A team of experts from Stralsund university comes up with different ways for Mittelstand companies to continue underpinning the German economy
Innovation, quality, change – steadfast companions of the Mittelstand, the bedrock of SMEs in Germany. Mittelstand firms are currently undergoing a process of change, with observers describing “waves of startups,” “waves of bankruptcies,” an “economic miracle,” but also a “problem child.” Despite this, the Mittelstand is still considered a driving force behind the German economy, and SMEs are leveraging economic agglomeration and international cooperation to keep pace with emerging technologies and new business models. This has spawned so-called transnational and multinational enterprises with immense economic power and considerable potential to innovate, and it is these companies that are now shaping the business landscape in Germany. A team of experts at Stralsund University of Applied Sciences and the Steinbeis Transfer Center for Network Planning and Evaluation is looking into different ways for Mittelstand enterprises to meet the challenges currently facing companies.
The key features of a market-driven economy are its ability to come up with innovation and competitiveness. Despite the continual processes of economic concentration and international competition, Germany is home to a remarkable number of small and medium-sized enterprises (SMEs). These are of major importance not only in societal terms, but also when it comes to economic policy; they make significant contributions to the competitive power and versatility of the German economy, as well as the provision of essential regional services. 
SMEs in Germany are primarily associated with tradition, roots in the regional economy, and stability. Even today, family-owned businesses – particularly “family dynasties” – still appear to play a special role as the backbone of the German economy. Despite this, all companies are currently facing by an increasingly volatile business environment marked by numerous global and regional challenges.
In response to technologies, global changes, and volatile value chains, companies must be in a constant state of readiness to adapt. This raises an interesting question: Do we need to reinterpret and rethink the Mittelstand? Answer: yes! For two reasons: firstly, because innovations can displace traditional business models, and secondly, because more attention should be given to the important role played by the Mittelstand when it comes to regional development.
SMEs secure the appeal of locations and the quality of life offered by regional economies
Innovation in products, processes, problem-solving, and partnership make the basis of entrepreneurial, regional, and international competitiveness.  If we focus on the appeal of locations and regional potential to offer good living standards thanks to the companies in an area, making quantitative distinctions between SMEs and large companies  is of little significance to business practice. In the coming years, it will be important to place more emphasis on the culture of innovation, as well as the regional and societal responsibility of companies “on the ground,” irrespective of the scale or even corporate ownership of local operations.
By fostering a “revolution” in the world of work,  local activities of skilled crafts enterprises, retail stores, hotels, restaurants, the local businesses of corporations and, in particular, start-ups  and co-working spaces, help shaping the appeal of a location and the future prospects of both cities and regions as a whole. Although the individual challenges faced by companies within value chains are highly diverse, collaboration – precisely between the different business models, cultures, and markets of companies – provides an answer to constant change and the safeguarding of value creation in a region.
For years, contemplating future prospects has been a disconcerting pastime. According to the KfW SME Innovation Report 2019, there has been a noticeable decline in the so-called innovator rate in recent years. The survey ascertained that the “rate of innovators in the SME sector […] has dropped again by four percentage points to 19%. The share of innovative SMEs has thus fallen to the lowest level since innovation activity was first surveyed with the KfW SME Panel around one and a half decades ago. The proportion of innovative businesses has decreased by 50 percent since the all year peak in 2004/2006.”  There is every reason to describe SMEs as champions of sustainability with a long-term business focus, but they are threatened by losing not only the edge they once had, but also their propensity to innovate and introduce market-ready innovations.
The new Mittelstand – the recipe for a sustainable future economy?
Mittelstand companies are increasingly losing their appeal and sense of orientation regarding the future. But changing a strategy or the company culture is not the sort of thing one will accomplish overnight. If SMEs want to master challenges in the years to come and manage the process of transformation, there is a case to be made for combining the virtues of the traditional Mittelstand with those of startups. This would require SMEs to engage in change management. And this affects areas such as innovation management, digitalization, sustainability, leadership, and recruitment of talents.
Although futurologists have occasionally predicted the total demise of SMEs, in macroeconomic terms they still form the backbone of the German economy. Medium-sized companies are known for their market proximity, versatility, flexibility, effectiveness, stability, their understanding of customers and employees, as well as their responsible approach to business management and commitment to local and social interests. They are not just miniature versions of big companies and corporations, and most definitely have their strengths, with certain success factors that are crucial for transformation processes.  These are values and attributes that are essential for future-ready forms of Mittelstand companies and family-owned businesses. The large number of companies that will go through succession processes in the near future presents challenges, but this is also an opportunity to create new structures and establish promising business models.
The declining innovator rate is a signal to Mittelstand enterprises that traditional strengths alone will no longer suffice if you want to remain competitive in the future. According to Evgeni Kouris (founder of New Mittelstand), Diana Scholl (New Mittelstand Ambassador and Head of Political Networks and Strategy at the German Association for Small and Medium-Sized Businesses, or BVMW), and Aileen Moeck (futurologist and New Mittelstand Ambassador), traditional SME values are also in demand from New Mittelstand companies. Based on their vision of a New Mittelstand community, a defining feature of these companies is their positive, sustainable, and authentic vision and a strategy of innovation that is both holistic and flexible, hand in hand with a transformative and future-oriented culture of leadership. Their focus lies in qualitative, meaningful, and purpose-oriented management, as well as an openness to networked skills management.
Framework conditions on the way to a successful future
There is no magic formula when it comes to establishing a new, innovative quality of corporate management in medium-sized companies – and achieving this quickly. It is already challenging having at least three very different generations currently playing an active role in shaping society and organizations. Collaboration – which involves people actively working together on joint projects, as well as tasks that require collective problem-solving, often transcending the rigidly defined boundaries of systems – is not without its critics. In many companies, interdisciplinary, inter-hierarchical, and at the same time pragmatic endeavors are not yet established practice. It is a rocky path from widespread mistrust to a culture of trust. Communication and openness, both internally and externally, are important prerequisites in fostering a culture of innovation. It is also important to be seen to be leading by example, and it is within this context that digital natives and startups are considered a driving force of innovation, economic growth, and prosperity.
Given all these demands and the changes they involve, it should not be forgotten that public policies are needed to support this change. Many SMEs say they support and drive meaningful change through internal projects, but there are still too many hurdles of bureaucracy and hindrances caused by the lack of high-speed internet coverage. The joint task of companies, politics, and educational establishments is to put in place and promote the framework conditions of business to guide the Mittelstand back to where it belongs – at the top. The Mittelstand is a locomotive of innovation, customer orientation, and business on the railroad track to growth, prosperity, and the future.
Prof. Dr. Norbert Zdrowomyslaw (author)
Freelance project manager
Steinbeis Transfer Center Network Planning and Evaluation (Stralsund)