Rethinking Economic Development, One Middle Market Community at a Time

As the executive director of The Edward Lowe Foundation, Mark Lange has helped to bring growth companies out of the shadows and supply them with a variety of new tools for success. However, when it comes to economic development, the tools are rarely “one-size-fits-all.”

MME: Are business communities and regions beginning to look at middle-market businesses in a new light?

Lange: I think that communities, regions, and states are more and more recognizing that existing middle-market companies are much more important to their economies than they may have realized. They cannot have their eyes solely on startups or on big companies, and they have to understand middle-market companies in order to make certain that they are providing resources and paying attention to them and servicing them appropriately.

This is not to keep them from leaving, but to help them grow. When you do this, you have to focus on what we call “strategic information,” because for these types of companies, growth is very often not just about operations, systems, or financials. Now, it could be about needing additional capital or talent, but the most fundamental thing that we’re seeing is the question as to whether the company is facing the right direction. By “facing the right direction,” I mean this as a strategic issue. It concerns whether you understand your business model and understand the real dynamics that are happening in your industry.

MME: So they are facing the right direction in order to pursue strategic opportunities?

Lange: The question is whether these companies are moving in the right direction to be successful. We can begin to help them see the answer by using real intelligence and getting them to talk about it.

Typically, business leaders don’t step back and look at their organizations — they are too busy running the company. Now, when they step back and are able to use sophisticated high-end information to make better decisions using some of the tools that we’re producing, we see them begin to think differently based on this intelligence and ask questions such as, “Should I adjust my product mix?” “Should I be moving to another customer category?” And so forth.

Too often, we see companies get into a commodity trap, where basically they’re spending all of their time reducing their margins and competing on price, and they market their way out of a situation when they really need to innovate themselves out of it. This is where this strategic information comes in. By taking in information on a regular basis, companies are able to begin a pattern of growth. This pattern of growth then signals their opportunities to continue to grow.

MME: What trends have you observed when it comes to accessing public and private capital inside the middle market?

Lange: In my view, the capital markets — and particularly the private equity market — are moving downward to these smaller middle-market companies. I’ve only come to know this by speaking to private equity people who are beginning to take on deals that involve not only investing, but managing and working more closely with these companies than they perhaps have done in the past. Because these companies are a lot smaller, we see private equity taking on something of a different role.

Now, when it comes to IPOs, Sarbanes-Oxley and other factors have impacted the lower end of the middle market. The small IPOs have stopped, and this is really where the action is in terms of adding jobs. For the ones that have gone public, it’s now all about maximizing profit, so they’re not hiring people. Thus the public capital markets are just not getting the kind of returns they used to.

MME: You have suggested that incenting companies to relocate is often flawed economic development …

Lange: The idea of relocating companies is one that many states and regions have pursued. What we’ve learned is that the net effect is zero impact. Even when you move companies, you are still taking the jobs away from somewhere else. Now, having said that, it’s still something that communities can do to try to create diversity, but it’s not a strategy for sustainable job growth.

MME: How can communities trigger sustainable growth? How can they supply their businesses with the types of insights and information required to do so?

Lange: What we’ve done, along with a group from Colorado, is create a center known as the NationalCenter for Economic Gardening (NCEG). What we do is find growth companies and then have the economic development organizations within their communities pay for teams of researchers. So instead of offering companies real estate deals, tax incentives, and those types of things, communities can now offer businesses a team of researchers and say to the individual business leader, “We’ll pay for 36 hours of this team to work on your behalf.”

This is really making CEOs stop and think. They can now have, say, four really impressive employees on their team, each of whom has these incredible skills to pinpoint key strategic issues. So imagine a team with one specialist in strategy, one in market research, one in Internet marketing, and one in GIS (Geographic Information Systems), all working on the company’s behalf. That’s exciting, and packed with potential.