Mid-Size Firms That Do Best Stress Quality

One of the hard lessons people who run companies have to learn is that getting bigger may be fun but can lead to disaster.

That’s especially true of fast-growing mid-size companies, says Richard E. Cavanagh, who, with colleague Donald K. Clifford Jr., studied them for the management consulting firm McKinsey & Co. For management of a lot of these firms, “a little feels good so a lot is better,” he adds.

It was probably inevitable after the success two other McKinsey consultants had with their book, “In Search of Excellence,” which attempted to unlock the secrets of the best-run big companies, that the firm would take a look at the next tier down. The next tier is defined as companies with $25 million to $1 billion in annual sales, although some grew bigger than that before the study was completed. Cavanagh and Clifford call their book “The Winning Performance, How America’s High-Growth Mid-Size Companies Succeed.”

It’s not surprising that much of what makes these companies succeed is the same stuff that makes the bigger ones succeed. There’s a lot of attention paid to the needs and aspirations of people in the organization, an effort to instill some real feeling about the value of the company and its mission.

More significant, the best ones don’t talk much about the bottom line. Contrary to business school lessons about “profit maximization,” the best of the mid-size group want to talk about products and the future. “Wealth creation is kind of a byproduct,” Cavanagh observes. Cavanagh and Clifford did uncover some things that defy standard wisdom. For example: “It’s a myth that you have to be in a high-growth business to succeed,” Cavanagh says. In fact, some of the big winners were in such mundane things as glue and industrial hardware. The key usually is some kind of modest innovation that gives the company a niche within an industry, old or new.

Another surprise is that being the low-cost producer isn’t the key. Most of the big winners made it by hawking quality and getting customers to pay for it. “You go for people who want something better,” Cavanagh explains.

The authors figure that there are about 15,000 mid-size companies in the country, accounting for about a quarter of all sales by businesses. The main advantage of looking at this group, as opposed to the biggest ones, is that there’s less bureaucracy to obscure what really makes these companies tick.

Cavanagh refers to this group as being in a period of adolescence, in which company management has to learn to cope with rapidly expanding size. Some try to cope by creating instant bureaucracies in the image of the biggest organizations. Others don’t get around to creating much organization at all. Cavanagh refers to these outfits as “day-care centers for adults.” Somewhere between lies potential success. MCI, the bantamweight rival to AT&T;, owes some of its success to keeping the bureaucracy to three levels, in contrast to AT&T;’s 18, he notes.

The authors found no examples of conglomerates--companies prone to acquiring an assortment of lines of business with little relationship to each other--among the best in the mid-size group. What they found were companies that have scored big in their own fields.

There’s Unifi Inc., a Yadkinville, N.C., producer of textured polyester yarn that has done well by getting to know its customers’ business well; Safety-Kleen Corp., an Elgin, Ill., supplier of little tubs with solvent to clean machine parts, which used a simple idea and a highly motivated sales and service force to beat the competition; A. T. Cross, which has found its niche in top-quality pens, and Lenox China, which promoted bridal registries in department stores.

Another thing the authors discovered: It’s rare to find cases where success is smooth and uninterrupted. They found only two companies in the group they studied where there’s been unrelenting earnings growth for as long as 20 years. What that says, of course, is that even the best-managed firms have to be able to manage through bad times as well as good. What they don’t do in such times, the authors observe, is get shortsighted and start firing people they’ll wish they had when business turns upward.