So far, we have learned that developments of privately held or privately controlled technical SMEs (Table I.4, Table I.74, Figure I.128) in the US and Germany are rather similar and reference to the German situation will allow some generalizations. Notable differences may occur with regard to extent of globalization and internationalization, where generally German firms put much more emphasis on than American SMEs.
As will turn out small and large high growth firms put much emphasis on strategy and execution, summarized, for instance, by the characteristics 1-7 of the German Hidden Champions (ch. 4.3.5.2). Thus there will be a relation to strategic groups, defined by
M. Porter as “a group of firms pursuing similar strategies along strategic dimensions”
[Runge 2006:221].
An investigation of 1,300 German mid-sized firms, usually family-controlled, and com- parisons with the 180 firms showing the strongest growth revealed that the top firms have growth rates of 10 – 39 percent, far exceeding the others. And, furthermore, they also invest significantly more than others. This was attributed to the following factors [Fröndhoff 2008].
1. Taking advantage from megatrends.
Adapting the business model very early to global market trends, in particular, mobility, health, energy and process and control technologies.
2. Strong internationalization
The firms with the highest growth rates have an export rate of 50 percent and more. Even small firms have set up a distribution network including sales and service offices or even production facilities.
3. Premium products and services
The firms with the highest growth rates have decade-long experiences in their segments and focus on premium products. They have high innovation rates and thus can keep their lead times and withstand competition. They specialize and focus on few businesses in global markets. Their lead in knowledge and experience allow them to launch tailored products in the markets. Further- more, they offer additional services for their products.
4. Manufacturing and networking
Bundling product and associated service is seen as a successful strategy for competing with young firms from developing countries. Firms with the highest growth rates set off themselves through difficult to copy knowledge of produc- ing high-tech products. And they often cooperate with universities and public resource institutes and develop products together with customers or firms of other branches.
5. Local roots
The high growth firm has local ties expressed by social engagement.
A study of Ernst & Young [2011] inquired into 68 mainly technically oriented (German) mid-sized and large firms, actually finalists of the “Entrepreneur of the Year” contest, which showed above average growth over a series of years. They had on average revenues of ca. €115 million per year and 815 employees. The majority of the firms generate their revenues in the home market.
The majority of these firms (ca. 60 percent) operated in lucrative niches or promising and growing market segments. A high proportion of sales – on average 14 percent – is attributed to the research and development departments. Sustainable growth relies on permanent innovations including internal processes and high appreciation of the firm by employees and customers [Ernst & Young 2011]. Main success factors include:
1. Look at the bigger picture (“Über den eigenen Tellerrand schauen”).
During an upturn 45 percent of the firms turn to new markets, ca. 30 percent turn also to new target groups. Apart from the well-known European markets growth markets in Asia and South America are seen as big opportunities.
2. Perceive competition as chance.
Though three quarters of the firms complain about higher competition they ac- cept the challenges to optimize their offerings and arouse new needs. Glo- balization is not seen only as a threat, but also an opportunity to access ideas, talents, customers and businesses.
3. Innovation and investment persistence (Figure I.127).
cf. for instance, German Erlus AG [Runge 2006:237/238].and its cooperation with Nano-X GmbH (B.2).
4. Continuously improve not only offerings, but also organizational processes.
During an upturn, if competitive pressure tends to decrease, 75 percent of the firms take the time to assess their organizational processes and to re- configure them so that new ideas can spread and get promotion and support.
5. Inform and motivate employees.
The majority of the firm sample has a style of cooperative leadership concern- ing firm orientation, strategy and goals of the firm. The targeted incentives, but also demands of employees are appreciated – 80 percent of the firms can trust that their employees are committed to these plans and new develop- ments.
6. Plan ahead.
The firms prepare for possible uncertainties and issues in their business, in particular on those, which they can influence even in the worst case.
All the above success factors correspond essentially also to those which are typical for the class of the German Hidden Champions (ch. 4.1.1).
In a comparative study of technical and non-technical high-growth companies from around the world in ca. 30 industries versus their less successful competitors Kim and Mauborgne [1997] presented a rationale for the differences. They found high-growth to be achieved by small and large organizations, in high-tech and low-tech industries and private and public firms. The origin of the differences was the companies’ funda- mental implicit assumptions about strategy which sought to make their competitors ir- relevant through a strategic logic they called “value innovation.”
They inquired into the five textbook dimensions of strategy given in Table I.78. For value innovation logic the first and last dimensions exhibit typical systemic features.
They found that managers of less successful companies all thought along conven- tional strategic lines.
The high-growth companies used a value innovation approach, and it was consistently applied to business initiatives in the market place. This means, value innovation logic requires execution (Figure I.87).
Table I.78: Two types of strategic logic for value innovation [Kim and Mauborgne 1997:106]. Reprinted by permission of Harvard Business Review. Copyright ©1997 by Harvard Business Publishing; all rights reserved.
Five Dimensions of Strategy
Conventional Logic Value Innovation Logic
Industry assumptions Industry’s conditions are given.
Industry’s conditions can be shaped.
Strategic focus A company should build competitive advantages.
The aim is to beat the competition.
The competition is not the benchmark. A company should pursue a quantum leap in value to dominate the market.
Customers A company should retain
and expand its customer base through further seg- mentation and customi- zation. It should focus on the differences in what cus- tomers value.
A value innovator targets the mass of buyers and willingly lets some existing customers go. It focuses on the key commonalities in what customers value.
Assets & capabilities A company should leverage its existing assets and capa- bilities.
A company must not be constrained by what it already has. It must ask:
What would we do if we were starting anew?
Product & service offerings
An industry’s traditional boundaries determine the products and services a company offers. The goal is to maximize the value of those offerings.
A value innovator thinks in terms of the total solution customers seek, even if that takes the company beyond its industry’s tradi- tional offerings.
Value innovation is expressed by the departure from the conventional logic of the par- ticular industry and can emerge from a so-called “value curve” which relates valuation of the customers (Table I.13) versus experiences of the customer (Figure I.161).
Value innovation provides inquiries into answering four key questions [Kim and Mauborgne 1997]:
1. What factors should be eliminated that our industry takes for granted?
2. What factor should be reduced well below the industry standard?
3. What factor should be raised well above the industry standard?
4. What factors should be created that the industry has never offered?
This often is a relation of the kind: increase utility drastically while reducing similtane- ously own costs or, alternatively, give customers more of what customers need or ap- preciate most and much less of what they are willing to do without.
As an example in curve 2 in Figure I.161 the customer will get a device from three suppliers with above average advantages for elements C, D. E concerning functional- ity (C and E) and delivery, but the price (A) is rather high and it is not easy to use (B).
Curve 1 represents a device with extremely favorable elements A and B (price and ease of use), but serious disadvantages concerning C, D. E.
The innovation displayed by curve 3 means combining advantages of D and E con- cerning delivery, functionality and B (ease of use) and disregarding C, which is op- tional features and meaning cost. The offering of curve 1 (maybe by an entrant) targets essentially customers who so far did not use the particular device due to a high price and learning efforts.
Value innovation is different to technological innovation, considered as innovation that integrates interfaces, marketing and operations. The emphasis is on product, service, and delivery. Competition is the key building block of strategy and positioning is by differentiation from the competitive pack by “breaking” the rules of the “standard game” to create fundamentally new and superior customer value.
In so far, value innovation can be useful as an instrument to assess young firms con- cerning growth in a competitive market by assessing in how far the they may provide appropriate answers to the above four questions.
Figure I.161: A “value curve” for value innovation.
How the logic of value innovation translates into a company’s offerings in the market has been described by Kim and Mauborgne [1997], for instance, for the German originally Hidden Champion SAP AG (ch. 4.1.1; Figure I.143; A.1.4) as follows.
Until the 1980s Enterprise Resource Planning (ERP) appeared as “business-applica- tion software.” Providers focused on sub-segmenting the market and customizing their offerings to meet buyers’ functional needs, such as payroll, human resources, pro- duction management and logistics. And the emphasis of the makers was focusing on improving the performance of particular software products.
Instead of competing on customers’ differences, SAP sought out important commonal- ities in what customers value. SAP’s founder/leaders correctly hypothesized that for most customers the performance advantages of highly customized, individual software modules had been overestimated. Such modules forfeited the efficiency and informa- tion advantages of an integrated system, which allows real-time data exchange across a company.
In 1979, SAP launched R/2 (Figure I.143), a real time integrated business-application software for mainframe computers. R/2 had no restriction on the platform of the host computer; buyers could capitalize of the best hardware available and reduce their maintenance cost dramatically. Most important, R/2 led to huge gains in accuracy and efficiency because a company needed to enter its data only once. And R/2 improved the flow of information. A sales manager, for instance, could find out when a product will be delivered and why it is late by cross-referencing the production database.
SAP’s growth and profits have exceeded its industry’s.
Concerning technology entrepreneurship our interest in expectation of levels of suc- cess is the top ca. 20 percent of firms that create ca. 80 percent of jobs by high or fast growth (Figure I.119). The interest is to assess the fate of a startup from its initial con- figuration, its “birth” including the “startup thrust phase” (ch. 4.3.1, 4.3.2; Figure I.125) in a given environment.
We shall tackle the scope of ex ante expectations referring to three situations
Statements about essentially survival and rough growth levels at the time of firm’s foundation based on its initial configuration (“year 0” of existence and the first year at the highest)
Statements about the situations after the startup thrust phase (year three or four of existence when the period of highest level for a firm’s failure has suc- cessfully passed) or generally,
Firms’ development after a significant bracket in terms of dynamically stable states (as outlined in ch. 4.3.5.3).
In restricting to the time one must keep in mind that startups with (anticipated) produc- tion often need a period of four to eight years before they can commercialize their of- ferings (“delayed growth”). Such long “projection” into the future restricts expectations
seriously, as not only the market and competitive landscape will have changed. The expectation would require assumptions about the scale-up process into large-scale production and a successful entry into the market.
The first case will be similar to that of natural science when usually the initial condi- tions and corresponding equations of motion (or situation-related differential equa- tions) suffice to predict time-dependent trajectories. For the current discussion the ini- tial configuration (ch. 4.3.2) would be the starting point.
We shall take care as far as possible of the caveat that the very dynamic develop- ments of new firms in the first years in business (Table I.71) and short-term success does not allow inferences about sustainable success.
Serious issues for ex ante approaches are raised by the high complexity of new tech- nology-based firms (Figure I.128) which makes statistical approaches largely ques- tionable due to sample selection and keeping the structure in the answer sets. The multi-dimensionality of factors contributing to survival and growth of an NTBF and the much randomness of environmental changes impacting firm size result in situations which are often not expectable.