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Lessons from Germany and strategic discipline

By Brett Crombie, director, Straightedge Accounting.

The tempestuous business environment of the past 18 months has led to bankruptcies for some businesses and record profits for others. In the spirit of never letting a crisis go to waste, it is timely to look at certain types of business that tend to better withstand economic upsets.

The German “Mittelstand” provides a good study of a business type that has shown it can withstand business crises better than others.

The Mittelstand is a term used to describe mid-sized and privately held companies in Germany, as distinct from corporate, publicly-listed firms. Mittelstand firms are often regarded as the backbone of the German economy, accounting for nearly 60 percent of employment.

Mittelstand firms have a common set of values and management practices. They tend to be conservatively managed, both in terms of financing and operating practices. Company independence, quality products, stability and longevity are all prioritised over short-term profitability.

Most Mittelstand firms produce niche, technology dependent products in sectors including machinery, chemicals, automotive, and electrical equipment. Examples that New Zealanders may be familiar with are Stihl (chainsaws), Miele (whiteware) and Bausch + Strobel (contact lenses and hospital equipment).

There has always been a lot of anecdotal evidence that these companies tend to perform better than others during crises, but until recently there has been little in the way of evidence-based research.

However, in 2020 a study was published by the Centre for Economic Studies in Munich that took an evidence-based, empirical approach to the issue and looked at the experience of firms during the 2008 Global Financial Crisis.

It surveyed close to 6000 firms across Germany, including both Mittelstand and non-Mittelstand firms. The outcome of the study was that Mittelstand firms indeed performed significantly better and were more stable than other firms during the crisis period.

The reasons for this outcome are varied, but one of the clearest is the idea of ‘strategic discipline’, which describes the philosophy of Mittelstand firms. There are three components to this: simplicity, resistance to short-term temptations; and a focus on implementability.

Strategic discipline can be contrasted with the concept of pivoting, a trendier management concept which centres on experimenting with ideas in the market and changing course depending on immediate results.

Cultivating simplicity

Mittelstand firms tend to deliberately limit key numbers, whether in the range of their products or services, the number of parts in their products, or the number of suppliers used. This simplicity extends to management and understanding that complex businesses tend to spawn new staff functions, new management layers and a range of consultants that firms do not actually need.

Resisting short-term temptations

By focusing instead on long-term competitiveness, Mittelstand firms tend to look past juicy looking short-term opportunities.

A good example is Stihl, which by the 1960s had become one of the top global firms in high-end chainsaws, along with US rivals Homelite and McCulloch. With the rise of big-box retailers, these US brands went ahead and earned windfall sales revenues by using this new distribution channel.

Stihl believed that selling through these big-box retailers would lead to pressures on margins, weaken its brand recognition and impact the quality of after sales service.  The firm went so far as to take out full-page ads in US newspapers stating; “the world’s number one selling brand chainsaw is not sold at Lowe’s or The Home Depot”. Sure enough, today Stihl is a far more recognisable brand than its US competitors.

Focusing on implementability

These firms tend to take a slow and steady approach to expansion, seeking to replicate in new markets what works in their home markets as much as possible.

In contrast to larger publicly-listed or co-operative firms, which often commit substantial resources into foreign expansion (think back to Air New Zealand’s ill-fated purchase of Ansett Australia, or Fonterra’s costly Beingmate investment in China as examples), Mittelstand firms make sure of their turf before investing heavily into foreign markets.

This careful approach to expansion also helps to keep management hierarchies flat and simple by slowly expanding their spans of control, avoiding added management layers and consultant costs which often come with rapid expansion.

Lessons for local government?

Not only can our businesses look to the Mittlestand for performance improvement lessons, so too can our local government sector.

Councils are not immune to the complexity, excessive management layers and reliance on consultants that Mittelstand firms deliberately avoid.

Short-term temptations such as decisions to sell council assets for short term cash windfalls would be contrary to the Mittelstand philosophy, as would expansion into projects beyond the scope of core services.

As local authorities become increasingly constrained financially, best practice lessons from leading sectors of the business world, such as the Mittelstand, are likely to become especially valuable.

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