A UK Mittelstand, Mr Cameron?

David Cameron keeps saying that the UK can learn a thing or two from Germany’s Mittelstand. Can we?

UK Mittelstand

The UK’s medium-sized businesses are told to emulate the Mittelstand. Emulating Germany’s medium-sized, mostly family-owned businesses is seen as the way to boost growth, jobs and exports. While the Mittelstand is identified and recognised in Germany, there doesn’t appear to be such clarity of definition or recognition for the UK’s medium-sized businesses.

Mittelstand refers to small and medium-sized enterprises in German-speaking countries. Economists have been increasingly giving these companies more and more credit for Germany’s economic growth. These firms have prospered in specialised markets, earning good margins which finance more innovation and produce a virtuous circle. This is what the UK/Cameron is chasing.

Germany’s Mittelstand companies are a very important part of the country’s economy employing over 70% of the workforce. In the UK, firms with a turnover of between £10 million and £100 million represent less than 2% of businesses but generate 23% of economic revenue and 16% of all jobs!

There are a number of characteristics the archetypal Mittelstand companies tend to exhibit. They are:

  • typically privately-owned
  • highly focused, highly efficient with a razor-thin focus, learning to do the one thing really well” then diversifying internationally to enjoy great economies of scale”
  • mostly export-oriented focusing on innovative and high-value manufactured products. Consequently they occupy worldwide niche market leadership positions in numerous B2B segments
  • benefit from Germany’s apprentice system, which provides highly-skilled workers, and there is a “collaborative spirit that generally exists between employer and employees…”

Many of the successful Mittelstand companies combine a cautious and long-term oriented approach to business with the adoption of modern management practices, like employing outside professional management and the implementation of lean manufacturing practices and total quality management. Certainly, the better UK companies do this already.

Other so-called characteristics of the Mittelstand might include their emphasis on long-term profitability. Typically, Mittelstand companies work closely with universities and researchers and cluster themselves around big manufacturers. It should be noted that the attributes listed above apply mainly to those companies concentrated in machinery, auto parts, chemicals and electrical equipment.

So, the argument suggests that a culture and tradition of having a Mittelstand is the reason for Germany’s economic success. Correlation, however, does not imply causation; a correlation between two variables does not necessarily imply that one causes the other!

It would appear that there is a cause-and-effect (chicken and egg) loop that is difficult to unpick, for example, does the presence of a Mittelstand cause economic success or is it the reverse? While the cause-and-effect loop is interesting to explore elsewhere, it is believed by most economists that the correlation is too strong to ignore.

What is clear is that the UK’s medium-sized businesses have got lost in the political and economic mix. They are not economically as powerful as the FT100 companies; they are not as politically powerful as 4 million SME owners’ votes (along with those of their families and workers). Ironically, Britain’s medium-sized businesses are out-performing both smaller and larger businesses but they are the overlooked success story of the so-called economic recovery.

MDs and CEOs of medium-sized businesses are in a bizarre position: they are too savvy to believe the simplistic start-up hype yet they are below the radar of the media’s headlines. Cited as ‘the engine room of the British economy’ or the ‘forgotten army’, they have been overlooked for too long.

MDs and CEOs will ask themselves, ‘So what?’ Yes, it would be great to be supported and recognised but most do not believe that much will change. At least not in the short run. By the time any directive comes down from manifesto to parliamentary vote through a budget and is disseminated via civil servants then most sane business directors would rather depend on their own limited resources to make things happen for themselves. If, in the meantime, appropriate and relevant support becomes available then so much the better. But it had better meet the needs of the targeted client-companies.

I recently attended a meeting. The regional director of Medium-sized Business Support for a business support organisation proudly announced; “Because you are medium-sized, you can have one of our advisers. You should take advantage of this opportunity because it is free.” We MDs don’t buy into a programme because it is free. What we buy into is the value that can be added to our organisation. As long as ‘free’ is the USP of a programme then it will fail to resonate or engage its targets.

These people need to get a bit more sophisticated if they want to work with CEOs and MDs of UK’s medium-sized businesses. If not, we will resign ourselves to being a best-kept secret as well as a ‘forgotten army’!