Abstract

Our Story Begins: The Search for a Clean Shirt
Our washing machine broke down last spring. I called Norris, our local appliance repairman, who promptly came down, gave it a quick a look, and told us it wasn’t worth fixing. “Any suggestions?” I asked. “Well there are all the usual brands—Kenmore, Whirlpool, Frigidaire—they’re all about the same.” But then he said one thing more, “But if you can afford it, you might want to consider Miele.” Miele? Hadn’t heard of that brand so I quickly forgot about all about it.
So off my wife and I went to buy a washing machine. We visited the usual retailers and looked at the usual suspects—Kenmore, Whirlpool, and Frigidaire—and came away less than impressed. Not exactly cheap prices paired with not very long warranties. Particularly distressing was an offhand comment made by one washing machine salesman who nonchalantly stated that the best we could hope for was about 7 to 10 years before we’d be back buying another one. Suffice to say, we came home to our now-growing pile of laundry less than enthused.
Somewhere along the way we also happened to hear about a retailer who sold some brands not offered by mainstream retailers. One of these brands was Miele, the name I remembered our repairman had mentioned. We decided to at least give it a quick look. After hearing Miele’s pitch, which centered on an extremely well-designed product, matched by a 10-year warranty, we decided to give it a shot, or more specifically, our clothes a wash.
Fast forward to this spring when I was asked to review Hermann Simon’s 2009 effort Hidden Champions of the 21st Century. The book, which is a follow-up on his 1996 Hidden Champions: Lessons from 500 of the World’s Best Unknown Companies, introduces the reader to a diverse set of quietly run, typically privately held, world-class market leaders that also typically don’t get the press they deserve. That’s why they’re “hidden.” These are companies that make things and offer services that we often use but simply don’t notice. Companies like Germany’s Miele, which produces best-in-class home appliances; Iceland’s Baader, which manufactures fish processing systems; North Dakota’s Bobcat, the world leader in compact construction equipment; France’s Petzl, a company that specializes in equipment for rock-climbing harnesses; and Orica, an Australian firm that leads the world in developing explosives for use in mines and quarries. In short, companies that one doesn’t hear a whole lot about in the mainstream business media.
These lesser known firms, to use Simon’s terminology are “hidden champions”—privately held, highly focused competitors that have identified and captured a specialized niche. These companies typically avoid drawing attention to themselves and prefer instead to operate in what Simon calls the value chain’s “hinterland” (p. 13). Compared with the average Fortune Global 500 player, which has more than 65,000 employees, “hidden champions” are relatively small operations, with just more than 2,000 employees. However, while small in the conventional metrics of size and sales, they are concomitantly world leaders in their respective competitive arenas. In this review, I will present a brief encapsulation of what Simon has to say about these overlooked operators, followed by some thoughts that came to mind concerning what his work might mean for family-intensive operations.
The Book: Hermann Simon’s Hidden Champions
Simon begins his book with a general description of his sample and a general statement concerning his purpose in writing the book. Front and center is helping readers understand how these “hidden champions” define and implement the strategic visions and operational goals that underlie their remarkable success. What is apparent in many of these firms is how company success is often fuelled by the driving passion of a one, often long-serving, individual, a point we shall return to later.
Contrary to an unquestioned gospel of growth, Simon notes an important growth-related attribute that characterizes many of these firms—namely, that they choose to not grow, at least not in the conventional way. Germany’s Klais Organs, for example, has had exactly 65 employees for the last 100 years. Rather than face the quality-related tradeoffs that so often accompany the undiscerning pursuit of size, this company simply chooses to sustainably service a global niche that it perceives as requiring 65 employees, no more, no less.
While asserting that hidden champions are “leaders,” he also takes on the potentially thorny question of what exactly defines a market leader. Here Simon makes an important point. Market leadership, he asserts, goes beyond the superficial logic of coarse-grained measures, such as a simplistic focus on market share. Instead to stay meaningful, the concept needs to distinguish between “good” market share driven by innovation, superior product performance, and excellent service versus “bad” market share, achieved through price reductions and aggressive promotions. In short, not all market share is created equal, or equally desirable; according to Simon, hidden champions understand and master this distinction.
The late Peter Drucker, who Simon counted as a close associate, once defined the essence of strategy as action with intent. In the spirit of Dr. Drucker’s maxim, hidden champions’ strategy centers on identifying and acting to satisfy a very unique, and not easily satisfied, customer need and then extending their value proposition to customers anywhere on the planet—including disenchanted washing machine shoppers in Winnipeg, Canada, like me. Simon calls these companies “super-nichists” (p. 70). The logic is well encapsulated by BBA, an English textile company that describes their core tactic as seeking “to dominate our market niches by transforming general markets in which we are a nobody into market niches where we are a somebody!” (pp. 71-72). Mark Twain, who advised his readers to “Put all your eggs in one basket and then watch that basket,” would have been pleased.
Chapter 4 focused on how hidden champions have managed the opportunities and challenges of globalization. While many of the champions have become increasingly globalized over the past two decades, they seek “global fitness” (p. 103) in a variety of different ways. Some firms, such as Danfoss, the Danish world leader for refrigeration and air conditioning components, have gone so far as to bring the Danish royal family to China. Others report encountering counterfeits overseas (Naím, 2005), resulting in some, such as Vietz, the German specialist in pipeline construction machinery, to move operations back home. Again, no one-size-fits-all solutions.
Chapter 5 describes the customers, products, and services offered by hidden champions. More often than not, they focus on direct sales of products to a comparatively highly concentrated group of clients; interesting, these firms do not see themselves as especially strong in marketing, but often symbiotically “sailing in the wake of [their] top notch customers” (p. 144).
Chapter 6 focuses on innovation. This is one of the most unambiguous parts of the book. According to Simon’s survey, the overwhelming majority of hidden champions (85%) perceive themselves as technological leaders in their particular market domain. They steer a course of perpetual innovation, while simultaneously steering clear of both over-engineering and also excessive reliance on patent protection (the latter particularly important since, according to Simon, more than one quarter of all patents ultimately go unused—p. 169.) As Klaus Grohmann, CEO of Grohmann Engineering, a leading producer of assembly lines, asserts, “Patents move at horse speed, we’re flying at jet speed” (p. 166).
The theme of chapter 7 is competition. On average, hidden champions report about only about half a dozen serious competitors. Only a few are in polypolistic markets, while others, such as pencil-makers Faber-Castell and Staedtler-Mars and Lyra, and orthopedic implant specialists Zimmer, DePuy, and Biomet, cluster in close proximity—the former in Nuremberg, Germany, the latter in Warsaw, Indiana. Interestingly, only one in seven of hidden champions see themselves as part of a competitive cluster.
Chapter 8 deals with a seemingly incongruous set of topics: financing and the surrounding environment. Concerning the first, these companies generally leave themselves a lot of slack. Some, such as Miele, are completely equity-financed. A key driver for many of these firms is dynasty, a motive, Simon notes, not typically shared with very many private equity investors. As concerns location, one of the most significant findings is a penchant for the least slightly out-of-the-way rural locations, like Gwinner, North Dakota, home to BobCat. Remoteness in location, Simon argues, matters because it facilitates the kind of in-depth, sustained attention that excellence demands and which the competing demands of large cities make increasingly difficult.
Chapter 9 is all about employees. Simon estimates that the hidden champions have grown from an average of 1,285 employees to 2,037 over the past 10 years. This growth is also increasingly outside country-of-origin, which has meant the champions are increasingly confronting a whole new set of issues. Robert Reich’s two HBR pieces, “Who is us?” (1990) and “Who is them?” (1991), came to mind as articulating two of the key questions an increasing number of hidden champions are facing. Simon very much echoes Reich’s essays when he asks, “What does it mean when a company like CEAG, the world market leader in chargers for cell phones, has more than 18,000 employees in China and only 270 employees in Germany? Can we still call it a German company?” (p. 260). In short, some interesting days ahead.
Chapter 10 gets into some family business issues that will be of special interest to FBR’s readers. To summarize, Simon observes a general trend toward declining family ownership and increasing difficulties in hiring from outside, particularly when a move to a rural setting is involved. I would assert that Simon also sees some problems ahead for a not insignificant number of his sample. One key source emanates from high levels of authority concentrated in relatively few hands for rather long periods. While many company leaders, like Hans Riegel, who has managed Haribo, the world leader in “Gummi Bears” for 63 years, and Horst Brandstätter, who has led Playmobil for 54 years, have led their respective enterprises to world-leadership in their respective niches, the inevitable question is whether these champions can retain their edge absent their key advocate.
Another Simon, this one named Herb, wrote that “Organizational Golden Ages, whether in government, universities, or business firms, seldom endure beyond the generation of people who create them” (1991, p. 61). It remains to be seen whether his assertion also applies to hidden champions. In his book Simon (Hermann) quotes Augustine of Hippo, who asserted, “The fire you want to ignite in others must first burn in you” (p. 30). Accordingly, while there is mention made of the critical role of widows and progeny in several of the companies studied, it remains to seen whether the champions will be able to successfully pass on the flame to those that follow.
The book’s penultimate chapter is about developing strategy. Simon begins by articulating a general tension in this quest—we look for repeatable answers, but strategy, by its very nature, is unique and cannot be repeated or imitated. This caveat notwithstanding, Simon notes a few notable characteristics including a tendency among his sample to avoid over-engineering, a somewhat ironic observation given how detailed (and at times arguably over-engineered) the book is.
So what then does it mean to be a hidden champion? Drawing on the first 11 chapters, Simon brings it all together in chapter 12. Hidden champions do one thing better than anyone, and then do it anywhere the world it needs to be done. They define their markets astutely and dynamically—they look for a different kind of answer and then keep looking for it. They ask and keep asking difficult questions, like how things might be made at least a little better. Reminiscent of Karl Weick’s (1984) observations on the importance of “small wins,” these firms look for small answers rather than “short-lived fads or one-sided exaggerations of specific aspects” (p. 379) like outsourcing, strategic alliances, and the like. But in asking and successfully enacting their answers, there is an innate tension. In short, “The more successful a hidden champion strategy is, the faster it reaches its own limits” (p. 368).
Hidden Champions and the Family Firm
So what’s the takeaway for family business? One clue came in chapter 2, where one CEO, Alfred Ritter of Ritter Sport, chocolate manufacturers, stated that at his company, “We do not think in years, but rather generations” (p. 55); likewise, another CEO, Dr. Karsten Ottenberg of Giesecke & Devrient, stated, “We don’t think about producing good figures in the next quarter. We are more concerned with sustainability over generations” (p. 55). In essence, hidden champions have become champions because they have done something that was worth doing well, even if it could not be done quickly. Accordingly, I think one challenge for family firms in our increasingly frenzied email-intensive and cell phone–saturated world (Hallowell, 2006) will be to facilitate and protect the kind of sustained engagement that makes such mastery possible. To extrapolate Malcolm Gladwell’s (2008) “10,000 hour rule,” hidden champions have put in their time. The pressing question is whether, and how easily, the next generation will put in theirs.
Reading between Simon’s lines, I also wonder whether this challenge will become only more pressing for those champions that have realized increasing success by expanding their operations beyond a relatively constrained geographic base. In essence, by becoming more global, and arguably, less hidden, these champions may be incurring an overlooked but significant cost. More specifically, the “champion” status they have achieved in comparative geographic isolation and at smaller scale may become increasingly difficult to replicate and sustain on a global basis and at a larger scale. In short, Klais Organ, which has limited itself to a mere 65 employees for over a century, may be on to something. Bigger is not necessarily better.
Dealing with the wildcards of larger organizational size and greater geographic span may only exacerbate some of the potential time bombs that may be ticking within some of the hidden champions. To the extent the champion’s long-term success has been driven by one key individual, there could be some very vexing challenges on the horizon. This was one notable limitation of Simon’s presentation. While he notes the tendency toward power being concentrated in very few hands, and furthermore that same power often being held for comparatively longer periods (an average CEO tenure of 21.6 years), he does not offer any practical solutions for power’s relinquishment and transfer beyond the current power holder. Accordingly, I found myself wondering to what extent some of these hidden champions are in the midst of some hidden “power struggles” (Levinson, 1971) and “succession conspiracies” (Lansberg, 1988), which our field has written about for decades.
That said, and to his credit, Simon’s book does offer some shining examples of family businesses that have been able to respond to the complex challenges faced.
The French writer Antoine de Saint-Exupéry once wrote, “If you want to build a ship, then do not gather men to find wood, award commissions and distribute work, but teach them to yearn for the wide, endless sea” (p. 46). These are companies that have collectively yearned for the wide and endless horizon of customer value in ways that can teach us all something. In summary then, Simon’s Hidden Champions is a rich narrative of many not-often-told stories and, by extension, the story of satisfied customers and clean shirts.
