SAP - German SMEs' Recipe for Success

SAP - German SMEs' Recipe for Success


German SMEs' Recipe for Success
By Bernd Venohr, Institute of Management at the Berlin School of Economics, Germany

Globalization has brought great benefits for many German SMEs. In an interview with SAP INFO online, Professor Bernd Venohr from the Institute of Management at the Berlin School of Economics describes the strategies, management structures and processes that pave the way for global success.

Which companies are you referring to when you claim that SMEs have benefited from globalization?
Venohr: The term “SME” refers to a broad range of companies, covering everything from small corner shops to companies with annual sales of several hundred million euros. It is primarily the “high end” medium size companies that are benefiting from globalization. These are international companies with annual sales of between 50 million and a billion euros. There are around 3,200 of them in the German industrial sector. Companies such as the door technology supplier Dorma, the cooking system manufacturer Rational, and the packaging machinery producer Krones may not be household names but each boasts a global market share of 50 percent and above in its market sector.

Is this type of company particularly prevalent in Germany?
Venohr: The breadth and capacity of Germany’s SME sector is unique, although there are comparable sectors in Switzerland and Austria too. I receive inquiries from many European countries, such as France, Ireland and Belgium, where companies want to learn from Germany’s example of succeeding on the fiercely competitive global market despite being in a high-cost location.

What opportunities does globalization offer high end SMEs?
Venohr: For one, these companies can step up their activities on markets like China, India and Russia that until recently were not open to them. The range of products and services offered by many German SMEs ideally matches the demand profile in these countries – quality products for developing the infrastructure are as sought-after as premium consumer goods for the burgeoning elite. The sharp decline in transportation and IT costs has also boosted worldwide opportunities for SMEs.
Which criteria are used to evaluate the performance of German SMEs on the global market?
Venohr: The 3,200 companies in the high end SME sector are responsible for some 30 percent of Germany’s total export volume. Around 1,300 of them are ranked in the top three in their market sector worldwide. These companies have been returning above-average sales and revenue figures for many years. Double-figure growth rates are the norm.

What’s the secret of this global success?
Venohr: I attribute this success to the special “Made in Germany” management model, consisting of the strategies, management structures and processes typical of German SMEs.

What typifies this model? What strategies do SMEs pursue?
Venohr: The companies dominate niche markets worldwide. They achieve this by developing high-quality products and services, covering everything from machine tools to kitchen appliances and software. This is made possible by the capacity to innovate, something which cannot simply be plucked out of thin air. Consequently, the level of spending on research and development is well above average. It is twice as high as the international norm for the sector. The companies reap the rewards of many years’ cooperation and knowledge transfer with suppliers and research facilities at their own site. Added to this is a meticulous approach and the persistence required to set up worldwide sales and service networks. Whenever possible, the companies favor direct customer contact via their own branches. This ensures outstanding service and provides a vital source of innovations.

What role do management structures play?
Venohr: I would call the structure most commonly found among successful SMEs “intelligent family capitalism”. The companies are family-owned, but they are often run by managers outside the family from the second generation onwards. This arrangement is more common in Germany than in countries such as the U.S., the United Kingdom or France. It combines the advantages of private ownership, such as long-term objectives and independence from short-term capital market expectations, with innovative management methods. It also overcomes the Achilles heel of the “traditional” family-owned company, that is, a lack of management expertise among the generations succeeding the founder.

Which processes perfect the “Made in Germany” management model?
Venohr: It’s not only product quality that’s crucial, but also excellence in the company’s core processes, from R&D to production, marketing, sales and service. The manner in which successful SMEs have taken the principles of Total Quality Management to heart to continuously improve all these processes has been exemplary.

How important is IT in globalization for SMEs?
Venohr: Globally standardized and IT-based company processes play a vitally important role. In smaller SMEs, managers can “keep an eye” on things by moving around the company and identifying problems. However, in companies with several international locations, it is crucial to have clearly defined and standard processes, otherwise control is quickly lost and there will be impending efficiency losses. Global standardization of processes also ensures consistently high product quality and the increasingly important exchange of “best practices” between sites. This is where Germany’s top-performing software industry comes in. Germany – and not the U.S., as many believe – is the world market leader in exporting software. In addition to SAP, there are a number of highly specialized software companies, e.g. in the logistics or production sectors. IT also plays an increasingly important role in the supply of additional services, such as remote maintenance of plants online. The Internet is also a key sales channel, particularly for smaller companies. For example, I know of a small Hamburg-based company called Windpilot with two employees which sells its products exclusively online and is the world market leader in wind vanes for sailboats.

What prompted you to conduct research into SMEs?
Venohr: As a consultant, I developed strategies for large companies and SMEs. I then went on to run a venture capital fund and became familiar with start-ups. Of these three types of company, I found SMEs particularly exciting on account of their specific management models and outstanding products and services, coupled with the strong desire to perform that marks all company processes. What’s more, research into SMEs had not gone into much detail before then, mainly because these companies are often privately-owned and reluctant to disclose their figures. That meant there was fertile ground for pioneering research work.

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Google steigt in Markt mit Öko-Energie ein - Nachrichten - computerwoche.de

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FT.com / Companies / IT - Why nobody wants to see inflation with no clothes on

FT.com / Companies / IT - Why nobody wants to see inflation with no clothes on

Why nobody wants to see inflation with no clothes on
By John Kemp

Published: November 27 2007 02:00 | Last updated: November 27 2007 02:00

The Emperor's New Clothes, Hans Christian Andersen's fairy tale about the fear of challenging mass delusion, is a story with resonance today.

Nowhere in economic debate does such power of perception play a bigger role than in the alleged disappearance of inflation. Central banks have switched the focus of public and media attention away from the full set of "consumer prices" to a subset that excludes some of the fastest-increasing items and therefore understates the true rate of price increases. The US Federal Reserve, for example, focuses on "core inflation" - which excludes food and energy.

There is no harm in focusing on core measures to smooth out month-to-month volatility - provided the core measure and the broader inflation gauges track one another roughly over time. But during the past 10 years the US core rate has been on average 0.3 percentage points lower than the broader one. And the discrepancy is growing. Over the past two years it has been minus 0.7.

There is a perception that central banks are focusing on core measures because they are more expedient. Commentators are querying the reliability of the numbers. For most households, the published inflation rates do not accord with their own experience of rising living costs, causing a growing credibility gap that is fuelling criticism of the data.

The statistical authorities have also been "adjusting" the inflation numbers downwards to take account of improvements in quality. Most people would accept the logic of making quality adjustments for computers. But once they started going down this route, the government's statisticians have found it hard to stop. The US government is now making "hedonic quality adjustments" to a whole range of items: clothes dryers, microwave ovens, camcorders, DVD players, even college textbooks.

The problem is that no one is making any negative adjustments to take account of declines in quality. Because the data are being adjusted only for improvements, never for declines, it is arguably biasing the published inflation numbers downwards.

There is also the problem that published measures of inflation do not include the price of assets. But it is not obvious why they should be excluded. As incomes rise, households start to devote a much higher proportion of their income to the acquisition of assets (from bigger houses to larger stock portfolios and saving plans for retirement and college education). As household consumption patterns shift, so the traditional consumer price index captures a diminishing proportion of expenditure.

Crucially, asset price inflation can create just as many inefficiencies as the inflation in goods and services prices. If all financial asset values are rising rapidly, it may be hard to discern where capital can be employed most profitably, leading to indiscriminate capital allocation.

And as the financial side of the economy has grown in relation to the real one, the potential for instability arising on the financial side to spill over has grown. Excess liquidity has piled into the asset markets. Instead of excess liquidity chasing up the price of goods and services (inflation), it has chased up the price of assets (which is not inflation by the conventional definition).

There is a sense that commentators and policymakers are engaged in the collective delusion of the emperor's new clothes. Excess liquidity created by the Federal Reserve and other central banks during 2001-2005 did indeed result in faster inflation - but in asset prices rather than goods and services. It also created distortions - but in property prices, subprime mortgages and securitisations.

Even as the US housing bubble has deflated, inflationary pressures within the global economy remain strong. High commodity prices are no longer offset by declines in the price of computers, cars or imports from China.

The "death of inflation" was predicted by one economist in the 1990s. He might have characterised it better as the "disappearance" of inflation. The question for policymakers and investors alike is whether and when the little boy will shout from the crowd and break the illusion. If it happened, interest rates would have to be much higher.

The writer is the economist at Sempra Metals
Copyright The Financial Times Limited 2007