Strategy interview with Professor Hermann Simon
From the stable price phase, things now went into inflation just as quickly as in the 1970s. Some of the driving forces were also comparable. At present, the pressure from the money supply will continue and there is now also a wave of wage increases. For this reason, Hermann Simon expects another parallel to the 1970s - a second inflationary surge. According to Simon, the level of inflation will realistically settle between 4 and 6 percent.
Fighting inflation holistically
According to Hermann Simon, inflation affects all areas of the company. Of course, price increases are urgently needed when costs are rising, but that alone is not enough. It is also about getting the cost side under control in order to reduce the pressure on profits. To this end, clever financial management should achieve better payment terms and invest the money in "non-perishable" assets.
Money is becoming a perishable commodity and sales in particular are faced with the complex task of negotiating prices with customers several times a year. In these times, it is not uncommon for sales staff to visit customers eight times a year.
According to Simon, it requires an industry- and product-specific perspective to understand how strong the price resistance is among customers.
However, price alone is not the only instrument. According to observations by Simon Kucher & Partners over the last three years, around 50 percent of cost increases can be offset by price increases. 25 percent can be achieved by increasing efficiency and reducing costs. The remaining 25 percent is at the expense of profits.
Optimal pricing of customer benefits
Pricing is particularly difficult for genuine innovations. According to Simon, there are three specific price anchors:
- the costs
- the competition and
- the customer benefit
Today, around 80 percent of all prices are based on a cost-plus basis because it is not so easy to quantify customer benefits - especially for new products without a competitive anchor. Only if we understand the benefit correctly can we draw conclusions about the price. After all, costs and prices are also numbers, so we also need a number for the customer benefit.
But it's not just about one price, it's about new pricing models. Simon quotes Socrates here: "The benefit of a product does not result from ownership, but from use." In his opinion, there has been more innovation in the last 20-30 years than in the 2000 years before that. Digitalization in particular has made pricing models such as freemium, pay-by-use etc. possible in the first place.
Focus on profit
The profit margins of the German Global Fortune500 are low in an international comparison of the past year. In Simon's latest study, Germany is in last place out of 15 countries with a net return of 4.1% (only countries with five Global Fortune500s each were included in the ranking). The USA is at the top of the ranking with 8.3 percent and Switzerland with 9.1 percent.
For Simon, this raises the question of the quality of German management. In particular, the many failed acquisitions of major German companies in recent years seem to underpin this.
From hidden to open champions
Overall, the hidden champions are doing much better than the German economy as a whole or large companies. Hidden champions are also not immune to the dangers of our time. However, according to Simon, the technologically innovative and internationally strong companies are doing well.
The most important principles of the hidden champions have not changed either:
- Ambition to be the best in its market
- can only be achieved by focusing on a niche - this makes the market small at first but
- and then you make it big again through globalization.
For Simon, the challenge of globalization for companies today is to find the best location in the world for each activity.
But some success factors have also shifted: In the past, many hidden champions were proud of a high vertical range of manufacture of 70-80 percent. Today, this is no longer an advantage at a time when new skills are needed quickly. Business ecosystems have therefore gained enormously in importance. To achieve this, a trusting relationship with partners must replace the former principle of confidentiality. In his opinion, even transatlantic ecosystems are needed here.
Differentiators through software plus hardware for B2B
According to Simon, we will not play a role in digital mass markets and artificial intelligence. Markets such as the USA and China offer better starting conditions. In the mass market of digitalization, the standard will not come from Europe.
However, we are more familiar with industrial processes when it comes to skillfully integrating software and hardware. Apple alone has 776 suppliers in Germany. According to Simon, we should concentrate on that and this pie is big enough for us.
Advice for successful entrepreneurship
For Simon, the Hidden Champions strategy works with the three most important principles. But it doesn't work quickly, it only works
"on rough paths to the stars."
SHOWNOTES
Podcast Hope is not a strategy
Podcast episode #10 How to go from Hidden to Open Champion in 4 steps
Selected books by Hermann Simon:
Hidden Champions in the Chinese Century: Ascent and Transformation