Definition of Mittelstand
“Mittelstand”: can be used to describe an individual organisation or a type of specialist SME. It is essentially a family business, has a strong stakeholder commitment, and a focused product-service, usually in industrial sector niches, involvement. It is also identified by the term “Micro-Multinational” reflecting its focused interests and extensive international reach.
The term Mittelstand (strong specialist small enterprise) was coined in Germany and describes companies with 50 to 500 employees and up to €50m annual turnover (some do exceed this amount). Some Mittelstand companies have been existence in excess of 100 years.
The term has come to be used to describe derivatives of the German model. More than 99 per cent of all German firms belong to the “German Mittelstand” which contributes almost 52 per cent of total economic output and in 2011 it accounted for around 37 per cent of the overall turnover of German companies. It employs approximately 60 per cent of all employees.
The Mittelstand's training programmes contribute significantly towards the comparatively low level of youth unemployment. Overseas revenues have been growing for years, and stood at €186.1bn in 2010.
Almost all of Germany’s SMEs are family-owned, and many are managed by their owner. Their business policies tend to be especially long-term. Some 90 per cent of them operate in the business-to-business market and 70 per cent are based in rural areas (Economist: 2010).
Mittelstand companies focus on market niches, typically in areas such as mechanical engineering. They have spent the past 30 years working to turn their domination of German market niches into domination of global ones; for example; Kärcher – high-pressure cleaners and Koenig & Bauer, printing presses.
Compared with similar SME companies elsewhere in the world, the “German Mittelstand” is highly active in the industrial sector: almost a quarter of all employees work in this field. It is a major supplier of capital goods in new markets all round the world.
The German Mittelstand companies have a unique corporate culture driven by family ownership. Long-term survival and intergenerational transfer dominate objectives. Profit is expected as a result of attention paid to customers, and a focus on long-term mutual sustainability with key stakeholders, leading to an implicit “life-long” contract with the stakeholders. Flat hierarchies and informal channels of communication implement the Mittelstand philosophy. (also see: Database German World Market Leaders 2.2.2 (01.10.2010) – World Market Leader (narrower sense) © 2011 Prof. Dr. Bernd Venohr).
Structurally, their high equity ratio and a cautious approach to expansion has enabled these organisations to undertake medium-term and long-term investments, even in times of crisis. They finance most of their investment from their own equity (54 per cent) and bank loans (29 per cent). In 2011, 11 per cent of the investment was financed using public-sector assistance and venture capital funding.
German Mittelstand companies are some of the most innovative in Europe – 54 per cent of companies brought a product or process innovation to market in the 2008-2010 period – the EU average was only 34 per cent. Some €8.7m was invested in research and development in 2010. Spending on R&D rose by around 71 per cent between 2004 and 2010, compared with about 19 per cent for large companies.
Similar organisations exist elsewhere. Japan has a number of very successful medium sized organisations – chuken kigyo – strong medium-sized firms. Like the Mittelstand the chuken kigyo is not simply a part of the national economy, but the core of its industrial structure. It enables the country's bigger, well-known electronics firms to exist, as well as meeting foreigners' essential needs.
The chuken kigyo established itself in the 1980s on the world market as a major new actor in Japanese industry. Such companies serve more than 70 per cent of the worldwide market in at least 30 technology sectors worth more than $1 billion apiece. Their niche areas are mostly at the high-end of electronics, engineering and materials-science.
Roper and Malshe (2013) have identified the UK’s “mid-market’ organisations Growth Champions (companies with an annual turnover of between €20m and €1bn) as having stronger growth than the German Mittelstand companies in recent years.
While there is a tendency to for them to emphasise short-term objectives such as cost control, they do map the strategic characteristics of the Mittelstand model: a focus on expansion, on investing in new talent and setting ambitious growth targets; re-investing in the business for R&D, innovation, and for productivity improvement. See Groom and Connor (2013) for a detailed discussion of the report.
The Mittelstand model is working well, but globalisation is forcing it to adapt. Many German companies have opened sales and service outlets and even factories abroad. Wittenstein, a manufacturer of high-quality gears and drive systems in Baden-Württemberg, has chosen an optimal strategy: exports make up 57 per cent of its €200m annual sales, with most going to Europe and North America, and 9 per cent to Asia. It is also considering a possible move into China.
Despite, or perhaps because of, its caution, the Mittelstand is booming. Sales are reckoned by some to be growing at nearly 12 per cent a year. As René Obermann, the boss of Deutsche Telekom, recently remarked; “this is faster than the Chinese economy”.
The Mittelstand model has attraction for developed economies that lack the opportunities for offshore revenues afforded by developing manufacturing economies of scale. The Mittelstand offers the opportunity to develop knowledge based businesses that can achieve international responses and revenues.