Academics Shumpeter's Contribution on the IO Industrial Operation Theory Modelling (toimialan luova tuho -konsepti), Case German's Industrial Success Part II   

Hidden champions companies and technologies found in Germany's and USA's industries in many sectors - including energy, aviation and other natural sciences specific IO -areas.

2. The German success recipe 2 – realistic view of global competition

 Thanks to Schumpeter and his followers, Germany is at least one step ahead other EU countries in competition policies. Schumpeter was well aware of the monopolistic power of big firms. Schumpeter (1942) made his famous prediction of the transition from competitive capitalism to trustified capitalism. Schumpeter shared Marx's conclusion that capitalism will collapse, although from various reasons. Schumpeter predicted that the success of capitalism will lead to a form of corporatism and to fostering of values that are hostile to entrepreneurship, especially among intellectuals. John Galbraight (1956) shared the same views. His countervailing power concept, the collusion between large firms and the government, is a parallel concept to Schumpeter's trustified capitalism. Like Schumpeter Galbraith found that the static economic efficiency was a barrier to innovate, because only through the accumulation of monopoly profits could innovations be financed. In his life's work, Schumpeter not only recognized the need for a theory of economic development, but also came to understand that such a theory would have to deal with the impacts of transition from individual to collective entrepreneurship in the process of technological change (Lazonick, 1991). Although economists would agree with the judgment that an entrepreneur is a central figure in economics, Schumpeter's writings were, at least temporarily, ignored by many brilliant Nobel prize winners, economists like John Maynard Keynes, Wassily Leontief, Milton Friedman and Paul Samuelson that represent the British-American Economic School. The ignorance for Schumpeter's writings is the major reason why the British American Economic School, the dominant doctrine of neoclassical economics, has been and still is separate with the German Historical School. Schumpeter introduced the concept of temporary monopoly profit as the lifeblood of innovativeness. There was another professor, Edward Chamberlin (1933), who also opposed the neoclassical Walras Marshall price theory that solely relied on two theoretical models of competition (perfect competition and monopoly) and excluded the reality of imperfect, monopolistic competition. Chamberlin contributed the concept of differentiation that is a parallel concept of Schumpter's concept of innovation. Chamberlin's work can be considered revolutionary, in the sense that he conceptualizes a market structure characterized by both competitive and monopoly elements, and that is the point that makes his work so important to the modern microeconomic theory. Differentiation through innovativeness (economies of scope) is an entrepreneur's best strategy in competition against the market power of multinationals (economies of scale). 

Chamberlin's major target was to modernize the neoclassical theory. Schumpeter shared the same interest. Both failed in that. However, they have laid down a more realistic approach to study oligopoly which is the dominant type of competitive relations. Most of the leading schools of economics have their focus on the industrial organization economics (IO) that is built on Chamberlin's model of oligopoly market(s) with relatively permanent market structure (Bain, 1956). In the global markets, the offerings of firms are heterogeneous and differentiated. The two of competitive models that are practical are: 1. Heterogeneous oligopoly is the core area of Harvard-Chicago industrial organization (IO) doctrine. IO-doctrine is the theoretical construction on which extensions of managerial economics are built and later, strategic management doctrine. Oligopoly, as Chamberlin interprets it, is accountable to the mutual dependences between few competitors that are positioned in the same industry or markets. 2. Monopolistic competition is the core content of the marketing doctrine. When the number of competitors is sufficiently large, the mutual dependences of competitors are relaxed and the marketing tools, like advertising and selling, are important to differentiate a firm's offerings from market average offerings. However, because the number of competitors is large, monopolistic competition embodies elements of perfect competition in addition to monopoly. But as long as a firm can maintain its differentiation strategy, features of monopoly are dominating, since for differentiated products the demand curve is negatively sloped. The dilemma of most EU-27 countries is that they have not been able to develop their own management doctrines. They apply the U.S. Industrial Organization (IO) model without critics. During the 1980s, the most influential book was undoubtedly Michael Porter's (1980) Competitive Strategy. In a remarkably short time, Porter's writings on mobility barriers or generic strategies became broadly used in teaching, consultation, and research projects. Indeed, Porter moved economics closer to the strategic management and is the author of influence in the topic as the huge number of citation reveals. Porter's model in Figure 3 that divides a company's market scope in two ones: industry wide and particular segment only. Anyone who has read Porter's dissertation (Porter, 1973) could recognize that this is the same division into big (industry wide) and small (particular segment only) companies.

Porter relies on abstract oligopoly model. He is not willing to accept the fact that his generic strategies are not theoretical but empirical. Oligopoly is accountable to the mutual dependences between few MNCs that are positioned in the same market and try to dominate markets by internalizing them. NMCs take advantage of homogenous segments in global markets. Serving these segments with standardized products offers economies of scale for NMCs. Aggregated preferences for certain product can emerge simultaneously worldwide which provides huge prospects for certain commodities (e.g. Nokia's mobile phones in the 90s). Germany has a large population of MNCs of which many are market leader in their segments, e.g. Volkswagen. German MNCs have the well-trained management teams who are able to win by their global market strategies. Hidden Champions has applied to conquer global markets as Hermann Simon describes in his excellent book (Simon, 2009). Hidden Champions are best in the world in monopolistic competition. They have collectively constructed the emergent growth theory for highly innovative and customer-oriented companies. The empirical facts are unbelievable. Venohr (2010) has estimated that in German there are 1500 companies that are worldmarket leaders (among three best) in their own segments. About 1350 of them are Hidden Champions (HD). About 90% of HD companies act in B2B markets and the most important industry group is the Machinery & Equipment industry. HD companies have a unique idea for market definition. They prefer to specialize in globally heterogeneous and marginal market segments that multinationals use to avoid because of low growth prospects and high customer-specific transaction costs. One of the major reasons is that NMCs, through strategic entries, build-up overseas capacities in order to stop potential rivals from entering the most potential market segments. NMCs attempt to establish market power through strategic alliances, joint ventures and collaboration over R&D and make portfolio investments abroad to increase and obtain control of critical resources (Cross, 2000). HD companies have succeeded to win by complementary business strategies and, thereby avoided the competitive power of NMCs. In 1994-2004 HD companies succeeded to grow by 8.4% when German DAX companies (NMCs) grew by 4.9% (Venohr & Meyer, 2009). There are about 2710 HD companies worldwide and about one half of them in Germany1 . The German management method is based on training inside companies. Therefore, German managers know their companies in-depth. The German apprentice education system is certainly the best in world to train humble managers who are really interested to serve their customers worldwide.2 Strategic marketing emphasizes that strategy development needs to be externally oriented, towards customers, competitors and markets. David Ricardo's comparative advantage concept highlights the important of differences between country-specific resources and firm-specific resources. Germany is the best home market for B2B products and services. Service business has been growing 1,428% (Table 4) during the two decades of globalization in 1990- 2011. Germany is the third in service exports after the

The customer-focused marketing concepts, such as segmentation, positioning and the product-life cycle, have also influenced thinking in strategic management (Day, 1992, 1993). Product/brand positioning is a core strategic marketing activity and firms can seek to adopt a number of distinct positions in the marketplace. These may involve positions based on price, premium quality, superior service and innovativeness. The major paradox is that Porter's generic strategies dominate the SMEs literature in most of EU-27 countries when German Mittelstand/HD companies are utilizing German doctrine of strategic marketing. A good summary of key points is given by Simon (1996, 2009) and Venohr and Meyerr (2007, 2009): 1. They strive for market leadership worldwide in their markets/segments. 2. Market definition (Abell, 1980) is narrow from customer and technology perspectives 3. They serve the target markets through their own subsidiaries and do not delegate the customer relationship to third parties. 4. They close to their customers in particular to their top customers. They are value, not price oriented. 5. They are innovative in both products and processes. Innovation activities are globally oriented and continuous. 6. The overall company orientation is technology and market driven. 7. They are close to their top competitors and defend their position actively. Competitive advantages are product quality and services. 8. They rely on their own strengths. They mistrust strategic alliances and outsourcing. They see the foundation of their competitive superiority in things which only they can do. 9. They have strong corporate cultures associated with excellent employee identification and motivation. Selection for jobs is sharp. 10. Their leaders are strong and stay at the helm for decades. George Day (1990) argues that winners (1) are guided by a strategic vision and (2) responsive to markets and customers. This is the method that German HD companies have developed during two past decades. Following their integrating model of marketing HD companies develop their own resource configuration models that are oriented toward customer needs and wants. The key issue is the humble choice of markets segments, to make good business of any kind of goods and articles, not to follow trends or hit lists. Product differentiation is the key of German businesses. It means a long run commitment to serve customers and to invent better products for them. So simple to be true! Marketing channel is the third element of German success receipt. German companies prefer to internalize their marketing channels to keep customer secrets in a strict control. So simple to be true! Germany's customer-specific differentiation is not well known since global gurus dominate the English literature and media. The paradox is that German companies have made a better version of the U.S. industrial method that helped the U.S succeed for about hundred years until the 1980s. Alfred Sloan (1963), the famous CEO of GM was one of the first managers that utilized Chamberlin's product differentiation in positioning.

The EU's SME concept is misleading. It is built on the implicit assumption that small and medium-sized companies are isolated from the global competition. This is not the truth. The German SME concept is not a static one relying solely on company size. Germany SMEs or Mittelstand are globally oriented. They are aware of the fact that when markets are open their only success recipe is to grow quicker than NMCs. During two past decades they have succeeded to do that. The Harvard-Chicago IO doctrine is solely relying on top-down approach. The European and German bottom-up approach is important to take into account (McGee and Thomas, 1986). This approach is verified in Finland by 4 dissertations: Lahti (1983), Salimäki (2003), Killström (2005), and Luukkainen (2012). Lahti' model of strategy and performance are used as the main framework model (Figure 6). Lahti's model links the 'Realized and intended strategy making' to the 'Firm performance' in the within-industry approach.