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Schumpeter
Germany s midsized companies have a lot to teach the world
MANAGEMENT gurus are constantly scouring the world for the next big idea.
Thirty years ago they fixated on Japan. Today it is India. The more restless
are already moving on to Peruvian or Zulu management. Yet in all this
intellectual globe-trotting the gurus have sorely neglected the secrets of one
of the world s great economies. Germany is the world s largest goods exporter
after China despite high labour costs and a strongish euro. It is also stuffed
full of durable companies that have survived hyperinflation and two world wars.
Faber-Castell, a giant among pencilmakers, boasts that Bismarck was a customer.
Thankfully, a couple of management thinkers have defied the boycott on Germany.
On November 18th Bernd Venohr, of the Berlin School of Economics and Law, gave
a fascinating talk on the secret recipe of the country s Mittelstand at the
second annual Peter Drucker Forum in Vienna. Last year Hermann Simon, of
Simon-Kucher & Partners, a consultancy, published an even more gripping sequel
to his 1996 book on Hidden Champions . Put the two together and you get a good
idea of the management theory at the heart of Germany s success.
Although the term Mittelstand is sometimes applied to quite small, parochial
firms, the most interesting ones are rather bigger and more outward-looking.
Most shun the limelight: 90% of them operate in the business-to-business market
and 70% are based in the countryside. They are run by anonymous company men,
not hip youngsters in T-shirts and flip-flops.
They focus on market niches, typically in staid-sounding areas such as
mechanical engineering rather than sexy ones like software. Dorma makes doors
and all things door-related. Tente specialises in castors for hospital beds.
Rational makes ovens for professional kitchens. This strategy helps them avoid
head-to-head competition with global giants ( Don t dance where the elephants
play is a favourite Mittelstand slogan). It has also helped them excel at what
they do.
Globalisation has been a godsend to these companies: they have spent the past
30 years of liberalisation working quietly but relentlessly to turn their
domination of German market niches into domination of global ones. They have
gobbled up opportunities in eastern Europe and Russia. They have provided China
s factory to the world with its machine-tools.
The Mittelstand dominates the global market in an astonishing range of areas:
printing presses (Koenig & Bauer), licence plates (Utsch), snuff (P schl),
shaving brushes (M hle), flycatchers (Aeroxon), industrial chains (RUD) and
high-pressure cleaners (K rcher). K rcher s dominance of the high-pressure
market is so complete that in 2005 Nicolas Sarkozy caused a scandal, after a
spate of riots, by calling for a crime-ridden banlieue to be cleaned out au K
rcher .
How durable is the Mittelstand model? Sceptics worry that it will eventually
become the victim of globalisation: emerging-world companies will learn to
produce their own clever machines at a fraction of the cost. They also worry
that Mittelstand companies are too conservative. American start-ups can become
global giants in a generation (Wal-Mart, now the world s biggest retailer, was
not even listed on the stock exchange until 1972). German companies are content
to remain relatively small.
The first criticism is overstated. Mittelst ndler have not only focused on
sophisticated niches that are hard to enter. They have thrown their energies
into building up ever more powerful defences. They constantly innovate to stay
ahead of potential rivals. They are relentless about customer service. Their
salespeople are passionate about their products, however prosaic, and dogged in
their determination to open up new markets. Mr Simon s hidden champions ,
mostly German Mittelstand firms, typically have subsidiaries in 24 foreign
countries, offering service and advice. Many get the bulk of their revenues
from service rather than products. Hako, which makes cleaning equipment,
generates only 20% of its revenue from sales of its machines.
The second criticism has more substance. Germany has a poor record at
generating start-ups or at quickly turning smallish firms into giants.
Mittelstand firms are finding it increasingly difficult to persuade the world s
best and brightest to make their careers in rural backwaters. But for all that,
the record of the Mittelstand over the past three decades has been a history of
global conquest rather than missed opportunities. Koenig & Bauer, for example,
gets 95% of its revenue from outside Germany.
German lessons
So the Mittelstand is likely to keep powering Germany s export machine for
years to come. But does it have any lessons for the rest of the world? Mr Simon
says that although 80% of the world s medium-sized market leaders are based in
Germany and Scandinavia, successful Mittelstand-style companies can be found
everywhere from the United States (particularly the Midwest) to northern Italy,
so the model does seem to be transferable.
Three general lessons for politicians as well as corporate strategists follow
from this. First, you do not need to try to build your own version of Silicon
Valley to prosper; it is often better to focus on your traditional strengths in
old-fashioned industries. Second, niches that appear tiny can produce huge
global markets.
The third lesson is that Western companies can preserve high-quality jobs in a
vast array of industries so long as they are willing to focus and innovate.
Theodore Levitt, one of the doyens of Harvard Business School, once observed
that sustained success is largely a matter of focusing regularly on the right
things and making a lot of uncelebrated little improvements every day. That is
a lesson that the Germans learned a long time ago and that the rest of the rich
world should take to heart.