Hidden champions – adapting to change through innovation

For these so-called hidden champions – a term coined by Professor Hermann Simon – innovation is a core, defining feature alongside a focus on narrow markets, a high degree of customer orientation, and long-term strategic vision. Innovation, a process intimately linked to value creation, will remain crucial in the post-COVID era. 

“Made in Germany” is a label that is usually associated with superior quality, innovativeness, and service. To reach these high standards, hidden champions tend to invest more in research and development (R&D) and have a higher number of patents than many other larger, better-known companies. Many of their R&D departments work directly with end-users. By involving customers, they secure higher satisfaction and greater willingness to acquire products and services priced higher than those from competitive brands. By closely serving customers, hidden champions can pride themselves on being full-solution providers, not just product/service suppliers. This strategic focus has resulted in more than half of the approximately 1,800 hidden champions becoming global players and, in doing so, losing their “hidden” feature. 

Last year, together with Boston Consulting Group and Egon Zehnder, the Hidden Champions Institute at ESMT Berlin conducted about 25 interviews with CEOs to assess the success factors behind hidden champions. Repeatedly, CEOs highlighted the role of innovation as one of, if not the most, important means of becoming or remaining more competitive internationally. Many of them stated that their companies buy skills and products that are outside of their own market specialization, which gives them the resources to focus on developing their core competencies. In this process, digitalization has increasingly become crucial, both as a means to further innovation and as a product in itself (e.g., online platforms, apps, software). To boost their innovative power, many companies also cooperate with other established companies, universities, and startups.  

Innovation is an uncertain process with multiple cultural, political, and strategic obstacles. One that has been rising is China. Germany’s number one trading partner has a contested approach to intellectual property and is rapidly catching up in the production of industrial goods, posing a real threat to Western innovation. Hidden champions should make sure that they stay innovative, leveraging digitalization and strategic partnerships. Moreover, government should continue to foster the innovation ecosystem by providing funds and a regulatory framework in which hidden champions can continue to thrive. As the COVID-19 pandemic underscored, companies that cope with and adapt to deep disruption can succeed. Embodying the innovative spirit, hidden champions should be able to continue to contribute to the German powerhouse. 

On September 9, the Hidden Champions Institute and its strategic partners BDI, BCG, and Egon Zehnder will host the first CEO conference focusing on the success factors of these companies, including leadership, innovation, and digitalization, and on their corporate social responsibilities.