Samiksha Jaiswal (Editor)

Mittelstand

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Mittelstand

Mittelstand commonly refers to small and medium-sized enterprises in German-speaking countries, especially in Germany, Austria and Switzerland, however Britain also has its own. The term Mittelstand proves difficult to translate and causes a lot of confusion. The majority of definitions define the Mittelstand as a statistical category and most commonly suggest that Mittelstand firms are small and medium-sized enterprises (SMEs; German, kleine und mittlere Unternehmen or KMU) with annual revenues up to 50 million Euro and a maximum of 499 employees.

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The term is not officially defined or self-explanatory hence, in English linguistic terms SMEs are not necessarily equivalent to the Mittelstand. In fact, even larger, and often family-owned, firms claim to be part of the Mittelstand, such as Robert Bosch based on the Mittelstand's positive connotations. The term Mittelstand mainly applies to mid-sized firms as opposed to larger listed companies and most importantly Mittelstand companies are characterized by a common set of values and management practices.

Already Ludwig Erhard, the former Economics Minister who crafted the post-war (West) Germany's economic miracle (German: Wirtschaftswunder) warned not to reduce the Mittelstand to a mere quantitative definition, but instead emphasized more qualitative characteristics which embody the German Mittelstand, as it is "...much more of an ethos and a fundamental disposition of how one acts and behaves in society."

What does define the Mittelstand, is a much broader set of values and more elastic definitions. Business historians define various traits associated with Mittelstand firms, such as:

  • Family ownership or family-like corporate culture
  • Generational continuity
  • Long-term focus
  • Independence
  • Nimbleness
  • Emotional attachment
  • Investment into the workforce
  • Flexibility
  • Lean hierarchies
  • Innovativeness
  • Customer focus
  • Social responsibility
  • Strong regional ties
  • The latest English publication on Mittelstand firms by Prof. Bernd Venohr, Prof. Jeffrey Fear and Dr. Alessa Witt highlights that: "These companies are predominantly run by classic “owner-entrepreneurial families” (Unternehmerfamilien) seeking to sustain the business by instituting a core ideology of longevity, conservative long-term financing, and operating practices." The Mittelstand acts as a counterpoint to a singular focus on shareholder value and dispersed investor-orientated shareholding.

    Germany's business 'landscape' and the role of the Mittelstand

    Due to the broad set of values which define the Mittelstand, Venohr, Fear & Witt (2015) divide Germany's 'business landscape' into three distinct categories of Mittelstand firms.

    1. 'Classic' SME-type Mittelstand firms, which account for 99% of German firms (revenue below 50 million EUR).
    2. 'Upper'-sized Mittelstand firms, which account for 0.34% of German firms (revenues between 50 million EUR up to 1 billion EUR).
    3. Large cooperations, which account for 0.02% of German firms (revenues over 1 billion EUR) and are more well-known companies, including the DAX 30 companies.

    This pyramid shows that over 99% of German firms are Mittelstand firms but 0.34 depart from the classic small and medium-sized enterprise (SMEs) definition. The two categories of 'classic' and 'upper' Mittelstand firms in Germany account for 68% of Germany's exports. In comparison, Germany's larger cooperation generate 32% of Germany's exports. The 'upper'-sized Mittelstand firms (revenues between 50 million EUR and 1 billion EUR) form a unique and distinctive group, as they are the most export-orientated group of firms in Germany's business landscape contributing significantly to Germany's sustained export success. As such, Mittelstand firms clearly form the backbone of the German economy.

    Defining the term 'Mittelstand'

    The German word Stand refers to an estate, from the medieval model of society, under which a person's position was defined by birth or occupation. There were three principal levels, the upper one being the aristocracy, the middle one (the Mittelstand) the free bourgeoisie of the cities, and the lower one the peasants. Today, the term is used with two meanings. The first refers to small and medium-sized enterprises (SME; German, kleine und mittlere Unternehmen or KMU), as defined by number of employees and turnover. The second meaning refers to any family-run or -owned business (not necessarily a SME).(Note that the correct term to describe households of middling income would be Mittelschicht, with the English translation middle class.)

    The Mittelstand explained

    Mittelstand companies are "highly focused, achieving unprecedented efficiencies by designing a business model with a razor-thin focus and learning to do the one thing really well"; then to "compensate for their razor-thin focus . . . they diversify internationally and enjoy great economies of scale". Mittelstand companies benefit from Germany's apprenticeship system, which provides highly skilled workers; and there is a "collaborative spirit that generally exists between employer and employees . . . . In the post-reunification recession, it seemed only natural to German workers to offer flexibility on wages and hours in return for greater job security.".

    Many Mittelstand companies are export-oriented. They focus on innovative and high-value manufactured products, and occupy worldwide niche market leadership positions in numerous B2B segments. They are typically privately owned and often based in small, rural communities. Many of the successful Mittelstand companies combine a cautious and long-term-oriented approach to business with the adoption of modern management practices, such as employing outside professional management, and the implementation of lean manufacturing practices and total quality management. The Mittelstand emphasis on long-term profitability stands in contrast to the public corporations of many countries (including German public corporations) which face quarterly or annual pressure to meet expectations.

    Management model "Made in Germany"

    The Mittelstand model is most specifically defined in the 2015 publication "The Best of German Mittelstand", which summarizes the distinct management model that "dovetails strategy, leadership and governance principles, with core processes in a unique blend, creating a finely tuned process."

    1. Strategy: Global niche dominance
    2. Governance: 'Enlightened' family capitalism
    3. World class performance in core processes
    4. Locational advantages: The German microeconomic business environment

    Britain's Mittelstand

    The Mittelstand in Britain, sometimes called the Brittelstand or UK Mittelstand (McMittelstand in Scotland) plays as important a role to the UK economy as they do in Germany. Figures from the British government state that they employed 14.4 million people in the U.K. in 2013. Furthermore, the European Commission's performance review of UK this year estimated their gross value added at 473 billion euros ($595.4 billion) or 49.8 percent of the U.K. economy. The Confederation of British Industry (CBI), has long urged for the backing of the British Mittelstand. Help to grow schemes have been invested to help the British Mittelstand to grow as a result it has since been growing rapidly, and in some cases has outpaced it's European rivals.

    Whilst continuing to grow, a recent study[1] which performed a comparison between German and British successful mid-cap companies suggests that British firms are far more short-term orientated in terms of management and policy raising the question whether the UK Mittelstand can endure over time in the same manner as the German equivalent, something the British government hopes to work on by embracing a longer term place.

    Mittelstand's main sectors

    Germany's Mittelstand is heavily concentrated in:

  • machinery
  • auto parts
  • chemicals
  • electrical equipment
  • Industrie 4.0

    While the Mittelstand has served the German economy well since World War II, it is now faced with questions about how it will adapt to the digital revolution of the 21st century. Many of the industrial machines produced by the Mittelstand are quickly being connected to the Internet of Things (IoT), from manufacturing equipment that can warn owners when material is low to cars that are connected to digital entertainment systems. Strides have recently been made by firms such as Trumpf, which in October 2015 unveiled a digital platform called Axoom that can connect machines built by Trumpf and others to collect data that can be used to help firms improve their operating efficiency.

    Germany’s National Academy of Science and Engineering (Acatech) has addressed the challenge by introducing the concept of "Industrie 4.0" in 2013, calling for German manufacturing firms to enter the IT revolution by "consistently integrating information and communication technology into its traditional high-tech strategies so that it can become the leading supplier of smart manufacturing technologies."

    The cause of Industrie 4.0 has been taken up by the German government and is a favorite theme of Chancellor Angela Merkel. The government has invested 200 million euros in Industrie 4.0 research. With this policy, the government seeks to create test beds for new ideas in industry and to convince the smaller Mittelstand firms to take up the cause of digitization.

    References

    Mittelstand Wikipedia


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