Panelist: Dr. Dr. h.c. (mult.) Hermann Simon
Interviewer: Dr. Dr. h.c. (mult.) Peter Lorange
Dr. Hermann Simon is Founder and Honorary Chairman of the Bonn-based management consulting firm Simon-Kucher & Partners. He has written more than 30 books, which have been published in almost as many languages. He is an honorary professor at the University of International Business and Economics in Beijing. In China, the “Hermann Simon Business School” is named after him. He was educated at the Universities of Bonn and Cologne, and lives in Bonn.
1) Let us first focus on the German so-called “Hidden Champion” firms, i.e. relatively smaller, but successful firms not so well known as those such as Siemens, Daimler-Benz, etc. What are the largest threats to the continuing success of these companies today?
There seem to be three major classes of threats:
Traditionally most German firms have been producing their products out of German locations, for then to export these worldwide. This way of doing business is heavily dependent on free trade and relatively few barriers to exports. But there seems to be a clear tendency away from this with more national protectionism, regulations, trade disputes/”trade wars”, etc. The new trend is towards direct foreign investments, and with relatively less exports. Examples: There are more than 2000 German-controlled direct investment manufacturing plants in China (vs. only four Chinese greenfield plants in Germany!). Dr. Simon’s consulting firm now has three autonomous headquarters in Germany, USA, and Singapore. CEIBS, the leading Shanghai-based Chinese business school acquired the Lorange Institute, an innovative business school located outside Zurich, primarily in order to train Chinese leaders there, so as to be better able to operate in Europe, anticipating a growing trend of direct foreign Chinese investments in Europe.
A strong trend towards digitalization. (This shall be discussed in item 3 below).
Sustainability - perhaps the “next digital”. Hidden Champions are leading ESG initiatives, and part of this involves the internationalization of their workforces, including also the management level in most German corporations. Although for the last 10 years, Hidden Champions have had the majority of their workforce outside Germany, this is not true for top management which is still mostly German. Mid-sized German corporations used to primarily be run by Germans, but this is also now changing (also addressed below).
2) Culture. This traditional German culture in most German corporations thus seems Traditionally the much-admired German corporate culture tended to be dominated by various categories of engineers (chemical, electronics, mechanical, …). Now, however, with digitalization across all types of industries, a new type of knowledge is dominating (see also issue 3). And, there are perhaps above all key aspects of this that might be mentioned:
This group of new experts need to be highly open-minded, in the sense that they typically must be able to combine and integrate several competences and underlying disciplines. Hidden Champions lead in the industrial application of digital.
Eco-systems, traditionally labelled “clusters” of related corporations, are now not just associated within an industry or sector but are also forming in specific geographic locations, such as for example, medical/med-tech eco-system in the Black Forest area with more than 500 medical technology firms, most of them small and highly specialized. Or the photonics ecosystem in Jena with 170 companies and 10 large research institutes.
Such eco-systems are de facto competing with each other. Modern (technical) universities are part of such eco-systems, leading the merging of disciplines today. The three top ones in Germany are perhaps the Technical Universities in Munich (TUM) and Aachen (RWTH) and the Karlsruhe Institute of Technology (KIT). The leading non-technical universities are in Bonn (with six clusters of excellence), Munich and Heidelberg. But there are other examples of theoretical excellence too, such as mathematics in Göttingen.
The new breed of experts seems to be clustering differently in Europe vs. US and China. While the latter two seem to be particularly strong when it comes to B2C, the Europeans seem to be stronger when it comes to B2B, such as in complex industrial processes. And, old or proven technologies are often combining with new technologies (example: fuel cells and trains) and/or combining across country boundaries (example Dutch ASML which has 80% of the global market for chip making machines and forms an ecosystem the German Zeiss (optics) and Trumpf (laser). And, these eco-systems do not “recognize” country borders! (Examples: Zurich, Basel and the Black Forest area in medical, or Switzerland, Austria, South Tyrolia and Baden-Württemberg). We may soon speak of “Hidden Clusters” as opposed to Hidden Champions.
3) Digitalization. How might German corporations successfully cope with this?
Digitalization affects everything! Perhaps the most fundamental advantage that digitalization seems to be able to “give” is speed. AI and big data are key contributors here. Corporations may now be able to more effectively implement global logistics. R&D investments done by “Hidden Champion” are twice the industry average (around 6% of annual revenue). Most of these investments are related to digitalization, and this is seen as key to staying competitive. Many of these investments may lead to increased improvements, not necessarily to fundamentally new approaches. So, to benefit from innovations might be equated with strong ability to learn, to permanently try to improve. We are now also seeing an era of the digital elite, those individuals who are driving culture change in both product and service processes.
As an example, the German chainsaw manufacturer, Stihl, might be given. Traditionally, their portable chainsaws were relatively heavy, and petrol powered. Over time, they have become much lighter for the operator to carry and powered with electric (rechargeable battery packs). To pursue “lightness” Stihl even manufacture their own light-weight batteries!
4) What about inputs from customers, now when “globality” is in effect?
Closeness to key customers is seen as the biggest strength by many Hidden Champion firms, and not technological superiority! But to achieve a workable balance between emphasis on customer needs and technology is seen as important. And, relatively smaller firms might be realistically better able to achieve this – there are typically fewer actors “in between” in their B2B efforts.
The service dimension is seen as critical when it comes to coping with customer inputs from today’s global reality. Services should therefore be local! To train one’s workforce locally, to be able to “deliver” relevant service in various local contexts is crucial, and to maintain simplicity is typically a critical factor here.
Several Hidden Champions have brought the customer into their businesses, literally, for example, by hiring highly specialized and experienced staff from the targeted business.
5) What about profitability?
As already noted, much of Hermann Simon’s work is done through the consulting firm Simon-Kucher & Partners, and this firm with 1500 employees and 40 office is the global leader in price consulting. Profit equates price multiplied by volume less costs. Simon-Kucher & Partners looks at how effective those drivers are. If you can increase your price by 1% say, your profit increases by 10%. The profit elasticity of price is 10, for cost it is 6 and sales volume it is 4.
It should be stressed, however, that pricing is a complex issue, depending a lot on the industry and the customers here. It should be noted that pricing-related innovations have been more prevalent over the last 20 years than for the previous entire 200-year time period!
Porsche’s pricing of its Cayman sports car some 10 years ago might serve as a good example. While a typical norm in the automobile industry is to price hardtop cars around 10% lower than their cabriolet counterparts, Porsche priced its hardtop version 10% higher! And, the company was indeed successful! This decision has been taken at the very top level of Porsche, by its then CEO, Dr. Wendelin Wiedeking.
Additional questions
Is there more to be said when it comes to achieving effective sustainability-driven strategies?
Recycling seems to be particularly key here. And, we are already seeing significant increases on innovations to achieve this. 3D printing might be seen as an example, with significant “savings” in materials needed.
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