German Mittelstand firms use Services to retain their competitive niche

by NIck Frank on April 16, 2012

In these turbulent times, many in  Europe are looking to how their German counterparts have managed to grow and thrive through the deepest recession since the 30’s.  A key driver of Germany’s success has been the German Mittelstand companies. These are those small-medium sized privately owned enterprises who have grown to dominate their  niche markets, especially in the developing parts of the world. They have built such a dominant position that they attract few rivals. As the Economist in April, many of these companies have turned to services to defend their niches. Unlike many in manufacturing who deride service as a cost of business to be minimised, these Mittelsatnd firms see a services led approach as key to maintaining their competitive advantage and maximising the value of their technology. These companies who in the 90’s focussed on building their own global sales and maintenance networks, now find themselves with the capability to sell value, as opposed to many competitors who have developed through agents. This is allowing them to a new ‘hybrid value-added’ model in which the product is an outcome that the customer wants rather then the good that produces it.  Their chinese competitors may be able to re-produce the industrial part, but they can not copy the whole hybrid. Some believe that this hybrid approach, means that Germany’s actual manufacturing output might be even 10% higher than the current 20%.This is not purely a German phenomenon.  Two of the UK’s leading engineering businesses, Rolls Royce and BAE Systems, now have more than 58% of their revenues from Services. But despite these few exceptions there still appears significant opportunity  for European business’s, including Germany’s to further strengthen their competitive position. In a study in 2009, Andy Neelyshowed that 58% of  US manufacturing businesses had services as part of their portfolio, as opposed to 19-40% in Western Europe.So what’s holding back Europe. Perhaps the Mittelstand firms start to provide a clue with their Hybrid approach, which is very much Outside In thinking. This requires businesses leaders to get away from pure technology and manufacturing and think more about how to make their customers more successful in their business.

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