Germany’s ‘Mittelstand’ enjoys a good reputation and serves as a role model worldwide. US author Alan Crawford calls it the ‘mighty Mittelstand’ in the April issue of the European edition of Businessweek. He managed to identify a silver lining, despite the difficult economic times. But what distinguishes the Mittelstand in Germany?
By Prof. Friederike Welter
One of the Mittelstand’s distinguishing features is its structure: the Institut für Mittelstandsforschung (IfM) Bonn takes into account all companies where the owners or their family members not only hold the majority of the shares but also manage the business. This therefore includes Dr. Eckel Animal Nutrition. The declared aim of most family business owners is to make the best possible use of their own capabilities and remain independent. Since only enduring corporate success can secure their livelihoods, they characteristically have longer term corporate strategies than those of companies run by employed management.
More than just an economic term
The lowest common denominator among Mittelstand companies is therefore this fusion of ownership and management, regardless of size: small and medium-sized companies (SMEs) that do not belong to a group of companies are therefore just as much a part of the Mittelstand as large family businesses with more than 500 employees or an annual turnover of more than 50 million euro.
If you were to ask business enterprises in Germany who they would include in the Mittelstand, they would confirm the definition of the IfM Bonn: in their view, this should only include companies that are independent, create value and secure their livelihood through commercial activity. However, they do not think that the maximum number of employees a Mittelstand company can have should be a limiting factor.
Accordingly, companies that have grown steadily over several generations still consider themselves Mittelstand companies, even when ownership and management are no longer a single entity, that is, although the family still holds the company shares, the family members themselves no longer actively contribute to the company. This suggests that the desire to belong to the Mittelstand is also based on values and traditions that are very important to many family business owners. The reason for such strong sentiment for the Mittelstand lies in the history of Germany’s economy.
From guilds to hidden champions
The nature of Mittelstand companies was initially defined by the guild system from the 11th century onwards: the various trades had specific requirements and regulations that determined how the company should be managed and how junior staff should be trained. Even today, their training and certification in Germany is still governed by the Chambers of Industry and Commerce and the Chambers of Trades. Furthermore, the guilds also ensured that the widows of their members were cared for until the end of their lives.
In the course of industrialisation, when the predominance of guilds was suppressed, this social commitment was transferred to family businesses, which quickly grew in size and economic importance due to technological development. It was during this time that the image of the caring business owner who, together with his family, took care of ‘his’ employees even outside work emerged. A prominent example is the Margarethenhöhe housing estate in Essen, established by the Krupp family business in 1906. In other places, companies established schools for children of working-class families. Indeed, the first company health insurance funds can also be traced back to initiatives of family business owners. However, despite all the enthusiasm for such social services, one should not forget that these provisions were not entirely altruistic: on the one hand, the family business owners could thus permanently bind their workers to the company and, on the other hand, such measures were also intended to conceal companies’ efforts to prevent any political activities on company premises.
Nevertheless, a distinctive feature of many family business owners in Germany to this day is their extraordinary social solidarity, both with employees and with the region in which the company is located. This includes the fact that many family businesses engage in further training for their employees to update their skills and expertise as much as possible.
In addition to focusing on their own core competences, specific niche markets and quality, this particular emphasis on employee development has played a key role in the evolution of many family businesses into hidden champions.
The importance that the Mittelstand attaches to the skills and expertise of its workforce is also reflected in the fact that Mittelstand companies try to retain their employees, even in times of crisis. A case in point is the conduct of large companies run by employed management and that of large family businesses during the global financial crisis in 2008 and 2009: as opposed to the large companies run by employed management, the large family businesses did not reduce their workforce, despite a drop in sales. Such conduct did not only contribute towards stabilising the German labour market. It also helped the family businesses ride the global crisis and emerge as winners, because they could directly handle the increase in orders throughout the period of economic recovery. Consequently, in contrast to the large companies run by employed management, they quickly achieved higher sales in 2010 and 2011.
The family business advantage
The German Mittelstand’s success is also due to the structure of family businesses: as opposed to companies and groups run by employed management, they are more flexible in terms of organisation, personnel and production methods, and they have a clearer internal communication structure. This helps them solve specific customer issues quickly and innovatively, among other things. Even though smaller family businesses may not do their own research and development (R&D), they are certainly creative and competitive.
Only last year, for instance, a study by the IfM Bonn showed that SMEs primarily focus on improving existing products or services, and on process, marketing or organisational innovations.
Fig.: Types of innovation in Mittelstand companies
Taken as a whole, innovation is just as diverse as the Mittelstand itself, which includes large, industrial family businesses in addition to trades, trading companies, freelancers and sole traders. Indeed, Mittelstand companies that innovate without doing their own R&D tend to be small and operate mainly in the service sector. This includes most of the companies run by women in Germany. On the contrary, Mittelstand innovators with their own R&D tend to be large and operate in the manufacturing sector: the R&D expenditures of large family businesses averaged more than three per cent of annual sales, whereas the national average at the time was 2.8 per cent. A manufacturing company with a female CEO, Dr. Eckel is certainly a pearl amidst German Mittelstand companies, and a prime example of the innovativeness that defines such companies.
Incidentally, in terms of corporate strategy, there is no major difference between companies run by women and those run by men: ultimately, both have to face stiff competition in their respective markets and both must react to the respective economic conditions. So it is not surprising that family business owners repeatedly specified that their greatest challenge was to ensure their competitiveness with innovation and growth in the 2017 SME Panel survey. And the Mittelstand’s good reputation across the globe is ample evidence of their success, despite all the dire predictions.
From an economic point of view, Mittelstand companies are definitely extremely important for Germany: SMEs with up to 500 employees alone contribute around 58 per cent of the total net value added of all companies in Germany. A similar picture emerges when looking at the number of employees in Mittelstand companies: around 58 per cent of all employees subject to social insurance contributions and around 82 per cent of all trainees are employed by SMEs. In addition, there are around 4,700 large family businesses that had an average of 1,770 employees and generated an average turnover of almost 499 million euro in 2016. In view of these figures and such economic performance, the Mittelstand, the mainstay of the German economy, has more than earned the attribute ‘mighty’.