Hidden Champion
Professor Hermann Simon and the Hidden Champion
Prof. Simon is a professor of business administration and taught at Harvard and Stanford, and is the founder of the management consultancy Simon-Kucher & Partners. In addition to 40 books in 27 languages, he is the inventor of the term “hidden champion”.
What is a “hidden champion”?
When we talk about globalisation, we usually think of large companies. Large companies seem to be the main engine of the economy, but this is not the case.
If we analyse how many industries or markets can be divided independently in the world, only 2% of the industries may be well-known to everyone, such as the automobile industry and the fast-moving consumer industry. More sub-sectors account for 98% of the overall market, and not everyone is familiar with it.
In these sub-industries, you will find that many of the world’s leading companies are small and medium-sized enterprises. They are very powerful and occupy a very important position in the industry, but at the same time they are not known to the outside world. These companies are what we usually call “hidden champion” companies.
We also have a formal definition for “hidden champion” companies.
A “hidden champion” company refers to a company whose market share ranks among the top 3 in the world; its annual revenue is less than $5 billion or €5 billion; it is usually unknown to the public. The “hidden champion” is not known to the outside world because what he produces is usually a component, not a final product.
The Three Pillars
The success of the “Invisible Champion” is based on three pillars. The most important pillar is entrepreneurship.
Do entrepreneurs have the ambition to make their own business the best in the world? This is a prerequisite for whether a company can become a “hidden champion.”
After having this ambition, how do you realise it?
The second pillar is focus.
Only a focused company can be the best company in the world, and only focus can make one’s own company reach the highest height in its own subdivisions. Of course, focus will also bring a problem, that is, after you focus, you will make the market you serve smaller. How to solve such a problem? This dilemma can be solved through globalisation.
Therefore, the third pillar of the “hidden champion” is globalisation.
Globalisation makes the market you serve no longer confined to the local area. Through globalisation, the “hidden champion” can make the company bigger and stronger while focusing.
“Invisible Champions” can better respond to crises
It is still difficult to judge the long-term impact of Covid-19 on the economy, whether there will be a second wave of epidemics, and when the vaccine will be available, which will greatly affect the trend of the future pattern.
I have observed three major trends related to Covid-19: Globalisation, digitisation and customer relationship and individual management of customers. And – there is another secret.
Globalisation
Among the country’s export growth ratios from 1990 to 2010, the growth rate was twice that of GDP. From 2010 to the present, the relationship between export growth and GDP growth has become equal.
This means that in the future economic growth, the share of exports will become smaller, and this trend may continue due to the impact of Covid-19. Direct investment – building factories directly in customer markets in the future to serve customers nearby may help alleviate that problem.
Chinese companies usually think that the Chinese market is already very big, so why go overseas and encounter other risks? In fact, if we look at the world, China only accounts for 17% of the global economy. If we only seize the Chinese market, we will miss 83% of the market potential. This is actually a pity.
Digitalisation
Covid-19 has not actually created such a major trend, but it has objectively accelerated the digitalisation process of various industries.
- It has promoted the development of e-commerce, because we could no longer go shopping in physical stores, but shop online.
- The take-out service is already quite developed in China, but it is not so highly regarded in Europe. However, under the influence of Covid-19, more consumers choose to use meal delivery services.
- The original offline meeting was moved to online.In fact, many people feel a little frustrated. Although they can work at home and use modern technology to conduct video conferences, they still lack contact between people. It remains to be seen what kind of impact it will have on customer relationship in the long term, and what changes will occur between sellers and buyers.
At the same time, because Covid-19 has objectively changed the way people work, some of their work methods will be retained, and 30% to 50% of meetings may be kept online.
However, how to balance virtual meetings and face-to-face meetings, and how to find such a balance point, actually still requires us to continue to experiment.
- In terms of customer relations, this cannot be replaced by virtual meetings. Face-to-face conversations are still very important. We still need to communicate with customers outside of the business. In order to maintain a long-term, sustainable customer relationship, in fact, it is necessary to leave the virtual environment and have close contact.
Therefore, we still need to keep close contact with customers as much as possible.
And the last secret to a better response to crises:
The “hidden champion” has a high profit margin.
The profit margin of the “hidden champion” is more than 3 times that of ordinary enterprises, and its own capital ratio is also very high. Therefore, when there is a crisis, the “hidden champion” is financially more stable, so it can better resist the negative impact of the epidemic.
The most important lever that affects profits is pricing. When we talk about pricing, we need to pay attention to the impact of pricing and value, more accurately the value of customer experience.
German companies are falling behind compared to other countries. They just make too little profit. We operate solidly and manufacture the best products in the world, but we negligently neglect the economic side.”
Germany’s weak earnings are dangerous. Today Apple is worth more on the stock market than all Dax companies put together. And profits and market values determine the purchasing power of takeovers and mergers.”
No company has ever lost its profit. But if you neglect profits, you endanger not only the future of your company, but also that of society.”
“Hidden Champions” focus more on providing customers with better and more value. At the same time, they will make a match in terms of pricing and require a relative premium while providing good value.
According to our research, “hidden champions” usually achieve a 10%-15% premium over their peer companies. At the same time, they can take the absolute lead in market share.
This shows that if we can truly serve customers well, create value for them, and establish a strong brand in a market segment, then customers will be willing to pay for it, and they will not pay so much attention to price.
For this strategy to succeed, it requires long-term investment from the company.
The “hidden champion” will focus on its own value demands, and then maintain the value and price system by providing good customer service. In a short period of time, they may make some price concessions, but from a long-term perspective, they usually insist on a high-value, high-price strategy.
Whether it is brand building, price, or value positioning, it cannot be achieved in one or two years. It requires patience and a long period of cultivation.
This article is an edited version the first part of the live broadcast “Top-level Design of Pricing Logic: Seeing How the German Hidden Champion Copes with the Epidemic” hosted by Huazhang Company and Simon Guhe Management Consulting Company on July 15th, 2020.
