Borussia Dortmund played Arsenal at the Emirates in the group stages of the Champions League last season.

As his players walked around the pitch a few hours before kick off, Juergen Klopp, Dortmund's charismatic coach, said he noticed one of his younger, overawed charges sneaking a picture of an Arsenal player. His kids have come a long way since.

The manner in which Dortmund have blazed a way to this year's final, bettering Manchester City and Real Madrid (twice), among other others, has lit up the tournament. Their tie with Bayern Munich, who eviscerated Barcelona 7-0 in the semi-final, sets up one of the most exciting showpieces in years.

More thrillingly, both sides boast plenty of star attractions who have emerged from Germany's youth system. Bayern will field Philipp Lahm, Bastian Schweinsteiger and Thomas Mueller; Marco Reus and Mats Hummels will both play for Dortmund; Toni Kroos, Holger Badstuber and Mario Goetze will, sadly, miss out through injury.

The roots of that focus on youth goes back to a humid night in Lyon in July 1998. "We lost 3-0 to Croatia in the quarter-finals of the World Cup," recalls Ulf Schott, director of youth development at the DfB, Germany's football association. "Before then, youth development wasn't so high on the agenda in the DfB or in the clubs. It was difficult to get money but, after 1998, alarm bells were ringing."

The existing strategy was torn up. Lessons were learned from France and the Netherlands and a German twist added to create two central columns of a coordinated strategy between clubs and governing bodies. In May 1999, Franz Beckenbauer, coach of Germany's 1990 World Cup-winning team, announced plans to establish a network of national talent centres. Today, there are 366, catering for 14,000 "talents", with a focus on 11- to 14-year-olds.

"We recognised we had problems in developing that age group," says Schott. "It is difficult to isolate who will make it as a professional player at that stage so we wanted to widen the net for developing players at 11 years of age. When players get to an older age, when you have a smaller, more concentrated group of young players, the clubs take over."

Schott cites the cases of Reus and Ilkay Gundogan. Both slipped through the net of the major side but were cultivated in regional centres until they were absorbed into the club system in their mid-teens.

For the second strand of its plan, the Bundesliga's 36 clubs, and those seeking promotion from the third division, were required to establish centrally regulated academies. They had to meet certain criteria if they wanted a slice of the €700m invested over the last decade, including regulated pitches, qualified coaches and a tie-in with schools. "Players must attend school until they are 18," says Schott. "We wanted all of them to have a school examination because the self-confidence of a player is not only based on football. It's also based on family, on abilities in school and other factors. We want to create more rounded personalities who are able to deal with positive things in their lives but also negative things such as injuries."

External factors played a part, too. In 2002, the Kirch TV conglomerate that funded the Bundesliga's boom collapsed, leaving a hole in the finances of many clubs. Wage bills had to be cut, especially for expensive foreigners. Efforts to develop home-grown talents were redoubled and the number of expatriots has fallen since, from 60% in 2002/03 to 46% a decade later.

The case of Dortmund, who have won five Bundesliga titles in the last 18 years, was the starkest. By 2005, they had ran up a debt of €130m and had to accept a loan from Bayern to stay afloat. A rescue package from 400 investors, who each ploughed in between €5,000 and €100,000, saved the club from bankruptcy. For the Champions League final, the cost of the club's likely XI is around €40m, the price paid, incidentally, by Bayern last summer for Javi Martinez, their Spanish midfielder.

When it comes to developing very young players, small-sided games are prized, a philosophy which grew out of a study by the University of Cologne in 1996. The researchers analysed six- to 10-year-olds while playing games of different team sizes and discovered, unsurprisingly, that those playing 11-a-side got less touches of the ball. In seven-a-side, midfield was bypassed, as a lot of goals came from long passes out of defence, but the academics found that four-a-side games were best for developing technique. There were more one-on-ones, players got more touches and took more shots. It was better at that stage of their development, they concluded, to forsake tactics and positioning for ball work and creativity.

Schott cautions, however, against too getting carried away with magic formulas. "It's not a secret," he says. "It's the result of having better coaches and more of them. In 2000, we had 100 coaches involved at clubs, regional level and with the DfB. Today, that number has increased to approximately 400 full-time coaches. When you have the possibility of thinking about football 24 hours a day and you can discuss with other full-time coaches who are also in your academy, the training and results will be better."

It would be misleading to suggest that Germany's development of its under-age players is ueber alles. The country won the UEFA Under-19 European Championships in 2008, then beat the England of Micah Richards, James Milner and Theo Walcott 4-0 in the final of the Under-21 event the following year with a team included Hummels, Manuel Neuer, Jerome Boateng and Marcel Schmelzer, as well as Real Madrid pair Sami Khedira and Mesut Oezil. They failed to qualify in 2007 or 2001, though; and Germany has only reached one of the last four under-20 World Cups.

Their cultivation of native talent is to be recommended, however. Significantly, at least 12 players from each tranche of a club's academy players a year must be German, which explains how all 23 members of the national squad in the last World Cup graduated from one of their clubs' youth systems.

Uwe Roesler, Brentford's German manager, pointed out last month that homegrown 19- and 20-year-old players in the Bundesliga get a chance in first-team squads, while "the average foreigner blocks the youngsters" in England.

It was notable that when City, reigning champions of England at the time, played Dortmund at the Etihad last November, seven of the visitors' XI were German. Just one of City's team, goalkeeper Joe Hart, were from England. And which one of those teams has reached the final?