Issue 8: January 2014

SUCCESS SECRETS SHARED: LEARNING FROM THE BEST MITTELSTAND AND BRITISH GLOBAL NICHE CHAMPIONS

By Alessa Witt, PhD student & Chris Carr, Professor of Corporate Strategy, both at Edinburgh University Business School

Globalisation opens up new and exciting opportunities for businesses, but for many it can be more of a death sentence. Larger multinationals may sometimes thrive, but many smaller players become victims of increasing global consolidation. One winning strategy, particularly appropriate for smaller businesses is to pursue a global niche strategy.

Germany of course benefits from its well-known large companies such as BMW and Siemens. Less fully appreciated is the unique contribution of its mid-sized businesses. It is these companies that  have pioneered global niche strategies and it is this which has been the real key to Germany’s competitive success. Germany inherits several unknown global niche companies such as Wanzl, W.E.T. and 3B Scientific. Primarily found in B-2-B markets they are leading manufacturers in niches such as shopping trolleys (Wanzl), automotive heating systems (W.E.T.), and medical teaching aids (3B Scientific). These companies may be considered to be the backbone of the German economy due to their outstanding international performances. 

These global niche companies are mostly part of the German “Mittelstand”. The Mittelstand approach has received enormous attention internationally and has become an ambition of many neighbouring countries. George Osborne recognises the importance and suggests, “we should all learn the lessons of the successful Mittelstand Model.” But what exactly is the German Mittelstand model?

The term loosely translates to mid-cap companies but it causes a lot of confusion in a strategic context. Even larger businesses such as Bosch would consider themselves part of the Mittelstand. The notion of the Mittelstand proves difficult to interpret, as it is as much to do with a mentality reflecting deep-rooted German traditions, rather than just a question of size. What they share is their philosophy of longevity, family ownership, and innovativeness. So what can Great Britain really learn from Germany here?

Our research at the University of Edinburgh Business School focuses on an elite group of Mittelstand companies, which are global niche champions. These companies operate in small quirky niches securing at least one of the top three global positions in their defined market. Whilst the world is their market, they remain just below the radar of large multinationals. They achieve this by selling typically unsexy but highly specialised products. Global niche champions are often lone wolves in their segments due to their unique and thus indispensable expertise. We find evidence of global niche champions selling products in 120 markets, often achieving monopolistic positions even achieving global market shares as high as 95%.

These types of companies are primarily found in Germany but our research also identifies several global niche champions in Great Britain and indeed Scotland. Kilfrost for example, is the globally leading manufacturer of de-icing fluids exporting to airports around the world. Global niche champions can be found in various industries including several British service companies. Roughly 60 companies can be found in Great Britain, though Germany benefits from some twenty times more of these unique global niche champions. So why is Germany doing better than Great Britain here and what exactly are they doing differently?

..These companies operate in small quirky niches securing at least one of the top three global positions in their defined market.

Preliminary results of our on-going research do, however, suggest several overlapping success strategies pursued by global niche champions from both nations. After visiting and interviewing many of these champions, we find recurring commonalities including strong leadership, innovativeness, niche market focus, close customer relationships, and global presence. These companies are managed by visionary leaders, who define clear future goals creating ambitious working environments. Continuous innovation and improvement of existing technology is the key to maintain market leadership. Rather than diversify, they develop competitive advantages through intense focus and specialisation on core products. Such niche champions are better able than larger players to respond to customer demands through customisation. Long-lasting relationships and outstanding service therefore form an essential part of their business success. The full potential of their niche is then further unlocked through vigorous international expansion and serving customers all around the world. 

In both countries we find outstanding champions following a global niche strategy but slightly different strategic approaches are required in each country, reflecting differences in terms of ownership structure. These lead to differences in international market entry choices and outsourcing behaviour.

German companies remain family-owned and privately held, whereas the British counterpart is predominantly publicly traded. Whilst Germans enjoy their financial secrecy, especially for their long-term investments, British companies have to thrive in the face of stock market pressures. Germans prefer organic international growth and choose high-investment entry modes such as green-field sites enabling full control over foreign subsidiaries. The British, on the other hand, primarily venture abroad using acquisitions,  which allows  them to move considerably faster. Distinct differences are especially found in their value-chains. Whilst German businesses preen themselves with their “Made in Germany” labels, national production facilities and supply chains, we find that more British companies are outsourcing production to low-cost markets.

So why is Germany doing better than Great Britain here and what exactly are they doing differently?

The key success strategies of German global niche champions are traits closely associated to the Mittelstand such as their philosophy of family ownership, long-term goals, investment into the workforce, and close involvement with local social and cultural institution. Therefore, can the success of German global niche champions be transferred to Great Britain or is it embedded in the German context and culture?

Our German champions inherit exactly those Mittelstand values. Their loyalty towards their home country is reflected in many of their strategies. The social benefits of national production, for example, are reflected in redundancy and increasing apprenticeship. Close ties to local universities foster skilled, and especially young workforce paving a path for increasing employment in future. More importantly, it encourages cluster formation in Germany. The density of businesses found in Germany triggers the emergence of more specialised business but more importantly it attracts foreign direct investment.

British businesses in contrast are generally more willing to move their headquarters overseas. The exception here is many often Scotland-based oil and gas associated businesses. Whilst headquarters might remain within national borders, we find alarming evidence of Scottish and British companies shifting their production to low cost destinations. Absolutely unlike German counterparts, there are successful British champions lacking any home production facilities at all. More needs to be done to foster the home base to secure Britain’s economic future. Ultimately, the longevity of German companies may be an indication of more sustainable success stories. And they contain lessons that all of us can learn from. 

Alessa Witt is a PhD student & Chris Carr is Professor of Corporate Strategy, both at Edinburgh University Business School

By Alessa Witt, PhD student & Chris Carr, Professor of Corporate Strategy, both at Edinburgh University Business School

Issue 8: January 2014

Issue 8: January 2014

SMART CITIES: SMART SERVICES: SMART WORKING

Smart Cities: Smart Services: Smart Working Editorial

In focusing on 'Smart Cities' let's start with a few teaser questions (answers at the foot of this column)...

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