Dr. Ulf Schneider – How a major company keeps building on the values of its “Mittelstand” origins

It’s something a nation can take pride in: Germany is the fourth-largest economy in the world. German companies are at the forefront of automotive in­­dus­try as well as being powerhouses in chemicals and engineering. The “Made in Germany” tag is the hallmark of high quality – whichever language it’s transla­t­­ed into. High-profile corporations such as Siemens and Volkswagen are just the tip of the iceberg. Many more strong companies lie just below the surface, forming the core of the German economy. In fact, the lion’s share of economic output in Germany stems from the much-fabled Mittelstand, the small and mid-size private enterprises that make German business what it is.

Germans still argue about the exact definition of Mittelstand. It typically refers to companies with up to 500 em­­ployees with revenues of up to 50 million euros. But what’s interesting about these companies is that they are not just local players. Many Mittelstand business­­es operate in their chosen mark­ets far beyond their national borders. Their in­­­ternational activities have best­owed many of these companies with lau­rels of another sort: hidden champions.

If I had to define the essential character­istics of the successful enterprises that make up the German Mittelstand, I would cite innovation, knowing the customer, adaptability and a willingness to take risks. Many Mittelstand companies are hot-beds of ideas, they know a customer need when they see one. They are quick to make and act on decisions. And they are prepared to leave the beaten path and venture into new markets.

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Fresenius, the company I have been lea­­d­ing for the last ten years, also took root in the German Mittelstand. Today, the Fresenius Group employs over 170,000 people and has annual sales of about 20 billion euros. Until the 1970s, how­ever, it belonged to the Mittelstand. Our accelerated growth beginning in the mid-1970s stemmed precisely from the characteristics outlined above. The fact that we’ve upheld these values as we’ve evolved into a major global corporation is, I believe, central to our success.

Take innovation. This is the cornerstone of everything we do at Fresenius. Even when a business is flourishing, we are always looking for ways to make our products and services better. Clearly, this benefits our patients. This mindset also allows us to maintain and build on our position in the market. In the early 1980s, for instance, we had a lucrative business in dialysis machines and dialysers for the treatment of renal patients. But we did not feel that the dialysers being made at the time were perform­ing up to par in terms of urea clear­ance. So we developed a polysulfone fiber-based membrane which clears out toxins much like human kidneys do. Polysulfone-based dialysers are still regarded as the gold standard of hemodialysis today. This in­­­no­vation propelled Fresenius to become the global leader in dialysis. In 2005, our subsidiary Fre­sen­ius Medical Care won the Ger­man Indus­try Innovation Award for our new­est dia­lysis machine.

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Adaptability and knowing the customer pose major challenges to large corporations, which are hampered by hierarchies that can slow things down and complicate decision-making. The markets these giants operate in are frequently heterogeneous, so they cannot rely on stand­ardised mass products. In contrast, small and mid-size companies often find it easier to respond to the needs of their individual customers and keep de­­cision-making lean. To accomplish this within the structures of a big company, Fresen­ius has introduced the principle of working as “entrepreneurs within the enterprise”. Each business segment more or less operates independently within its area of respon­­sibility. What’s more, the vast majority of operating decisions can be made without lengthy approvals or involvement from upper management. This allows our business segments to react rapidly to new market developments and adapt their business model as need­ed. In fact, Fresenius is so decent­ral­ised that in many markets people regard us as a local supplier!

It is no secret that the bigger companies become, the more cautious they become. This is especially true for publically trad­ed companies where one false move or ill-informed decision can have a disa­s­trous impact on share price. But by continually shirking risk and vital business evolution, companies run the other risk of losing market share – and thus their place in the market. Many companies like Fresenius have risen beyond the ranks of the Mittelstand by delib­erately not playing it safe at decisive moments. Instead, they have embraced their historic willingness to take risks and seized opportunities.

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The history of Fresenius has also been shaped by several milestone decisions, many of them considered controversial at the time. Entering the market to develop dialysis equipment and dial­ysers in-house was the subject of much debate in the mid-1970s. But when it did happen, it catalysed a move for Fre­senius out of the Mit­tel­stand towards becoming a global health care com­­­pany. Three more de­­cisions illustrate how Fre­senius may be a big company, but it has not lost its ap­­pe­tite for mak­ing radi­cal moves. The first was the 1996 take­over of the U.S. dialysis provider National Medical Care, which at the time was more than twice the size of Fresenius. A second was Fre­senius’s entry into the German private hospital business in 2001. A third was the multi-billion dollar acquisition of U.S. generic drug manufacturer APP Phar­ma­­ceu­ticals right in the middle of the global financial turmoil and economic crisis of 2008. Each of these de­­ci­sions paved the way for Fre­senius to access new mar­­kets and fresh growth opportunities, laying the foundations for leadership in each field.

The entrepreneurial energy and competi­­­tive clout of the German Mittelstand are key drivers behind the success of the overall German economy. They are also major reasons why Germany has remained relatively unscathed by the global financial, economic and debt crisis which has persisted since 2008. Transplanting these strengths, and the values that underpin them, to the structures of a major company is never easy. But it certainly has its rewards.

Dr_Schneider_GB_2010-kopierenThe author is chairman of the management board of Fresenius. Dr. Schneider joined Fresenius in 2001 and served as chief financial officer of Fresenius Medi­cal Care. Previously, he was group fi­­­nance director for Gehe UK plc. He held several senior executive positions with Franz Haniel & Cie. GmbH as of 1989. He holds a Ph.D. in Economics and an MBA from Harvard University.