Industry Has a Future in Germany

System Head-Study Explores Chances for Production and Employment

07.12.2009 -

Strategy - Industrial production still has a great potential in Germany. A joint study by Roland Berger Strategy Consultants, the German Federation of Industry (BDI) and IW Cologne shows that to strengthen the so called system head functions like R&D, marketing and high quality production, results in higher competitiveness and still supports home operations and employment. There are already many system head companies in Germany - and most are growing faster and are more profitable and innovative than their competitors.

People in Germany have stayed surprisingly calm during the current economic crisis. But this is only a current spotlight. Already since years, many feel uneasy about globalization and fear the loss of their jobs. And reality too often seemed to prove them right with production relocated abroad. The crisis was just another threat. How can we make people self-confident again? I think by answering their worries. Nevertheless, abstract answers cannot deal with diffuse worries. Thus, to give concrete answers was our motivation to look - together with BDI and IW Cologne - into the long term opportunities for industry in Germany. To give substantial and differentiated answers on the questions, how and where Germany has healthy economic potential, how companies should position themselves to get to this goal and to secure confidence in their employees, and which constitutional framework is needed.
The results of these efforts is the study "System Head Germany Plus" for which we analyzed 6,000 companies in the first phase, another 3,500 in phase two, and conducted a series of in-depth interviews with CEOs from leading companies.
Part of our hypothesis was based on the strengths German companies have acquired over time and which are - quite impressively - summarized in the rankings of the World Economic Forum. Examples are:

  • Germany ranks first for the nature of competitive advantage - meaning that its companies can differentiate themselves internationally by their excellent products;
  • It ranks second for its innovation capacity; so our R&D can't be so bad!
  • Second for production process sophistication - or put another way: high quality production is permanently competitive; our industrial competence is the backbone of our economy.
  • Third for local supplier quality - translated into business life that means companies are better in building and managing reliable supplier networks.

System Head Functions Help to Succeed

Our assumption was that behind these competitive advantages there are specific functions in the companies, so called system head functions. This regards R&D, steering of production and distribution, marketing, branding, design and the production of high quality parts and products. System head functions are sophisticated functions which companies need to monitor and manage their global activities and to differentiate themselves from competitors worldwide. Companies, who bolster these functions at home in terms of personnel and means, are called system head companies. Our hypothesis was also, that these functions - or better: the command over these functions within the value chain - not only strengthen the global competitiveness of our companies, but are a basis, to secure or even expand employment in Germany as well. The findings of our study have confirmed this thesis. In short:

  • Some 19% of all larger enterprises in Germany are already system head companies;
  • These companies are more successful than others - they grow faster, are more profitable and more innovation intensive; and
  • System head companies are more loyal to their home market. Although more than two thirds of system head companies have significant parts of their business abroad, less than 10% have system head functions abroad.

Home Operations Are Strengthened

Sophisticated operations or functions are not shifted abroad at all - or in a lesser extend if it fits with the company's strategy. Furthermore, system head companies try to get into the technological leadership position in their business and on average spend more money on R&D than others.
Many system head companies also focus on integrated businesses - thus they expand their system competence and combine products and services for their customers' needs and produce sophisticated solutions. This development is even more important, when we keep in mind that business services require the strong connection to production - and vice versa.

Networks Foster Competitiveness

Another observation is that system head companies are frequently part of local networks of suppliers, in production and/or R&D and steer these networks concretely. The proximity - and by that the short ways and personal trust, that can be developed more easily - plays an important role. And there are good examples including the Rhine/Neckar-area with BASF in chemicals, Hamburg in aerospace and logistics as well as Leipzig and Dresden in developing clusters for logistics, automotive and high tech businesses.
System head companies are organized more locally, less HQ-centered - which means customer and market related functions are locally managed with their own entrepreneurial responsibilities. For me this is an extremely important point, because I believe that we can cope with the growing complexity of the globalized world only by organizing companies more locally.
Finally, System head companies consider outsourcing and/or off-shoring much more carefully than others, they bet - successfully as we have seen - on typical German strengths and differentiate more strongly: What is important for my competitiveness, were can we make connections with singular resources, where is the greatest potential for value adding and where does know-how count the most? So this is again, how we define our system head functions.
To sum up, companies are in great danger, not only in Germany, to take a lot of short term action to ensure survival and thus lose sight of the long term strategic perspective due to the uncertainties of the current crisis despite all signs of a possible recovery. But our study shows that there is great potential for industry and for industrial employment in Germany in a globalized environment, if companies develop their strategy according to the system head approach.


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