Lessons from Hidden Champions: How to Innovate Deep, Vertical, and Over the Long-Haul

An Interview with Hermann Simon, author of "Hidden Champions of the 21st Century: Success Strategies of Unknown World Market Leaders"

German management authority Hermann Simon coined the term "hidden champion" to describe mid-sized companies that are first, second or third in their markets yet have little awareness outside their industries. Simon included companies with up to $4 billion in revenue, although the vast majority are under $1 billion. Over 25 years of research, he identified more than 2,700 such companies around the world and surveyed them about subjects ranging from leadership to customer relationships. He also interviewed many of their leaders in person, on visits or through consulting projects.

Simon's research unearthed a roster of traits common to such companies, which he describes in his book "Hidden Champions of the 21st Century: Success Strategies of Unknown World Market Leaders." Although more than half the firms discussed in that book are in Western Europe, hidden champions based in the United States and elsewhere demonstrate most of the same traits, Simon says.

Among those traits is an emphasis on innovation, which Simon calls the dominant driver of market share in such high-performing companies. The National Center for the Middle Market spoke with Simon recently about the innovation advantages of hidden champions.

 

Just to be clear, when you talk about hidden champion innovation you don't mean disruptive technology, correct?

Correct. Most hidden champions' innovation is incremental, achieved in small steps day after day, year after year. Process innovations are often more important than product ones. They innovate in distribution, marketing, and sales as well.

How do successful middle-market R&D functions differ from large corporate ones?

Large corporations tend to throw big budgets at a problem. Hidden champions deploy small, dedicated teams. They have remarkably small R&D crews. Unlike at large companies, these aren't people who are climbing the career ladder and only stay in R&D for a period of time. Hidden champions' R&D departments are full of people who have made a specialty out of the industry and the particular company's products. In some cases they have devoted their whole careers to them.

Another advantage is that there is much less friction between departments. That kind of culture saves a lot of time, so there is a speed advantage. Here is one measure of that. I ask managers the question, "How much energy do you use to overcome internal resistance within your company?" At large companies, managers answer between 50% and 70%. In mid-sized companies, generally, it is 20% to 30%. In the hidden champions it is between 10% and 20%.

To what extent is friction a function of size?

Certainly there is less friction when people know each other, which happens when you just have a few hundred employees. But size also affects how close employees are to the customer. I once visited Nokia: they had 19,000 people in their R&D department.

How many of those 19,000 do you think know anything about the customer or about the manufacturing process? If you have small groups then you are close to the customer, close to the manufacturing process. It is fundamentally different.

How important is customer contact to innovation?

For the hidden champions it is very important because many ideas come from customers. But they particularly come from working closely with customers with whom you have long-term relationships. About 70% of hidden champions sell only direct, and more than 70% of their customers are regular customers.

Don't large companies have more people available to work directly with customers?

In large companies, between 5% and 10% of employees have direct customer contact. In hidden champions it is between 25% and 50%. There has to be more contact with the customer because the products are in general more complex. But in smaller companies there is also less division of labor. Someone from manufacturing may be sent out to a customer to do a service job. That would not happen in a large company. Years ago at BMW, they had a program in their R&D center, which had about 5,000 people at that time. In this program, young engineers had to go to an auto dealer for one week. And after just one week they came back with a changed perception of the world.

How much does hidden champions' innovation respond to customer needs and how much emerges from their own capabilities and discoveries?

This is another great strength of the hidden champions. 65% say they manage to balance technology and customer needs as the driving force of their innovation. In a parallel study that I conducted with large corporations, just 19% said that. The goal of innovation should be to integrate technology and customer needs. There is no need to produce the most powerful product possible. It only introduces complexity. I remember one hidden champion did a study among its clients about training. And people in developing countries said, "Your training is excellent. But we wish your products were less complex so we didn't need all this excellent training."

How can mid-sized companies overcome large corporations' much greater resources?

These hidden champions may be small, but they are at the top of their markets. They are recognized as experts not only by their customers but also by everyone in their industries. And that is something they can use to bring in more resources. A few years ago I gave a speech at an annual conference held by a company called Plansee, which is based in a small town in Austria. They call it the Plansee Seminar, and it is for everyone involved in the hard metals industry. People came from all over the world: professors, researchers, even their competitors. They had 40 presentations from China and about the same number from America. All the best knowledge in the world on hard metals was gathered there in that small Austrian village. There were 70 Plansee employees there and every one of them got to know all the experts. So now if they have a problem they can call the guy from Beijing or the guy from MIT. And this is not unique. I've been to a similar conference for a company that makes corrugated paper. So never mind how small you are. If you are the best in your field, you can build around you a worldwide network of experts. That is the foundation of very deep innovation.

In general, does it make more sense for middle-market companies to think about innovating deep - within existing product lines, for example, or even developing their own production equipment - rather than innovating broad?

I tend personally to prefer the deep option. That is how you become unique and superior. Many of these companies--most of them--don't outsource their R&D or manufacturing. When you ask them, they will tell you that in order to achieve superior end products, you have to go one, two, three steps deeper in the way you create them. You must be the one to create unique technologies or equipment or processes. Remember, uniqueness can only be created internally. If you buy something from someone else, other people can buy it as well. When I travel, I always look to see where the luggage carts at airports are coming from. In Tokyo, in Seoul, in Beijing, in Mexico City, they all come from Wanzl, in Germany. A luggage cart would seem to be the simplest product, but Wanzl's products are unique because the company does everything itself. They even define their own quality standards, which are higher than the industry standards. The secret lies in the depth.

In the mid-sized companies you studied, who took chief responsibility for innovation?

Innovation is usually the concern of the top person. In these companies the tenure of the CEO tends to be very long - about 20 years. Many of them are founders or members of the founding family. So they care very deeply about what they make and have had a very long time to learn everything about it.

Simon's research suggests a dual-pronged opportunity for mid-sized companies: to position themselves as masters of a narrowly defined market and then to deepen their reputation for expertise by becoming the dominant innovator in that market. As mid-sized companies invest in the development of equipment and technologies to produce their own products, they may also become suppliers to competitors and potentially introduce standards for new markets overseas. Close, trusting customer relationships are key to achieving such deep, vertical innovation. 


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