The Hidden Champion Innovation

"Chinese companies need more innovation and higher quality products. The image of 'Made in China' must be changed from 'inferior quality and low price' to 'high quality and affordable price'." Talking about Chinese companies What it takes to become a veritable hidden champion, says Professor Hermann Simon.

Interactive topic: Your market share: good or bad?

Professor Simon is the founder and chairman of Simon-Kucher & Partners, Germany. He is known for his research and discovery of excellent companies called "hidden champions" and their excellent management methods. "Father of Hidden Champions". He is also a world-class expert in product pricing.

Professor Simon's representative books include "The Hidden Champion", "The Pricing Bible", "Profit First - How to Get High Profits in a Highly Competitive Market", "The Hidden Champion in the 21st Century", "Vibrant" —The 33 Laws of Fast Profitability for Businesses. His third and latest book on Hidden Champions will be published in Chinese this fall in Chinese.

Professor Simon recently accepted an exclusive interview with the author, deciphering the latest development of hidden champions and how to play a strategic role in pricing. He spoke to Chinese companies: set ambitious goals, implement a focused strategy, and expand to the global market.

The Evolution of the Hidden Champions Standards

CEConline: You developed the Hidden Champions standards in 1996 and updated them in 2009. From today's perspective, how do you think the standard of hidden champions has changed?

Herman Simon: The biggest and most important change is the threshold for sales revenue. In 1996, I capped the "hidden champion" sales threshold at $1 billion.

At that time, this upper threshold defined a large SME. Ten years later, I raised the threshold to 3 billion euros (the euro did not exist in 1996), which is equivalent to 4 billion dollars. In my latest book, which will be published in Chinese this fall, I capped the threshold at 5 billion euros, or about $6.5 billion.

This latest ceiling, for SMEs, seems high. But it reflects the true growth of the hidden champions over the past nearly 20 years. And this real growth is driven by globalization. Even the smallest Fortune Global 500 company has sales of around $23 billion, almost four times larger than the largest hidden champion company.

In the age of Globalia—I call today's new globalized world Globalia—we have to get used to a new dimension of company size.

CEConline: If we re-examine the typical characteristics, strategies and management models of hidden champions from today's perspective, what are the main changes?

Herman Simon: As I just said, globalization and continuous growth are the biggest changes. This is reflected in the fact that the market presence of hidden champions is much larger than in the past. Some of these mid-sized world market leaders have expanded their market presence to more than 100 countries. They are truly global companies.

It's not just a matter of size or numbers, it has given rise to a rather different company makeup and workforce. In 2008, Germany's hidden champions hired more people outside Germany than in Germany for the first time. Moreover, its management is increasingly international. Can you imagine that the head of the human resources department of a German company is actually a Chinese? This is today's reality.

A further change has to do with innovation. We are already witnessing a huge wave of innovation from hidden champions. Hidden champions have recently shifted most of their R&D activities to emerging markets as they have realized that they cannot develop products in Germany that suit emerging market customers. The research and development of products must be carried out in the corresponding country in a way that is close to the customer.

CEConline: Since market position (and largely market share) is such a critical hidden champion criterion (you put it in the first criterion), why did you publish in 2006 the Profit First - How to Get High Profits in a Highly Competitive Market, declares that "Management is for profit, not market share"?

Herman Simon: A company's primary goal must be profit, not market share. Profit is the cost or price of survival. I'm a fan of strong market share and market leadership, as evidenced by my long-held interest in Hidden Champions. The crucial question, however, is how this market share or market leadership is achieved.

Is it achieved through innovation, quality and performance combined with good prices and profits? This is what I call "good" market share. What we found with the Hidden Champions is this market share.

Or, is it obtained through price wars such as low prices, deep discounts, excessive promotions, etc.? This price war results in thin profits, losses, and ultimately bankruptcy.

I call it "bad" market share.

Perhaps the most famous example of this is General Motors. It used to be the market leader in the US and even the world.

But this market leadership is based on low prices (but it doesn't have a corresponding low cost), lots of promotions and big losses. Sony is another example company with poor market share and repeated losses in recent years.

I see too many companies fighting fiercely for market share and ignoring profit goals. That's why we wrote Profits First - How to Get Big Profits in a Highly Competitive Market.

Using Pricing Strategically

CEConline: Pricing is an important area of your expertise. How do you think pricing plays a strategic role?

Herman Simon: During my 16 years as a university professor, pricing has been my area of research. On this basis, I founded Simon Guhe Management Consulting. It is today the world leader in price consulting, operating in 23 countries. We also set up a branch in Beijing.

Price is the most effective profit driver and therefore a very important driver of shareholder value. The famous American investor Warren Buffett once said, "The most important business decision in evaluating a business is pricing power."

In a global survey on pricing, Simon Gu and interviewed 4,000 managers. The results show that the involvement of corporate CEOs in pricing decisions creates much stronger pricing power, thereby increasing profits and shareholder value. Therefore, pricing has a prominent strategic significance.

CEConline: What pricing strategies do hidden champions often employ and implement?

Herman Simon: They usually use a premium pricing strategy. The premium above the market average is mostly 10-15%.

This premium is based on better value. Value is the most important factor related to price, and it determines the willingness of customers to pay. This willingness is more important to price than cost.

In emerging market countries, hidden champions are increasingly entering lower-priced segments because these segments are becoming very large. They often enter these segments as a secondary brand to avoid harming their main brand.

Talk to Chinese Enterprises

CEConlines: Many small and medium-sized export manufacturers in China use OEM or ODM to expand their international market share. Some of these manufacturers have entered the world's top three in their industry. However, a large portion of the profits from their products go to their international partners, such as brands. From the perspective of hidden champions, what do you think of these export-oriented manufacturers in China?

Hermann Simon: This reflects the difference between Germany's hidden champions and China's hidden champions - a difference that is important, if not fundamental. It is said that those Chinese manufacturers who produce and sell their products to international middlemen receive only one-fifth of the profit or value of their products.

Apple is an often cited example. That's right, having a strong brand, controlling direct contact with consumers, playing a strong role in distribution channels, and developing innovative concepts like the iPad or iPhone, all of these do play a key role, and so does the result and different.

In this regard, Germany's hidden champions are very different. Most of them sell their products directly to customers. This is why they need to establish branches in the target market. Although they are not well known to the general public, they often have a strong brand presence among their carefully defined target customers, and these brands are often global brands.

I think building their own global brand and sales network is one of the biggest challenges for China's hidden champions. Some big Chinese companies have proven that this can be done, Lenovo and Huawei are examples of this.

CEConline: In response to slowing demand in the international market and emerging competitors, especially those in Southeast Asia, China is expanding domestic demand. For small and medium export manufacturers, opportunities and challenges coexist. Under such circumstances, how should Chinese export-oriented manufacturers learn from the experience you have drawn from the hidden champions?

Herman Simon: I would like to highlight three lessons. The first is ambitious goals. You didn't become a hidden champion by chance. You need to set ambitious goals to drive you to market leadership, first regionally, then China, then Asia, and finally worldwide. And, you have to pursue those goals consistently for decades.

Market leadership can only be achieved through focus. This is why focusing becomes the second experience. It is only through focus that a company can reach world class.

However, the focus made the market too small. How do you expand this market? Carry out regional expansion, first in China, and finally to the world.

Ambition, focus, and globalization are the three most important lessons for Hidden Champions.

If we look at China and Chinese entrepreneurs, there is no shortage of ambitious goals. In my speeches to Chinese entrepreneurs, I always ask the question: Who wants to be the hidden champion? Usually half of the audience of 1,000 or 2,000 raised their hands. Of course, not all of them will achieve this goal, but at least a few will.

As for focus and globalization, my assessment is less positive. Many Chinese entrepreneurs diversify their operations after they have successfully tapped the first pot of gold. They lose focus. At the same time, the barriers to globalization remain high for many Chinese entrepreneurs. They are not familiar with foreign environments, or do not speak foreign languages. In this case, I recommend that they hire those with relevant internationalization capabilities.

CEConline: In today's business environment, what conditions should a Chinese company build or possess in order to become a veritable invisible champion?

Herman Simon: As I said earlier, the mental and cultural competencies required for globalization are very important.

But before that, I would like to make innovation a prerequisite for successful internationalization. In the past, most Chinese companies built their brilliance on the basis of low cost and imitation rather than innovation.

This situation has changed drastically. Rising wages and costs in China, competition from countries with much lower wages such as Vietnam or Bangladesh, all of which make it more difficult for Chinese companies to compete solely by relying on low costs and low prices.

In contrast, Chinese companies need more innovative, higher-quality products. The image of "Made in China" must be changed from "inferior quality and low price" to "high quality and affordable price".

Innovation and branding place high demands on investment and competence. I've seen several Chinese hidden champions already on this path. An example of this is the Sany Group, which was once a hidden champion and has now turned into a mega-champion. But, as Sany's case also shows, this road takes time and it's not always smooth sailing.

CEConline: You published "33 Laws for Fast Profitability," designed to help Western companies beat the world financial and economic crisis. Of these rules, what do you think are the three most relevant to China's small and medium export manufacturers?

Herman Simon: The 33 Laws were specifically developed in response to the 2009/2010 crisis, and their focus was on rapid market reactions, hence the name "The Laws of Quickness".

However, many of these recommendations are of course relevant instructive to normal business conditions. I choose three of them here.

The first is to increase sales effectiveness. This includes increasing core sales time, especially in foreign markets, strengthening direct sales through its own sales branches (a strategy of hidden champions), and penetrating new customer segments.

The second is pricing. In this regard, Chinese companies should strive to improve their price positioning and learn to use sophisticated price structures such as non-linear pricing or bundling pricing.

The third area has to do with service, and many Chinese companies are still weak in this area. Service enhancements include enhancing service offerings, increasing the percentage of customers signing service contracts, and innovating service offerings.