Mittelstand: How Small Businesses Survive

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Mittelstand refers to small and medium-sized businesses in Germany, Austria, Switzerland and Italy. As shown in this video, many economists believe that these businesses, which are largely family run, are responsible for Germany’s economic growth since the beginning of the 20th century.

According to wikipedia’s definition “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”

Although the Mittelstand focuses primarily on things like machinery and electrical equipment rather then more creative artisanal pursuits there are some things we can learn from them. It’s worth noting that these companies employ 70% of Germany’s workforce.
Their’s is an economic model that revolves around a few, very good key principles:

– Avoid incurring any debt; independence from banks
– No more than 500 employees with the average being closer to 30
– No nanotechnology or sophisticated information technology other than the Internet
– Stability, not growth, is prioritized
– Largely family run, succession business
– It is important to turn the company over to the next generation in good order

Fundamentally they don’t believe in taking too much risk to achieve short-term gain, at the expense of long-term stability. So for example, to ensure that they do not become dependant on any one huge distribution company they often refuse to supply large buyers with more than 10% of total sales. If that company goes under for any reason, they can survive the loss of 10% of sales. Many businesses might be tempted at the thought of one large buyer who takes everything they can make which, might be great for a while but at what cost? At any time they can simply say we demand a price cut – or worse – they might go out of business and then you are really in trouble.

The Mittelstand principles are very much in line with how artisans run their business. It gives me great comfort to know that the professional artisan will very likely win out on the last day, when the large companies built on debt; huge volumes of global sales, cheap labour and ever increasing profits to meet short-term, quarterly targets, fail. The underpinnings are already shaky as high unemployment and an increased cost of living continue to eat away at our standard of living and cause people to question both their purchasing decisions and their lifestyle choices.

There is clearly a growing trend toward buying locally made, enduring, quality products, that can be used and enjoyed every day such as clothing, jewellery, saddles, hats, shoes, dishes, fences, stained glass windows, quilts, vases, lamps, furniture, fine art pieces, handbags, clocks etc. So while you may not be building car parts you are helping to building our Mittelstand.

It’s worth googling Mittelstand – read up on it for yourself because it provides a different perspective. We don’t usually think of artisans are “manufacturers” we think of them as “artists”, because there is a large artistic element to what they do, but they also need to think of themselves as a business and that’s where the Mittelstand model may be useful.

Artisans can learn and borrow what works for them from the Mittelstand in Germany such as, being flexible yet stable, avoiding debt, investing in training, specializing in niche markets, developing product based services and building on their relationships with other local artisans (i.e. stick together to create a value-added chain).

In other words consider making products used by other artisans. For example, a spinner might sell yarn to a weaver, a fine woodworker might build and sell a loom to a weaver, a blacksmith might make tools used by a woodworker or a jeweller, the possibilities are endless. there are so many tools used by artisans, everything from knitting needles to hammers there is no need for all these tools to be bought from large companies, artisans can make for artisans to some degree.

This is a fairly short, interesting paper about Germany’s Mittelstand and this is another article in the Wall Street Journal about the Mittelstand.