Mittelstand


Mittelstand commonly refers to a group of stable business enterprises in Germany, Austria and Switzerland that have proved successful in enduring economic change and turbulence. The term is difficult to translate and may cause confusion for non-Germans. It is usually defined as a statistical category of small and medium-sized enterprises with annual revenues up to 50 million Euro and a maximum of 500 employees.
However, the term is not officially defined or self-explanatory, so the English expression "small and medium-sized enterprises" is 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, more importantly, Mittelstand companies are characterized by a common set of values and management practices. In Britain different terms have been devised by the media to describe their own mittelstand companies, such as Brittelstand.
Ludwig Erhard, the Economics Minister who crafted post-war West Germany's economic miracle warned against reducing 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."

Characterization

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
A publication on Mittelstand firms by Venohr, Fear and Witt highlights: "These companies are predominantly run by classic 'owner-entrepreneurial families' 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-oriented shareholding. Another and more recent publication by David Audretsch, Erik Lehmann and Julian Schenkenhofer underlines that "here are between six and 14 characteristics distinguishing a Mittelstand company, ranging from small size to governance, human resource relations, linkages to the local community, finance and long-term orientation, among other things. Firm size, i.e. being classified as an SME, is just one among multiple key salient characteristics"

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

Due to the broad set of values which define the Mittelstand, Venohr, Fear & Witt 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.
  2. 'Upper'-sized Mittelstand firms, which account for 0.34% of German firms.
  3. Large corporations, which account for 0.02% of German firms 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 definition. The two categories of 'classic' and 'upper' Mittelstand firms in Germany account for 68% of Germany's exports. In comparison, Germany's larger corporations generate 32% of Germany's exports. The 'upper'-sized Mittelstand firms form a unique and distinctive group, as they are the most export-oriented 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''.
The Mittelstand is not a rigid economic entity. On the contrary, Germany's liberal economic order, which is also subject to international competition, is constantly leading to structural changes which in turn influence the composition and characteristics of the corporate landscape. In the past several years, an increase of very small units can be observed: the so-called "solo self-employed." These are business start-ups that are not designed to grow into a small or larger business over time. Instead, such entrepreneurs will act permanently as individuals.
New forms of cooperation have also emerged in the recent past. Depending on the project requirements, teams of independent agents form, each contributing their own specific skills and competences and thus work together efficiently. However, these entrepreneurs usually do not feel like they apply to the term "Mittelstand," as do start-ups that have not been on the market for at least three years. On the other hand, the affinity of small and medium-sized enterprises for one another increases with company size and age; the older and larger the companies, the more they identify themselves as small and medium-sized enterprises. However, among those companies that consider themselves to be medium-sized, according to the IfM Bonn definition, one in seven is no longer included because they no longer fulfill the criterion of "ownership and management in one hand."
As a result of continuing globalization and worldwide corporations, SMEs in Germany were increasingly under competitive pressure. In order to compensate for the resulting disadvantages, more and more medium-sized companies have joined forces in recent decades to form co-operative partnerships. As a single member of a group of companies, the respective family-owned company retains entrepreneurial independence, but through joint inter-company activities it can gain a market position that only large companies could otherwise offer. Today's groups are regional, national and even international. The inter-company cooperation of the group is usually organized from a legally independent center and covers a variety of areas such as purchasing, marketing, logistics, IT solutions, financing services, consulting or training and so on. In Germany, around 250,000 companies from around 45 different branches of trade, craft trades and the service industry are currently grouped together, resulting in around 400 groups. 320 of these groups were formed through the Central Federation of Industrial Associations e.V. based in Berlin, Brussels and Cologne.
The importance of small and medium-sized enterprises is also evident from the fact that more than 160,000 small and medium-sized enterprises with about 4.3 million employees have organized themselves in the Federal Association of SMEs. The focus of the association's work is creating network, organizing events and political advocacy.

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 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, as defined by number of employees and turnover. The second meaning refers to any family-run or -owned business.
As Stand addresses a group, single Mittelstand-companies are often called Mittelständler.

Geographical distribution

According to an article published in the journal, , the most important medium-sized enterprises—using absolute figures—are in North Rhine Westphalia at over 22%, followed by Bavaria and Baden-Württemberg. The lowest ranking performers are Bremen, Saarland and Mecklenburg-Vorpommern, each with an approximate share of 1%.
However, when assessed based on size by population, the city states of Hamburg and Bremen lead with 185 and 182 large medium-sized enterprises per 1 million inhabitants, respectively. The larger states of Bavaria and Baden-Württemberg follow close behind with 163 and 159 major medium-sized enterprises, respectively.
The article also mentions the cities of Hamburg, Berlin and Munich with the highest so-called "top middle class enterprises" ranking.

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 implementing lean manufacturing practices and total quality management. The Mittelstand emphasis on long-term profitability stands in contrast to the public corporations of many countries 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