The German SMEs - Successfully Exploited Market Niches Are No Guarantee for Future Success

Small and medium-sized enterprises (SMEs) in Germany rely on specialisation and finding niches in the market. This continues to be a model for success in the future. Markets and products are, however, subject to constant change. In order to maintain their success, SMEs must maximise their ability to strategize. This is the finding of a new study carried out by the Centre for European Economics Research (ZEW) and Prognos, on behalf of the Federal Ministry of Economic Affairs and Energy.

The study, entitled "2025 Innovative SMEs – Challenges, Trends and Recommended Actions for the Business Sector and Economic Policy", presents a breakdown of SMEs into two groups. On the one hand, there are those companies who identify trends early, raise questions and devise medium- to long-term strategiesso they are able to go in new directions should circumstances change. They recognise potential in new developments and know how to take advantage of them. These constantly researching and innovating companies also include those businesses labelled as "hidden champions".

On the other hand, we have those companies who tend to innovate on an ad hoc basis and in response to the needs of customers. They view disruptive changes that displace existing technologies, products, processes and services as more of a problem than an opportunity. They often lack the tools to assess market and technology trends. Furthermore, they are also lacking in strategies and solution approaches of their own to successfully confront these new challenges and avoid falling behind.

Many businesses lack the ability to strategize and take action

There are currently four trends to which small and medium-sized enterprises are under pressure to respond to: increased competition between companies to innovate, digitalisation, globalisation and demographic change. Successfully filling a niche in the market today is no guarantee for a company's future success in the face of rapidly changing circumstances. Here the inability of many businesses to strategize and take action proves to be the biggest constraint on the development of SMEs and the continuation of the "SME model for success". This is because for small and medium-sized enterprises the following rules apply: withoutmedium-term HR planning these firms will lose out when competing for personnel; without an early succession plan they will be left without direction; and without any kind of digitalisation strategy they will be unable to gear their work processes towards the demands of an interconnected and globalised economy. These are exactly the challenges that innovative SMEs must overcome if they still want to successfully compete in the future.

From the results shown the study is able to derive a number of recommended courses of action to increase the ability of small and medium-sized enterprises to strategize and take action. One of these recommendations, for example, is to create greater transparency for current and future developments, whether they be for new projects, work processes or staff working hours, and to examine currently occupied market niches thoroughly to determine how sustainable they are for the future. Additionally, it is also extremely important for SMEs to become more digitally competent and to combat the looming shortage of skilled professionals with staffing policies that anticipate this shortfall.

With regard to governmental innovation funding for SMEs, the study asserts that the national funding sector provides a wide range of measures and programmes. In particular, the continuity and reliability of these programmes are of great significance. One of the direct rewards of the companies' willingness to innovate, however, would be research funding financed through taxation – at this point still non-existent in Germany – since it could open up the possibility for returns to flow directly into the R&D budgets of businesses, thus allowing them to expand their capacities.

For more information please contact

Dr. Christian Rammer, Phone +49(0)621/1235-184, E-Mail rammer@zew.de