Why have German Companies been so Successful?

It is common to see the words Germany, innovation, industry, and success in the same sentence and many observers might even take this for granted. However, the foundations of German business successes and innovation is more down to small and medium-sized companies and less to headline grabbing companies and technologies.

The German Mittelstand – the industrial backbone comprised of these smaller companies – has managed to build export markets and dominate them in a way which larger companies often struggle to do. Some of these smaller companies command market shares in their fields of 70-90% and make up the large part of Germany’s trade surplus, and this on a year after year basis.

The reason that many people do not know about these Mittelstand companies is because they make products that make the products which consumers buy… i.e. their products are invisible to consumers. In addition, they do not seek the limelight, but prefer to remain obscure.

A survey by the Harvard Business Review narrowed down some of the reasons for the success of the German Mittelstand to the following 5 points:

  • Combine strategic focus with geographic diversity.
  • Emphasise factors like customer value.
  • Blend technology and closeness to customers.
  • Rely on their own technical competence.
  • Create mutual interdependence between the company and its employees.

But these should also be considered against the backdrop of Germany having a long tradition of craftsmanship, apprenticeship programmes and on the job training.

While the existence of extensive high quality training is unique, what is also interesting is that the points listed above are less reliant on technological breakthroughs and more on incremental improvements and a focus on improving client and market support.

As the HBR article comments:

These German companies demonstrate that global leadership depends less on great technical breakthroughs than on vigilant attention to improvement, a commitment to serving foreign markets, and persistence.

These companies tend to follow a strategy that combines technical competence with worldwide marketing and sales. They tend to focus on a particular market niche, usually one that requires technical expertise, and direct all of their resources toward maintaining the top position in that niche. Diversification is seldom considered and they prefer to focus on becoming the best in their field.

When Mittelstand companies grow and expand overseas, they show a strong preference for full control over operations, often establishing their own offices with their own staff, in part because they view the relationship with the customer as too important to delegate.

The commitment to international expansion usually takes two forms: investment and people. Although a high initial investment may not be justified by short-term returns, Germany’s midsize companies consider it necessary for other reasons. The key one being to show potential customers and other constituents they are serious and determined to stay. German companies are often sceptical of their foreign competitors (when they attempt to enter the German market, for example) precisely because they rarely demonstrate this type of commitment.

Rather than attempting to outperform the competition, Germany’s small and medium sized companies rather focus their efforts where they are superior. As a result, their strengths are well matched to customers’ real needs. One of these areas is in training and servicing, particularly with technical products. Many customers of German products are often swayed because German technicians are superbly educated. In many cases, the senior managers of companies are themselves technically trained and capable of giving direct hands-on advice to customers.

However, German Mittelstand companies do not adhere strictly to the modern doctrine of customer orientation, or single-mindedly pursue technology. Instead they see the market and technology as equally important driving forces.

Another unique trait of Germany’s midsize companies is that the develop and trust in their own capabilities. They believe they can enter new markets and solve manufacturing and R&D problems on their own and that doing so strengthens their product knowledge and preserves their top competitive position.

The fact that these businesses are small and usually located in small towns and regions means that there is a different relationship between staff and management. The two groups are usually drawn from the same area and a lot of time is invested in training and developing staff. Also, the rigid hierarchies of larger companies tend not to exist and there is great collaboration between staff from all areas of the company.

While all this adds up to a formidable capacity there are some weaknesses. Many of the Mittelstand companies tend to have little or no marketing capacity due to their closeness to customers. Also, there is a tendency to become increasingly complex and sophisticated with their products, sometimes at the expense of customers understanding their products. Finally, these companies tend to have closed cultures which can become a hindrance when confronting unforeseen changes in management or staff.

However, despite these shortcomings, the German Mittlestand has been nimble, practical and resourceful in the past and are likely to continue to remain so.

Photo credit: “Colourbox.com”. Material used in the preparation of this article has been drawn from Harvard Business Review.

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