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  • The American Mittelstand

    Posted by David Foster on November 5th, 2014 (All posts by )

    Two posts that sort of go together:

    GE Capital cites some data from the National Center for the Middle Market on the importance of the “unsung heroes of the US economy”–the 200,000 businesses with annual revenues ranging from $10 million to $1 billion.

    Amy Cortese writes about the potential re-emergence of local/regional stock markets, which could provide an avenue for companies in the middle market category to obtain financing and hence accelerate their growth.

     

    9 Responses to “The American Mittelstand”

    1. David Foster Says:

      A piece on the German Mittelstand here:

      http://www.inc.com/magazine/201402/leigh-buchanan/business-lessons-from-german-mittelstand.html

    2. Grurray Says:

      From your link:

      But things get trickier for companies burdened with high capital costs and substantial fixed assets. Yes, manufacturers must be nimble. But they also require skilled local work forces, assurances of unimpeachable quality, and a measure of stability. This is where the Mittelstand excels.

      In the Six Sigma world they call it tribal knowledge. Planners, more often than not, try to eliminate it because they don’t like to risk variation and deviation from the plan. Automate it and forget about it. However, no one likes it until automating and outsourcing decimate company culture so much that the collective forgetting sets in, and the company doesn’t know its product anymore.

      Airbus SAS and Boeing come to mind as two companies constantly dealing with these issues. The former struggles with too many isolated silos spread around in different regions that are mandated by government subsidies. The latter has usually been on the other end of the spectrum with downsizing and outsourcing.

      The company that learns to harness tribal knowledge rather than fight it or be taken over by it is usually the one that is going to succeed. In that case, smaller is better.

    3. David Foster Says:

      “Tribal knowledge”…see Stuart Schneiderman’s post today on The Corporate Neighborhod:

      http://stuartschneiderman.blogspot.com/2014/11/the-corporate-neighborhood.html

    4. Michael Hiteshew Says:

      >>The company that learns to harness tribal knowledge rather than fight it or be taken over by it is usually the one that is going to succeed. In that case, smaller is better.

      I agree with that. However, it takes a large organization to bring the talent and manpower together that’s required to design and build a complex product like a ship or an airplane. But to the greatest degree possible, it should be divided into the smallest business units possible and run that way. Make each unit an independent cost and profit center as well.

    5. Grurray Says:

      David has got one solution in his observation of boundaries in his comment. Cross functional teams with members from different units help open up separate hierarchies and orient them towards the common ground.

      It’s a delicate process, however. The family is a good analogy because tribes form from the top down. Culling the right members into a project team or core team would most likely mean picking some of the middle members of the hierarchy before they get completely indoctrinated. You don’t want to create an adversarial environment and break down trust by establishing something akin to a political commissar in each group. You don’t want to pick pushovers or create lone wolves either. It’s not something you can just pencil into the organization plan but requires qualified judgements on an individual basis.

      Another risk is diluting the tribe so much that the collective knowledge drains away. Sometimes isolated units work, such as Lockheed Martin’s Skunkworks. A large part of our victory in the Cold War can be attributed to that “family”.

    6. vxxc2014 Says:

      The danger for the middle businesses and the state/regional stock market are the ravenous predators at the center of our politics, power and Finance.

      Now if they were gone these are marvelous things, why to believe in America.

      America increasingly at the National Level is becoming a once thriving but now crime and gangster plagued neighborhood. Nothing good can be built [including families] until the gangsters are thrown out.

      Or Hung.

    7. Robert Schwartz Says:

      David Foster: I read the “inc.” article you linked. There are many ways in which Germany is an admirable culture and an admirable country, but I fear that the cultural differences between Germany and the US are too great for us to hope to be able to create a mittelstand. Some of the differences are in family structure that Lex has written about and linked articles about Emmanuel Todd. It is hard for me to believe that an American family would stay in the same place and the same business for multiple generations. I think the German apprenticeship system is a far better thing for the middle two thirds of high school students, but without an employer buy in it can’t happen. American employers cannot expect that their employees will stay put for an entire career, so our version of an apprenticeship system would have to be very different.

      I also read the NYTimes article about local stock exchanges. The article missed the real problem which is the disappearance of local investment banks that could underwrite tiny IPOs successfully. In the 80s and 90s they got bought out by bigger houses that have since disappeared in to the maws of the mega banks. All the stock exchanges in the world won’t help if they don’t have i-bankers and traders who actually gather and move the money.

    8. Grurray Says:

      It is hard for me to believe that an American family would stay in the same place and the same business for multiple generations.”

      There’s the old saying – a dynasty only lasts for three generations. The first founds it, the second builds it, and the third goes snow boarding.

    9. David Foster Says:

      Grurray and Robert Schwartz…yes, there are differences between Germany and America which are important here. It does seem unlikely that there will be many American families in which several successive generations will want to run the same company. (Smaller families have an impact here: if you have 4 kids, the odds that one of them will want to go into the family business are much better than the odds if you have 1 kid….although this is probably having an effect in Germany, too) American mid-market companies are less likely to be family-run and owned…the benefit of this, of course, is that it opens more opportunities to those without family connections.

      Financing, too, must be very different..the German Mittelstand companies are largely bank-financed, based on very-long-term relationships. This isn’t a very good fit to the creature that is today’s US banking system, hence, the importance of other financing modes such as Business Development Companies, and–maybe–regional stock exchanges.

      Regarding traders and investment bankers, I’m not convinced that these things in their current form are needed for a modern regional exchange. Trading is largely electronic anyhow; all you need is the platform. Right now, Angel investing is done without benefit of i-banks…the investor reviews the offering documents, signs them, and wires the money. Usually there is an escrow account with a threshold…the offering has a target size, say $2 million, and a minimum threshold, say $1 million…if the threshold is not met, the offering fails and the money is returned to investors. IPOs on a regional exchange could work similarly, with vetting of the company and opinions on valuation offered by independent for-profit or not-profit entities.

      One question is whether public ownership is compatible with a truly long-term view. Changes in capital gains tax structure could help: if the maximum CG tax rate were to keep on falling after the 1-year holding period, finally reaching zero after, say, 5 years, it would help establish a core set of investors with a more long-term orientation.