Lesson from German Mittelstand Companies

I just read an interesting article from Inc. magazine that discussed about Mittelstand in German. Mittelstand in German are companies which are family-owned, small to midsize manufacturing companies. Until now, Mittelstand companies contribute to 52% of German’s economic output and almost 2/3 of jobs. The characteristic of Mittelstand is quite special compared to companies from America or another countries, such as innovate constantly in narrow markets (they rarely diversify their products), aggressively pursue sales growth through international sales, maintain intimate relationship with their customer, design and produce their own machines, etc. They are less risk-taker, as said in Inc. magazine.

“If we could decide between 5 percent growth and 100 percent security, we would choose security”

Maybe some of us think that they are old-fashioned companies, rigid, etc and is not quite well-suited in fast and dynamic business environment nowadays. But, the fact that their companies mostly last longer than 40-50 years and still able to grow better show that they also have good strategies.  What lessons can we learn from the Mittelstand, especially in operations?

  1. Narrow your horizons: Most of mittelstand companies choose one specialization of their products and focus intensively in that narrow niches (mainly, their products are spare parts or components that is used to build other stuff, not the end-product). The reason: they can develop unsurpassable expertise that is less vulnerable to disruptions. That’s why the choose depth over breadth. They only do “soft diversification”, which is adding little changes in their existing products to fulfill the latest industrial needs.

    “Sometimes, it is good if you stick to your core competence, and then one day, if you have the patience, there is a topic where you can suddenly jump on”

  2. Go Global Fast, Go Global Hard: many of mittelstand companies aim for international sales, mainly because their domestic market is too small compared to international market. In German, small to midsize manufacturers account for 70% of it’s exports number, quite huge number.

    “We are bonsai global players. We do it with the same quality as the big companies, but at a very reduced scale”

  3. Innovate incrementally and internally: Mittelstand companies are not allergic to innovation, they just do it differently. Most of them are incrementalist, improving the existing products and services, not just jump into radical new ideas. And much of that innovation happens with customers. Just as point no 4 said, Mittelstand companies are maintaining their relationship intimately with their customers and it includes giving some enhancement of their products that they think it will help the customers. Other things, Mittelstand companies innovate not only in the output, but also in the input and process. Sometimes, they also design and make their own machines or specific materials so that the competitors would not be able to easily copy their products, because it will require the competitors to built the same machines too and it’s not easy jobs. For Mittelstand, vertical integration is all about control. If you can control the input and machines used in production, you mostly can control the output quality you want.

    “Often, innovation is defined as something that changes a market. But to me, it is where you individually develop something for your customer. It may be a very very small detail. But it shows understanding and respect.”

  4. Go the extra mile for customers: Mittelstand companies usually maintain high intimacy with their existing customers. Even, they will stock some old inventories just to make sure that their old customers will be able to find the components in case they need it although it will cost them more. In addition, their customer orientation is not just that. They also selectively find suppliers (mostly are other Mittelstand companies too) to ensure that standards and requirements are fulfilled by the suppliers (and it’s easier if you have Mittelstand companies as your suppliers)

    “We ask a lot from our suppliers, so they have to understand our standards and requirements. Having the Mittelstand makes it easier for us to fulfill our promised to customers”

  5. Run your business as if you expect it to live forever: As most of Mittelstand companies are family-owned, they are operated by heritage of the owner’s families. It’s for that reason that Mittelstand build for a future generation. The long-term perspective can be seen in a conservative approach to finance. Their equity ratio reached 20.7% in 2011. Equity and bank loans are their main financing sources. In this modern era, there is a thought that their children will be ride the ‘entrepreneur waves’ and start their own company, leave their family Mittelstand. It is partially true. Somehow, after doing their own business (and make their mistakes), they will join the family company and make it better as they become more experienced in running business.

    “We are going to make mistakes, but we are going to do it somewhere else and then come back to our own (family) company to make sure it is successful”

Those lessons give me another perspective of how traditional, old companies can still catch up (or even compete) with modern corporations nowadays. It’s true that maybe their approaches are old-fashioned, less aggressive compared to large multinational companies. But, it’s their choices and strategies, and they define their own success which maybe quite different with others. It’s by upgrading, upscaling their family companies slowly but sure, they can make personal and collective achievement for their business and leave a great legacy for their heirs.

“I am very grateful that the company cared for me during my childhood. Now I have a chance to care for the company”

*This post is mainly inspired and sourced from article in Inc Magazine titled ‘Built to Last Forever’