-
Department of Marketing and Management, University of Southern
Denmark, Odense 2008
Management Consulting FirmsManagement Consulting FirmsManagement
Consulting FirmsManagement Consulting Firms ---- Finding the
Finding the Finding the Finding the RRRRight ight ight ight
GGGGrowth rowth rowth rowth SSSStrategytrategytrategytrategy
A A A A CCCComparative Case Study of Growth and omparative Case
Study of Growth and omparative Case Study of Growth and omparative
Case Study of Growth and StrategyStrategyStrategyStrategy
WWWWithin the Danish Management Consulting Industrithin the
Danish Management Consulting Industrithin the Danish Management
Consulting Industrithin the Danish Management Consulting
Industryyyy
Master Thesis: Cand. Merc. International Management
Supervisor: Professor Marcus Becker Autor: Jesper Kirkegaard
Kristensen
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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
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Danish summary Mange konsulentvirksomheder har kunnet leve
fornuftigt de senere r p grund af den generelle gode konomiske
udvikling, ogs selvom de ikke har haft en strategi og er get
hovedkulds efter vkstmulighederne i markedet. Sprgsmlet er, hvor
udbredt denne tendens har vret blandt virksomhederne, og dermed
hvor svagt/strkt konsulentvirksomhederne og deres organisationer
str rustet i de kommende r, hvor markedet ikke vokser s strkt, og
hvor kundernes krav stiger markant. Dette speciale omhandler
strategi og vkst i management konsulentbranchen samt, hvorledes
dette bedst kan hndteres i forhold til de vkstfaktorer og
-barrierer, som branchen p nuvrende tidspunkt og i fremtiden str
overfor. Den danske management konsulentbranche er prget af enkelte
store og hastigt voksende konsulentvirksomheder og herudover en
bred vifte af mindre foretagender. Generelt set er det de strste
virksomheder, som hster strstedelen af profitten, mens der blandt
de mindre virksomheder er en strre kamp for overlevelse og vkst.
Set i lyset af at branchen sandsynligvis er p vej imod svrere
tider, er det derfor relevant at se p, hvorledes vkststrategi kan
og br hndteres. Ledende personer i en rkke forskellige management
konsulentvirksomheder er blevet interviewet med henblik p at bne op
for en dybere forstelse af strategi og vkst i en ellers meget
broget og lukket branche. Konsulentvirksomhederne er blevet valgt
sledes, at de reprsenterer henholdsvis sm, mellem og store
konsulentvirksomheder samt ud fra, at de er etableret omkring r
2000. Gennem en komparativ analyse af disse virksomheder har det
vret muligt at identificere signifikante vkstprocesser og
-barrierer p tvrs af strrelse samt kendetegn ved de
konsulentvirksomheder, som hndterer vkst og strategi bedst.
Ydermere er analysen blevet styrket af en brancheanalyse, som har
haft til forml at belyse de udfordringer, som branchen str overfor.
P et brancheplan viser analysen, at der generelt er sket et skifte
fra et slgers marked til et kbers marked. Kunder fravlger
one-stop-shopping, er mindre loyale og presser priserne. Overordnet
set er kundernes forhandlingskraft steget, hvilket udfordrer
konsulentvirksomhedernes strategi og stiller hjere krav til
professional virksomhedsdrift. P et virksomhedsplan viser analysen,
at vkst er ndvendig for konsulentvirksomheder som en forudstning
for internt at kunne udvikle sig kompetencemssigt. En
konsulentvirksomhed, som fravlger vkst eller ikke er i stand til at
vkste, kan ikke udvikle sine kompetencer og risikerer dermed at
miste sine konkurrencemssige fordele. Ydermere vil analysen vise,
at danske konsulentvirksomheder vokser gennem tre signifikante
stadier, der hver isr er
-
kendetegnet ved en vkstkrise. For sm konsulentvirksomheder
ligger den primre vkstbarriere hermed i, at stifteren er bde ejer
og leder. Dette skaber interessekonflikter og hmmer fremtidig vkst.
For konsulentvirksomheder af mellemstrrelse bestr den primre
vkstbarriere i evnen til at identificere muligheder for komplementr
diversifikation; herunder de ansattes egenskaber til at sttte disse
vkstmuligheder. Store konsulentvirksomheders vkstbarrierer skal
findes i deres evne til at samle et fragmenteret firma med mange
forskellige specialer i en samlet organisation og udvikle
mellemledere, som tnker i samme retning som organisationen.
Afslutningsvis er de vkstprocesser, som er karakteristisk for de
mere succesfulde konsulentvirksomheder, blevet identificeret med
henblik p at kunne nrme sig en anvendelig vkststrategi.
Hovedkonklusionen er, at de konsulentvirksomheder som har
oplevet strk vkst, er dem, som har formet at adskille ledelse og
ejerskab. Ved at adskille ledelse og ejerskab kan
konsulentvirksomheder skabe grundlaget for strategisk og fokuseret
vkst. Herigennem bnes op for et fokus p udviklingen af
medarbejdernes kompetencer inden for ledelse og
forretningsudvikling samt, at virksomheden udvikler sine
kompetencer komplementrt. Sledes vil fremtidig vkst bygge p
udviklingen af mellemledere, ydelser og produkter fra en allerede
eksisterende kompetenceplatform. Konsulentvirksomheder kan alts
ikke alene vre sikker p at skabe vkst gennem et hjt fagligt niveau
og ved at tilfje flere partnere med et hjt fagligt fundament i
virksomheden. I stedet skal der skabes en langt strre grad af
tilpasning mellem konsulentvirksomhedens ml og strategi, dens
ressourcer og kompetencer, samt ledelse og medarbejdere gennem
designet af organisationen. P baggrund disse resultater foresls en
tilgang til vkststrategi i konsulentbranchen ud fra tre trin.
Konsulentvirksomhederne m indledningsvis identificere de primre
vkstmuligheder og vkstbarrierer, som de str overfor. Herigennem
skal fokus rettes mod fem kerneomrder, der danner grundlaget for en
vkststrategi. Disse er: Ledelsestilpasning, strategisk udvikling,
tilpasning af organisationen, HRM samt innovations- og
vidensudvikling. Sidst skal konsulentvirksomheden identificere de
branche- og virksomhedsspecifikke organisationelle virkemidler,
hvormed den kan opn tilpasning blandt de fem kerneomrder. Gennem
denne strategiske agenda kan konsulentvirksomheden skabe en unik
position med en klar konkurrencemssig fordel og dermed danne det
fremtidige grundlag for vkst.
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Table of contents CHAPTER 1
INTRODUCTION
.................................................................................................................................................
1 1.1 MOTIVATION
.................................................................................................................................................
1 1.2 CHALLENGES IN PRACTICE
............................................................................................................................
2 1.3 PROBLEM STATEMENT
...................................................................................................................................
3 1.4 FOCUS AND STRUCTURE
.................................................................................................................................
4
CHAPTER 2
THE DANISH MANAGEMENT CONSULTING INDUSTRY
........................................................................
6 2.1 STRUCTURE
...................................................................................................................................................
6 2.2 GROWTH IN THE INDUSTRY
..........................................................................................................................
11 2.3 CHALLENGES FOR THE INDUSTRY
................................................................................................................
14 2.4 THE FUTURE
................................................................................................................................................
17 2.5 SUMMARY OF INDUSTRY ANALYSIS
.............................................................................................................
17
CHAPTER 3 THEORIES OF FIRM GROWTH
....................................................................................................................
19
3.1 THE CONCEPT OF GROWTH
...........................................................................................................................
19 3.1.1 The tension between growth and size
...........................................................................................................
20 3.1.2 The dynamics of growth
................................................................................................................................
21 3.1.3 The sustainability of growth
.........................................................................................................................
22
3.2 THEORETICAL
CONTRIBUTIONS....................................................................................................................
23 3.2.1 Inside-out perspective
...................................................................................................................................
24 3.2.2 Outside-in perspective
..................................................................................................................................
30 3.2.3 Tying the ends in the organization design
....................................................................................................
33 3.2.4 Summary of theoretical contributions
..........................................................................................................
34
3.3 SME THEORY
..............................................................................................................................................
34 3.3.1 SME growth
..................................................................................................................................................
34 3.3.2 The entrepreneur
..........................................................................................................................................
35 3.3.3 Strategy and culture in SMEs
.......................................................................................................................
36
3.4 CREATING AN INTEGRATED APPROACH
........................................................................................................
37 3.5 SUMMARY OF THEORY
.................................................................................................................................
39
CHAPTER 4
DESIGN AND IMPLEMENTATION
...............................................................................................................
41 4.1 METHODOLOGY AND SETTINGS
...................................................................................................................
42 4.2 OPERATIONALIZATION
.................................................................................................................................
44 4.3 DATA ANALYSIS
..........................................................................................................................................
44
CHAPTER 5
EMPIRICAL FINDINGS
...................................................................................................................................
46 5.1 THE PURPOSE OF GROWTH
...........................................................................................................................
46 5.2 DEVELOPMENT THROUGH GROWTH
.............................................................................................................
48
5.2.1 Stage one consulting firms
............................................................................................................................
48 5.2.2 Stage two consulting firms
............................................................................................................................
54 5.2.3 Stage three consulting firms
.........................................................................................................................
59 5.2.4 Concluding remarks on growth development
...............................................................................................
64
5.3 GROWTH PROCESSES
...................................................................................................................................
65 5.3.1 Culture
..........................................................................................................................................................
65
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5.3.2 Entrepreneurship
..........................................................................................................................................
66 5.3.3 Strategy
.........................................................................................................................................................
67 5.3.4 Resources and competences
.........................................................................................................................
68 5.3.5 The factor market
.........................................................................................................................................
70 5.3.6 The product
market.......................................................................................................................................
70 5.3.7 Organization design
.....................................................................................................................................
72
5.4 SUMMARY OF ANALYSIS
..............................................................................................................................
74
CHAPTER 6
DISCUSSION.......................................................................................................................................................
75 6.1 CHANGE IN THE SIZE AND DIVISION OF VALUE
.............................................................................................
75 6.2 DEVELOPMENTAL LEADERSHIP
....................................................................................................................
77
6.2.1 Developmental perspective in consulting firms
............................................................................................
77 6.3 GROWTH STRATEGIES
..................................................................................................................................
78
6.3.1 Strategic growth vs. opportunity driven growth
...........................................................................................
80 6.3.2 Organic growth vs. inorganic growth
..........................................................................................................
81
6.4 BEST PRACTICE OR NEXT PRACTICE
.............................................................................................................
82 6.5 THE TENSION BETWEEN GROWTH AND SIZE
.................................................................................................
84
6.5.1 Advantages of growth
...................................................................................................................................
85 6.5.2 Disadvantages of growth
..............................................................................................................................
86 6.5.3 An optimal size
.............................................................................................................................................
87
6.6 FITTING THE ORGANIZATION DESIGN TO GROWTH
.......................................................................................
88 6.6.1 Governance and ownership
..........................................................................................................................
88 6.6.2 Organizational levers
...................................................................................................................................
90
6.7 SUMMARY OF DISCUSSION
...........................................................................................................................
91
CHAPTER 7
TOWARDS AN APPROPRIATE GROWTH STRATEGY
...........................................................................
92 7.1 WHAT IS AN APPROPRIATE GROWTH STRATEGY?
.........................................................................................
92 7.2 CORE ISSUES
................................................................................................................................................
93 7.3 CREATING FIT
..............................................................................................................................................
96
7.3.1 The importance of organizational levers
......................................................................................................
97 7.4 CONCLUSION
...............................................................................................................................................
97
CHAPTER 8 LIMITATIONS AND SCOPE
............................................................................................................................
98
8.1 THEORETICAL LIMITATIONS
.........................................................................................................................
98 8.2 PRACTICAL LIMITATIONS
.............................................................................................................................
99 8.3 SCOPE
........................................................................................................................................................
100
CHAPTER 9
CONCLUSION
..................................................................................................................................................
102
REFERENCES
..................................................................................................................................................
104
APPENDIX
........................................................................................................................................................
115
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It is a little like the tailors 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
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1
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
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2
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 Rd)1 which is a branch
association for Danish management consulting firms and represents
more than 175 consulting firms. DMRs 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 Andersen2
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 organizations
webpage at www.DMR.nu.
2 In may 2008 Bjarne Lundager Jensen, has been appointed
director of DMR.
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3
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 (Brsen, 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
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4
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.
-
5
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 Rambl
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.
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6
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 analysis3 and a
tendency analysis4 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 one- person spare-time firms over highly professional
firms who employ several consultants to
global firms who have more than 20.000 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 2006/7.
http://www.dmr.nu/log/dmr403/library/BRANCHEANALYSE%202006_2007.pdf
4 Tendensundersgelse 2007.
http://dmr.nu/log/dmr403/library/Tendensundersgelse2007.pdf
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7
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, Rambl 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
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8
employees), medium (16-50 employees), and large (51-200+
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-
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9
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 11 20
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).
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10
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 2006. 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 industrys 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 HHI5 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.
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11
knowledge, and competence of the individual consultant become
important parameters of competition.
The industry is clearly clustered around two areas in Denmark;
Copenhagen and rhus. 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 14.408 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 industrys 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 industrys significance within the Danish economy.
Appendix G shows the industrys share of the
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12
Danish GNP. If the expected growth in 2008 is achieved it will
mean that the industrys 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
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13
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
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14
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 dtre 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
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15
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 customers 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.
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16
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 10th 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.
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17
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 250-300
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 firms 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
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18
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.
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19
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
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20
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.
3.1.1 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 firms 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 firms ability to
develop the resources, which exist in the firm, and how these
resources can support the firms 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 firms
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
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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 firms
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.
3.1.2 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.
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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 (OGorman, 2001).
3.1.3 The sustainability of growth Research has shown that
industry factors may be less significant when explaining firm
profitability and growth (OGorman, 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
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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
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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 firms 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.
3.2.1 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 firms 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 Penroses (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 value-creating 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,
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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 Penroses 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 firms internally generated resources, which
in the case of growth are much more elemental than economies of
scale6.
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 firms 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 th