Small businesses deserve more attention from G20 Summit

Do politicians, the press, the public at large really understand the economy? And is the real economy present in such events as the G20 Seoul Summit?

Hermann Simon

By Hermann Simon

Do politicians, the press, the public at large really understand the economy? And is the real economy present in such events as the G20 Seoul Summit?

There are doubts. To the G20 Business Summit which precedes the meeting of the G20 politicians, only CEOs of big corporations have been invited.

Where is the voice of the small and mid-sized companies who form the backbone of most economies?

A recent study revealed that large companies get 84 percent of the media attention but contribute only 20 percent of all jobs. The same is probably true for the attention of politicians.

In the two leading export nations, China and Germany, 68 percent of all exports come from companies with less than 2000 employees. Some 88 percent of all countries in the world have no company in the Fortune 500, which lists the largest companies in the world.

There is no doubt that the success or failure of a country in the global competition depends largely on the performance and competitiveness of its small and mid-sized companies.

The “Hidden Champions,” the thousands of little known small and mid-sized world market leaders, prove that in the age of globalization and global communications international business is no longer a question of size, but a matter of vision, will power and effective implementation.

Then why are China and Germany so strong in exports?

The product portfolios of the two countries couldn’t be more different. China exports primarily consumer products, while Germany is strong in machinery, engineering and technology.

What these two countries have in common are their mid-sized and small companies which contribute heavily to their exports.

In China, 68 percent of all exports come from companies with less than 2000 employees. In Germany this percentage is of the same magnitude.

As the data tells us, it is a widespread misconception that large, well-known corporations are decisive for a country’s export performance.

After all, why else are Japan and the United States, with the highest share of Fortune 500 countries, not faring better in exports?

Within the larger circle of small and mid-sized companies there is an elite group I call the Hidden Champions.

These are companies that dominate their world markets often with market shares of 50, 60 or even 80 percent.

They typically have export quotas higher than 80 percent. They generate more than 80 percent of their revenue outside of their domestic markets.

Since the mid-1980s I have been gathering names and further information about Hidden Champions from all over the world. The results are surprising.

My current list comprises about 2500 of these unknown world market leaders. Of those, about half are from Germany. Germany has by far the largest number of Hidden Champions.

The U.S. has somewhere between 300 to 500, while Japan has only about 200.

Chinese companies are still on the rise and fewer are world market leaders.

On a recent speaking tour in China in October 2010, I frequently asked the audiences, comprised of Chinese entrepreneurs, who were aspiring to become a world market leader.

About 50 percent raised their hands. This doesn’t mean that all will achieve this goal, but it reveals the unusual ambition of millions of Chinese entrepreneurs.

We can be sure that many market leaders of the future will come from China.

Korea has initiated a very ambitious program to create 300 to 500 Hidden Champions in the next five to ten years.

U.S. President Barack Obama’s goal to double American exports in the same period will only be achieved if America mobilizes thousands of small and mid-sized companies for the export arena.

The book “Hidden Champions of the 21st Century (2009)” delves deeper into my findings on the Hidden Champions of German-speaking countries. These very successful companies practice strategies that are very different from the typical strategies of large corporations.

Here are the basic facts.

The Hidden Champions have created one million new jobs in the last decade, 350,000 of which are in Germany.

They have grown in “Chinese” rates: They are three times larger today than they were in the 1990s.

More than 100 new billion-dollar companies have evolved from this group. Several of these Hidden Champions, such as Fresenius Medical Care, SAP and Wuerth, have become true giants with revenue in the ten billion range.

The Hidden Champions have increased their world market shares significantly and they are highly innovative.

These facts deviate strongly from the public’s perception of the German economy over the last ten years, which was strongly influenced by negative media coverage of large corporations.

For the most part, the unbelievable success of the Hidden Champions was kept from the public eye.

Then why are these companies so successful? What are they doing differently from large corporations?

The answer is almost everything! Here are the most important lessons from which large as well as small companies can benefit:

1. Extremely ambitious targets

You don’t become a world market leader by chance, but by setting very ambitious targets and pursuing them with never-ending perseverance. The targets of Hidden Champions are aimed at growth and market leadership.

These companies have grown 10 percent annually in the last decade, nearly tripling their size. Furthermore, their market shares have skyrocketed.

Ten years ago they were on average 56 percent larger than their strongest competitor worldwide – today they are more than double this amount.

2. Focus and depth

You can only become world-class through focus and concentration. The Hidden Champions define their markets narrowly and work deep into the value chain. Their vertical integration is 50 percent; the average industrial company is at 29 percent.

3. Globalization

Focus makes a market small, but globalization makes it large. The Hidden Champions have their own subsidiaries in all critical markets around the globe and practice direct customer relationship management. They invest continuously in markets of the future.

4. Innovation

Hidden Champions invest nearly two times more revenue in R&D than all German companies. On average, patent intensity is more than five times higher for the Hidden Champions.

The number of patent applications per 1,000 employees is 5.8 for large corporations and 30.6 for the Hidden Champions. R&D cost per patent application is one-fifth of that in large corporations. About two-thirds of the Hidden Champions consider market and technology to be equally important driving forces; only 19 percent of large corporations achieve this balance.

5. Closeness to customers and competitive advantages

While only 5 to10 percent of employees in large corporations have regular and frequent contact with customers, about 25 to 50 percent of Hidden Champion employees can say the same.

Closeness to customers is the biggest strength of mid-sized companies, even more so than innovation. Product quality and service are two of their outstanding competitive advantages.

Hidden Champions have created new competitive advantages in the form of advice and systems integration. These are hard for competitors to imitate, as they are not found in products, but in the minds of their employees.

6. Loyalty and highly qualified employees

The employee turnover rate of Hidden Champions is about 2.7 percent per year – far below the German average of 7.3 percent.

This figure is much more important than the average sickness rates, because every lost employee also means lost skills and knowledge.

Hidden Champions have greatly increased the number of highly qualified employees over the last ten years.

The percentage of workers with a university degree has grown from 8.5 to 19.1 percent. Better qualifications are the foundation of their superiority.

7. Strong leadership

At the head of Hidden Champion companies are strong personalities who identify themselves completely with the company.

On average, CEOs of Hidden Champions remain at the top for 20 years. DAX CEOs, in contrast, average 4.7 years. Younger executives and women are also more present than in large corporations.

In summary, the Hidden Champions of the 21st century follow their own path – and do so with more decisiveness and success than ever before.

They do nearly everything different from large corporations. They don’t follow management fashions and pay little heed to what management gurus proclaim.

In essence, they apply common sense ― so simple, and yet so difficult when it comes to implementation.

And this is perhaps the most important lesson.

The Hidden Champions prove that small and mid-sized companies are strong means by which countries can strengthen their international economic competitiveness.

Our focus should not only be on the management prowess of large corporations, but also ― and more importantly ― on mid-sized entrepreneurial businesses.

For most countries, these companies will determine their success in a globalized world.

Hermann Simon is the founder and chairman of the worldwide management consulting firm Simon-Kucher & Partners. He is known as the leading management thinker in German-speaking countries after the late Peter Drucker. His book “Hidden Champions of the 21st Century” has been published in 20 languages.