How can small and mid-sized companies reinvent themselves? We take a look at four German companies that are breaking the rules and proving that the future belongs to the fast.

Marco Polo, the intrepid explorer, came across a fascinating phenomenon in 1275. As he was fishing for squid off the coast of Socotra Island in the Arabian Sea, he noticed dull gray clumps of a waxy substance floating on the ocean’s surface. It had a foul – almost fecal – stench, which much to his surprise soon transformed into a pleasant aroma. He suspected, quite correctly, that this strange substance had come from sperm whales.

Ambergris, as this mysterious substance is called, has become a much sought-after commodity for the fragrance industry. Yet to this day nobody knows exactly how it forms. What we do know is that the substance is made in the body of the whale after it has swallowed something indigestible, like a squid’s beak. It ends up floating in the ocean in whale vomit or manure, and the longer ambergris spends floating on the surface of the ocean, the more it develops a woody, almost tobacco-like aroma that has perfume makers around the world making a beeline for it.

But these days, there’s no need to scour the oceans to find rare ambergris. You just need to go to Bitterfeld, a nondescript town in the eastern part of Germany.

The chemical plants glisten in the rain, the heavy clouds still hang above the old two-story brickworks and there is an unpleasant smell in the air that clings to your nose. "C12MNA," explains Stefan Müller by way of a greeting, referring to 2-Methylundecanal, the chemical to be blamed for the stench.

Müller took over the mid-sized chemicals company, Miltitz Aromatics, from his father in 2013. Miltitz produces synthetic ambergris using a remarkably efficient and much sought-after process. "Earlier you needed up to 300 bar pressure to make ambergris, but our old plant couldn’t manage that. So we designed a proprietary method that works without pressure," says the 39-year-old.

In Bitterfeld of all places, where East Germany’s opencast brown coal mines once polluted the air, Miltitz produces not only ambergris, but also the ingredients for some of the world’s most popular scents. With its innovative process for ambergris production and other in-demand aromatic substances, the company’s 50 employees achieved a turnover of almost €14 million ($15.3 million) in 2015. The company’s customers primarily include major perfume and aroma manufacturers around the world. "Around 1,600 out of the 2,000 components in perfumes are chemically synthesized today, with the rest provided by nature," says Müller.

The well-respected Swiss Research Institute of Small Business and Entrepreneurship at the University of St. Gallen in Switzerland recently crowned Miltitz Aromatics as one of 23 Future Champions in the German-speaking world. These firms have an export rate of at least 40%, are technology leaders, have taken command of new markets early and are growing so fast they stand to become the dominant, global players in their respective fields. Miltitz Managing Director Stefan Müller says that his company simply needs to reinvent itself frequently and make the best of what it has as quickly as possible. "Otherwise we could never remain competitive in the capital-intensive chemicals industry."

The age of "micro-multinationals"

This makes Miltitz one of those companies well prepared for the third wave of globalization. According to the Trade Winds study by HSBC, this wave will quadruple global trade by 2050. Yet unlike previous expansions, experts report that small and mid-sized enterprises (SMEs) stand to benefit the most this time. New technologies and global platforms are making location and size irrelevant. The study’s authors even speak of an "age of micro-multinationals." The future, it would seem, belongs to specialized, flexible and well-connected SMEs.

Of course, innovative and globally sought-after products and services are essential. And they need to be developed in ever shorter timeframes. "The future belongs to the fast," as Hewlett-Packard CEO Meg Whitman once said at the World Economic Forum in Davos.

However, companies like Miltitz are the exception. On the whole, Germany’s much praised SMEs no longer seem to be quite up to speed. The German Chamber of Industry and Commerce (Deutsche Industrie- und Handelskammer – DIHK) raised the alarm back in December. "SMEs are falling behind," screamed the headline of the DIHK Innovation Report 2015/2016. Only 41% of firms with fewer than 250 employees planned to "expand innovation activities" compared to more than 60% of larger companies.

Germany’s KfW development bank is also singing the same tune. "The risk of Germany’s SMEs losing ground internationally with their aging range of products is increasing," wrote KfW Chief Economist Jörg Zeuner in the bank’s SME Innovation Report 2015.

Do German SMEs regard digitization as only good for automating production and networking factories (known as Industry 4.0)? Haven’t they realized that they too will have to develop new products faster, or even come up with completely different business models in order to remain competitive globally? This risk has been described by Carsten Hentrich and Michael Pachmajer, who discussed the closed attitude toward digitization among SMEs in their new book "Der Weg zum digitalen Unternehmen" (The Path to a Digital Company). "Around 50% of family companies want to transform their business model but they don’t know how," says Pachmajer.

But for those willing to take another look, there are also positive examples. SMEs that have restructured are constantly reinventing themselves. This happens in tiny steps and isn’t as spectacular as, say, the disruption from a Silicon Valley startup, but they are highly successful in their respective fields nonetheless.

Take Siegfried Koepp, for example, who started his own revolution before the turn of the millennium. In 1999, when he became Managing Director of EMG Automation GmbH – an automation specialist from Germany’s Sauerland region making everything from electro-hydraulic guide rollers for production machinery and high-end infrared measurement products for machines to electromagnetic processes – he promptly scrapped all divisions and created a new structure with a flat hierarchy. "Since then, below the management level, teams of 20 to 50 employees work together as equals responsible for the entire process chain – from distribution to assembly," says Koepp.

His priority was to eliminate thinking in divisions. "The word itself immediately shows what’s wrong: employees are closed off in their own areas and don’t have an overview of the whole company," explains the 60-year-old engineer. That led to blinkered vision and power games that often ended in finger pointing at meetings with the sole purpose of establishing which department was to blame. Koepp also discovered that division leaders often became mini "power centers" within the company acting as impediments to change.

Creating a new system

Changing this took some painful decisions. "We had to let most of the management go," says Koepp. But many employees also had difficulty adjusting. "After an acclimation period of a year, around 80% of the staff had gotten used to the new system, and most of them really blossomed." The rest, however, slowly left the company bit by bit. "As Managing Director, I had to take a deep breath and explain again and again why I was convinced the new structure was right," says Koepp. The first year in particular was "extremely challenging." Time has shown that the courage and effort it took was worthwhile. "Suddenly, we had a complete overview of the entire process, from order to delivery." After just a few months, EMG had halved its throughput times, reduced inventories by 40% and increased productivity by 15%. And six years after Koepp’s revolution, turnover has trebled.

However, Siegfried Koepp, who is also involved with the German Engineering Federation (Verband Deutscher Maschinen- und Anlagenbau – VDMA), knows that EMG is the exception among Germany’s SMEs. "In most companies, the willingness to turn the organization upside down like this is missing," he says. In order for flat hierarchies to work, bosses are required to trust their employees. A director who micromanages everything and always has to have the last word only prolongs the actual decision-making process – not even the flattest organization can fix that. Change management expert Kai Anderson and Jane Uhlig write in their book "The Agile Company" about the principle of "subsidiarity" – bosses who give the individual business units "a high level of freedom," ensuring that employees can bring in and develop their own ideas. EMG Director Siegfried Koepp swears by this principle. "I’ve experienced that people grow beyond their limits when they really make a difference and influence something," he says. That’s why it is important to give employees the freedom to make their own decisions and to involve them closely in the decision-making process. "That means management has to listen and not only tolerate dissent, but also take it seriously," says Koepp.

Anderson and Uhlig agree. "Closeness and approachability have certainly become hallmarks of a manager of an agile organization, today more than ever," they write. And naturally an autocrat can’t suddenly appear every time something happens to go wrong. "Employees have to know they can make mistakes," says Miltitz Director Stefan Müller, who is convinced that "intrinsic motivation" grows when workers can truly make a difference at a company. "That’s really important for us, since we’re a small company that can’t pay the same salaries that large chemical corporations can," he says. Michael Otto, head of the Otto Group, the world’s largest mail order company, even promotes a "culture of failure." "Employees who have failed with one project are some of the most valuable," he says, because they definitely won’t make the same mistake twice.

However, autonomy isn’t enough. For teams to develop as many ideas as possible, successful managers must bring together different perspectives and skills. "We need to cultivate managers who can discover and systematize the capabilities of networking for themselves," says author Carsten Hentrich.

According to Anderson and Uhlig, "the starting point of the innovation process" is "opening the organization and the respective minds" and a "confrontation with the new." If engineers in their mid-50s keep to themselves, the opportunity for creating new ideas is going to be less than if laborers, developers, designers and customer relationship experts all sit at the same table.

Fostering innovation

Wittenstein SE in Igersheim is particularly keen on mixing up teams. Here in the land of the Madonnas, as the locals call this strip of land 25 miles south of Würzburg, a futuristic building of glass and exposed concrete nestles among the rolling hills. Inside are mobile offices, lounges and lots of open space for thinking and interacting. Welcome to the future. Welcome to the Innovation Factory, built by Wittenstein for €35 million ($38.2 million) and opened in 2014. Developers, programmers, technicians and marketing specialists work alongside the production team. "The vast majority of the value added here takes place within a radius of just 40 meters (43 yards)," says Anna-Katharina Wittenstein, who has been running the company’s business of drive systems since October 2016. It guarantees direct interaction between co-workers with different perspectives. The Innovation Factory has started living up to its name; it’s not only an innovative factory, it’s also a factory where innovation is born. Wittenstein recently launched a completely new gearwheel, or more precisely, a gearwheel without teeth, that promises productivity increases of up to 40%. This "galaxy drive system" won the Hermes Award at the Hannover Expo and recently landed the German Business Innovation Award.

Yet it’s not enough to bring together a diverse collection of professions to create a healthy mix – a company also requires diversity in terms of both age and gender. Siegfried Koepp at EMG considers unconventional thinkers to be crucial. "People questioning what’s established often drive discussions forward in a decisive fashion." Miltitz Managing Director Müller takes this reasoning a step further by making his customers part of the innovation process. "We frequently come up with ideas after speaking with our customers," he says. "That’s why our sales people always take along a chemist when going to appointments, to provide a scientific perspective." This helps the firm continue to create new synthetic scents and improve production methods.

Flat hierarchies, great teams, new product ideas: that all sounds wonderful. Yet in many cases, that still won’t be enough, especially if companies only consider how they can improve their core business. Digitization is disrupting entire sectors, so it’s important to keep a broad perspective and enter new segments and markets – even if that means exiting established fields. It all comes back to Schumpeter’s concept of creative destruction.

But it’s only at a few companies that employees have been tasked with questioning their business models regularly, and in a structured fashion. "That’s unfortunately not part of the industry’s DNA," says Thomas Rinn, Director of the global Competence Center Operations Strategy at Roland Berger.

However, when you look at sectors transformed in recent years by the digitization of production or Industry 4.0, it becomes strikingly clear why this is so necessary. For example, most heavy machinery is now computerized, opening up the mechanical engineering sector to IT firms aiming to take over the lucrative part of the business and downgrade machinery makers to mere parts suppliers.

That would be fatal for some, like wire-drawing machine manufacturer Ernst Koch GmbH & Co. KG from the town of Hemer near Iserlohn. "The machinery normally has a long lifecycle," says Jochen Koch, Managing Partner in the firm, which has 120 employees and an annual turnover of €45 million ($49.1 million). From a business viewpoint, the money is to be made by tapping into the shorter innovation cycle for IT and software.

That’s why Koch, the grandson of the firm’s founder, is pushing the company’s transformation from a machinery manufacturer to an IT service provider. "We’ve decided to build that software competence ourselves rather than buying it," he says. The only thing outsourced is digital support. Koch’s employees were deeply involved in the decision-making process – and they still are. "We have intensive internal discussions about which skills we should develop ourselves and where firms from our circle of partner companies can help," says Koch.

Koch made an important decision back in the late 1990s: since that time, his firm has worked with other targeted SMEs. Making everything from medical wiring to cables for ski lifts, Koch presents itself as a one-stop provider of systems rather than just products. That makes it much more difficult for IT firms to attack the Koch business model. Since 2003, one of its most important partners has been the Italian firm M+E, which specializes in wet-drawing machines, making particularly high-strength wire. "Our partners aren’t competitors, but companies that complement our offerings – with products such as cleaning systems, machinery for coatings or wet-drawing machines," says Koch. "In light of digitization and growing complexity, such cooperation is becoming ever more important."

Experts, including those behind the Trade Winds study, are convinced that cooperative models like Koch’s are the way of the future. Examples of such clever networking are becoming more common – like Euronics, a collection of some 1,500 electronics retailers in Germany that market themselves as a single brand. There’s even an online marketplace to connect the group’s physical and online stores.

The end of centralization

Cooperation and networking like this shows that the trend toward decentralization is not just a few firms allowing teams to operate independently. "Autonomous units make connections both within and outside a company," write Anderson and Uhlig in their book. A corporate headquarters, in the traditional sense, will become rare. "Modern companies have very lean holdings, comprising the executive management and a few central functions like accounting," says EMG Managing Director Koepp. Everything else is the team’s responsibility – enabling them to work efficiently at several different locations.

Neither Koepp nor Müller of Miltitz believe in abandoning fixed structures altogether. "It wouldn’t be a problem if some of my staff worked from home and connected via Skype." Most of them would probably make use of this, as they, like Müller, live in nearby Leipzig. "And they’re better off there than in Bitterfeld," says Müller. "However, direct on-site contact and interaction are important for discussions and the innovation process." In Bitterfeld, Müller still holds his morning meetings. Even his father insisted on calling his staff together at 7 a.m. to share breakfast. "That’s when we always came up with our best ideas," says Müller. The key to sniffing out the best ideas, it seems, is taking the time to chew them over.

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