• Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 6/25/2013

The Recipe for Success of the Hidden Champions of the 21st Century 

Recipe for success
If one follows the media or attends business school, it looks like the business world is dominated by large public companies with high-leverage, engaging in merger and acquisitions strategies, outsourcing parts of the value chain, aggressively entering new markets to spur growth, changing CEOs frequently, and continuously searching for (and losing) top talent. One would think these are required business strategies for global companies in the 21st century.

Well, one would be wrong, according to Hermann Simon, author of the 2012 book – “Hidden Champions – On the road to Globalia”. Mr. Simon has catalogued, over 25 years, more than 2,700 hidden champions – medium-sized companies that rarely appear in the news although they are global market leaders in unique niches, each with revenues between $1B and $5B and an average of 2,000 employees.

These hidden champions form the backbone of many industrial economies, particularly in the German-speaking countries where 55% of all the identified hidden champions are located. Listening to Hermann Simon speak at a recent research seminar, I was struck by how different the typical strategy and positioning of these hidden champions is, compared to the companies we normally hear about.

Financing growth from cash flow

Hidden Champions use low leverage, financing their growth mostly from their cash-flows. They are vertically integrated, usually with operations geographically concentrated but often away from major urban centers.

They concentrate in a single market niche that they serve globally – be it home appliances for Miele, fish processing systems for Baader, or compact construction equipment for Bobcat, usually having a very large market share. They have a relentless focus on incremental product and process innovation, develop five more patents than the average company per 1,000 employees, yet trust more in trade secrets and the tacit knowledge of their employee base than patents as a source of competitive advantage.

Most hidden champions are private, family businesses

They treat their employees well and keep them even during downturns. Therefore employee loyalty is high and turn-over low.

Most hidden champions are private, family businesses that have a strategic horizon of generations instead of quarters. Their CEOs have an average tenure longer than 20 years and talk to customers and distributors much more frequently than the CEOs of public companies.

They avoid acquisitions and hate diversification. They serve only one market but serve it globally, being a driver of exports for the countries that host them. And they serve their global market niche better than anyone else in the world in a ‘hard to imitate’ way because of the integrated nature of their production process, their focus on continuous innovation, and the sourcing of geographically clustered competencies.

A foundation for economic revival

Not quite the exciting mix of strategies that (mostly) American business books like to describe and recommend. Yet effective in ensuring profitable and market leading companies in many sectors. The strength of these companies may help explain the resilience of the German-speaking Economies in the face of the recent economic downturn and financial crisis. Hopefully these Hidden Champions, and the emulation of their example by companies in other countries, can serve as a foundation for an economic revival in Europe.

Filipe Santos

Filipe Santos
Filipe Santos is Associate Professor of Entrepreneurship at INSEAD. He is the director for the Maag International Centre for Entrepreneurship and the academic director of the INSEAD Social Entrepreneurship Initiative.

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