Increasing Power of Larger Rivals Threatens to Stifle Midmarket Growth

Economist Intelligence Unit Research Reveals Future Hopes, Fears and Challenges of More Than 3,700 Midmarket C-level Executives and Senior Managers

SINGAPORE - February 08, 2006 - Midsize companies are the power houses behind many of the world’s national economies but the rising dominance of big players encroaching on their territory is threatening to push them out. This is the finding of a major Economist Intelligence Unit research program, sponsored by SAP AG (NYSE: SAP), based on in-depth interviews with more than 3,700 business and public sector executives of midsize companies (with an annual turnover of $20-$500m) across Europe, Asia Pacific (APAC) and the Americas. The announcement was made in conjunction with SAP’s sales kick-off meeting in Singapore, being held February 8-9, 2006.

Nearly two-thirds of business leaders of midsize firms (63 percent) cited the growing strength of larger rivals as the main competitive threat to growth over the next three years. There was marked consensus among respondents that market saturation, creating downward pressure on prices and a shortage of talented staff, will be the key hurdles midsize companies will have to overcome if they are to compete effectively.

Midsize firms recognize that they have distinct advantages over their larger rivals, citing adaptability (47 percent), better pricing flexibility (42 percent) and deeper customer relationships (41 percent) as key weapons in the battle for market share. However, executives fear that these very characteristics are most likely to erode as their companies grow.

The ability to execute quickly on changes in strategy was cited by 44 percent of respondents as among the attributes most likely to erode with growth; 36 percent also said that the advantage of deep customer relationships would diminish as they grow. In an environment where customers across all industries are growing more demanding, respondents in APAC are most concerned about being less flexible on price, with nearly one-third citing this attribute as likely to erode compared to under one-quarter in the United States.

In order to balance these concerns, midsize firms will take a steady, manageable approach to growth. Boards and management at most of the firms surveyed have identified an optimal rate of growth. This is particularly the case in APAC, where firms are considerably more likely than their European peers to have determined optimal growth and size metrics—73 percent compared to 53 percent in Europe. Across all regions, most midsize firms intend to ‘go it alone,’ with 68 percent aiming to grow organically. This stands in sharp contrast to the wider marketplace, which has seen mergers and acquisitions activity up 38 percent between 2004 and 2005*—a trend expected to continue throughout 2006 as larger companies look to scale for growth.

A leaner, more competitive business environment is forcing leaders of midsize firms to reevaluate their growth strategies. The survey reveals marked differences in how this will be achieved. Over 60 percent of respondents in the United States will look to expand their existing customer base, compared to less than half of their peers surveyed in APAC and Europe (50 percent and 46 percent, respectively). Respondents across both APAC and Europe put greater emphasis on cost reductions through improvement of operations (61 percent and 51 percent, respectively), compared to 36 percent in the United States. Where there is agreement, however, is in the intention to go global. More than one-third of executives are looking to new geographic markets for growth. Particularly, the opening up of markets in the BRIC (Brazil, Russia, India and China) areas are offering a raft of new business opportunities from which midsize companies are well-positioned to benefit.

“The resounding message from this study is that midsize companies aspire to grow, but fear losing the very characteristics which made them successful in the first place,” said Léo Apotheker, member of the SAP Executive Board. “To keep up with the larger competition and the accelerated pace of change among worldwide markets, today’s midsize company must pursue a strategy of optimal growth: one which avoids excessive strain on organizational structure, allows the flexibility to innovate and adapt quickly and promotes continuing proximity and commitment to customers and their demands.”

Commenting on the research, Denis McCauley, the Economic Intelligence Unit’s director of Global Technology Research said, “Midsize firms are being squeezed from all sides; larger rivals are trying to edge them out, and customers are increasingly exerting their increased power in pricing and the setting of other contract terms. To respond effectively, midsize firms must use their people and technology to maximum effect.”

The key findings are as follows:

* Government support is crucial for growth. Offering tax incentives for investment and reducing red tape were cited by respondents as the two main ways (62 percent and 51 percent, respectively) that government can help midsize companies grow over the next three years. These views were especially pronounced in the United States.
* Companies in Asia Pacific are the most affected by shortages of skilled labor. Despite their huge pools of available labor, companies in the APAC region are more concerned about shortages of talented staff than in either Europe or the United States. More than 40 percent of APAC executives surveyed said a shortage of talented staff was a major issue for them, compared to 36 percent in the United States and 28 percent in Europe.
* IT will be an important enabler of growth. Over two-thirds of executives singled out IT as central to their growth strategy and see IT as critical to their ability to retain flexibility while growing (68 percent and 72 percent, respectively). Firms also will use IT to deepen their knowledge of customer behavior and improve how they serve customers.
* Europe lags behind rest of world in integrating IT with business. U.S. companies lead the world in integrating IT closely with business strategy, with more than 80 percent of respondents agreeing that IT and business functions are closely aligned. In comparison, just 70 percent of European companies agree that IT is closely aligned with business strategy.

Thinking big: Midsize companies and the challenges of growth is available free of charge from the Economist Intelligence Unit’s Executive Briefing website (http://www.eiu.com/ThinkingBig).

* Source: Thomson Financial

Note to editors
On February 8, SAP shared global and regional Asia-Pacific findings at the company’s annual sales kick-off meeting in Singapore. Additional regional findings from the study—covering Europe, North America and Latin America—will be shared as the research becomes available.

About the Economist Intelligence Unit
The Economist Intelligence Unit is the business information arm of The Economist Group, publisher of The Economist. Through our global network of over 500 analysts, we continuously assess and forecast political, economic and business conditions in 195 countries. As the world’s leading provider of country intelligence, we help executives make better business decisions by providing timely, reliable and impartial analysis on worldwide market trends and business strategies.

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