The term “Mittelstand” has become a widely recognised German word which describes a breed of successful German SMEs. But that it is only part of the definition and is misleading for those who think of replicating the achievements of these “Hidden Champions”. In recent years more people have been researching this phenomenon to uncover the nuggets of wisdom that must surely lie just under the surface. However, as with prospecting for gold, it is not that simple.
Organised a conference on the ‘mittelstand’
Last week I attended a MacKay Hannah conference in Edinburgh “McMittelstand: Scotland’s middle market companies – recognising their importance, unlocking their potential”. An ambitious proposition which was backed up by some excellent research from the University of Edinburgh Business School. As almost all the participants were from public sector agencies or academic institutions only the first aim was achieved by this interesting event. Unlocking the potential of SMEs in Scotland will take a wee bit longer but it is clearly a segment which has not had enough attention from Scottish policy makers.
The first thing to note about Mittelstand companies is that they do not fit neatly into the EU definition of mid-market enterprises which requires a turnover not exceeding €50 million and a maximum of 250 employees. The Bosch Group considers itself as still being a member of this elite although the turnover is now over €50 billion with 300,000 staff. In fact membership is much more a set of values or a way of life than it is a function of size or financial strength.
German ‘mittelstand’ companies don’t fit easily into business classifications
The leaders of these family firms are often charismatic individuals with a very clear vision of the direction of the business. These individuals take on the full responsibility for their staff and the fortunes of their companies. Some owners are now bringing in external managers to family-owned companies in order to cope with the issue of succession and the demands of globalization. One example is the Rethmann Group which was founded by Josef Rethmann who started the waste management business in 1934 with a couple of horses and carts. Now the Group, still in family ownership but with some non-family managers, has 60,000 employees and a turnover of €12 billion. The son of the founder, now in his 80’s, still puts in a full working week. There is a strong mutual respect between staff and management which creates loyalty and commitment to the shared aims.
Private Equity firms have made little headway in Germany
Private ownership is a key factor which creates freedom to act in the best interests of the business. These enterprises are often free of debt and use their local banks only for day-to-day business. This financial independence is fiercely defended – which is one reason why the Anglo-Saxon private equity approach has never really caught on in Germany. There have been a few attempts by these large funds to enter the German market but they don’t even get into a dialogue with the owners. One disappointed investor complained to me that there had been “a number of false dawns” in Germany for the international private equity industry. Many of these companies are more than 100 years old and have still not succumbed to the temptation of selling out – and probably never will. The main reason, apart from distrust of the PE model, is that they are usually important as employers and drivers of the local economy and the owners, therefore, have a status that is not to be bought and cannot be traded.
Retractable dog leads – a German invention
At the same time these individuals are usually very secretive about their business dealings, mainly to protect themselves against the competition. They operate mainly in a business to business environment and so their names are not generally known outside the industry sector in which they operate. At an early stage the strategy is to move beyond exporting and to expand internationally but to keep close control of the globalization process by placing German managers in the foreign operations. The aim is to gain a significant world market share in a tiny niche such as door furniture or castors for hospital beds or metal closures for sausages. It sounds crazy but then if you have a 90% world market share then that is a lot of sausage closures. Or the blowing bubbles manufacturer Pustefix which now sells in 50 countries. Or the company that makes those extendable dog leads which started with a wooden version in 1972 and today distributes to 90 markets worldwide.
What can Scottish entrepreneurs learn from their German counterparts? Actually not a lot because so much of how these Mittelstand companies operate is deeply embedded in the culture and history of Germany. It is more that these astonishingly successful enterprises demonstrate most of the basic principles of good management ie strategic thinking, staying close to the customer, fostering good employee relations and, now, riding the globalization tiger.