BLOGS:

Success Habits of the German Mittelstand!

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The German equivalents of U.S. midmarket companies enjoy unprecedented success and a special place in the German economy. In fact, it is because of the German mittelstand that the German economy is so resilient and Germany is the biggest net exporter in the world.  What is so special and what can we learn from them?

In the United States, most midsize companies don’t see themselves as midsize – they identify with their industry or geography, not their size.  The public and the government are focused on the fascinating startups or the well-known behemoths, ignoring the ‘big middle’ that accounts for 1/3rd or the employment and GDP.  They often find themselves too big for ‘help’ or too small to access capital and markets or leverage economies of scale or scope.  And, more importantly, they get little help with issues that are unique to their mid-size.  However, in Germany, midmarket companies — known as the Mittelstand — identify themselves as such and enjoy an exalted existence with the government and the public, getting the attention and credit they deserve. They are considered the backbone of the German economy and are considered the ‘secret’ of the ‘German miracle’ that has the highest per capita exports in the world.

What is the Mittelstand? The word Mittelstand has two meanings in Germany, where it originated.  The first meaning refers to small and medium sized enterprises, SME ('kleine und mittlere Unternehmen', KMU), defined by number of employees and turnover; and, the second meaning refers to any family-run or owned business (which does not have to be a SME).  Mittelstand companies range in annual revenues from a few million Euros to several billion Euros.  These companies are mostly privately held and largely family owned.  They are located in rural areas but many operate globally. 

One of the foremost experts on the German Mittelstand is Dr. Prof. Herman Simon, author of the book ‘Hidden Champions’.  In that book, he distilled the key characteristics of the the best of the German Mittelstand.  Another stalwart who has followed up on Dr. Simon’s research is Dr. Prof. Bernd Venohr who conducted follow-on research about the companies about 10 years after Prof. Simon’s original research.  We have interviewed Dr. Simon, Dr. Venohr and many other experts on the German mittelstand which you can find on our website under special sections. Dr. Simon was the first to study and distill the essence of what sets the Mittelstand apart - here are a few key points:

Make Machines that Make Products

A majority of these companies create products rather than purely provide services. They dominate the machine tool industry – tools that make the equipment used by manufacturers worldwide.  Whether the Chinese need to setup a new factory or India’s TATA wants to build a low cost car, they need German tools and machinery to make their products – the Germans win irrespective of which country wins the industry wars.  And, by tightly controlling the innovation process in-house – making the tools that make the products they sell – they are able to protect their intellectual property, command premium prices and garner huge market shares.

Niche FocusThey tend to ‘go deep on product and wide on markets’.  They dominate many niches with worldwide market shares often higher than 70%.  A concentration on niche industries results in a deep understanding of customer needs and products that enables a focus on developing and producing precision, quality products. They focus on doing ‘one thing extremely well, rather than many things’.

Customer Intimacy over MarketingThey prefer customer intimacy over marketing three to one.  They tend to be very close to their largest and most demanding customers, locating near them and following them to new markets.  The long history of many of these companies translates into extensive experience and knowledge of their customers. These close relationships allow the Mittelstand companies to know their customer’s needs and priorities well.  It is difficult for a competitor to displace them, even with greater customer focus but definitely not just with more marketing.

Long-term Vision - ‘multi-generational thinking’They tend to have a long-term outlook rather than short-term results and tend to be conservative in their business decisions.  They tend to have low debt, take calculated risks and focus on building sustainable businesses that develop their craft over a long period for future generations. They tend to be wary of private equity and other outside money, choosing instead to ‘self-finance’ the business.  Businesses that get passed down several generations are common.  In a conversation with Prof. Sabine Kline, of WHU, she told us of one business that had been in the family for 9 generations and had 600 family members as shareholders. The blending of the stockholders and the stakeholders and the management drives long-term thinking.

Obsession with QualityA hallmark of the Mittelstand is its commitment to well-built products that are designed to meet the demands of customers. Besides quality being a hallmark of the German culture, their customer intimacy creates an obligation to do their very best.

Expert workersGermany has an apprentice system that combines skills with classroom education enabling the graduates to be quickly productive in the workplace. Mittelstand companies acquire 83 percent of apprentices in Germany. Companies often offer university scholarships in exchange for the student’s return to the company after graduation. Companies weed out employees that don’t fit within the first two years of employment and then live with the strict labor laws that make force reductions difficult.  The result is an educated, well-trained workforce, often with niche knowledge and skills that provides long-term labor for the company and long-term employment for the employee.  The annual employee turnover among the ‘Hidden Champions’ – the top end of the Mittelstand - is just 2.7%.

Focus on exportsThe relative smallness of the German market and the access to European markets made mittelstand companies exporters a long time ago.  They have broad international reach and focus heavily on exports.  They go for sales first, facilities second and then follow with people and then management.

What can American midmarket companies learn from the Mittelstand?

The Mittelstand is unique to Germany and the German area.  Replicating it in the US is just as difficult as replicating Silicon Valley elsewhere.  However, they have many core principles and ideas that are ‘uncommon common sense’ – things we have forgotten along the way or are worth emulating.  The ‘Small Giants’ in the US are the closest to the Mittelstand.  There are many companies in the US that operate similarly and get similar or better results.  Just as the world can learn from the success of American companies, we too can learn from the success of the Mittelstand.