Learnings from Hidden Champions

Posted: October 2, 2017 by Robert Craven

Rapidly heading towards Brexit, the UK’s medium-sized businesses are still told to emulate the Mittelstand. Before it’s too late, I suspect.

Emulating Germany’s medium-sized, mostly family-owned businesses, is seen as the way to boost growth, jobs, and exports. While the Mittelstand is identified and recognised in Germany, there doesn’t appear to be such clarity of definition or recognition for the UK’s medium-sized businesses.

Mittelstand refers to small and medium-sized enterprises in German-speaking countries. Economists have been increasingly giving these companies more and more credit for Germany’s economic growth.

These firms have prospered in specialised markets, earning good margins which finance more innovation and produce a virtuous circle. This is what the UK is/was chasing.

Germany’s Mittelstand companies are a very important part of the country’s economy employing over 70% of the workforce.

In the UK, firms with a turnover of between £10 million and £100 million represent less than 2% of businesses but generate 23% of economic revenue and 16% of all jobs!

 

There are a number of characteristics the archetypal Mittelstand companies tend to exhibit. They are:

• typically, privately-owned
• highly focused, highly efficient with a razor-thin focus, learning to do the one thing really well “then diversifying internationally to enjoy great economies of scale”
• mostly export-oriented focusing on innovative and high-value manufactured products. Consequently, they occupy worldwide niche market leadership positions in numerous B2B segments
• benefit from Germany’s apprentice system, which provides highly-skilled workers, and there is a “collaborative spirit that generally exists between employer and employees…”

 

Many of the successful Mittelstand companies combine a cautious and long-term oriented approach to business with the adoption of modern management practices, like employing outside professional management and the implementation of lean manufacturing practices and total quality management. Certainly, the better UK companies do this already.

Other so-called characteristics of the Mittelstand might include their emphasis on long-term profitability. Typically, Mittelstand companies work closely with universities and researchers and cluster themselves around big manufacturers. It should be noted that the attributes listed above apply mainly to those companies concentrated in machinery, auto parts, chemicals, and electrical equipment.

So, the argument suggests that a culture and tradition of having a Mittelstand is the reason for Germany’s economic success. Correlation, however, does not imply causation; a correlation between two variables does not necessarily imply that one causes the other!

What is clear is that the UK’s medium-sized businesses have got lost in the political and economic mix. They are not economically as powerful as the FT100 companies; they are not as politically powerful as 5 million SME owners’ votes (along with those of their families and workers). Ironically, Britain’s medium-sized businesses are out-performing both smaller and larger businesses but they are the overlooked success story of the so-called economic recovery.

MDs and CEOs of medium-sized businesses are in a bizarre position: they are too savvy to believe the simplistic start-up hype, yet they are below the radar of the media’s headlines. Cited as ‘the engine room of the British economy’ or the ‘forgotten army’, they have been overlooked for too long.

MDs and CEOs will ask themselves, ‘So what?’ Yes, it would be great to be supported and recognised but most do not believe that much will change. At least not in the short run.

By the time any directive comes down from manifesto to parliamentary vote through a budget and is disseminated via civil servants then most sane business directors would rather depend on their own limited resources to make things happen for themselves.

 

Hermann Simon sums up the lessons we can learn very neatly in his article ‘Hidden Champions: what German companies can teach you about innovation’:

1. Extremely ambitious targets – The targets of Hidden Champions are aimed at growth and market leadership.
2. Focus and depth – Hidden Champions define their markets narrowly and work deep into the value chain.
3. Globalization – Focus makes a market small, globalization makes it large.
4. Innovation – The effectiveness of the Hidden Champions’ innovation and R&D activities beats that of large corporations by a factor of 5.
5. Closeness to customer and competitive advantages – Closeness to customer is the biggest strength of the Hidden Champions, even ahead of technology.
6. Loyalty and highly-qualified employees – The Hidden Champions have “more work than heads” and high-performance cultures.
7. Strong leadership – The leadership is authoritarian in the principles, but flexible in the details.