Fidelio Partners recognises that a thriving manufacturing sector needs leadership. As such, we are delighted to welcome a guest contribution to Overture from Stephen Cheetham, MD PK Engineering. Stephen Cheetham has spent his career in industry and financial services in the UK, Germany and the US, and is now trying to “think Mittelstand” as he runs his own engineering company.
Germany’s Mittelstand, its many small and medium-sized manufacturing companies with a formidable record of export-driven achievement, is an object of wonder to policy-makers in other countries. In the aftermath of a recession which exposed the limitations of the UK’s service-heavy economy, it would be difficult to find a politician not in favour of trying to emulate this German success.
Yet the Mittelstand cocktail is complex. Some ingredients – apprenticeships, strong academic links, government support for R&D – are reasonably clear, and policies are in place to try to strengthen these in the UK industrial scene. But some of the most important elements are philosophical and behavioural, rooted in governance and reward structures.
We should all learn the lessons from the successful Mittelstand model.
– George Osborne, Chancellor of the Exchequer, at The Daily Telegraph Festival of Business 2011, Manchester
Here’s our guide to behaving like a Mittelstand Director:
1. Quarter, what quarter?
A firm grasp of financial indicators is common to all successful firms, but stressing about short-term financial results is usually counterproductive. Investment programmes in manufacturing businesses can take years to pay off, and the short-term impact on the P&L can be ugly. This is a good reason why the typical Mittelstand company is privately owned and financially conservative. The short-termism of the stock market would be an unwelcome distraction, and potentially result in poor decisions.
A positive example from the UK Mittelstand: a family-owned agricultural and construction equipment manufacturer buys its diesel engines from a company which is sold to its major competitor. It then decides to fund a large multi-year programme to develop and manufacture its own engines. Clearly the right strategic move, as it preserves its independence and the engines become a key differentiator – but a quoted company would have come under pressure not to spend the large sums of money involved.
2. Give people the right incentives
Compensation systems drive behaviour. Pay people on short-term results, and that’s what you’ll get. The Mittelstand obsession with building value and passing the business on to the next generation has important implications. If the key decision-makers are thinking about their grandchildren, you will get long-term decisions.
Family ownership is likely to become trickier for the Mittelstand as the baby-boomers reach retirement age, and their parents pass away. Business acumen is not always inherited, and children often want to do something different from their parents. In addition, inheritance is likely to split dominant shareholdings, and yesterday’s strong leader becomes today’s group of bickering insiders.
A number of firms have demonstrated a viable solution by delegating day-to-day management to professionals, the structure possibly also including a Stiftung (trust-like body). In this kind of arrangement, management of outside directors and reward systems become extremely important if the long-term Mittelstand perspective is to be maintained.
3. Dominate the technology
Spend on R&D (but control it tightly). Aspire to be at least three steps ahead of the competition. Persist with promising ideas especially when they get sticky: you will learn from them. Always support the wacky and off-the wall (up to a well-defined financial point). These ideas could prove disruptive.
Example: a Mittelstand injection moulding manufacturer develops a 3D printing concept that challenges the current industry model by using easily available commodity raw materials. If you don’t dominate the technology, global competition will soon consign you to history.
4. Do as you would be done by
Develop strong partnerships. Don’t sell the cheapest deal to your customers, or demand it from your suppliers: offer and insist on value instead. If you offer value, and your technology and quality is always the best, your customers will be loyal. If you demand value from your suppliers, and develop their capabilities, you will get the strong supply chain you deserve.
German mid-tier businesses, known collectively as the Mittelstand, have shown themselves better able to weather current and prevailing economic storms than many of their competitors by building flexibility and resilience into their business eco-system.
– “German lessons – what UK companies can learn from the Mittelstand”, Stephanie Hyde, Head of Regions, member of the UK Executive Board, PWC
5. Strengthen your regional roots
The strength of the German regions is inspiring. Substantial global competitors are widely distributed across the country, many in places not immediately associated with industry. Not only does this give employees an enviable quality of life, but it has important business advantages.
If you are the local employer of choice you will be able to develop strong links with local schools, colleges and universities. Your employees will be loyal and your wage bill will quite possibly be a competitive advantage. If you offer challenging jobs and good ongoing development programmes, most of your apprentices are likely to stay put. Successful Mittelstand businesses play a leading role in their local communities.
6. Leave the flashy car at home
(or better still, don’t buy one)
Mittelstand is a state of mind. Even very large businesses like Robert Bosch still think Mittelstand. Hard work and thrift are what matters, and as a director you have to set the tone. Conspicuous displays of wealth are simply not done. You are trying to build a team, and your people will always notice what’s in the car park.
Fidelio High Notes – March 2014
- Fidelio delivers Board and Internal Board Development Programmes
- Fidelio impresses with process and thinking on Chairman and Board Search
- Governance and Public Affairs – Fidelio’s Executive Search expertise in demand
- Real Estate practice gains traction
For more information on Fidelio Partners at info@fideliopartners.com