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OPEN MINDS AND STRONG LEADERSHIP

The market is undergoing a significant shift and the coronavirus pandemic is accelerating this transformation.  Prof. Nadine Kammerlander is an expert in the SME industry. She talks about the topics dominating the field right now.

IT SEEMS AS THOUGH THE CURRENT SITUATION IS PARTICULARLY DIFFICULT FOR SOME SME COMPANIES. WHY IS THAT?

Prof. Nadine Kammerlander —

There are currently a number of factors that are making life difficult for SMEs. One is the general volatility on the markets, which has increased drastically in recent years. We’re also observing great technological changes in some sectors – for instance, the automotive industry. The pandemic is causing problems, too. Along with the companies directly affected by restrictions, it is also having an impact on SME companies right now, especially those that depend on globalization, such as suppliers.

How well a company is doing at the moment also depends on how the company has positioned themselves. Until recently we were experiencing a solid upturn that may well have hidden a number of weaknesses in companies. That means strategic, financial or personnel problems may have been concealed at some companies. For those companies, the pandemic will act like a magnifying glass, bringing those problems into the light.

Diversity is a success factor. After all, heterogeneous teams where everyone is equal are more openminded.

HOW ARE SME COMPANIES REACTING TO THE DIFFICULT OVERALL SITUATION?

Kammerlander —

I am currently working with some colleagues from Australia on a study to see how SMEs are behaving in this pandemic. We have identified two distinct approaches. One is “hibernation.” These companies are trying to weather the crisis, by lowering costs and taking advantage of state support, for instance. They intend to hibernate through the crisis, as it were. The other approach used by companies is to actively manage the crisis, by adapting their business models and entering new fields, for example. They are strengthening their business so that they can continue to make sales and profits even during this difficult time.

WHAT MAKES THE ACTIVE COMPANIES DIFFERENT? WHAT WILL HELP THEM MASTER THE CRISIS?

Kammerlander —

We have seen that an active approach often leads to new products and customer groups. In the current pandemic, a lot of companies in the field of protective equipment, for example, have been taking this approach.

The characteristics associated with traditional family-run business can also help companies to master the crisis. The ability to make decisions and implement them quickly in a fast-changing environment is a particular quality. Another very important aspect is good financial management. Those with a solid equity ratio have quick access to the means necessary to make investments, e.g., in new machinery.

And last but not least, the workforce is also a critical factor. The workforce must be fully committed to implementing the measures. If companies want to adapt in a crisis situation and implement transformation rapidly, their employees’ levels of training and motivation in particular are extremely important.

It is not the idea, but its the implementation that is often the difficulty.«

Prof. Nadine Kammerlander

Prof. Nadine Kammerlander

is a professor at the WHU – Otto Beisheim School of Management, where she is the head of the Institute of Family Business and Mittelstand. Before joining the WHU, she spent several years with a leading strategic consultancy and provided support for international companies in the automotive and high-tech sectors. Her teaching and research focuses primarily on innovation, management and succession.

SUCCESSFUL TRANSFORMATION OFTEN GOES HAND IN HAND WITH SUCCESSFUL INNOVATION. WHAT ARE THE CHALLENGES THAT COMPANIES FACE?

Kammerlander —

It is not usually a lack of innovative ideas that is the stumbling block. But where companies tend to struggle is with implementation. Many ideas are “talked to death” at management level. One of the reasons for this is that the more innovative an idea is, the greater the uncertainty about the underlying business plan. Companies have to make a lot of assumptions: about the market and how it will develop, the “right way” to implement new approaches and much more. And the more volatile the environment, the stronger the tendency to resist.

HOW CAN COMPANIES INCREASE THE PROBABILITY OF SEEING SUCCESS FROM INNOVATION?

Kammerlander —

Innovative projects are usually more successfully implemented when the issue lands higher up the chain of command – ideally this should be the responsibility of top management levels. Decisions regarding innovation can be pushed forward more effectively, which can help prevent the project being buried under day-to-day business.

It’s also helpful – especially when it comes to the more “radical” ideas – if innovative processes are removed from the normal running of the company and given their own space. With fires both big and small to be put out every day, daily business and innovation development tend to naturally stand in one another’s way. Structures, processes and incentives for employees are usually laid out in such a way that they’re more likely to take care of daily business. To ensure implementation is successful, it is better to put together a project team that can drive innovation forward at full steam.

Innovation processes should be removed from day-to-day business.«

Prof. Nadine Kammerlander

DO YOU HAVE AN EXAMPLE OF SUCCESSFUL IMPLEMENTATION?

Kammerlander —

The launch of the Spiegel Online news platform is a good example. The digital arm, including the editorial side of things, was initially developed separately and was only incorporated into Spiegel once the digital concept was up and running. This prevented any internal resistance and conflict between the online and analog editorial teams that could have hindered the process. You have to remember that individual expectations and employees’ emotional attachment to their current positions are really important aspects of change processes. If you’re not careful, they can soon lead to logjams.

As I mentioned earlier, the automotive industry is currently in the midst of exactly this sort of “cultural” transformation process: electrification is pushing conventional drive technology out of its dominant position and is leading the entire vehicle industry into a new phase. Engineering savvy turned the German automotive industry into a global success story spanning many decades. It is now up to the established companies to offer new concepts so that they can hold their own in a fast-changing competitive environment.

WE GET THE IMPRESSION THAT MANY SME COMPANIES ARE STILL HOLDING BACK WHEN IT COMES TO DIGITALIZATION. WOULD YOU AGREE?

Kammerlander —

Yes, I would. My institute surveyed around 1,700 SME companies last year. The results showed that the SME industry recognizes the relevance of digitalization, but is trailing behind when it comes to the specific implementation of digital technologies. Basic IT instruments such as CRM management and ERP systems were only being used by 50–75% of the companies. The more advanced the technologies, the less they were being used by the companies. Artificial intelligence was only being used by 5%.

The study also showed that many SME companies would like to move forward in this direction, but they were uncertain of how. So we can conclude that there is a lack of examples to follow and a lack of knowledge in dealing with topics such as big data. Moreover, there are not enough standards and norms to guide them. Many companies fear making a “double investment” by investing too early in technologies that may not catch on.

WHERE DO YOU SEE THE GERMAN SME SECTOR AS A WHOLE AS FAR AS DIGITALIZATION IS CONCERNED?

Kammerlander —

Taking a bird’s eye view, a company’s digitalization process can be split into three stages. The first is process digitalization and involves the digital mapping of internal processes. The second step is about products and services, as well as the digitalization of customer interfaces. The third step then involves digitalizing the business models themselves, i.e., creating a comprehensive offering of digital products, e.g., as part of a smart factory.

Looking at the sector as a whole, German SMEs are currently moving between steps one and two. Only very few SMEs have already taken the third step. Examples include the heating system supplier Viessmann or the elevator manufacturer Vestner. Both companies – which are, incidentally, led by young management teams, recognized the opportunities of digitalization early on and applied them systematically to their business models.

COMPETITIVE PRESSURE IS RISING AND DIGITAL SKILLS ARE A CENTRAL FACTOR FOR SUCCESS. HOW MUCH TIME DO COMPANIES HAVE TO ENSURE THEY DO NOT FALL BEHIND IN THE FUTURE?

Kammerlander —

That depends on the sector and how the global competition develops. In the B2B field, companies in Germany are further along with digital development than in the B2C field. But if I had to make a prediction, I would say within three to five years. For some companies, a “winner takes all” situation will occur. Where signs are starting to point to this trend, companies will have to move fast.

DIGITALIZATION ALSO INVOLVES HANDLING LARGE VOLUMES OF DATA …

Kammerlander —

... which, in my personal opinion, presents policymakers in Germany with a key challenge. It is big data processing that allows the really big leaps to be taken in terms of digitalization. That’s why we urgently need good ideas about how to bring digital processes into line with the regulations. Data storage, maintenance services, autonomous driving - they all require a framework that complies with the data protection regulations, safeguards the various interests and at the same time allows German SMEs to maintain their international competitive standing. Our stringent regulations do not just impose restrictions, however, they also open up opportunities. If German companies can find a particularly secure way of using data, this could give them a crucial competitive edge, especially when marketing services in the B2B sector.

HOW IMPORTANT IS COOPERATION RIGHT NOW FOR FORGING THE PATHS AHEAD? HOW ARE ATTITUDES TOWARD MERGERS AND ACQUISITIONS CHANGING AT THE MOMENT?

Kammerlander —

Cooperation is becoming more important all in all. And diversity plays a vital role here, too. This means that companies currently have to cooperate closely with businesses with very different backgrounds – e.g., industrial companies with start-ups. With different corporate cultures, this often is not easy for either side.

The M&A market has recently been difficult in general. Going forward, however, the market is expected to pick up speed again, evolving from a seller’s market into a buyer’s market. We are set to see more fire sales and “stressed” M&A situations. Sales multiple spreads will increase significantly.

If we take a look at the well-positioned SMEs, i.e., the companies with good multiples, we can see that owners are becoming more open-minded with regard to sales or bringing in investors. And the focus is increasingly on whether it is a good match – how well the partners fit together beyond the price tag. Does the buyer want to develop the company further or are they basically just interested in pulling assets out of the company or transferring them to another company? Particularly in companies where the successor generation is at the helm, the latter is not the preferred option.

WHEN A SELLER IS READY TO PASS THEIR BUSINESS ON, DO THEY LOOK MORE AT THE PRICE OR HOW THEIR LIFE’S WORK WILL BE PRESERVED?

Kammerlander —

It is always a combination of both aspects. But to get a substantiated answer to the question, we conducted a survey among more than 2,000 entrepreneurs in partnership with a sales portal for companies a few months ago. The cooperation with the portal created a setting in which the entrepreneurs had no reason not to give a truthful answer.

The results showed a more or less 50/50 split. For just under half of the sellers, price was the decisive factor. Just over half said they cared about what would happen to their business. Many of them said that particularly relevant considerations for them were whether the company would continue to operate under the same name, and the seller’s vision for the company’s employees.

WHAT DO YOU THINK THE PROTOTYPICAL SME WILL LOOK LIKE IN FIFTEEN YEARS?

Kammerlander —

A positive view of the prototypical SME in 15 years is one where the company uses digital processes wherever it is necessary and helpful for customers, costs and security. It will have maintained the typical advantages that it has today, including effective decision-making structures. It will have motivated employees that are welleducated in digital fields and that have no problems finding their feet in the new world. And it will not be funded solely by the owner but is economically – in whatever shape – borne by numerous investors so that nothing stands in the way of its future development or growth.

WHERE DO YOU SEE THE GERMAN SME SECTOR AS A WHOLE AS FAR AS DIGITALIZATION IS CONCERNED?

Kammerlander —

Taking a bird’s eye view, a company’s digitalization process can be split into three stages. The first is process digitalization and involves the digital mapping of internal processes. The second step is about products and services, as well as the digitalization of customer interfaces. The third step then involves digitalizing the business models themselves, i.e., creating a comprehensive offering of digital products, e.g., as part of a smart factory.

Looking at the sector as a whole, German SMEs are currently moving between steps one and two. Only very few SMEs have already taken the third step. Examples include the heating system supplier Viessmann or the elevator manufacturer Vestner. Both companies – which are, incidentally, led by young management teams, recognized the opportunities of digitalization early on and applied them systematically to their business models.

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