The Squeeze on Nordic Midcaps
In our client work, we see multiple problems hitting Nordic midcap companies. High interest rates, rising labor costs, material costs, and tariffs are hitting them harder than their big rivals because of their tighter margins and cash flow. As a result, they have less flexibility to consider acquisitions, hire new staff, and invest in innovation and technology. Other sources of capital are less available—lenders and investors are wary of many of these companies, especially those facing succession issues.
These factors make it tougher for midcaps to fund the investments required for long-term success. But no organization can succeed without investment. Without continuous review of operations efficiency, innovation diminishes and customers go elsewhere, creating a vicious cycle. Midcap companies face a significant investment hurdle to unlock the future benefits of AI, including the need to modernize legacy IT infrastructure. Exports are a factor as well. For most of these companies, long-term success depends on selling far beyond Europe, especially to China and the United States. But doing so requires investing in innovation, building local presence, protecting their own intellectual property, and overcoming tariffs and other trade barriers. Further, the Nordic talent crunch is having a greater impact on midcaps than on larger peers.
According to our analysis, approximately one-third of Nordic midcap companies are experiencing considerable transformation pressure—surpassing the European average of one in four. Notably, 1 in 15 Nordic companies are in a position so critical that full-scale restructuring is warranted. This urgency is most evident in sectors such as Energy, Telecom, and Retail.
The transformation opportunity for midcaps becomes even more compelling when viewed through the lens of total shareholder return (TSR). While the performance gap between midcaps and large-cap companies in the Nordics existed before the Covid-19 pandemic, it has widened significantly in recent years. Over the past six years, large-caps have delivered average annual TSR of approximately 12%, compared to just 6% for midcaps. This gap is most pronounced in Sweden and Denmark, where large-cap companies have outperformed their midcap peers by 8 and 5 percentage points, respectively. Finland and Norway show smaller gaps—2 and 3 percentage points—but both have seen the divergence increase over the past two years. The trend reinforces the urgency for midcaps across the region to pursue transformation to remain competitive.
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The Promise of Transformation
With the right ambition and a strategic approach to transformation, midcap Nordic businesses can turn these challenges into opportunities and emerge even stronger. Specifically, successful transformation programs in midcap companies are underpinned by the following key success factors.
Be aggressive in reducing costs and releasing cash to fuel growth. With fewer resources than larger companies, mid-sized companies need to show growth in order to attract capital. But they need to start the flywheel first. Our research shows that companies that achieve higher cost efficiency gains than peers do in the first year of their change program have a 3 percentage-point higher success rate in transforming for growth . The transformation agenda should be bold, with ambitious cost reductions and cash releases across the entire enterprise combined with a strategic vision for how to put that freed-up capital to work. In that way, their size is an advantage. Big companies sometimes struggle to achieve a broad mandate for change, while midcaps can get everyone aligned around a clear set of objectives.
Invest in programmatic planning, financial rigor, and change management. Transformations need priorities, structure, and hands-on oversight. All too often, midcaps haven’t developed the governance muscle to prioritize initiatives and establish strong execution with formalized governance and reporting, instead relying on individual efforts in siloes. Establishing a formal transformation program boosts long-term TSR by 5.9 percentage points. Organizations should invest in a transformation office that sets the overall governance, build a concrete implementation plan, drive change management, and ensure financial rigor. Even under constrained resources, investing in a transformation office will pay dividends. Our experience shows the merits of having this effort led by a chief transformation officer (CTO). Empirically, the appointment of a CTO at the outset of the transformation is associated with a remarkable 22 percentage-points higher success rate in our sample. It is no wonder, then, that CTO hiring has increased significantly in recent years.
Include people at all levels in the transformation and foster innovation. To generate buy-in and bottom-up solutions, encourage employees to propose and test new ideas that lead to disruptive innovations. In a business context that is not conducive to growth, innovation is more crucial than ever. As a result, a successful growth transformation rests on fostering a creative environment. Our empirical analysis verifies this: companies with a more creative culture have 3 percentage-point higher odds of success in growth transformations compared with the baseline success rate of less than one-third across our sample. Use transformation as a platform to upskill current employees and attract high-caliber talent. Again, this is an area where midcaps can position themselves as a more attractive option for ambitious individuals than larger corporates can.
Celebrate success and create a strong culture.
Changing a culture
takes time, but it can be one of the most important ways to improve performance and ensure the long-term success of a transformation program. Our evidence suggests that just crafting a
compelling narrative
at the outset of a cultural shift results in 10 percentage-points higher success rate in transformations. Successful midcaps also empower employees and celebrate milestones along the transformation journey. They embed new ways of working by proactively developing leadership capabilities from top management to frontline leaders.
The Benefits of Change
From more than 500 transformations around the world over the past five years, we have seen midcap companies make significant improvements with a programmatic approach to transformation. These change programs provide a “moment of truth” that stretches a company and pushes it to build capabilities and teams for future success.
By transforming now, midcaps can attract investment from private equity and other investors that otherwise prefer to invest in big firms or startups. Transformations can also help midcaps attract talent and capabilities they lacked before. And with an upgraded talent pool, they can go after market possibilities they previously resisted.
For example, a midcap Nordic pharmaceutical company started to invest in future growth but realized that it would not achieve these gains without a rigorous, holistic overhaul. It launched a transformation to reduce costs, concentrated its efforts on fewer markets, and focused its R&D on a smaller number of target segments and a new model of innovation. The company set ambitious goals and created a transformation office to implement the program and keep it on track. A leaner cost structure unlocked capital to invest, and a more focused culture positioned the company to build for the future. The company is now expanding into new markets and pursuing a public listing to raise more capital to fund its growth.
The current environment for Nordic midcaps is tough, with significant economic and political uncertainty. But challenging times can actually create momentum for transformation, as a crisis underscores the need for change. By taking proactive action, midcaps can still control their future, capitalizing on their nimble size and speedier decision-making to transform faster than their big competitors.
This moment of slowdown is also a moment of opportunity. By acting boldly and following a structured, programmatic path, Nordic midcaps can transform faster than their larger peers—and emerge stronger on the other side.
