How to Learn from Germany’s Mittelstand

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“Everyone thinks that the Japanese possess some special magic that enables them to run rings around their competitors in world markets.”

Kenichi Ohmae wrote those words in 1980. Japan had the third highest GNP in the world then and sober prognosticators forecast that it would be the highest in the world by 2000. American companies figured that if they copied successful Japanese companies, they would succeed, too.

Today, several analysts think that American companies can do better if they emulate the companies that the Germans call “Mittelstand.” They’re small to medium-sized German companies and they’re drawing a lot of attention. According to the Economist.

“Officials and businesspeople from the world over are making pilgrimages to Germany to learn from the Mittelständler, much as they flocked to Japan in the 1970s to study Toyota.”

You may want to study the Mittelstand companies yourself. Just make sure you’re studying the right thing.

Two Definitions of Mittelstand

There is an official German statistical category called “Mittelstand.” It includes small to medium enterprises that have less than 500 employees and less than 50 million Euros in revenue. When the term is used that way, Mittelstand companies make up more than 90% of all German firms and provide a huge chunk of the economic output of the country.

But “Mittelstand” is also used as shorthand for some business values. Big companies like Bosch might claim to be “Mittelstand” in their attitudes or culture. They’re claiming the same values as Mittelstand companies that are mostly privately held and mostly family owned. Those companies have a few things that they do that are worth studying.

Long Term Focus

Mittelstand companies make plans and decisions based on the long term. There’s no chasing after quarterly profits here. To some extent that’s a natural result of being a family-owned business. Being privately held makes it easier.

Conservative Finance

Mittelstand firms are very conservative financially. They try to maintain a strong balance sheet and limit their financial exposure. That makes them able to weather downturns and even to seize the opportunities that downturns offer.

Niche, Sweet Niche

Mittelstand companies find a niche and fill it. The niches aren’t especially romantic. Go to the refrigerator or trot down to the supermarket and find a fat tubular package of sausage. Look at the clip on the end. That clip and the system that puts it on the sausage package are made by Mittelstand company, Poly-Clip.

Part of dominating a niche is becoming indispensable to your customers. Mittelstand companies do that by collaborating with their customers to create better products.

Valuing People

Companies love to claim that “people are our greatest asset.” Then they treat people like a piece of machinery. Mittelstand companies treat their people like valuable people. Not parts. Not “assets.” The companies help the people become more valuable with lots of training, beginning with apprenticeship. The result is that turnover in Mittelstand firms is about 2 percent per year.

Things You Can’t Copy

You may be able to adopt those four elements, but you’ll have to do it in an American way. One thing we learned from studying Japanese companies, is that you have to drain away the things that are embedded in the culture or the economic ecosystem.

German culture values work in a way that doesn’t translate to the US. The country has a superb apprenticeship system that undergirds German companies of all sizes.

Things that Go Against the American Business Grain

If you want to adopt Mittelstand practices you have to shed some American business cultural baggage. We Americans laud start-ups and fast growth and entrepreneurial spirit. Mittelstand management is more conservative both financially and strategically.

Unless you’re located in Germany, you’re going to have to adapt to the culture and the economic ecosystem of wherever you are. If you don’t have a history of good relations with the people who work at your company, you can start today to fix that, but it will take a while. If you haven’t been managing conservatively and for the long term, you’ll need some time to clean up your balance sheet and change your way of thinking.

The Good News

Don’t despair. There are American companies very much like the Mittelstand companies. One of them is in Covington, Kentucky. Atkins & Pearce is a family owned business that is now in the seventh generation. Here’s how they describe themselves.

“Atkins & Pearce, Inc. (est. 1817) is a leading manufacturer of braided technical textiles based in Covington, Kentucky. We produce and process industrial cordage and twine, coated insulation sleeving, tubing, expandable sleeving, lacing tapes, tie cords, candlewick, and custom braided textile products. We offer our clients 200 years of fiber technology expertise and the most advanced textile processing capabilities on the market. We establish strong partnerships with clients that are founded on collaborating to achieve your growth goals.”

That’s sounds “Mittelstandish” to me. So does the way they pay attention to hiring and training. When Tom Hall and I wrote about them in Ruthless Focus, the average tenure of a day shift worker was just shy of 15 years.

Bottom Line

Before you attempt to learn the lessons of successful businesses from another culture or country, you need to drain away the effects of the culture and the economic ecosystem.

If you want to have the kind of success that the Mittelstand companies have, you have to do the basic four things they do, but do them in a way that’s right for you and for the business world you inhabit.

Start today to think about managing for the long term. Make your financial management as conservative as possible. Focus ruthlessly on a market that you can serve well and partner with your customers. Treat your people right and help them grow.

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