Choosing the Right Business Strategies for Foreign Companies in Germany

Thesis (M.A.) , 2019 , 80 Pages

Business economics - Company formation, Business Plans

The main purpose of this dissertation is to study which challenges foreign companies are faced with in Germany and outline the strategies and opportunities for related companies with special focus on the management consulting.

When the challenges are taken in a wide view, simultaneously the companies can perform the analysis of opportunities and strengths against threads and weaknesses. The challenge based strategies will create economic and social value for the companies.

The dissertation concludes that foreign companies can create competitive positions in Germany when they develop the understanding of challenges they face and innovative strategies based on their different culture and specific advantages. Additionally, management consulting can help to support the implementation of strategies and models.

Germany has a leadership role among surrounding European countries and is the fifth largest economy in the world. It has a very high degree of openness for international trade and business. Germany has established itself as a key economic power on the global stage making doing business in Germany more attractive than ever. In Germany, business culture is defined mostly with efficiency, quality and high technical standards and discipline. The business climate is very positive. Furthermore, the consumers have plenty of savings in the pockets.

Doing business in Germany without adequate cross-cultural awareness, however, is a risky proposition. Many entrepreneurships and business relationships come to an end even before they begin. The values of German business culture at the root of the country's economic success can also prove a source of cross-cultural misunderstanding for global companies doing business in Germany. The intercultural differences and misunderstandings very often result in critical loss of time and money.

The foreign companies in Germany have noteworthy risks and challenges. It is essential to understand the business environment and partners. Especially with Germans, even small issues can be crucial. If the foreign business partner has not enough understanding or experience about the differences of German business environment and culture, even speaking to a potential German business partner can create unexpected problems and results.

Contents

ABSTRACT

Abbreviations

List of Figures

List of Tables

INTRODUCTION

1. DEFINITIONS AND BACKGROUND
1.1 Political System
1.2 Global Competitiveness Index of Germany
1.3 Geography and Population of Germany
1.4 Demographics and Religion Structure

2. CHALLENGES FOR FOREIGN COMPANIES IN GERMANY
2.1 Complexity of regulations and bureaucratic procedures
2.2 Complicated tax laws and high tax rates
2.3 Transfer Pricing
2.4 Local Accounting and reporting
2.5 Communication with Business Partners
2.6 Organizational Structure of Company
2.7 The Lack of qualified personnel
2.8 Brexit
2.9 Sanctions by USA
2.10 Other Challenges
2.11 Survey Results

3. OPPORTUNITIES
3.1 Incentives
3.2 E-Commerce
3.3 Accounting and Reporting based strategies
3.4 Labour and Employee related strategies
3.4.1 Finding Suitable Staff in Germany
3.4.2 Integration of international assignment program to reduce the labour shortage
3.4.3 The Employment Related Requirements and Models
3.5 Survey Results

5. MANAGEMENT OF CONSULTING SERVICES

CONCLUSION

References

Appendices

ABSTRACT

For decades, Germany has been a country with highly developed, high-value economy and business culture, with efficiency, quality, high technical standards and disciplines; however, doing business in Germany has noteworthy risks and challenges. The main purpose of this dissertation is to study which challenges the foreign companies are faced with in Germany and outline the strategies and opportunities for related companies with special focus on the management consulting.

When the challenges are taken in a wide view, simultaneously the companies can perform the analysis of opportunities and strengths against threads and weaknesses. The challenge-based strategies will create economic and social value for the companies. The dissertation concludes that foreign companies can create competitive positions in Germany when they develop the understanding of challenges they face, and innovative strategies based on their different culture and specific advantages. Additionally, management consulting can help to support the implementation of strategies and models.

Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

List of Figures

Figure 1: Separation of Powers in Germany

Figure 2: 2018 Global Competitivenes Index of Germany

Figure 3: The main components of corporate income taxation in Germany

Figure 4: Corporate Income Tax Rates in Europe for 2018

Figure 5: Comparison of unemployment rate of Germany and European Union.

Figure 6: Unmet labour demand in Germany by sector- Job vacancy rate (%) not seasonally adjusted

Figure 7: Perception of challenges of foreign companies in Germany

Figure 8: Innovation profiles of the company in DACH

Figure 9: Decisive drivers on the innovation projects in DACH Region according to total sales figures of the companies

Figure 10: Germany’s Different Incentives Packages and Respective Programs

Figure 11: The e-Commerce Revenue in Germany between years 2017-2023

Figure 12: Payment types in e-Commerce in years 2017-2019 and further (projected)

Figure 13: Perception of Opportunities/Strategies for foreign companies in Germany

Figure 14: Volume of the consulting market in Germany

Figure 15: Firm‘s main processes

Figure 16: Types of management consulting preferred by foreign companies in Germany

Figure 17: The overview of strategy consulting

Figure 18: Overview of the consulting project

List of Tables

Table 1 : Federal States of Germany

Table 2: Key figures on population

Table 3: 2018 International Tax Competitiveness Index Rankings

Table 4: Instruments for Strategy of Companies and Business Units

Table 5: SWOT Analysis of the foreign companies in Germany are compared to the external opportunities and risks from the German and international markets

Table 6: The types of innovations

Table 7: Comparison of popular e-Commerce Platforms in Germany

INTRODUCTION

Germany has a leadership role among surrounding European countries and is the fifth largest economy in the world. It has a very high degree of openness for international trade and business. Germany has established itself as a key economic power on the global stage making doing business in Germany more attractive than ever. In Germany, business culture is defined mostly with efficiency, quality and high technical standards and discipline. The business climate is very positive. Furthermore, the consumers have plenty of savings in the pockets.

Doing business in Germany without adequate cross-cultural awareness, however, is a risky proposition. Many entrepreneurships and business relationships come to an end even before they begin. The values of German business culture at the root of the country’s economic success can also prove a source of cross-cultural misunderstanding for global companies doing business in Germany. The intercultural differences and misunderstandings very often result in critical loss of time and money.

The foreign companies in Germany have noteworthy risks and challenges. It is essential to understand the business environment and partners. Especially with Germans, even small issues can be crucial. If the foreign business partner has not enough understanding or experience about the differences of German business environment and culture, even speaking to a potential German business partner can create unexpected problems and results. Additionally, “typical German” tick is arguable in recent years. Germany looks like a melting pot with its people, and third generation of immigrants (especially with Turkish roots) are tired of having to articulate their identity between being a German or where those grandparent came to Germany from.¹

It is very important to understand the business environment and partners. Additionally, the characteristics of the German public agencies and its authorities should be taken into consideration. Mostly it is not easy to find the right way through the jungle of the German bureaucracy.

The World Bank and International Finance Corporation (IFC) rank Germany # 114 in the world for ease of starting a business. There are several procedures and requirements for new companies. On the same ranking table of the World Bank and IFC, Germany has the 24th place on ease of doing business in the world. The related figures also point that doing business in Germany requires doing homework.

The aim of this academic study is to highlight the highly possible challenges for small and medium-sized foreign companies in Germany and to explain the ways and strategies how to deal with identified issues, considering the cultural and sociological aspects of Germany.

The objectives of the research are:

- To identify the factors and challenges that represent the key issues for foreign companies in Germany;
- To outline the strengths and weaknesses of foreign companies in Germany;
- To identify the opportunities and applicable strategies for foreign companies in Germany;
- To develop the strategy based consulting approach for foreign companies in Germany.

The object of the study is foreign companies doing business in Germany. The subject of the study are factors and challenges that determine the way how foreign companies do business in Germany. The work is only related to the existing small and medium-sized companies (SME), the cultural and social aspects in Germany.

For decades, Germany has been a country with highly developed, high-cost economy and business culture with efficiency, quality, high technical standards and disciplines. However, the author puts forward a hypothesis that for a small or medium-sized foreign company, doing business in Germany has noteworthy risks and challenges.

The study has a unique subject in literature because it is aimed to collect the information and data from different sources and create a new summarized topic which give strategy and can be of practical value for the foreign companies in Germany.

Since the author works in a foreign company in Germany currently, the author took practical value into consideration. The realistic challenges, applicable opportunities and strategies are chosen as content for this study for the related companies. A validity confirmation has been done before for the literature and internet-based findings with help of external and self-designed surveys and data reports. In self-designed surveys, the only results from participants are evaluated, who is working or has worked in a foreign company as employee or consultant.

In the study, the essential data collection supported by related literature and internet were selected as main methods, built the basis to work on this topic. For a better comprehension of the study especially the results of external and self-designed (see Appendix 4 : Self-designed survey) surveys and data reports are included. With the help of self-designed survey which was conducted with 32 participants from different job levels and fields, the accuracy of the findings was tested. In self-designed survey, the scale of valuation (between extreme likely – extreme unlikely) is used.

In order to meet the aims of this work, the following structure is chosen:

Introduction introduces the aims and objectives of this work, its motivation, limitations and structure.

In chapter 1, the background and definitions are presented as an overview to familiarize the reader with current demographic, political and economic situation in Germany.

In chapter 2, challenges for foreign companies are explained.

In chapter 3, the applicable strategies and opportunities for foreign companies in Germany are presented and the strategic consulting concept based on strategies of foreign companies are designed.

In chapter 4, management consulting role to implement strategies in foreign companies in Germany is explained.

In the Conclusion, the interpretation of findings and strategies for foreign companies in Germany is summarized. Additionally, the strategies are illustrated based on a strategic consulting approach.

1. DEFINITIONS AND BACKGROUND

In the planning phase of a new business or business connection in a foreign country, it is crucial knowing about the country, where the company can visit or locate. Geography, population, political structure, religion and demographic structure are main topics, which are useful to focus on while finding opportunities, developing and implementing the right strategies.

1.1 Political System

Germany is a federal republic consisting of sixteen states, which used to be independent kingdoms that joined together first economically and then later politically as the German Empire in 1871. Due to this reason, the previous kingdoms and now federal states still have autonomous decision power in the German legal system. If the German government, as the law-maker, introduces a law, it overrules all laws of the federal states which might be in contradiction to it. If there is not, however, each federal state can make their own. Therefore rules and regulations might be different depending on which federal state the company is located in.

Germany has the following federal states which are also known as “Bundesländer” show in Table 1.

Table 1 : Federal States of Germany

Abbildung in dieser Leseprobe nicht enthalten

source: https://www.steuerliches-info-center.de/EN/FinanzverwaltungDerLaender/finanzverwaltungderlaender_node.html; accessed 19.04.2019

The political system is stable in Germany. Additionally, the legal certainty and public safety are permanently guaranteed by the separation of powers (legislative, judicial and executive) set out in the 1949 Constitution and the division of government between the federal and individual state level. (Winheller 2010) The separation of powers is showed in Figure 1 below.

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Figure 1 : Seperation of Powers in Germany²

1.2 Global Competitiveness Index of Germany

The Global Competitiveness Index (GCI) is an indicator of the competitiveness of individual countries, which is yearly published in a report by the World Economic Forum. GCI report annually examines and indexes the competitiveness of global economies. According to GCI report, Germany as the strongest European performer, it has 3rd place in overall in 2018 (2017: 3rd place in overall). The results show (Figure 2: 2018 Global Competitivenes Index of Germany) that Germany ranks #1 globally on the Innovation capability pillar (87.5). Additionally, in macro-economic stability Germany has a leading role in the world. On the other hand, from the perspective of Business dynamism, Infrastructure, Skills, Product Market and Market Size, Germany has a great ability in the world.

Abbildung in dieser Leseprobe nicht enthalten

Figure 2: 2018 Global Competitivenes Index of Germany³

“Innovators benefit from a vibrant business sector to bring innovations to market (81.6, 2nd). Germany’s strong overall competitiveness performance is further explained by very solid fundamentals, such as a stable macroeconomic environment and a healthy, well-educated and highly skilled population. However, the country lags behind when it comes to ICT (Information and communication technology) adoption, ranking only 31st globally with a score of 69.3. The gap is particularly pronounced on mobile broadband and mobile-cellular telephone subscriptions (53rd) and on the provision for the latest ICT infrastructure, in particular in terms of fiber connectivity to the home (66th).” World Economic Forum - The Global Competitiveness Report, 2018). In Appendix 3, all the index components of Germany’s Global Competitiveness Index report are shown.

1.3 Geography and Population of Germany

Germany is located in Central Europe and has 357,168 square kilometer area. In this region Germany is one of the largest countries.

In total about 83 million people currently live in Germany. Berlin is the nation’s capital and, with about 3.7 million inhabitants, is the largest city in Germany. (Riemhofer 2019, P. 1) (Statistisches Bundesamt 2019). Frankfurt International Airport is the biggest aviation hub in Germany, and at the same time Frankfurt is the Germany’s fifth largest city with population of approximately 750 thousands. The German financial metropolis is situated roughly in the centre of the country and should not be confused with Frankfurt an der Oder, which is in the east of Germany, closer to Berlin and bordering Poland

1.4 Demographics and Religion Structure

In dimension of social market economy, Germany has a low income inequality as a society internationally, based on the GINI⁴ index, which calculates the inequality of distribution of real household incomes. According to calculations of DIW Berlin (Das Deutsche Institut für Wirtschaftsforschung - German Institute for Economic Research), GINI index in Germany was reported at 31.7 in 2015. The German government provides fundamental social and legal security for the families. A significant part of national budget is used for the social system in Germany. The General Equal Treatment Act (GETA) enables a prevention system against any disadvantages based on differences, like ethnic heritage, gender, age, world view, religion, disability or sexual identity. In addition to that, in 2018, Germany places 11th on the Corruption Perceptions Index (CPI), which is a sign of a very low level of corruption. On the same index, Russia is on the 138th and Turkey is on the 78th place.

According to statistics based on website of Germany Federal Statistical Office, 42% of the 41.3 million households in Germany were one-person households in 2017 and 59% of all Germans were either married or living together (Statista GmbH Hamburg 2018b). Living together without official marriage is socially accepted in Germany. It is also very common to live together for some time before marriage. Another figure on the website of Germany Federal Statistical Office shows that divorce rate is roughly 39% in 2017. The key figures on population are shown in Table 2 below.

Table 2 : Key figures on population

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Source: (Riemhofer 2019, P. 2)

The religion does not play a major role in Germany, and religion and state are separated. Christianity is the largest religion in Germany, and about every second person in Germany is a Christian. About five percent are Muslims and four percent belong to other religions. Thirty-six percent of the population, more than one third, belong to no religion; it is an upward trend. (Deutschland.de 2018)

The report published by Fowid (Die Forschungsgruppe Weltanschauungen in Deutschland - Research Group of Worldviews in Germany) shows that 27 percent of population are not affiliated with any church or religion in Germany. The second largest religion in Germany is Islam, with around 4 million adherents (5% of the population), almost all of them have full or partial foreign background. The Muslim communities are also growing because of the recent influx of immigrants from Syria and Afghanistan: Smaller religious groups include Buddhism (0.2%), Judaism (0.1%), Hinduism (0.1%) and others (0.4%). Overall, women are more religious than men, and the people living in the western parts of the Germany are more religious than those living in the eastern parts of the country. (Fowid research on religions in Germany 2017) Many surveys and signs show that in lives of Germans, there are many things that are more important than religion. Health, family, friendship, children are main actors, and education, work or occupation and nature are the main topics for Germans. (Fowid research on the meaning of religion in Germany 2017)

2. CHALLENGES FOR FOREIGN COMPANIES IN GERMANY

2.1 Complexity of regulations and bureaucratic procedures

If a foreign company wants to expand into Germany, one of the existing options can be chosen: it can set up a subsidiary, branch office, permanent business establishment or representative office. A business registration and, if necessary, a separate state authorization is required for the subsidiary, branch office and permanent business establishment to commence commercial activities. (Wilke 2018) German government regulations are complex. Additionally, regulations have protective character for local suppliers, especially regarding safety or environmental standards.

Foreign businesses in Germany must do their homework thoroughly and make sure they know precisely which standards apply to their products or services since the complexity of regulations is high and there are many bureaucratic procedures. There have been significant developments (for example, e-Government and projects on Bureaucracy) in last years, but still it costs time and money for the businesses in Germany.

Additionally, German government often requires test and certifications, so it is very important to be prepared and obtain testing and certification timely. Mostly, in order to stay longer in German market, the foreign companies must know the complex safety environmental standards. These standards can complicate market access and the competitiveness of the foreign company in the market. European Union’s (EU) Common Agricultural Policy and German restrictions on biotech agricultural products are the though obstacles in Germany which have to be considered by importers and exporters. (Hattingh, 2017)

English translations of the German Civil Code and other important laws are available at the German legislation portal online, gesetze-im-internet.de. The other important official sources are listed in Appendix 2.

2.2 Complicated tax laws and high tax rates

Doing business in Germany is a challenge for foreign companies relating to the legal and tax structures and constraints. There are relatively high marginal tax rates and complicated tax laws.

The taxation of companies has three main dimensions in Germany (shown in Figure 3: The main components of corporate income taxation in Germany) below. Firstly, the limited liability companies (GmbH) and stock corporations (AG) are subject to corporate income tax (Körperschaftssteuer). On the other hand, the partners of partnerships are subject to personal income tax (Einkommenssteuer). The rate of corporate tax is 15 percent on the taxable profits of the company.

Abbildung in dieser Leseprobe nicht enthalten

Figure 3 : The main components of corporate income taxation in Germany

Secondly, corporations are subject to the solidarity surcharge (Solidaritatszuschlag) as addition to the corporate or personal income tax. The amount of the solidarity surcharge is calculated as 5.5 percent of the income tax rate (0.825 percent). Together, the corporate tax and solidarity surcharge amount to 15.825 percent.

The last component is the trade tax (Gewerbesteuer). All corporations and partnerships are also subject to it. The trade tax can differ by local municipalities because the trade tax is imposed by local municipalities. For example, the trade tax rate starts at 7 percent, and the German average trade tax rate is around 14 percent. Due to different trade tax rates, total corporate income tax burden in some areas can be as low as 22.83 percent. The average German corporate tax rate is 29.83 percent.

Corporate income tax rates differ substantially across countries, ranging from 9 percent in Hungary to 34.4 percent in France. (Russia: 20 percent). High tax rates and increasing complexity of tax laws weigh heavily on investment climate and market in Germany. In the Figure 4 below, the comparison map of corporate income tax rates in Europe in 2018 is presented.

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Figure 4 : Corporate Income Tax Rates in Europe for 2018⁵

The International Tax Competitiveness Index (ITCI), which is published by Tax Foundation (Washington D.C.) seeks to measure the extent to which a country’s tax system adheres to competitiveness and neutrality. These two terms are the most important aspects of tax policy. According to 2018 ITCI rankings (Table 3: 2018 International Tax Competitiveness Index Rankings), Germany has the 16th places among other countries. Corporate tax rank (24th place) is the worst comparing to other Organisation for Economic Cooperation and Development (OECD) countries.

Table 3 : 2018 International Tax Competitiveness Index Rankings⁶

Abbildung in dieser Leseprobe nicht enthalten

For several years now, corporate taxes have not been a popular subject in German politics, and it is not possible to see sufficient evidence that this is likely to be different in the near future. (Bräuninger 2018)

Germany’s fiscal system is hard to manage. Complexity of business and tax laws and high number of applicable taxes consume about 207 working hours of companies annually. The preparation of social security declarations and payment of related contributions takes 134 hours on average. Calculating corporate income tax and VAT (Value added tax) payments can also be extremely time consuming. As a result, there are 14 different applicable taxes which may be payable by businesses operating in Germany. (TMF Group 2019)

2.3 Transfer Pricing

Germany has extensive related party transfer pricing rules. From the perspective of tax auditors, transfer-pricing issue is one of the most important components of any tax audits. The German transfer pricing rules are to a large extent in accordance with the OECD reports and recommendations on the subject, although they are more detailed and more specific. Rules try to ensure that all related parties should trade at arm’s length, i.e. as though each unit involved was an independent entity. According to rules, there are three main transfer pricing methods: the comparable uncontrolled price, the resale price and or the cost-plus method. According to the method chosen, the company has to document all related party transactions.

The taxpayer would only be obliged to prepare the local file documentation, either if intercompany supplies of goods in excess of €6m or services or other transactions in excess of €500,000 per year. A master file needs to be provided when the sales (intercompany as well as to third parties) of the local branches amounted to at least €100 million in the previous financial year. (PwC - Doing Business and investing in Germany, 2018),

There are specific penalty rules relating to documentation requirements. Failure to provide the necessary records and documentation in a satisfactory state within 60 days (30 days in the case of extraordinary transactions) of a request by the tax authorities leads to the following sanctions, in addition to any correction of taxable income: (PwC - Doing Business and investing in Germany,2018),

- Refutable presumption that the relevant taxable income has been under-reported; the tax authorities may then, for example, adjust the income to the less favourable end of an arm’s length range.
- Penalties of 5-10% on the additional income but no less than €5,000.
- Delayed provision of records will be penalised at at least €100 per day, rising to a maximum fine of €lm.

The third transfer pricing documentation element is the Country by Country Reporting (CbCR), which is to be prepared and filed by the ultimate parent company of the group/partnership in the country where the parent company is registered, provided the consolidated sales of the previous financial year amount to at least €750m. Starting December 31, 2015, the CbCR is to be filed for each financial year within 12 months after the financial year-end (i.e. by December 31, 2017 for the financial year 2016 for the first time). Failure to provide the CbCR could trigger a penalty of up to €5,000.

Another relevant transfer pricing element is the so-called transfer of function (Funktionsverlagerung). The transfer of function is assumed if an entire function, including risks and opportunities as well as assets, is transferred from Germany to a related party abroad to perform the same function. Since such transfers have unique features and third-party data is unavailable, it is hard to make an arm's-length test. Therefore, German tax administration has published an additional guidance on the transfer of function and its application of the arm’s length test. (International Tax Review, 2018)

Many foreign companies are familiar with Transfer Pricing regulations in their country of origin, but naturally lack information on the local regulations in Germany. Therefore, often foreign companies pay little or no attention to the Transfer Pricing compliance. This may lead to enormous tax consequences and penalty payments in Germany. (dhpg, 2018)

2.4 Local Accounting and reporting

While internationalization in German codification and accounting practice was and still is restricted to the group accounts, single financial statements remained unaffected due to their material legal consequences. Therefore, the German financial accounting world has separated into two subsets: Capital market oriented accounting at group level, especially for publicly traded companies based on International Financial Reporting Standards (IFRS), and the more contracting, i.e. tax, dividend distribution and debt covenants oriented HGB accounting on the legal entity level. This distinction also affects the research community which increasingly disaggregates due to the necessary specialization in both areas. (Fülbier and Gassen, 2011).

There are also deviations between German GAAP accounts and tax accounts. The companies in Germany book their transactions first on the statutory accounts according to German Generally Accepted Accounting Principles (GAAP). Tax balance sheet is made with the specific tax law and accounting adjustments on statutory accounts, and additional accounting options are available. Following that, the taxable income in general is determined based on the tax balance sheet. Common tax adjustments are, e.g. (N.B. this enumeration is non-exhaustive and business-specific) (PricewaterhouseCoopers GmbH, 2018):

- intangibles,
- provisions for expected losses,
- pension provisions,
- amount of annual depreciation on certain assets (such as acquired goodwill),
- interest-free liabilities and certain accruals with a term of at least twelve months.

Additionally, the companies have to consider the off-balance-sheet-adjustments to calculate the taxable income further. There are limitations on the deductibility of certain operating business expenses. For example, the following items are non-deductible or partially deductible:

- income taxes, i.e. corporate income tax and trade tax, as well as the supplementary charges on these taxes,
- gifts to non-employees in excess of €35 per year/per person
- 30% of entertainment costs,
- non-deductible interest exceeding the so-called interest-capping limitation,
- from 2018 onwards: expenses for the assignment of use or the right to use rights (royalty payments) as far as the deductibility is restricted by the royalty limitation rule,
- donations exceeding certain amounts.

2.5 Communication with Business Partners

In Germany, marketing and sales focus on the customer. “The customer is king” is a typical German saying, meaning that when it comes to success or failure of a product, the customer is the crucial factor. Customers in Germany are well aware of the fact that not delivering a good service is not acceptable in the global world. (Koch 2016, P. 28)

In Germany communication is perceived in a very direct manner. In business culture the opinions are shared openly and straightforwardly. Being serious is preferred instead of using humor in business, which can be accepted as unprofessional in many cases. The cross cultural difference is a major issue which has to be considered by foreign companies in Germany. For example, in negotiations constructive criticism will improve the outcome as a contribution rather than personal strikes. (Maclachlan, 2019)

For foreign companies in Germany, the rate of understanding German business culture creates the value leading to profitable business while doing business in Germany. It can contribute to company’s global success while enabling cross cultural awareness and balance of negotiations with German businesses in company’s favour. (Maclachlan, 2019)

2.6 Organizational Structure of Company

In this part, organizational structure of German companies is evaluated under two aspects: hierarchical company structures and strong departmental rivalry.

Hierarchical Company Structures

Hierarchy has a significant role in German business culture. Strict hierarchical structure creates a business atmosphere, where decisions are made at the top, and vertical communication is usually preferred. For this reason, the highest positions will be occupied by the most technically qualified and experienced employees. Especially for foreign companies in Germany, the hierarchical structure can affect negotiations and meetings which may seem to take longer than expected. The strong procedures and policies create a perception that they slow down the business activities and establish an environment of doubt. But in reality, German companies mostly require to look closely at all details and wait for decisions to be made at the acceptable level. Generally, slow decision making processes produces the final result of the highest quality, as German products are famous for it. (Maclachlan, 2019)

Strong Departmental Rivalry

In Germany, the rivalry between departments is very strong, which is encouraged by German managers because that’s how they get the best out of their employees and staff. The benefits of the related environment are high levels of efficiency and competitive product. (Maclachlan, 2019)

2.7 The Lack of qualified personnel

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According to the labor market report of the German Chamber of Industry and Commerce (DIHK), the labor shortage could hit the brakes on growth in Germany. 24.000 companies have difficulties filling vacancies. Around 1.6 million jobs are open and hard to be filled currently. Some companies are trying to overcome the problems and have already given up looking for new skilled workers simply because there are no qualified applicants. Another research published by the Bertelsmann Foundation found that Germany needs at least 260,000 new migrant workers per year until 2060 in order to meet labor shortages caused by demographic decline, and of that number, 146,000 people each year would need to immigrate from non-EU member states. As it is shown in Figure 5, the unemployment rate in Germany is explicitly lower than the unemployment rate of EU: Because of the aging population, the labor force in Germany is estimated to shrink by a third, or around 16 million people, by 2060 without immigration. Additionally, the research pointed out official numbers showing that only 38,000 workers came and stayed in Germany in 2017. (Deutsche Welle, 2019)

Figure 5: Comparison of unemployment rate of Germany and European Union.

In the chart below (Figure 6: Unmet labour demand in Germany by sector- Job vacancy rate (%) not seasonally adjusted) the unmet labour demand in Germany by sector is shown. The markets of administrative, construction and accommodation and food have the highest unmet labour demand in Germany.

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Figure 6 : Unmet labour demand in Germany by sector- Job vacancy rate (%) not seasonally adjusted

2.8 Brexit

Brexit (British exit from the European Union) is the main current subject in Germany, which represents a major challenge for trade relations between Great Britain and the European Union. The negative effects of the Brexit vote are already weighing on business which is result of the uncertainty about future trade relations. In 2018, German exports to the island fell by almost four percent. Especially British companies in Germany struggle with the results of Brexit. According to results of the DIHK’s business survey, the companies face with following difficulties: (DHIK 2019)

- customs bureaucracy;
- Increase in tariff barriers to trade;
- Legal uncertainty;
- Medium-term slowdown in UK economic growth;
- foreign exchange risks;
- Increase in non-tariff barriers to trade (also for Services).

2.9 Sanctions by USA

The companies with Chinese, Iranian and Russian capital in Germany have major bans and limits because Germany is one of the countries which cannot bypass sanctions according to the agreement between USA and Germany. There are only expectation that a mechanism launched on January 31th, 2019 by Germany, France, and Britain to allow financial flows to be sent to Iran would not violate United States sanctions (Erlanger 2019)

2.10 Other Challenges

Getting Credit Lines

Germany is home to a modern financial sector that operates within a strict legal environment. Getting credit is therefore a relatively streamlined process, although there is no collateral registry in operation. (TMF Group 2019) According to 2018 Global Competitiveness report, German has 38th place regarding domestic credit availability to private sector.

Enforcing Contracts and Resolving Insolvency

Germany’s modern legal system handles contracts and insolvency with relative efficiency. It takes 394 days to enforce a contract and 438 days to resolve insolvency. (TMF Group 2019)

2.11 Survey Results

Self-survey was conducted to gain insight into challenges and opportunities of foreign companies in Germany and to understand the preferences in application of management consulting.

The survey was built using extension of ‘Google Forms’ and hosted online in ‘Google Docs’. The survey wasn’t public, the survey link was sent privately to respondents who work or have worked in a foreign company in Germany as an employee, owner or (external-) consultant. The confirmation has been requested and received from respondents after they completed the survey. In the first section, the subject and the purpose of survey is explained and depending on the first answer (if they have already have experience working in a foreign company or consulting to a foreign company in Germany), respondents were driven to answer the next questions. The second section of the survey consisted of various questions regarding the job level and field (department) of respondents. Additionally, the information about company type (start-up, SME or big enterprise) was requested in the same section. Since the survey link was sent privately, other personal details (age, gender, nationality and the industry) were collected in selection phase and noted separately.

In the third section, the challenges of foreign companies have been listed and respondents were asked to evaluate them on scale from extremely likely to extremely unlikely (evaluation from 5 to 1). In the last question of the third section, it is asked if the respondents could bring any additional challenge forward with the help of a text box. In the fourth section, the opportunities/strategies of foreign companies have been listed and respondents were asked to evaluate them on scale from extremely likely to extremely unlikely (evaluation from 5 to 1). In the last question of the fourth section, it is asked that if the respondents could bring any additional opportunity/strategy forward with help of a text box. In last section, the management consulting activities for foreign companies have been listed and the preference of respondents is asked in scale of extremely likely to extremely unlikely (evaluation from 5 to 1). As the last question, it is asked if the respondents could suggest any additional consulting activity which was not listed, indicating with the help of a text box. The survey is presented in Appendix 1.

Thirty two (20 male and 12 female) respondents answered all the questions, and only the data collected from 32 respondents is taken into evaluation process. 69 percent of respondents are between ages between ages 30-50, 22 percent of respondents are below 30. Only 9 percent of respondents are over age 50. 42 percent of the respondents are of German nationality and 31 percent of respondents are of Turkish nationality. 22 percent of respondents are from Russia, Iran and USA. The rest of respondents are from Chile (3%) and Serbia (3%). 69 percent of respondents hold positions of managers or above. The rest of respondents hold positions of supervisors (28%) or specialists (3%). The major part of respondents (41%) works in finance and accounting department and the rest of respondents work mostly in production/operations (16%), management (13%) or other functions (21%). 41 percent of respondents work in logistics sector. After logistics, the consulting sector has second place with 37 percent. Rest of respondents work in utility sector (16%) or in other sectors (6%). The distributed results of the demographic and professional structure of respondents are illustrated in Appendix 5. Following the statistical analysis of all data, the distributed results were compared with the findings on literature and external surveys.

The major survey results are presented at Figure 7 : Perception of challenges of foreign companies in Germany.

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Figure 8 : Perception of challenges of foreign companies in Germany

The survey provided useful information that according to the perceptions of 32 respondents representing small and medium-sized foreign companies in Germany (Appendix 5: Results of Self-designed Survey), the complexity of regulations and bureaucracy and the lack of qualified personnel are the major challenges for foreign companies in Germany. The other significant challenges are: Local accounting and reporting, Transfer pricing and organizational structure of the company. Additionally, the communication with business partners in Germany is also mentioned as one of important challenges. Brexit and sanctions by USA have low priority among other challenges.

As a conclusion, complexity of regulations and lack of qualified personal are the main challenges for foreign companies in Germany. Additionally, organizational and accounting based issues listed above should be always considered. At last but not least, the communication with business partners is also important challenge to build relationships for a company’s long-term growth.

3. OPPORTUNITIES

In Table 4, the applicable instruments for strategy of companies and business units are listed. In the first row, the instruments are listed for the companies as a whole. In the second row, the instruments for the business units are listed. It is also important to choose strategies which are analysis based or implementation based, separated in last two columns of the table.

Table 4: Instruments for Strategy of Companies and Business Units⁷

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With the help of SWOT analysis (Table 5: SWOT Analysis of the foreign companies in Germany are compared to the external opportunities and risks from the German and international markets), the internal strengths and weaknesses of the foreign companies in Germany are compared to the external opportunities and risks from the German and international markets:

Table 5 : SWOT Analysis of the foreign companies in Germany are compared to the external opportunities and risks from the German and international markets

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The foreign companies can offer competitive prices in German market, for example with help of home country based research and development activities or locating some production or services processes abroad. Another strength can easily realize with adaptation of international workforce which is explained under chapter 4.5.2 Integration of international assignment program to reduce the labour shortage.

Integration of international assignment programs to recruit and retain talents from home country is a unique solution for foreign companies in Germany. Labour friendly regulations make the assignment process fast and easy. Due to personal networks of the integrated foreign personnel more international candidates might get informed about the possibility to work in Germany and consider this as an interesting alternative. As a result of this strategy, the companies can save costs. (Weber 2016, 6.3 Outlook) Additionally, the foreign companies which want to recruit skilled workers abroad, have to clarify their countries of origin. For example, India is a popular origin for the companies looking for IT experts. In Germany, online career portals such as LinkedIn, Xing, StepStone or other job boards are also good sources to find experts abroad. (Wollseifen 2019) As the last major strength point; with help of the right designed concept and strategy, the foreign companies can find new ways to reach their niche. (Siegemund 2008, P.69)

On weaknesses side the foreign companies struggle with bureaucracy and complexity of regulations in Germany. Secondly, high labor cost is another weakness because mostly foreign companies don’t reflect it on their business plan or forecasts accurately.

Germany presents many opportunities for companies. Strong economy and stable political system are the major opportunities for foreign companies in Germany. Additionally, Germany has developed infrastructure. Businesses profit especially from Germany’s excellent logistics infrastructure. Lastly, Germany presents many incentives and has positive reputation among international competition.

As a threat in the German market, Brexit is the hot topic in recent years. On the related topic the major difficulties are customs bureaucracy and increasing tariffs. Another threat for foreign companies is the trade ban against China, Russia and Iran. These bans affect directly the companies from these countries, and indirectly the companies which are in business with them.

4.2. Innovation

Innovation is always an actual topic in economy and business world of Germany. Innovation is the key tool for many companies to achieve faster growth, higher sales, or critical competitive advantage. However, a study named “Strategies, challenges and maturity levels in the DACH⁸ region” shows how companies often place the wrong focus on innovation management. According to the study, German companies are often afraid of making mistakes and taking risks. Therefore, they focus mostly on existing products, rather than opening up new business areas. It creates only results for short-term targets and meets the short-term customer and market expectations; however, short-term targets do not create any value or change on a technological, organizational or social level. (Bremmer 2019) Additionally, foreign companies can overcome high competition in Germany with the help of offering high-quality products and services at competitive prices, and strong local based aftersales support. (Hattingh 2017)

According to related study, 82 percent of people surveyed primarily see the opportunity with Innovation to optimize products and services and make them more efficient. Almost three quarters of the companies surveyed focus on ensuring the competitiveness, but not on developing new visionary products or services. Another surprising finding (as shown in Figure 9: Innovation profiles of the company in DACH) is that only twelve percent of the respondents classify their company as an innovation leader, while 55 percent consider themselves follower of innovation and the rest 33 percent as a latecomer. (Bremmer 2019)

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Figure 9 : Innovation profiles of the company in DACH⁹

Many companies in Germany use AI (Artificial Intelligence), Connectivity and Big Data, which shows that they have already reached an undeniable level. That level allows them to make and connect smarter. Integration of technologies into a product, offering it as a service and creating an ecosystem around it are just the initial steps in development. Another evolutionary step is the introduction of a results-oriented business environment, which is connected to the business models and marketing strategies. The companies which are leaders in Innovation, do not sell a product or even a service, but a result. (Bremmer 2019)

In the future, the portion of digital and AI-enabled products and services will be higher than today. According to another result from the related study, only 51 percent of German companies believe that AI and digital components will completely change their product and service portfolio in the future. (Bremmer 2019)

The value of a product is moving from hardware to electronics, to software and to digital technology, and more and more added value is provided by digital technologies than by the hardware itself. In our ages, the companies do not develop a smart networked product or related product is not maintained same way as a conventional product. Currently, it is possible to access it remotely and collect more and more data.

At the same time, producers can have new possibilities to create value. The companies can offer transaction-based services which are completely different, and new business model. If the product is still a part of an ecosystem, customers could buy a collection of services provided by different vendors through the ecosystem. For example, Amazon sells smart speakers and smart home tools (Echo dot, Echo spot and Echo Show etc. with Alexa infrastructure). These products enable wide range of connected services with additional tools or software from different vendors. There many vendors which produce lightning, cooling, warming, security etc. products and services, creating value connected to Echo and Alexa.

The key steps of Innovation in a company: (Gassmann and Granig 2013)

- innovation strategies are successfully developed and implemented,
- Not only technologies, but also business models have to be considered and become revolutionized,
- core competencies are identified and developed,
- Innovation processes are successfully conducted,
- intellectual property can be protected,
- the creative potential of employees is used successfully,
- A living culture of innovation can be actively developed.

When it comes to benefits of innovation for the foreign companies, innovative companies can build and improve their competitiveness, generate more sales, and have strong ability to retain customers for longer. When it comes to the question of specific goals to be achieved with innovations, it becomes clear that the ranking of the drivers hardly varies with the size of the company. In the figure below (Figure 10 : Decisive drivers on the innovation projects in DACH Region according to total sales figures of the companies), it is shown that the companies with different sales volumes have different decisive drivers on their innovation projects. The major driver is increase of productivity in DACH Region. The other significant drivers are increase of productivity and reputation of the company from outside. (Accenture 2019)

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Figure 10: Decisive drivers on the innovation projects in DACH Region according to total sales figures of the companies¹⁰

The types of innovations, which are part of the business strategies, are named and shortly described in the table (Table 6: The types of innovations) below: (Siegemund 2008)

Table 6: The types of innovations

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The intentions of all the listed types of innovation, which can vary among improvements of products, processes and services, are: (Siegemund 2008)

- Improved quality
- Creation of new markets
- Extension of the product range
- Reduced costs (labour costs, material, energy)
- Improved production processes
- Replacement of products or services

Innovation labs are the current innovative trend in Germany. The builders and accelerators of German companies highlight the enormous demand and the passion of the top management to see company’s prosper in the digital and innovative world. Pioneering new business models are nevertheless still rare. German companies also still have enormous pent-up demand regarding the development of unicorns, which are projects with a market value of one billion US dollars. (KPS AG 2018)

Mostly innovation projects fail because of an improper or a too unspecified goal definition, poor alignment of actions to goals, wrong participants in the supervising committee or poor communication, access to information and monitoring of results. To decrease the risk of failure, the consulting companies developed several consulting concepts to support the innovation process and the strategic management. (Siegemund 2008)

As another valuable option for foreign companies in Germany, blue ocean strategy provides differentiation and low cost; it also builds brands, which can last decades. Blue Ocean strategy was developed by W. Chan Kim and Renee Mauborgne at Harvard and INSEAD universities. In research phase, it has been implemented in 300 companies over 20 years. It is a proven system for making competition irrelevant by creating a low-cost and a differentiated strategy in parallel. In the context of the Blue Ocean strategy, it is recommended to look at market boundaries differently and present products and services for consumers from different segments by identifying a common trait.

[...]

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¹ (Statista 2018)

² (Süss 2019, P 19)

³ World Economic Forum – Germany Competitiveness Index 4.0 (2018)

⁴ “GINI Index is a measure of statistical dispersion intended to represent the income or wealth distribution of a nation's residents, and is the most commonly used measurement of inequality. It was developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper Variability and Mutability“) (Wikipedia 2019)

⁵ (Asen 2019)

⁶ (Tax Foundation 2018)

⁷ (Gathen 2014, P10),

⁸ DACH: Germany, Austria and Switzerland

⁹ (Accenture 2019)

¹⁰ (Accenture 2019)

• Author: Okan Yildiz (Author)
• Publication Year: 2019
• Pages: 80
• Catalog Number: V922898
• ISBN (eBook): 9783346240736
• ISBN (Book): 9783346240743
• Language: English
• Tags: business strategies, germany, Strategic Entrepreneurship, Innovation, International Business, management consulting