In the 1990’s, Hermann Simon conducted pioneering research into the success of Germany’s “Mittelstand” companies – a group of medium-sized, highly successful companies that he called the “Hidden Champions”. The Confederation for British Industry (CBI) made a reference to this term in their “Future Champions” research last year, which stressed the importance of investing in the UK’s medium-sized business sector. The interesting question is: what lessons can the UK’s Future Champions learn from Germany’s Hidden Champions?
Who are the Hidden Champions?
The Hidden Champions are a group of medium-sized German companies that have achieved market dominance, but they often have low profiles. Many enjoy world market share of 70-90% in their given market and are ‘truly global’ firms. They are typically family-owned businesses and have proven that medium-sized businesses can out-perform other firms in the private sector. Germany’s Hidden Champions have certain characteristics in common that could provide useful lessons for UK firms.What do they have in common?
Extensive research has been conducted into the performance and characteristics of Germany’s world-leading Hidden Champions, most notably by Hermann Simon himself, but also by others such as Prof. Dr. Berndt Venohr of the Berlin School of Economics.In 2008, Prof. Venohr summarised the characteristics of what he calls the “Mittelstandt Champions” into three primary areas: 1) a clear strategy of pursuing Global dominance in narrowly defined niche markets; 2) operational effectiveness through deployment of world class processes; and 3) a family-based governance modeldescribed as “enlightened family capitalism”, as shown in the diagram below.
What questions does this raise for UK firms?
The framework raises some interesting questions for leaders of UK medium-sized firms.• Firstly, are you following the right strategy? The research shows that the Hidden Champions follow a global-niche strategy. If medium-sized companies try to operate in mass markets, they will find it difficult to compete with the scale of larger firms. The Hidden Champions select a clearly defined customer group and engage very closely with those customers to meet their needs on a global scale. They cooperate with their customers to develop innovative products and services that meet their customer needs, with a focus on high performance rather than low price. Closeness to the Customer is a key source of competitive advantage.
• Secondly, how effective are your operational processes? The Hidden Champions focus on improving the efficiency of their business and operational processes. They actively seek better ways of doing things and have processes in place for sharing best practices across geographic and organisation units. They also have a strong focus on target setting & performance management. Lower value added activities are often candidates for outsourcing to lower cost economies such as China.
• Lastly, do you have the right governance in place? Many of the Hidden Champions are family-owned businesses, but with externally recruited, professional management. This provides the right balance of the benefits of family ownership and the experience of professional managers. The result is that the Hidden Champions have a strong culture, with loyalty amongst their employees and an ability to make decisions for the long term.
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