“Real Profit” and Hidden Champions – Hermann Simon debunks business myths

In your recent statements, you’ve been emphasizing the importance of companies focusing on ‘true profit’ rather than just growth. Could you elaborate on the key indicators that define ‘true profit’ and how businesses can effectively measure it?

In the long run, you need profit to survive. One can say that profit is the cost of survival. There is a lot of deception going on. EBITDA (earnings before interest, taxes, depreciation and amortization – Ed.) is not profit, EBIT (earnings before deducting interest and taxes – Ed.) is not profit. The only “true profit” is net profit after all costs, interests and taxes. Therefore I look at net profit when I evaluate a company. Of course, you have to accept differences across the life cycle of a company. For a start-up growth can be more important than profit, for a certain period of time.

You’ve predicted that inflation rates may stabilize around 5% annually over the next five years. What strategies should companies adopt to manage pricing and maintain profitability in such an inflationary environment?

Yes, I think that inflation will come back again. Wages are increasing in many sectors and companies must pass on these higher costs to their customers. Also, the experience of the 1970s should warn us. Here are the inflation rates from 1972 through 1981.

Companies should not wait too long to adjust their pricing. And as I describe in my book “Beating Inflation” in more depth, frequent smaller price adjustments are better than infrequent large price adjustments.

Given your extensive research on “Hidden Champions”, how do you assess the current state of these mid-sized global leaders in the face of digital transformation and globalization?

Of course, the Hidden Champions are not immune to crises and new technological challenges. But in many cases their products are indispensable in the longer term. And they are very deep in their technologies and processes. Therefore I am optimistic about their future. For instance, I don’t think that the German Hidden Champions will be strongly affected by Trump’s tariffs.

In light of your critique of contemporary industrial strategies, what policy changes do you believe are necessary to foster innovation and competitiveness among small and medium-sized enterprises?

The challenge of innovation is the integration of technology and customer needs. And the Hidden Champions are much better and faster in this integration than large corporations. One of the big challenges is the integration of hardware and software. Here I advise European Hidden Champions to build transatlantic business ecosystems. When we talk of politics, the reduction of bureaucracy is the most important task.

With the increasing importance of sustainability, how can “Hidden Champions” integrate environmental considerations into their business models without compromising their competitive edge?

Sustainability is ultimately a technological challenge. Only if we find more sustainable ways to solve a problem will we succeed. This challenge concerns all industries and all processes. In the beginning these markets are small and may not be attractive for large players. This creates a chance for SMEs and Hidden Champions. The following case illustrates the potential. Today most shirts are made from cotton. The Austrian Hidden Champion Lenzing has developed a new fibre based on wood, the brand name is Lycocell.

The table shows the difference between a cotton and a Lycocell shirt – sensational!

You’ve highlighted the role of China as a significant player in global innovation. How should Western companies adapt their strategies to remain competitive in markets where Chinese firms are gaining prominence?

The Chinese are a very serious threat for European Hidden Champions. Therefore I advise the Hidden Champions to do each activity in locations where this activity can be done best. To illustrate this through some concrete cases. Two German Hidden Champions in mining technology have moved their whole value chain to China. We no longer have mining operations in Germany, in China mining is still very important. Another German Hidden Champion in the pump sector establishes its competence centre for Artificial Intelligence in China, because data protection and availability offer better conditions there.

Considering the potential for financial crises, what early warning signs should companies and policymakers be vigilant about, and how can they proactively mitigate associated risks?

I see a high level of debt as a risk and early warning indicator. This applies in particular to the ratio of debt to cash flow. If the debt is three to four times higher, or even more, than the cash flow, then it becomes dangerous. You also have to be very careful with new competitors. There are no permanent monopolies in this world. The recent example of DeepSeek versus ChatGPT and suppliers of AI-Chips is a prime example of such dangers. Nvidia lost 600 billion dollars in market capitalization in one day, the highest daily decline ever. So never feel safe, always be on your guard.

Reflecting on your extensive career, what do you consider the most significant shifts in global business practices, and how have these changes influenced your perspectives on management and strategy?

Since around 2010 global exports have been growing less than the global gross domestic product. I call this “Relative Deglobalization”. But this is not the end of globalization. We see that service exports are still growing faster than the global gross domestic production. But goods exports are increasingly replaced by foreign direct investment. There is a kind of competition between the costs of manufacturing and the costs of logistics. As the figures show, logistics costs have come down dramatically (Source: Hermann Simon, Hidden Champions in the Chinese Century, New York: Springer Nature 2022), much more than manufacturing costs. This was a major driver of globalization. But this trend has come to an end, due to environmental and political (risk, tariffs) considerations.

In your opinion, how has the role of leadership evolved in the context of modern challenges such as digital disruption, economic volatility, and geopolitical tensions?

I distinguish two aspects here. The fundamentals of leadership are not changing. The old statement by St. Augustine of Hippo that it is the task of the leader to ignite the flame that burns within him or her in subordinates will always stand. But the techniques of leadership are changing dramatically as a result of digitalisation and, soon, artificial intelligence. Digitally, a leader can communicate with a large number of followers regardless of time and place, and will soon be able to do so even regardless of language, thanks to automatic translation. In the opposite direction, information can flow from any number of decentralised units to the leader. In terms of technology, leadership from the time of a Roman general and a modern manager is therefore very different. In terms of motivating the troops, both face the same challenge.

Looking ahead, what emerging trends do you foresee that could redefine the landscape for “Hidden Champions”, and how should these companies prepare to navigate these changes successfully?

Artificial Intelligence is probably the biggest challenge since the invention of the internet. With Trump in power, the landscape of globalisation is changing. We don’t know where this will lead. The Hidden Champions should continue to further develop their global corporate cultures. Most products will not disappear, but have to be improved in terms of sustainability. Acquisition of top talent is a very major challenge, also with regard to increasing resistance against immigration. Hidden Champions don’t like the home office, but may face resistance, when they insist on office presence.

Hermann Simon is the founder and Honorary Chairman of Simon-Kucher, a global leader in pricing and growth consulting. An expert in strategy, marketing, and pricing, he is the only German in the “Thinkers50 Hall of Fame.” He has taught at top universities, including Harvard, Stanford, and MIT. Author of over 40 books, he coined the term “Hidden Champions.” He has received numerous awards and honorary doctorates.

Last Updated on February 11, 2025 by Anastazja Lach