Why Germany’s Mittelstand Model Will Improve Your Odds of Success

Lessons from World-Class Business Champions

Germany’s Mittelstand is considered to be the backbone of the German economy. Mittelstand companies are small to mid-size enterprises (SMEs) with annual revenues of up to €50 million and a maximum of 499 employees¹. These businesses, along with startups, are considered to be the main driver of the economy, boosting employment, innovation, and technology in Germany.

So far, the general impression of the German economy is that it’s dominated by big brand names like Siemens, Volkswagen, and Bosch. However, a recent study by the German Savings Bank Association shows that Germany’s Mittelstand is outperforming the country’s larger multinational companies in terms of profitability².

The key to the success of Mittelstand companies lies in their ability to combine a long-term value approach with the adoption of agile management processes, such as the implementation of lean manufacturing practices and trend forecasting. These businesses have a laser-sharp focus on producing manufactured products to occupy niche market leadership positions in various B2B sectors worldwide. In terms of industry focus, Mittelstand companies are generally concentrated in machinery, automotive parts, chemicals, and electrical equipment.

Key Figures on the German Mittelstand:

• 58.5% of workers are employed by SMEs³
• 99.6% of all companies belong to the Mittelstand⁴
• 54.9% of turnover is produced by SMEs⁵
• 82% of trainees are employed by SMEs⁶
• 44% of Mittelstand employees have been with their company for more than 10 years⁷
• 3.2% is the annual employee turnover rate in SMEs⁸

While the Mittelstand has served the German economy well for the last several decades, it’s now facing entirely new challenges on how it will adapt to the digital revolution — Industry 4.0.

Even with Germany’s high prevalence of global market leaders (as seen in figure 1 below⁹), German SMEs feel the growing pressure from digitalization. Technologies such as IoT, machine-to-machine communication (M2M), AI and blockchain are changing historical value chains and putting traditional business models to the test.

“Those who do not take digitalization seriously are putting their own existence in jeopardy.” - Martin Viessmann, CEO of Viessmann Group.

According to Statista, in addition to keeping up with the rapid pace of digitalization, here are the biggest challenges SMEs currently face in Germany:

SMEs are battling tough competitive pressure, the need to continuously develop new products, bring new innovations to market, and achieve greater returns.

So, the question remains - What support frameworks are in place to address these challenges and promote Germany’s Mittelstand?

Addressing Industry Challenges with Strategic Partnerships

Technology-driven companies that prioritize IoT and data will more effectively make, deliver and market their products and services, gaining a competitive edge and solidifying their position as market leaders. In addition to leveraging technology, German SMEs can collaborate and engage with ecosystem partners, corporate initiatives and upliftment programs to overcome current prohibitive barriers.

Who Forms Part of the German SME Promotion System?

Government Programs

The German Central Government has a number of programs that offer financial support, consultancy services, and promote the ongoing research and development (R&D) of digital technologies to upgrade existing companies. 1) “Industrie 4.0” is a national strategic initiative from the German government through the Ministry of Education and Research (BMBF) and the Ministry for Economic Affairs and Energy (BMWI) to drive automated manufacturing forward by increasing digitalization in SMEs. Other examples include: 2) Go-digital; 3) the Eureka program, and 4) the Mittelstandsinitiative, which consists of various support tools to promote entrepreneurship in Germany.

Banks and Financial Programs

These programs strengthen the capital structure of SMEs and improve access to equity capital. 1) Launched as part of the post-war WW2 Marshall Plan, the federal KfW Development Bank has invested more than €1.3 trillion into various business and societal causes¹¹. 2) High–Tech Gründerfonds (HTGF) is an active seed-stage investor and an important catalyst for corporate-startup collaborations, having already invested €900 million into more than 600 German tech startups¹² .

Business Associations and University Programs

These programs provide businesses with legal support, advisory services, business planning and offer incubator programs that support the development of enterprises. 1) The Fraunhofer-Gesellschaft offers partnerships between universities and companies to capitalize on the research of real-world applications. 2) Germany's National Academy of Science and Engineering (Acatech) addresses economic and industry challenges with "Industrie 4.0", which calls for German manufacturers to adopt IoT into traditional business strategies.

Economic and Innovation Promotion Organizations

As an essential driver of innovation, entrepreneurship, and economic dynamism, numerous organizations exist to promote new partnerships, develop new products, and assist with SME financing. 1) The Central Innovation Program for the Mittelstand (ZIM) is a German funding program for SMEs and research institutes to co-develop new products, processes, and technologies. 2) Berlin Partner, a business and technology development agency, facilitates the transfer of technology between partners to rapidly execute and implement new innovations. 3) Next Big Thing AG is a startup studio for the Machine Economy that backs, builds, and scales successful tech ventures.

Alternative Innovation Alliances

Innovation today is increasingly led by startups. With the right partnership, both Mittelstand companies and startups can benefit significantly. Established SMEs are able to connect with new partners to gain a different perspective on the world of innovation. Collaboration between corporations and startups fosters the development of entirely new entrepreneurial ecosystems across Europe.

By bringing together the startup scene and Germany’s Mittelstand, businesses are better prepared to address challenges and expose untapped opportunities.

Lessons from the Mittelstand

Germany’s Mittelstand is at the forefront of an agile-management business model that prioritizes market leadership, internationalization, employee motivation, customer satisfaction, and innovation.

7 Lessons from the Mittelstand Model to Succeed in Business:

• Invest in R&D and business innovation
• Be committed to developing workers' skills
• Select a specialty and strive to be a world leader in it
• Seek out funding, investment, and strategic partnerships
• Focus on long-term strategies for sustainability and success
• Develop technology expertise and gain extensive market knowledge
• Maintain a transparent and supportive atmosphere among employees

An Opportunity to Make Further Improvements

Organizations and the government must take collaborative action to ensure that the backbone of the German economy, the German Mittelstand, remains prosperous and innovative while retaining their position as global market leaders.

In order to ensure that the Mittelstand continues to contribute toward the growth, employment and prosperity of Germany, additional measures should be put in place:

• A greater focus on developing key technologies
• Increased support with the hand-overs and start-ups of companies
• Better use of Germany’s pool of skilled labor and ways to attract new talent
• Implement a Mittelstand-friendly tax policy and promoting tax incentives for research
• Greater commitment from the political system to shape a supportive business environment
• Developing new support frameworks to give SMEs the courage to go digital and to secure additional investment
• Remove red tape and bureaucratic hurdles with policies that enable entrepreneurial freedom and young business leaders

Uncovering the Hidden Champions of the Mittelstand

The "hidden champions" of Germany are companies that are among the first three to go global in their field of expertise and where turnover is less than $5 billion¹⁴. These companies are not widely known among the general public. Of 2,700 global companies with these characteristics, about 1,300 are German¹⁵.

Hidden champions combine strategic focus with geographic diversity and put employees and customers at their center of gravity for conducting business. Around 80% of Mittelstand companies offer incentives for workers to contribute new ideas, more than 50% have quality circles, and about 40% offer profit-sharing programs¹⁷.

Characteristics of Mittelstand Champions:

• Flat hierarchies
• Often export-oriented
• Maintain a low level of debt
• Family-like company culture
• Long-term focus on success
• Focus on social responsibility
• Large investments into the workforce
• Usually produced with a high output ratio
• Compete through value additions, not by cutting costs

Although hidden champions may often go unnoticed, these companies are highly focused on achieving unprecedented efficiencies by placing greater emphasis on innovation than their competitors. These companies drive the “think global, act local” approach and have their finger on the pulse of the global market.

With a customer-centric philosophy and deep focus on conquering a leading market position, hidden champions will continue to be a source of lessons on how to succeed in the global economy. Continued focus leads to world-class. Despite their hidden nature, companies in Germany’s Mittelstand deserve a spotlight for how to innovate into the future.

At NBT, we are always searching for IoT innovators looking to scale their business. If you would like to meet us in real life, we’ll be at Hinterland 2020 on 13 February, or you can reach out to us here.

¹ Wikipedia, https://en.wikipedia.org/wiki/Mittelstand

² Harvard Business Review, https://hbr.org/2016/08/germanys-midsize-manufacturers-outperform-its-industrial-giants

³ Federal Ministry for Economic Affairs and Energy, https://www.bmwi.de/Redaktion/EN/Publikationen/Mittelstand/driving-economic-success-sme.pdf?__blob=publicationFile&v=2

⁴ EconStor, https://www.econstor.eu/bitstream/10419/189840/1/GLU-WP-No53.pdf

⁵ Federal Ministry for Economic Affairs and Energy, https://www.bmwi.de/Redaktion/EN/Publikationen/Mittelstand/driving-economic-success-sme.pdf?__blob=publicationFile&v=2

⁶ Federal Ministry for Economic Affairs and Energy, https://www.bmwi.de/Redaktion/EN/Publikationen/Mittelstand/driving-economic-success-sme.pdf?__blob=publicationFile&v=2

⁷ Journal of Management Policies and Practices, http://jmppnet.com/journals/jmpp/Vol_6_No_1_June_2018/3.pdf

⁸ Journal of Management Policies and Practices, http://jmppnet.com/journals/jmpp/Vol_6_No_1_June_2018/3.pdf

⁹ Deutsche Standards, https://static1.squarespace.com/static/548ac75ce4b0a10ad41f38e7/t/55edaa22e4b03d3d6e78da4c/1441638946906/MITWMF_Folder_Venohr_Website.pdf

¹⁰ Statista, https://www.statista.com/statistics/700718/monthly-current-challenges-before-sme-germany/

¹¹ Telegraph, https://www.telegraph.co.uk/connect/small-business/driving-growth/secrets-growth-power-of-germany-mittelstand/

¹² High-Tech Gründerfonds, https://high-tech-gruenderfonds.de/en/investors/

¹³ Berlin Startup Academy, https://image.slidesharecdn.com/startupsplusmittelstandisterfolg-140829122834-phpapp01/95/startups-mittelstand-success-14-638.jpg?cb=1409315396

¹⁴ CommonWealth, https://english.cw.com.tw/article/article.action?id=1716

¹⁵ Journal of Management Policies and Practices, https://www.researchgate.net/publication/327322119_The_German_Business_Model_the_role_of_the_Mittelstand

¹⁶ Institut für Mittelstandsforschung der Universität Mannheim Internationalization, https://image.slidesharecdn.com/prsentation-mittelstandenglisch-151104050058-lva1-app6892/95/mittelstand-in-germany-an-international-perspective-on-sustainable-business-38-638.jpg?cb=1446613851

¹⁷ Journal of Management Policies and Practices, http://jmppnet.com/journals/jmpp/Vol_6_No_1_June_2018/3.pdf