CEO of Smartlink communication. Global analyst, consultant and trainer, passionate about leadership, global communication and competition.
Many management courses start by explaining that Say’s law– essentially “build it and they will come” – is the biggest folly of any company. With that, the engineering side is delegated to the research and development department, just to mention when optimizing overhead is discussed. For many companies, especially in the world before the Third wave of globalization, that’s right. The business world is filled with examples of products that were better than their competitors – only to be sidelined beta max to that of IBM Simon.
This is not so with the tradesman or middle class. Taking into account approx 57.6% of employment and 34.4% of national revenue in Germany, the Mittselstand is a collective noun for that of Germany 3.6 million small and medium-sized enterprises. In my experience, the typical Mittselstand is primarily involved in manufacturing, bank-funded, family-owned, with an apprenticeship program, and export-oriented. It is also likely to operate in a niche industry that others may consider boring. They are successful in no small part by focusing on developing the best product available, building a significant advantage in expertise through incremental improvements, and then selling these “slightly better mousetraps” worldwide. So it is easy to understand why countries, as well as companies, often want to copy the Mittselstand model.
I myself aspire to run a global mid-sized company and have had the privilege of working with many German companies as they expand in Eastern Europe. This has given me insight into day-to-day business, practices and, last but not least, culture. It is my goal with this article to help others gain a balanced understanding of the Mittselstand model, including how the model came about and why it is much more replicable than it first appears.
The ingredients of a Mittselstand
For starters, the particular Mittselstand structure isn’t so much an idiosyncratic choice as it comes about in part because of Germany’s somewhat dismal starting parameters. historical, Germany has actually been quite poor and more often than not at war with itself. Many of what we think of as Mittselstand characteristics come from that German context: Germans always had to be efficient with what little was available and plan ahead.
Second, the reason many SMEs have remained SMEs has been financing. On the other hand, let’s take a look at Adobe. In the 1990s, it may have been hailed as a successful American Mittselstand. Started by engineers and export-oriented, it developed a slightly better way to print documents. But in the context of the US stock markets, success translated into funding, which translated into two decades of acquisitions of what could have been considered another asset, and Adobe became a large-cap.
Third, many countries have their own mittselstand; they just look different. Take the Mitsubishi Group in Japan. Formerly a family-founded exporter, it now comprises approx 1,700 companies (paywall), many of which would be classified as SMEs, very much along the lines of the Mittselstand if they didn’t all fall under the Mitsubishi umbrella.
Creating a global Mittselstand
The Mittselstand model is much more replicable than it seems. South Koreafor example active pushing (paywall) toward the partial adoption of the model, particularly in the context of declining margin returns associated with formal education and the chaebol– driven “Hell Joseon” phenomenon. Few would suggest that it lacks Koreans zitfleischbut what else is needed for other countries to create a mittselstand?
1. Integrated product development
Most Mittselstands don’t really have a significant technological edge over competitors, nor do they have significant economies of scale that would give a typical Mittselstand company a major advantage. Very simply, a prosaic VIRO analysis would suggest that many are on the brink of bankruptcy, sandwiched between price competition from below and superior higher-end alternatives from above. What makes the middle thrive is a deep culture of craftsmanship that naturally brings together the employee, the researcher, the manager and the accountant to refine a product to be globally competitive. Of all aspects, that would be the most difficult to reproduce, because it is not driven by economic values, but by a fully developed Weltanschauung or shared philosophy.
2. Bi-directional sales
Because many midmarketers operate in the business-to-business market, they aren’t necessarily associated with the frenetic, larger-than-life sales activities of a US company, but integration into complex supply chains doesn’t happen by accident. Relationships with both suppliers and buyers are often carefully maintained for the specific purpose of acting as a greater whole. For example, say a car manufacturer requires a change – both the suppliers of a particular part and the suppliers’ suppliers can renegotiate business in a manner similar to an East Asian keiretsu while they are autonomous entities. Perhaps counterintuitively, this product focus entails constant sales activity, even between the same companies, to ensure harmonious processes.
3. Continuous improvement
Kaizen, or the Japanese word for constant improvement, is often overlooked as an important part of a Mittselstand. It means that a reasonably skilled workforce can speak directly to upper management in a shared language – and plainly. In the Mittselstand culture of craftsmanship that’s natural, but in other cultures it can get in the way of millennia of momentum.
In conclusion, the German Mittselstand is not as unique as it seems nor impossible to reproduce, with the caveat that some features actually represent weaknesses, not strengths. By focusing on the culture of craftsmanship – with an emphasis on integrated product development, two-way selling and constant improvementz – small and medium-sized businesses around the world can use the same Germanic blueprint. East Asian cultures, in particular, fit hand-in-hand with the model, perhaps even better than contemporary Germany, but extractive corporate cultures may be a hindrance to others.