Arto Lahti: German success recipe: Monopolistic competition

Joseph Schumpeter at Harvard (1932-1950) gave economists food for thought with the concept of creative destruction. He claimed that an innovative transformation in a capitalistic society is a conflict-ridden process, and entrepreneurs are the heroes of the drama. Schumpeter introduced the concept of temporary monopoly profit as the lifeblood of innovativeness. His student Edward Chamberlin at Harvard (1937-1967) made significant contributions to microeconomics, particularly on competition theory. He constructed the theory of monopolistic competition in which differentiation is a firm´s best response to a downward sloping demand curve, and when there are many firms or many competing products that are close substitutes in nature and many specialty brands. Monopolistic competition is modified by a German economist Erich Gutenberg (1987-1984). His monopolistic scope concept (monopolistische bereich) advises firms to specialize in narrow market segments. This is the market strategy that German and Nordic SMEs follow in global competition. Monopolistic competition is rewarding in globalizing markets and 60% of the total (Figure 1). In Paul Krugman’s writing (1979, 1995) monopolistic competition and differentiation are the two main drives of trade. Chamberlin’s contribution has been fundamental to the trade-driven global economy, although not accepted by most of orthodox economists (Lahti, 2010, 2012, 2020, Lahti, Talvela, Rajala, 2023). 

The monopolistic competition theory contributes strongly to the economic miracle of Germany in the global markets since the 1990s. Venohr (2010) has found that there are 1,500 firms in Germany that are world-market leaders (among three best) in their segments. About 90% of HCs act in B2B-markets and the most important industry group is the Machinery & Equipment industry. They are called Hidden Champion (HCs). The term is coined by Hermann Simon (Simon 1990, p. 876). HCs specialize in globally market segments that multinational companies (MNCs) avoid. MNCs establish their market power through strategic alliances in-house R&D and portfolio investments abroad (Cross, 2000). HCs are known only in their own area, but not to the wider public (Simon, 2009, p. 15). They are often concealed behind a curtain of invisibility and business secrets. Often, but not always, they are family-owned. Their values are conservative: hard work, high performance, and high employee loyalty. HCs produce high quality products that are ranked top in the world. For them, market leadership means “inner flame” to seek top performance, by unique products utilizing the in-depth knowledge about customers. HCs “earn” their market leadership through performance and not through price aggression. 

HCs have their advantage in organizational learning and technological innovations (Simon, 2009). HCs have efficient contracts (social, legal) between owner-managers and employees with “different personal utility functions” (Gutenberg, 1951). Simon’s writings (2009, 2014) on German HCs revolutionize the standard business theories. HCs have occupied global leadership positions despite their small size. They are highly Schumpeterian in their actions. The HCs’ business recipe is working well in international markets. HCs invest in internationalization early in their growth paths. The high co-dependence between HCs and their customers means a risk to their customers. In oligopoly, there are barriers to entry. A high co-dependence between HCs and their customer is not an entry barrier, since the customers have a free choice. HCs do small things better than their competitors contributing to them differential advantage (Alderson, 1957, 1965). A market leadership position of a firm is highly rewarding but difficult to achieve in competitive markets (Drucker, 1985). Following their integrating model of marketing, HCs use to develop their own unique resource configuration models that are oriented toward customer needs.

German and Finnish marketing professionals are both honest and well-educated.  German marketers have succeeded to commercialize their reliability, credibility, and authenticity. For Finnish marketers, the same kind of qualities means a handicap in international arenas. German HCs have attained a high customer loyalty worldwide with their technological superiority. Most of Finnish companies are in serious crises (Lahti, Talvela, Rajala, 2023) and only some companies have succeeded maintain a high profitability in global markets. Most on about 1.000 internationalized companies have a relatively weak growth rates and profitability (ROI) when German HCs have high (90%) success rates. A reason to the paradox is academic marketing education. International marketing is not possible to learn without personal internationalization of leaders and professors in marketing. In Germany, marketing leaders know the company and target markets. So, it is in highly successful companies in Finland, e.g. Nokia, Kone, Supercell or Bayer). Most students in universities are obliged to listen abstract sociopsychological lecture by marketing professors that has nothing to do with the global markets or relevant theories. German professors like Hermann Simon are excellent in practice. They understand completely the monopolistic competition models that is the theoretical foundation of marketing by Chamberlin and Gutenberg, and they travel all around to world to observe personally how customers are acting in various continents.