What Works: Success in Stressful Times. Hamish McRae
drug demand. But that goes beyond the realms of both medical intervention and law enforcement and into marketing, psychology, brand advertising and so on. No one has yet succeeded there. Advertising can project the notion that drug taking is harmful but it has yet to succeed in convincing young people that it really is an illness. There are some elements, though, in what Zurich has achieved that point in this direction. It is not glamorous to have to make a daily appointment at a drug clinic to get one’s fix.
All our experience of drug taking through the ages is that it does not head forever in one direction. It goes in cycles. One form of drug abuse, or more broadly one set of social problems, recedes while others take its place. But well-designed policies can have an impact. We know what does not work; we know that the hands-off approach of Zurich in the 1980s did not work; it is pretty obvious that the turning of drug taking into a criminal offence, as in the USA, does not work either. The way forward must be some balance between the two extremes, and this experiment is as good an example of that as any in the world.
I. WHAT IS THE STORY?
Germany is the world’s most successful goods exporter. In 2008 it sold more manufactured goods to other countries than the USA, more than China, more than Japan-all countries with far larger populations.1 It did so despite not being particularly strong in the new electronics industries and it has managed to overcome the problem that most of its European neighbours are slow-growing markets.2
So what is its secret? Part of the answer is that there are many great German corporations-the household names such as BMW, Siemens or Volkswagen. But another part of the answer is that it is home to thousands of medium-sized companies-ones that most people have never heard of, but that are wonderfully successful in their own specialist fields. They each employ perhaps a few hundred people (though some have staff counts running into the thousands) and are usually family-owned3 and managed, so they do not have huge resources behind them. Yet they dominate the markets in which they operate, often being number one or two in the world. They are the German ‘Mittelstand’.
Notions about their size and their dominance of the German economy vary. On one count they employ more than two-thirds of all employees in private business, according to the Institut für Mittelstandsforschung in Bonn, the research body that studies and promotes their activities.4 They contribute half the value-added of the entire country and produce directly a third of all exports. All other countries, of course, have small and medium-sized businesses, but no other nation has anything on this scale. Perhaps most surprising of all, this sector has survived the devastation of defeat in two world wars, the hyper-inflation of the 1920s and the challenges of lower-cost companies in Eastern Europe and Asia. Germany is an expensive place to make things-on some counts the most expensive in the world.5 Yet while there have obviously been individual corporate casualties, as a sector these small and medium-sized companies have survived and prospered.
Why and how? Mittelstand businesses have a number of common characteristics. One is that family plays a core role. In some instances the same family has carried on for generations, both owning and managing the firm. In others the family ownership has become diluted, with other shareholders being brought in. In still others the family owns the firm but has it run by professional managers. The point in common is that families are able to take a very long view of a company’s future-far longer than the shareholders of publicly quoted businesses.
A second characteristic is that most of the firms are in manufacturing rather than services and they usually have highly specialized, intermediate products that are part of the manufacturing process, rather than being finished goods. So the products are invisible to the consumer. The companies focus on a narrow market niche, aiming to dominate that niche worldwide. Typically a firm might have 70 to 90 per cent of the world market for that product.
That leads to a third characteristic. They tend not to have grand strategic visions but instead work in great detail with their customers to meet market demands. They are helped by the good technical training in Germany, so are able to draw on an innovative and educated workforce. The main competitive advantage this seems to give the firms is that they offer better customer service-something that enables them to justify their higher cost base.
Finally, many of these companies are located in small towns, where they are the dominant employer, rather than in large conurbations. This binds the workers into the company because they have fewer options for alternative employment. You could argue that it is dangerous for any town to become too dependent on one company, but the effect has been to align the interests of staff with those of the business, which probably makes management easier and fosters innovation by workers.
These characteristics were highlighted by the author and consultant Hermann Simon, who in the early 1990s identified more than 450 ‘Hidden Champions’-companies that had global leadership despite their small size. His book, published in 1996 with that title, still offers the best description and analysis of the sector.6
My own introduction to the Mittelstand came rather earlier, as from the 1950s onwards my father had the Irish agency for a number of German companies. He had a little one-man business as a textile agent, selling material on commission to Irish shops and clothing manufacturers. The most important of his agencies was a textile producer in Augsburg called Christian Dierig-you could almost say commission from the firm paid for my education. As it happens, this has proved a very good example of the longevity of German companies.
The company, named after its founder, dates back to 1805, and since then there have been six generations of the same name. The family still controls the company and it is still in textiles. That said, it is atypical in several ways. It was founded in the very early years of the Industrial Revolution, long before the notion of Mittelstand companies was conceived. At one stage it was one of the largest companies in Germany: just before the Second World War it employed nearly 19,000 people, whereas now it has some 200. But it survived wars, it survived the partition of Germany, it survived the decline of the European textile industry. And while its product mix has changed radically and it now makes quite a lot of its money from property development, it is still in the business in which it set out more than two centuries ago.
Boasting somewhat less longevity but a prime example of how the Mittelstand can touch our daily lives while remaining invisible is Webasto. Indeed many of us literally touch one of its products when we get into our car. You might think that if you bought a BMW then most of the car, aside from obvious components such as the electrics, would have been made by BMW. Not true. That goes for the vast majority of European-made and US-made cars and many others around the world. If a BMW has a sunroof that will have been made by Webasto-until quite recently it had more than half the world market for sunroofs, though as China has ramped up its car production that proportion has come back to about one-third. (Webasto started work on a factory near Shanghai in the middle of 2009, so expect it to garner a larger share of that market too. Mittelstand companies retain their German roots but think global for their future.)
Webasto has been making car sunroofs since 1932, when it invented the first folding roof for saloon cars. The company itself goes back even further, to 1901, when it started making things out of sheet metal. It moved to its present headquarters, in Stockdorf near Munich, in 1908 and has been a family-run business ever since. In 1935 it started making heaters for cars with water-cooled engines, and after the war branched out into products such as heating units for buses, electric steel sunroofs and parking heaters (so you can get into a warm vehicle on a cold morning). Now it has two broad product ranges. One category comprises the various car-roof products,