The National Center for the Middle Market sits down with Anil Makhija, dean and John W. Berry, Sr. Chair in Business at The Ohio State University Fisher College of Business, about how academia is supporting the middle market.


The middle market and the Ohio State University, come listen to Dr. Anil Makhija, dean of the Fisher College of Business, share how academia is supporting this powerful yet understudied segment.

Welcome to The Market that Moves America, a podcast from the National Center for the middle market which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities.

Hello, and welcome to The Market that Moves America, the podcast of the National Center for the Middle Market. I'm Tom Stewart, executive director of the center. And with me today is our special guest, is Dean Anil Makhija, who is the dean of the Fisher College of Business at the Ohio State University and therefore, the host, the sponsor, and the proprietor, if you will, of the National Center for the Middle Market. Anil, it's great to have you on the podcast.

Thank you.

You were here at the beginning 5 and 1/2 years ago when the NCMM was formed and were one of the guiding lights, one of the people really pushing for the creation of the center. And I wonder if you could tell us a little bit about why you feel that looking at middle market companies is so important and to whom it's important.

Thank you, Tom, for this opportunity. First of all, of course I'd like to believe that I singlehandedly did all that. Unfortunately, you know, other people jumped in and did the heavy lifting.

But the question you have asked is a very important one because it goes to the heart of why we have spent all this effort studying the middle market. And very quickly for those who haven't followed the technical definition of middle market, we've sponsored a definition where middle market firms are firms with revenue from 10 million to a billion. Now, I know that's very large territory, and the middle market center at Fisher has always divided this into three parts, so cutting, chopping it up so we could see the various parts of the middle market.

Your question, of course, is, why bother? Why look at this segment of firms? And the reason is-- and I'm going to walk you through the different audiences as to why they should care about this segment.

If you are a policymaker, well, you know that small firms, through the formal advocacy of the Small Business Administration, has given a lot of attention to small firms, and deservedly so. And of course, large firms are in the public eye. So they automatically get a lot of attention.

And they also can hire lobbyist firms, law firms, and others to represent them in the corridors of power as well.

Exactly, Tom, and that's why their point of view is front and center. And because of the large number of small firms, perhaps order of magnitude six million of them, you can imagine that both of these ends get a lot of attention. And mind you, I will add they deservedly get that attention.

But you see this middle turns out to be as important, and perhaps a lead in importance. Why so? Because these firms in the middle, they explain one-third of all private sector jobs, one-third roughly also of non-government GDP.

And more than that in terms of growth in jobs and GDP. So it's a third of the existing jobs, but the largest area of growth in jobs.

Absolutely, and if you look back in the last 5, 10 years, you will find that the growth in jobs has come more from this segment than other segments.

So I want to interrupt you for just a second. Two weeks ago in Chicago, I had the privilege of meeting Steve Koch, who's the deputy mayor. And he was talking about the fact that he had learned about the importance of the middle market in Chicago, Cook County, and the nation generally, and was struck, as a newly enlightened or aware policymaker, if you will, he was struck by the fact that these companies were extraordinarily important and were relatively disengaged from the policy process, which is to say not only did the mayor not pay attention or-- I don't mean specifically Mayor Emanuel.

But not only did mayors not pay attention to the middle market, but the middle market, it sort of wasn't paying too much attention to what policymakers could do for them. There was sort of a non-conversation going on.

Tom, your observation is right on because this is a segment that is understudied by various audiences. So for one thing, I don't think middle market firms have even recognized themselves to be middle market. And therefore, they have not recognized their own audience and their own segment as such. And--

So they see themselves as a logistics company, an auto parts company.


They don't see themselves as a-- and we're not too big, but they don't identify that there's something here in the middle that all of us have in common.

Absolutely. And yet, I will, in a moment, point out that middle market firms are distinctly different from small firms and from large firms. So in fact, they do deserve special attention because uniquely, they have some issues of their own.

Now, there could be one other aspect that I should quickly slip in. And that is, by order of magnitude, we are talking about something like 200,000 firms. So on the one hand, you have millions of small firms. And in a democracy, you can see why that catches attention quickly.

And then you have the large firms, which have extremely deep pockets and perhaps, as you pointed out, some lobbyists to go with it. So consequently, the middle doesn't get the same kind of attention that it perhaps, on account of its importance in the economy, deserves.

And let me add one other item why policymakers ought to very carefully study and follow this group. Think back about the Great Recession that we had. During the Great Recession, as we know, large firms actually dropped millions of employees. Do you know the one segment that during that period was still hiring by the millions?

I do.

There we go. You see? So these are all the reasons why, you know, I would say that we want to draw attention of policymakers to this segment and that this segment deserves that attention.

Well, you're a scholar and a dean. Why have academics neglected this, or have they neglected the middle markets? Or I guess I know the answer to that. But what do you think about the academic stakeholder group here or the business researchers, many of whom are academics?

Well, Tom, you certainly have a habit of being right.

Well, we agree. That's why we both agree that we have a habit of being right.

Yeah. So this is an area that is truly understudied. And I think the reason it's understudied is-- you know, it's like, where do you go looking? Where the light is. And the SBA has made a lot of effort to get us data about small firms. Large firms are regularly providing data to the SEC.

So on either end, it's kind of relatively easier to do research. But here, there is this one-third of the segment, and we don't know much about these firms.

Mostly private companies, so no public information with the stock exchanges.

By estimates of our center, only about 80% to 85% of them, rather, are privately held, whether it's a family-owned or private equity-owned. So you're talking about only a small fraction that is publicly traded, therefore officially providing data. So now you can see which is easier.

One of the things our center has done or taken upon itself is to make sure to collect a lot of this data, and then to make it available in turn to future researchers as well.

If academia were to change in this respect, if you were to look optimistically out five years from now, what would an academic research agenda for middle market companies look like? What would be some of the two or three topics that you would want to knock on?

Yeah, so-- and you know, and one topic clearly, which is of importance to all the people interested in various segments of the economy, is what brings about growth. And in fact, in a bit, I might even suggest that we pick on some area of growth for middle market firms and sort of go into in depth to see how that plays out.

But relatedly, of course, you know that issues that interest us in the economy today are innovation because US is certainly not competing with the rest of the world on labor, cheap costs, et cetera, but being the front leader on [INAUDIBLE] advancement, manufacturing, but in innovation. Similarly, the questions of operational excellence, you know. So there are these important issues that are important for many firms, but I think they're very important for middle market firms as well.

And you think they're a little different in the middle from small or large, tech innovation or--

Absolutely. I mean, I know that a lot can be said about innovation. But if you're a middle market firm, you're simply not going to be able to afford a large portfolio of bets on different innovation projects. And therefore, you have to approach this portfolio approach quite differently than perhaps a large pharmaceutical firm would approach new drug discovery by betting on 24 different startups.

Another thing that I've been thinking about, just as I've been working on this, is that in many cases, some of the younger middle market companies are companies that have only one or two product lines where innovation is a sporadic Eureka thought in the bathtub. It's not a sustained process.

And so with innovation, as with some other things, it's one of the things that happens in the middle market, is you have to learn how to create a rhythm or a cadence or a process, and where that comes from, how do you emerge from sort of random insights to a pulsed, cadenced beat of innovation. And I think that's a topic that I've never seen written about in any academic or business literature.

And based on what you just said, Tom, wouldn't you agree that middle market firms are greater in need of a culture of innovation because, so to speak, they cannot rely on a department of innovation?

That's right. And somewhere out there, there are companies that are doing this, and discovering them would be a big deal.

And I think our center tries to highlight those successes because they become the best practices, then, for the rest of us.

And by the way, if any of you listening to this podcast is that company, inventing, creating cadences and processes of innovation as you work through the middle market, talk to us. You can write to us and go to our website at middlemarketcenter.org and let us know about your innovation experiences, because we'd love to hear what you're doing.

But Anil, you were talking about the policymaker audience, the academic audience, and then--

Shall I--

Yeah, the third.

The most important audience ultimately is the middle market manager and the potential employees. Those are the talent, the students speaking now as an academic as well. So let me speak a little bit about why these audiences ought also to pay a lot of attention to the middle market.

From the point of the executive, I think a bit of that point was already made when we talked about innovation. So middle market managers recognize that their problems are unique problems. And just to highlight that, shall I just share one statistic with you?

At one point, we had done a study of the mortality of small firms versus middle market firms and large firms. And I know it's a little bit dated, a few years, but not very long. But middle market firms have average lives of about 31 years.

Now, I give you the middle market first because you might fall under the trap of thinking that small and large are going to be sort of equal-weight distance on either side. But you're going to be surprised by the results.

It turns out that small firms have average life, in our study, of only about seven years. And large funds are 39 years. So you see? The middle market firms don't fit very easily into what you might think as small firms on their way to becoming large firms.

So they have a lot more runway. They have this nice, sweet spot with a lot of runway, a lot of room to grow, but also a lot of resilience. And let's think about runway a little bit in the few minutes that we have left.

Let's go back to what you said earlier about looking at a point of growth where there's a real opportunity for the middle market or for middle market companies, but also unique kinds of obstacles that middle market companies face. And we were talking in advance, and you said you'd like to talk about?


And globalization, yes?

Yes, absolutely. So you know, we just talked a few minutes back about innovation as a form of growth. And I think there are many issues there. But let's talk about another form of growth, and that is through globalization.

So here's-- our center has been studying globalization pretty much from the get-go. And what we have done is we've done a study with The Economist. We've done another study with Brookings, and we continue to do more work on this issue.

It turns out that our data shows that 40%, only 40%, of middle market firms have actually got foreign sales-- 60% of them, zero. And the 40% that do have international sales, they get about 10% of their sales. So the net result is-- let me summarize-- that for the typical middle market firm, they are only getting $0.04 on their dollar from their international sales.

And where are those international sales coming from?

Interestingly, they're not coming from very far, Mexico and Canada.

But nevertheless, when you look at the numbers, you basically see that there's a whole world out there to conquer and a whole lot of people who seem to be holding back. Why?

That's a very interesting question. You know, I'll run you through some reasons that I think are top of mind as to why middle market firms are hesitating to go abroad. And some of them are things you would expect.

There's uncertainty about product demand abroad. They just don't know whether their product is sellable across. There could also be lack of knowledge about foreign markets and how to deal with regulations, et cetera. And of course, remember, middle market firms don't necessarily always have the talent for every one of these international markets. So there are a number of these reasons.

But here's something that I think perhaps goes to how they think about it and I think is interesting. It turns out that if you ask the firms that have not gone abroad, they will tell you that the US market is a large market. There's plenty of growth opportunity here, and it's very logical to have that point of view.

The problem with that, of course, is that competition will come from abroad if you don't go to the competition yourself abroad, OK? So this is a kind of a sense of a cocoon.

In other words, I may think, wow, my domestic market is good. But my French, German, Canadian, Chinese competitor says, yeah, the US market is good. I want some of that, which means they want some of my market.

Exactly. So your industry is not to be contested only at home, you know? So that's one part of it.

The other part of it is those that have gone abroad actually come and tell a very different story. They come and report that their domestic business, in fact, is better off because they have gone abroad because they have picked up a thing or two in trying to compete internationally.

Yeah, you and I--

And in fact, those firms typically also have reported in our studies that they intend to expand their international business even more.

You know, you and I are not football players or never would likely to be. But from your office, we can actually see the football stadium of the Ohio State Buckeyes. And I think we know that the best offense is a good defense, and vise versa, right? And the best defense is a good offense. And so playing offense internationally is also a great defensive play for your domestic market.

Absolutely, no doubt about that.

This has been a terrific discussion, Anil, and I know there's much more to talk about. But I just want to summarize a couple of points from Dean Makhija, the dean of the Fisher College of Business at the Ohio State University. Number one was the importance of the middle market to various stakeholders, policymakers, academic and other business researchers, and executives themselves in trying to tease out some of the key areas where mid-sized companies are different and are making major contributions.

And we talked a little bit about two of them, about innovation and about globalization. And I think if you play that back and what the dean was just saying about globalization and say, gee, what should executives be doing about that, what should academics be doing about it, and what should policymakers be doing about it, you see the beginnings of a practical agenda. And yes, Anil?

And great careers for our students.

A good point, an excellent point. I think that lots of students, as they're graduating, can think of a billion opportunities or can think of 500 opportunities in the Fortune 500, but there are 200,000 sets of opportunity in the middle market, and spoken like a dean. So with that, Anil Makhija, dean of the Fisher College of Business at the Ohio State University, thank you very much.

And thank you to listening to The Market that Moves America. You can find this recording and previous and subsequent episodes of The Market that Moves America on iTunes, on the Android store, on Stitcher, or wherever the best podcasts are found. Thanks very much.