Learning from the German Model
If you visit these days one of those more than five thousand Mittelstand champions of German industries coincidentially you might meet a German engineer with a foreign flag guiding a management delegation from abroad. It happened to me twice this week. What’s going on there? If you ask the German SME-associations and lobbyists it’s the same scene. They have more and more inquiries and now every month one or two delegations of politicians and lobbyists from China, India, Korea, Iran, Egypt, Nigeria or Brasil who hope to learn from German Mittelstand companies.
Since 2007/2008 the models of management are in a carination. The old models were mostly more short-term orientated, more centralized, more hierarchical, less dialogue orientated and less regulated by the govenment. The pendulum of economic contradictions swung in the decades before the crisis to short term profit that debalanced society. The life expectancy of an enterprise sank. Ten years ago some economic nobel price winners calculated the probability of a great depression like 1929 with a prospective risk of one to some millions.
The practitioners of management have known before that crises there is a difference between theory and practice. Managers have observed in the last years the failure and the helplessness of the so called experts in economic theory, management theory and financial theory.
Managers are more and more attracted by existing alternatives of good management and management education beyond the models of business schools and of MBA approaches “that train the wrong people in the wrong ways with the wrong consequences” (Herny Mintzberg). Managers are looking for new role models which are more balanced and are more based on the practice of the daily work of the profession. Lots of them are attracted now by the German economy. They observed an industrial country recovering in 2009/2010 in a better way than many other industrial countries. Managers from all over the world learned in those years – which much of them heared for the first time – that the German success story is based mostly on a humdrum capitalism and a more patient capital. It is based mostly on its medium-sized globally orientated companies. These so called “hidden champions” embody the heart of the German economy—much more than all the well-known German big industrial brands. If we look at the Fortune‘s 500 list, the big German companies are compared to other countries, compared to US or even China below average. Germany doesn’t have much big companies on a global perspective. They have some – but related to the size of their economy much less than France, the UK or Japan and much less than the US.
The strength of the Germany economy is its Mittelstand. Almost 50% of around 3.000 existing global hidden champions are located in Germany (Hermann Simon). Business historians have recognized the influence of small and medium-sized companies to Germany’s economic growth since the late 19th century. Many of those enterprises have been export-orientated from the beginning and helped to create a balanced economy with a very diversified and decentralized structure. 340.000 Mittelstand companies in Germany are active in export and 4.400 famliy businesses have a turnover of more than 50 million euro.
German Mittelstand has become a new role model for managers from all over the world. A pilot study of Mannheim Institute of Applied Management Research points out that mostly managers from Asia and emerging countries are attracted by the German Mittelstand model and send delegeations. When managers didn’t find any management education programs at business schools or training institutes they decided to visit their peers in Germany directly. If the management theory, training institutes and consultants ignore the Mittelstand approach and experts do not know the details of those practicies then the managers are “voting with their feet”. The caravan of management delegations to German Mittelstand companies of those days is happening completely below the radar of international economic observers. The hosts and the guests of those new caravanserais are managers, sometimes followed by few journalists and scientists from their home countries.
In economic theory and in the media Mittelstand champions have been discussed for a long time rather under the column niche strategy who did not represent an important concept in the global scene. I am convinced that this model—which is more than a niche strategy—has more and more influence to many practicioners and even to managers of big conglomerates. Regarding market leadership, globalization, customer orientation, innovation, motivation German Mittelstand is at the forefront of a modern management model.
We learn from these unorthodox and flexible companies both to survive in turbulent times and to be a champion with new strategies. Excellent products and services always are the basement where a long-term customer relationship starts. Excellence as well means to be a leader in technology and innovation, in a long-term orientation where you can have service and spare and wear parts after years and decades and where you know what your strengths are.
What are the questions of all the management delegations that visit German Mittelstand companies? What makes the difference of this new role model of management? The delegations are interested in leadership models, in strategy or in customer relationship models. What they learn are different aspects of a new management model.
First: Management is about human beings. Mittelstand champions focus the attention on the workplace. In German Mittelstand companies you will find a collaborative spirit. Managers give their workers time, are wandering around at the shop floor and deeply understand their knowledge workers. They build a personal relationship that lasts. As a Mittelstand manager it is also your task to reach out to your employees and to help them grow. You will find a culture of trust and commitment. An effect of this people orientation is employee retention which is another important key factor for most companies. Successful Mittelstand champions have a fluctuation rate of less than 2%. Long-term employment relationships are the key to high performance and motivation levels among the employees.
Second: The management of Mittelstand sets ambitious goals which give to every worker an orientation and produce a unique collaborative spirit. Ambitious goals give an organisation the chance that everyone pulls in the same direction and, with persistence, finally reaches the objective.
Third: Short-term profit is not everything. Only a small minority of Mittelstand champions are listed on the stock exchange. And even then they find solutions to control the preference share and can still be called a family business. The goal of German Mittelstand is not the short-term profit but a long-term value. The unit of owner and manager is to be found frequently. And also in those cases when—mostly in the fourth or fifth generation—the management is not any more recruited of family members, the principle of long-term orientation and sustainable customer relationship is kept. Take the example Freudenberg, a conglomerate still with a Mittelstand spirit. In its more than 160-year-old tradition, Freudenberg has always been a company characterized by a great commitment to values, responsible conduct and ethical standards. 330 family members own this company in the 8th generation. Freudenberg’s focus is set on reliable partnerships with its customers, long term orientation and financial solidity. Stock cannot be sold to non-family members. No stockholder holds more than 2% ownership. Freudenberg has the rule to hold an equity ratio of at least 40%
Fourth: Mittelstand Champions are dominating their global niches and concentrate on the wishes of their global customers. They are extremely focused
Typical statements of this strategy are “we want to be the best in our field” and “we want long-term commitment to this field”. In this way they send a message of strong commitment to their customers. Everyone who works in such a partnership is dedicated on mutual technological leadership. Take the examples Sennheiser or Heidelberger Druckmaschinen, you can still order parts of a 40 year old consumer earphone or a hundred year old printing machine (the “Tiegel”). Their strategy is to avoid, to play where the big players dance. To quote Joachim Kreuzburg from Sartorius, a cell cultivation champion, “we are not in the gold seeker business. We sell shovels to gold seekers.” Products and services of German Mittelstand are customized. In their niches they try to achieve to be the technology leader, which is nothing less than to work with the state-of-the-art in their sector.
To be close to the needs of their mostly B2B-customers their vertical range of manufacture is higher than average. They invest above average in innovations and R&D and hold many patents with compared to big group relatively small financial resources. Mittelstand champions have five times more patents per employee than large companies. Their costs per patent are one fifth of the costs in large companies.
Fifth: German Mittelstand’s success story is based on the family business. The danger of failure in the German Mittelstand is based also on the fact that they are a family business. Family business is a resource and as well very vulnerable, mostly when there are no succession plans for the third, fourth and so on generation.
Family businesses are different, more successful, more at risk, (potentially) more intelligent, financially different constructed, long-term orientated and long-lasting, more immune to advices, more familial and give more entrepreneurial space (Schlippe/Groth).
The greatest danger for a family business is tribalization and warring clans. But some wellknown historic failures gave the German family businesses milieu more enlightenment. Within their networks the owners have learnt about family conflicts that destroyed prestigious companies. Additionally has grown a wide service and consulting to solve or to prevent conflicts in family businesses.
One focus in Multiple Generation Businesses has to be the succession plan. Take the example Rittal. Friedhelm Loh was 28 years old when he followed his father in 1974. From 200 employees at that time the company grew to 12.000 employees nowadays.
Or take Trumpf, an industrial laser producer and Bertold Leibinger, who was kind of a “speaker of the Hidden Champions”. It is an important symbol that his talented daughter Nicola Leibinger-Kammüller followed her father in 2005. She is reputated to be a “woman with an attitude”.
In the German Mittelstand model emerges a model that some observers call a multiple generation business. A German family business typically gives a strong commitment to the region where the company is based. Those companies have a long tradition with social responsibility and engage in social activities in their neighborhoods, since this is the only way to remain embedded in the local culture and small rural communities. CSR projects create a social value. People notice, SME gain recognition and acceptance, and establish trust in the people in the region of origin. The good relations to the authorities in the respective provinces and an outstanding reputation as an employer beyond the local borders of these regions are proof of the success of this strategy.
Take the example Bosch which not at all a medium-sized company but still some observes call Bosch a conglomerate that has kept its “Mittelstand”-spirit. Bosch is best known for its long history in social responsibility. Robert Bosch has been more than 100 years ago a pioneer in better work conditions. In 1906 he established the 8-hour-work day in his plants. He was a pioneer in offering life-long learning and a donator for clinics or social benefits.
Sixth: German Mittelstand champions are able to establish strategic alliances and joint ventures all over the world in a unique way. These partnerships are based on mutual values, mutual commitment, and mutual respect and trust. In many partnerships you can find unorthodox solutions. They develop unusual practices that enable the partners to manage very complex tasks. By the way, a lot of very trustful and long-lasting relationships are sealed only by a simple handshake between businessmen. That is possible among SME. Big groups with their overheads and more formal organizational cultures, and not least their rules and law restrictions are not able to practice such informal businesses.
Fifteen years ago Germany has been called the “sick man of Europe” with low growth, high rates of unemployment and enterprises with a sinking capacity to compete. It has done its homework and has helped to re-organise its economy. It has become a quite well-functioning capitalism with inclusive growth through a variety of enterprises. Its balanced economy has some successful big players but the key of its success is the Mittelstand.
Henry Mintzberg, a Canadian management expert points out that after the financial crisis all countries have to rebalance their society. He doesn’t think that government is capable anymore of rebalancing. He points out that “we are too far out of balance”. A role model can be the midsized and family owned business with its down-to-earth-management approach, its more patient capital structure and its values that are long-term orientated. Let’s see what a traditional but updated management model that grabs the attention of so many delegations will change in management practice and theory.