Presented in South Africa at the National SMME Policy Colloquim 2015 by Prof. Dr. Michael Woywode, Institute for SME ResearchUniversity of Mannheim.

1. Prof. Dr. Michael Woywode
Institute for SME Research
University of Mannheim
Institut für Mittelstandsforschung
Universität Mannheim
L9, 1-2
68161 Mannheim
Tel. 0621.181.2894
www.ifm.uni-mannheim.de
woywode@ifm.uni-mannheim.de
Mittelstand in Germany: An international
perspective on sustainable business

2. The Metropolregion Rhein-Neckar (MRN) – a powerful region
where excellent science meets powerful economic actors
2
• 39 universities and
research labs
• 6 DAX stock market
listed companies
• Many family firms and
hidden champions,
• numerous start ups

3. THE “GERMAN MITTELSTAND”: ECONOMIC
RELEVANCE, CHALLENGES, AND TRENDS
3

4. Introduction
From the sick man of
Europe (2004, Economist)
To
Question: What is the contribution of the Mittelstand
to Germany‘s surprising recovery?
2014, Economist

5. Agenda
1. What is the
German
Mittelstand?
5

6. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand
?
6

7. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand?
3. Challenges
and trends
7

8. Agenda
1. What is the
German
Mittelstand?
8

9. Importance of small and medium-sized businesses
No. of employees
Share in the economy in percent
10-19
50-99
100-499
20-49
1-9
> 500
9,6%
80,4%
2,2%
6,0%
1,6%
0,3%
Share of small and medium-sized businesses in the economy
9
Source: ifm / destatis
small business
medium-sized
business
large business
Hidden
champions: 200 -
2000 employees

10. 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
© Institut für Mittelstandsforschung der Universität Mannheim 10
Source: ifm / destatis
55,2%
of business
taxes

11. 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
© Institut für Mittelstandsforschung der Universität Mannheim 11
Source: ifm / destatis
55,2%
of business
taxes

12. Mittelstand contributes to low youth unemployment
12
• 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)

13. 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
1. What is the
German
Mittelstand?
13

14. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand?
1. Economic conditions
2. Management
• Investment behavior
• Supporting institutions
• Internationalization
• Management innovations and
professionalization
14

15. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand?
1. Economic conditions
2. Management
• Investment behavior
• Supporting institutions
• Internationalization
• Management innovations and
professionalization
15

16. Economic dependence
Currently, German medium-sized businesses profit from a favourable
economic situation
16

17. Economic dependence
Credits and liquidity are easily available
17

18. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand?
1. Economic conditions
2. Management
• Investment and innovation behavior
• Supporting institutions
• Internationalization
• Management innovations and
professionalization
18

19. Sources of finance
19
• 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. Investing in innovation
Hidden
Champions
> 5%
© Institut für Mittelstandsforschung der
Universität Mannheim
20
Medium-sized businesses invest in innovations – however, not as much as
large businesses
SME
Large companies
INNOVATION EXPENDITURES
AS PERCENTAGE OF SALES

21. 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)
21
Source: Federal Ministry of Economics and Technology (www.bmwi.de)
Hidden
Champions
> 5%

22. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand?
1. Economic conditions
2. Management
• Investment and innovation behavior
• Supporting institutions
• Internationalization
• Management innovations and
professionalization
22

23. SME supporting institutions in Germany
SME
EU Bund State Municipality
ERP-Funds
Förderdatenbank
State owned banks
EIB-Group
EU-RegionalFund
EU-Social Fund
Euro-Info-Centre
Promotion of
local economy
KfW
Programs
Guarantee banks
Chamber of
Handcraft
Ministry of Economics
of the states
Federal ministry
of
Economics
Chamber of
Industry and
Commerce
Corporate-
growth
Research &
Innovation
Business-
start-up
Foreign-
trade
Labour Consulting
Vocational
Training
Regional-
promotion
23
Source: ifm

24. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand?
1. Economic conditions
2. Management
• Investment behavior
• Supporting institutions
• Internationalization
• Management innovation and
professionalization
24

25. Internationalisierung
German medium-sized businesses internationalize – at present even more
than in the past
25
Source: Federal Ministry of Economics and Technology (www.bmwi.de)

26. Exports 2003-2012 in Euros
26

27. Per Capita Exports 2003-2012 in Euros
27

28. 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
28
2
1
Source: ifm
3

29. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand?
1. Economic conditions
2. Management
• Investment behavior
• Supporting institutions
• Internationalization
• Management innovations and
professionalization
29

30. Management innovations
0% 20% 40% 60% 80% 100%
Six Sigma
Business Intelligence
Business Process Reengineering
KnowledgeManagement
Balanced Scorecard
EnterpriseResource Planning
Work LifeBalance
ChangeManagement
CorporateSocialResponsibility
Shareholder ValueManagement
Strategic Alliances
Just-In-Time
JointVentures
Customer Relationship Management
Lean Management
Managementby Objectives
Key AccountManagement
Benchmarking
Outsourcing
Quality Management
ISO 9000
Quality Circles
Knowledge
Implementation
30
Source: ifm
Quality
Efficiency
Customer

31. 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
31
Source: ifm Mannheim

32. The number of employees in Germany is rising among the biggest top
500 German family businesses relative to the DAX companies
32
© Institut für Mittelstandsforschung der Universität Mannheim

33. Agenda
1. What is the
German
Mittelstand?
2. Quo vadis –
German
Mittelstand?
3. Challenges
and trends
33

34. Demographical change
Declining birthrates: Acquiring qualified employees – also from abroad –
will be one of the main challenges for the next decades
34
SMEs are increasingly
recruiting internationally

35. Successions have an increasing economic impact
Corporate
Successions (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
35
„Hunting season“ for
international
investors

36. 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
36
Source: Simon 1996

37. 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
37
Source: Federal Ministry of Economics and Technology (www.bmwi.de)

38. The Hidden-Champion-Strategy
© Institut für Mittelstandsforschung der Universität Mannheim
Internationalization
Highly qualified
and motivated
employees
Strong
Leadership
and
ambitious goals
Innovative
orientientation
Specific competitive
advantages
Focus -
Value capturing
business model
Closeness to
customers
Conservative
Financing – self
financed growth
High degree of
internal value creation

39. Thank your for your attention
39

40. Introduction: Institute
40
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, …

41. 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
41
Source: Diagnose Mittelstand 2012
Development of firm‘s equity capital
In 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 %