further expand their businesses.

MME: So a more global mind-set is also enveloping the middle market?

Esch: Well, yes. I think one of things that the recession taught us is that the world has just gotten much smaller, and globalization means that a problem in Europe can affect my company here in the U.S. It’s not just globalization in the context of there being new potential customers, but also the downside risk of foreign economic issues that affect U.S. businesses.

MME: We keep hearing firms use the phrase “strategic hires,” as in “We’ll be making only ‘strategic hires’ this quarter.” This sounds rather selective …

Esch: The broader Trendsetter [study] that we completed did show an uptick in hiring. However, the problem was that firms were not hiring enough heads to move the needle on the economy. So in this current Trendsetter release, we’ve seen measured hiring. We’ve seen that there is a willingness to hire when it comes to the marketing and sales function, and finding that individual who can help to grow a customer base in a new geographic area or help to steal market share from a competitor. We also saw this on the R&D side. Firms are saying that they need to engage in an innovation strategy and develop products and services that are attractive to customers in new markets, and to get there, they will need more engineers.

MME: Where does technology fit in here?

Esch: On the technology side, what we’ve seen is a movement where companies are moving away from, say, ERP implementations to focusing their money and spending on information that they may already have, and they can do this through data analytics. “How do I take all this information I have on my customers and/or potential customers and tailor my products and services to increase my sales?” This is where firms are spending real time and effort. I think the other technology area that is important but might not be delivering the same expectation as data analytics is cloud computing and using cloud software–type applications to manage their cost structure as they build their business. Social media is another area, where companies certainly feel they need to be there, and while they don’t always know what they get out of it, they’re spending some time and money in that space.

MME: Are there evident changes in the lending environment that are contributing to the uptick in innovation initiatives?

Esch: I would say that since the downturn, banks may be a little more judicious as far as where they loan money, but anecdotally I can say that the competition for lending money to good businesses is pretty intense right now. At the same time, while we saw growth in both the top line and profitability through the Trendsetter analysis, companies weren’t necessarily going out and accessing bank lines to expand their businesses. They were getting that done through internal cash flows as opposed to going out and securing new lines of credit. I think that we’re just starting to see an uptick on the borrowing front, but not at a substantial measure. I think that as with a lot of things, as a result of headwinds in the economy, companies in the near term don’t see a big demand for their products and services. So, by and large, they maintain a cautious outlook.