Mittelstand: The Family Business Titans of Germany

Mittelstand: The Family Business Titans of Germany
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In today’s business climate it that if something has been proven successful – whether it be products, office designs, management structures, or training procedures – CEO’s from all corners of the globe are only too happy to adopt it.

So why hasn’t the world been able to cut and paste Germany’s Mittelstand which has ben extremely successful for a majority of their businesses for hundreds of years?

What is Mittelstand?

The answer to this question – as the attempts to replicate it – is not as simple as it first appears. The generally accepted definition of the term refers to the small to medium enterprises, mostly in the business of manufacturing exports, which can be found in the smaller cities and communities throughout Germany, Austria, and Switzerland.

The problem with this definition is that it fails to adequately capture the true nature of what makes a company a Mittelstand, because Mittelstands come in a stunningly large range of sizes. Today, there are three tiers of Mittelstand:

  1. Classic – A firm below 50 Million Euros in revenue
  2. Upper – A firm between 50 Million and One Billion Euros in revenue
  3. Large – A firm above One Billion Euros

Approximately 99% of German firms fall under the category of ‘Classic’ Mittelstands, and when combined with ‘Upper’ Mittelstands, the group accounts for 68% of Germany’s total exports. So if these enterprises can range from small Mom & stores to a large corporation with more than a billion Euros in revenue, what exactly makes a Mittelstand a Mittelstand, and how do they differ from SME’s that can be found in other parts of the world?

The Nature of the Mittelstand

The defining quality of the Mittelstand has more to do with corporate philosophy and practices than size or product. Generally speaking, they tend to be family-owned companies that have remained in family hands over several generations. They tend to operate conservatively, placing a premium on long-term stability rather than quickly increasing profit margins. Mittelstands are also known to make considerable investments in employee benefits and well-being as well as investments into the local community in which they operate. As a result, they tend to generate a great deal of loyalty both within the ranks of management and employees as well as from the community residents. Perhaps, most importantly, they are very, very successful. And the impact of their success reaches far beyond that of its owners – thanks to their deep commitment to local community through apprenticeship programs, Germany’s under 25 unemployment rate is a staggering 7.8%, far less than those of other European economies such as Sweden’s 22% and Spain’s 54%.

I’ll Have What She’s Having

In light of the Mittelstands’ success as growth drivers of the economy, there have been a number of foreign emissaries who have traveled to Germany to visit and study the impact of these firms. One of the major delegations hailed from South Korea where there has been a shift in public policy to support small to medium enterprises and wean the economy off of the dependence on a handful of mega corporations. Similar fact finding missions were undertaken by Egypt, Iran, and the United Kingdom, where in 2011, Chancellor George Osborn called on British firms to “learn the lessons of the successful Mittelstand model”. And although there appears to be no shortage of countries that seek to replicate the German success, many have discovered that the Mittelstand model is so uniquely inter-woven into the cultural DNA of these communities, and not easily replicated elsewhere.

The most glaringly obvious problem in setting up similar structures outside of Germany is that many of the fundamental tenants of Mittelstand are counter-intuitive to standard business practices around the world. How do you convince CEO’s in fiercely capitalist societies like South Korea and the United States that they should spend more than they need to in employee benefits and community support when it will eat into the bottom line? Cost cutting and increasing profits are more than just a guiding principle for companies – it is a raison d’etre. Furthermore, with many CEO bonuses tied to profit performance, it is often difficult to convince them to take a conservative growth approach that favours long-term stability.

Will Mittelstand Remain Elusive?

Could it be that Mittelstand is the great white whale of the global business community? Is it destined to remain a unique corporate way of life that cannot be implemented outside of a handful of Germanic societies? With much of the world descending to greater income inequality and increasing corporate power, all eyes will be on whether models like the Mittelstand can be the answer to the social tensions in the 21st century economy.