Insights & Perspectives
The Power of Small and Medium-Sized Companies: ‘Mittelstand’ in View
‘Mittelstand’ is a German term, and the envy of global businesses and governments. It refers to small and medium-sized companies—often family owned and operated—that prosper, even during economic change and turbulence, and privilege long-term development over short-term results.
Mittelstand companies offer a value-rich business model with distinct characteristics, both economically and in managerial ethos.
“Specialized in” and “privately held” are terms closely associated with Mittelstand companies. The German brand Sennheiser, founded in 1945 and famous for its headphones, claims two CEOs bearing the Sennheiser name. Ravensburger, a German game and toy company and the European jigsaw puzzle market, was founded in 1883 and is privately owned by the Maier family.
By definition, a Mittelstand company claims fewer than 500 employees, and less than 50 million Euros in annual revenue. However, the companies have other characteristics in common: they manufacture and sell niche products, are located outside of major metropolises, and diversify internationally shipping products to, on average, 16 different foreign markets.
Further analysis reveals Mittelstand companies also express a unique mindset, value system and intuitive management practices.
A Company Profile Beyond Numbers
Locality and longevity play a critical role in Mittelstand companies’ managerial value system.
“Firms are embedded in their regions,” explains Professor Weber Winfried Weber, professor of management at Mannheim University of Applied Sciences, interviewed by Caroline Bayley for the BBC. Located almost always outside of major cities, such positioning engenders strong regional ties and an evident sense of social responsibility.
Mittelstand structuration encourages flatter and leaner hierarchies fostering a strong sense of individual responsibility and emotional attachment, contrary to large corporations and closer to the spirit of tech start-ups.
The consequences of this are greater flexibility, innovation and reactivity to market changes—if deemed appropriate, as Mittelstand companies are rarely derailed by trends but rather focus on the core value of their product offering. The customer is key, and customers expect quality before all.
Management Values Creating Value
Over 99% of German companies are small and medium sized and there are about 3.5 million of them, representing 78.5 % of the German workforce. “In Germany we have only 28 of the global 500 biggest companies but we have around 48% of those small world market leaders,” explains Professor Weber Winfried Weber.
While companies across the globe can have identical profiles as German Mittelstand companies, in Germany they the unique backbone of its economy, often called the “growth champions” of the world’s fourth largest economic power.
German products are often synonymous with exceptional quality, and consumers are willing to pay for this difference. Mittelstand companies tend to keep every production process in-house to guarantee quality levels. Such razor-sharp focus on niche products meticulously produced in-house, coupled with a bold exportation strategy make for a unique inward and outward-bound perspective at once.
And, in the middle, is the companies’ significant investment in its workforce, retaining skilled production workers as long as possible, and remaining loyal to its local employees.
When economic turmoil arises, Mittelstand companies are celebrated for their strength and durability, a consequence of what Professor Weber calls “patient capitalism”. Government support is also a critical element in keeping such sustainable, long-term business values in practice.
German Mittelstand companies, for example, can benefit from a government program known as Kurzarbeit that subsidizes companies cutting hours, not staff, during difficult economic times.
Germany companies also benefit from favorable taxation and fiscal policies that allow a continuity from generation to generation at the time of company succession.
For financing, Mittelstand companies prefer to self-finance through revenue, or source financing from government entities, for example, Germany’s reconstruction bank set up after 1945, KFW (Kreditanstalt für Wiederaufbau) and France’s BPI (Banque Publique d’Investissement) which represents the country’s effort to create a similar structure to steer public and private finance into middle range firms.
The Future of Industry on Small and Middle-Sized Company Scale
Can family-owned companies, rooted in old economy products such as machine tools, survive future global trends towards automation, data exchange in manufacturing, cognitive computing and artificial intelligence?
Again, the German government aimed to take the lead in 2017 with a 200 million USD investment in “Industrie 4.0”, a national strategic initiative through the Ministry of Education and Research (BMBF) and the Ministry for Economic Affairs and Energy (BMWI) to drive digital manufacturing forward. Its end-goal is to convince the smaller Mittelstand firms to take up the cause of digitization, often referred to as ‘Mitteltech’.
With increased digitization and the interconnection of products, value chains and business models, a new era of business is underway. Arguably more focused on this form of internal development along with international exchange which, with Mittelstand companies as a model, threatens no part of the core values at work.
SOURCES: Wall Street Journal, Bloomberg, The Economist, CNBC, BBC, European Commission on Internal Market, Industry, Entrepreneurship and SMEs.