Priorities and practical recommendations for the midsize business sector

| September 1, 2017

Of the 2 million registered Australian businesses, 1.96 million are SMEs. Of these Australian SMEs only a small fraction (2.3 per cent) is made up of midsize companies. The proportion of midsize businesses varies considerably across industry, space and across time, and it has grown since 2009, particularly in service industries.

Succeeding in a fast pace changing economic environment requires managers and leaders of midsize businesses to answer the crucial questions of WHY, WHAT and HOW of business strategy.

Why should midsize businesses approach the issues of change (any change) strategically? The answer to this question comes from the changing nature of economic development. Theorists of “compressed” development tend to emphasise the patchy distribution of indicators of development spatially and the often fast speed of development (compressed in time) in many regions in the world. Economic integration and success in a world of compressed development poses new challenges to all companies but particularly to midsize businesses.

A few examples may help us in understanding the importance of the WHAT questions. What does compressed development mean for midsize companies? In a world where production is fragmented and geographically dispersed across regions in the world (e.g., the production of computers), compressed development means comparative advantage is playing its role out at the level of companies rather than at the level of national economies.

Integration into a globalised economy is often a matter of inclusion in Global Production Networks (GPNs) rather than in terms of entry into final markets whether these are for goods or services. This focus on GPN integration in the context of compressed development implies that strategic focus by midsize businesses has to be correctly conceived. For example, entrepreneurship, often conceived as a set of individual pursuits aimed to enter an uncharted market territory is often wrongly used as a synonym of innovation. Innovation in the context of GPN integration in a compressed world is the ability to move from low value nodes of the GPN to a high value node, rather than the ability to enter a completely new market.

Another example of wrongly answered WHAT questions relate to technological adoption. What is it? And why is it important for true innovation? Too often midsize businesses are told to focus on innovation and too little attention is given to the issue of adoption and diffusion even within workplaces, particularly in midsize companies where the drive to adapt existing technologies to move to high value nodes of the GPN are not only pressing but also potentially very lucrative. This issue leads to the HOW question: How to make technological adoption happen? How to sustain it?

Diffused trust and good industrial relations are essential criteria in any organisations but particularly in midsize businesses. When it comes to technological innovation and adoption, managing age and gender relations requires an understanding of the ways in which workers of different ages and gender are perceived and how these associate with sub-optimal deployment.

Midsize companies substantially differ in their access to financial and credit markets and are often disproportionally affected by financial crises compared to large companies. Firms’ difficulties in accessing credit are often cited among the challenges for firms’ competitiveness as well as employment growth and job quality in Australia (CPA Australia Asia-Pacific Small Business Survey, various years).

Studies show that financially constrained midsize businesses pay lower wages in exchange for higher future wages, effectively borrowing from their employees. Caggese and Cunat (2007). Financing constraints increase the volatility of all types of employment, but also increase the use of more precarious types of employment relative to permanent workers. These literatures point to clear tensions between the return from trust and good industrial relations (e.g., in addressing the challenge of financial constraints) and the factors that may limit such trust (e.g., insecure employment).

It is only by identifying the right WHY, WHAT and HOW questions and related answers, that mid-size companies in Australia can nurture harmony, encourage people to get on with the job and drive success.