Mittelstand in Germany: An international perspective on sustainable business

transcript

Prof. Dr. Michael WoywodeInstitute for SME ResearchUniversity of Mannheim

Institut für MittelstandsforschungUniversität Mannheim

L9, 1-268161 MannheimTel. 0621.181.2894

www.ifm.uni-mannheim.dewoywode@ifm.uni-mannheim.de

Mittelstand in Germany: An international perspective on sustainable business

The Metropolregion Rhein-Neckar (MRN) – a powerful region where excellent science meets powerful economic actors

• 39 universities and research labs

• 6 DAX stock market listed companies

• Many family firms and hidden champions,

• numerous start ups

THE “GERMAN MITTELSTAND”: ECONOMIC RELEVANCE, CHALLENGES, AND TRENDS

Introduction

From the sick man of Europe (2004, Economist)

Question: What is the contribution of the Mittelstandto Germany‘s surprising recovery?

2014, Economist

Agenda

1. What is the German Mittelstand?

Agenda

2. Quo vadis – German Mittelstand?

Agenda

3. Challenges and trends

Agenda

Importance of small and medium-sized businesses

No. of employeesShare in the economy in percent

100-499

Share of small and medium-sized businesses in the economy

Source: ifm / destatis

small business

medium-sized business

large business

Hidden champions: 200 - 2000 employees

Significant economic impact

The economic impact of the Mittelstand in Germany is significant

40,3% of sales

99,7% of businesses

70,9% of employees

82,4% of apprentices

55,2% of business taxes

Significant economic impact

The economic and social impact of the Mittelstand in Germany is significant

40,3% of sales

99,7% of businesses

70,9% of employees

82,4% of apprentices

55,2% of business taxes

Mittelstand contributes to low youth unemployment

• More than 80 percent of trainees receive their training in the German Mittelstand

• Due to its long-term oriented strategic orientation, the Mittelstand can be regarded as a major factor ensuring low youth unemployment compared to other European countries

• Vocational training system in Germany guarantees a high quality of training

• 2012 more than 550.000 apprenticeship contracts were newly signed

Source: Ministry of Education and Technology (www.bmbf.de)

Preliminary conclusions

• The Mittelstand plays a crucial economic and social role in Germany

• Quantitative definitions for the Mittelstand do not suffice

• Instead, qualitative characteristics are very important when aiming to understand what the Mittelstand is and how it acts

The Mittelstand is not a simple statistic, but an important element of the social market economy

Agenda

1. Economic conditions

2. Management

• Investment behavior

• Supporting institutions

• Internationalization

• Management innovations andprofessionalization

Agenda

2. Management

• Management innovations and professionalization

Economic dependence

Currently, German medium-sized businesses profit from a favourable economic situation

Economic dependence

Credits and liquidity are easily available

Agenda

2. Management

• Investment and innovation behavior

Sources of finance

• Most investments in the German Mittelstand are financed from cash flow/own funds (54 percent) and bank loans (29 percent)

• The importance of bank loans drops

• Alternative forms of financing (e.g. venture capital, private equity) are only used hesitantly

Source: Federal Ministry of Economics and Technology (www.bmwi.de)

20© Institut für Mittelstandsforschung der Universität Mannheim

Investing in innovation

Hidden Champions

Medium-sized businesses invest in innovations – however, not as much as large businesses

Large companies

INNOVATION EXPENDITURESAS PERCENTAGE OF SALES

International comparison of investments in R&D

• More than 50 percent of the companies from the Mittelstand have created at least one process or product innovation between 2008 and 2010

• In 2010, the Mittelstand has invested roughly 9 billion Euros in R&D

• Between 2004 and 2010, investments in R&D have increased by 71 percent (large companies: 19 percent)

Hidden Champions

Agenda

2. Management

• Investment and innovation behavior

SME supporting institutions in Germany

EU Bund State Municipality

ERP-Funds

Förderdatenbank

State owned banksEIB-Group

EU-Regional Fund

EU-Social Fund

Euro-Info-Centre

Promotion oflocal economy

KfWPrograms

Guarantee banks

Chamber of Handcraft

Ministry of Economics of the states

Federal ministryof

Economics

Chamber of Industry and Commerce

Corporate-growth

Research &Innovation

Business-start-up

Foreign-tradeLabour Consulting Vocational

TrainingRegional-promotion

Source: ifm

Agenda

2. Management

• Management innovation and professionalization

Internationalisierung

German medium-sized businesses internationalize – at present even more than in the past

Exports 2003-2012 in Euros

Per Capita Exports 2003-2012 in Euros

Internationalization during the European crisis

• Although export turnover is still growing, many German SMEs face challenges when aiming to internationalize

• Challenge: At present, it is hard to make the first learning steps within Europe

Source: ifm3

Agenda

2. Management

• Management innovations andprofessionalization

Management innovations

0% 20% 40% 60% 80% 100%

Six SigmaBusiness Intelligence

Business Process ReengineeringKnowledge Management

Balanced ScorecardEnterprise Resource Planning

Work Life BalanceChange Management

Corporate Social ResponsibilityShareholder Value Management

Strategic AlliancesJust-In-Time

Joint VenturesCustomer Relationship Management

Lean ManagementManagement by ObjectivesKey Account Management

BenchmarkingOutsourcing

Quality ManagementISO 9000

Quality Circles

Knowledge

Implementation

Source: ifm

Quality

Efficiency

Customer

Management innovations

Medium-sized businesses adopt management innovations comparatively slowly, but focused

• The Mittelstand is skeptical towards management fashions – it wants management concepts that bring immediate return

• Focus on quality enhancing concepts, efficiency, customer oriented concepts

31Source: ifm Mannheim

The number of employees in Germany is rising among the biggest top 500 German family businesses relative to the DAX companies

Agenda

3. Challenges and trends

Demographical change

Declining birthrates: Acquiring qualified employees – also from abroad – will be one of the main challenges for the next decades

SMEs are increasingly recruiting internationally

Successions have an increasing economic impact

CorporateSuccessions (70.900)

Family succession (31.000) 43,8%

Buy-out (enterprise)(7.300) 10,2%

Liquidation(5.900) 8,3%

Buy-out (external)(11.700) 16,5%

Non-buy-out sale(15.000) 21,1%

Source: ifm/ ZEW 2010

Change in ownership & control leads to a variety of outcomes, which have a strong influence on the future shape of the company

„Hunting season“ for international

investors

Hidden Champions - characteristics

• privately owned family enterprises• often with a long history• >200 and <2000 employees• global leader of a niche market• high equity capital quota• high export rate of > 50 %

Characteristics of Hidden Champions in the German Mittelstand

Source: Simon 1996

Hidden Champions – international comparison

No other country in the world has as many hidden champions as Germany

Around 1.300 small and medium sized enterprises are world market leaders and have positioned themselves in successful market niches

High number of hidden champions especially in machinery construction, electrical industry and industry products

The Hidden-Champion-Strategy

Internationalization

Highly qualified

and motivated employees

Strong Leadership

and ambitious goals

Innovativeorientientation

Specific competitiveadvantages

Focus -Value capturing business model

Closeness to customers

ConservativeFinancing – selffinanced growth

High degree of internal value creation

Thank your for your attention

Introduction: Institute

Institute for SME Research and Entrepreneurship, University of Mannheim

Interdisciplinary research institute with a focus on German SMEs Core topics

Family Businesses (New) Entrepreneurship Management, Strategy and Organization

Director: Prof. Dr. Michael Woywode Former positions: University of Karlsruhe, RWTH Aachen, Stanford

University Publications: Academy of Management Journal, Organization Studies,

American Journal of Sociology, Journal of Institutional and Theoretical Economics, Journal of Industrial Economics

Team: 25 researchers from various backgrounds Research funding: DFG, Economics Ministry (state of Baden-

Wurttemberg and national), Ministry for Education,Volkswagen Stiftung, …

Investment behavior: Focusing on equity

Businesses of all sizes have increased their equity capital continuously after the financial crisis and are now less dependent on banks

Source: Diagnose Mittelstand 2012

Development of firm‘s equity capitalIn percent according to size classes

0 to 1 mill. €Small enterprises

1 to 50 mill. €Medium enterprises

0 to 50 mill. €“Mittelstand”

> 50 mill. €Large enterprises

Equity ratio of hidden champions often > 50 %