Middle-market companies looking to grow need foresight. But focusing only on the latest trends might be a mistake. Mike Mazzeo, an associate professor of strategy at the Kellogg School, explains how companies can find their calling card to profitable growth through a focus on capabilities.

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Video 1 (1:07): Business Scaling Challenge: Remaining Competitive

Demographic trends are extremely important. Identifying where your market is going to be in the future is absolutely critical. The problem is that while you’re trying to solve that problem, your competitors are trying to solve that problem, too. By trend spotting, trying to figure out what’s going to be the next new best thing, you’re really putting yourself in a very competitive situation. Right off the bat, you’re setting yourself up for intense competition.

I would think, instead of trying to chase the latest trend, trying to do what everybody else is doing, the more successful companies are ones that identify something that they can do better than the competition even if it’s into a shrinking market. If they can do that better than the competition, then they’ll have an opportunity to exist in a place where they’ve got some protection against the competition.

Video 2 (3:31): Business Scaling Tip: Expand Upon Business Strengths

To grow your business, you have to think about focusing. Not broadening your expertise or broadening your market for each, but instead thinking about expanding on the things that you’re already doing well. Those are the things where you’re going to have an opportunity to be able to grow profitably in your new endeavors.

A great example of a company that has built growth opportunities through resources and capabilities, is a company that we met called TiLite. TiLite has a history in providing titanium products for the nuclear power industry. Their “Ti” in TiLite stands for titanium.

TiLite grew for many years—as the nuclear industry grew—based on expertise in sourcing titanium and particularly in working with the metal. There were specific things that they learned and gained experience with in welding titanium. Also very importantly in shaping the metal there was a term for that, that I learned, called swaging. Swaging the metal is what you do when you bend it and twist it into different shapes.

Their experience in welding and in swaging the titanium had a great application in the nuclear industry but that limited their growth opportunities especially as the nuclear industry waned in the 1990s and beyond. They were losing their market opportunity because their big customer wasn’t growing and was in fact shrinking.

What the company did that was really smart was, they thought about where else they could apply the skills and the capabilities that they had gained expertise about over the years of serving the nuclear industry. What that meant was trying to find a new market where titanium products would be useful. They looked around. They didn’t find it right away. They tried tennis rackets and they tried bicycles.

Eventually, after a few missteps, they came across a great new application in manual wheelchairs. That’s a market where titanium was a great metal. Very importantly—these manual wheelchairs—they need to be customized in order to be useful for the user. Somebody who’s 6-foot-6 would need a different seat height, a different angle, a different arm length, and a different wheel base then somebody who is five feet tall. As a consequence, you can’t manufacture customized wheelchairs to scale. A company that has experience in bending, shaping, and welding metal would be really effective in efficient customized manufacturing.

Video 3 (4:27): Business Scaling Challenge: Achieving Profitable Growth in Middle-Market Companies

As we think about profitable growth for middle market companies, it’s important to recognize some of the challenges associated with trying to bridge the gap between successful strategies and achieving profits at a smaller size with some of the new challenges that come up when a company tries to get bigger. Sometimes those things are in conflict, sometimes those things work against each other. In trying to work out how you stay good at what you’re already doing while at the same time taking on new growth opportunities, that’s often a big challenge for middle market companies.

Achieving profitable growth—and we’re not just talking about growth of market share or growth of revenue—what we’re really talking about is growth where, as you sell more, you’re also making more profits. Companies have to think about not only what they’re doing and doing more of it, but whether they can continue to earn the margins on these new activities when sometimes those new activities require new investments. Those activities require connections with new customers. Those activities require solving new problems that they hadn’t solved before.

Building on the existing capabilities of the company, when you do that, is really important. It’s also important to identify new opportunities that are related to things you already do well.

In one interview that I did with a company owner, I got a real sense of how you can grow profitably. This company was a company called Advanced Environmental Options, AEO. They were in the business of cleaning up hazardous waste. If your company had pharmaceuticals that it wanted to dispose of, you could do it yourself and you could figure out all the regulations you’d have to go through, or you could call AEO. they had certifications that allowed them to provide that service in a government approved way.

AEO grew over time by, year after year, gaining additional certifications to be qualified to take care of different kinds of hazardous wastes. They built that expertise little by little, by gaining new markets and new opportunities, by learning about new regulations, by obtaining the equipment necessary to dispose of different types of hazards.

Each one of those was an investment that they had to evaluate. ‘Is the cost of gaining this certification and this ability going to be less than what we’d earn once we’re able to take on these kinds of projects?’

They had become certified by the government to clean up busted meth labs. AEO was—once they got that certification—in the market to bid for that business. There weren’t a lot of competitors and they were in good shape to grow their business in a big way.

They thought about these things ahead of time. ‘Is this growth going to be profitable? Are we going to be able efficiently obtain the equipment? Is a big investment necessary?’ Growth often requires big investments being made. A company has to think about, ‘can we recoup those investments necessary to take on those new opportunities in the revenue and the profits that we’ll earn once we’re ready to compete for them?’

Video 4 (1:46): Business Scaling Tip: Effective Delegation within Scaling

A big challenge that middle-market companies have when they are trying to grow is that the founder of the company—if you want to grow and be bigger, the founder can’t really do everything anymore if the company gets to a certain size. So delegation becomes a crucial problem for the company, and particularly for the founder of the company. It becomes a huge problem, a challenge for the founder to try to solve.

Three things that you have to do in order to delegate effectively: one is, you have to hire. You have to bring good people into the organization, and you have to have people that you can delegate activities to. The second thing you have to do if you want to delegate effectively is: you need to provide the right incentives for these other employees or other people in the organization that you’ve brought in to do these activities. Those incentives have to be in line with the incentives of the profitable growth of the entire organization. Hiring is very important. Hiring is related to incentives, which is crucial for getting the employees to do the right thing. Then the third piece is figuring out which parts of the onion you should peel off and have somebody else do and which things you should keep doing yourself.