Management Consulting Firms

Transcription

1 Department of Marketing and Management, University of Southern Denmark, Odense 2008 Management Consulting Firms - Finding the Right Growth Strategy A Comparative Case Study of Growth and Strategy Within the Danish Management Consulting Industry Master Thesis: Cand. Merc. International Management Supervisor: Professor Marcus Becker Autor: Jesper Kirkegaard Kristensen

2 Acknowledgements First, I would like to thank Danish Management Association (DMR) for motivating and inspiring this master thesis towards a direction, which corresponds to my own personal and professional interests, namely strategy and consulting. Especially Tom Vile Jensen, special consultant at DMR, deserves great thanks for his contribution and help, both economic and information wise. This has been an enormous support throughout the whole process, and I sincerely hope that this master thesis will contribute to the important work that takes place at DMR. Furthermore, great appreciation goes to all the consulting firm managers who have taken time out of their busy schedule to participate in this project. I know it has been difficult to find the time, but I was always met with great hospitality and sincere interest. Without their openness and helpful attitude towards my interview questions, I would not have been able to conduct my research. Finally, I would like to dedicate thanks to Professor Marcus Becker, University of Southern Denmark, for providing valuable feedback and guidance in my work. Ultimately, I give great thanks to everyone who has contributed to my master thesis, as well as provided me with support and assistance through out the process. Jesper Kirkegaard Kristensen Odense, 22/9 2008

3 Danish summary Mange konsulentvirksomheder har kunnet leve fornuftigt de senere år på grund af den generelle gode økonomiske udvikling, også selvom de ikke har haft en strategi og er gået hovedkulds efter vækstmulighederne i markedet. Spørgsmålet er, hvor udbredt denne tendens har været blandt virksomhederne, og dermed hvor svagt/stærkt konsulentvirksomhederne og deres organisationer står rustet i de kommende år, hvor markedet ikke vokser så stærkt, og hvor kundernes krav stiger markant. Dette speciale omhandler strategi og vækst i management konsulentbranchen samt, hvorledes dette bedst kan håndteres i forhold til de vækstfaktorer og -barrierer, som branchen på nuværende tidspunkt og i fremtiden står overfor. Den danske management konsulentbranche er præget af enkelte store og hastigt voksende konsulentvirksomheder og herudover en bred vifte af mindre foretagender. Generelt set er det de største virksomheder, som høster størstedelen af profitten, mens der blandt de mindre virksomheder er en større kamp for overlevelse og vækst. Set i lyset af at branchen sandsynligvis er på vej imod sværere tider, er det derfor relevant at se på, hvorledes vækststrategi kan og bør håndteres. Ledende personer i en række forskellige management konsulentvirksomheder er blevet interviewet med henblik på at åbne op for en dybere forståelse af strategi og vækst i en ellers meget broget og lukket branche. Konsulentvirksomhederne er blevet valgt således, at de repræsenterer henholdsvis små, mellem og store konsulentvirksomheder samt ud fra, at de er etableret omkring år Gennem en komparativ analyse af disse virksomheder har det været muligt at identificere signifikante vækstprocesser og -barrierer på tværs af størrelse samt kendetegn ved de konsulentvirksomheder, som håndterer vækst og strategi bedst. Ydermere er analysen blevet styrket af en brancheanalyse, som har haft til formål at belyse de udfordringer, som branchen står overfor. På et brancheplan viser analysen, at der generelt er sket et skifte fra et sælgers marked til et købers marked. Kunder fravælger one-stop-shopping, er mindre loyale og presser priserne. Overordnet set er kundernes forhandlingskraft steget, hvilket udfordrer konsulentvirksomhedernes strategi og stiller højere krav til professional virksomhedsdrift. På et virksomhedsplan viser analysen, at vækst er nødvendig for konsulentvirksomheder som en forudsætning for internt at kunne udvikle sig kompetencemæssigt. En konsulentvirksomhed, som fravælger vækst eller ikke er i stand til at vækste, kan ikke udvikle sine kompetencer og risikerer dermed at miste sine konkurrencemæssige fordele. Ydermere vil analysen vise, at danske konsulentvirksomheder vokser gennem tre signifikante stadier, der hver især er

4 kendetegnet ved en vækstkrise. For små konsulentvirksomheder ligger den primære vækstbarriere hermed i, at stifteren er både ejer og leder. Dette skaber interessekonflikter og hæmmer fremtidig vækst. For konsulentvirksomheder af mellemstørrelse består den primære vækstbarriere i evnen til at identificere muligheder for komplementær diversifikation; herunder de ansattes egenskaber til at støtte disse vækstmuligheder. Store konsulentvirksomheders vækstbarrierer skal findes i deres evne til at samle et fragmenteret firma med mange forskellige specialer i en samlet organisation og udvikle mellemledere, som tænker i samme retning som organisationen. Afslutningsvis er de vækstprocesser, som er karakteristisk for de mere succesfulde konsulentvirksomheder, blevet identificeret med henblik på at kunne nærme sig en anvendelig vækststrategi. Hovedkonklusionen er, at de konsulentvirksomheder som har oplevet stærk vækst, er dem, som har formået at adskille ledelse og ejerskab. Ved at adskille ledelse og ejerskab kan konsulentvirksomheder skabe grundlaget for strategisk og fokuseret vækst. Herigennem åbnes op for et fokus på udviklingen af medarbejdernes kompetencer inden for ledelse og forretningsudvikling samt, at virksomheden udvikler sine kompetencer komplementært. Således vil fremtidig vækst bygge på udviklingen af mellemledere, ydelser og produkter fra en allerede eksisterende kompetenceplatform. Konsulentvirksomheder kan altså ikke alene være sikker på at skabe vækst gennem et højt fagligt niveau og ved at tilføje flere partnere med et højt fagligt fundament i virksomheden. I stedet skal der skabes en langt større grad af tilpasning mellem konsulentvirksomhedens mål og strategi, dens ressourcer og kompetencer, samt ledelse og medarbejdere gennem designet af organisationen. På baggrund disse resultater foreslås en tilgang til vækststrategi i konsulentbranchen ud fra tre trin. Konsulentvirksomhederne må indledningsvis identificere de primære vækstmuligheder og vækstbarrierer, som de står overfor. Herigennem skal fokus rettes mod fem kerneområder, der danner grundlaget for en vækststrategi. Disse er: Ledelsestilpasning, strategisk udvikling, tilpasning af organisationen, HRM samt innovationsog vidensudvikling. Sidst skal konsulentvirksomheden identificere de branche- og virksomhedsspecifikke organisationelle virkemidler, hvormed den kan opnå tilpasning blandt de fem kerneområder. Gennem denne strategiske agenda kan konsulentvirksomheden skabe en unik position med en klar konkurrencemæssig fordel og dermed danne det fremtidige grundlag for vækst.

5 CHAPTER 1 Table of contents INTRODUCTION MOTIVATION CHALLENGES IN PRACTICE PROBLEM STATEMENT FOCUS AND STRUCTURE... 4 CHAPTER 2 THE DANISH MANAGEMENT CONSULTING INDUSTRY STRUCTURE GROWTH IN THE INDUSTRY CHALLENGES FOR THE INDUSTRY THE FUTURE SUMMARY OF INDUSTRY ANALYSIS CHAPTER 3 THEORIES OF FIRM GROWTH THE CONCEPT OF GROWTH The tension between growth and size The dynamics of growth The sustainability of growth THEORETICAL CONTRIBUTIONS Inside-out perspective Outside-in perspective Tying the ends in the organization design Summary of theoretical contributions SME THEORY SME growth The entrepreneur Strategy and culture in SMEs CREATING AN INTEGRATED APPROACH SUMMARY OF THEORY CHAPTER 4 DESIGN AND IMPLEMENTATION METHODOLOGY AND SETTINGS OPERATIONALIZATION DATA ANALYSIS CHAPTER 5 EMPIRICAL FINDINGS THE PURPOSE OF GROWTH DEVELOPMENT THROUGH GROWTH Stage one consulting firms Stage two consulting firms Stage three consulting firms Concluding remarks on growth development GROWTH PROCESSES Culture... 65

6 5.3.2 Entrepreneurship Strategy Resources and competences The factor market The product market Organization design SUMMARY OF ANALYSIS CHAPTER 6 DISCUSSION CHANGE IN THE SIZE AND DIVISION OF VALUE DEVELOPMENTAL LEADERSHIP Developmental perspective in consulting firms GROWTH STRATEGIES Strategic growth vs. opportunity driven growth Organic growth vs. inorganic growth BEST PRACTICE OR NEXT PRACTICE THE TENSION BETWEEN GROWTH AND SIZE Advantages of growth Disadvantages of growth An optimal size FITTING THE ORGANIZATION DESIGN TO GROWTH Governance and ownership Organizational levers SUMMARY OF DISCUSSION CHAPTER 7 TOWARDS AN APPROPRIATE GROWTH STRATEGY WHAT IS AN APPROPRIATE GROWTH STRATEGY? CORE ISSUES CREATING FIT The importance of organizational levers CONCLUSION CHAPTER 8 LIMITATIONS AND SCOPE THEORETICAL LIMITATIONS PRACTICAL LIMITATIONS SCOPE CHAPTER 9 CONCLUSION REFERENCES APPENDIX

7 It is a little like the tailor s son who wears dirty clothes. We have not been good at developing our own internal managers like we do at our customers We run change courses for other firms, but that medicine we have not taken ourselves. Manager in a large management consulting firm

8 Chapter 1 Introduction This master thesis seeks to investigate how Danish management consulting firms currently build and sustain competitive advantage, and how this can be translated into growth, development, and strategy for the individual firm. The hope is that the findings of this master thesis will contribute to the understanding of the different growth factors and barriers that are at play in the Danish management consulting industry, and that it can benefit managers of consulting firms in a practicable manner. 1.1 Motivation The state of the Danish management consultant industry is good. Firms experience very strong growth, which even exceeds the growth of some technological sectors (Danish Statistics). However, there is a less positive side to this as well. The biggest consulting firms make the majority of the profit in the industry. In general, many small management consulting firms have a difficult time overcoming growth barriers, and research show that 90 percent of all consulting firms fail in their first 5 years (Hasek, 1997). Based on conversations with the Danish Management Association (DMR) it quickly becomes evident that there is a tension between small and large consulting firms. Profit end revenue is consolidated around a few large consulting firms. 80 % of the revenue goes to 20 % of the firms so it is to a large degree the major players who bear the brunt and reap the benefits. Tom Vile Jensen, special consultant in DMR Most small management consulting firms stay small their entire life or evidently perish. This raises the question about whether there exists a best practice in the management consulting industry, and whether the large management consulting firms seem to stimulate a best practice for growth and success. Moreover, this is especially relevant now where the Danish economy shows signs of a recession following a period since 2004 where the Danish consulting industry experienced increasing growth. Economic growth creates work for consulting firms and has made it possible for many new consulting firms to start up with the prospect of making a profit. However, experience shows that when times get tough it is often consulting services that are among the first to be cut away by clients. The management consulting industry faces a period where clients will be more reluctant and critical in their use 1

9 of consultants and competition will be intensified. This creates new challenges for the Danish consulting industry. This master thesis is initiated in cooperation with the Danish Management Association (Dansk Management Råd) 1 which is a branch association for Danish management consulting firms and represents more than 175 consulting firms. DMR s mission is to; develop and maintain professionalism and ethics within the Danish consulting industry, develop and improve conditions for consulting firms in Denmark, and develop Denmark as a knowledge-based society. Through several pleasant discussions with DMR director Susanne Andersen 2 the topic of the master thesis was determined. The cooperation with DMR is of great significance as DMR offers expert information on the Danish management consulting industry on a continuing and systemized basis. Where this master thesis differentiates itself from information already present in DMR is that it offers a bottom-up approach. Hereby, is meant that as where DMR offers knowledge from an industry perspective, this master thesis draws its conclusions from a firm perspective where growth, strategy and development are investigated in a number of Danish management consulting firms. 1.2 Challenges in Practice Initially, it is crucial to identify growth factors and barriers on an industry level. That is, the external environment which consulting firms face must be assessed via an industry analysis in order to identify current and future challenges that are relevant in the context of this master thesis. There is an immediate need to dig deeper into the tension that exists between growth, size and success in the industry. As already mentioned, only a very small number of management consulting firms manage to grow beyond a size of five to ten employees. To get a thorough understanding of this creates a two-fold challenge. On the one side, it is important to understand how management consulting firms grow. That is, to identify measures, which the individual consulting firms, takes in order to grow, but also to understand the external factors that have had an impact on their growth. Equally important, is to understand why only a few firms experience a distinct growth while many fail on this path. It is not clear what stimulates growth in the industry, and where potential answers must be found. Therefore, an integrated approach and a theory base, which forms the point of departure for examining and systemizing the factors of industrial, resource, and relational character that enables and inhibits growth, must be developed. Since there is general 1 For further information about DMR consult the organization s webpage at 2 In may 2008 Bjarne Lundager Jensen, has been appointed director of DMR. 2

10 lack of existing frameworks and knowledge regarding a best practice in the industry, this creates an empirical and explorative challenge. Based on theory the challenge is to create a model that can be used on a general firm level, but also allows for insight on the individual firm level. Furthermore, as I have chosen to approach the problem via an entire industry with an expected internal heterogeneity there is a challenge in balancing generalization and detail. Finally, a challenge lies in opening up the black box of strategy in consulting firms. It is an industry where the players do not like to share too much about their strategy and competitive advantages, and where most industry information and knowledge is collected from a top-down perspective. Thus, a challenge lies in achieving an inside perspective from the management consultants themselves and their take on how to devise and execute strategy. 1.3 Problem Statement The management consulting industry has experienced a significant change over the last decade. Where consultants earlier made their living providing general services such as market analyses of remote countries, strategies for going global, fusions and so on, today customers demand much more specific services. There seems to be a rising degree of professionalism among customers of consultant services, and they demand cutting-edge competences and quick and swift problem solving. In addition, the competition on the Danish consulting market has increased significantly. International consulting houses, as well as a long tail of micro consulting firms provide their services (Børsen, 2005). However, there is still a need and demand for consultant services. What have changed, as the global market have become more complex and competitive, is that customers who demand consulting services have much higher standards - hot air and buzzwords do not cut it anymore. Therefore, owing to the above described development and challenges in the Danish consulting industry, it evidently appears that consulting firms, in general, must seek proactive measures in every aspect of their organization in order to be able to survive and compete in the future. However, good advice stops here as there does not seem too be much guidance for consulting firms on how to overcome growth barriers. This consequently leads to the following problem statement for this master thesis: What is an appropriate growth strategy for Danish management consulting firms relative to their current size and situation in the market? In order to arrive at a full understanding of the problem statement it is necessary to break it down into subcategories. First, a category of descriptive research questions is supposed to create the basis for understanding the complex and broad management consulting 3

11 industry. Second, a category of research questions will focus on firm growth, and how this is related to size and other firm factors. Finally, a category of research questions will explore how empirical findings can be tied together to formulate a growth strategy, as well as a general understanding of how the industry can enable growth and overcome growth barriers. These research questions will not be explicitly answered, but serve as a guideline throughout the research. Research questions concerning the industry: 1) What characterizes the Danish management consulting industry? 2) Are there major significant differences between Danish management consulting firms with regard to size? 3) How do the findings of research question 1-2 affect growth at the level of the individual management consulting firm? Research questions concerning firm growth: 4) What is the motivation to grow? 5) How do management consulting firms differentiate across size, and do this allow them to be categorized into significant life cycle stages? 6) How does growth enablers and barriers relate to factors such as: a. Firm culture? b. Entrepreneurship? c. Strategy? d. Resources and competences? e. Factor and product market influences? f. Organization design? Research questions concerning growth strategy: 7) How can the findings of research questions 1-6 be translated into growth strategy that accounts for the specific size and situation of the individual consulting firm? 1.4 Focus and structure The focus of this master thesis is on Danish stand-alone management consulting firms. The industry definition of a management consulting firm is (Danish Statistics): The management consulting industry is a designation for the type of firms that: 1) Deliver knowledge and advising about management and business development to decision makers and managers in private firms, organizations, and public institutions and/or 2) Work with educating and developing management in private firms, organizations, and public institutions with the purpose of developing organizations, business systems and people. 4

12 The term Danish stand-alone narrows the focus down to those firms, which have been founded in Denmark and operate as pure management consulting firms. This focus leaves out large international firms such as Mckinsey & Company and The Boston Consulting Group, and consulting firms where consulting is a secondary service tied up to a primary function such as Rambøl Management or Deloitte. The argument for this is that the mentioned types of consulting firms have a completely different economic and organizational structure or stem from primarily an American market, which offers very different conditions than the Danish market. The structure of this master is very much shaped by the adoption of a holistic approach, which means that the entire management consulting industry is considered. Neither a purely theoretical approach nor an analysis of a single consulting firm will provide the level of general answers needed. Therefore, this master thesis concerns the Danish management consultant industry as a whole. The level of analysis will be both on firm level as well as on industry level. That is, I consider the topic from a top-down perspective (the industry analysis) and a bottom-up perspective (the empirical part of this master thesis) through three steps. First, I adopt an exploratory research approach in order to clarify the problem. This is done through an industry analysis that rests on secondary data and an exploratory expert interview. The purpose is also to explore new dimensions of the topic. Second, in order to come to a full understanding of the complex notion of growth, and how this is related to the Danish management consulting industry, I find that it is important not to lock in, a priori, on a specific theoretical framework. This runs the risk of omitting important elements because of the use of a specific paradigm. Instead, I choose to open up this complex problem by accepting that there is no single right answer, and that investigating the problem cannot be done by simply pulling together available evidence. I hope, by going from the known to the unknown, to be able to add something new to the field by adopting inductive reasoning, which is essentially a method of discovery. This is done through the development of an integrated approach to the theory of firm growth. Third, comparative research is conducted in a number of Danish management consulting firm that each display different levels of growth, size and success. Through this assessment of growth factors and barriers, I hope to be able to identify significant factors, which enable or inhibit growth and relate these findings to the stages of development of consulting firms. Finally, all three elements is gathered and discussed in order to end up with a number of practicable implications. For the sake of simplicity, the overall structure of this master thesis is illustrated in appendix A. 5

13 Chapter 2 The Danish Management Consulting Industry The point of departure of this master thesis is a description of the structure of the industry, growth, challenges, and future perspectives. The purpose is to create a foundation for understanding the industry from a top down perspective in the context of this master thesis. As already mentioned, the management consulting industry is a diverse industry with many different players. Thus, measures such as industry size, turnover, and demand are always estimates. The results presented in this chapter rests upon three sources; an industry analysis 3 and a tendency analysis 4 conducted by DMR and supported by the most recent numbers, and an expert interview with Tom Vile Jensen, special consultant in DMR (see appendix P). The two surveys are conducted on a yearly basis and builds on qualitative questions among DMR members. Thereby, they represent the newest source of information. In my search for information of the management industry, other surveys and articles have popped up, but they have the disadvantage that they do not rest on the newest information. As the industry is developing fast, it is important that conclusions be made from recent information. However, where results from other surveys have been interesting these issues have been discussed in the expert interview, in order to either confirm or disconfirm their robustness and relevance. 2.1 Structure The strong growth that has taken place in the consulting industry has attracted management consultants with very different backgrounds. In addition, the consultant industry, as a whole, is a relatively young and diverse industry. Many different types of consultant services take place every day and range from coaching and teambuilding to more integrated and big projects that help firms with strategy, organization, operations, etc. Firms range from oneperson spare-time firms over highly professional firms who employ several consultants to global firms who have more than employees on their pay check. At a first glance, the industry appears very diverse and broad, but a little investigation can shred a little light upon the industry. 3 Branche analyse 2006/ Tendensundersøgelse

14 History The Danish management consulting industry had its beginning in the 60s and 70s, but was more seriously founded in the late 80s where some of the first real consulting firms were created. Traditionally, the role of the consultant was based on technology and rationality, but to a higher degree, the role developed into what it is to day where the focus is on evolution and revolution in the way an assignment is considered (Poulfelt, 1998). Where the focus originally was on the professional content, this changed into a focus on the relationship between the consulting firm, the organization and the concrete assignment. A more process oriented and organic consultant role was developed where the task of the consultant was to help line management to define and understand the problem at hand. Thereby, consulting changed into management consulting and today management consulting services cover many areas. Obviously, an industry so diverse will attract many different players. Players The amount of active management consulting firms in the industry is steadily rising. It is estimated that there is an increase of about 10 % firms every year. In 2006, it was established that the amount of active firms was 7.550, see appendix B. This indicates an industry where players enter the market and still expect profit to be made. At this point in time, the market does not seem to be saturated. It is possible to classify the Danish management consulting industry into five strategic groups. These are: Big international consulting companies: This group represents firms such as Mckinsey & Company, The Boston Consulting Group, IBM Business Consulting, and Accenture among others. Typically, these firms employ around 100 to 300 consultants in their regional office. Strategically they are run from US offices and are supported by international organizations with several thousands employees. To a large degree, they provide standardized solutions based on tools and frameworks, as well as they have very well defined career paths for their consultants. Large concerns with build in consulting departments: This group of consulting firms is either departments or subsidiary companies of large international concerns. Consulting services are tied in with another primary function such as accounting, engineering, or architecture. Examples are; Deloitte, Rambøl Management, Cowi, and PricewaterhouseCoopers where consulting services are build into a large business that allows them to draw on synergies internally in the concern. Stand-alone Danish management consulting firms: This group represents the largest number of consulting firms and is to be understood as firms, which has consulting as their only business. Furthermore, they have been founded in Denmark and have achieved their growth on the Danish market. This group can be further divided into small (1-15 7

15 employees), medium (16-50 employees), and large ( employees) management consulting firms. Micro firms and sole practitioners: Here we find the array of micro firms that provide some kind of consulting service either on a full time basis or as a side occupation to their regular job. Often, the consulting services they provide have a character of being either social events or teambuilding without a larger degree of theory, knowledge, or tools behind. The kinds of services and the regularity with which they are provided does not allow these firms to be characterized as true management consulting firms. Contrary, this group also represents sole practitioners. This is typically the consulting professor or the consulting guru who has been in the game for many years and posses a huge amount of theoretical knowledge, which he provides/sells to senior management of large corporations. No doubt useful, but they do not constitute the essence of a firm. Non-commercial consulting firms: These government-owned or -sponsored organisations play an important role through their specialization on for example small and medium enterprises or certain industry sectors. DMR is an example. They are, however, run in a non-commercial fashion and growth is most likely not a core issue for them. On the demand side, the largest customer group is made up of the manufacturing industry and the public sector, which combined make up for little more than 50 % of industry revenue. The second largest group is the financial sector, which constitutes almost 10 % of the sector. Finally, there are many different customer segments which make up for 40 % of industry revenue, with revenue shares of 1 5 %, see appendix C. Types of services: It is possible to divide consulting services into different areas such as strategic consulting, HR consulting, change management, project management, operations management, IT consulting and outsourcing, etc. However, this does not provide much information for several reasons. First, some consulting firms provide advice that does not easily fall into one of these areas, for example consulting activities that are of a much more general character. Second, even for the more traditional service providers, it is difficult to pinpoint an assignment as pure IT consulting because, due to a process orientation, it often entails more. Third, a lot of consulting work is often, in its essence, only outsourcing. That is, firms hire in bodywork for certain projects which they do not have the capacity to lift themselves. Finally, services change all the time and new consulting areas arrive in the industry such as LEAN or coaching. Instead, what is interesting is to consider the parameters with which consulting firms can differentiate their services. The three most significant parameters are; mass, high- 8

16 end/low-end and specialization/full-service. First, mass indicates how many consultants a consulting firm has at its disposal. This is critical in some customer segments, as large companies will demand a large workforce over a long duration of time. Only the largest consulting firms can provide this. Second, high-end/low-end refers to the type of people a consulting firm employs and their level of education. Are they masters, PhDs, MBAs, certified consultants, etc. or do they have hands-on approach? Some customers demand the best because then they cannot be held responsible for a project gone wrong, but this solution is obviously very expensive. Third, specialization/full-service refers to the amount of service areas in which a consulting firm claims to have capabilities. A broad range of services can allow a consulting firm to cross-sell services, and thereby, become the sole provider and trusted consultant of a customer. As indicated, the range of services provided spans a broad spectrum. It is suitable to deepen the knowledge of these on the individual firm level as it indicates different strategic choices. Size distribution The consulting industry is relatively young and therefore not fully consolidated. Small players can enter the market in the form of one- or two-person firms and still expect profit to be made. On the other hand, it is relative easy to leave the market again or limit the level of activities and services provided to almost none. To be able to understand the whole story of the structure of the industry it is very important to take into consideration the size distribution that is at play. Appendix D shows the percentile number of consulting firms distributed among firm size. Almost two thirds of the industry is made up of small consulting firms with revenue of zero - 10 million Danish kr. About one fifth of the industry consists of firms with revenue of million Danish kr. while approximately the last fifth of the industry has revenue, which exceeds 50 million Danish kr. These numbers provides a picture of an industry characterized by a large amount of small players and only a few big. It is worth noticing the difference in the above size distribution concerning the changes that have taken place compared with 2005 (numbers in parenthesis). The group of the smallest firms has increased from 65 % to 66 % while the second smallest group has decreased from 18 % to 12 % of the entire industry. This indicates that some small firms manage to grow but also that several leave that market again or perish. It is very difficult to say anything about an average size of consulting firms in Denmark, but based on numbers provided by special consultant Tom Vile Jensen, an estimated average size in terms of employees is eight. This is well below the size of the large consulting firms who employ somewhere between 50 and 200 consultants. The size of management consulting firms allows them to be characterized as small and medium enterprises (SMEs). 9

17 Revenue distribution The inequality in the industry becomes clear when considering how revenue is distributed among firm size. As appendix E shows, firms with revenue of 51+ million Danish kr. made 76 % of the total revenue made in the industry in This means that despite the fact that the industry is characterized by a large amount of small players and only a few big, revenue is concentrated among the big players. 12 % of the industry s players make up for 76 % percent of the total industry revenue while 66 % of the players make up only 6 %. Degree of competition and concentration The industry has a concentration ratio of approximately 880 HHI 5 points (DMR industry analysis 2006/7, p. 18). This supports what was earlier stated about the industry. It is characterized by a large amount of firms on the one hand and a large amount of customers on the other hand. Competition is based on providing the best service, quality, and results to customers. The consulting industry is a relatively knowledge and workforce intensive industry. It is characterized by a very low need to make investments, and thereby there are very low entry and exit barriers. So fare, there exist a number of different consulting and project management certificates but these are only used and accepted by consultants and customers to a very low degree. In general, the industry is not driven by authorizations, specific educations, or certificates. This has a significant impact on the way that the individual consulting firm seeks to do business and define its strategy. That is, most consulting firms pursue a diversification strategy in order to clarify the difference between them and other firms. In addition, competition is to a great degree determined through the customer network that the individual consulting firm operates within. The name of the firm, its references, and the reputation of the individual consultant employed are important elements in the creation of a large and wide clientele. Once this is established the firm has a strong competitive position compared with other firms who do not have the same amount of clients. Thereby, experience, 5 HHI is the Herfindahl-Hirschman index, a commonly accepted measure of market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases (Rickard, 2006). An industry where the HHI is between 1000 and 1800 are considered a moderately concentrated industry. An industry of 1000 points or less means that many small firms with a well-functioning competition characterize the industry. 10

18 knowledge, and competence of the individual consultant become important parameters of competition. The industry is clearly clustered around two areas in Denmark; Copenhagen and Århus. However, this does not seem to be a problem when addressing the question about customers choice of consultants. There is no connection between the geographic placement of consulting firms and their customers. Often, consulting firms serve customers on a countrywide basis and are not limited to doing business in their geographic region. However, clusters can have another significant impact on the industry. Namely, that of the creation of competence clusters. Competition does not happen on a general industry level across strategic groups, but instead among those consulting firms who provide the same range of services. Therefore, even though competition is characterized as being very hard, it is normally only a few firms who do actually end up competing about a concrete project. This further emphasizes the arguments that competition in the industry is very much network and customer based. Most often, the large consulting firms service large firms and the other way around. Finally, the fact that the industry earns its living from knowledge and the people it is embedded within, as well as the fact that there is to some extent a high degree of competition clearly affects relations and cooperation across consulting firms. This practically does not take place. 2.2 Growth in the industry The Danish consulting industry has since 2004 experienced a significant growth progress. For many consulting firms a growth rate higher than 20 % has been quite usual. In 2006 the average growth was 22,5 % and in 2007 the industry expected a growth rate of 22,9 % (DMR industry analysis, p. 6). In 2006, the industry had revenue of billion kr., which means that it equalled that of the Danish audit industry, and almost doubled that of the Danish law sector (Danish Statistics). Appendix F shows the development of the industry s revenue. The same figure also shows an industry that is relative sensitive to fluctuation in the state of the market. That is, the activity will more or less follow that of the general economy. When firms experience hard times, services provided by management consultants are usually among the first to be cut away. The management consulting industry is central in the change and development of private firms, as well as public institutions and organizations. The effect of a global market booming has been felt in all areas in consulting services, be it strategy and organization, management development, IT, HR or operations to name a few. A growth rate as high as the one experienced now has increased the industry s significance within the Danish economy. Appendix G shows the industry s share of the 11

19 Danish GNP. If the expected growth in 2008 is achieved it will mean that the industry s exceeds 1 % of GNP. Because of the strong growth since 2004, consulting firms have experienced almost no problems with finding customers and billing hours. Actually, they have been so busy that other problems have occurred. Finding new and qualified consultants, thinking ahead and making sure that internal competences are developed, are some of the issues that might be at stake. However, the central question for management consulting firms is whether the future will bring global growth or the turbulence, which marks the financial markets, will continue. The American market is still experiencing a crisis and there is a chance that the Asian tiger economy will lose some of its pace, but these questions are difficult to answer even for the economic wise men. Therefore, the assumption in this context is that there will be some level of slowing down in the state of the market, and this will affect the Danish management consulting industry in some way. Based on an indication of a general market slow down it is possible to suggest different scenarios on how this will influence the management consulting industry in the future (Poulfelt, 2006). One scenario suggests that consulting firms will experience the same level of workload as up until now. A decline in the economy will mean that organizations are forced to become more efficient and effective in order to stay competitive. Some employees will have to be laid off and there will be a need to conduct organizational reorganizations. As change agent, consulting firms have largely become a steady partner in both private and public markets and therefore an economic decline will not mean less work for consulting firms but instead work where the focus is more on organizational efficiency and global competitiveness. For example, IT and operations will still play a significant role in connection with this. Another scenario is that there is less growth compared with current growth levels. The reason for this is, as earlier suggested, that consulting services are the first place where firms chose to save money. However, the general perception is that the consulting industry will not experience as tough times as in the period 2000 to 2004 when it was in a practical free fall. Based on this discussion it is possible to identify future growth factors and barriers. Growth factors: Reformations in the public sector: The restructuring of the public sector are expected to provide the consulting industry with a lot of work the next couple of years. Many firms specialize in this area and some even build their entire consulting business around the public segment. In general, there seems to be a greater accepts for public administrations to set aside money for consulting services. Raised quality demands in the public and private sector: The public sector is under a still increasing pressure to administrate the money of taxpayers in the best possible way. Therefore, many of those 12

20 consulting services that were initially developed to the private sector have found its way into the public sector. For example, an award for best consulting service was awarded to Valcon for implementing lean principles in the administration of Copenhagen municipality. Private organizations also need to be better functioning today in relation to offering a good, effective, and carrier advancing work place. Managing human resources will continue to be in focus, and the mean is better-managed and well-run organizations. Consulting firms can play an important role in stimulating management and organizational development. Capacity problems in private companies: The general lack of labour in many private companies means that there is a greater need to coordinate and optimize production and business practices. This raises the demand for consulting services in areas such as operations and IT. Often firms also accept that their employees are tied up with work, and therefore hire consultants to be in charge of temporary projects. Strong international competition: Currently, with the high degree of global competition, Danish firms need to be as effective and efficient as possible concerning product development, new market penetrations, and internal business procedures in order to stay competitive. The fast development of the information technology area: The fast developing IT support services that take place in many business areas demand that firms stay up to date in this area and never relax. Therefore, the demand for IT systems such as ERP and CRM systems will still be high, especially the implementation of these. Growth barriers: A general economic cool down: The ministry of finance expects growth in GNP to drop from 2,2 % in 2007 to 1,6 in 2008 (DMR industry analysis, p. 19). Significant decline in investments in the private sector: In 2006 the growth of investments was at a staggering 15 %, but it is expected that there will be a significant decline in investments to a level of around 2 % in 2008 (DMR industry analysis, p. 19). Lack of a qualified and educated work force: The consulting industry is experiencing a very difficult time find enough qualified employees to keep up the current expansion and have to turn down orders and thereby money. The lack of qualified work is also seen in a demand of higher wages among consultants and an increased use of headhunting. Higher degree of competences in firms: Many private firms have during the period of high growth hired academics who traditionally would not be employed in that sector. A good example is the engagement of a communication or HR employee which can take away some of the need of consulting services because the competences are already within the company. In general, this development means that many firms have in them the sufficient competences to do large analytic tasks, and the demand for consultants will move more in the direction of facilitating and implementation. In some service areas, for example strategy, this can lead to a smaller demand or change in the service profile. If you compare the Danish management consulting industry with its European counterparts, it is among the leading. With the second highest growth rate, only topped by Great Britain, and a GNP share that are higher than any European country it is safe to say that 13

21 Denmark, also on an international level, is among the more well functioning industries in the European management consulting industry (DMR industry analysis, p. 21). 2.3 Challenges for the industry Based on the discussion about the structure of the industry and the growth factors and barriers that are present, it is possible to identify a number of challenges, which confronts the management consulting industry. Supply side/firm driven One major challenge, which almost all consulting firms seem to agree with, is the scarcity of qualified labour. Among DMR members, 37 % have experienced to turn down a project or job and thereby revenue due to lack of labour (DMR tendency analysis, p. 5). Consulting firms find that customers on the Danish market do not demand new graduates or junior consultants. Instead, the demand is on senior consultants, people with a broad experience but also detailed knowledge and often with no less than 3-5 years of experience as a consultant. These circumstances narrow down the recruitment basis on a market where the lack of labour is already high. In practice, this means that consulting firms experience a claim of higher wages and benefits among employees, less qualified applicants, a bigger flow of employees, and an increased use of headhunting. It is most likely that this lack of labour will hamper growth to such an extent that it is not possible to maintain current growth rates. The high degree of busyness in the industry has of course played a significant role in making the industry as large and important as it currently is. However, this might have some future caveats. First, the strong demand for consulting services could mean a risk that new consulting firms with out the necessary professional skills and foundation for doing consulting work have been founded. The industry might have attracted an array of less qualified consulting firms and even some without any raison d être at all because of the low degree of entry barriers. Combined with the fact that the industry is only controlled to a very small extent, this means that customers who do not have any great experience in buying and using consulting services might end up buying and implementing poor advice. Furthermore, already established consulting firms might be temped to hire employees who are not fully qualified which again affects the result. The individual well-qualified and skilled consulting firm must therefore continue to make visible its quality and professionalism either through certificates and/or branding. In addition, there is also a risk that the busyness can have a downside effect on the already well established and recognized consulting firms, namely, the possibility that 14

22 some firms prioritize capacity and quantity in their projects more than quality. It is very important that consulting firms follow their projects all the way through, and not just deliver some report on the desk of the management at the firm they advise. Likewise, internal competence development and strategic planning run the risk of not getting enough attention as daily operation and customer projects are prioritized on a here-and-now basis. In general, the above-discussed busyness and its effects might mean that several firms are in need of a bit of strategic soul-searching, and here a slow down in the growth might actually be an advantage. Those consulting firms who survive and prosper in the next couple of years will be those who have not fallen through when it comes to securing future ethics, quality, and professionalism. For an industry where ethics, quality, and professionalism is decisive in order to maintain customer respects and thereby to obtain growth this is a very significant challenge. Demand side/customer driven The industry is to a large extent buyer driven, and its direction is shaped of what customers demand. Often, diversification happens because a customer demands additional services outside the scope of the consulting firm. To maintain the customer relation, the consulting firm contracts external experts who have the specific knowledge to do the job and eventually hire them into the firm. In the Danish management consulting industry the main part of services is in the area advising/consultancy. It constitutes 63 % of all consulting services. Outsourcing and development/implementing are only respectively 2 % and 6 %. Finally, other services such as recruitment, markets analysis and education make up 29 %. Appendix H shows the distribution of services. A further insight shows an interesting development of the services in the category advising/consulting. Appendix H also shows that the area organization and operations management has increased in revenue while strategy consulting has gone down almost 3 %. In general, this development indicates a movement from services of a more analytic character to services where implementation is also a part of the task, which customers demand. Consulting firms can therefore no longer rely on general consultant services and standardized products. Instead, customers demand specific competences and results that can be seen on the bottom line. That is, projects and assignments are to a considerable degree characterized by process orientation as opposed task orientation. This means that consultants must act in completely different terms, which broaden the demand of skills present in the consulting firm. To much higher degree empathy, understanding of the customer s situation and follow-up services are important elements of the competitiveness of consulting firms. Furthermore, customers have become very experienced in buying and using consultants. 15

23 Management consultant services are generally considered expensive among customers. However, price is not decisive for how customers choose their consultants. Indeed, as appendix I shows price is only ranked on a 10 th place over how customers prioritize when they choose a consultant. This indicates that firms believe that price and the increase in performance that a consultant will provide is in good accordance. This fits well with the fact that delivery of concrete value to the firm is ranked as the highest priority. For the consultant firm this means that customers demand high, visible, and sustainable results when it comes to delivering value to the customer. Ranked as the second most important factor, is existing relations with the customer. This backs up what was earlier stated about customer networks and competitiveness. Often consultants engage in a direct and intimate relationship with their consultants, and this demands a high degree of respect and trust from both sides. This means that there is a high degree of second time buying in the industry. Once a close and tight customer network has been created, it can become a stabile factor of future business and growth. There is a tendency in the industry towards an imbalance between the size of the customer and the size of the consulting firm. Most often, large companies demand that the consulting firm can provide regarding resources, competences, and work force. Often small and medium consulting firms do not have the capacity to serve these large companies in addition to their regular clients. There seems to be consistency in that large companies hire large consulting firms. This can have a less positive outcome in two ways. First, it means that small and medium consulting firms only to a certain extent get the experience and competences necessary from working with large clients. In line with the increased professionalism, this can mean that small and medium firms risk appearing less professional and suitable for serving large clients simply because they do not have the experience and know how. In the end, this might further consolidate the industry and sharpen the bias between small and large consulting firms. Second, if the argument is taken to its extreme, it means that the industry is split up into an A-team and a B-team. One the one side, the industry consists of consulting firms of an appropriate size who have the required skills, resources, competences and experience to provide valuable consulting services to the market, whereas, one the other side, there is also a large portion of small consulting firms who are in need of a quality and competence boost. 16

24 2.4 The future Despite signs of an economic cool down most consulting firms, expect an increase in future demand. It continues to be the private sector, with manufacturing companies as the most dominating purchasers, who drives demand but the public sector is still important. Together these two groups account for over a fourth of the turnover in the industry (DMR tendency analysis, p. 2). However, it will become difficult to maintain the current growth rates because of two main reasons. First, because the Danish market to some extent has become saturated. The relationship between supplier and buyer seems to be at an appropriate level. The Danish market is relatively limited in size. That is, there is a limit to the size of firms operating in Denmark, both international and domestic. The fact, that the Danish market is relatively small compared for example to the American market, indicates that the size we see of the large consulting firms of around employees is a maximum size, at least within the phase they are now. Currently it is difficult to obtain the volume and strength necessary to grow beyond that size. Therefore, the next big issue will be to figure out how Danish management consulting firm s best can leverage their competences internationally. Second, because of the growth inhibiting factors discussed above, with the high lack of labour as the primary reason, growth will necessarily drop. The industry is relatively labour heavy and growth rates of 20 % will roughly mean that an intake of 20 % on the employee side is needed. The above discussion indicates that a consolidation process will take place in the Danish management consulting industry in the nearest future. It will be in part driven by a competence shortage caused by the lack of labour, and in part by that fact that firms seem to demand a deeper aspect of services from one consulting firm. Practices such as no cure - no pay and free pre-analyses that have not previously been utilized, might become parameters for competition in the future. Furthermore it means that those small and medium consulting firms who have only barely managed to survive the last couple of years will experience hard times because of a lower activity level, and it will not be as attractive as it have been to establish a new management consulting enterprise. 2.5 Summary of industry analysis The tension between size and success in the industry shows an industry where only a few firms manage to grow extremely fast, while the majority of firms seem to struggle in their pursuit of growth. Successful consulting firms are to a much greater degree able to leverage existing resources and capabilities towards customer contact and retention, internal development, and recruitment. All these elements play an important role in the growth of the 17

25 firm as the development of the consulting firm very much happens trough learning-by-doing. This raises an important question for the remainder of this master thesis. What constitutes the primary growth factors and barriers across firm size? Thereby, the industry analysis indicates that there is some significant differences across size but does not allow for a deeper insight. If existing consulting firms want to stay competitive and sustain their growth rates, satisfy customers and dodge a possible recession there are some areas, which demand attention on the individual firm level. There is a need to consider the strategic management of consulting firms in a new perspective. Focus on consulting capabilities alone must not put in the shade professional management and business. Innovation must be incorporated in a systematic manner in the firm in order to maintain competitiveness. Human resources should be considered as a core issue, concerning both recruitment and retention to secure that the best possible resources enter and stay in the firm. Finally, for the largest consulting firms, as the home market is consolidating there is a need for, and future growth possibilities in, establishing a global presence either through internationalization or alliances. 18

26 Chapter 3 Theories of firm growth The literature offers several different theories for systemizing the analysis of firm growth. Looked upon in isolation these theories each uncover interesting ideas and phenomena, but in the end, findings are of a partial character. This is a logical consequence because of the choice of theoretical perspectives and the use of specific theoretical and explanatory models. However, this leaves a need for a more holistic understanding of the characteristics of high growth firms, as well as growth barriers in low growth firms. Therefore, there is a need to integrate theoretical perspectives in order to understand the full story of the theory of the growth of the firm. The purpose of this chapter is to review the growth literature with a focus on the sources of growth and the limitations to growth. Hence, the first step is to investigate the concept of growth and the effects of growth in a dynamic perspective. Second, theoretical contributions to growth theory are assessed with regard to their explanatory value when considering external and internal growth factors and barriers. Third, SME theory is considered in an attempt to define growth even closer, as Danish management consulting firms belong to this segment. Finally, an integrated approach on how to evaluate growth factors and barriers and consequently, growth strategy, is developed which builds on the findings of the first three steps. This integrated approach will in turn shape the way in which the empirical work is done. 3.1 The concept of growth The point of departure of this theoretical framework is briefly to touch upon what growth is. Growth can be manifested in many different ways; selling more, hiring more people, expanding, broadening geographic scope, generating bigger profits, or increasing stock prices. No general guidelines or definitions seem to exist for high growth firms, and some researchers have even denied that it is possible to generalize about what growth is (Penrose, 1959). Growth may result in both quantitative results and qualitative results. Measurements such as; size, assets, net capital, revenue, or number of employees are strictly of a quantitative character, but may not capture all of the things there are at play in small firms. Qualitative measures such as value added, a sense of belonging, motivation, and attractiveness should not be left out. Owing to this, growth, in this master thesis, is considered in terms of a range of indicators and draws on contributions from several different theoretical fields. However, one condition that must hold is the fact that in order for a firm to experience growth it must have an advantage over its competitors. A competitive advantage leads to profits and the possibility 19

27 of growth. Hereby, a certain degree of selection in the industry is assumed. Hence, it is not possible for a firm to grow if it does not excel in some areas of its business The tension between growth and size The law of proportionate growth (Gibrat, 1931) explains the skewed growth distribution that will take place over a period of years, and implies that some firms will grow faster than others will. More formalized, Gibrat hypothesized that over a given time period the percentage change in the size of an individual firm in an industry is independent of the firm s initial size. There are several explanations to why there are such large variations in the growth rate of individual firms within the same industry or strategic group. Evidence show that the most elementary fact about firm growth is that firms follows a random growth path (Geroski, 2000). Often, it is more or less isolated events or shocks, which mark the path to success, such as a unique innovation, and these, have a permanent effect on the size of the firm. Consequently, growth cannot be considered a process, which follows a predetermined law or trend. However, to consider growth as a pure game of random events and luck does not leave much motivation or influence for managers. Traditional growth strategies involve economies of scale and scope and mergers and acquisitions. These strategies require a certain firm size in order to be effected, which, at least in the starting years of a consulting firm, will not be relevant. Therefore, the focus of firm growth is on the firm s ability to develop the resources, which exist in the firm, and how these resources can support the firm s ability to innovate, diversify, and be flexible in order to manage organizational change (Tecce et. Al. 1997). For small firms, this is in the hands of management, which has to be capable of exploiting current routines and exploring new opportunities as they occur. Adding this to the operational role that the manager of a small firm has, size becomes a factor, which can limit growth, as management is simply overburdened. If we develop the line of thought further to encompass the firm s organizational capability, which rests on firm specific culture and behaviour, the link between management and its workforce becomes clear. It is necessary if a firm is to achieve growth to constantly enable and motivate its employees in an optimal way. When the effort of both management and employees are aligned, successful product innovation or process innovation will provide learning and foundation for further development and innovation and consequently growth. That is, success breeds success. On the other hand, for a small firm a product or process innovation, which fails, is closely connected with reduced growth, profit loss, and maybe even bankruptcy. Therefore, the uncertainty associated with starting a firm or a diversified activity within an already existing firm is affected by the cost of capital. For 20

28 small firms, which are often person-owned or run as a partnership, there is a considerable amount of risk to be aware of and in effect they will pay a risk premium, for example a higher interest rate, in order of acquiring the necessary funds. Small firms will not have the sufficient cash flow to engage in large investments, which again provide a barrier to growth. Instead, they rely on opportunity driven growth and do many first-time projects, which they cannot repeat and leverage successfully to the future projects. Furthermore, these first-time projects strain the firm s profitability and incur large costs as the firm is learning by doing. The attractive force of opportunity driven growth is obvious, as it allows the firm make some profit and engage in new businesses. The downside to this is that growth becomes random, less profitable, and driven by occurring opportunities, rather than a careful market analysis and a strategic response and positioning to those opportunities. The idea is that strategic growth will allow a firm to focus its image and position it as an expert in well-defined areas. Thereby, future business will be consistent with firm specific competences and resources and build credibility and expertise in strategic areas. The goal is to repeat and improve past successes and thereby increase efficiency and profit margins. The above discussion give rise to the idea that there is some kind of glass ceiling which small and medium firms have to burst through in order to achieve growth. This breakthrough is where opportunity driven growth is changed into strategic growth, and this raises the question of how firms achieve this, and especially, how small and medium sized firms manage it. The next logical step is therefore to consider the dynamics of growth The dynamics of growth Firms grow by passing through a discrete series of growth stages (Kazanjian, 1988). If the firm does not solve strategic and structural problems connected with the transition from one stage to the next, this will eventually prevent the firm from growing. Organizational growth models have been developed by several authors, Greiner (1972), Kimberly and Miles (1980), Churchill and Lewis (1983), Scoot and Bruce (1987) among others. In general, these models are concentrated on the types of problems small and medium firms encounter. There is some predictability in organizational development that allows it to be divided into different stages. How many stages there are in a certain life cycle model stems from the type of research carried out (Yusuf, 1997), but most often we see four or five stage models. The contribution of these models is a framework for gaining insights into the options that firms face at a given time. A life cycle model will contribute to this master thesis with an opportunity to differentiate the growth factors and barriers that consulting firms experience across firm size and development. 21

29 The choice of life cycle model falls on Greiners organizational life cycle (1972). On first hand, this might seem as an odd choice as the originating research is more than thirty years old and as it focuses on industrial firms. However, this framework has undergone a development of its own, and has been adapted to professional service firms and their distinct growth stages (Malernee and Greiner, 2005). The model is presented in appendix J. In this model, firms pass through situations of evolution and revolution. Growth stages correspond to a series of internal crises related to managerial and organizational issues of coordination and control. In each stage of its life cycle, an organization is dominated by a specific focus, exploring, focusing, diversifying and institutionalizing. Each stage is ended by a crisis that threatens organizational survival, and brings about a revolutionary change through which the firm passes to its next life cycle stage. In addition, each stage is dominated by a different strategic approach to the market and a specific set of managerial practices. These allow the firm to evolve through the stage, but this stage-specific strategy and practice are rendered useless in the next stage. Between each stage is the crisis, which predicts a revolutionary and necessary change for the firm in order to adapt to the market, future growth and survival. That is, in the resolution of one crisis are the seeds for the next crisis. An important thing to keep in mind is that the organizational life cycle model is based on a study of American professional service firms. Hence, market conditions are very different from the Danish market. Other general critical issues of life cycle models are; they fail to capture the details, they assume continuity and they do not take into account external factors (O Gorman, 2001) The sustainability of growth Research has shown that industry factors may be less significant when explaining firm profitability and growth (O Gorman, 2001). The choice of a high growth market does not condition growth for the individual firm, as the demand of a high growth industry creates pressure on resource constrained firms. In the end, this may result in a lack of internal development and organizational failure. Furthermore, when measuring the impact of industry factors over time, the explanatory significance of these seem to reduce significantly (Rumelt, 1991). In essence, the choice that an entrepreneur faces is whether to enter an industry or not, and not so much which industry to enter. Therefore, this choice is very much path dependent of the founder(s) and his experience. This path dependency puts limits on future strategic choices of the business and consequently its growth strategy. Superior competitive strategies are decisive for achieving growth relative to competition and a foundation for sustained growth. Five growth disciplines constitute the growth portfolios of companies that knew how 22

30 to maintain steady double-digit growth in difficult times. These are base retention, market share gain, market positioning, related and unrelated diversification (Tracy, 2004). These superior competitive strategies must create and develop resources and capabilities that can be used to sustain the growth process within the firm. Because management hold different path dependent assumptions of how to conduct strategy, and because of causal ambiguity within the relationship between resources and success, some firms will continue to succeed while others fail. Usually growth is an unquestioned positive and has become synonymous with bigness. Growth as an expansion or increase in magnitude is deeply entrenched in the way we think. Even though, increases in size, profitability and scope are often connected with growth, they are not what drive it. In the long run, expansion is not viable goal in itself. Because of organizational inertia, both structural and cultural, failure happens when market conditions shift. According to John Kay, a leading Oxford economist: It is rare for the market power and scale economies associated with market dominance not ultimately to fall victim to the hubris, the insulation from the market, and the sheer bureaucratic inefficiency that goes with such size, (Bryan and Kay, 1999, p.106). In relation, firms often find it difficult to sustain high and fast growth rates. Three important factors, which relate to issues already discussed in this chapter, can be the end of sustained growth if not managed properly (Tomasko, 2005). A fast growing firm, which expands in size, can create inhospitable surroundings. That is, a growing firm will become the objective of more competition from other large firms and customers might be reluctant to do business because of the sheer size. To sustain a high growth demands that the resource intake is equally high. At some point, the supply side will come under so much pressure that the only choice is to make do with low quality resources. Hence, resource constraints are another factor to consider. Furthermore, when firms grow they will experience organizational limits. Management, culture, and employees are lost in the pursuit of efficiency as complexity and hierarchy increase. These factors are very much at stake when one considers the Danish management consulting industry where large international competitors are present, labour is scarce, and competition is based on internal knowledge and customer relationships. 3.2 Theoretical contributions If you consider the vast amount of different investigations and theories of firm growth, it is possible to discover some main categories across economical and behavioural theories. Two different theoretical schools of thought exist, which both consider competitive advantages but vary when it comes to explaining how firms achieve growth and sustain it. They differ based 23

31 on the view they adopt, that is how for example the firm, its environment, and its markets work. Roughly, it is possible to label them outside-in theories and inside-out theories (Alexander, 1992). Outside-in theories are concerned about firm growth as a consequence of external circumstances, primarily assessed in a product market perspective. This category of theories rests upon several main assumptions. First, the environment of the firm allows itself to be easily and straightforwardly analyzed. Second, firms can easily adapt to its environment. Third, theories are externally oriented and operate within a static universe. On the other hand, inside-out theories see the firm s environment as changeable and very difficult to analyze. There is a great focus upon the problems, which occur in firms because of friction. That is, firms are considered highly dependent of their firm history, resources, and existing routines. Growth is considered a consequence of circumstances and settings in the internal situation of the firm and factor markets. This group of theories is thereby internally oriented and contains in it a focus on organizational development. In appendix K, the most significant differences between the outside-in orientation and the inside-out orientation are outlined Inside-out perspective The inside-out perspective focuses on the presence of specific competences inside the firm. Firms are considered to be facing both implementation and friction problems and to be dependent of specific historic and resource conditions. Penrose (1959) opened up the black box of the firm s internal processes and focused attention on the firm, not as a production function, but as a flesh and blood organization characterized by firm specific resources. It is based in developmental economic thought, and states that firm specific resources and competences are crucial for development and growth. This section therefore deals with theories, which explain the internal processes of the firm and how they relate to firm growth. The theory of the growth of the firm Penrose s (1959) idea of firm growth holds that it is led by an internal momentum generated by learning-by-doing. As managers increase their experience, administrative tasks require less attention and work, and they become routine. This means that excess managerial talent can be released and focused on exploring valuecreating opportunities and training new managers. Thereby, a firm will grow in order to create value from unused resources, which in turn will create new resources. This is what Penrose calls economies of growth. This also means that growth in any period is limited by the amount of managerial attention. Hence, economies of growth which are imbedded in the growth process are the reason why firms grow. There are no advantage linked to size as such, 24

32 and firm size is considered a consequence of growth. This contradicts with the neoclassical perspective, which is discussed later, because there is no optimal size. This is the main factor to why Penrose s theory has, to some degree, been marginalized in economic discourse (Montgomery, 1994). For Danish consulting firms this dynamic perspective of firm growth seems strong because it focuses on the role of firm s internally generated resources, which in the case of growth are much more elemental than economies of scale 6. However, her ideas of firms as idiosyncratic configurations of resources have been very influential in the strategic management literature. This is another key concept in the theory of the growth of the firm, and these resources act out a significant role in gaining a sustained competitive advantage if they can be characterized as rare, valuable, inimitable and non-substitutable (Dierickx and Cool, 1998). Evolutionary approach The evolutionary approach sees the firm as a processor of knowledge resources that provide the firm with the flexibility and speed necessary to respond successfully to changes in the external environment (Nelson and Winter, 1982). Routines and learning are central to the process of gaining new knowledge, and these capabilities must be coordinated and developed within the firm. This implies that firms are likely to grow idiosyncratically as they use and evolve their knowledge base. That is, capabilities are constantly being modified over time, which in turn means that each firm s growth is likely to be path dependent. Hence, previous experience and the repertoire of routines constrain future direction, and opportunities for diversified growth must be complimentary to current activities in order to maintain complementarities and coherence. Furthermore, the central premise of the evolutionary approach (Nelson and Winter, 1982) states that competition shapes both market and organizational structures, and thereby forces those firms out whose organizational form does not create flexible capabilities to match the changing environment. In the consulting industry, we see many firms entering and leaving all the time, which might indicate that these firms do not manage to adapt their organization to the shifts that takes place in the industry. This creates an idea of the principle of growth of the fitter but empirical results do not provide much evidence. Instead, it is suggested that selection works only by elimination of the weaker, where growth is not related to viability but instead to the discretion of managers (Coad, 2006). 6 In general, the inside-out perspective has come to be the most dominating and cited perspective in recent strategy and management theory. Also authors such as Porter moves towards this perspective (Porter, 1991; DeMan, 1994) 25

33 The resource based view (RBV) RBV argues that firms with superior systems and structures are profitable because they have lower costs or offer a higher quality or product performance. The focus of this approach is directed at the rents accruing to scarce firm specific resources instead of the economic profits from market positioning and entry deterring strategic investments. Resources can be defined as assets, capabilities, organizational processes, information, knowledge etc. that are controlled by the firm (Barney, 1991). They are characterized as either tangible or intangible assets, for example; technology, access to raw materials, production equipment, location, or human resources, accumulated knowledge, experience, and relations which are tied semi-permanently to the firm (Wernerfelt, 1984). The main point of importance is that resources are heterogeneous and not homogeneous. Heterogeneity among firms allows some of them to hold a competitive advantage. The firm is considered a unique bundle of idiosyncratic resources and capabilities where the task of the manager is to optimize the deployment of these and develop a resource base for the future (Grant, 1996). As well as the RBV argues that resources can give way for a competitive advantage it also argues how it can be sustained via some kind of protective and isolating mechanism which prevails the diffusion of the resources into the rest of the industry (Peteraf, 1993; Foss and Knudsen 2003). Various researchers have defined the characteristics of resources that can lead to a sustained competitive advantage (Barney, 1991; Peteraf, 1993; Dierickx and Cool, 1989). These characteristics are heterogeneity, imperfect mobility, valuable, rareness, imperfect imitable, ex ante and ex post limits to competition, and nonsubstitutable. According to the RBV, the firm can only handle external factors based on an internal exploration competence. The external environment of the firm is not considered as an objective and easily measurable factor. Instead, resources have to be organized so they enable the firm to identify and understand the opportunities that arise from it. Firms thereby follow different growth opportunities according to their specific resource and competence endowments, and how these fit their history, traditions, and goals (Hougaard and Duus, 1996). Hereby, we also recognize the limitations of the RBV. First, when competitive advantages or growth factors are rooted in situation specific resources and capabilities. Therefore, the analysis of growth risks becoming very situation specific as well. It will become difficult to create as set of specific recommendations, which goes beyond general recommendations that a firm must develop competences, and capabilities that are difficult to copy (Tecce, Pisano and Shuen, 1990). Second, because the perspective considers the external environment as very volatile and something that you cannot predict, there is a risk of overlooking the role of the external environment. Firm strengths and weaknesses become the 26

34 only focus point and threats and opportunities in the external environment are not considered in enough extent. The Competence approach This approach sees the firm as an organization for facilitating learning. That is, the approach analyzes what a firm does well and sees the firm as an organization capable of generating a knowledge stock, which can capture value. Sources of competitive advantage, and thereby economic rents are derived from firm specific competences sometimes rooted in physical assets but most often in the large number of different activities performed by the firm. Therefore, this approach views the firm as a locus of creation (Winter, 1982), creation not only as the physical process of transformation but also much more intangible elements such as R&D, design, innovation, discovery of future customer demands, etc. As in the RBV, competitive advantage lies upstream of product markets and springs from resources that are idiosyncratic and hard to imitate. The crucial idea is therefore that a firm must be able to allocate its resources so it can capture the opportunities and value inherent in its competences. Much focus of this approach has been on routines and processes as embodying the skills of the firm (Nelson and Winter, 1982). The argument is that only within the firm, can heterogeneous knowledge routines and processes be developed, coordinated, and exploited, and therefore a firm can create more value than the market. The focus here is on the heterogeneous knowledge resources that firms hold and how they use it. The process of learning by doing means that the firm always adds to its stock of knowledge by a combination of fixed routines and processes and by exploiting excess knowledge resources. This relationship between knowledge resources, processes, and routines is subtle and it can be hard to identify its causalities, even by the firm itself. Thereby competitive advantages rest on a high degree of tacit knowledge, which is an immobile resource, and a strategic asset of the firm. However, the process of learning and accumulating knowledge resources is very timeconsuming (Rickard, 2006). This implies a size limit on the firm as management resources devoted to discovering value added activities are constrained. The notion of core competences (Parhalad and Hamel, 1990) thereby becomes strategic building blocks for the firm, as collective learning and resources should be allocated so they support these. A core competence can be identified by asking three questions; does it provide access to a variety of markets, does it improve customer benefit, and is it difficult to imitate? When a firm can answer yes to these questions, it has a foundation for achieving a competitive advantage. Where the recommendations of the core competence approach are highly vulnerable is in a rapidly changing environment. If a firm chooses to build its strategy around 27

35 a few core competences, it can end up in big trouble if the demand for these disappears. So, even though, the approach sees the firm as an organization that must continually develop its resource base there is a need to add more a more dynamic perspective to this approach. The dynamic capability approach The ability of management to rapidly and effectively redeploy and coordinate existing core competences into new forms of competitive advantage has been termed dynamic capabilities (Tecce, Pisano and Shuen, 1997). In general, the approach refers to the firm s capacity to renew and adapt competences to changes in the external environment and considers the managerial ability to align organizational resources. It focuses on the creation and capturing of value, but the underlying resources to do so are the capabilities inherent in the firm. It is dynamic in the sense that a firm can build upon its existing capabilities through innovation and then add new capabilities. Furthermore, this theory takes on an evolutionary approach as discussed earlier (Nelson and Winter, 1982). This approach implies that it is firm capabilities, which form the strategic path. Thereby, there are three key factors to dynamic capabilities: Processes, position and paths. Competitive advantage lies in the managerial and organizational processes (routines, current practice, and learning), shaped by its asset position (the firm s current specific endowments of technology, intellectual property, complementary assets, customer base, and external relations) and the paths available (the strategic alternatives available to the firm and its path dependencies) (Tecce, Pisano and Shuen, 1997). Dynamic capabilities are supported by routines inherent in the firm where capabilities can be seen as higher-level routines that help implement and improve lower level routines. Routines can be defined as an abstract way of doing things, seeing routines as a link to organisational memory based on past learning. Thereby, the firm can avoid organizational inertia. Routines are building blocks of capabilities and contributes dynamically by; variation (new combinations of routines may lead to new capabilities), selection (different combinations of routines may foster new capabilities) and adaptation (adaptations of new routines may function as a feedback loop according to changes in the environment) (Nelson and Winter, 1982). Capabilities can be subject to imitation which is replication performed by rivals, however, capabilities are idiosyncratic to the firm and thus very difficult to imitate (like stated in the RBV, Dierickx and Cool, 1989). They can also be subject to replication by the firm itself. Replication involves transferring or redeploying competences from one concrete economic setting to another (Tecce, Pisano and Shuen, 1997). By constantly being able to adapt to changes in the environment and by exploiting its routines a firm can achieve sustained competitive advantages through its capabilities. 28

36 Hereby, three other important aspects are introduced: Organizational learning, organizational adaptation and flexibility. Organizational learning is the process of identifying an organizational context and successfully coping with it (Hedberg, 1981). Learning should be viewed by the firm as an organizational process and not just an individual one. Therefore, the firm needs to implement learning systems in order to capture the benefits of knowledge accumulation and not just expect this to happen on its own (Shrivastava, 1983). Learning systems should allow both first-order learning and second order learning to take place inside the firm. For a firm to have an adaptive ability resources must therefore be deployed so current routines are exploited to maintain stability and sustain existing rules. On the other hand, resource deployment must also support the exploration of alternative routines, goals and opportunities (Lant and Mezias, 1992). Organizational flexibility is thereby a combination of a managerial task and an organizational task (Volberda, 1996). The managerial task is defined as dynamic capabilities, and the organizational design task as the responsiveness of the organization inherent in the relationship between exploration and exploitation. Finding the right mix will allow the firm to adapt to the two fundamental types of change, momentum (refinement and incremental adjustments) and revolution (gestalt shift) (Miller and Friesen, 1980). The limitations of the competence and capability approaches are very similar to those of the RBV but can be further elaborated. In general, there is a lack of clear definitions, and scarce resources, core competences or capabilities are often defined ex post. Furthermore, if you build your firm around a tight set of resources, competences, or capabilities it will become difficult to respond to severe changes in the external environment. That is, the in-side out perspective not only explains why firms are different but also offers an explanation to why firms are frequently unresponsive to major shifts in their competitive environment. This insight is crucial for the management consulting industry as it can explain why firms often build their strategy tight around core competences and then find themselves in big trouble when these competences are no longer in demand. Managerial theory A managerial theory of firm growth holds that managers attach utility to the size of their firms (Marris, 1964). Compensation, bonuses, prestige, power, etc. are associated with size, and therefore firm size and firm growth are considered important factors in the managerial utility function. In the case of management consulting firms, which are often owner managed or run as a partnership this, has some implication. In the small consulting firm, growth maximization concur with profit maximization, but if run as a partnership, growth of certain business areas might conflict with the overall profit 29

37 maximization of the firm. That is, according to managerial theory, managers maximize growth under the constraint of earning a satisfactory profit. The key take-away from this theory is that managers sometimes act irrationally in relation to the overall benefit of the firm. One basic prediction from this is that growth rates of manager-controlled firms will be higher than those of owner-controlled firms. Furthermore, if SMEs are considered some evidence show that management-controlled firms have stronger preferences for growth than those firms, which are owner-controlled (Hay and Kamshad, 1994) Outside-in perspective Here the focus is on the analysis of the external factors of the firm. It general, the outside-in perspective treats the external conditions as given, that is, they are analyzed and then the firm acts accordingly. Adaptation of products and activities to these external factors are considered to be done relatively unproblematic. This perspective is rooted in the neoclassical foundations and the structureconduct-performance (SCP) postulate (Mason, 1938; Bain, 1959). The basic idea is that there is a causal relationship between the structure of an industry, the conduct of the firms within the industry, and the performance of these firms. That is, the number and size of firms in the industry affect the behavioural rules followed by sellers and buyers, which again affect the overall economic profitability of the firms within the industry. In an industry such as the management consulting industry, where firms can easily enter and exit to obtain a part of the profit, this perspective gives useful insights concerning the explaining of firm growth. Neoclassical foundations The main prediction emerging from the neoclassical perspective is that firms are attracted to some sort of optimal size (Rickard, 2006). This optimal size it the profit-maximizing level of production and growth is only a means to achieving this size. Once this is attained, firms are assumed to no longer grow and, consequently, this perspective becomes very static. In continuation, transaction cost theory (Coarse, 1937; Williamson, 1981) deals with the optimal boundaries of the firm through upstream or down stream integration. This is determined by a trade-off between coordination via hierarchy and coordination through the price mechanism. Factors that affect the level of integration are the frequency of transactions, uncertainty, degree of asset specificity, and the possibility of opportunistic behaviour. These factors are relevant in the context of management consulting firms but predictions made by transaction cost literature most often concern vertical integration, that is, growth by acquisition (Kay, 2000). Therefore, transaction cost theory only have a limited scope for explaining growth as vertical integration is not the order of the day in the Danish 30

38 consulting industry. Furthermore, the concept of an optimal size lacks empirical support and is suggested to have little use in the understanding of why firms grow (Coad, 2006). Porter s framework Competitive advantage and growth happen through already existing entry and mobility barriers or through superior strategic choices, which increase these barriers. To gain a thorough understanding of these forces, Porter s framework, which is rooted in the SCP postulate, supplies a tool for systemizing the analysis of the forces that influence strategic behaviour and competitive advantage in the industry (Porter, 1980). The framework views the essence of competitive strategy formulation as relating the firm to its business environment. A Firm can achieve growth and competitive advantages by positioning itself where it most optimally defends itself or take advantage of industry forces. These forces are internal rivalry, bargaining power of customers, bargaining power of suppliers, threat of substitutes, and entry- and mobility barriers. The framework deals with industry structure and Porter s five forces can thereby be used to identify growth barriers and opportunities primarily on an industry level. The degree of rivalry between incumbents can be investigated by competitor identification. If there is a high degree of rivalry in the industry this will most likely mean that competition is based on either price, quantity, or market share, which will affect the overall profit, generated in the industry. The more rivalry and competition, the more likely it is that a firm will not be able to earn profits above the industry average. Therefore, it is important to identify the number of incumbents and the degree of market differentiation. The degree of rivalry will also affect the cooperation that takes place in the industry. That is, the more fierce competition, the more one will expect that firms will protect their resources and knowledge instead of engaging in cooperation with the risk of opportunism. Bargaining power of buyers describes the degree to which buyers can affect the price that products in the industry are sold at. If the amount of buyers is small or they are heavily concentrated, this can increase the power they hold to reduce the ability of the firms in the industry to earn economic rents. If, on the other hand, demand is high and buyers are many, this gives firms in the industry an advantage to affect the price of their products, and thereby earn economic rents. Finally, information plays a significant role. The more buyers are informed about production costs and competing products, the greater their ability to reduce the rent-earning capacity of suppliers will be. Bargaining power of suppliers follows the same story as the one above. If the number of suppliers is large then firms in the industry can easily choose which one to use and create competition between them, thereby earning economic rents. Contrary, if suppliers 31

39 provide niche goods or services then their prices are likely to be held above marginal costs, which lower the overall value appropriation for firms in the industry. In addition, if firms in the industry are perceived to be earning economic rents, then this might motivate suppliers to engage in down stream integration and thereby cause increased competition. An important influence on the demand for the products or services provided by firms in the industry is substitute products. These products or services are substitutes in the sense that they constitute a threat from other industries that are likely to undermine the existing demand. Substitute products and services reduce the monopoly power of firms within the industry. Entry- and mobility barriers are defined as factors, which prevent either a potential newcomer or an incumbent who wants to make a strategic group move in earning economic rents post entry. Barriers may be structural, institutional, or strategic or a combination of all three. Structural barriers exist when incumbent firms have a cost advantage. Examples of structural barriers include economies of scale, sunk costs, patents, and advertising. Institutional barriers exist when there are certain institutional factors that favour some industries or firms compared with others. Finally, strategic barriers arise when incumbent firms engage in entry-deterring strategies in order to keep potential new entrants out. However, there are some shortcomings of the Porter framework. When considering the product life cycle hypothesis (Rickard, 2006) this becomes evident. Products or services run through a number of stages; introduction, growth, maturity, and decline, which will effect the conduct of incumbents directed towards entry barriers and production cost reduction and ultimately the degree of rivalry in the industry. Porter s framework does add dynamics to the SCP postulate, but is not a complete explanation of the dynamic nature of rivalry. Another shortcoming is the fact that is misses the contribution of the individual firm. Analysis takes place on industry or product market level and does not explain individual firm growth, but rather the development of the industry or market because of factors outside the firm. The strategic conflict approach gives a more comprehensive insight in the dynamic nature of rivalry (Shapiro, 1989). The argument is that incumbent firms will soon realize that they are mutually interdependent (Brickly et. al., 2001) and therefore play a more interactive game. Strategic interactions with other firms, customers, and markets allow a firm to capture any value created. Strategic behaviour that firms may engage in range from tacit collusion to strategic manipulation of rivals information about market conditions. In the end, game theory offers a more dynamic tool to analyze strategic moves over time compared with 32

40 porter s framework. However, the focus of game theory is not firm growth but on how to appropriate value. Therefore, this approach is best used as a supplement to others theories when it comes to explaining firm growth. Furthermore, the approach stresses strategic behaviours such as commitment and reputation, instead for example flexibility and innovation. As already mentioned, theories from the outside in perspective do have some shortcomings which allow them to only partially explain firm growth. The major reason for this is that the perspective is rooted in neo-classical economic theory where the focus is on static, homogeneous, and mobile resources, equilibrium, perfect information, and other more or less unrealistic assumptions. Clearly, when one considers the management consulting industry, it is obvious that these assumptions will not be maintained because of all the firm specific competences and resources that are at play. Hereby, the above-mentioned theories can only partly explain growth and the contribution from the inside out perspective becomes highly important Tying the ends in the organization design The right organization design will be a result of the chosen industry and position, internal routines, resources, and relationships, past experience of senior management and the goals of the firm. The central argument is that at the centre of growth strategy is the organization design of the firm with all its limitations and opportunities. Tacit knowledge and the systems that surround it are extremely difficult to duplicate, and thereby it becomes clear as to why firms in the same industry show different levels of success and growth. The wrong organization design will result in decisions, which are made based on inadequate information and personnel, rather than organizational goals. No two organization designs will be the same as it is determined in large measures by past experience and the actions and attitudes of senior managers. Consequently, the organization design imparts heterogeneity on the firm. The objective of the organization design is to carry out the variety of activities, which take place in the firm in a manner that uses the appropriate amount of resources, the skills of the workforce, and knowledge embedded in the firm and aligns these with the goals of the firm. These coordinating activities, routines and relationships which are often characterized by causal ambiguity, creates internally generated and intangible resources which have a crucial influence on efficiency, strategic choices and competitive advantage. Furthermore, the right organization design can bring to the firm the ability to change and adapt as the goals of the firm vary with changes in the external environment. This is done by establishing routines and systems that encourage learning, risk taking and flexibility. 33

41 3.2.4 Summary of theoretical contributions Thereby, there exist two major discourses in the literature concerning firm growth. However, as suggested, none of the discussed discourses provides us with a thorough understanding. In their attempt to stay loyal to their orientation they evidently leave explanations out that are rooted elsewhere. However, if you combine elements from both, I argue that we can reach a more complete understanding of firm growth and in the end be better able to create a reliable model for assessing firm growth. 3.3 SME theory The management consulting industry consists primarily of small and medium firms, and consequently an in-depth examination of the specific factors at play in this segment will deepen the theoretical framework. Today, it is accepted that small firms are not just scaled down versions of large corporations (Storey, 1994). On the contrary, it is acknowledged that SMEs have certain particular characteristics and that these have large effects on how SMEs operate and think. Factors that separate small firms from large corporations are among others: The higher degree of uncertainty that small firms operate under (Storey, 1994), the big role in innovation that SMEs take (Pavitt, Robson and Townsend, 1987), and a much more personalized way of managing the firm (Storey, 1994). These factors, combined with characteristics such as a small number of employees, small capital forces, small market shares, and a degree of co-dependency with other firms make up some of the specifics of SMEs SME growth It is suggested that SME growth may be the result of several different factors. Among these are the strategic choices of entrepreneurs, the ability to make structural adaptations to the growing organization, the ability to overcome barriers to growth, or the structural characteristics of the external environment. Together these explanations lead to two generic explanations of SME growth; the strategic choice explanation and the industry structure explanation (O Gorman, 2001). This discussion is in accordance with the previous distinction between the inside-out and outside-in perspective. The strategic choice explanation argues that SME growth is a consequence of the strategic and structural choices made by the founder or manager. By pursuing superior strategies and managing the firm through stages of growth, the manager can ensure the success of the firm. Research suggest that small firms who achieve high growth do it by pursuing a differentiated strategy (Kuhn, 1982) as they operate with few customers, and competitors and therefore rely on qualitative competitive factors. This also makes it important 34

42 for SMEs to be able to respond to market changes, and, especially for medium firms, to have organizational flexibility (Smallbone et al. 1993; Kuhn, 1982). The industry structure explanation argues that the external environment that firms operate in affects growth (Porter, 1980; Aldrich and Fiol, 1994). One perspective, population ecology, takes this argument to the extreme by stating that growth is a function of environmental selection (Hannan and Freeman, 1989). Thereby, growth can be seen as the evolution from one organizational form to another as the environment changes, or growth can be restricted to one type of organizational form which forces it out when this form is deselected (O Gorman, 2001) The entrepreneur Based on the above discussion of the strategic growth explanation, the entrepreneur comes to play a significant role in the success of the SME as the decision maker. Definitions of the entrepreneur differ but usually entrepreneurship refers to business activities related to growth and innovation (Schumpeter, 1942; Storey, 1994). For the purpose of this master thesis, the entrepreneur may be defined as the individual(s) who manage a consulting firm with the intention of growing it and who has the managerial capacity to do so in the face of strong competition from other consulting firms, both small and large. This opens up for examining the founders of the firm and whether they bring certain characteristics and skills, which can lead to competitive advantages. This is especially important in management consulting firms as the partner or manager add to the firm a certain amount of abstract capital. Under this category is for example, experience of life, business experience, the entrepreneurial gene, a specific philosophy, and idea about the purpose of life. All these will shape the firm s culture, its path and its competitiveness. The management consulting industry is characterized as a very knowledge intensive industry. There exist a flow of routines in the firm, which draw on different kinds of knowledge at the different stages of the value chain. At each stage, there is an opportunity for management to achieve advantages over competitors by introducing innovative changes or services because of accumulated knowledge. Thereby, it becomes clear how big the challenge is for small firms to grow, as management must be involved in all steps of the value chain. The crucial issue is that the entrepreneur can identify these opportunities. This puts a large strain on management and it is often more concerned about survival than growth per se (Storey, 1994). Indeed this survival mode and a possible taken-for-grantedness of existing routines can convert entrepreneurs into being just managers and become a significant growth barrier. 35

43 3.3.3 Strategy and culture in SMEs Strategy is a continuing process, which has to be reconsidered as external and internal changes occur. The strategic process can be divided into two main elements: Strategic crafting and strategic execution. However, when we are dealing with small to medium enterprises the process becomes somewhat narrower and shorter in time scope. Large corporations, who face less uncertainty relative to SMEs, use a strategic vision to synchronize the decision making process in the long run. Smaller firms, however, often have vague visionary plans and adjust the direction in which they are going frequently (Storey, 1994). SMEs are often in a need of formulating objectives that are more precise as the market situation quickly changes, and hence lacks specific ideas of strategy execution. Indeed, the plights of small firms are many, to an extent that much time is dedicated to survival as opposed to creating long-term firm efforts to ensure sustained growth. The lack of a precise and specific strategic vision and strategy can be an important growth barrier for the firm, as it will hinder execution in practice. In this connection, firm culture also becomes important. A series of attitudes and assumptions make up the core values and shape the purpose of the firm, its mission and vision. Schein (1994, p. 20) defines culture as: A pattern of shared basic assumptions that the group learned as it solved its problems of external adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to be taught to new members as the correct pathway to perceive, think, and feel in relation to those problems. For the sake of simplicity, it can be useful to describe firm culture in terms of market orientation and growth orientation (Hougaard and Duus, 1996). Market orientation describes the firm s ability gain insight onto its market, that is, to identify customer demand, the players, and suppliers. Furthermore, it deals with the firm s ability to share market knowledge inside the firm and its specific competence with regard to adapting its services and activities to the market. In the same way, growth orientation deals with the firm s ability to identify growth opportunities, define growth targets and its ability to implement decisions based on a growth focused strategy. By considering firm culture in these terms, firm growth becomes a function of growth opportunity identification but more important also a function of growth opportunity implementation, that is the actually exploitation of these opportunities. Firm culture must be developed around and support both elements. The culture of a firm is largely shaped by its founder. Especially in the context of management consulting firms, the founding partner(s) will have a dominating influence on firm culture, and how its market and growth orientation will be in the future. Either the firm will be build tightly around the core competences that the partners have, or it will be more broadly build around the partners ability to explore new opportunities. This, in turn, shapes 36

44 the initial years of the firm s history and experience. Since culture, history and past experience have so strong normative characteristics, the future path of the firm will be dependent upon these factors. 3.4 Creating an integrated approach The two discussed perspectives are, as earlier mentioned, frequently viewed as being in conflict, but in large measures, we can gain a more complete framework if we view them as complementary, and add insights from SME theory. The outside-in perspective assumes away many issues relevant for managing an economic organization but does provide predictive outcomes for firms facing external forces and change. Because the outside-in perspective is rooted in neo-classical economic theory, it assumes perfect information and rationality in some degree. Therefore, no firm can gain a competitive advantage based on strategy and structure, as competitors would soon copy them. However, if we relax the assumptions and instead treat the world with uncertainty and bounded rationality and therefore the existence of firms with heterogeneous strategies and structures, the inside-out perspective comes into play. Thereby, these two perspectives come together in the firm s organizational design as an internally produced resource whose primary goal is to control decision-making and strategy and react to external forces (Rickard, 2006). No two organization designs will be identical and in the case of the SME it will in large measures be affected by the entrepreneurs/managers and culture. Thus, the organization design can be a source of competitive advantage and growth by aligning and motivating resources towards the firm s goals. In order for an integrated approach to be able to deal with growth as a science of the specific, the focus will be on growth processes as opposed to growth factors. It is assumed that successful consulting firms share both internally and externally a series of growth processes that allow them to gain a competitive advantage over other firms. Thereby, the focus is not on the specific factors that give the individual consulting firm an opportunity to grow but instead on the shared pattern of processes that stimulate growth across several firms. Here, the strength of a multi-theoretical contribution comes at its right as it opens up for the possibility to look at growth from several perspectives. The model below is put forward with the intention of structuring the succeeding empirical work. Thereby, the model does not describe how a firm can achieve growth but introduces important elements that must be taken into consideration when investigating growth. The model is therefore not a goal in itself but instead a structure to capture the processes at play in connection with firm growth in the management consulting industry. 37

45 Model for assessing firm growth Culture of Feasible strategies set Factor Generators markets Entrepreneurship Organization design Competitive advantage Feasible resources competences set and of Moderators Product or markets accelerators GROWTH FIRM Source: Own making By culture, is meant the current performance of the firm, the markets it currently serves and its history and experience. These elements are all path dependent and will influence the future opportunities of the firm. The firm culture, which among others describes the firm s ability to gain market insight and to identify growth opportunities, is an important element. Inherent, is also the routines which the firm has developed and which in part will shape its possibility to exploit current resources and competences and explore new opportunities. Entrepreneurship describes the capabilities and attitude of management. Here the focus is very much on the creators of the firm and their qualifications in terms of abstract capital (experience, purpose of life, etc.) and specific capital (which competences do the entrepreneur(s) bring into the firm). The entrepreneur of the firm also plays a big role in the degree of diversification, which the firm engages in. Whether the entrepreneur develops his firm in broad or tight terms around his competences will shape the firms future path. These two elements, culture and entrepreneurship, are considered interdependent. A feasible set of resources and competences shapes the firms organization design and will in turn be shaped by it. A set of tangible resources, human and physical, must be managed and developed to achieve firm specific synergies ranging from intellectual property over core competences to routines capable of rapid reaction to change. For the firm to exploit the potential value of these internally generated resources and competences, it calls for both entrepreneurial skills and strategies. The firm s resources and competences therefore define its set of feasible strategies. These will be reflected by its history and experience and the entrepreneurial flair of its managers. The set of strategies will describe how the firm chooses to operate on 38

46 operational and strategic levels and this will affect the organization design as well as the organization design will affect strategy, as it creates a limit on available strategies. The influence from the external environment is captured in factor and product markets. Factor markets identify the sources, which create growth opportunities for the firm. Herein lies growth opportunities by the establishment of specific and scarce resources that are difficult to obtain for competitors and through the possibility for cooperation with firms, which create relational rents. These factors create a foundation for firm growth and can be viewed as generators. Product markets identify industrial factors such as market structure, entry barriers, and substituting products but also customer relations and insight are important factors, as this information allows management to adapt to these circumstances. The degree of rivalry will be shaped by the set of strategies the firm adopts, and thereby the possibility that competition will either eat up profits or create profits through cooperation. Growth will either be moderated or accelerated by these factors. These six elements come together in the organization design to affect a synthesis of the two perspectives by clarifying that the role of the organization design is to align the firm s resources with its strategy and external environment, in order to achieve a competitive advantage. Organization design imparts heterogeneity on the consulting firms, and thereby become a mean to achieve competitive advantage. Hence, the focus is on how consulting firms align and create coherence in the firm. Furthermore, it is assumed that a competitive advantage is necessary in order to achieve growth. That is, the market in question is not characterized by unlimited demand and a certain selection pressure exists. I argue that this is the case in the consulting industry. Hopefully, the model proves to show that only considering growth from one perspective will miss out on other equally relevant issues, and that the two perspectives are not opposites but complementary and interrelated. 3.5 Summary of theory To reach a comprehensive theory of the growth of the firm it is necessary to explain why firms expand their horizontal boundaries, and, especially important in the context of this master thesis, why some firms within the same industry grow at a very high rate while other firms seem to have a hard time breaking through the glass ceiling. The organization design of the firm has been suggested as the focal point of a theory of the growth of the firm supported by theories from the inside-out perspective and outside-in perspective. The resource based view, in accordance with the competence and capability approach, view growth as a process of developing, accumulating and productively utilizing internally generated specific knowledge resources. Growth opportunities is seen as limited by history and experience and 39

47 the benefit of diversification, for example adding a new partner with different competences to the consulting firm, is to expand the stock of knowledge resources in the firm. For the firm to be able to sustain growth it has to have an entrepreneurial managerial ability to identify growth opportunities and deploy resources necessary to realize them. However, a resource or competence has to be tried in the market in order to realize its value. Recommendations from the inside-out perspective can lead to an underestimation of the value of market positioning and adaptation. The inside-out perspective therefore brings into consideration the product market as an accelerator or moderator of growth. Now the tools to conduct an empirical investigation are in place. The model for assessing growth can give a clear indication of the issues that are at stake in the SME sector and especially in the management consulting industry. 40

48 Chapter 4 Design and implementation In this chapter the methodological settings and approach with regard to the interview guide, the interview process, and the treatment of the qualitative data is discussed and vindicated. When the goal is to identify an appropriate growth strategy across different firm sizes, it is important that it is supported both by theory and empirically. This means that there is a continuous need for theory development throughout the investigation. Therefore, it is not appropriate to conduct a population survey where questionnaires are sent to a large amount of consulting firms, as it will not capture the processes that are at play ex ante and does not allow for further theory development. On the other hand, a single case study of a consulting firm does not allow for the wanted degree of generalization. Roughly, empirical investigations can be placed on a continuum as below: Continuum of empirical investigations methods Single case study Multiple case study Population study Detailed understanding, no generalization Detailed understanding and generalization at the same time Source: Duus, 1995 High degree of generalization, statistical significance, no knowledge of factor interaction Therefore, the choice of method in this master thesis falls on the multiple case study. This allows for a combination of the advantages from the single case study and the population study. The purpose is to generalize from the theory base developed in the previous chapter by holding this against a number of empirical results in order to be able to develop further theory. This approach is a combination of explanation building and pattern matching (Yin 1998). That is, an analysis of the causal explanations and a continuing comparison of these with the existing and discussed theory. The idea here is to conduct an analytic generalization in relation to theory development rather that a statistical generalization in relation to hypothesis testing. The focus of the chosen discovery-oriented methodology is to further develop theory, as a consequence of the limited amount of theory on the management consulting industry. A crucial part in theory development and building is the evaluation of emergent concepts and existing theories, which consequently supports the preceding theory base and integrated approach of chapter 3. The case study approach is recommended by several different researchers as being especially appropriate in studies of new areas or areas 41

49 with inadequate existing theory, as the results commonly are novel, testable and empirically valid (Eisenhardt, 1989; Despande, 1983). 4.1 Methodology and Settings A multiple case study can include both qualitative data and quantitative data. In this master thesis, qualitative data has been chosen as the primary data collection method as it is useful for directly suggesting theory development and building. The semi-structured in-depth interview is the general framework from which qualitative date has been collected. The point of departure for the nine interviews was the interview guide, which rests on the integrated approach developed in the theoretical part of this master thesis. The interview guide is based on open-ended questions and projective question techniques, exemplified by questions such as; what constitutes growth for you and your firm?, and it was always attempted to keep the setting as informal as possible. If, during an interview, new areas of interest surfaced they were pursued to some extent with out sacrificing the rest of the interview. The interview guide therefore served more as a guideline rather than a series of question that were to be strictly followed. However, to obtain a relevant interview the questions were prioritized in order to be sure that certain crucial issues were dealt with. The interviews lasted somewhere between 1 1½ hour and was conducted at the offices of the consulting firms. This allowed for a more thorough understanding of the individual firm, as there was often a chance to meet other employees and see office buildings, and how this, for example, relates to firm culture. Prior to the interviews, a pilot interview was conducted with a small local management consulting firm in order to evaluate the quality and understanding of the questions, and based on this experience the interview guide was subject to minor changes. The interviews were conducted in the period of the 16 th of May until the 7 th of July 2008 and a subsequent evaluation of the interview guide was done after each interview in order to capture experience and new relevant issues for the next interview. The different management consulting firms who were contacted for interviews were chosen among the members of DMR. This membership list consists of 180 management consulting firms who adhere to an industry code 7 and thereby definitively falls under the category management consulting firm and the focus of this master thesis. Initially, the chosen consulting firms was sent a contact letter (appendix L) and then contacted by phone in order to establish a concrete meeting. I believe one important reason for the success with finding relevant firms is that they were chosen among DMR members. Even though this list does omit many consulting firms, it still represents a long list of diverse management consulting firms

50 that are generally interested in developing the management consulting industry. If the point of departure had not been DMR, members it would have been difficult to identify relevant subjects for interviews. The firms interviewed cover a broad range of consulting areas from strategy/organization, operations, and communications to more IT heavy services. To obtain the appropriated number of interviews only twelve consultant firms were contacted and those who declined did so reluctantly because of busyness. It was demanded that interviewees hold a leading position in the consulting firm and have insight and influence on strategy. All the interviewees are either CEOs or partners in their respective firms. Consequently, all interviewees have been promised full anonymity. Owing to the problem statement of this master thesis, which deals with the tension between size and growth it was important to consider management consulting firms of various sizes. As already mentioned, Danish consulting firms belong to the SME segment but it is not directly applicable to divide consulting firms into the small and medium category, as it does not capture the diversity well enough 8. Therefore, an adapted size distribution covering Danish stand-alone management consulting firms was used in accordance with the industry analysis: Overview of respondents Small consulting firms Medium consulting firms Large consulting firms 2-15 employees employees employees 3 firms interviewed 3 firms interviewed 3 firms interviewed Source: Own making The total number of interviewed firms is thereby nine. However, to create a more in-depth understanding and to capture the diverse elements of growth factors and barriers it was attempted to choose one firm in each group which either had experienced problems to grow or currently experiences growth problems. This proved to be a difficult task as such information is difficult to obtain ex ante but to some extent, it has succeeded. However, because of the uncertainty connected with this information, the difference between high growth firms and low growth firms will only serve as additional information and not be considered as scientifically evident. Furthermore, the firms were chosen because they were founded close 2000, give or take a few years as this allows for easier comparing. An overview of the interviewed firms is presented in appendix M. 8 The current definitions by EU is that a firm belongs to the category small if it employees less then 50 people and medium if it employees between 50 and 250 ( 43

51 4.2 Operationalization The purpose of the empirical analysis is to give a description of and to create a foundation for understanding growth factors and barriers in the Danish management consulting industry with a special emphasis on their current market situation and organizational conditions. As already mentioned, the theory base and the integrated approach presented and discussed in chapter 3 serves as the basis for which the questionnaire has been developed. In general, it deals with nine different topics and relating questions, all designed to provide information about the discussed theory base. Appendix N gives an overview of the operationalization that has been done with this in mind and the interview guide is enclosed in appendix O. There are several different measures, which can be applied in order to identify growth firms. In general, the following are suggested in the literature; size, assets, net capital, revenue, and growth in the number of employees (Hougaard and Duus, 1996). Each measure has its own advantages and disadvantages however, because of the complexity of the concerned industry and the high degree of competition it is very difficult to obtain exact numbers relating to revenue and profit, etc. Therefore, to identify the degree of growth that the individual consulting firms have experienced, number of employees has been the prime indicator along with the perception of growth and further information supplied by the interviewee. The argument is that in this context growth in the numbers of employees is a viable measure as it is a consequence of growth or growth expectations in other measures. 4.3 Data analysis The nine interviews were recorded electronically and hereafter partially transcribed with a focus on emphasizing the most influential opinions and answers related to the theoretical framework. While transcribing the interviews, attention was paid to the potential risk of selectively or irrationally disregarding parts of the interviews. This is a potential outcome of choosing to do partial transcription, and it limits the opportunity to use the disregarded parts in later analysis. However, the subsequent reading of the data material has been systemized in a way such that understanding and meaning was slowly developed and elaborated. The reading of the material has been done through four steps. First, each interview was reviewed with the intention of creating a general description and understanding of the specific firm and its growth situation, see appendix M. Second, the interviews were reviewed in order to establish the purpose of growth in the management consulting industry. Third, a comparative review was made, in which the empirical data was considered in sets of three according to their size, in order to establish significant growth differences across size and situation. Finally, 44

52 a reading of the data material was done in which growth processes in general was considered. Here, it was assumed that the large firms represent the more successful consulting firms whereas the small firms represent less successful consulting firms. This could be done because the chosen firms have all been founded close to Hence, the data analysis is not exact science but instead a qualitative interpretation, which is supposed to identify and create patterns and processes. The empirical analysis will therefore comprehend and decode the answers of the interviewees in relation to the theoretical framework. A hermeneutic approach allows for a deeper interpretation and a chance to go beyond the direct answers of the interviewees to identify patterns and meanings that have not been explicated. Inevitable, this will bring the risk of scientific bias and consequently, treatment of the data in a highly objective manner is crucial (Kvale, 1997). 45

53 Chapter 5 Empirical findings This chapter presents the empirical findings based on the analysis of the nine qualitative indepth interviews The purpose of growth The point of departure is an understanding of why consulting firms choose to grow. A crucial insight is that managers of consulting firms are not interested in profitability per se but instead in a profitable expansion of the activities of the firm. Cost minimization and efficient allocation of resources are not a primary concern, as much as the development of the firm is. In the interviews, all firms expressed a wish to grow and saw it as a critical issue for future success and development. There are no alternative to growth in a consulting firm, well maybe there are, but then you are just keeping yourself occupied. If you want to be taken seriously as a firm, with regard to knowledge production and development, then there are no alternative to development which means that we get new strengths, inspiration, and knowledge into the firm. CEO of a medium sized strategy and management development consulting firm (F/08:10) Hereby, it is underlined how consulting firm managers perceive growth as a dynamic concept. That is, only through growth is the consulting firm able to perceive and act upon new opportunities. There is, to a very high degree, a focus on the internal organizational factors and the role of the firm s internally generated resources. Hence, a growing consulting firm is a firm, which stimulates the process of resource accumulation in order to create services that are surplus of current business areas. The consulting firm s productive opportunities are thereby those growth possibilities that management perceive and act upon. Accompanying growth is an increasing stock of accumulated resources, and as mentioned by different managers their organizations do experience strains on the organizational structure as they grow. Growth opportunities are only valuable if they do not jeopardize the organizational coherence. For consulting firms, growth opportunities expand much faster than its actual productive possibilities, as a result of being in the knowledge business and because they are in continuous contact with customers, where they appropriate knowledge and have the possibility to transform this into new business areas. Thereby, the difference between growth opportunities and productive possibilities is very much dependent 9 All interviews are attached on CD-ROM for further listening. Whenever a quote is used, it can be referred back to the interview by the capital letter and time designation through appendix M. 46

54 on the organization design of the firm. If this supports internal development and growth, then the difference between growth opportunities and actual production possibilities will be small and enable the firm to choose between a variety of different growth possibilities. The successful consulting firms, which were interviewed, had an ability to explore new growth possibilities and at the same time maintain an organizational ability to coherently develop and deploy new resources. Innovation and change have to be a build-in part of our thinking and our way to organize the firm. We need one or two ground-breaking projects every year. CEO of a medium sized strategy and management development consulting firm (F/35:20) Consequently, consulting firms choose to grow because of the development inherent in growth. They do not grow because of the possibility to achieve economies of scale or market power. These might be important issues, but are not a primary concern of consulting firm managers. Thereby, it could be considered that size is of no importance for these managers however, that is not entirely true. In order to get at a situation where internal development and resource accumulation is sustained there is a need to be of a certain size. Several of the interviewed consulting firm managers name this size critical mass. At this size, the business area or consulting firm, through a process of learning-by-doing, is always adding to its existing stock of knowledge. Hence, size is a goal in it self but it is not an unconditioned goal as it stresses the organization with regard to organizational coherence. If you want critical mass, if you really want to deliver heavy in business areas, then you need to be at a minimum 20 consultants. If you want knowledge transfer and a well functioning team, then you need 20 consultants in a business area. CEO of a medium strategy and IT management consulting firm (D/25:45) This does not imply that there is a size optimum or a size limit to the consulting firm. Obviously, this is very much dependent of the areas in which the individual consulting firm operates. Thereby, growth is seen as a dynamic process and conditioned by an internal focus on development and growing from the inside. Growth is necessary and must become an in-build process in the organization design. Even if a consulting firm is content with its current situation and position in the market, growth is necessary because the environment is complex and changing. Customers demand more from their consultants and trade-specific knowledge develop all the time. Consequently, growth in the consulting industry cannot be perceived as a mean to achieve a static optimum but must be considered a dynamic process that creates the foundation for further development. 47

55 5.2 Development through growth The second step in the analysis is an examination of the nine management firms consulting across size and situation. The interviews covered among others; firm history, organization structure, strategic decisions, the management system and significant challenges and changes in the life time of the firm. Even though, the examination rests on a relatively small sample there are clear factors, which allow the firms to be arranged in three discrete stages. Several CEOs or partners even described how they considered their firm to be in a certain stage: The stage that we, in actual fact, are in is only stage two. In stage one, we were concerned with establishing a firm altogether. Stage two is now about establishing the firm in an economic, professional and managerial sense and stage three will be about the visionary and exciting growth oriented issues. CEO of a medium sized communication consulting firm. (E/08:50) Stage one consulting firms In this group, we find consulting firms that are typically managed by one person, the founder. Typically, he has left his job in another large consulting firm or management position. The prime motivation for this was a wish to become master in own house. Furthermore, it was with an expectation that he would be able to leverage the competences, which he has achieved in previous job positions, to his own firm and that his current business network will give him a starting point and an advantage in the start-up phase. The stage one consulting firm is characterised by little or no formal organization structure, and the founder and employees meet informally to make decisions about daily matters. Only a few people are employed which typically include someone who manage administrative work, and a few consultants who support the line of business, which the founder has laid out. The business area that the firm operate in and the services provided is typically centred on the competences of the founder. The main part of employees is connected to the firm on a freelance basis and is pulled in on assignments when necessary. In general, firms in this stage find it difficult to grow and do so only in a limited extent. However, common for them is that they wish to grow. Where they are different from the consulting firms who have managed to grow, is in the growth vision. Typically, their growth vision is somewhat more narrow and limited because of the founder s perception of growth. I have a clear goal for growth. I see the firm in three years as having a maximum of 7-8 employees If we grow beyond 7 8 employees I risk losing sight of the assignments and if we grow beyond 20 employees I risk loosing sight of both assignments and employees. CEO of a small management and event consulting firm (C/12:50) 48

56 The consulting firms in this stage seem to experience a kind of glass ceiling in the pursuit of growth. That is, despite their wish to grow, there are elements in their organizational structure and management practice, which prevents them in doing so. Growth processes The approach to growth in this stage is characterized by a random search and identification of market driven opportunities. The range of services provided is broad and target a broad market. At this point, it is generally unclear which services will be most profitable and which clients should be focused on. I have to say, it has not been a target-oriented or planned development. It has been very impulsive. Now there is an area of interest, we need to get involved. CEO of a small organization management consulting firm (A/52:40) The types of assignments, which are taken on, are to a large degree very different and often put the firm under pressure, in both a competence and economical sense. However, it is also in these new assignments that the small firm finds opportunities to grow and develop its competences and capabilities. So, even though the firm will most likely exceed its capabilities this is a necessary development in order to achieve means of growth. It might be that we take on an assignment that are so exiting and can give us some experience and because we might be able to earn money on it in the future. We have done this quite often but also have to acknowledge that there are many assignments we only do once. So there is a lot of development but we do not earn any money on this. CEO of a small management and event consulting firm (C/34:00) However, there is a downside to this way of developing capabilities and possible customer relationships. The firm must spend more time and people doing research and investigating an unfamiliar problem as the firm is learning-by-doing. In the end, it means that a project or an assignment will be less profitable and maybe even of a poorer quality as firm competences are stretched. Most often, the firm will not be able to perform these odd assignments cheaper, faster or more competent than rivals who are already focused in that area. This type of growth is often connected with the risk that a specific customer project is a one-time project and will therefore never be done again. This means that the firm will have to undertake sunk costs as it will not be able to leverage new skills. The founder of the firm acts out a significant role in this stage concerning growth as he brings about the necessary conditions for growth. It is his entrepreneurial skills, combined with his professional skills, which provide the foundation for growth. His background and experience constitute the business area that the firm operates in and the development of the firm takes place in a narrow sense around him. All interviewed managers 49

57 in this segment agree with the fact that they constitute the most important resource in their firm at the current stage. Drive and enterprise is very much centred on me and the thoughts and ideas about where I want to go, no doubt about that. Ideas and strategic development lie with me or else we will not be able to develop our self. CEO of a small management and event consulting firm (C/32:40) The business foundation is created around the customer network, which the founder has established in previous positions. Through this network of relations, the consulting firm can get orders from customers that are crucial in the start-up phase. I asked my old customers (from a previous consulting job) what I need to do better in order for them to buy my services. So, I definitely used old customers. With them there are some strong ties, they typically constitute your network. CEO of a small organization management consulting firm (A/52:40) This interdependence between the consulting firm and its customers is decisive, as the firm both creates its economical foundation and develops it capabilities in relation with their customers. Consulting firms which have one or two big customers from the beginning will find it much easier to grow as this network creates an economical security for the firm and allows it to leverage on existing capabilities and routines. We need one or two big customers. We need this kind of stability so we do not need to invent new customers again and again We use a lot of time attuning expectations through meetings etc. and this demand a lot of time the first time but not the second time. CEO of a small management and event consulting firm (C/14:50) Typically, the small consulting firms service small and medium sized customers. They have an advantage in this segment because of a number of factors. The price of their services are below that of the larger and more established consulting firms which opens up for a market of SMEs who do not set aside a large amount for consulting services. The fact that they are small also allow them easier access to the SME segment because they have a firm profile which smaller firms better can relate to. We can help small and medium sized firms, especially owner managed firms, who are a little nervous when there comes a Mckinzie consultant where the theoretical ballast and the support base are top tuned. It can often seem intimidating, both investment wise but also strategically wise Where we can make a difference as a small firm is that we help with strategy but also with carrying it out in real life CEO of a small organization management consulting firm (A/20:21) Another advantage, as stated by small consultant firm managers, is the specific culture of small consulting firms. The small consulting firm is in a highly entrepreneurial phase where initiatives for future profit are tried in the market. The low degree of formalization and structure allows different initiatives to be made, and in general creates more 50

58 freedom regarding how employees can tackle different assignments. Contrary to larger consulting firms, there are often no standardized tools or frameworks which must be used when handling customer assignments. This improves the flexibility of the small consulting firm and allows it to better adapt and specialize to the needs of SME clients. This relaxed culture often attracts experienced consultants who have previously worked in large and more tightly controlled consulting firms, and now has a wish to continue their trade under less formalized and strict conditions. Herein, lies the advantage for small consulting firms in attracting new employees. The culture must create the framework within which people are not tied on hands and feet with regard to thinking and work methods There is not one right way to be a consultant, there are several ways. CEO of a small management and event consulting firm (C/14:50) Having discussed the growth factors which are specific for small management consulting firms and which they leverage in order to achieve growth it is, however, important for understanding the whole story, to consider the duality of these factors. At the same time these factors become processes of growth, they also become barriers to growth as the analysis in the next part shows. Growth barriers The manager of the small consulting firm is balancing his role as manager with his role as consultant. The services and assignments, which the consulting firm take on, are centred on his competences. Therefore, he often becomes an indispensable person when dealing with clients. You are both the strategist and the owner but you are also the operational consultant who must go out there and perform I need to prioritize time to be the administrative director When I contact my customers they say; you are the one we buy. I can bring along young consultants to do spreadsheets and stuff but I have to be there all the time. CEO of a small organization management consulting firm (A/03:20) Time for strategy and administration must be prioritized which becomes a difficult act to balance. The manager is tied up with operational work as opposed to long term planning and strategy. He is often the one who deals with day to day decisions. Therefore, these consulting firms often do not have a clear and defined plan for the future. Growth is opportunity driven as opposed to strategically driven. As a result, stage one consulting firms navigate the complex and opaque consulting market without the right conditions and assumptions. Because the manager is often alone in his position, he finds it difficult to discuss strategic issues and lacks a sparring partner. The manager, in effect, becomes a limitation to growth, as it is only his vision and ideas, which the firm rests upon. 51

59 Even though, the founder has a vast experience and knowledge from previous jobs it is difficult for him to both maintain this knowledge, obtain new knowledge and disseminate this to employees in a structured way. The transfer and acquisition of current and new knowledge, which obviously is crucial in the consulting industry, is given a lower priority. A barrier can be that we do not have enough focus on new knowledge. It is my responsibility and I do not always have enough time to look into it. CEO of a small management and event consulting firm (C/01:02:30) Consequently, there is often a need to specialize in a specific consulting area if specific competences are to be maintained and developed. However, all the small consulting firms describe their services as rather broad. In general, there seems to be a misfit between the size of the firm, the degree of specialization and the consulting services provided. Customers, who have become better at buying consulting services, know that it is difficult for the consulting firm to maintain competences and capabilities within a broad range of services. Therefore, they do not want to engage the fuzzy and turbid consulting firms in the middle exactly because they are too broad. Hence, it is suitable for consulting firms to be either specialised and/or a high-quality provider. However, small consulting firms lack critical mass in order to reach a sufficient level of quality. In this industry, where the quality of the work is decisive, the right amount of resources and competences must be present as an assignment is taken in. There will necessarily be a limit on the size and scope of the types of assignments, which small consulting firms can solve without jeopardizing their integrity. Often small consulting firms find themselves balancing their current competences with large and complex assignment that can lead to a stretch in competences. The result can be poor solutions and loos of reputation. In connexion with the above, another problem for small consulting firms arises. Because education and training, as well as carrier possibilities are somewhat limited in small firms relative to large consulting firms, young consultants choose to begin their carrier elsewhere. The small consulting firms interviewed find it hard to attract new employees with the right background as opposed to the medium and large consulting firms who do not experience this as a problem to the same extent. Thereby, a problem arises concerning how to secure the consulting firm in the future as new inputs and potential new partners do not emerge. Instead, it is often the same group of senior partners who manage and control the firm, which does not promote the exploration of new opportunities. 52

60 The new growth base for our firm does not come from us seniors but from the young consultants. Furthermore they are also the reason why we can attract more young consultants in the future We need to create a food chain. Senior partner in a small strategy and operations consulting firm (B/28:50) Because the small consulting firm typically services small and medium sized customers, they will often be dependable of one or two larger customers within this segment. This relationship creates an economical base and security for the small consulting firm. A large customer is achieved either through personal relations or through retention of a customer who has increased his consulting use to become a large buyer. However, this makes the small consulting firm vulnerable. If growth happens through a personal relationship with specific persons within the customer organization, the consulting firm is very fragile to restructuring which might take place in the customer organization. Relations to customers are decisive. As an example, we just lost our biggest customer the other day because the person who I have been working with left the firm. After six months of dialog with the two new persons, who were my contact persons in the organization, they finally decided on another consultant. CEO of a small management and event consulting firm (C/25:42) In addition to a certain degree of dependence of key customers, small consulting firms also face difficulties with the fact that their services are some what affected by high season and low season changes. It clearly makes business a little bit more insecure when there are periods where the firm only gets few or none assignments and this will affect investment in the long run. Slow periods must be made up for in busy periods, and the personal risk for the manager is high in slow periods. The key issue it to align the business model to the type of customer segment that the consulting firm serves. Therefore, it becomes highly crucial how the organization design of the consulting firm is put together. Development of new capabilities and competences in the small consulting firms does take place but it is not systemized. Often, it is centred on the founder or CEO and his already existing competences and interests. However, because the founder is often not capable of opening up for new influences, internal development is somewhat limited. This can become an important barrier to growth if management, responsibility and development are not spread out in the organization so that it is not only dealt with by the founder. On a strategic level with regard to development and growth I sometimes ask my self the question; do I have enough competences to carry this firm? My own competences can become a barrier. CEO of a small management and event consulting firm (C/48:15) 53

61 Stage one crisis The manager is both the factor that allows the firm to grow in the first place, but is also the barrier, which prevents further growth. Some managers realize this and some do not. We have had and still do have a managerial problem. There are some senior partners who do not give room for the young consultants. This has been our Achilles heel and is our biggest problem. Senior partner in a small strategy and operations consulting firm (B/26:40) I know that if I want the firm to grow then I cannot stay in the position where I am now. CEO of a small organization management consulting firm (A/04:10) The crisis, which must be overcome, is rooted in the founder s ability to let go of responsibility and power, and let other people have an influence in the development of the consulting firm. Only through this letting go can the small consulting firm be able to grow beyond the small size. As long as the founder will not give room for others in the decisionmaking process, future opportunities is limited to his competences. Either finding a complementary senior partner or the promotion of an employee to the rank of senior partner can be necessary steps for further growth. Opportunity driven growth further enhances the crisis, as the consulting firm cannot focus on any specific areas and plan strategically. The firm must overcome the glass ceiling of founder control and establish a grip in a specific niche in which in can leverage it current competences. This is certainly a difficult task but a very necessary one, because the foundation for the firm is created here. If this crisis is not overcome, it is most unlikely that the firm will grow beyond the small size category. Hence, overcoming the crisis lies in finding and adapting the right structure and design for the firm in which a professionalization and specialization can take place Stage two consulting firms These firms are founded by partners with different wishes for the future, but these partners have undergone a strategic change towards one common direction. In all the interviewed medium consulting firms, there have been not one, but several partners in charge and thereby these firms have overcome the management crisis evident among small consulting firms. Stage two consulting firms have managed to align the visions of partners and the services they provide so that the consulting firm, in some extent, is focusing on a specialized market niche. These firms have chosen which competences are to become core competences and capabilities in the search for future competitive advantage. The formal structure becomes heavier and demanding as it must be reoriented toward supporting the firm s capability to deliver the chosen speciality. Furthermore, as the firm grows in size and hires more 54

62 employees this also raises the demand of a well functioning structure that can account for more trivial things such as maternity leave and fixed working hours. Issues, which were not relevant in stage one consulting firms because of the entrepreneurial culture. Decision making is still residing with the founding partners who seek to achieve consensus before acting. Occasionally they consult with younger partners and employees on some major decisions, but this is more in the interest of sparring, more than actual participation in decision-making. The founding partners retain sole responsibility for devising strategy, hiring, evaluating and compensating staff. Compensation schemes are more formal planned than in stage one consulting firms, and account both for those employees who wish to put in a lot of work and those who work more moderately. Profit is still allocated among partners at the end of the year, and a part of this is reinvested into the firm. Grow is driven by a wish to create a viable, strong and independent consulting firm which is not shaken or threaten by consultants who change job, large customers who hire other consultant houses, or customers who demand large assignments. Furthermore, there is also a wish to make the firm independent of the owner so that the firm is not directly dependent of one to three key persons to secure its future. A central challenge is the move from being a small entrepreneurial firm where we three partners are a part of everything, to becoming a real-firm firm with middle managers, delegation of responsibilities and business areas which run without the founders being a part of everything. CEO of a medium sized communication consulting firm. (E/02:53) Growth processes The growth that has taken place in stage two firms can be characterized as organic growth. Organic growth represents true growth for the core company and at this relatively early point in their lives, stage two consulting firms are still too small and internally focused to grow through acquisitions or mergers. The rate of organic growth indicates how well management have been able to leverage internal resources and competences to obtain growth. This type of growth is essential in order to have a strong and well-founded resource and competence base to build future growth on. We have reached the size we have now by organic growth and by gathering key persons in the firm. The prerequisite for us to grow is the way we organize the firm more sharply towards some key business areas and where some employees, on a higher level, takes on responsibility for developing these. This is the process we are currently dealing with CEO of a medium sized strategy and management development consulting firm (F/06:00) Hereby, the foundation for future growth can be created on core competences and developing them into strategic business areas. The key to achieve growth in this stage is to align the consulting firm so that structure, strategy, and employees come together around these areas. It becomes necessary for the firm to restructure around a number of strategic 55

63 business units. The interviewed stage two firms all had three core business areas, which constituted the focal point of their strategy. Employees are clearly delegated so that they focus their knowledge in one key area instead of drifting around between different types of projects. This sharp focus on key business areas creates focus, and allows the firm to build a better structure for developing routines and sharing knowledge. There starts to be a bigger meaning with what we are doing. We cooperate more and more, there is a pattern in the type of assignments we solve, and this lead to the fact that we needed to become sharper and therefore, we created three clearly defined business areas You will see a clearer company profile forming in the future. CEO of a medium sized strategy and management development consulting firm (F/16:50) Furthermore, stage two firms have managed to grow via balanced growth. Contrary to stage one consulting firms, there is not a direct dependence of one or two major customers concerning economic security. Instead, these firms have managed to create a broad customer basis by maintaining a focus on those sector markets in which they are strong and then leveraging competences to new sector markets. The above growth tendencies create a clear view of consulting firms, which are very much conscious of devising and following a specific strategy. Growth is, to a much higher degree, driven by focus considerations as opposed to opportunity driven growth. In general, growth happens layer by layer, and it is continuously adapted towards and supporting a clear strategy formulation. Hereby, there are from time to time assignments that stage two consulting firms turn down because either it does not fit with the core competences of the firm, or it will not contribute with new competences, which are relevant in relation to firm strategy. Finally, delivering a poor solution might jeopardize firm reputation. Stage two firms are driven by identification of strategic openings, market considerations, and positioning. That is, the founders of these firms have not started the firm with an idea of doing general consulting work but instead with an idea the somewhere in the consulting market there was a strategic position open; a specific area which the firm could specialize in and which, in effect, would shape the strategy and direction of the firm. This choice of position and business focus translates into the rest of the firm, and affects the organization design of the firm so that there is a fit between strategy, structure, and market position. We have a position in the market which means that we are somewhat different from our competitors We primarily consider this an advantage because we, compared to the classic PR firms, are experienced to be different. We can be in competition with COWI, PriceWaterhouseCoopers, freelance journalists, IT firms and many different firms because we are placed in between different professions. Our customers and we see this as an advantage. This is combined with a couple of areas where we are market leaders Finally, we have chosen a price concept and business model that is a little different We charge a price, which is 56

64 somewhere between freelance agents and the established consulting firms This has the advantage that we can provide our services cheaper and in a longer duration of time. CEO of a medium sized communication consulting firm. (E/02:53) When the consulting firm has decided which core business to pursue it furthermore becomes possible to plan and organize sales on a more coherent level, as opposed to the shot gun sale approach adopted by stage one firms. Thereby marketing efforts, pricing and markets can be controlled and targeted much more directly. The firm can create a much sharper image and establish cross sales of its services. The fact, that stage two consulting firms position themselves deliberately in the market means that they can relatively easily find and hire new employees, which is a necessary condition for maintaining annual growth rates at about 20 percent. The interviewed stage two firms did not find it particular difficult to employ the necessary amount of people because they attract people from various educational backgrounds and not just one specific type of people. Systems for monitoring and evaluating performance are slowly being implemented. These systems supply management with information on activities and how ideas and knowledge diffuse through the firm. Furthermore, these systems helps management creating an overview of knowledge and development needs and keeps track on the firms stock of human, physical, and intangible resources. Obviously, a carefully developed compensation system also supports the recruitment process and plays a major role in attracting the right employees. Growth barriers A condition for a firm to be able to follow and carry out a defined strategic business plan is a focus on the role of management. Obviously, as the consulting industry is a people business, and because much development happens as project learning and on-the-job training where senior partners is in charge of a project and act as role models for younger consultants, managers play an important role in the field as consultants. More weight on the CEO role is a condition for taking the next step and this is where we are now Our ambitions with growth are conditioned by that fact that we, who do have formal management tasks, deal with this to a larger extent: Strategic recruitment, employee development and continuous development. CEO of a medium sized strategy and management development consulting firm (F/03:30) However, managers focus a lot of their time on selling and producing. This means that they do not spend sufficient time on the professional management of the firm. There is a great focus on the consulting trade among managers and not so much on the managerial aspects of running a firm. The consequence is a lacking focus on strategic aspects and development of mid-managers level, which in the future can be put in charge of business 57

65 areas. This is very much in contrast to the increasing need of coordination and control, which stage two firms experience. Hence, a growth barrier lies in the do-sell cycle which management easily becomes trapped in. On one side we have a professional and planned progress we try to follow so we are not blind or fumble our way forward. However, on the other side, then we are still a firm where management is in the field and producing. This means that the resources to deal with these things [strategic decisions and challenges] sometimes lag behind. CEO of a medium sized communication consulting firm. (E/04:20) Even though, stage two firms have grown substantially since the start-up phase there is still a lack of critical mass, both in the organization as a whole and more pronounced in the business core areas. This means that there is always a managerial deficit. Competences are stretched and continually under pressure, so exploring new opportunities becomes an activity, which is seldom undertaken. In continuation, growth by diversification becomes very difficult as all resources are engaged in current activities. There is a lack on a formalized system or processes to explore new growth opportunities and in turn, these often pass by unnoticed. We had our core business and then we tried something different. This went completely wrong. There was no synergy and we could not get our competences to work together. We have to grow competence wise layer by layer as long as we have the size that we have. We simply lack volume and economy to enter completely new areas. CEO of a medium sized communication consulting firm. (E/18:06) As stage two consulting firms experience growth they inevitable grow in size. This entails stress on the organizational structure that is felt at all levels. Management experience the increase in size by the fact that they have less control over what happens. Suddenly, they are not in daily contact with every consultant and lose touch with operational matters. Therefore, as size increases there is a need to formalize coordination across business areas and assure the information travels through the firm. Employees, on the other hand, experience this size increase as well. Where many consultants have chosen not to work in large consulting firms because of a more rigid structure, a change is happening towards this. Employees have much less leeway in their activities and their job descriptions are specified to a much higher degree. Often, they are attached to a specific business area in which they must develop their knowledge and routines. In general, it means that the firm becomes more formalized and complex and looses some of its charm. In this respect, there is a growth barrier in the duality between maintaining a flexible and entrepreneurial firm, while at the same time struggling with the need of developing a professional and viable firm. 58

66 Stage two crisis The foundation of the next crisis is created by the process, which the consulting firm has gone through in stage two. Through a continuous focus and specialization, the firm has become very dependent on a few core business areas in which it offers superior value. However, this also means that the firm becomes unable to respond to changes in customer requests or new growth opportunities. The firm simply does not have the necessary range of in-house services or consultant capabilities for expansion. The crisis is two-fold as it concerns the development of new services but also establishing a capable staff. Because the managers have been caught in a do-sell cycle some aspects have been neglected. Mid level managers, the development of new capabilities and knowledge and service diversification. Therefore, the crisis that must be overcome is in developing the firm into a real firm while exploring new opportunities for diversification Stage three consulting firms A group of three to four people who were previously very skilled and successful consultants in other large consulting firms founded these firms through partnerships. However, where these firms are markedly different is in the fact that they, from day one, had a clear-cut vision and idea of how to get there, formed by a consensus among the group of founders. The founders have identified strategic positions in the consulting market, which offer unique opportunities and allow their firm to grow. Furthermore, because the founders were a group they have been able to draw on each other s skills, and thereby obtain synergy effect in the very early stages of the start up. Investments have been made in advance, in order to be ahead of the expected growth and development. As a stage three firm grows and becomes stronger, both financially and with reference to resources and capabilities, it gradually starts to broaden its services and maybe opens offices in other cities. Employees specialize in practice areas and young and newly qualified consultants are hired. This allows the firm to take on large projects with lower priced staff and thereby improving the economic advantage of the firm. Furthermore, it allows senior partners to focus on strategic management. Training programs, knowledge sharing and compensation schemes are elements which are adapted and improved to fit the growing organization. However, to support the increasingly diversified firm a decentralized structure is adopted which delegates responsibilities and improves career opportunities. In the end, the true stage three consulting firm can be described as a full-service provider, but also as a firm with several small independent, and to some degree, detached business areas. Growth becomes a competitive parameter that is highly critical for the future of the firm. Only through high annual growth rates, and preferable rates, which are higher than 59

67 the industry average, can stage three consulting firms continue to develop and attract new employees. Experiencing high growth then goes from being an organizational goal, to being a necessary component for large consulting firms in order to stay competitive relative to the other large and international consulting firms who operate on the Danish market. There is no doubt about the fact that the general growth in Denmark will drop. We are used to growth rates of up to 35 % and this can not continue. However, it is a clear goal for us to have a significant growth and a growth higher than the rest of the market. And it is not supposed to be a growth rate of 7 %, no; growth has to so high that it creates opportunities for people. In this type of firms, if we do not grow, then employees will leave If new opportunities are not continuously created then the most talented, who aspire for the next level, cannot move on. CEO of a large strategy and operations consulting firm (H/08:20) Growth processes The successful stage three consulting firm is characterized by having a strong and cohesive organizational culture through which it enables and motivates its work force. That is, these firms manage to build a significant organizational capability through culture, which acts out a significant role in reaching the objectives of the organization. Therefore, it is highly critical for these firms to direct management efforts towards this area. Managers openly emphasize and talk about firm culture and its beliefs. Important here is that the culture of the firm must continuously be articulated, not only in talks and speeches but also in direct actions. Through initiatives, employees are given a high degree of responsibility over important elements of the organization design. Once responsibility and agreement about these elements are reached, employees become vocal advocates of the firm s culture and beliefs. Two years ago we introduced process owners. A process owner is someone who have the responsibility of developing and running a certain process in the firm; quality management, recruitment, culture, education and training etc. Large or important management posts. Some consultants choose to wear that hat and undertake a managerial responsibility. CEO of a large strategy and operations consulting firm (H/27:40) A strong organizational culture supports the entrepreneurial drive, which resides in the type of people who are hired into stage three firms. A common characteristic for these people is that they undergo a thorough screening process in order to make sure that they fit with the organizational culture and that they have an entrepreneurial capability. This entrepreneurial capability, which is equally important at all levels of the firm, foster new ideas and improves the dynamic capabilities of the firm. When a stage three firm manages to create or improve the entrepreneurial capability among its employees to change existing routines and practices, the firm will leap towards new capabilities and thereby a wider set of growth opportunities. 60

68 In reality this has been the basic model; not thinking in professional areas but thinking in persons and creating the settings in which the individual can get energy and support and become motivated to work on what one is enthusiastic about For example the SAP area which is actually a very peripheral area in our firm has been carried by a contact to a few, like all other in the firm, truly dedicated persons. Partner of a large strategy and operations consulting firm (I/04:20) Based on an accumulated stock of knowledge and resources combined with a highly entrepreneurial management and workforce, these stage three firms manage to diversify. The interviewed firms provide consulting services in up to twenty different areas that are all related to the core competences of the firm. Related diversification becomes a powerful mean to achieve growth and consolidate the firm as a full-service firm. However, equally important is also the unrelated diversification that takes place. As these stage three consulting firms work for and with the most important firms in the country, they get a firsthand impression of new growth opportunities and how these can be leveraged via unrelated diversification. Some of the business areas which we have launched move away from consulting and into doing. Further down the hall there is a product development centre, not consulting, they do actual product development Where we can see that our customers have problems with critical mass, consulting does not give any meaning We want to take in the executing part which some of our customers cannot lift. CEO of a large strategy and operations consulting firm (H/20:00) Traditionally, unrelated diversification in knowledge intensive industries, such as the consulting industry, has a low chance of succeeding because of the risk of overextending employees and diluting resources. However, growth via diversification demands that senior managers ensure that firm resources travel to their most productive areas. One way of dealing with this is to create strategic business units within the firm. These become small relatively self-contained sub-units, which are managed by younger partners with a high potential for the future. In order to keep the large firm as decentralized as possible, these business units are responsible for important aspects such as obtaining new clients and developing the unit s employees and capabilities. These large consulting firms typically employ 50 or more consultants and have critical mass in some areas of their business. Critical mass is used to describe the existence of a sufficient momentum in a system, such that the momentum becomes self-sustaining and fuels further growth. Hereby, volume becomes important, as it is necessary in order to achieve critical mass. We have a vision that we want to leave footprints and this demands that we are good at what we are doing and enough so that we can deliver heavy and solid all the time, that is a critical mass in what we are doing. CEO of a large strategy and operations consulting firm (H/12:00) 61

69 Providing consulting services of high quality, in turn becomes self-sustaining as firm reputation is gradually spread by word of mouth, through references and by branding. Thereby, elements from industrial organization become a more important factor, such as market leadership and power. By broadening knowledge of the firm and reinforcing reputation, a large consulting firm can become the preferred consulting supplier. Customers are under pressure not to choose low quality consulting firms, which do not deliver. When consulting firms reach a significant size, it also becomes possible to engage in growth measures more characteristic from industrial organization. Large consulting firms acquire small 2-5 person consulting firms because they have a specialization, which fit well with the overall business areas. However, large acquisitions and mergers are not common. Furthermore, growth takes place as sequential steps in which the firm slowly develops without offsetting its current capabilities. This can be both by adding new complimentary services and by establishing new offices in different geographical locations. The same process is used in relation to internationalization where the large consulting firms slowly establish offices in the Nordic region and subsequently in Asia or Eastern Europe. Growth barriers As the stage three firm grow to a size of employees it becomes difficult to maintain the unique culture and entrepreneurial spirit from the initial stages. Because the firm are specialized in several self-managing business areas with their own operational manager and assigned consultants, these business areas start to resemble small profit centres within the organization. Incentive schemes conditions these profit centres to behave in a manner where they act and think independently and hereby develop their own sub-culture. A result is a lack of coordination across business areas, different approaches to customers, and difficulties with sharing personnel for large projects. We have a lot of small business units And unfortunately this is reflected on our web page and shows that we consists of a lot of small groupings more then it is an expression of our business areas. In general we do not have 32 different professional areas but only four. Partner of a large strategy and operations consulting firm (I/58:20) Because of the lack of shared firm culture and approach, some employees might find that the firm is loosing some of the informality and charm they initially appreciated. If incentive schemes are not designed in a manner, which accounts for both those employees who want to work hard and those who also want a fun job, some employees will not accept the increase in organizational complexity. Furthermore, those mid-level consultants who have held managing positions will expect to be rewarded either by promotion to partner or through a higher salary and development. If the firm does not manage to sufficiently motivate its 62

70 employees, they will begin to leave for other consulting firms that are smaller and allows for more individuality or better career prospects. Internally it is a constant challenge to maintain an attractive place of work; to keep it fun and at a high standard. But this is a derivative of growth and being as large as we are. Partner of a large strategy and operations consulting firm (I/04:20) As already discussed, managerial pressure increase along with an increase in firm size. The managerial workload becomes larger and larger, especially if management still wants to maintain a role as producing consultants. Consequently, managers become the factor, which inhibit growth because they are constantly in deficit. That is, up until a certain point it was been sufficient that it only was the management group who developed and planned ahead for the firm. Mid-level managers where responsible only for operational decision-making. This was possible because managers were able to maintain an overview of the entire organization. However, as this is not possible anymore, the consulting firm risk overlooking important growth opportunities in their respective business areas because they have not direct control or insight of what is happening. Instead, the mid-level managers who are in charge of a business area must use the insights, which are gained through customer contact to explore new growth opportunities, and not only worry about the completion of a project. Hence, if management does not establish a food chain of new managerial talent that are capable of thinking strategically and not only operational, then this will naturally impose a growth barrier. Management will become overburdened and miss growth opportunities. The issue of cultivating strategic managers who are not only operational managers is important. When we were only eighty to a hundred employees, we could manage with the fact that only a few people had strategic vision, me as one of those, and then many very skilled operational managers. But where we are now then it is necessary that the managers of our business areas are in fact thinking strategically and are capable of developing their own businesses. CEO of a large strategy and operations consulting firm (H/05:15) An important element in the future growth of the stage three consulting firm is internationalization. Through a broadening of the geographical scope, the firm can overcome the natural barrier, which the relative small Danish market constitutes. However, this is not an easy task, as there are no guidelines or best practice for internationalizing a consulting firm. So, in this context, stage three consulting firms actually behave as stage one consulting firms but on the global market. That is, the largest and most successful consulting firms in Denmark are slowly trying to establish themselves in other countries through a trial and error approach which very much resembles the opportunity driven growth characteristic of the initial phases. 63

71 Therefore, as long as the stage three firm has to struggle with finding the right growth recipe for the international market, this can constitute a significant growth barrier. How we in actual fact handle this challenge, I am not sure we fully realize yet. We try some things and we launch a lot of ships but in reality we do not know how to deal with this so far. CEO of a large strategy and operations consulting firm (H/07:00) Stage three crises The crisis, which must be overcome by stage three consulting firms, is in creating a one-firm firm. Attempts to diversify the firm and to bring in new units that have not been fully absorbed in the firm have created a firm in need for a common culture and approach to the consulting trade. However, this is complicated by the firm s attempts to internationalize, which furthermore runs the risk of fragmenting the firm. Hence, the objective for the stage three consulting firm is to re-unify the firm and identify a sensible way to broaden geographical scope without creating more units that are disjointed. The notion of the one-firm firm must be translated down through the hierarchy so that all employees, especially mid-level managers, act towards this goal. If this does not happen then the firm runs the risk of organizational inertia and eventually of breaking-up Concluding remarks on growth development The three growth stages correspond to a series of internal crises related to management, control and organizational coordination. The resolution of one crisis sows the seeds of the next crisis and hence, suggests that growth can only take place trough organizational development. On clear finding from evaluating growth across size, is that firm growth is dependent of the developmental capabilities of firm managers. Hence, management plays a pivotal role. Furthermore, as the consulting firm grows and develops it resembles a professional firm more and more. That is, the managerial and organizational side of the firm develop the small owner-managed firm to a professional firm where strategy and management are essential. An overview of the suggested life cycle development and related managerial issues is presented in appendix Q. Finally, it is important to consider the limitations of the analysis of growth development. Developmental change did not take place through abrupt changes, but instead as a continuous process accumulated gradually and incrementally over time. The interviewed firms have also moved back and forth in their developmental stages and it is never a hundred percent clear where a firm is placed. Development on the individual firm level has most often been a result of small and less obvious incremental changes and the manager s perception of these. 64

72 5.3 Growth processes The final step of the analysis evaluates significant growth processes and strategies that have been used by the more successful management consulting firms. On the surface, the nine interviewed consulting firms seem different; they have different competence areas and customers, vary in size and scope, and appear different on the market. However, there seems to be some underlying and shared processes, which enable growth and success Culture Consulting firms are, like all other organizations, social communities and they develop a firm specific organizational culture and behaviour. The culture in a consulting firm is, however, some what different from traditional firms. There is only a limited amount of formal rules concerning problem solving, and often consultants spend a lot of time in the field without close supervision. Without a clear and present hierarchy, there is always the risk that employees act in ways, which are contrary to firm strategy. However, the more successful consulting firms are characterized by having a strong culture, which serves to reinforce the alignment of strategy, and internal practices with the way employees act. From day one, new employees are lead trough an introduction program that teaches them the values of the firm s culture. The whole issue around culture is important. No unnecessary bureaucracy It has to be fun - we want to be mean something for each other, create energy and be informal This we are often credited for by employees who arrive from other consulting houses. Partner of a large strategy and operations consulting firm (I/04:20) Culture refers to the set of beliefs employees hold about how they are expected to behave and what values they are to share with fellow consultants. In these successful consulting firms, there is a strong culture, which means that beliefs and values are shared and accepted across the entire organization. Even though, it is difficult to specify the beliefs of each interviewed firm as they obviously vary some common themes are present across successful firms. The importance of the consulting trade, work has to be fun but solutions always of a high quality, and the firm is a unified community are three important beliefs that carry across the successful firms. The managers of a successful consulting firm actively reinforce firm culture and beliefs in their daily work. Through formal and informal talks, participation in large projects, and mentoring they shape it by their behaviour and decisions. Hence, managing culture becomes an important growth process both in the alignment of the firm, but even more in periods of change where effective cultural management can create the foundation for moving in a new direction. 65

73 5.3.2 Entrepreneurship Entrepreneurship has been a characteristic across all the interviewed firms. However, there were significant differences between the more successful consulting firms and the less successful consulting firms in two areas. First, among some of the interviewed firms entrepreneurship resided only with the founder who especially in the start-up phase was capable of carrying out different ideas and develop the firm into a small business. However, as the consulting firm has increased in size the founder has become overburdened as he maintains sole control over decision making. Thereby, instead of challenging existing routines and practices the founder has emphasized what currently works in the firm. Consequently, the firm becomes entrenched in status quo and the founder changes from being an entrepreneur to simply a manager, and is more concerned about survival as opposed to growth. In the more successful firms, entrepreneurship did not reside only within the management team but in the entire organization. That is, all levels of employees have entrepreneurial characteristics, and when new staff is hired, entrepreneurship is one of those traits that are screened for. Hereby, it is secured that an entrepreneurial capability is broadly present and supported in the firm. First of all, a consultant has to be well founded in the consulting trade but it is also a prerequisite that all consultants, especially those who advance in the firm, wish for things to develop around them. The project just solved and the reference just gained, where can these bring the firm in the future?. CEO of a medium sized strategy and management development consulting firm (F/22:00) Second, as entrepreneurial skills are very much dependent of previous business experience and knowledge accumulated in earlier consulting jobs, the interviewed managers display different entrepreneurial competences. The greater the entrepreneurial skills of management, the more diversified the growth path, which they can embark on. As a greater range of services and unrelated business areas are explored, there is an increasing need for entrepreneurial flair and managerial ability to maintain organizational coherence. Finally, it is important to acknowledge that the consulting industry, to a high degree, is a person-driven industry. That is, firms, ideas, visions and development happen mostly because one individual has the commitment to initiate something new. Hence, consultants are highly educated and most often highly experienced individuals who are not easy to manage. Instead, they manage others - their customers - by advice and counselling and are probably not always good at receiving advice and guidance from others. This implies a significant challenge on the human resource area concerning how these people are best managed. 66

74 5.3.3 Strategy The most successful consulting firms separate themselves by the fact that they have a clear and well-defined strategy, but even more so in their strategic execution. There is an actual and detailed design of the firm s strategy, which entails positioning, market focus, service focus, financial objectives and characteristics of employees. Thereby, these firms are capable of forming a strategic plan that typically covers the next three years, but more important, they make it happen. Management decides the specific way in which their consulting firm is to compete against other equally strong consulting firms in the market. The strategy, which is devised, is not oblivious to competitors and market. Instead, these elements are aligned through a series of clear and focused goals. The less successful consulting firms were characterized by having only a vague idea of how to run their firm. Furthermore, they are more motivated by that of being in the consulting industry, as opposed to the actual professional management of a consulting firm. Through communication of a clear and focused strategy, the more successful firms create a strong strategic identity, which in turn is reflected in the behaviour of all employees throughout the firm. Hence, it becomes a guideline, which works in relation to firm culture, and leads to a broader and deeper understanding of why the firm are offering some services and not others, and in turn, which growth opportunities fit with firm strategy. Furthermore, customers who can better understand what the core competencies of the consulting firm are also recognize a strong strategic identity. Taken together the more successful consulting firms are better at positioning and focusing their resources and competences and thereby avoiding strategic drift. I believe that you have to set clear and focused goals. You have to follow a strategy and make a conscious decision, which all employees agree on Where do we want to be in three years? Everybody must shake hands and agree on the direction. That spirit must reside in the firm It you have the right position and the branding then I do not think that you, as a consultant firm, will be affected that much by economic fluctuations. CEO of a medium strategy and IT management consulting firm (D/32:10) Consequently, strategic driven growth is characteristic of the more successful firms, whereas opportunity driven growth is characteristic of the less successful firms. It is very clear that the more successful firms consider the management of a consulting firm more in the lines of professional firm management consisting of a board, a CEO, and mid level managers. There is a focus on the development the managerial qualities necessary to achieve growth and not just a focus on being good consultants. 67

75 5.3.4 Resources and competences Resources are pulled into the firm according to what might be called an inverse competence pyramid. The majority of consultants, which are employed, are in the age of 40 and above. These people are characterized by having at least 10 years of experience from other consulting houses or industries, they know their trade, and have a substantial educational background. The interviewed managers find that seniority, experience and robustness are important for customers, and hence only employ a limited amount of young consultants and newly qualified candidates. Obviously, if a firm is to deploy young consultants it demands that some of those assignments the firm solves are of a broad analytical character. In the face of the relative strong lack of labour, it clearly becomes imperative for consulting firms to attract the best people. Here, the largest consulting firms have an advantage because they offer more opportunities than the small consulting firms do. However, small consulting firms are quite able of attracting these stars as well, simply because they offer more flexibility and influence. This raises a question of what it is that makes these people or resources unique to the extent that they can enable and sustain growth for the firm. Some consultants have a large customer network that is tied very closely to their person. That is, if they move from one firm to another then they are able to bring along almost all their customers, which will mean that a significant amount of customer capital is injected into the new firm. In addition, some consultants are perceived as gurus in the industry, and can in that manner supply the firm with something unique. Another way to bring uniqueness into the firm is by the use of certification. Although still not very recognized in the Danish market, some firms adopt a strategy, which necessitates that all their consultants must be certified and even best of class consultants. This allows the firm to send a clear signal to customers about the perceived level of quality. Finally, some consulting firms employ some business and economic majors, but also make sure that their resources pool is heterogeneous by employing candidates from other various fields. These untraditional consultants have the capability to develop competences, which are novel, and allow new opportunities to be explored. The above-mentioned strategies for attaining and deploying resources in a manner that allows them to become heterogeneous are characteristic of the more successful firms. That is, consulting firms have to ensure that the resources, which go into the firm, its employees, are developed into something unique, inimitable and valuable for the firm. This happens by fitting these resources to the strategy of the firm, its culture and organization design. Hence, it is not possibly for a consulting firm only to differentiate on having good consultants because the competitor will most likely employ people with the same level of skills. 68

76 The industry has in general become much more professional. There are many really skilled consulting firms and on some fundamental level, we all have the same capabilities. When I were in Rambøl in the 80s we got by on the fact that we were better educated than our competitors, we could make reports and analysis that made the angels sing However, today several firms can do this so here we cannot differentiate ourselves. Where we instead need to differentiate is through a different twist or approach to the market. CEO of a medium sized strategy and management development consulting firm (F/36:40) The consulting industry is now doubt a very knowledge intensive industry. Consulting firms are in the business of appropriating intellectual insights from smarter clients, and then broadening, branding, and providing it to the more needy clients at a premium price. Another difference between the more and less successful consulting firms is the efficiency with which knowledge is created, selected and distributed. Those mechanisms, by which employees discover and develop new knowledge, go beyond the individual intellect and touches upon the utilization of organizational learning. Development happen trough the projects we solve. It might sound a little cynical, but this is the way it is, no matter what people might say. To be able to secure that we are a knowledge firm where development is incorporated in the daily routines by engaging people who have the basis for solving an assignment, but are maybe stretched competence wise is where the primary development happens. You can send them on a lot of courses but it will not give as much as if you are able to build that mechanism into the firm. CEO of a medium sized strategy and management development consulting firm (F/28:35) We use professional knowledge teams, development of different concepts, weekly meetings with professional knowledge sharing and development, seminars three times a year There is a clear cut focus on professional development. CEO of a medium sized communication consulting firm. (E/37:50) Routines and processes are systemized and embody the skills of the organization. Knowledge resources and processes become heterogeneous within the firm as it develops, coordinates, and exploits those general resources which management choose to pull into the firm in the shape of employees. The learning-by-doing process means that the firm is always adding to its existing stock knowledge. Capabilities, which are created in a systemized manner, are so through subtle relationships that depend on the way information and knowledge is shared and exchanged throughout the firm. Over time, the firm will accumulate an excess stock of knowledge resources which the reasonable manager will seek to realize into new and related profitable outlets. Hereby, the consulting firm is able to create capabilities which rivals will find difficult to duplicate, as they resides on specific resources and knowledge that are tacit and as such, only valuable in the firm. This accumulation of heterogeneous resources is reinforced by strategic recruitment. Largely, it becomes difficult for consulting firms to stand out based on professionalism. Instead, it is important to hire the right people at the right time. That is, it is not necessarily another typical consultant who is well founded in strategy or operations 69

77 management who will benefit the firm most. The crucial issue is to employ people with skills that can leverage what the firm already exceeds at, and then through a synergy effect, explore new opportunities and ensure that dynamic capabilities are developed. Where we can differentiate ourselves is that we in some areas have a certain twist to the market. We try to take in different competences For example, we have a rhetoric employed, and the meaning is not that she is supposed to be as the rest of us in six months. No, it is to maintain what she can actually do and that we can use this in our management development program. CEO of a medium sized strategy and management development consulting firm (F/28:35) The factor market A consulting firm might have an appropriate strategy, but unless the right employees are present to deliver on that strategy, it is of no use. It is a fact that the pool of potential candidates is larger in density in the big cities in Denmark. Thereby, some firms have an advantage in attracting the right people because of their geographic placement. In addition, several of the successful firms have attained employees in lumps from large international consulting firms, because they have been able to match and exceed either salary or developmental perspectives. Obviously, in order to do this, a consulting firm has to be large and professional enough to compete on this level. Hereby, some successful consulting firms profit by the fact that young candidates are trained in the consulting trade in large firms such as Accenture, Mckinsey or BCG and then snatch them when they are experienced. Conditions for competence clusters are present in Copenhagen and Århus. Furthermore, both areas have more or less direct access to higher learning institutions such as Copenhagen Business School etc. Furthermore, the concentration of industries is very high meaning that customers are in close proximity. Finally, consulting firms in these two areas have a more direct access to knowledge heavy public institutions such as DMR. However, because the management consultant industry is relative new and at the same time a very knowledge intensive industry, firms only cooperate at a very limited degree. This means that the potential benefit of competence clusters are not fully realized at present. It is difficult to cooperate in this industry because a consulting firm will always use an assignment to build its references and its customer capital. It demands a high degree of maturity in order for the parties in a cooperation constellation to be loyal. I have burnt my fingers on this many times!. CEO of a medium sized strategy and management development consulting firm (F/50:45) The product market External conditions on the product market affect growth at the individual firm level, but only to a limited extent when compared to other more traditional industries. When perceived by the interviewed managers, the general perception is that the product market serves to either 70

78 moderate or accelerate firm growth, but that real growth development has to come from within the firm. Hence, the industry is characterized by only paying little attention to market structure, competitors, and positioning issues. This can have the affect that external changes are overlooked, which inhibits growth. Among the more successful firms, there is an agreement upon the fact that an economic cool down will mean a further consolidation of the market. Those firms that are perceived to be in danger are the less established consulting firms. This reason for this is that customers cannot afford to choose consulting firms who do not deliver the best quality. Thereby, there is a perception of survival of the best in the industry. The interviewed managers do not perceive the general competition to be tough and competition is often limited to the strategic group, which the individual consulting firm operates in. Often the interviewed firms are in competition with the same 5-6 firms, among which competition, however, is very hard. Hence, many consulting firms exist without a broad knowledge of incumbents and their development, especially the less successful. It is an industry where you do not know much about the competition. I really do not know what the others are capable of We do not deal with competitors strategically because of two reasons; a lack of insight in to what is important and a lack of resources. CEO of a small management and event consulting firm (C/01:08:05) That is, competitor analysis is not applied to a great extent. This also means that consulting firms compete on quality and references but not price or quantity. However, as already touched upon, the more successful consulting firms are those who have managed to position themselves strategically, and thereby leverage their superior quality even further. Competition wise, the more successful consulting firms have managed to position themselves just below the range of the large international consulting houses such as Mckinsey and BCG. This allows them to demand a premium price without rents being eaten by competition. Customers have increased their bargaining power and consulting firms experience this through less loyalty, more price bargaining, and incomprehensible buying patterns. This places more focus on the consulting firms ability to leverage existing customer relationships and use these to support the strategy of the firm. Especially, the less successful and small consulting firms are suffering under this change in power as they are much more dependent on one or two large customers. In line with the lack of labour, which have been a core issue in the past years, consulting firms experience that employees demand more. This is in terms of a higher pay, better development, and carrier opportunities, while they at the same time demand a balanced work life. This underscores how difficult it is for consulting firms to find the right people and fit these to the firm strategy. Because Danish consulting firms primarily employ experienced 71

79 consultants there are no formal training programs as in the large international consulting firms. This means that it takes longer time to educate new employees in the specific routines and ways of the firm, and therefore it is crucial that they are retained for a longer duration of time. As customers become more professional in their consultant handling they also gain more insight in the consulting trade. Consulting firms increasingly experience that they are opted out because large customers develop their own in-house consulting units. Furthermore, there is a pressure from those consulting firms, typically the large international ones, which deliver standardized services based on tools or frameworks. As the industry is still characterized as very non-transparent, despite efforts from both incumbents and organizations such as DMR, entry barriers remain small. This means that established consulting firms can suddenly be in competition with a small oneperson firm. Hence, customer references only create entry barriers to a certain extent. As long as there are no general support for certification in the industry and only a fraction of the entire amount of consulting firms are members of DMR, it will be relative easy to get established on the market. However, once established and recognized it becomes difficult to change the image of the consulting firm and choose a different path. This implies a high degree of path dependence concerning those choices that are made in the initial phases Organization design The interviewed consulting firms displayed different organization designs on various aspects of decision-making power, coordination and incentive systems. The key insight from the analysis of these various designs is that it serves as a competitive advantage and strategic variable. Several core issues of the organization design specific for consulting firms were identified. These core issues can be viewed as continuums where the consulting firms place themselves according to their strategy, core competences and place in the market. It was obvious that the more successful consulting firms managed their organization design in a way, which employ and develop routines and systems that encourage risk taking, learning, and flexibility and enables the firm to create value as goals vary with changes in the external environment. On the other hand, among the less successful firms no conscious choices or decisions where made as to which direction the firm is going to develop in, in the first place. Hence, in these firms the organizational structure was less consequent, and as such not able to carry out its function. Herein lies the difference between sustaining a growth path and determining the path in the first place. The various core issues of the organization design are outlined below and an overview can be seen in appendix R. 72

80 Authority structures for controlling decision-making processes can be placed on a continuum ranging from a traditional partnership, over a construction with only a few partners to a perfectly professional management. The more successful consulting firms have separated ownership from the professional management of the firm. In most firms, this has happened by appointing one of the partners as CEO and at the same time limiting the amount of partners to 2-6 people. The less successful firms still operate with a partner structure, which seems to inhibit growth by less risk taking, less innovation, and by maintaining a very centralized structure. In general, there is a tendency for the more successful firms to move away from the partner concept, and instead focus on the professional management of the firm as a precondition for managing growth. One firm even followed this process all the way through by abolishing the partner concept and hiring a CEO from outside the firm. The SWOT analysis showed that the challenges the firm was facing with regards to growth, was the fact that it was the owners who were in the board, it was the owners who were partners, and in reality it was the partners who yielded influence on daily operations. This was one of the reasons why growth did not take place. There were simply too many considerations to be made in the partner circle, there were no risk willingness One of the most important things which happened in the new strategy course was the abolishment of the partner term and a reconstruction of the firm commercially with me as the CEO. CEO of a medium strategy and IT management consulting firm (D/08:40) The employee structure can range from many permanent employees and only few freelance consultants to very few permanent employees and a large network of associated and freelance workers. The advantage, as stated by those firms who make great use of freelance consultants, is a cost advantage as they only have a staff to pay when they are actually working on projects. However, this also raises the need contracts to ensure that both parts are not subject to moral hazard or opportunistic behaviour. Hence, this constellation demands an organizational structure where systems for coordinating, monitoring and evaluating performance are in place. The more successful firms employ freelance workers with the perspective of employing these at a later time. Incentive systems to reward individual performance range form a high level of bonuses, performance pay and provision to fixed pay. The more successful firms have managed to create an incentive system, which incorporates the best of both ends of this continuum. In order to attract and retain the best people these systems accounts for those who wants to work hard and long hours, and for those who want to balance their work life with their private life. The development of routines and thereby ways in which new knowledge is generated and defused is to a great extent dependent of the consulting firm s strategy. The key choice is between standardized solutions and project based solutions. The first, assure the firm 73

81 has consistency in its problem solving, where the latter allows for a larger range of tasks to be handled. It is not clear which end of the continuum the more successful firms are in however, it is clear that these firms have made conscious choices about this and incorporated this approach in their overall design. The more successful consulting firms have formal introduction programmes and training/development systems, which serve to generate both new knowledge, but also to shape resource and knowledge flows. Consultants are expected to devote a specified amount of days on individual development, as well as participation in research and publications is appreciated and awarded. Contrary, development in the less successful firms happens on a very informal basis, and primarily, through on-the-job training and different emerging opportunities. All the interviewed consulting firms employ senior consultant with a vast experience and educational background. Using this strategy, consulting firms strive to be identified with thought leadership and high quality in their solutions. Only a few of the largest consulting firms employ students or people who have recently finished their education. This means that they can delegate less demanding work to lesser-paid employees. However, the chosen competence level must fit the rest of the organization design, such as whether or not a firm provides standardized or tailor-made solutions. The less successful firms have not made this distinction. The main finding behind the organization design of consulting firms is that it reveals several opportunities to differentiate from competitors. The crux seems to be to select a direction for the firm, aligning strategy, and then create organizational coherence through the design. The less successful consulting firms were clearly those where the organization design was not aligned with a growth strategy for the firm. 5.4 Summary of analysis From the analysis of growth in the consulting industry, a number of important issues and challenges are raised. A change in the size and division of value in the industry has taken place. Development in consulting firms is challenged as it often touches upon some managerial characteristics, which are strongly embedded in the firm. A clear-cut focus on strategic growth as opposed to opportunity driven growth is crucial in relation to success. Consulting firms must strive to become unique and not copy the practices other consulting firms. Size does matter, and successful consulting firms establish critical mass in business areas and thereby sustain development. The consulting industry is characterised by a low degree of professional firm management and focus organization design. These issues imply sources and limitations to growth, which must be evaluated. 74

82 Chapter 6 Discussion Based on the empirical findings a number of crucial issues appeared regarding growth in the consulting industry. This chapter discusses these issues in turn and how this is related to growth theory (sources and limitations) and the formulation of an appropriate growth strategy for consulting firms. 6.1 Change in the size and division of value An important result from both the industry analysis and the empirical analysis seems at first to be external but will, at a closer inspection, have internal effects on how to manage growth in the consulting firm. As discussed in the industry analysis in chapter two, a shift is happening in the balance of power in the consulting market. The consulting firm is, like any other business, a nexus of contractual relationships between its various stakeholders: Owners, employees, suppliers, lenders and clients (Graubner and Richter, 2003). The two most important stakeholders in this context are the owners (supply side) and the clients (demand side) who are in a continuous tug-of-war over the value generated by the consulting firms. In the period of high growth in the industry from 2004 up until now, the size and division of value have been in the favour of consulting firms. Customers have used consulting services in almost every aspect of their business, and the demand has been high. This means that most consulting firms operating in the period after the millennium have been able to make a profit. This profit has been used for two things, satisfying the demand of owners and employees and developing the firm. However, the distribution of value is shifting towards customers. In general, the size and division of value is changing in the favour of customers, as the ability of the consulting firm to appropriate value diminishes. Inevitably, it will have an effect on the internal organization of consulting firms. First, it means that the capacity, which consulting firms have to satisfy the demand of both employees and partners are diminishing. Traditionally, consulting firms have been run with highly skilled employees who benefited from generous compensation schemes or a partner group who divided the profit, but these incentives are becoming weaker. Combined with the already existing difficulty of finding the right employees, this raises interesting HR related matters. The claim that the war-for-talents (Maister, 1993) will become an increasingly important competitive arena for consulting firms still holds true, and it is exactly here that some firms can gain a competitive advantage. The argument is that 75

83 consulting firms must pay closer attention to HR management in order to secure new talents and retain those already in the firm. This can be done through several different HR practices. Recruitment must still focus on obtaining the best candidates but not of the same kind (economic majors, MBAs, etc.). Instead, employees should be found from a much larger and heterogeneous pool of candidates, which have not traditionally been considered. Hereby, the consulting firm can expand its horizon and hopefully also its capabilities and be able to offer something new and unique to the customer. Training and development is another important HR related matter. In tough times, senior partners might tend to focus on selling, more than on developing the younger staff. This is especially the case if management is made up of senior partners and not a professional CEO. In the long run, this will result in lower value added services and lower quality. On-the-job training is the best form of development and internal mentoring from the most experienced consultants facilitates this. Incentives schemes and motivation have traditionally been constituted by the prospect of partnership. However, in the future this will not be as motivating as earlier because of the greater risk a partner bears. Therefore, consulting firms must develop other means to motivate employees. More balanced incentive scheme, which do not rely only on financial incentives but also on non-financial incentives should be developed. Providing a well-balanced work-life and opportunities for training and development are decisive. In conclusion, there is a need to examine and evaluate the organization design of the consulting firm, and if this is in accordance with the changing power balance between consulting firms and their customers. The discussed change, which I argue is underway in the Danish Consulting market, is not unique to the global consulting industry. On the US market, large players such as Arthur D Little and niche players such as Razorfish and Oliwer Wyman have failed to react and entered bankruptcy or take-overs. Other major players such as Accenture have given up their partner structures and more are expected to follow suit (Niewiem and Richter, 2004). Finally, there is another important spin off from this discussion. If conditions get tougher, differences in strategy will show more openly and the direct effect will show on the bottom-line. There is an immediate need for Danish consulting firms to start contemplating their management practice and strategy and then align this with the firm in order to find new ways to create and appropriate value. This will at the centre of the rest of this discussion. 76

84 6.2 Developmental leadership As already suggested, growth is imperative in the consulting industry in order to develop as a firm. However, it was identified in the analysis that one of the most significant barriers to growth is to be found within the management of the consulting firm, especially significant for small and medium sized consulting firms. Hence, the growth of the firm is inseparable of the personal growth of its leadership (Greiner and Malernee, 2005). The development of the firm requires that the founder is capable of reformulating the firm and set aside his position of power and ownership. A highly critical argument is therefore that if a firm is to grow, this is very much dependent of the willingness of the founders or partners to change within themselves. Therefore, it becomes interesting to consider growth in a developmental perspective, and how this is related to management A developmental perspective in consulting firms Managers of a consulting firm are by definition change agents in their organization (Avolio and Gibbons, 1988) and they should be aware of it. This indicates that they should manage from a developmental perspective. Most often, problems occur because of the tension between the pull of the future and the hold of the past (Greiner and Malernee, 2005). This was typically the case in the small and medium firms. A senior partner would not give room for young partners or the founder was not ready to find a business partner to share his firm with. Consequently, it becomes important for managers to understand the duality of growth, that is, how one situation contains the seeds to for a new crisis and that past solutions will have to be reconsidered (confer appendix Q). In the stage one consulting firm, growth was both enabled and inhibited by the founder. Therefore, the founder must disregard his own will, in the interest of the firm. Through this, the firm can overcome the growth barrier of centralization and control, and establish itself as a real firm with an area of specialization. However, in stage two consulting firms, the intense focus on professionalism and specialization creates the possibility that the firm will become too focused and not capable of developing along with emerging market opportunities. Once again, management must reconsider the strategic direction of the firm in order to spur further growth via diversification. A stage three consulting firm has managed to diversify and provides a wide range of consulting services, but also here the firms runs the risk of entering its next crisis. The high degree of diversification will have an impact on the firm, which will develop into many small sub-organizations, each with their particular speciality. This can mean that the firm suddenly sends mixed signals, have different 77

85 approaches to customer handling and the consulting trade in general. In the end, the firm will either be broken up into subsidiaries or manage to establish itself as a one-firm firm. Some small consulting firms express a wish to stay small in order to be free from the bureaucratic fuzz of a large organization. However, the above discussion still applies to these firms. That is, to maintain a viable firm they must still find ways to grow other than in size or geography. This implies that the small consulting firm should form alliances with other small consulting firms in order to draw on different practice areas and have the critical mass of consultants to engage in large-scale projects. The problem, however, is still the same, the need for trust, openness, and allowing other people to have a say in decision-making is decisive, and the manager must open up in order to enable growth. This discussion suggest that the managing partner(s) of consulting firms hold within them the key to achieve growths and that the key is in the ability of letting go. Firm growth, especially in a knowledge and people intensive industry as the consulting industry, requires that senior partners accept a loss of power and control. 6.3 Growth strategies Consulting firms have a unique position as they can learn from those clients who have managed to achieve high growth rates and apply that insight on themselves. As discussed in section 6.1, strategies for creating and developing more value must be explored. Five growth disciplines; base retention, market share gain, market positioning, related and unrelated diversification constitute the growth portfolios of companies that knew how to maintain steady double digit growth in difficult times (Tracy, 2004). These will each be discussed in turn in the context of consulting firms. Improving the firm s customer base retention is the most obvious way of improving growth, but this is made increasingly difficult by the decreasing loyalty among customers. Therefore, consulting firms must actively use these relationships to deliver and create better value than their competitors. It is not enough simply to rely on a relative laissezfaire relationship management through senior partners. Instead, the argument is that this must be put into system. This is done by increasing and systemizing knowledge of customers, in order to deliver and tailor better projects than consulting firms who do not have this knowledge. Consulting firms can also affect customers evaluation of them, and thereby increase their market reputation as excellent advisors. In practice, this is very much what happens when customers recommend their consulting firm for the Danish Management Consulting Award 10. Several of the interviewed firms have been nominated for and won the 10 For more information on this, see 78

86 award in different categories. Indeed, letting customers become the primary source of advertisement via word of mouth is the best possible branding strategy for a consulting firms. Furthermore, consulting firms must leverage the economic advantage they have vis-à-vis other consulting firms, because customers incur costs of using new consultants as they will have to brief these about its issues, its personnel and where to collect information. In this strategy is also the prospect of turning customers in to one-stop shopping customers and engage in long and continuing projects. However, consulting firms must realize that there is a fine line between an advantageous cooperation and simply exploiting customers. Therefore, new customer openings and relationships must proactively be sought. No consulting firm can afford to rest on its professionalism and wait for customers to knock on the door. Hereby, customer relationships become a scarce resource for consulting firms and a way to sustain a competitive advantage (Barney, 1991). This relationship is characterized as intangible and difficult for competitors to imitate. The other side of base retention is gaining market share. But how can this best be accomplished when, as discussed, incumbents have a natural advantage? This strategy is an obvious extension of adding more customers to your portfolio, but it is difficult to realize. On the one hand, consulting firms can close the knowledge gap in order to reduce incumbents advantage or simply wait for customers to change their consulting provider, but this might take years and does not prompt growth. Instead, consulting firms should pursue a value adding strategy in which they differentiate themselves from competitors. Many clam to do exactly that, but if you take a broad look at the web pages of Danish consulting firms, they appear very much the same! For the most part, they hire the same kind of people, deliver the same services, and have the same cost structures. The key is therefore to be able to differentiate significantly from competitors through recruitment, value innovation, and cost structures, as these are intertwined. All elements play an equally important role in the firm. This will create a unique bundle of idiosyncratic resources and capabilities that competitors cannot easily copy because of the intangible relationship (Barney, 1991). Clear market positioning was one of those elements, which distinct high performing consultant firms, and this should definitely be a core issue for management. Because consulting firms have their daily walk among the decision makers and CEOs of Danish companies, they are in a unique position to develop powerful insight about new growth opportunities and changes that are under way in the market. For example, some of the current top performers in the Danish consulting industry were able to identify and implement LEAN services ahead of competitors and became operational powerhouses. Other consulting firms have used their interaction with customers to identify opportunities of unrelated 79

87 diversification, and then positioned themselves in new markets based on the advantage of clear market insights. Hence, accumulated knowledge, experience and relations will allow for a strategic advantage (Wernerfelt, 1984). However, this means that lower level consultants, those who are primarily in the field with customers, must be able to share, not only professional experience about projects but, equally important, how a certain projects can benefit strategic decision making. Even though, it has just been mentioned that consulting firms are in a propitious position to identify opportunities for diversification, it does not seem to as come as easy as that. Most of the interviewed firms have burnt their fingers in this attempt. Diversification can take place when the consulting firm gradually expands its resources and then frees these to focus on generating profits in new activities (Penrose, 1959). A unique sub-set of growth opportunities is developed ranging from growth opportunities with current operations, growth opportunities for related diversified activities, and growth opportunities for unrelated diversified activities (Rickard, 2006). However, the more diversified the growth path, the more organizational disturbance is accompanied with the changes that must be made to existing routines and systems. Diversified growth should build on core competence leverage (Prahalad and Hamel, 1990). The more the consulting firm relies on diversified growth, the more important is the role of the organization design in supporting, controlling and motivating the growth process. Therefore, diversified growth should only be in the mindset of managers when they identify a clear growth opportunity in a market, and should not be mean simply to expand the firm. The discussed elements of growth strategy are only realizable if management devote time and effort to this. If not, then market opportunities will be missed and the consulting firm risk lagging behind competitors who have managed to think ahead strategically. Hence, management is a constraining element on firm growth (Penrose, 1959) Strategic growth vs. opportunity driven growth The analysis revealed an industry where focus is very much on the trade of consulting as opposed to that of running a business. Most often, firms are started by a few very skilled people and developed with these founders as the focal point. Growth has taken place through exploring opportunities in relation to the skills of the founders. Advantages are obvious for this, short-term revenue, accommodating an important customer s request and maybe gaining new capabilities. However, first-time projects draw them away from repeating and leveraging what they have successfully done in the past, decreases profitability and incur large out-of-the pocket costs. The firm will never be able to accumulate assets, which are vital for a sustained 80

88 competitive advantage (Dierickx and Cool, 1989). A strategic focus, on the other hand, allows consulting firms to attract business that are consistent with their overall business plan. Projects must be chosen so they balance the exploitation of existing routines and the exploration of new opportunities through learning-by-doing (March, 1991). The interviewed firms express an increasing internal demand for control and coordination and a continuous managerial deficit. A dynamic vision of firms holds that an internal momentum generated by learning-by-doing (Penrose, 1959), leads firm growth. New managerial resources take time and effort to integrate, but once in place, these new managerial talents will develop themselves and the next level of employees. Hereby, the accumulated stock of resources is increased and can be directed towards new growth opportunities. However, growth is limited by the amount of available managerial attention. The most progressive and successful consulting firms have managed to separate ownership and management by choosing an administrating partner who acts and thinks strategically on a two- to three-year horizon, and developed mid-level managers capable of strategic thinking. However, this separation means that partners must commit to this and allow the administrating partner the power necessary to manage the firm, without direct interference from other partners. Only a few firms have followed this all the way through, established a board and a CEO, and thereby abandoned the partnership structure. This focus on strategic management and the separation of ownership and management follows much of the recent research on managing professional service firms (Lowendahl et al., 2001; Valcon, 2005; Morris and Pinnington, 1998) Organic growth vs. inorganic growth Organic growth has been the predominant way of developing the firm, whereas inorganic growth has almost not taken place among the interviewed consulting firms. Where the latter has been the case, it has often ended in failure or buy-backs. Acquisitions are expensive growth strategies and the acquiring firm typically pay a premium of % above market stock price (Mueller, 1969). This must be added to the costs of integrating the acquired firm into the culture and organization of the acquiring firm, if potential synergy is to be converted into realized synergy. Hence, growth by acquisitions is very seldom as path to success in the consulting industry, which is consistent with empirical evidence on company performance (Dickerson et al., 2000). However, this discussion can be further enlightened if we move down a level. It highlights growth problems among those firms who cannot manage to grow internally, but require momentum from the outside in the shape of partner driven growth. Creating a large 81

89 partner circle can create future growth problems. A partnership structure focuses attention on the consulting trade as opposed to the professional management of a firm. That is, partners attach more utility to the consulting trade and regard management as trivial and less prestigious. Furthermore, if a partner is promoted the rank of senior partner then this can lead to a problem if he is not suited for the task because they are difficult to remove again. Consequently, a broad partner circle can enhance the problems of overcoming the glass ceiling because it risks creating a decision-making process that is slow, risk adverse and fragile to partners leaving. Organic growth is preferable when synergies exist between the firm s existing activities and its target. Furthermore, if time pressure is not too great, such as in the case of the consulting industry, the consulting firm can steadily build a sound internal competence base, which will become a base for sustained competitive advantage. This argument follows economies of growth and the competence approach. 6.4 Best practice or next practice Best practice has achieved much attention in recent years, and has been used to benchmark firms and organizations against some kind of desirable condition. In the concept of best practice is embedded an ideal state, which all organizations in an industry presumably will benefit from (Poulfelt, 2007). However, there are elements of how consulting firms compete which suggest that following a differentiation strategy is more suitable, that is, opting for next practice instead of best practice. Consulting firms, which are knowledge intensive firms, compete differently from traditional manufacturing industries in that they initially fight to win the best projects and the best employees (Maister, 1993), but hereafter they cooperate with their rivals. Often consulting firms are seen passing a project on to another consulting firm because they are better suited, or even share competences and capabilities on a project and work together. In the consulting industry, reputation works as deterrent and established firms must seek to underline their area of expertise. New and small firms who do not have a track record will find it difficult to win customers. Where industrial firms can lure customers by prize cutting this is not a good option for consulting firms, as it may be seen as cutting quality (Sheenan, 2004). Therefore, the business model for a consulting firm should outline a strategy in terms of which customers they will target, what type of consulting services they will provide, and how this is done efficiently and effectively. Here, consulting firms must focus on value enhancement as opposed to cost reduction: Cost is important in knowledge-intensive firms, but it is not the defining characteristic the defining characteristic is adding the most value 82

90 by healing the sickest patients, winning the toughest court cases or designing the most aesthetically pleasing buildings (Sheenan, p 56). According to Porter (1980), firms can achieve above average profitability by shaping their business model towards low cost or differentiation. However, as suggested low cost is not really an option for consulting firms because of two things; first, customers might confuse low cost with low quality, and second, it is very difficult to implement a low cost strategy due to the cost structure of consulting firms. Premium salaries are typically the largest expense, and there is only little room to reduce these considering the lack of labour currently experienced in the Danish consulting industry. In addition, consulting firms lack real possibilities for scale economies. Instead, the key trade-off is the width of their problem domain, which defines consulting services areas, and the customers to be targeted (Lowendahl et al., 2001). That is, consulting firms can choose to specialize by focusing on a narrow range of services, or they can choose to generalize by focusing on broad range of services. Furthermore, consulting firms can choose a specific level of knowledge re-use in their positioning choices (Lowendahl et al., 2001; Hansen et al., 1999). That is, a consulting firm can choose between tailor made solutions, which are unique every time, or template/framework/tool solutions that are in general recycled solutions. Together, these trade-offs give a two-by-two matrix that suggest four business models; general stores, speciality shops, idea labs and boutiques (Sheenan, 2004), see appendix S. Obviously, cost structure, revenue, and risk varies across these four business models. General stores earn lower fees but have lower expenses. Speciality shops also typically charge lower fees but have a great potential of exploiting efficiency. Idea labs earn higher fees but also have high expenses due to unclear problem definition. Boutiques earn high fees but also face efficiency issues. In appendix S, numbers in parenthesis represent a suggested distribution of the interviewed consulting firms. Therefore, even though they appear quite similar they have made conscious choices of the business model in which they compete. This logic can be further elaborated by thinking of consulting firms as problem solvers, as opposed to industrial firms who transform input to output in the way they create value. This adds a different set of primary activities contrary to Porter s (1980) traditional primary and support activities. The primary activities range from problem finding, problem solving, choice of solution, implementation, and follow-up and control (Stabell and Fjeldstad, 1998). However, not all consulting firms are involved in every primary activity, some specialize in problem finding or implementation, and others perform every activity. By intentionally directing attention towards certain different business models and activities, consulting firm managers are provided powerful insight into new growth opportunities. One 83

91 of the interviewed firms discovered a new niche this way. Having delivered R&D problem finding and problem solving activities to SMEs, they found that there was a general lack of implementation power because SMEs often do not have the work force or the time to carry out the suggested R&D initiatives. Therefore, the consulting firm set up a business service in which it conducts R&D for customers, having highly skilled engineers doing the actual R&D work for customers. Even though, the above suggested business models and activities clearly simplify the content of the consulting trade, there is especially one significant point to be emphasized: There is room for differentiation in an industry where incumbents seem very much alike. Consequently, a clear recommendation in the answer of best practice vs. next practice in the consulting industry can be made. First, according to the chosen business type and activity focus it is very difficult, if not impossible, to suggest a best practice which covers everything. For consulting firms to all follow the same practice, contradicts the above discussion. Second, best practice fundamentally contradicts with the resource based view, which holds that sustained competitive advantages stems from practices that are impossible to imitate. Consulting firms should instead ensure that innovation is more predominant than imitation. 6.5 The tension between growth and size The analysis has suggested that there are fundamental differences between small, medium and large consulting firms. The entry rate of new firms in the industry is high because of extremely low entry barriers. However, only a very small amount of consulting firms manages to grow big. This indicates a tension between firm growth and firm size. Consulting firms enter the industry on a small scale relative to the size of incumbents, and this put them in a difficult situation from the beginning. They must grow rapidly in order to overcome the cost disadvantage, which larger firms do not encounter because they are above the minimum efficient scale of production. They can economise on repeat projects, learning-by-doing, reputation, and expanding customer networks. For small firms, this means that growth in the initial stages is a matter of survival and pursuit of profits. This indicates that small consulting firms should have an average growth rate higher than large consulting firms. However, entrepreneurship plays an important role in this context. As Santarelli and Vivarelli (2006, p.5) states that; one has to recognize that when dealing with gross entry across all economic sectors we encounter a huge multitude of followers and very few real entrepreneurs. The most successful consulting firms were the ones who entered the industry with a clear vision and positioning strategy, whereas those firms who enter because the founder is 84

92 overconfident, unsatisfied with his earlier job, or simply do not like to be managed will probably not survive for long. Those consulting firms who enter the industry on the right premises will have to grow in size in order to reach a level where they can sustain viability and future growth. In this process, organizations mimic biological organisms more than machines (Tomasko, 2005). Consulting firms that grow in size run the risk of bulking up. Too many complex structures will invariably lead the firm to focus inward instead of outward. Managers and employees loose sight of their customers and competitors and miss growth opportunities and growth eventually slows down. The point of this discussion is therefore, to consider the organizational advantages and disadvantages that accompany the growth process and whether these indicate an optimal size for consulting firms Advantages of growth Growth in a consulting firm entails several advantages besides the possibility of increasing its economic value. Work is likely to become more inspiring and challenging when a consulting firm explores new markets or business areas. This will both attract and retain employees in the firm, as they will feel a high level of personal satisfaction. Much related, promotion opportunities and high salaries that are present in a growing firm will attract employees. A prestigious and respected firm name will also attract many, and probably the best, candidates for employment. In a growing firm, it is therefore easier to achieve commitment to organizational goals (Roberts, 2004). Economics of growth, as suggested by Penrose (1959), explain the internal dynamics and effects of growth. As managers gain experience, their administrative tasks require less attention and as a result managerial resources are continually being released, which can be directed towards exploring growth opportunities. Hence, the more a firm is capable of organizational learning, the more successful it will be in the consulting market. Consultants are desperately in the need of customer contact and experience derived there from, because it is this knowledge they transform into new capabilities in the future. It follows that as the consulting firms grows, it is also capable of expanding its customer network and then include large and serious customers that further strengthen its reputation and position in the market. Growth and size also affects the scope of projects, which the firm can undertake. Obviously, some large customers will demand that the consulting firm they engage have a certain amount of resources and availability, which can be focused on their project. Therefore, in order to be taken into consideration for large projects the consulting firm has to be of a certain size. Hence, two cost advantages are contributed; firms can charge premiums for their 85

93 services because of an increased demand and lower marketing costs are incurred because customers actively seek the services of the firm. Finally, reputation may create competitive barriers, in that customers will only select among the most reputable consulting firms (Greenwood and Empson, 2003) A large and diversified firm is more capable of spreading risk among its activities, and for some consulting firms where management equal ownership this is an advantage. Furthermore, one reason why small consulting firms choose to grow by diversification, even though it stretches their competences and resources, is to create a sense of security. Hence, growth can be considered a basis for economic security (Whetten, 1987) Disadvantages of growth One central disadvantage in growing the consulting firms lies in the control-loss argument (Williamson, 1967). Loss of control may be caused by an increase in size or a high growth rate. Almost inevitable, as the firm grows, it will add employees and hierarchical levels, and the founder will fell that he has less control because he is less informed of the state of the firm. This increases the importance of issues of control and coordination, as they will become more complex and there is a demand to manage these issues in more formal and complex systems. Manager-owned firms or firms who rely on a partnership may also be very reluctant to grow, because this entails a letting-go of a tight control over the firm. As discussed in the previous section letting-go is essential for the founder/partner circle of the consulting firm. A large number of employees or new partners mean that the founder(s) will have to delegate responsibility and decision-making, in order to motivate these people. Furthermore, the founder or the partner circle may be much more risk averse and therefore not interested in growth. Obviously it is their own private savings they gamble with, and this will keep some firms in a comfort zone (Coad, 2007). Organizational issues will move at the forefront of managerial concern as the consulting firm grows. Where it initially could make do with little or no organizational structure and formalization, it now runs the risk of substituting initiative with routine and bureaucratic stiffness with flexibility. Large firms are stated to be less adaptable and less responsive than their small counterparts are (Coad, 2007). Growth also affects the culture of a consulting firm and, as the analysis showed, all managers considered employees and firm culture to be significant factors of growth. However, large organizations often become less motivating working environments for employees, and the energy and motivation of entrepreneurs within the firm are replaced by a 86

94 managerial system, which role is to monitor and coordinate a more routinely method of production (Witt, 2000) An optimal size The concept of an optimal size, as briefly discussed in chapter three, concerning both industry level and firm level, is appealing despite the lack of empirical support. On industry level, the notion of an optimal size is at odds with observations on the support and skewness of the firm size distribution found even at much disaggregated levels of analysis (Coad, 2007). On firm level, an optimal size is inconsistent with time-series analysis of the patterns of firm growth (Geroski et al., 2003; Cefis et al., 2001). Instead, a stochastic dispersion in firms size, such as the law of proportionate effect (Gibrat, 1931), seems to do better in empirical work than the notion of an optimal firm size. The analysis, although based on qualitative data, supports the notion that there is no such thing as an optimal firm size in the consulting industry. Both small one-person consulting firms and large consulting firms seem to do well and earn profits in the industry. Instead, something other than an optimal size is at play in the consulting industry, namely that of economics of growth as presented by Penrose (1959). The knowledge possessed by a firm s personnel tends to increase automatically with experience (1959; p.76), but the challenge is to take full advantage of these knowledge resources. Therefore, a firm will grow in order to create value from accumulated and unused resources, which in turn will generate new resources. Growth is imperative for the development of consulting firms, and this gives rise to the notion of critical mass. Critical mass is a sociodynamic term to describe the existence of a sufficient momentum in a social system, such that the momentum becomes self-sustaining and fuels further growth (Ball, 2004). In some ways this resembles the term minimum efficient scale used in industrial organization but has a more developmental perspective. Critical mass can refer to the entire consulting firm or probably more appropately to core business areas. The core issue here is to develop business areas that have enough critical mass to engage in larger and larger projects, to develop and share knolwedge internally and across business areas, and probably most important, to identify future growth opportunities. That is, critical mass is attained in a business area when all resources does no focus on operational matters but instead on opportunities for development. Excess managerial resources must be present and focus on value creating growth opportunities. It is difficult to establish the specific amount of people or resources which must be present in a certain business area in order to claim criticall mass. This is very specific and certainly dependent of the kind of knowledge in question and the 87

95 capabilities of employees. However, among the large consulting firms in the survey, critical mass was suggested to be around 20 people in a business area. There is no emperical evidence which suggest an industrial threshold size concerning how large a Danish consulting firm can grow. Obvioulsy, the relatively small domestic market moderate size compared to for example American consulting firms, but the benefits of internationalization have not nearly been realized. However, based on the industry analysis it will be quite remarkably if, in five or ten years, there exists a Danish consulting firm with more than 1000 employees, seems to be the limit. There is a pattern of firms building and merging to a size of around 200 and then splitting up because of organizational stress and incoherence. More often, the threshold size is determined by the manager s wish not to grow to larger because it perceivably hurts agility and competitiveness. Growth results in accumulation of an increasing stock of resources, which in turn, demands greater organizational capabilities if firm resources are to be managed and coordinated effectively and effectively. Therefore, in this respect, this suggests that size does matter in the consulting industry and that it is imperative that critical mass and bulk form a synthesis through the organization design. 6.6 Fitting the organization design to growth By moulding and shaping the firms organization design, entrepreneurial managers can facilitate the accumulation of new resources and their coordination with existing resources and create a basis upon which the firm can grow (Rickard, 2006). The analysis has shown that the way in which management consulting firms build and think their organization design is decisive. The internal organization of the consulting firm can be a source of competitive advantage and hence a strategic variable which must be considered and managed. As identified in the analysis, the organization design of consulting firms entail specific elements that have a significant impact on firm strategy Governance and ownership Arguably, the most critical element is that of governance form. Authority structure and ownership can either consist of a large partner circle where all partners own a share in the firm, or a professional construction with a board, a CEO and mid-level managers. The former has been the most predominant way of organizing which is also the case for many other professional service industries (Greenwood et al., 2002). However, the Rockwool layer, as it is often referred to, tends to confuse the concepts of management and ownership (Valcon, 88

96 2005). Hence, if a distinction is made between partnerships and corporations 11, there are some limiting conditions of the partnership structure, which must be discussed in relation to growth. As identified in the analysis, when consulting firms grow, this is associated with increasing specialization and complexity, a broadening of geographical scope and diversification of services. Typically, this means that partners become more in numbers and consequently are more remote from strategic processes. Face-to-face contact is difficult to maintain and consensus through collegial processes become time consuming and difficult to manage. In essence, this can result in extra costs as partners sacrifice billable time to internal management issues and important decisions risk being delayed (Greenwood and Empson, 2003). However, some firms manage to maintain the partnership structure in a limited size but also introduce professional firm management. Hence, the size of the partnership is important. Among the interviewed firms, the number of people in a partnership ranged from three to thirty. As partnerships grow and as some partners are given the task of decision-making, other partners still expect participation. This means that large partnerships add the costs of hierarchy to the costs of collegial control, instead of substituting it. Age difference can also play a disturbing role. Often the objectives of younger partners do not coincide with those partners who are nearing retirement age. The latter group will most likely be more risk adverse and resist changes and development within the firm. The degree of organizational heterogeneity is another element, which needs to be aligned with governance. Similar types of services, training and values characterize a homogeneous consulting firm. Employees have the same educational background and are socialized into relatively conformist behaviours. However, as suggested earlier, consulting firms should pursue a strategy in which this homogeneity is challenged in order to create a unique position in the market. This strategy encompasses the use of freelance consultants and top-class consultants, a specially designed incentive scheme to motivate these and a focus on specific service areas, which were some of the organization design elements utilized by the successful consulting firms. Hence, a heterogeneous organization is best managed as a corporation because heterogeneity further adds complexity to the decision-making process (Greenwood and Empson, 2003). The general trend for professional service firms are away from partnerships. Since 1950, the proportion of management consulting firms governed as partnerships has fallen steadily from 50 % to 17 % (Greenwood et al., 2002). The general impression from the 11 The legal distinctions between a partnership and a corporation are: 1) a partnership does not have a legal identity in its own right; 2) it represents an agreement between two or more persons; and 3) each partner is jointly and severally liable for the debts of the other partners (Greenwood and Empson, 2003) 89

97 empirical analysis follows this trend, and suggests that those firms, which handle growth issues best, are those, which clearly separate ownership and leadership Organizational levers Organizational levers are the systems, practices and structures that make an organization successful. They are the primary tools for aligning the consulting firm and enable management to direct the consulting firm towards high performance and growth. The analysis revealed six industry specific levers which consulting firms can employ to create competitive advantage (appendix R). These are discussed below: Organizational structure This is often an overlooked factor in the consulting industry but it has an enormous impact on performance. Hence, how decisions are made and at what levels, exposure to experienced consultants, team structures vs. individual structures, a flat vs. a hierarchal organization, and governance and ownership are core elements, which must be aligned. Selection The talent base will have a significant impact on the consulting firm s ability to execute strategy and deliver services. Furthermore, a competence wise broad talent base will allow the firm to explore and take advantage of growth opportunities, which can add uniqueness to the firm. Freelance employees add flexibility and cost incentives but are difficult to manage and assimilate in firm culture. Incentives Performance improves when performance is measured and holds people accountable for generating results. However, these systems must be designed not only to control performance but also to motivate employees towards improving performance in areas that make the biggest difference to the consulting firm. In connexion, reward systems play an important role in keeping teams focused on the project. However, these incentive schemes should be adaptable to the individual consultant and his or her personal goals. Strategy To build a high performing consulting firm the organization must be build around its vision and strategy. Hence, the purpose of strategy is to create fit and avoid strategic drift. Focus must be on a particular business model and what supports this. If it is not possible to obtain fit between business areas because of missing synergy effects, then these should be divided into different units sold to raise capital for the other business areas. 90

98 Development Training and developing employees and managers create a vast impact on business success. A consulting firm s ability to improve existing skills and capabilities and learn new ones, is arguably the most defensible competitive advantage of all. That is, training and development must be put into system and not left up to random assignments and projects. Competence focus The consulting firm must be rooted in the market and customer priorities and this lever must be considered in continuation of firm strategy. Using less experienced and young consultants, demands that projects are defined, use frameworks and probably not contain a whole lot of contact to high-level management at customers. However, it also entails lower fees. On the other hand, if projects typically are novel and need tailor made solutions experience is crucial. 6.7 Summary of discussion Based on the analysis and discussion it becomes possible to suggest where this master thesis is heading in the attempt to suggest an appropriate strategy. First, the theoretical contributions that best explain growth best in the industry stems from the inside-out perspective. The process of growth comes from within the firm and its abilities to perceive and act upon new opportunities. Through resource accumulation, a consulting firm can create uniqueness and differentiate itself from competitors. Hence, even though the market will enter an economic slow-down, those consulting firms, which manage to create and sustain uniqueness, will have the ability to grow, even in difficult times. Second, some issues have been prevailing in the investigation of growth. The role of management, strategic growth, HR management, and the change in the market are elements which a have had decisive role in the growth process. In the successful consulting firms, these issues have been managed in ways through different organizational levers, which have been aligned and allowed them to create unique positions in the market. Taken together, I now argue that we are prepared to suggest an appropriate strategy for management consulting firms. 91

99 Chapter 7 Towards an appropriate growth strategy This chapter ties the threads together and considers implications to the consulting industry based on the preceding work. Hence, the ambition here is to answer the problem statement in a manner which is as practical applicable as possible. 7.1 What is an appropriate growth strategy? Often threats to strategy are seen as coming from the outside environment such as changes in technology, knowledge, or the behaviour of competitors and customers. However, I argue that the greatest threat to strategy stems from within the consulting firm. Strategy is often undermined by misalignment in management, organizational incoherence and a misguided view of competitors and customers. An appropriate strategy is one that is effective over a longer time span, affects the firm in many different ways, and focuses and commits a significant portion of resources to expected outcomes (Andrews, 1997). That is, the decisions behind an appropriate strategy will define the firm regarding its members, its external stakeholders, and its position in the market and industry. The argument, so far, has been that managers must pursue a strategy in which they seek to create uniqueness for their consulting firm. The next-practice approach was deemed superior to the otherwise appealing best-practice approach. Therefore, the core of strategy is about defining the firm s position, making trade-offs and forging fit among activities (Porter, 1996). An appropriate strategy can be measured in a variety of ways; success, longevity, or performance metrics, but these measurements do not capture the importance of growth in the consulting industry. Because of the changing environment and of sell-by date of knowledge, consulting firms are under constant pressure of developing their resources and competences. Hence, in order to be successful in any of the above-mentioned measures, it is imperative that the consulting firm grows, not necessarily in size but in resource and knowledge accumulation. Therefore, an appropriate strategy, in the context of this master thesis, is one, which focuses attention towards growth enablers and barriers and how to most effectively take advantage of or overcome these. However, the desire to grow has an ambivalent effect on strategy, which must not be forgotten, and is arguably the core reason why so many management consulting firms fail. An appropriate growth strategy entails trade-offs but this often places real or imagined limits on profitability or revenue growth. For example, focusing on one customer group or 92

100 providing just a few core consulting services means that the consulting firm misses sales to other customer groups. Therefore, consulting firms often take incremental steps to improve short-term revenue, but eventually these steps blur the strategic position of the firm. Attempts to compete in all areas and directions create compromises and inconsistency, which eventually erode the competitive advantage of the consulting firm. Organizational motivation and focus is blurred and profit drops. The answer is more revenue sought in short-term growth opportunities. Consequently, the vital question in relation to an appropriate growth strategy is; which approaches to growth reinforce and preserve strategy? The argument presented in this master thesis is clear; management consulting firms must seek to deepen their strategy rather than broadening and compromising it. Growth must leverage existing competences and capabilities through activities and create firm characteristics and services that are impossible for competitors to match on a stand-alone basis. 7.2 Core issues The above argument suggests two important steps towards an appropriate growth strategy. First, consulting firms must identify the primary growth enablers and barriers they face. This allows the consulting firm to focus on immediate challenges and relating managerial issues. The life-cycle development model has been proposed as a general framework (see appendix Q), but should be matched with the individual characteristics of the consulting firm. Hereby, the specific size and situation of the individual consulting firm is taken into account. Second, once the primary growth enablers and barriers and their implications have been identified, they must be managed in a way that reinforce and preserve the strengths of the firm. The key element is what consulting firms should do, in order to ensure that growth and development is kept in line with strategy. I suggest five core issues, which consulting firms need to act on, in relation to their primary growth enablers and barriers: Management alignment Developing or re-establishing an appropriate growth strategy depends on leadership. The need for a strengthening of management in the consulting industry has increased. Often, leadership in consulting firms has degenerated to into a field where focus is more on the consulting trade and servicing customer in the field. This creates a resource and qualification deficit when it comes to managing the consulting firm, and there is a general underestimation of professional management in the growth process. Hence, the first step towards an appropriate growth strategy is to align management through alignment of actions and alignment of objectives. A shift towards a professional management structure will 93

101 provide the coordination mechanisms necessary to align the diversity of activities and resources inherent in a consulting firm. In this way, the CEO is given the authority and decision making capacity to react upon growth opportunities concurrent with the interest of the firm. Furthermore, there is a need to agree on the direction and future of the consulting firm among the decision-makers. Often the decision making process is influenced by many individual objectives. This means that innovation, such as in the creation of a new practice area, is often a matter of negotiation and political manoeuvring and important decisions are either slowed down or down right aborted. In many cases, this implicates that some partners will have to let go of sovereignty in the decision making process in order to overcome the glass ceiling towards growth. Finally, management alignment should also consider the development of the next chain of managers. This implies a focus on the development of middle managers, from operational into strategic thinkers. Hereby, the food chain of the consulting firm is secured and managerial resources, once accumulated, can be directed towards exploring new growth paths. Strategic development An area, which deserves more attention, than what is currently, receives, is the strategic development of the consulting firm. Most predominant is opportunity driven growth, but, albeit attractive in the short run, it corrupts strategy in the long run. In continuation, growth should preferably stem from organic growth rather than acquisitions or partner driven growth, which have proven not to be very successful in the consulting industry. Only through a strategy that contains positioning, trade offs and fit among activities can the consulting firm create a sustained competitive position. Hereby, it can build on already existing resources and competences. Uniqueness in this industry is far from unobtainable, as previous discussions have revealed. The consulting firm can differentiate itself in an otherwise alike industry in several parameters. These strategic considerations are highly critical when you consider how difficult it is to change the position of the firm once it has become embedded in the minds of customers. Because there is such a high degree of path dependence, this is the definitive argument against opportunity driven growth. Organizational adaptation This issue is critical because of the changing market. Where the role of consultants earlier was characterized by a state of elitism and know-all attitude, where customers only rarely questioned the conduct of consulting firms this have changed. Today, customers exercise a great deal of influence on the market by adding price pressure, less loyalty, more volatility, and quality demands. Hence, the accumulated stock of knowledge and capabilities inherent in the consulting firm must provide it with the dynamic capabilities 94

102 to flexible and rapidly respond to these changes. This implies two things. First, because the industry has been very busy in the last five years, there is a need to consider if the firm has changed along with the markets and the customers it wants to serve. Second, the capabilities inherent in routines and learning that are essential in the process of developing new and appropriable knowledge must be evaluated. There must be a fit between these and the strategic ambitions which management have for the consulting firm. HR and incentive structures Too many consulting firms experience a high turn over rate of employees. It is imperative that the right employees are retrained in the firm, and therefore the incentive structure and HR matters have to be weighed up. The analysis has shown that motivating consultants today is more demanding than it used to be. Traditionally, the up-orout partnership structure was enough to provide motivation among employees and personal attention from partners to junior consultants were almost not necessary. However, today the odds of making partner are smaller and time to partnership is prolonged, because the partnership structure is on its way out. Consultants want a balanced work life, personal development, and a fun job. Professional careers are available inside large corporations at salaries, which are competitive to those offered by consulting firms. Consequently, consulting firms are finding it increasingly difficult to attract and keep the right people in the firm. This implies an increased focus on HR management, which traditionally have not taken up much interest in the industry. It means recruiting from a broader pool of candidates, developing training programs, and creating incentive schemes, which accounts for both hard workers and those who want a personal life on the side. Innovation and knowledge management Very much in continuation of the need for dynamic capabilities, there is also a need to consider the current level of innovation and knowledge development in the consulting firm. Pressure on operations over a longer duration of time often places innovation and knowledge development in the back seat. Consulting firms are the epitome of knowledge-based organizations. Their product is knowledge and their key resource is the expertise and competence of their employees. As a consequence, they are reliant on these employees for competitive advantage through knowledge-based innovations. However, over time the value of knowledge diffuses, it commodifies. In order to remain innovative and be able to grow, consulting firms must differentiate from competitors and continue to win deals with existing customers through the development of new business areas. First, emergence of new and distinctive knowledge, based on differentiated expertise, can lead the firm towards new activities and customers. This can be created by leveraging current 95

103 practice or by developing and applying entirely new knowledge. Second, for a new area to be adopted in the firm there is also a need of an embedding process. This happens through organizational support via directing personnel, resources, and sponsorship towards new business areas. The above five core issues are not stand-alone issues but must be considered as a whole. Hence, the consulting firm must strive to achieve fit and coherence in their organization. An appropriate growth strategy is about combining all the activities that take place in the firm and aligning them towards organizational coherence. 7.3 Creating fit Organizational coherence will enable and mobilize intellectual and knowledge assets in the consulting firm towards a defined objective through alignment of activities and by effectively communicating information and knowledge. That is, it is about aligning the five core issues in the right configuration. This means that capabilities, assets, resources, and activities must be aligned and structured to adapt and respond to changes in the external environment. Coherence gives the consulting firm the ability to keep employees focused, and motivated and encourage new thinking and ideas in an efficiently and effectively manner, as it grows larger and engages in differentiation. But there is also another vital angle to this perspective. Competitive advantage comes from the way in which core issues and activities of the consulting firm fit and reinforce each other. Therefore the consulting firm must achieve strategic fit as this will enhance the uniqueness of its position and strengthen trade-offs. Hence, fit should go beyond simply creating consistency among activities but should focus on how these activities reinforce and optimize each other. It is also in the degree of fit that the consulting firm will be able to sustain its competitive advantage, because the system will be very difficult to imitate. Competitors will find it difficult to untangle, gain nothing from replicating only a few activities, and lack the specific experience, which has been build up over time. This reasoning further builds my argument that consulting firms cannot alone create competitive advantage by providing premium consulting services. Instead, they have to reconsider how the entire organizational system should be managed, in order to do all things well and not just excel at consulting. The objective of the organization design of the consulting firm is exactly to coordinate the variety of activities that takes place, in a way, which uses organizational levers to align activities towards organizational goals. Hence, these organizational levers, embedded in the organization design, provide options of organizing which must be understood and aligned. 96

104 7.3.1 The importance of organizational levers All consulting firms use levers but most do it very poorly. Either they are inadequately designed or they conflict with each other, resulting in a neutralizing effect. However, the primary reason why these organizational levers do not help the consulting firm is that they are not aligned with firm strategy. Hence, it is irrelevant that a consulting firm hires top-class consultants if for example, a partnership structure stifles initiatives from talented employees or business areas contradict each other. Used correctly, however, organizational levers can be the primary tools for building a high performance consulting firm. Two categories of organizational levers exist, industry specific levers and firm specific levers. Here, six organizational levers have been identified (appendix R), which I argue are industry specific. That is, most consulting firms can apply these but this list is not exhaustive and more levers can be added. However, the most valuable levers are those, which are firm specific. That is, the ones which are rooted in the experience of management, in the uniqueness of employees and the flexibility of the organizational architecture. Consequently, I argue that managers of consulting firms must identify the organizational levers that are specific for their firm and establish fit with vision and strategy. This is the last and final step towards an appropriate growth strategy for consulting firms. 7.4 Conclusion In summary, I argue that an appropriate growth strategy for consulting firms can be approached through three steps. First, the focus is on identifying the primary growth factors and barriers, which the consulting firm faces. Second, focus must be directed towards five core issues that contain crucial building blocks of growth strategy in the consulting industry. Third, industry and firm specific organizational levers must be identified and managed in order to create fit among the five core issues, stimulate growth enablers and overcome growth barriers. Through this strategic agenda, the consulting firm manager can create a unique firm with a clear competitive advantage. However, this process involves a continual search for ways to reinforce and extend the unique position. Hence, strategy is not viewed as static but dynamic and implies an ongoing endeavour to extend uniqueness and toughen fit. Therefore, even though management have identified a unique position for their consulting firm it must continually strive to find new trade-offs and leverage the system of complementary activities into a sustainable advantage. 97

105 Chapter 8 Limitations and scope In general, the overall methodological process of this master thesis is considered to have in fact investigated what it intended to do, and consequently it has been possible to answer the problem statement in a reasonable, practical and scientific manner. However, as the methodological problems and issues are evaluated it becomes clear that they are related primarily to the empirical foundation of the master thesis and choice of method. This chapter contains an evaluation of the methodological approach and a discussion of the scope of the findings. 8.1 Theoretical limitations The whole idea behind the methodological approach has been to conduct an analytical generalization in connection with theory development and not a statistical generalization in connection with hypothesis testing. This investigation has been directed towards theory development, because of the lack of specific theory on the subject of this master thesis. Existing theory has been used to create an integrated approach to firm growth and has quite roughly been divided into two perspectives. Even though a combination of these two perspectives has sought to eliminate theoretical weaknesses and bring together the most influential theories on firm growth and strategy, there is still a risk that important theories have been left out because they did not fit in with the inside-out or outside-in perspective. A concrete example is governance theory/transaction cost theory (Coarse, 1937; Williamson, 1981), which have almost not been dealt with. Identification of growth processes among the interviewed firms has not taken place by evaluating annual accounts, revenue or capital. Instead, the focus has been on inobservable factors and invisible assets. These conditions, which are difficult to measure, such as culture, entrepreneurship, competences, and capabilities, etc. are increasingly playing an important role in economical theory. Nevertheless, they give an impression of a somewhat casual and unstructured approach. Yet, these conditions have been considered important to consider in relation to firm growth. Consequently, conditions such as how the firm accumulates and applies information and knowledge, as well as attitudes and motivation of managers and employees can best be investigated through qualitative methods. The key strength of building theories from qualitative methods, such as case studies, is the probability of discovering novel theories, while the prime weakness is the temptation to build theories that try to capture everything (Eisenhardt, 1989). Herein, lie the 98

106 strength and weakness of this master thesis. In an attempt to balance generalization and detailed understanding, this master thesis has embraced a very broad approach, which at times has blurred the focus. However, if an investigation is to have a certain degree of generalization and detailed understanding then a multiple case study is an appropriate approach (Yin, 1993). Several other researchers have been successful with a similar approach (Ulhøi, 1991; Kohli and Jaworski, 1990). The overall approach has combined exploratory research, inductive reasoning, and a comparative case study approach. Through this multidisciplinary advance, this master thesis has been able to develop and expand insights concerning the problem statement. However, it has been necessary to draw on theoretical contributions from such different areas as economics, organizational behaviour, managerial theories, and sociology, etc. Therefore, it has been a significant challenge to identify and fit key issues from those theories to the specific problem at hand. Furthermore, this has been impeded by the fact that most literature concerning the consulting industry is based on the US market. This market is much more mature concerning the consulting industry and findings cannot be directly transferred. 8.2 Practical limitations Case studies usually combine various data collection methods and can be used to accomplish different aims, where theory development is the most interesting (Eisenhardt, 1989). To accomplish this aim, three data collection methods have been applied. First, a secondary analysis of quantitative data concerning the industry. Second, an informal expert interview. Third, nine in-depth interviews with managers of consulting firms. The implications of using these three methods will be discussed in turn and finally evaluated overall. The industry analysis rests on quantitative data gathered by DMR. This is probably the most reliable source of information on the Danish consulting industry and the most updated. However, this also means that other surveys have been disregarded, primarily because they did not present the newest information. Surveys conducted in the period of have indicated quite different things about the industry because of the great changes, which have taken place in the market. Concluding uncritically from these sources would have painted a wrong and unsatisfactory picture of the industry. Using secondary information has meant that some issues were left untouched, because I obviously have not had any influence on what was in fact investigated in these surveys. Unfortunately, the size and scope of this master thesis did not allow for a quantitative analysis of the industry as this entails a large amount of work. 99

107 The informal expert interview conducted with special consultant at DMR, Tom Vile Jensen, served to clarify some of those subjects, which other surveys than those from DMR showed to be of interest. This interview was only semi structured and roughly followed the guideline in appendix P. Hence, it served only as an initial and exploratory tool. Primary data have been based on nine case studies conducted with managers at Danish management consulting firms. It was sought to ensure that the interviewed firms was as representative of the industry as possible, that different sizes were covered,and finally, that three of the firms had experienced growth problems while the rest experienced strong growth. This was a difficult task and event though, it is assumed to have succeeded, the choice of firms rest more on the author s perception of the firms. It was not based on actual information, and this might represent a subjective bias. However, concerning the practical approach it is believed that there is a good and sound coherence between the primary data, secondary data and the expert interview since it all springs from the same place, namely DMR. This master thesis would of course have benefited from additional empirical data. Hence, because research rests on a relative small sample size, readers who work in consulting firms should their own experience against the results and recommendations presented here. Based on the above discussion, it becomes evident that the population of my investigation is not the Danish management consulting industry, but instead those management consulting firms that are members of DMR. DMR covers 180 consulting firms out of approximately 7500 firms, but these 180 firms are considered to be serious and professional consulting firms and therefore represent a segment that is appropriate to analyse. Finally, the use of the hermeneutic approach in the analysis might imply a certain degree of subjective researcher bias. This is due to the foregoing understanding on behalf of the researcher concerning the phenomenon in question. However, throughout the entire master thesis is has been a primary concern to continuously be as objective as possible. Where this objectivity might be brought in to question, is in relation to the choices of the theoretical frameworks adopted in this thesis. To some extent these perspectives present the subjective choices of the researcher, and run the risk of neglecting other theoretical viewpoints with explanatory powers, which otherwise would have surfaced in the interviews. 8.3 Scope Based on an assumption that this master thesis has in fact investigated what it intended to do, it makes sense to consider how these findings can be used in practice besides what has been discussed in the chapter seven. 100

108 To a certain extent, the whole structure, which this master thesis builds on, is a limiting factor concerning scope. Because, an exploratory and inductive reasoning have been applied this means that specific knowledge and information have surfaced underway, which in turn have shaped the remaining research. Hence, the theoretical approach was developed specifically with the problem statement in mind. On the other hand, because the purpose was to answer the problem statement in both a detailed manner but also a generalized manner this opens up for a possibility to generate the findings beyond the Danish management consulting industry. Throughout the master thesis, consulting firms have been assumed to belong to respectively the SME sector and the professional service firm (PSF) sector. Theory and knowledge gained from these sectors have been used to open up the black box of consulting firms, and it is thereby interesting to consider to what extent findings of this research can be reversed to these two sectors. Besides service firms the SME sector also covers manufacturing firms that do not employ more than 250 people. These firms face conditions that are very different from those which consulting firms face. Barriers to entry are higher because of scale economies, sunk costs, investments and patents. Technology plays a larger role than it does in the service industry. It is difficult to enter an industry without an innovative product and as a result, competition will be much fiercer. Thereby, some firms in the SME sector face competitive parameters, which are very different from those consulting firms face. I argue that the findings of this study cannot be transferred to the SME sector without adapting the preceding theoretical framework to emphasize the outside-in perspective. On the other hand, the PSF sector in general faces challenges that are very similar to those specific for consulting firms. The essential keys to success in the PSF sector are human talent and alignment (Lorch, 2000). The work of professional service firms depends on the talent and intelligence of the people delivering it. The best firms hire the best people and motivate them to stay committed to the profession and the firm for a long period. They develop organizational practices that motivate employees to serve clients well, and it is through this alignment that PSF become successful. I therefore argue that the challenges, which PSF in general face, can be addressed and acted upon by adopting the framework suggested in this master thesis. Hence, the scope of the findings, especially the suggested approach to an appropriate growth strategy, can be beneficial in industries such as law, accounting, advertising and architecture, as well as a broader range of consulting firms. 101

109 Chapter 9 Conclusion The purpose of this master thesis have been to examine how Danish management consulting firms currently build and sustain competitive advantage, and how this can be translated into an appropriate growth strategy for the individual management consulting firm. The Danish management consulting industry is characterized by few large and fast growing consulting firms and a long tail of small enterprises. In general, the large consulting firms reap the majority of industry profits, while the small consulting firms seem to struggle with growth and survival. Based on the premise that the industry is heading towards more tough times, it is relevant to consider how growth strategy can be managed. The main conclusion is that those consulting firms, which manage growth best, are those firms that have managed to separate leadership from ownership. Through this separation, these consulting firms have created the foundation for strategic and focused growth as opposed to opportunity driven growth. This opens up for a focus on the development of complementary competences and the capability of employees to think and act strategically. Hereby, future growth will build on the development of mid-level managers, services, and products from an already existing competence platform. Hence, consulting firms cannot alone rely on growth through competent consultants and by adding new partners into the firm. Instead, the firm must create alignment between goals and strategy, resources and competences, as well as management and employees. This happens through the careful design of the organization in which positioning, trade-offs and fit are considered. Based on this knowledge, this master thesis has been able to suggest an appropriate growth strategy. Initially the consulting firm must identify its primary sources and limitations of growth. Through these, focus must be directed towards five core issues, which create the foundation for growth strategy. These core issues are: Alignment of management, strategic development, organizational adaptation, HR and incentives structures, and innovation and knowledge management. Finally, by deploying industry- and firm specific organizational levers, the consulting firm must create alignment across these five issues in the organization design. Hence, this research has shown that growth must be initiated from within the firm. Several other perspectives have emerged through the research, which are relevant for growth, and which can create additional insights into the sources and limitations of growth in the industry. First, the immediate challenge for the Danish consulting industry is to identify appropriate strategies for internationalization. When faced with unknown markets, 102

110 incomplete information, and a state of incertitude, enterprises typically develop in foreign markets by adopting a process, which evolves incrementally. However, are there any possibility of avoiding the initial stages of internationalization and gaining a grip on the international market faster? Networks and strategic alliances could be the answer, and further research into the relationship between these and the management consulting industry could generate crucial insights. Second, the degree of collaboration across consulting firms is a relative unknown size. Several consulting firm managers have expressed a wish for more collaboration in the industry but this only takes place in limited extent. By considering relationships as the unit of analysis this might open up for a deeper understanding of value creating linkages between consulting firms and, equally important, the factors that impede the realization of relational rents. For both perspectives, it is obvious that the role of DMR is important. Both in establishing and inspiring research but also as a link between different consulting organizations and firms. Finally, this master thesis has advocated that consulting firms should separate leadership from ownership. However, actual research on governance forms in the Danish professional service firm sector is missing. If this was conducted, it might be possible to identify correlations between specific governance forms and measures such as size, profit and revenue. Hereby, we would get closer to an answer about the appropriateness of the partnership. It appears that there are enough issues to be dealt with for consulting firms. Not only in relation to the professional management and development of the firm, but also in relation to internationalization and cooperation in the industry. Hence, even though an external slowing down might take place in the market, it seems essential to direct attention and speed up on the internal lines of the management consulting firm. Thus, the next wave of growth can be founded. 103

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120 Magazines and other publications Bryan, L. and Kay, J. (1999): Can a Company Ever Be Too Big, McKinsey Quarterly, 1999, no. 4, p Børsen (2005): Slut med brede pensler i konsulentbranchen, Børsen, Executive viden, fredag den 25. november Lorch, J. W. (2000): Leading professional service firms. Harvard Business School, Working knowledge, May 2, Poulfelt, F. (2006): Lavkonjunktur I konsulentbranchen, In kommunikationsforum, Poulfelt, F. (2007): Er best practice bedste praksis?, In kommunikationsforum, Valcon, 2005: Professionelle services i Danmark - strategiske udfordringer og svar. Analyse af en sektor, som er i fare for at blive overhalet af kunderne. Analyse udarbejdet af Valcon. 113

121 Internet sources Danish Management Association (DMR): Danish Statistics DMR - Branche analyse 2006/7: DMR - Tendensundersøgelse 2007: Europa SCADPlus - Definition of micro firms, small and medium sized firms: 114

122 Appendix Content Appendix A Overall structure Appendix B Number of active firms in the industry Appendix C Revenue distributed across customers in Appendix D Number of firms distributed across firm size in Appendix E Revenue distributed across firm size in Appendix F Overall revenue of the industry Appendix G The management consulting industry s share of GNP Appendix H Service distribution Appendix I Customer prioritization Appendix J Life cycle model for professional service firms Appendix K Significant differences between the outside-in perspective and the inside-out perspective Appendix L Contact letter Appendix M Overview of the interviewed firms Appendix N Operationalization Appendix O Interview guide Appendix P Topics of semi-structured expert interview Appendix Q Life cycle development and related managerial issues Appendix R Core issues concerning the organization design of consulting firms Appendix S Business models for consulting firms

123 Appendix A Overall structure Problem statement: What is an appropriate growth strategy for Danish management consulting firms relative to their current size and situation in the market? Exploratory research Industry analysis and expert interview Chapter 2 Inductive reasoning Literary studies of growth theory and development of an integrated approach to firm growth Chapter 3 Comparative research Research design and implementation Analysis of data Chapter 4 Chapter 5 Analytical and practical approach Discussion Towards an appropriate strategy Limitations and scope Conclusion Chapter 6 Chapter 7 Chapter 8 Chapter 9 Source: Own making 116

124 Appendix B Number of active firms in the industry Source: DMR industry analysis 2006/7, p. 12 Appendix C Revenue distributed across customers in 2006 Source: DMR industry analysis 2006/7, p

125 Appendix D Number of firms distributed across firm size in % 7% 66% 10% 12% Omsætning 151+ mio. kr. Omsætning mio. kr. Omsætning mio. kr. Omsætning mio. kr. Omsætning 0-10 mio. kr. Source: DMR industry analysis 2006/7, p. 12 Appendix E Revenue distributed across firm size in % 6% 11% 21% 55% Omsætning 151+ mio. kr. Omsætning mio. kr. Omsætning mio. kr. Omsætning mio. kr. Omsætning 0-10 mio. kr. Source: DMR industry analysis 2006/7, p

126 Appendix F Overall revenue of the industry Source: DMR industry analysis 2006/7, p. 6 Appendix G The management consulting industry s share of GNP 2008 (Est.) 1,02% ,96% ,90% ,77% ,69% 0,00% 0,20% 0,40% 0,60% 0,80% 1,00% 1,20% Source: DMR industry analysis 2006/7, p

127 Appendix H Service distribution Distribution among services Source: DMR industry analysis 2006/7, p. 9 Revenue distribution for the service advising/consulting IT-rådgivning 16,3% (15,2%) Strategisk Rådgivning 19,2% (22,2%) HR-rådgivning 7,2% (8,1%) Forandringsled else 9,4% (12,4%) Projektledelse 16,7% (18,5%) Organisation/ Operations Management 31,2% (23,7%) Source: DMR industry analysis 2006/7, p

128 Appendix I Customer prioritization Source: DMR industry analysis 2006/7, p. 11 Appendix J Life cycle model for professional service firms Large Crisis: Need for common approach to clients and shared ownership Stage IV Institutionalizing Size Crisis: Need to broaden services and develop staff capabilities Stage III Diversifying Crisis: Need to agree on growth vision and target market Stage II Focusing Small Stage I Exploring Young Age Mature Source: Malernee and Greiner,

129 Appendix K Significant differences between the outside-in perspective and the inside-out perspective Ethos Outside-in theories Closed systems, free of change and surprises, static orientation. Inside-out theories Open systems, change and unforeseen situations occur on almost daily basis, dynamic and development oriented. Market perception To a high degree predictable. Not predictable, complex and volatile. Focus Product markets and industries. The firm is described based on its placement herein. Factor markets, internal firm competences and capabilities Firm goals Maximizing of profit. Superior long-term competitive advantage which results in the survival of the firm. Role of the manager Assessing quantitative sizes and implementing these for optimal production. Collecting, assessing and understanding information. Creating, choosing, implementing and adapting strategies. Competitive advantage Is gained through superior choices of strategy that enhances strategic and structural barriers to entry and barriers to mobility. Advantages come from market power achieved by low market costs or product differentiation. Is gained and developed of rare, valuable, difficultto-copy and non-substitutable physical, human or organizational resources med the goal of achieving innovation. Normative directions Resource characteristics Examples of theoretical exponents Analyze the industry and adapt the firm to the conditions. External diagnosis is of most important and implementation is less important as it is considered unproblematic. Capital, labor and natural resources. All are considered homogeneous and perfectly mobile. Neoclassical theory SCP paradigm Porter s five forces Strategic conflict Analyze the environment generally and on a long term basis. Build firm competences, capabilities and resources in consideration with a long term vision of the firm. Information seeking and gathering as well as implementation are considered interesting. Financial, physical, legal, human, organizational, informational and relational resources. All are heterogeneous and imperfectly mobile. The theory of the growth of the firm Evolutionary approach The resource based view Core competences Dynamic capabilities Managerial theory Adapted from Hougaard and Duss,

130 Appendix L Contact letter Hej Mit navn er Jesper Kristensen, og jeg er studerende ved Syddansk Universitet i Odense. Mit studie har været fokuseret omkring strategi, organisation og ledelse (Cand. Merc. i international management) og da jeg ved siden af har arbejdet i et mindre konsulent firma, fandt jeg det naturlig at skrive et speciale omhandlende konsulent branchen i Danmark. I den forbindelse har jeg gennem et samarbejde med Dansk Management Råd (DMR) fået fastlagt specialets rammer og problemformulering. I korte træk drejer det sig om, at identificere en række best practice tiltag som det enkelt konsulent firma kan benytte sig af med henblik på at opnå fremtidig vækst. Jeg er nu så langt i forløbet, at det er på tide at få indsamlet empiri bestående af ca. 10 semi-struktureret interviews. I den forbindelse har jeg som udgangspunkt kigget på DMR s medlemsliste over konsulenter. Det er mit indtryk, at jeres firma,, kan give en interessant indsigt i hvorledes man kan håndtere vækst i konsulentbranchen. Jeg håber derfor, at I vil finde det interessant at deltage som case-studie firma og deltage i et interview af ca. 1-1½ times varighed. Interviewet vil være med en enkelt person og denne bør have en ledende position i firmaet og have indflydelse på fremtidig strategi og vækstmuligheder. Detaljerne omkring specialets indhold og interviewets indhold vil selvfølgelig blive præciseret når vi mødes. Der vil ingen steder i specialet blive nævnt firmaets navn, så det er kun mig som forfatter, som kender denne sammenhæng. Jeg vil også medbringe en fortrolighedserklæring som kan udfyldes. Forventelig bliver specialet publiceret i en forkortet version på DMR hjemmeside, ligesom I selvfølgelig er velkomne til at få en elektronisk udgave af det færdige resultat. Jeg håber dette brev har skabt interesse, og jeg vil inden for et par dage kontakte jer telefonisk. Med venlig hilsen Jesper Kristensen Tlf [email protected] 123

131 Appendix M Overview of the interviewed firms Interviewee Short firm description Interview date Small organization management consulting firm This firm was founded in 2001 by the interviewee who is the CEO and sole owner of the firm. It currently employs 4 people and 15 freelance consultants. The firm is based in a large villa in northern Sjælland, which it shares with a few other small consulting firms. The firm deals with management CEO of a small consulting, organization development, education psychology and human resource management on organization management strategic, tactical and operational levels. In addition, it offers seminars, educations and workshops. The consulting firm general business concept combines rational, emotional and spiritual elements. In addition to the more A traditional consulting services, the firm also offers teambuilding and fire walking. Since its foundation, the firm has experienced growth but only to a limited extent. The greatest barrier to future growth, as stated by the owner, is to find the right persons to share management with. Its vision it to be among the top 5 consulting firms in Denmark measured in quality and awareness. Senior partner in a small strategy and operations consulting firm B CEO of a small management and event consulting firm C CEO of a medium strategy and IT management consulting firm D CEO of a medium sized communication consulting firm E Small strategy and operations consulting firm This firm was founded by the leading partner in 1992 as a sole practitioner firm. Around 2000 three additional senior partners where drawn into the firm (including the interviewee). In addition to the four senior partners, 5 partners are associated on a freelance basis. The firm has offices in Århus, Odense and Copenhagen are is geographically spread out. The firm offers a broad array of services; strategy, organization, supply chain management, marketing, LEAN, IT governance and logistics. Most consultants are CMC certified. The firm has only experienced limited growth because of a very rigid partnership structure. Small management and event consulting firm This firm was founded in 2001 by the CEO and owner and based on Fyn. He currently is the sole owner and manager and employs 5 people with various backgrounds. In addition, there are about 30 freelance employees connected to the firm. These people do not have a traditional consulting background but are more experienced in areas such as outdoor and recreational education. The firm provides outdoor courses which focuses on management and employee development in a teambuilding framework. In addition, the firm also has an event service where it manages company parties, excursion, seminars etc. The firms marked by a high degree of season dependence. Recently, the firm has experienced high growth and has problems with finding the right and qualified employees to deliver high quality products. Medium strategy and IT management consulting firm This firm was founded in 1998 as a partnership structure but in 2006 realised that growth problems was related to this. Therefore, it abandoned the partnership structure and hired an external CEO (the interviewee). His job is to run the firm and he does not function as a consultant. The firm provides services in areas such as program and project management, IT management and organization development. The firm balances it employs between a permanent staff, associated consultants and freelance consultants. In total, it employs around 40 consultants. All consultants are highly experienced and educated and hold top level certifications. The goal is to reach a size of approximately 100 consultants. It has it offices in central Copenhagen. Medium sized communication consulting firm This firm was founded in 2002 as two separate firms who worked together extensively and then merged in 2004 into one firm. The two founders serve as managers and partners and the firm employs 23 people. It provides analyses, branding, strategy, PR, graphic design, and crises-, web- and change communication. Most employees have an educational background in communication. After the merger, the firm experienced high growth and the challenge is to grow without losing flexibility. The firm deliberately sets its prices just below the large players, which allows it to attract assignments from the public sector. It is based in central Copenhagen

132 CEO of a medium sized strategy and management development consulting firm F Manager in a large management consulting firm G CEO of a large strategy and operations consulting firm H Partner of a large strategy and operations consulting firm I Medium sized strategy and management development consulting firm The CEO (and shareholder - 70%) founded this firm in In addition, 3 other shareholders have ownership in the firm (10 % each). However, a process of broadening ownership to around 10 shareholders is taking place. The firm employs 20 consultants with various backgrounds. Among others traditional consulting, rhetoric and journalism. It provides services in three areas; strategy and development, competence development and interim management. It has its offices in Århus, Ålborg and Copenhagen. Large management consulting firm This firm has been included to examine the effect of mergers in the industry. Formerly a successful consulting firm focusing on management development, this firm was acquired by a large international corporation in After this, the firm has been placed under strict control from its American mother company Manpower. However, since the merger the firm has experienced very low growth rates and extensive problems of retaining skilled employees. The firm has gone from employing 75 consultants to only 12 permanently employed staff. It provides services in people development and the majority of consultants are psychologists. It is based in northern Sjælland. Large strategy and operations consulting firm This firm is one of the leading consulting firms in Denmark. Three persons who are currently also partners in the firm founded it in The firm has its offices in northern Sjælland where 130 consultants work. The turnover is around 160 million kr. this year. It provides consulting in two main areas; strategy and operations. Its services covers strategic development, supply chain management, LEAN, innovation and product development, activity based costing, performance management, process optimization, transfer management and sourcing and purchase. It has experienced growth rates among the highest in the industry. Currently it is opening offices in eastern Europe and Asia. The firm has won the consulting award from DMR several times. Since its start, it has experienced double-digit growth rates. Large strategy and operations consulting firm This firm is currently the largest Danish owned consulting firm in Denmark. It employs more 200 people, has a yearly turnover of 270 million kr. and sees double-digit growth rates. It is organized in a number of sub divisions. Currently there are around 30 partners of various levels and approximately 50 joint owners in the firm. It provides services in areas such as strategy & growth, (service) operational excellence, leadership & projects and IT & infrastructure. It has offices in Denmark, Norway and Sweden. Source: Own making

133 Appendix N Operationalization Topic of analysis Purpose of analysis Life cycle stage To analyze which life cycle stage the concerned consulting firm is in. To identify which conditions are specific for the consulting firm in relation to the life cycle stage it is in. History and experience To asses the circumstances in the consulting firm which have shaped its history and experience. To determine to what degree these circumstances are path dependent. To understand how the consulting firm understands growth. Entrepreneurship To identify to what degree entrepreneur ship acts out a significant role in relation to the growth that the consulting firm have experienced. Feasible set of strategies To understand how the consulting firm builds its strategy and how this is related to growth. To see if the consulting firm has a defined growth strategy. To identify how the strategy of this firm might be different from other consulting firms. Feasible set of resources and To understand how the consulting firm bring about resources and competences through management decisions. competences To understand how these resources and competences are translated into firm specific resources and core competences. To identify how the firm addresses changes, both internally and externally. Factor markets To determine if there are any specific circumstances on the factor market which are critical for the growth of the concerned consulting firm. To analyse to what degree the consulting firm uses relations and networks as a growth factor. Product markets To determine which factors on the product acts out a significant role in relation to the growth of the consulting firm: - The degree of competition and rivalry - The role of buyers - The external environment and the general economy - The possibility for creating new business areas (mobility barriers) Organizational architecture To analyse how the organizational architecture of the consulting firm affects growth: - Incentives and reward systems - Authority and hierarchy - systems for coordinating, monitoring and evaluating performance - Ownership model (CEO vs. partner) The future To understand what the consulting firms consider important in the future in order to stay competitive. Source: Own making 126

134 Appendix O Interview guide Interview guide semi-struktureret interview Introduktion Kort introduktion til emnet og opgaven samt formålet med denne o Eventuelle begrebsdefinitioner klarlægges for respondenten Kort om interviewets forløb (ca. 1-1½ times varighed) Snak om fortrolighed, såfremt det ønskes af virksomheden, underskriv evt. fortrolighedserklæring Tænd for diktafon!- TEST DEN - Snak højt og tydeligt! Formalia Navn, position (job), ansættelsestid (i virksomheden, i position) Hvilket ansvar indebærer dit job? Hvad er din daglige rolle i virksomheden? Life cycle stage Hvor mange ansatte er der i firmaet (konsulenter vs. Non-konsulenter)? Omsætning eller andre nøgle tal Hvor længe har firmaet eksisteret? Hvad er pt. de centrale udfordringer for dit firma? Hvordan reagerer organisationen på de disse udfordringer? Hvad er firmaets målsætning på længere sigt o Ønsker firmaet at vokse eller ej? o Hvor meget? Er der en grænse for firmaet? En optimal størrelse? Hvilke signifikante faser er firmaet gået igennem? Hvad forventer du den næste fase bliver? Hvilke barrierer eksisterer i forhold til at komme dertil? Culture Hvad var motivationen for firmaets opståen? Er de oprindelige stiftere/partnere stadig i firmaet og hvad er deres rolle nu? Hvordan er ejerforholdene? o Børsnoteret eller lignende Hvordan vil du beskrive jeres kultur og hvordan hænger den sammen med firmates historie? Hvad er styrken/svagheden i jeres kultur i forhold til vækst? Hvordan er jeres markedsorientering? 127

135 o Hvilken form for konsulentvirksomhed beskæftiger firmaet sig med? o Er der tale om nicheydelser eller mere brede ydelser? o Er der nogen bestemt markeder som i koncentrerer jer om? Hvordan er jeres vækst orientering? o Hvordan betragter i vækst o Hvordan opstår vækst (eksternt i miljøet eller internt i firmaet) Hvorledes har den organisatoriske struktur ændret sig gennem tiden? o Hvordan var firmaet som udgangspunkt organiseret og har dette ændret sig? Hvilke forhold i firmaets historie og erfaring begrænser jer i fremtidige beslutninger? Entrepreneurship Hvordan er iværksætter ånden i firmaet? Hvilke egenskaber har stifterne/nuværende ledere af firmaet bidraget med? - Livserfaring, erhvervserfaring, særlig lyst til at starte firma? Hvordan bliver firmaets retning skabt? Snævert omkring iværksætterens kompetencer eller er de bredt skabte? Hvorledes er ledelsen/iværksætterne involveret i værdi kæden? I alle led eller er der et særligt fokus? Hvordan definere du de vigtigste egenskaber hos lederen af et konsulent firma? Feasible set of strategies Hvad betyder vækst for jer? Kan du ganske kort beskrive hvordan firmaet er vokset? Hvad har I gjort for at vokse/har i en vækststrategi? Hvad gør jeres firma bedre end andre konsulent firmaer? Hvad kan konsulent firmaer generelt gøre for at vokse? Hvilke strategiske udfordringer står jeres firma overfor? Hvad er de positive og negative konsekvenser af jeres vækst? Hvilke særlige vækstfremmere/vækstbarrierer har i oplevet? Feasible set of resources and competences Hvad er jeres konkurrencemæssige fordele i forhold til andre firmaer? Hvad er firmaets vigtigste ressourcer? o Hvordan er disse unikke for firmaet? Hvad ser du som værende jeres vigtigste kerne-kompetencer? o Hvorledes er dette noget som er specielt i forhold til resten af branchen? Hvordan vedligeholder I jeres ressourcer/kompetencer? o Uddannelse/nye medarbejdere/knowledge management Hvordan reagerer firmaet overfor forandringer? Hvilke formelle systemer benytter I jer af med hensyn til at forstærke jeres forandringsberedskab? Factormarkets 128

136 Hvilke særlige forhold på faktormarkedet er med til at give jer en fordel overfor andre konsulent firmaer? o Politisk støtte? o En regional iværksætterkultur? o Leverandør relationer? o Samarbejde med universiteter og andet? Hvorledes har I mulighed for at tilvejebringe særlige ressourcer som kan være svært tilgængelige for andre virksomheder? Productmarkets Hvilke eksterne generelle branche vilkår spiller en rolle for jeres vækst? Gør i nogle tiltag for at sikre jeres position i branchen? Hvordan oplever i konkurrence intensiteten og hvorledes hæmmer antallet af potentielle/eksisterende konkurrenter og substituerende produkter jeres vækst? Hvorledes opfatter i samarbejde med andre konsulenter og gør i det? Hvad gør i for at påvirke køberne forhandlingskraft? Skaber i på nogen måde forhold som gør det sværere for potentielle konkurrenter at komme ind på markedet samt at manøvrerer rundt? Organizational architecture Hvordan er jeres firma organiseret? Hvordan bliver beslutninger på operationel/taktisk/ strategisk niveau taget? Hvordan benytter i formelle systemer til at evaluere og belønne individuel performance? Hvorledes koordinere og kontrollerer I de aktiviteter/projekter som finder sted? The future Hvordan ser du fremtiden for din virksomhed? For konsulentbranchen generelt? Hvordan skal I konkurrere i fremtiden? o Hvad skal i konkurrere med og på? Hvad bliver vigtigt i fremtiden for at sikre sig overlevelse som management konsulent i branchen? o No cure-no pay o One stop shopping o Certificeringer Andet Yderligere kommentarer, tilføjelser m.m. i forhold til emnet, som ikke er blevet berørt? Diktafonen slukkes! Interviewet afsluttes med tak til respondenten for deltagelse Efterrationalisering af interviewet sammen med respondenten: Nogle underlige/uforståelige spørgsmål? Hvad kan jeg gøre bedre? Noget som der mangles? 129

137 Appendix P Topics of semi-structured expert interview Emneroversigt til ekspertinterview med Tom Vile Jensen, DMR Branchens struktur: Hvordan vil du karakterisere den danske management konsulent branche med hensyn til: o Størrelse? o Vækst? o Profit? o Overskuelighed og gennemsigtighed? I hvor høj grad er branchen konjunktur følsom? Er der noget karakteristisk billede af hvem som betjener hvem? Eksempelvis at små firmaer bliver betjent af små firmaer? Strukturelle og politiske tiltag? Hvordan spiller den offentlige sektor en rolle i forhold til den private sektor? Er der lave adgangs og exit barrierer i branchen? Hvad og hvordan konkurreres der i branchen? Branchens vækst: Hvad er jeres/branchens vækst forventninger? Hvorledes spiller følgende faktorer en rolle i denne vækst/vækstbarrierer? o Fusioner/opkøb? o Netværk og relationer? o Branding og markedsføring? o Udvikling af kompetencer? o Anskaffelse af ressourcer (gode medarbejdere) Oplever i nogen særlige fastholdelses kneb, i form af: o One-stop shopping? o No cure no pay? o Gratis foranalyse? Størrelse, profit, vækst, er der en form for sammenhæng eller inkonsistens? Hvad driver udviklingen i branchen? Er der vækstmæssigt nogen forskel på små og store konsulent huse? Hvad er branchens vækstbarriere? Branchens udfordringer: Hvad er vigtigt for kunderne? Hvilken betydning har det for konsulent firmaerne at de skal være proces orienteret og ikke kun opgave orienteret? Bliver der stillet flere krav til konsulenterne? Hvordan oplever i interessen for DMR og branche organisationer generelt? Har mindre konsulent huse har brug for kompetence løft? Er der behov/opbakning for certificering? Er der tale om opdeling i et A og B-hold? Har de små firmaer kompetencerne til at hjælpe andre firmaer godt nok? Forventninger om fremtidige udfordringer? Andre relevante emner? 130

138 Appendix Q Life cycle development and related managerial issues Stage one firms identifying Stage two firms becoming Stage three firms diversifying the growth opportunities professional and specialized firm and going international Strategy Opportunity driven. Focus driven. Strategy driven. Management Organization structure Managed by one person, the founder who has previous experience in the industry. Little or no formal structure exits. Allows for flexibility and better adaptation and specialization to the needs of SME clients. Managed by two or more persons who have come to an agreement on the focus and development of the firm. A formal structure with back office administration, compensation schemes and formalized work processes. Size slowly becomes an issue as the organizational complexity rises. Managed by a group of senior partners who have had a clear vision and strategic plan from the start. A decentralized structure with several small business areas that are managed by mid level partners. At the top of the hierarchy is the board which one or more of the founders are member of. Decision making Resides solely with the founder. Takes place between the senior partners who rely on consensus for both the strategic and operational running of the firm. The group of founding partners continues to make strategic decisions but delegate operating decisions to mid level partners. Development Happens on an informal basis and primarily via on-the-job training. The driver of development is the founder. Primarily takes place trough projects as learning-by-doing but is to a larger degree supported by internal competence development, knowledge sharing and seminars. Happen in a much larger extent via systemized efforts to share and develop knowledge, as well as outside institutions, such as universities and are Culture Informal and relaxed, highly affected by the founder. Focused on professionalism and task oriented. A cultural plurality characterized by that fact that the firm consists of several small business areas. Purpose of Growth Limited growth visions which are centered on the ideas and visions of the founder. To establish a sound firm that is not constantly under threat by internal and external changes. To stay competitive with regard to attraction the right employees and maintaining a market leader position. Primary growth processes The customer network and entrepreneurial skills of the founder. Dependent of one or two large customers within that network. Focus on strategic business areas. Focus and positioning relative to the market. Strategic recruitment. Cross selling of services. Creating a strong, entrepreneurial and unified firm culture. Related and unrelated diversification. Maintaining a market leader position. Employing the best. Having critical mass in key business areas. Broadening geographical scope. Primary growth barriers The founder balances the role of both consultant and manager. Lack of a sparring partner. Lack of an area of specialization or niche service. No critical mass in any service areas. Managers are still caught in a do-sell position. Still hampered by a lack of critical mass. To establish the capabilities necessary for diversification. Not being able to maintain a unified culture because of the increase in size. Employees leaving for smaller firms. The firm risk ending up with several small business areas with different approaches to consulting and customers. Not developing mid level partners who can think strategically. Finding the right recipe for internationalization. Crisis Overcoming the glass ceiling The dominating founder must take a step back in order to enable further growth. For example via sale of the firm, taking another partner into the firm or promoting a trusted employee to the rank of senior partner. Hereby the creation of a professional and specialized firm can take place. Establishing the real firm It is necessary to further develop the firm in a professional sense with a formal structure, extended compensation schemes and strategic planning. The key to further growth lies in diversifying the services the firm provides and developing the capabilities of employees to support this. Creating the one firm firm It is necessary to direct managerial efforts towards creating a one firm firm in order to prevent fragmentation. Mid level managers must be motivated to act strategically and not only operational and in the general interest of the firm. Source: Own making 131

139 Appendix R Core issues concerning the organization design of consulting firms Authority structures and ownership/organizational structure Professional management Few partners among which one serves as CEO Many partners in a traditional partnership Many freelance workers, relatively few little permanent employees Employee structure/selection Combination of mostly permanent employees but also some free lance workers Many permanent employees, no freelance workers Performance pay, provision and bonuses Incentive systems A combination Fixed salary Standardization, tools and frameworks Strategy A combination New approach every time, project based Methods of learning, training and developing employees Large training and development programmes Small introduction programmes and little training Only informal training and development Junior consultants Competence focus Mostly senior consultants with some junior staff Senior consultants Source: Own making 132

140 Appendix S Business models for consulting firms Broad service domain Narrow service domain Recycled solutions General stores (2) - Pluss leadership, Right management. Speciality shops (3) Target People, Operate, Mindweiss. Tailor made solutions Idea labs (2) Implement, Valcon. Boutiques (2) Dragsted Development, IP Teams. Source: Adapted from Sheenan,