Chapter 2 The Danish Management Consulting Industry
Chapter 2 The Danish Management Consulting Industry
Chapter 2 The Danish Management Consulting Industry
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Department of Marketing and <strong>Management</strong>, University of Southern Denmark, Odense 2008<br />
<strong>Management</strong> <strong>Management</strong> <strong>Consulting</strong> <strong>Consulting</strong> Firms<br />
Firms<br />
- Finding the Right ight Growth rowth Strategy trategy<br />
A Comparative omparative Case Case Study Study of of Growth Growth and and Strategy Strategy<br />
Strategy<br />
Within ithin the the <strong>Danish</strong> <strong>Danish</strong> <strong>Danish</strong> <strong>Management</strong> <strong>Management</strong> <strong>Management</strong> <strong>Consulting</strong> <strong>Consulting</strong> Industr <strong>Industry</strong> Industr<br />
Master <strong>The</strong>sis: Cand. Merc. International <strong>Management</strong><br />
Supervisor: Professor Marcus Becker Autor: Jesper Kirkegaard Kristensen
Acknowledgements<br />
First, I would like to thank <strong>Danish</strong> <strong>Management</strong> Association (DMR) for motivating and<br />
inspiring this master thesis towards a direction, which corresponds to my own personal and<br />
professional interests, namely strategy and consulting. Especially Tom Vile Jensen, special<br />
consultant at DMR, deserves great thanks for his contribution and help, both economic and<br />
information wise. This has been an enormous support throughout the whole process, and I<br />
sincerely hope that this master thesis will contribute to the important work that takes place at<br />
DMR. Furthermore, great appreciation goes to all the consulting firm managers who have<br />
taken time out of their busy schedule to participate in this project. I know it has been difficult<br />
to find the time, but I was always met with great hospitality and sincere interest. Without their<br />
openness and helpful attitude towards my interview questions, I would not have been able to<br />
conduct my research. Finally, I would like to dedicate thanks to Professor Marcus Becker,<br />
University of Southern Denmark, for providing valuable feedback and guidance in my work.<br />
Ultimately, I give great thanks to everyone who has contributed to my master<br />
thesis, as well as provided me with support and assistance through out the process.<br />
Jesper Kirkegaard Kristensen<br />
Odense, 22/9 2008
<strong>Danish</strong> summary<br />
Mange konsulentvirksomheder har kunnet leve fornuftigt de senere år på grund af den<br />
generelle gode økonomiske udvikling, også selvom de ikke har haft en strategi og er gået<br />
hovedkulds efter vækstmulighederne i markedet. Spørgsmålet er, hvor udbredt denne tendens<br />
har været blandt virksomhederne, og dermed hvor svagt/stærkt konsulentvirksomhederne og<br />
deres organisationer står rustet i de kommende år, hvor markedet ikke vokser så stærkt, og<br />
hvor kundernes krav stiger markant. Dette speciale omhandler strategi og vækst i management<br />
konsulentbranchen samt, hvorledes dette bedst kan håndteres i forhold til de vækstfaktorer og<br />
-barrierer, som branchen på nuværende tidspunkt og i fremtiden står overfor. Den danske<br />
management konsulentbranche er præget af enkelte store og hastigt voksende<br />
konsulentvirksomheder og herudover en bred vifte af mindre foretagender. Generelt set er det<br />
de største virksomheder, som høster størstedelen af profitten, mens der blandt de mindre<br />
virksomheder er en større kamp for overlevelse og vækst. Set i lyset af at branchen<br />
sandsynligvis er på vej imod sværere tider, er det derfor relevant at se på, hvorledes<br />
vækststrategi kan og bør håndteres.<br />
Ledende personer i en række forskellige management konsulentvirksomheder er<br />
blevet interviewet med henblik på at åbne op for en dybere forståelse af strategi og vækst i en<br />
ellers meget broget og lukket branche. Konsulentvirksomhederne er blevet valgt således, at de<br />
repræsenterer henholdsvis små, mellem og store konsulentvirksomheder samt ud fra, at de er<br />
etableret omkring år 2000. Gennem en komparativ analyse af disse virksomheder har det<br />
været muligt at identificere signifikante vækstprocesser og -barrierer på tværs af størrelse<br />
samt kendetegn ved de konsulentvirksomheder, som håndterer vækst og strategi bedst.<br />
Ydermere er analysen blevet styrket af en brancheanalyse, som har haft til formål at belyse de<br />
udfordringer, som branchen står overfor.<br />
På et brancheplan viser analysen, at der generelt er sket et skifte fra et sælgers<br />
marked til et købers marked. Kunder fravælger one-stop-shopping, er mindre loyale og<br />
presser priserne. Overordnet set er kundernes forhandlingskraft steget, hvilket udfordrer<br />
konsulentvirksomhedernes strategi og stiller højere krav til professional virksomhedsdrift. På<br />
et virksomhedsplan viser analysen, at vækst er nødvendig for konsulentvirksomheder som en<br />
forudsætning for internt at kunne udvikle sig kompetencemæssigt. En konsulentvirksomhed,<br />
som fravælger vækst eller ikke er i stand til at vækste, kan ikke udvikle sine kompetencer og<br />
risikerer dermed at miste sine konkurrencemæssige fordele. Ydermere vil analysen vise, at<br />
danske konsulentvirksomheder vokser gennem tre signifikante stadier, der hver især er
kendetegnet ved en vækstkrise. For små konsulentvirksomheder ligger den primære<br />
vækstbarriere hermed i, at stifteren er både ejer og leder. Dette skaber interessekonflikter og<br />
hæmmer fremtidig vækst. For konsulentvirksomheder af mellemstørrelse består den primære<br />
vækstbarriere i evnen til at identificere muligheder for komplementær diversifikation;<br />
herunder de ansattes egenskaber til at støtte disse vækstmuligheder. Store<br />
konsulentvirksomheders vækstbarrierer skal findes i deres evne til at samle et fragmenteret<br />
firma med mange forskellige specialer i en samlet organisation og udvikle mellemledere, som<br />
tænker i samme retning som organisationen. Afslutningsvis er de vækstprocesser, som er<br />
karakteristisk for de mere succesfulde konsulentvirksomheder, blevet identificeret med<br />
henblik på at kunne nærme sig en anvendelig vækststrategi.<br />
Hovedkonklusionen er, at de konsulentvirksomheder som har oplevet stærk<br />
vækst, er dem, som har formået at adskille ledelse og ejerskab. Ved at adskille ledelse og<br />
ejerskab kan konsulentvirksomheder skabe grundlaget for strategisk og fokuseret vækst.<br />
Herigennem åbnes op for et fokus på udviklingen af medarbejdernes kompetencer inden for<br />
ledelse og forretningsudvikling samt, at virksomheden udvikler sine kompetencer<br />
komplementært. Således vil fremtidig vækst bygge på udviklingen af mellemledere, ydelser<br />
og produkter fra en allerede eksisterende kompetenceplatform. Konsulentvirksomheder kan<br />
altså ikke alene være sikker på at skabe vækst gennem et højt fagligt niveau og ved at tilføje<br />
flere partnere med et højt fagligt fundament i virksomheden. I stedet skal der skabes en langt<br />
større grad af tilpasning mellem konsulentvirksomhedens mål og strategi, dens ressourcer og<br />
kompetencer, samt ledelse og medarbejdere gennem designet af organisationen.<br />
På baggrund disse resultater foreslås en tilgang til vækststrategi i<br />
konsulentbranchen ud fra tre trin. Konsulentvirksomhederne må indledningsvis identificere de<br />
primære vækstmuligheder og vækstbarrierer, som de står overfor. Herigennem skal fokus<br />
rettes mod fem kerneområder, der danner grundlaget for en vækststrategi. Disse er:<br />
Ledelsestilpasning, strategisk udvikling, tilpasning af organisationen, HRM samt innovations-<br />
og vidensudvikling. Sidst skal konsulentvirksomheden identificere de branche- og<br />
virksomhedsspecifikke organisationelle virkemidler, hvormed den kan opnå tilpasning blandt<br />
de fem kerneområder. Gennem denne strategiske agenda kan konsulentvirksomheden skabe<br />
en unik position med en klar konkurrencemæssig fordel og dermed danne det fremtidige<br />
grundlag for vækst.
CHAPTER 1<br />
Table of contents<br />
INTRODUCTION ................................................................................................................................................. 1<br />
1.1 MOTIVATION ................................................................................................................................................. 1<br />
1.2 CHALLENGES IN PRACTICE ............................................................................................................................ 2<br />
1.3 PROBLEM STATEMENT ................................................................................................................................... 3<br />
1.4 FOCUS AND STRUCTURE ................................................................................................................................. 4<br />
CHAPTER 2<br />
THE DANISH MANAGEMENT CONSULTING INDUSTRY ........................................................................ 6<br />
2.1 STRUCTURE ................................................................................................................................................... 6<br />
2.2 GROWTH IN THE INDUSTRY .......................................................................................................................... 11<br />
2.3 CHALLENGES FOR THE INDUSTRY ................................................................................................................ 14<br />
2.4 THE FUTURE ................................................................................................................................................ 17<br />
2.5 SUMMARY OF INDUSTRY ANALYSIS ............................................................................................................. 17<br />
CHAPTER 3<br />
THEORIES OF FIRM GROWTH .................................................................................................................... 19<br />
3.1 THE CONCEPT OF GROWTH ........................................................................................................................... 19<br />
3.1.1 <strong>The</strong> tension between growth and size ........................................................................................................... 20<br />
3.1.2 <strong>The</strong> dynamics of growth ................................................................................................................................ 21<br />
3.1.3 <strong>The</strong> sustainability of growth ......................................................................................................................... 22<br />
3.2 THEORETICAL CONTRIBUTIONS.................................................................................................................... 23<br />
3.2.1 Inside-out perspective ................................................................................................................................... 24<br />
3.2.2 Outside-in perspective .................................................................................................................................. 30<br />
3.2.3 Tying the ends in the organization design .................................................................................................... 33<br />
3.2.4 Summary of theoretical contributions .......................................................................................................... 34<br />
3.3 SME THEORY .............................................................................................................................................. 34<br />
3.3.1 SME growth .................................................................................................................................................. 34<br />
3.3.2 <strong>The</strong> entrepreneur .......................................................................................................................................... 35<br />
3.3.3 Strategy and culture in SMEs ....................................................................................................................... 36<br />
3.4 CREATING AN INTEGRATED APPROACH ........................................................................................................ 37<br />
3.5 SUMMARY OF THEORY ................................................................................................................................. 39<br />
CHAPTER 4<br />
DESIGN AND IMPLEMENTATION ............................................................................................................... 41<br />
4.1 METHODOLOGY AND SETTINGS ................................................................................................................... 42<br />
4.2 OPERATIONALIZATION ................................................................................................................................. 44<br />
4.3 DATA ANALYSIS .......................................................................................................................................... 44<br />
CHAPTER 5<br />
EMPIRICAL FINDINGS ................................................................................................................................... 46<br />
5.1 THE PURPOSE OF GROWTH ........................................................................................................................... 46<br />
5.2 DEVELOPMENT THROUGH GROWTH ............................................................................................................. 48<br />
5.2.1 Stage one consulting firms ............................................................................................................................ 48<br />
5.2.2 Stage two consulting firms ............................................................................................................................ 54<br />
5.2.3 Stage three consulting firms ......................................................................................................................... 59<br />
5.2.4 Concluding remarks on growth development ............................................................................................... 64<br />
5.3 GROWTH PROCESSES ................................................................................................................................... 65<br />
5.3.1 Culture .......................................................................................................................................................... 65
5.3.2 Entrepreneurship .......................................................................................................................................... 66<br />
5.3.3 Strategy ......................................................................................................................................................... 67<br />
5.3.4 Resources and competences ......................................................................................................................... 68<br />
5.3.5 <strong>The</strong> factor market ......................................................................................................................................... 70<br />
5.3.6 <strong>The</strong> product market....................................................................................................................................... 70<br />
5.3.7 Organization design ..................................................................................................................................... 72<br />
5.4 SUMMARY OF ANALYSIS .............................................................................................................................. 74<br />
CHAPTER 6<br />
DISCUSSION....................................................................................................................................................... 75<br />
6.1 CHANGE IN THE SIZE AND DIVISION OF VALUE ............................................................................................. 75<br />
6.2 DEVELOPMENTAL LEADERSHIP .................................................................................................................... 77<br />
6.2.1 Developmental perspective in consulting firms ............................................................................................ 77<br />
6.3 GROWTH STRATEGIES .................................................................................................................................. 78<br />
6.3.1 Strategic growth vs. opportunity driven growth ........................................................................................... 80<br />
6.3.2 Organic growth vs. inorganic growth .......................................................................................................... 81<br />
6.4 BEST PRACTICE OR NEXT PRACTICE ............................................................................................................. 82<br />
6.5 THE TENSION BETWEEN GROWTH AND SIZE ................................................................................................. 84<br />
6.5.1 Advantages of growth ................................................................................................................................... 85<br />
6.5.2 Disadvantages of growth .............................................................................................................................. 86<br />
6.5.3 An optimal size ............................................................................................................................................. 87<br />
6.6 FITTING THE ORGANIZATION DESIGN TO GROWTH ....................................................................................... 88<br />
6.6.1 Governance and ownership .......................................................................................................................... 88<br />
6.6.2 Organizational levers ................................................................................................................................... 90<br />
6.7 SUMMARY OF DISCUSSION ........................................................................................................................... 91<br />
CHAPTER 7<br />
TOWARDS AN APPROPRIATE GROWTH STRATEGY ........................................................................... 92<br />
7.1 WHAT IS AN APPROPRIATE GROWTH STRATEGY? ......................................................................................... 92<br />
7.2 CORE ISSUES ................................................................................................................................................ 93<br />
7.3 CREATING FIT .............................................................................................................................................. 96<br />
7.3.1 <strong>The</strong> importance of organizational levers ...................................................................................................... 97<br />
7.4 CONCLUSION ............................................................................................................................................... 97<br />
CHAPTER 8<br />
LIMITATIONS AND SCOPE ............................................................................................................................ 98<br />
8.1 THEORETICAL LIMITATIONS ......................................................................................................................... 98<br />
8.2 PRACTICAL LIMITATIONS ............................................................................................................................. 99<br />
8.3 SCOPE ........................................................................................................................................................ 100<br />
CHAPTER 9<br />
CONCLUSION .................................................................................................................................................. 102<br />
REFERENCES .................................................................................................................................................. 104<br />
APPENDIX ........................................................................................................................................................ 115
“It is a little like the tailor’s son who wears dirty<br />
clothes. We have not been good at developing our<br />
own internal managers like we do at our<br />
customers… We run change courses for other firms,<br />
but that medicine we have not taken ourselves”.<br />
Manager in a large management consulting firm
<strong>Chapter</strong> 1<br />
Introduction<br />
This master thesis seeks to investigate how <strong>Danish</strong> management consulting firms currently<br />
build and sustain competitive advantage, and how this can be translated into growth,<br />
development, and strategy for the individual firm. <strong>The</strong> hope is that the findings of this master<br />
thesis will contribute to the understanding of the different growth factors and barriers that are<br />
at play in the <strong>Danish</strong> management consulting industry, and that it can benefit managers of<br />
consulting firms in a practicable manner.<br />
1.1 Motivation<br />
<strong>The</strong> state of the <strong>Danish</strong> management consultant industry is good. Firms experience very<br />
strong growth, which even exceeds the growth of some technological sectors (<strong>Danish</strong><br />
Statistics). However, there is a less positive side to this as well. <strong>The</strong> biggest consulting firms<br />
make the majority of the profit in the industry. In general, many small management consulting<br />
firms have a difficult time overcoming growth barriers, and research show that 90 percent of<br />
all consulting firms fail in their first 5 years (Hasek, 1997). Based on conversations with the<br />
<strong>Danish</strong> <strong>Management</strong> Association (DMR) it quickly becomes evident that there is a tension<br />
between small and large consulting firms.<br />
“Profit end revenue is consolidated around a few large consulting firms. 80 % of the revenue<br />
goes to 20 % of the firms so it is to a large degree the major players who bear the brunt and<br />
reap the benefits”.<br />
Tom Vile Jensen, special consultant in DMR<br />
Most small management consulting firms stay small their entire life or evidently<br />
perish. This raises the question about whether there exists a “best practice” in the management<br />
consulting industry, and whether the large management consulting firms seem to stimulate a<br />
“best practice” for growth and success. Moreover, this is especially relevant now where the<br />
<strong>Danish</strong> economy shows signs of a recession following a period since 2004 where the <strong>Danish</strong><br />
consulting industry experienced increasing growth. Economic growth creates work for<br />
consulting firms and has made it possible for many new consulting firms to start up with the<br />
prospect of making a profit. However, experience shows that when times get tough it is often<br />
consulting services that are among the first to be cut away by clients. <strong>The</strong> management<br />
consulting industry faces a period where clients will be more reluctant and critical in their use<br />
1
of consultants and competition will be intensified. This creates new challenges for the <strong>Danish</strong><br />
consulting industry.<br />
This master thesis is initiated in cooperation with the <strong>Danish</strong> <strong>Management</strong><br />
Association (Dansk <strong>Management</strong> Råd) 1 which is a branch association for <strong>Danish</strong> management<br />
consulting firms and represents more than 175 consulting firms. DMR’s mission is to;<br />
develop and maintain professionalism and ethics within the <strong>Danish</strong> consulting industry,<br />
develop and improve conditions for consulting firms in Denmark, and develop Denmark as a<br />
knowledge-based society. Through several pleasant discussions with DMR director Susanne<br />
Andersen 2 the topic of the master thesis was determined. <strong>The</strong> cooperation with DMR is of<br />
great significance as DMR offers expert information on the <strong>Danish</strong> management consulting<br />
industry on a continuing and systemized basis. Where this master thesis differentiates itself<br />
from information already present in DMR is that it offers a bottom-up approach. Hereby, is<br />
meant that as where DMR offers knowledge from an industry perspective, this master thesis<br />
draws its conclusions from a firm perspective where growth, strategy and development are<br />
investigated in a number of <strong>Danish</strong> management consulting firms.<br />
1.2 Challenges in Practice<br />
Initially, it is crucial to identify growth factors and barriers on an industry level. That is, the<br />
external environment which consulting firms face must be assessed via an industry analysis in<br />
order to identify current and future challenges that are relevant in the context of this master<br />
thesis.<br />
<strong>The</strong>re is an immediate need to dig deeper into the tension that exists between<br />
growth, size and success in the industry. As already mentioned, only a very small number of<br />
management consulting firms manage to grow beyond a size of five to ten employees. To get<br />
a thorough understanding of this creates a two-fold challenge. On the one side, it is important<br />
to understand how management consulting firms grow. That is, to identify measures, which<br />
the individual consulting firms, takes in order to grow, but also to understand the external<br />
factors that have had an impact on their growth. Equally important, is to understand why only<br />
a few firms experience a distinct growth while many fail on this path.<br />
It is not clear what stimulates growth in the industry, and where potential<br />
answers must be found. <strong>The</strong>refore, an integrated approach and a theory base, which forms the<br />
point of departure for examining and systemizing the factors of industrial, resource, and<br />
relational character that enables and inhibits growth, must be developed. Since there is general<br />
1 For further information about DMR consult the organization’s webpage at www.DMR.nu.<br />
2 In may 2008 Bjarne Lundager Jensen, has been appointed director of DMR.<br />
2
lack of existing frameworks and knowledge regarding a “best practice” in the industry, this<br />
creates an empirical and explorative challenge. Based on theory the challenge is to create a<br />
model that can be used on a general firm level, but also allows for insight on the individual<br />
firm level. Furthermore, as I have chosen to approach the problem via an entire industry with<br />
an expected internal heterogeneity there is a challenge in balancing generalization and detail.<br />
Finally, a challenge lies in opening up the black box of strategy in consulting<br />
firms. It is an industry where the players do not like to share too much about their strategy and<br />
competitive advantages, and where most industry information and knowledge is collected<br />
from a top-down perspective. Thus, a challenge lies in achieving an inside perspective from<br />
the management consultants themselves and their take on how to devise and execute strategy.<br />
1.3 Problem Statement<br />
<strong>The</strong> management consulting industry has experienced a significant change over the last<br />
decade. Where consultants earlier made their living providing general services such as market<br />
analyses of remote countries, strategies for going global, fusions and so on, today customers<br />
demand much more specific services. <strong>The</strong>re seems to be a rising degree of professionalism<br />
among customers of consultant services, and they demand cutting-edge competences and<br />
quick and swift problem solving. In addition, the competition on the <strong>Danish</strong> consulting<br />
market has increased significantly. International consulting houses, as well as a long tail of<br />
micro consulting firms provide their services (Børsen, 2005). However, there is still a need<br />
and demand for consultant services. What have changed, as the global market have become<br />
more complex and competitive, is that customers who demand consulting services have much<br />
higher standards - hot air and buzzwords do not cut it anymore.<br />
<strong>The</strong>refore, owing to the above described development and challenges in the<br />
<strong>Danish</strong> consulting industry, it evidently appears that consulting firms, in general, must seek<br />
proactive measures in every aspect of their organization in order to be able to survive and<br />
compete in the future. However, good advice stops here as there does not seem too be much<br />
guidance for consulting firms on how to overcome growth barriers. This consequently leads to<br />
the following problem statement for this master thesis:<br />
What is an appropriate growth strategy for <strong>Danish</strong> management<br />
consulting firms relative to their current size and situation in the market?<br />
In order to arrive at a full understanding of the problem statement it is necessary<br />
to break it down into subcategories. First, a category of descriptive research questions is<br />
supposed to create the basis for understanding the complex and broad management consulting<br />
3
industry. Second, a category of research questions will focus on firm growth, and how this is<br />
related to size and other firm factors. Finally, a category of research questions will explore<br />
how empirical findings can be tied together to formulate a growth strategy, as well as a<br />
general understanding of how the industry can enable growth and overcome growth barriers.<br />
<strong>The</strong>se research questions will not be explicitly answered, but serve as a guideline throughout<br />
the research.<br />
Research questions concerning the industry:<br />
1) What characterizes the <strong>Danish</strong> management consulting industry?<br />
2) Are there major significant differences between <strong>Danish</strong> management consulting firms with regard to<br />
size?<br />
3) How do the findings of research question 1-2 affect growth at the level of the individual management<br />
consulting firm?<br />
Research questions concerning firm growth:<br />
4) What is the motivation to grow?<br />
5) How do management consulting firms differentiate across size, and do this allow them to be categorized<br />
into significant life cycle stages?<br />
6) How does growth enablers and barriers relate to factors such as:<br />
a. Firm culture?<br />
b. Entrepreneurship?<br />
c. Strategy?<br />
d. Resources and competences?<br />
e. Factor and product market influences?<br />
f. Organization design?<br />
Research questions concerning growth strategy:<br />
7) How can the findings of research questions 1-6 be translated into growth strategy that accounts for the<br />
specific size and situation of the individual consulting firm?<br />
1.4 Focus and structure<br />
<strong>The</strong> focus of this master thesis is on <strong>Danish</strong> stand-alone management consulting firms. <strong>The</strong><br />
industry definition of a management consulting firm is (<strong>Danish</strong> Statistics):<br />
<strong>The</strong> management consulting industry is a designation for the type of firms that:<br />
1) Deliver knowledge and advising about management and business development to decision makers and<br />
managers in private firms, organizations, and public institutions and/or<br />
2) Work with educating and developing management in private firms, organizations, and public<br />
institutions with the purpose of developing organizations, business systems and people.<br />
4
<strong>The</strong> term <strong>Danish</strong> stand-alone narrows the focus down to those firms, which<br />
have been founded in Denmark and operate as pure management consulting firms. This focus<br />
leaves out large international firms such as Mckinsey & Company and <strong>The</strong> Boston <strong>Consulting</strong><br />
Group, and consulting firms where consulting is a secondary service tied up to a primary<br />
function such as Rambøl <strong>Management</strong> or Deloitte. <strong>The</strong> argument for this is that the mentioned<br />
types of consulting firms have a completely different economic and organizational structure<br />
or stem from primarily an American market, which offers very different conditions than the<br />
<strong>Danish</strong> market.<br />
<strong>The</strong> structure of this master is very much shaped by the adoption of a holistic<br />
approach, which means that the entire management consulting industry is considered. Neither<br />
a purely theoretical approach nor an analysis of a single consulting firm will provide the level<br />
of general answers needed. <strong>The</strong>refore, this master thesis concerns the <strong>Danish</strong> management<br />
consultant industry as a whole. <strong>The</strong> level of analysis will be both on firm level as well as on<br />
industry level. That is, I consider the topic from a top-down perspective (the industry analysis)<br />
and a bottom-up perspective (the empirical part of this master thesis) through three steps.<br />
First, I adopt an exploratory research approach in order to clarify the problem.<br />
This is done through an industry analysis that rests on secondary data and an exploratory<br />
expert interview. <strong>The</strong> purpose is also to explore new dimensions of the topic. Second, in order<br />
to come to a full understanding of the complex notion of growth, and how this is related to the<br />
<strong>Danish</strong> management consulting industry, I find that it is important not to lock in, a priori, on a<br />
specific theoretical framework. This runs the risk of omitting important elements because of<br />
the use of a specific paradigm. Instead, I choose to open up this complex problem by<br />
accepting that there is no single “right” answer, and that investigating the problem cannot be<br />
done by simply pulling together available evidence. I hope, by going from the known to the<br />
unknown, to be able to add something new to the field by adopting inductive reasoning,<br />
which is essentially a method of discovery. This is done through the development of an<br />
integrated approach to the theory of firm growth. Third, comparative research is conducted in<br />
a number of <strong>Danish</strong> management consulting firm that each display different levels of growth,<br />
size and success. Through this assessment of growth factors and barriers, I hope to be able to<br />
identify significant factors, which enable or inhibit growth and relate these findings to the<br />
stages of development of consulting firms. Finally, all three elements is gathered and<br />
discussed in order to end up with a number of practicable implications. For the sake of<br />
simplicity, the overall structure of this master thesis is illustrated in appendix A.<br />
5
<strong>Chapter</strong> 2<br />
<strong>The</strong> <strong>Danish</strong> <strong>Management</strong> <strong>Consulting</strong> <strong>Industry</strong><br />
<strong>The</strong> point of departure of this master thesis is a description of the structure of the industry,<br />
growth, challenges, and future perspectives. <strong>The</strong> purpose is to create a foundation for<br />
understanding the industry from a top down perspective in the context of this master thesis.<br />
As already mentioned, the management consulting industry is a diverse industry<br />
with many different players. Thus, measures such as industry size, turnover, and demand are<br />
always estimates. <strong>The</strong> results presented in this chapter rests upon three sources; an industry<br />
analysis 3 and a tendency analysis 4 conducted by DMR and supported by the most recent<br />
numbers, and an expert interview with Tom Vile Jensen, special consultant in DMR (see<br />
appendix P). <strong>The</strong> two surveys are conducted on a yearly basis and builds on qualitative<br />
questions among DMR members. <strong>The</strong>reby, they represent the newest source of information.<br />
In my search for information of the management industry, other surveys and articles have<br />
popped up, but they have the disadvantage that they do not rest on the newest information. As<br />
the industry is developing fast, it is important that conclusions be made from recent<br />
information. However, where results from other surveys have been interesting these issues<br />
have been discussed in the expert interview, in order to either confirm or disconfirm their<br />
robustness and relevance.<br />
2.1 Structure<br />
<strong>The</strong> strong growth that has taken place in the consulting industry has attracted management<br />
consultants with very different backgrounds. In addition, the consultant industry, as a whole,<br />
is a relatively young and diverse industry. Many different types of consultant services take<br />
place every day and range from coaching and teambuilding to more integrated and big<br />
projects that help firms with strategy, organization, operations, etc. Firms range from one-<br />
person spare-time firms over highly professional firms who employ several consultants to<br />
global firms who have more than 20.000 employees on their pay check. At a first glance, the<br />
industry appears very diverse and broad, but a little investigation can shred a little light upon<br />
the industry.<br />
3 “Branche analyse 2006/7”. http://www.dmr.nu/log/dmr403/library/BRANCHEANALYSE%202006_2007.pdf<br />
4 “Tendensundersøgelse 2007”. http://dmr.nu/log/dmr403/library/Tendensundersøgelse2007.pdf<br />
6
History <strong>The</strong> <strong>Danish</strong> management consulting industry had its beginning in the 60s and 70s,<br />
but was more seriously founded in the late 80s where some of the first real consulting firms<br />
were created. Traditionally, the role of the consultant was based on technology and rationality,<br />
but to a higher degree, the role developed into what it is to day where the focus is on<br />
evolution and revolution in the way an assignment is considered (Poulfelt, 1998). Where the<br />
focus originally was on the professional content, this changed into a focus on the relationship<br />
between the consulting firm, the organization and the concrete assignment. A more process<br />
oriented and organic consultant role was developed where the task of the consultant was to<br />
help line management to define and understand the problem at hand. <strong>The</strong>reby, consulting<br />
changed into management consulting and today management consulting services cover many<br />
areas. Obviously, an industry so diverse will attract many different players.<br />
Players <strong>The</strong> amount of active management consulting firms in the industry is steadily rising.<br />
It is estimated that there is an increase of about 10 % firms every year. In 2006, it was<br />
established that the amount of active firms was 7.550, see appendix B. This indicates an<br />
industry where players enter the market and still expect profit to be made. At this point in<br />
time, the market does not seem to be saturated. It is possible to classify the <strong>Danish</strong><br />
management consulting industry into five strategic groups. <strong>The</strong>se are:<br />
• Big international consulting companies: This group represents firms such as Mckinsey &<br />
Company, <strong>The</strong> Boston <strong>Consulting</strong> Group, IBM Business <strong>Consulting</strong>, and Accenture<br />
among others. Typically, these firms employ around 100 to 300 consultants in their<br />
regional office. Strategically they are run from US offices and are supported by<br />
international organizations with several thousands employees. To a large degree, they<br />
provide standardized solutions based on tools and frameworks, as well as they have very<br />
well defined career paths for their consultants.<br />
• Large concerns with build in consulting departments: This group of consulting firms is<br />
either departments or subsidiary companies of large international concerns. <strong>Consulting</strong><br />
services are tied in with another primary function such as accounting, engineering, or<br />
architecture. Examples are; Deloitte, Rambøl <strong>Management</strong>, Cowi, and<br />
PricewaterhouseCoopers where consulting services are build into a large business that<br />
allows them to draw on synergies internally in the concern.<br />
• Stand-alone <strong>Danish</strong> management consulting firms: This group represents the largest<br />
number of consulting firms and is to be understood as firms, which has consulting as their<br />
only business. Furthermore, they have been founded in Denmark and have achieved their<br />
growth on the <strong>Danish</strong> market. This group can be further divided into small (1-15<br />
7
employees), medium (16-50 employees), and large (51-200+ employees) management<br />
consulting firms.<br />
• Micro firms and sole practitioners: Here we find the array of micro firms that provide<br />
some kind of consulting service either on a full time basis or as a side occupation to their<br />
regular job. Often, the consulting services they provide have a character of being either<br />
social events or teambuilding without a larger degree of theory, knowledge, or tools<br />
behind. <strong>The</strong> kinds of services and the regularity with which they are provided does not<br />
allow these firms to be characterized as true management consulting firms. Contrary, this<br />
group also represents sole practitioners. This is typically the “consulting professor” or the<br />
“consulting guru” who has been in the game for many years and posses a huge amount of<br />
theoretical knowledge, which he provides/sells to senior management of large<br />
corporations. No doubt useful, but they do not constitute the essence of a firm.<br />
• Non-commercial consulting firms: <strong>The</strong>se government-owned or -sponsored organisations<br />
play an important role through their specialization on for example small and medium<br />
enterprises or certain industry sectors. DMR is an example. <strong>The</strong>y are, however, run in a<br />
non-commercial fashion and growth is most likely not a core issue for them.<br />
On the demand side, the largest customer group is made up of the manufacturing industry and<br />
the public sector, which combined make up for little more than 50 % of industry revenue. <strong>The</strong><br />
second largest group is the financial sector, which constitutes almost 10 % of the sector.<br />
Finally, there are many different customer segments which make up for 40 % of industry<br />
revenue, with revenue shares of 1 – 5 %, see appendix C.<br />
Types of services: It is possible to divide consulting services into different areas such as<br />
strategic consulting, HR consulting, change management, project management, operations<br />
management, IT consulting and outsourcing, etc. However, this does not provide much<br />
information for several reasons. First, some consulting firms provide advice that does not<br />
easily fall into one of these areas, for example consulting activities that are of a much more<br />
general character. Second, even for the more traditional service providers, it is difficult to<br />
pinpoint an assignment as pure “IT consulting” because, due to a process orientation, it often<br />
entails more. Third, a lot of consulting work is often, in its essence, only outsourcing. That is,<br />
firms hire in bodywork for certain projects which they do not have the capacity to lift<br />
themselves. Finally, services change all the time and new consulting areas arrive in the<br />
industry such as LEAN or coaching.<br />
Instead, what is interesting is to consider the parameters with which consulting<br />
firms can differentiate their services. <strong>The</strong> three most significant parameters are; mass, high-<br />
8
end/low-end and specialization/full-service. First, mass indicates how many consultants a<br />
consulting firm has at its disposal. This is critical in some customer segments, as large<br />
companies will demand a large workforce over a long duration of time. Only the largest<br />
consulting firms can provide this. Second, high-end/low-end refers to the type of people a<br />
consulting firm employs and their level of education. Are they masters, PhDs, MBAs,<br />
certified consultants, etc. or do they have hands-on approach? Some customers demand the<br />
best because then they cannot be held responsible for a project gone wrong, but this solution<br />
is obviously very expensive. Third, specialization/full-service refers to the amount of service<br />
areas in which a consulting firm claims to have capabilities. A broad range of services can<br />
allow a consulting firm to cross-sell services, and thereby, become the sole provider and<br />
trusted consultant of a customer. As indicated, the range of services provided spans a broad<br />
spectrum. It is suitable to deepen the knowledge of these on the individual firm level as it<br />
indicates different strategic choices.<br />
Size distribution <strong>The</strong> consulting industry is relatively young and therefore not fully<br />
consolidated. Small players can enter the market in the form of one- or two-person firms and<br />
still expect profit to be made. On the other hand, it is relative easy to leave the market again or<br />
limit the level of activities and services provided to almost none. To be able to understand the<br />
whole story of the structure of the industry it is very important to take into consideration the<br />
size distribution that is at play. Appendix D shows the percentile number of consulting firms<br />
distributed among firm size. Almost two thirds of the industry is made up of small consulting<br />
firms with revenue of zero - 10 million <strong>Danish</strong> kr. About one fifth of the industry consists of<br />
firms with revenue of 11 – 20 million <strong>Danish</strong> kr. while approximately the last fifth of the<br />
industry has revenue, which exceeds 50 million <strong>Danish</strong> kr. <strong>The</strong>se numbers provides a picture<br />
of an industry characterized by a large amount of small players and only a few big. It is worth<br />
noticing the difference in the above size distribution concerning the changes that have taken<br />
place compared with 2005 (numbers in parenthesis). <strong>The</strong> group of the smallest firms has<br />
increased from 65 % to 66 % while the second smallest group has decreased from 18 % to<br />
12 % of the entire industry. This indicates that some small firms manage to grow but also that<br />
several leave that market again or perish. It is very difficult to say anything about an average<br />
size of consulting firms in Denmark, but based on numbers provided by special consultant<br />
Tom Vile Jensen, an estimated average size in terms of employees is eight. This is well<br />
below the size of the large consulting firms who employ somewhere between 50 and 200<br />
consultants. <strong>The</strong> size of management consulting firms allows them to be characterized as<br />
small and medium enterprises (SMEs).<br />
9
Revenue distribution <strong>The</strong> inequality in the industry becomes clear when considering how<br />
revenue is distributed among firm size. As appendix E shows, firms with revenue of 51+<br />
million <strong>Danish</strong> kr. made 76 % of the total revenue made in the industry in 2006. This means<br />
that despite the fact that the industry is characterized by a large amount of small players and<br />
only a few big, revenue is concentrated among the big players. 12 % of the industry’s players<br />
make up for 76 % percent of the total industry revenue while 66 % of the players make up<br />
only 6 %.<br />
Degree of competition and concentration <strong>The</strong> industry has a concentration ratio of<br />
approximately 880 HHI 5 points (DMR industry analysis 2006/7, p. 18). This supports what<br />
was earlier stated about the industry. It is characterized by a large amount of firms on the one<br />
hand and a large amount of customers on the other hand. Competition is based on providing<br />
the best service, quality, and results to customers.<br />
<strong>The</strong> consulting industry is a relatively knowledge and workforce intensive<br />
industry. It is characterized by a very low need to make investments, and thereby there are<br />
very low entry and exit barriers. So fare, there exist a number of different consulting and<br />
project management certificates but these are only used and accepted by consultants and<br />
customers to a very low degree. In general, the industry is not driven by authorizations,<br />
specific educations, or certificates.<br />
This has a significant impact on the way that the individual consulting firm<br />
seeks to do business and define its strategy. That is, most consulting firms pursue a<br />
diversification strategy in order to clarify the difference between them and other firms. In<br />
addition, competition is to a great degree determined through the customer network that the<br />
individual consulting firm operates within. <strong>The</strong> name of the firm, its references, and the<br />
reputation of the individual consultant employed are important elements in the creation of a<br />
large and wide clientele. Once this is established the firm has a strong competitive position<br />
compared with other firms who do not have the same amount of clients. <strong>The</strong>reby, experience,<br />
5 HHI is the Herfindahl-Hirschman index, a commonly accepted measure of market concentration. It is<br />
calculated by squaring the market share of each firm competing in the market and then summing the resulting<br />
numbers. <strong>The</strong> HHI takes into account the relative size and distribution of the firms in a market and approaches<br />
zero when a market consists of a large number of firms of relatively equal size. <strong>The</strong> HHI increases both as the<br />
number of firms in the market decreases and as the disparity in size between those firms increases (Rickard,<br />
2006). An industry where the HHI is between 1000 and 1800 are considered a moderately concentrated industry.<br />
An industry of 1000 points or less means that many small firms with a well-functioning competition characterize<br />
the industry.<br />
10
knowledge, and competence of the individual consultant become important parameters of<br />
competition.<br />
<strong>The</strong> industry is clearly clustered around two areas in Denmark; Copenhagen and<br />
Århus. However, this does not seem to be a problem when addressing the question about<br />
customers’ choice of consultants. <strong>The</strong>re is no connection between the geographic placement<br />
of consulting firms and their customers. Often, consulting firms serve customers on a<br />
countrywide basis and are not limited to doing business in their geographic region. However,<br />
clusters can have another significant impact on the industry. Namely, that of the creation of<br />
competence clusters.<br />
Competition does not happen on a general industry level across strategic groups,<br />
but instead among those consulting firms who provide the same range of services. <strong>The</strong>refore,<br />
even though competition is characterized as being very hard, it is normally only a few firms<br />
who do actually end up competing about a concrete project. This further emphasizes the<br />
arguments that competition in the industry is very much network and customer based. Most<br />
often, the large consulting firms service large firms and the other way around. Finally, the fact<br />
that the industry earns its living from knowledge and the people it is embedded within, as well<br />
as the fact that there is to some extent a high degree of competition clearly affects relations<br />
and cooperation across consulting firms. This practically does not take place.<br />
2.2 Growth in the industry<br />
<strong>The</strong> <strong>Danish</strong> consulting industry has since 2004 experienced a significant growth progress. For<br />
many consulting firms a growth rate higher than 20 % has been quite usual. In 2006 the<br />
average growth was 22,5 % and in 2007 the industry expected a growth rate of 22,9 % (DMR<br />
industry analysis, p. 6). In 2006, the industry had revenue of 14.408 billion kr., which means<br />
that it equalled that of the <strong>Danish</strong> audit industry, and almost doubled that of the <strong>Danish</strong> law<br />
sector (<strong>Danish</strong> Statistics). Appendix F shows the development of the industry’s revenue.<br />
<strong>The</strong> same figure also shows an industry that is relative sensitive to fluctuation in<br />
the state of the market. That is, the activity will more or less follow that of the general<br />
economy. When firms experience hard times, services provided by management consultants<br />
are usually among the first to be cut away. <strong>The</strong> management consulting industry is central in<br />
the change and development of private firms, as well as public institutions and organizations.<br />
<strong>The</strong> effect of a global market booming has been felt in all areas in consulting services, be it<br />
strategy and organization, management development, IT, HR or operations to name a few.<br />
A growth rate as high as the one experienced now has increased the industry’s<br />
significance within the <strong>Danish</strong> economy. Appendix G shows the industry’s share of the<br />
11
<strong>Danish</strong> GNP. If the expected growth in 2008 is achieved it will mean that the industry’s<br />
exceeds 1 % of GNP.<br />
Because of the strong growth since 2004, consulting firms have experienced<br />
almost no problems with finding customers and billing hours. Actually, they have been so<br />
busy that other problems have occurred. Finding new and qualified consultants, thinking<br />
ahead and making sure that internal competences are developed, are some of the issues that<br />
might be at stake. However, the central question for management consulting firms is whether<br />
the future will bring global growth or the turbulence, which marks the financial markets, will<br />
continue. <strong>The</strong> American market is still experiencing a crisis and there is a chance that the<br />
Asian tiger economy will lose some of its pace, but these questions are difficult to answer<br />
even for the economic wise men. <strong>The</strong>refore, the assumption in this context is that there will be<br />
some level of slowing down in the state of the market, and this will affect the <strong>Danish</strong><br />
management consulting industry in some way.<br />
Based on an indication of a general market slow down it is possible to suggest<br />
different scenarios on how this will influence the management consulting industry in the<br />
future (Poulfelt, 2006). One scenario suggests that consulting firms will experience the same<br />
level of workload as up until now. A decline in the economy will mean that organizations are<br />
forced to become more efficient and effective in order to stay competitive. Some employees<br />
will have to be laid off and there will be a need to conduct organizational reorganizations. As<br />
change agent, consulting firms have largely become a steady partner in both private and<br />
public markets and therefore an economic decline will not mean less work for consulting<br />
firms but instead work where the focus is more on organizational efficiency and global<br />
competitiveness. For example, IT and operations will still play a significant role in connection<br />
with this. Another scenario is that there is less growth compared with current growth levels.<br />
<strong>The</strong> reason for this is, as earlier suggested, that consulting services are the first place where<br />
firms chose to save money. However, the general perception is that the consulting industry<br />
will not experience as tough times as in the period 2000 to 2004 when it was in a practical<br />
free fall. Based on this discussion it is possible to identify future growth factors and barriers.<br />
Growth factors:<br />
• Reformations in the public sector: <strong>The</strong> restructuring of the public sector are expected to provide the<br />
consulting industry with a lot of work the next couple of years. Many firms specialize in this area and<br />
some even build their entire consulting business around the public segment. In general, there seems to<br />
be a greater accepts for public administrations to set aside money for consulting services.<br />
• Raised quality demands in the public and private sector: <strong>The</strong> public sector is under a still increasing<br />
pressure to administrate the money of taxpayers in the best possible way. <strong>The</strong>refore, many of those<br />
12
consulting services that were initially developed to the private sector have found its way into the public<br />
sector. For example, an award for best consulting service was awarded to Valcon for implementing lean<br />
principles in the administration of Copenhagen municipality. Private organizations also need to be<br />
better functioning today in relation to offering a good, effective, and carrier advancing work place.<br />
Managing human resources will continue to be in focus, and the mean is better-managed and well-run<br />
organizations. <strong>Consulting</strong> firms can play an important role in stimulating management and<br />
organizational development.<br />
• Capacity problems in private companies: <strong>The</strong> general lack of labour in many private companies means<br />
that there is a greater need to coordinate and optimize production and business practices. This raises the<br />
demand for consulting services in areas such as operations and IT. Often firms also accept that their<br />
employees are tied up with work, and therefore hire consultants to be in charge of temporary projects.<br />
• Strong international competition: Currently, with the high degree of global competition, <strong>Danish</strong> firms<br />
need to be as effective and efficient as possible concerning product development, new market<br />
penetrations, and internal business procedures in order to stay competitive.<br />
• <strong>The</strong> fast development of the information technology area: <strong>The</strong> fast developing IT support services that<br />
take place in many business areas demand that firms stay up to date in this area and never relax.<br />
<strong>The</strong>refore, the demand for IT systems such as ERP and CRM systems will still be high, especially the<br />
implementation of these.<br />
Growth barriers:<br />
• A general economic cool down: <strong>The</strong> ministry of finance expects growth in GNP to drop from 2,2 % in<br />
2007 to 1,6 in 2008 (DMR industry analysis, p. 19).<br />
• Significant decline in investments in the private sector: In 2006 the growth of investments was at a<br />
staggering 15 %, but it is expected that there will be a significant decline in investments to a level of<br />
around 2 % in 2008 (DMR industry analysis, p. 19).<br />
• Lack of a qualified and educated work force: <strong>The</strong> consulting industry is experiencing a very difficult<br />
time find enough qualified employees to keep up the current expansion and have to turn down orders<br />
and thereby money. <strong>The</strong> lack of qualified work is also seen in a demand of higher wages among<br />
consultants and an increased use of headhunting.<br />
• Higher degree of competences in firms: Many private firms have during the period of high growth hired<br />
academics who traditionally would not be employed in that sector. A good example is the engagement<br />
of a communication or HR employee which can take away some of the need of consulting services<br />
because the competences are already within the company. In general, this development means that<br />
many firms have in them the sufficient competences to do large analytic tasks, and the demand for<br />
consultants will move more in the direction of facilitating and implementation. In some service areas,<br />
for example strategy, this can lead to a smaller demand or change in the service profile.<br />
If you compare the <strong>Danish</strong> management consulting industry with its European<br />
counterparts, it is among the leading. With the second highest growth rate, only topped by<br />
Great Britain, and a GNP share that are higher than any European country it is safe to say that<br />
13
Denmark, also on an international level, is among the more well functioning industries in the<br />
European management consulting industry (DMR industry analysis, p. 21).<br />
2.3 Challenges for the industry<br />
Based on the discussion about the structure of the industry and the growth factors and barriers<br />
that are present, it is possible to identify a number of challenges, which confronts the<br />
management consulting industry.<br />
Supply side/Firm driven One major challenge, which almost all consulting firms seem to<br />
agree with, is the scarcity of qualified labour. Among DMR members, 37 % have experienced<br />
to turn down a project or job and thereby revenue due to lack of labour (DMR tendency<br />
analysis, p. 5). <strong>Consulting</strong> firms find that customers on the <strong>Danish</strong> market do not demand new<br />
graduates or junior consultants. Instead, the demand is on senior consultants, people with a<br />
broad experience but also detailed knowledge and often with no less than 3-5 years of<br />
experience as a consultant. <strong>The</strong>se circumstances narrow down the recruitment basis on a<br />
market where the lack of labour is already high. In practice, this means that consulting firms<br />
experience a claim of higher wages and benefits among employees, less qualified applicants, a<br />
bigger flow of employees, and an increased use of headhunting. It is most likely that this lack<br />
of labour will hamper growth to such an extent that it is not possible to maintain current<br />
growth rates.<br />
<strong>The</strong> high degree of busyness in the industry has of course played a significant<br />
role in making the industry as large and important as it currently is. However, this might have<br />
some future caveats. First, the strong demand for consulting services could mean a risk that<br />
new consulting firms with out the necessary professional skills and foundation for doing<br />
consulting work have been founded. <strong>The</strong> industry might have attracted an array of less<br />
qualified consulting firms and even some without any raison d’être at all because of the low<br />
degree of entry barriers. Combined with the fact that the industry is only controlled to a very<br />
small extent, this means that customers who do not have any great experience in buying and<br />
using consulting services might end up buying and implementing poor advice. Furthermore,<br />
already established consulting firms might be temped to hire employees who are not fully<br />
qualified which again affects the result. <strong>The</strong> individual well-qualified and skilled consulting<br />
firm must therefore continue to make visible its quality and professionalism either through<br />
certificates and/or branding.<br />
In addition, there is also a risk that the busyness can have a downside effect on<br />
the already well established and recognized consulting firms, namely, the possibility that<br />
14
some firms prioritize capacity and quantity in their projects more than quality. It is very<br />
important that consulting firms follow their projects all the way through, and not just deliver<br />
some report on the desk of the management at the firm they advise. Likewise, internal<br />
competence development and strategic planning run the risk of not getting enough attention as<br />
daily operation and customer projects are prioritized on a here-and-now basis.<br />
In general, the above-discussed busyness and its effects might mean that several<br />
firms are in need of a bit of strategic soul-searching, and here a slow down in the growth<br />
might actually be an advantage. Those consulting firms who survive and prosper in the next<br />
couple of years will be those who have not fallen through when it comes to securing future<br />
ethics, quality, and professionalism. For an industry where ethics, quality, and<br />
professionalism is decisive in order to maintain customer respects and thereby to obtain<br />
growth this is a very significant challenge.<br />
Demand side/Customer driven <strong>The</strong> industry is to a large extent buyer driven, and its<br />
direction is shaped of what customers demand. Often, diversification happens because a<br />
customer demands additional services outside the scope of the consulting firm. To maintain<br />
the customer relation, the consulting firm contracts external experts who have the specific<br />
knowledge to do the job and eventually hire them into the firm.<br />
In the <strong>Danish</strong> management consulting industry the main part of services is in the<br />
area advising/consultancy. It constitutes 63 % of all consulting services. Outsourcing and<br />
development/implementing are only respectively 2 % and 6 %. Finally, other services such as<br />
recruitment, markets analysis and education make up 29 %. Appendix H shows the<br />
distribution of services. A further insight shows an interesting development of the services in<br />
the category advising/consulting. Appendix H also shows that the area organization and<br />
operations management has increased in revenue while strategy consulting has gone down<br />
almost 3 %. In general, this development indicates a movement from services of a more<br />
analytic character to services where implementation is also a part of the task, which customers<br />
demand. <strong>Consulting</strong> firms can therefore no longer rely on general consultant services and<br />
standardized products. Instead, customers demand specific competences and results that can<br />
be seen on the bottom line. That is, projects and assignments are to a considerable degree<br />
characterized by process orientation as opposed task orientation. This means that consultants<br />
must act in completely different terms, which broaden the demand of skills present in the<br />
consulting firm. To much higher degree empathy, understanding of the customer’s situation<br />
and follow-up services are important elements of the competitiveness of consulting firms.<br />
Furthermore, customers have become very experienced in buying and using consultants.<br />
15
<strong>Management</strong> consultant services are generally considered expensive among customers.<br />
However, price is not decisive for how customers choose their consultants. Indeed, as<br />
appendix I shows price is only ranked on a 10 th place over how customers prioritize when<br />
they choose a consultant. This indicates that firms believe that price and the increase in<br />
performance that a consultant will provide is in good accordance. This fits well with the fact<br />
that delivery of concrete value to the firm is ranked as the highest priority. For the consultant<br />
firm this means that customers demand high, visible, and sustainable results when it comes to<br />
delivering value to the customer. Ranked as the second most important factor, is existing<br />
relations with the customer. This backs up what was earlier stated about customer networks<br />
and competitiveness. Often consultants engage in a direct and intimate relationship with their<br />
consultants, and this demands a high degree of respect and trust from both sides. This means<br />
that there is a high degree of second time buying in the industry. Once a close and tight<br />
customer network has been created, it can become a stabile factor of future business and<br />
growth.<br />
<strong>The</strong>re is a tendency in the industry towards an imbalance between the size of the<br />
customer and the size of the consulting firm. Most often, large companies demand that the<br />
consulting firm can provide regarding resources, competences, and work force. Often small<br />
and medium consulting firms do not have the capacity to serve these large companies in<br />
addition to their regular clients. <strong>The</strong>re seems to be consistency in that large companies hire<br />
large consulting firms.<br />
This can have a less positive outcome in two ways. First, it means that small and<br />
medium consulting firms only to a certain extent get the experience and competences<br />
necessary from working with large clients. In line with the increased professionalism, this can<br />
mean that small and medium firms risk appearing less professional and suitable for serving<br />
large clients simply because they do not have the experience and know how. In the end, this<br />
might further consolidate the industry and sharpen the bias between small and large<br />
consulting firms. Second, if the argument is taken to its extreme, it means that the industry is<br />
split up into an A-team and a B-team. One the one side, the industry consists of consulting<br />
firms of an appropriate size who have the required skills, resources, competences and<br />
experience to provide valuable consulting services to the market, whereas, one the other side,<br />
there is also a large portion of small consulting firms who are in need of a quality and<br />
competence boost.<br />
16
2.4 <strong>The</strong> future<br />
Despite signs of an economic cool down most consulting firms, expect an increase in future<br />
demand. It continues to be the private sector, with manufacturing companies as the most<br />
dominating purchasers, who drives demand but the public sector is still important. Together<br />
these two groups account for over a fourth of the turnover in the industry (DMR tendency<br />
analysis, p. 2).<br />
However, it will become difficult to maintain the current growth rates because<br />
of two main reasons. First, because the <strong>Danish</strong> market to some extent has become saturated.<br />
<strong>The</strong> relationship between supplier and buyer seems to be at an appropriate level. <strong>The</strong> <strong>Danish</strong><br />
market is relatively limited in size. That is, there is a limit to the size of firms operating in<br />
Denmark, both international and domestic. <strong>The</strong> fact, that the <strong>Danish</strong> market is relatively small<br />
compared for example to the American market, indicates that the size we see of the large<br />
consulting firms of around 250-300 employees is a maximum size, at least within the phase<br />
they are now. Currently it is difficult to obtain the volume and strength necessary to grow<br />
beyond that size. <strong>The</strong>refore, the next big issue will be to figure out how <strong>Danish</strong> management<br />
consulting firm’s best can leverage their competences internationally. Second, because of the<br />
growth inhibiting factors discussed above, with the high lack of labour as the primary reason,<br />
growth will necessarily drop. <strong>The</strong> industry is relatively labour heavy and growth rates of 20 %<br />
will roughly mean that an intake of 20 % on the employee side is needed.<br />
<strong>The</strong> above discussion indicates that a consolidation process will take place in the<br />
<strong>Danish</strong> management consulting industry in the nearest future. It will be in part driven by a<br />
competence shortage caused by the lack of labour, and in part by that fact that firms seem to<br />
demand a deeper aspect of services from one consulting firm. Practices such as no cure - no<br />
pay and free pre-analyses that have not previously been utilized, might become parameters for<br />
competition in the future. Furthermore it means that those small and medium consulting firms<br />
who have only barely managed to survive the last couple of years will experience hard times<br />
because of a lower activity level, and it will not be as attractive as it have been to establish a<br />
new management consulting enterprise.<br />
2.5 Summary of industry analysis<br />
<strong>The</strong> tension between size and success in the industry shows an industry where only a few<br />
firms manage to grow extremely fast, while the majority of firms seem to struggle in their<br />
pursuit of growth. Successful consulting firms are to a much greater degree able to leverage<br />
existing resources and capabilities towards customer contact and retention, internal<br />
development, and recruitment. All these elements play an important role in the growth of the<br />
17
firm as the development of the consulting firm very much happens trough learning-by-doing.<br />
This raises an important question for the remainder of this master thesis. What constitutes the<br />
primary growth factors and barriers across firm size? <strong>The</strong>reby, the industry analysis indicates<br />
that there is some significant differences across size but does not allow for a deeper insight.<br />
If existing consulting firms want to stay competitive and sustain their growth<br />
rates, satisfy customers and dodge a possible recession there are some areas, which demand<br />
attention on the individual firm level. <strong>The</strong>re is a need to consider the strategic management of<br />
consulting firms in a new perspective. Focus on consulting capabilities alone must not put in<br />
the shade professional management and business. Innovation must be incorporated in a<br />
systematic manner in the firm in order to maintain competitiveness. Human resources should<br />
be considered as a core issue, concerning both recruitment and retention to secure that the best<br />
possible resources enter and stay in the firm. Finally, for the largest consulting firms, as the<br />
home market is consolidating there is a need for, and future growth possibilities in,<br />
establishing a global presence either through internationalization or alliances.<br />
18
<strong>Chapter</strong> 3<br />
<strong>The</strong>ories of firm growth<br />
<strong>The</strong> literature offers several different theories for systemizing the analysis of firm growth.<br />
Looked upon in isolation these theories each uncover interesting ideas and phenomena, but in<br />
the end, findings are of a partial character. This is a logical consequence because of the choice<br />
of theoretical perspectives and the use of specific theoretical and explanatory models.<br />
However, this leaves a need for a more holistic understanding of the characteristics of high<br />
growth firms, as well as growth barriers in low growth firms. <strong>The</strong>refore, there is a need to<br />
integrate theoretical perspectives in order to understand the full story of the theory of the<br />
growth of the firm. <strong>The</strong> purpose of this chapter is to review the growth literature with a focus<br />
on the sources of growth and the limitations to growth. Hence, the first step is to investigate<br />
the concept of growth and the effects of growth in a dynamic perspective. Second, theoretical<br />
contributions to growth theory are assessed with regard to their explanatory value when<br />
considering external and internal growth factors and barriers. Third, SME theory is considered<br />
in an attempt to define growth even closer, as <strong>Danish</strong> management consulting firms belong to<br />
this segment. Finally, an integrated approach on how to evaluate growth factors and barriers<br />
and consequently, growth strategy, is developed which builds on the findings of the first three<br />
steps. This integrated approach will in turn shape the way in which the empirical work is done.<br />
3.1 <strong>The</strong> concept of growth<br />
<strong>The</strong> point of departure of this theoretical framework is briefly to touch upon what growth is.<br />
Growth can be manifested in many different ways; selling more, hiring more people,<br />
expanding, broadening geographic scope, generating bigger profits, or increasing stock prices.<br />
No general guidelines or definitions seem to exist for high growth firms, and some researchers<br />
have even denied that it is possible to generalize about what growth is (Penrose, 1959).<br />
Growth may result in both quantitative results and qualitative results. Measurements such as;<br />
size, assets, net capital, revenue, or number of employees are strictly of a quantitative<br />
character, but may not capture all of the things there are at play in small firms. Qualitative<br />
measures such as value added, a sense of belonging, motivation, and attractiveness should not<br />
be left out. Owing to this, growth, in this master thesis, is considered in terms of a range of<br />
indicators and draws on contributions from several different theoretical fields. However, one<br />
condition that must hold is the fact that in order for a firm to experience growth it must have<br />
an advantage over its competitors. A competitive advantage leads to profits and the possibility<br />
19
of growth. Hereby, a certain degree of selection in the industry is assumed. Hence, it is not<br />
possible for a firm to grow if it does not excel in some areas of its business.<br />
3.1.1 <strong>The</strong> tension between growth and size<br />
<strong>The</strong> law of proportionate growth (Gibrat, 1931) explains the skewed growth distribution that<br />
will take place over a period of years, and implies that some firms will grow faster than others<br />
will. More formalized, Gibrat hypothesized that over a given time period the percentage<br />
change in the size of an individual firm in an industry is independent of the firm’s initial size.<br />
<strong>The</strong>re are several explanations to why there are such large variations in the growth rate of<br />
individual firms within the same industry or strategic group. Evidence show that the most<br />
elementary fact about firm growth is that firms follows a random growth path (Geroski, 2000).<br />
Often, it is more or less isolated events or shocks, which mark the path to success, such as a<br />
unique innovation, and these, have a permanent effect on the size of the firm. Consequently,<br />
growth cannot be considered a process, which follows a predetermined law or trend. However,<br />
to consider growth as a pure game of random events and luck does not leave much motivation<br />
or influence for managers.<br />
Traditional growth strategies involve economies of scale and scope and mergers<br />
and acquisitions. <strong>The</strong>se strategies require a certain firm size in order to be effected, which, at<br />
least in the starting years of a consulting firm, will not be relevant. <strong>The</strong>refore, the focus of<br />
firm growth is on the firm’s ability to develop the resources, which exist in the firm, and how<br />
these resources can support the firm’s ability to innovate, diversify, and be flexible in order to<br />
manage organizational change (Tecce et. Al. 1997). For small firms, this is in the hands of<br />
management, which has to be capable of exploiting current routines and exploring new<br />
opportunities as they occur. Adding this to the operational role that the manager of a small<br />
firm has, size becomes a factor, which can limit growth, as management is simply<br />
overburdened. If we develop the line of thought further to encompass the firm’s<br />
organizational capability, which rests on firm specific culture and behaviour, the link between<br />
management and its workforce becomes clear. It is necessary if a firm is to achieve growth to<br />
constantly enable and motivate its employees in an optimal way. When the effort of both<br />
management and employees are aligned, successful product innovation or process innovation<br />
will provide learning and foundation for further development and innovation and<br />
consequently growth. That is, success breeds success. On the other hand, for a small firm a<br />
product or process innovation, which fails, is closely connected with reduced growth, profit<br />
loss, and maybe even bankruptcy. <strong>The</strong>refore, the uncertainty associated with starting a firm or<br />
a diversified activity within an already existing firm is affected by the cost of capital. For<br />
20
small firms, which are often person-owned or run as a partnership, there is a considerable<br />
amount of risk to be aware of and in effect they will pay a risk premium, for example a higher<br />
interest rate, in order of acquiring the necessary funds. Small firms will not have the sufficient<br />
cash flow to engage in large investments, which again provide a barrier to growth. Instead,<br />
they rely on opportunity driven growth and do many first-time projects, which they cannot<br />
repeat and leverage successfully to the future projects. Furthermore, these first-time projects<br />
strain the firm’s profitability and incur large costs as the firm is learning by doing. <strong>The</strong><br />
attractive force of opportunity driven growth is obvious, as it allows the firm make some<br />
profit and engage in new businesses. <strong>The</strong> downside to this is that growth becomes random,<br />
less profitable, and driven by occurring opportunities, rather than a careful market analysis<br />
and a strategic response and positioning to those opportunities. <strong>The</strong> idea is that strategic<br />
growth will allow a firm to focus its image and position it as an expert in well-defined areas.<br />
<strong>The</strong>reby, future business will be consistent with firm specific competences and resources and<br />
build credibility and expertise in strategic areas. <strong>The</strong> goal is to repeat and improve past<br />
successes and thereby increase efficiency and profit margins.<br />
<strong>The</strong> above discussion give rise to the idea that there is some kind of “glass<br />
ceiling” which small and medium firms have to burst through in order to achieve growth. This<br />
breakthrough is where opportunity driven growth is changed into strategic growth, and this<br />
raises the question of how firms achieve this, and especially, how small and medium sized<br />
firms manage it. <strong>The</strong> next logical step is therefore to consider the dynamics of growth.<br />
3.1.2 <strong>The</strong> dynamics of growth<br />
Firms grow by passing through a discrete series of growth stages (Kazanjian, 1988). If the<br />
firm does not solve strategic and structural problems connected with the transition from one<br />
stage to the next, this will eventually prevent the firm from growing. Organizational growth<br />
models have been developed by several authors, Greiner (1972), Kimberly and Miles (1980),<br />
Churchill and Lewis (1983), Scoot and Bruce (1987) among others. In general, these models<br />
are concentrated on the types of problems small and medium firms encounter. <strong>The</strong>re is some<br />
predictability in organizational development that allows it to be divided into different stages.<br />
How many stages there are in a certain life cycle model stems from the type of research<br />
carried out (Yusuf, 1997), but most often we see four or five stage models. <strong>The</strong> contribution<br />
of these models is a framework for gaining insights into the options that firms face at a given<br />
time. A life cycle model will contribute to this master thesis with an opportunity to<br />
differentiate the growth factors and barriers that consulting firms experience across firm size<br />
and development.<br />
21
<strong>The</strong> choice of life cycle model falls on Greiners organizational life cycle (1972).<br />
On first hand, this might seem as an odd choice as the originating research is more than thirty<br />
years old and as it focuses on industrial firms. However, this framework has undergone a<br />
development of its own, and has been adapted to professional service firms and their distinct<br />
growth stages (Malernee and Greiner, 2005). <strong>The</strong> model is presented in appendix J. In this<br />
model, firms pass through situations of evolution and revolution. Growth stages correspond to<br />
a series of internal crises related to managerial and organizational issues of coordination and<br />
control. In each stage of its life cycle, an organization is dominated by a specific focus,<br />
exploring, focusing, diversifying and institutionalizing. Each stage is ended by a crisis that<br />
threatens organizational survival, and brings about a revolutionary change through which the<br />
firm passes to its next life cycle stage. In addition, each stage is dominated by a different<br />
strategic approach to the market and a specific set of managerial practices. <strong>The</strong>se allow the<br />
firm to evolve through the stage, but this stage-specific strategy and practice are rendered<br />
useless in the next stage. Between each stage is the crisis, which predicts a revolutionary and<br />
necessary change for the firm in order to adapt to the market, future growth and survival. That<br />
is, in the resolution of one crisis are the seeds for the next crisis.<br />
An important thing to keep in mind is that the organizational life cycle model is<br />
based on a study of American professional service firms. Hence, market conditions are very<br />
different from the <strong>Danish</strong> market. Other general critical issues of life cycle models are; they<br />
fail to capture the details, they assume continuity and they do not take into account external<br />
factors (O’Gorman, 2001).<br />
3.1.3 <strong>The</strong> sustainability of growth<br />
Research has shown that industry factors may be less significant when explaining firm<br />
profitability and growth (O’Gorman, 2001). <strong>The</strong> choice of a high growth market does not<br />
condition growth for the individual firm, as the demand of a high growth industry creates<br />
pressure on resource constrained firms. In the end, this may result in a lack of internal<br />
development and organizational failure. Furthermore, when measuring the impact of industry<br />
factors over time, the explanatory significance of these seem to reduce significantly (Rumelt,<br />
1991). In essence, the choice that an entrepreneur faces is whether to enter an industry or not,<br />
and not so much which industry to enter. <strong>The</strong>refore, this choice is very much path dependent<br />
of the founder(s) and his experience. This path dependency puts limits on future strategic<br />
choices of the business and consequently its growth strategy. Superior competitive strategies<br />
are decisive for achieving growth relative to competition and a foundation for sustained<br />
growth. Five growth disciplines constitute the growth portfolios of companies that knew how<br />
22
to maintain steady double-digit growth in difficult times. <strong>The</strong>se are base retention, market<br />
share gain, market positioning, related and unrelated diversification (Tracy, 2004). <strong>The</strong>se<br />
superior competitive strategies must create and develop resources and capabilities that can be<br />
used to sustain the growth process within the firm. Because management hold different path<br />
dependent assumptions of how to conduct strategy, and because of causal ambiguity within<br />
the relationship between resources and success, some firms will continue to succeed while<br />
others fail.<br />
Usually growth is an unquestioned positive and has become synonymous with<br />
bigness. Growth as an expansion or increase in magnitude is deeply entrenched in the way we<br />
think. Even though, increases in size, profitability and scope are often connected with growth,<br />
they are not what drive it. In the long run, expansion is not viable goal in itself. Because of<br />
organizational inertia, both structural and cultural, failure happens when market conditions<br />
shift. According to John Kay, a leading Oxford economist: “It is rare for the market power<br />
and scale economies associated with market dominance not ultimately to fall victim to the<br />
hubris, the insulation from the market, and the sheer bureaucratic inefficiency that goes with<br />
such size”, (Bryan and Kay, 1999, p.106). In relation, firms often find it difficult to sustain<br />
high and fast growth rates. Three important factors, which relate to issues already discussed in<br />
this chapter, can be the end of sustained growth if not managed properly (Tomasko, 2005). A<br />
fast growing firm, which expands in size, can create inhospitable surroundings. That is, a<br />
growing firm will become the objective of more competition from other large firms and<br />
customers might be reluctant to do business because of the sheer size. To sustain a high<br />
growth demands that the resource intake is equally high. At some point, the supply side will<br />
come under so much pressure that the only choice is to make do with low quality resources.<br />
Hence, resource constraints are another factor to consider. Furthermore, when firms grow they<br />
will experience organizational limits. <strong>Management</strong>, culture, and employees are lost in the<br />
pursuit of efficiency as complexity and hierarchy increase. <strong>The</strong>se factors are very much at<br />
stake when one considers the <strong>Danish</strong> management consulting industry where large<br />
international competitors are present, labour is scarce, and competition is based on internal<br />
knowledge and customer relationships.<br />
3.2 <strong>The</strong>oretical contributions<br />
If you consider the vast amount of different investigations and theories of firm growth, it is<br />
possible to discover some main categories across economical and behavioural theories. Two<br />
different theoretical schools of thought exist, which both consider competitive advantages but<br />
vary when it comes to explaining how firms achieve growth and sustain it. <strong>The</strong>y differ based<br />
23
on the view they adopt, that is how for example the firm, its environment, and its markets<br />
work. Roughly, it is possible to label them outside-in theories and inside-out theories<br />
(Alexander, 1992).<br />
Outside-in theories are concerned about firm growth as a consequence of<br />
external circumstances, primarily assessed in a product market perspective. This category of<br />
theories rests upon several main assumptions. First, the environment of the firm allows itself<br />
to be easily and straightforwardly analyzed. Second, firms can easily adapt to its environment.<br />
Third, theories are externally oriented and operate within a static universe. On the other hand,<br />
inside-out theories see the firm’s environment as changeable and very difficult to analyze.<br />
<strong>The</strong>re is a great focus upon the problems, which occur in firms because of friction. That is,<br />
firms are considered highly dependent of their firm history, resources, and existing routines.<br />
Growth is considered a consequence of circumstances and settings in the internal situation of<br />
the firm and factor markets. This group of theories is thereby internally oriented and contains<br />
in it a focus on organizational development. In appendix K, the most significant differences<br />
between the outside-in orientation and the inside-out orientation are outlined.<br />
3.2.1 Inside-out perspective<br />
<strong>The</strong> inside-out perspective focuses on the presence of specific competences inside the firm.<br />
Firms are considered to be facing both implementation and friction problems and to be<br />
dependent of specific historic and resource conditions. Penrose (1959) opened up the black<br />
box of the firm’s internal processes and focused attention on the firm, not as a production<br />
function, but as a flesh and blood organization characterized by firm specific resources. It is<br />
based in developmental economic thought, and states that firm specific resources and<br />
competences are crucial for development and growth. This section therefore deals with<br />
theories, which explain the internal processes of the firm and how they relate to firm growth.<br />
<strong>The</strong> theory of the growth of the firm Penrose’s (1959) idea of firm growth holds that it is<br />
led by an internal momentum generated by learning-by-doing. As managers increase their<br />
experience, administrative tasks require less attention and work, and they become routine.<br />
This means that excess managerial talent can be released and focused on exploring value-<br />
creating opportunities and training new managers. <strong>The</strong>reby, a firm will grow in order to create<br />
value from unused resources, which in turn will create new resources. This is what Penrose<br />
calls “economies of growth”. This also means that growth in any period is limited by the<br />
amount of managerial attention. Hence, “economies of growth” which are imbedded in the<br />
growth process are the reason why firms grow. <strong>The</strong>re are no advantage linked to size as such,<br />
24
and firm size is considered a consequence of growth. This contradicts with the neoclassical<br />
perspective, which is discussed later, because there is no optimal size. This is the main factor<br />
to why Penrose’s theory has, to some degree, been marginalized in economic discourse<br />
(Montgomery, 1994). For <strong>Danish</strong> consulting firms this dynamic perspective of firm growth<br />
seems strong because it focuses on the role of firm’s internally generated resources, which in<br />
the case of growth are much more elemental than economies of scale 6 .<br />
However, her ideas of firms as idiosyncratic configurations of resources have<br />
been very influential in the strategic management literature. This is another key concept in the<br />
theory of the growth of the firm, and these resources act out a significant role in gaining a<br />
sustained competitive advantage if they can be characterized as rare, valuable, inimitable and<br />
non-substitutable (Dierickx and Cool, 1998).<br />
Evolutionary approach <strong>The</strong> evolutionary approach sees the firm as a processor of<br />
knowledge resources that provide the firm with the flexibility and speed necessary to respond<br />
successfully to changes in the external environment (Nelson and Winter, 1982). Routines and<br />
learning are central to the process of gaining new knowledge, and these capabilities must be<br />
coordinated and developed within the firm. This implies that firms are likely to grow<br />
idiosyncratically as they use and evolve their knowledge base. That is, capabilities are<br />
constantly being modified over time, which in turn means that each firm’s growth is likely to<br />
be path dependent. Hence, previous experience and the repertoire of routines constrain future<br />
direction, and opportunities for diversified growth must be complimentary to current activities<br />
in order to maintain complementarities and coherence.<br />
Furthermore, the central premise of the evolutionary approach (Nelson and<br />
Winter, 1982) states that competition shapes both market and organizational structures, and<br />
thereby forces those firms out whose organizational form does not create flexible capabilities<br />
to match the changing environment. In the consulting industry, we see many firms entering<br />
and leaving all the time, which might indicate that these firms do not manage to adapt their<br />
organization to the shifts that takes place in the industry. This creates an idea of the principle<br />
of “growth of the fitter” but empirical results do not provide much evidence. Instead, it is<br />
suggested that selection works only by elimination of the weaker, where growth is not related<br />
to viability but instead to the discretion of managers (Coad, 2006).<br />
6 In general, the inside-out perspective has come to be the most dominating and cited perspective in recent<br />
strategy and management theory. Also authors such as Porter moves towards this perspective (Porter, 1991;<br />
DeMan, 1994)<br />
25
<strong>The</strong> resource based view (RBV) RBV argues that firms with superior systems and structures<br />
are profitable because they have lower costs or offer a higher quality or product performance.<br />
<strong>The</strong> focus of this approach is directed at the rents accruing to scarce firm specific resources<br />
instead of the economic profits from market positioning and entry deterring strategic<br />
investments. Resources can be defined as assets, capabilities, organizational processes,<br />
information, knowledge etc. that are controlled by the firm (Barney, 1991). <strong>The</strong>y are<br />
characterized as either tangible or intangible assets, for example; technology, access to raw<br />
materials, production equipment, location, or human resources, accumulated knowledge,<br />
experience, and relations which are tied semi-permanently to the firm (Wernerfelt, 1984).<br />
<strong>The</strong> main point of importance is that resources are heterogeneous and not<br />
homogeneous. Heterogeneity among firms allows some of them to hold a competitive<br />
advantage. <strong>The</strong> firm is considered a unique bundle of idiosyncratic resources and capabilities<br />
where the task of the manager is to optimize the deployment of these and develop a resource<br />
base for the future (Grant, 1996). As well as the RBV argues that resources can give way for a<br />
competitive advantage it also argues how it can be sustained via some kind of protective and<br />
isolating mechanism which prevails the diffusion of the resources into the rest of the industry<br />
(Peteraf, 1993; Foss and Knudsen 2003). Various researchers have defined the characteristics<br />
of resources that can lead to a sustained competitive advantage (Barney, 1991; Peteraf, 1993;<br />
Dierickx and Cool, 1989). <strong>The</strong>se characteristics are heterogeneity, imperfect mobility,<br />
valuable, rareness, imperfect imitable, ex ante and ex post limits to competition, and non-<br />
substitutable.<br />
According to the RBV, the firm can only handle external factors based on an<br />
internal exploration competence. <strong>The</strong> external environment of the firm is not considered as an<br />
objective and easily measurable factor. Instead, resources have to be organized so they enable<br />
the firm to identify and understand the opportunities that arise from it. Firms thereby follow<br />
different growth opportunities according to their specific resource and competence<br />
endowments, and how these fit their history, traditions, and goals (Hougaard and Duus, 1996).<br />
Hereby, we also recognize the limitations of the RBV. First, when competitive<br />
advantages or growth factors are rooted in situation specific resources and capabilities.<br />
<strong>The</strong>refore, the analysis of growth risks becoming very situation specific as well. It will<br />
become difficult to create as set of specific recommendations, which goes beyond general<br />
recommendations that a firm must develop competences, and capabilities that are difficult to<br />
copy (Tecce, Pisano and Shuen, 1990). Second, because the perspective considers the external<br />
environment as very volatile and something that you cannot predict, there is a risk of<br />
overlooking the role of the external environment. Firm strengths and weaknesses become the<br />
26
only focus point and threats and opportunities in the external environment are not considered<br />
in enough extent.<br />
<strong>The</strong> Competence approach This approach sees the firm as an organization for facilitating<br />
learning. That is, the approach analyzes what a firm does well and sees the firm as an<br />
organization capable of generating a knowledge stock, which can capture value. Sources of<br />
competitive advantage, and thereby economic rents are derived from firm specific<br />
competences sometimes rooted in physical assets but most often in the large number of<br />
different activities performed by the firm. <strong>The</strong>refore, this approach views the firm as a locus<br />
of creation (Winter, 1982), creation not only as the physical process of transformation but also<br />
much more intangible elements such as R&D, design, innovation, discovery of future<br />
customer demands, etc. As in the RBV, competitive advantage lies upstream of product<br />
markets and springs from resources that are idiosyncratic and hard to imitate. <strong>The</strong> crucial idea<br />
is therefore that a firm must be able to allocate its resources so it can capture the opportunities<br />
and value inherent in its competences.<br />
Much focus of this approach has been on routines and processes as embodying<br />
the skills of the firm (Nelson and Winter, 1982). <strong>The</strong> argument is that only within the firm,<br />
can heterogeneous knowledge routines and processes be developed, coordinated, and<br />
exploited, and therefore a firm can create more value than the market. <strong>The</strong> focus here is on the<br />
heterogeneous knowledge resources that firms hold and how they use it. <strong>The</strong> process of<br />
learning by doing means that the firm always adds to its stock of knowledge by a combination<br />
of fixed routines and processes and by exploiting excess knowledge resources. This<br />
relationship between knowledge resources, processes, and routines is subtle and it can be hard<br />
to identify its causalities, even by the firm itself. <strong>The</strong>reby competitive advantages rest on a<br />
high degree of tacit knowledge, which is an immobile resource, and a strategic asset of the<br />
firm. However, the process of learning and accumulating knowledge resources is very time-<br />
consuming (Rickard, 2006). This implies a size limit on the firm as management resources<br />
devoted to discovering value added activities are constrained. <strong>The</strong> notion of core competences<br />
(Parhalad and Hamel, 1990) thereby becomes strategic building blocks for the firm, as<br />
collective learning and resources should be allocated so they support these. A core<br />
competence can be identified by asking three questions; does it provide access to a variety of<br />
markets, does it improve customer benefit, and is it difficult to imitate? When a firm can<br />
answer yes to these questions, it has a foundation for achieving a competitive advantage.<br />
Where the recommendations of the core competence approach are highly<br />
vulnerable is in a rapidly changing environment. If a firm chooses to build its strategy around<br />
27
a few core competences, it can end up in big trouble if the demand for these disappears. So,<br />
even though, the approach sees the firm as an organization that must continually develop its<br />
resource base there is a need to add more a more dynamic perspective to this approach.<br />
<strong>The</strong> dynamic capability approach <strong>The</strong> ability of management to rapidly and effectively<br />
redeploy and coordinate existing core competences into new forms of competitive advantage<br />
has been termed dynamic capabilities (Tecce, Pisano and Shuen, 1997). In general, the<br />
approach refers to the firm’s capacity to renew and adapt competences to changes in the<br />
external environment and considers the managerial ability to align organizational resources. It<br />
focuses on the creation and capturing of value, but the underlying resources to do so are the<br />
capabilities inherent in the firm. It is dynamic in the sense that a firm can build upon its<br />
existing capabilities through innovation and then add new capabilities.<br />
Furthermore, this theory takes on an evolutionary approach as discussed earlier<br />
(Nelson and Winter, 1982). This approach implies that it is firm capabilities, which form the<br />
strategic path. <strong>The</strong>reby, there are three key factors to dynamic capabilities: Processes, position<br />
and paths. Competitive advantage lies in the managerial and organizational processes<br />
(routines, current practice, and learning), shaped by its asset position (the firm’s current<br />
specific endowments of technology, intellectual property, complementary assets, customer<br />
base, and external relations) and the paths available (the strategic alternatives available to the<br />
firm and its path dependencies) (Tecce, Pisano and Shuen, 1997). Dynamic capabilities are<br />
supported by routines inherent in the firm where capabilities can be seen as higher-level<br />
routines that help implement and improve lower level routines. Routines can be defined as an<br />
abstract way of doing things, seeing routines as a link to organisational memory based on past<br />
learning. <strong>The</strong>reby, the firm can avoid organizational inertia. Routines are building blocks of<br />
capabilities and contributes dynamically by; variation (new combinations of routines may lead<br />
to new capabilities), selection (different combinations of routines may foster new capabilities)<br />
and adaptation (adaptations of new routines may function as a feedback loop according to<br />
changes in the environment) (Nelson and Winter, 1982). Capabilities can be subject to<br />
imitation which is replication performed by rivals, however, capabilities are idiosyncratic to<br />
the firm and thus very difficult to imitate (like stated in the RBV, Dierickx and Cool, 1989).<br />
<strong>The</strong>y can also be subject to replication by the firm itself. Replication involves transferring or<br />
redeploying competences from one concrete economic setting to another (Tecce, Pisano and<br />
Shuen, 1997). By constantly being able to adapt to changes in the environment and by<br />
exploiting its routines a firm can achieve sustained competitive advantages through its<br />
capabilities.<br />
28
Hereby, three other important aspects are introduced: Organizational learning,<br />
organizational adaptation and flexibility. Organizational learning is the process of identifying<br />
an organizational context and successfully coping with it (Hedberg, 1981). Learning should<br />
be viewed by the firm as an organizational process and not just an individual one. <strong>The</strong>refore,<br />
the firm needs to implement learning systems in order to capture the benefits of knowledge<br />
accumulation and not just expect this to happen on its own (Shrivastava, 1983). Learning<br />
systems should allow both first-order learning and second order learning to take place inside<br />
the firm. For a firm to have an adaptive ability resources must therefore be deployed so<br />
current routines are exploited to maintain stability and sustain existing rules. On the other<br />
hand, resource deployment must also support the exploration of alternative routines, goals and<br />
opportunities (Lant and Mezias, 1992). Organizational flexibility is thereby a combination of<br />
a managerial task and an organizational task (Volberda, 1996). <strong>The</strong> managerial task is defined<br />
as dynamic capabilities, and the organizational design task as the responsiveness of the<br />
organization inherent in the relationship between exploration and exploitation. Finding the<br />
right mix will allow the firm to adapt to the two fundamental types of change, momentum<br />
(refinement and incremental adjustments) and revolution (gestalt shift) (Miller and Friesen,<br />
1980).<br />
<strong>The</strong> limitations of the competence and capability approaches are very similar to<br />
those of the RBV but can be further elaborated. In general, there is a lack of clear definitions,<br />
and scarce resources, core competences or capabilities are often defined ex post. Furthermore,<br />
if you build your firm around a tight set of resources, competences, or capabilities it will<br />
become difficult to respond to severe changes in the external environment. That is, the in-side<br />
out perspective not only explains why firms are different but also offers an explanation to why<br />
firms are frequently unresponsive to major shifts in their competitive environment. This<br />
insight is crucial for the management consulting industry as it can explain why firms often<br />
build their strategy tight around core competences and then find themselves in big trouble<br />
when these competences are no longer in demand.<br />
Managerial theory A “managerial theory” of firm growth holds that managers attach utility<br />
to the size of their firms (Marris, 1964). Compensation, bonuses, prestige, power, etc. are<br />
associated with size, and therefore firm size and firm growth are considered important factors<br />
in the “managerial utility function”. In the case of management consulting firms, which are<br />
often owner managed or run as a partnership this, has some implication. In the small<br />
consulting firm, growth maximization concur with profit maximization, but if run as a<br />
partnership, growth of certain business areas might conflict with the overall profit<br />
29
maximization of the firm. That is, according to managerial theory, managers maximize<br />
growth under the constraint of earning a satisfactory profit. <strong>The</strong> key take-away from this<br />
theory is that managers sometimes act irrationally in relation to the overall benefit of the firm.<br />
One basic prediction from this is that growth rates of manager-controlled firms<br />
will be higher than those of owner-controlled firms. Furthermore, if SMEs are considered<br />
some evidence show that management-controlled firms have stronger preferences for growth<br />
than those firms, which are owner-controlled (Hay and Kamshad, 1994)<br />
3.2.2 Outside-in perspective<br />
Here the focus is on the analysis of the external factors of the firm. It general, the outside-in<br />
perspective treats the external conditions as given, that is, they are analyzed and then the firm<br />
acts accordingly. Adaptation of products and activities to these external factors are considered<br />
to be done relatively unproblematic.<br />
This perspective is rooted in the neoclassical foundations and the structure-<br />
conduct-performance (SCP) postulate (Mason, 1938; Bain, 1959). <strong>The</strong> basic idea is that there<br />
is a causal relationship between the structure of an industry, the conduct of the firms within<br />
the industry, and the performance of these firms. That is, the number and size of firms in the<br />
industry affect the behavioural rules followed by sellers and buyers, which again affect the<br />
overall economic profitability of the firms within the industry. In an industry such as the<br />
management consulting industry, where firms can easily enter and exit to obtain a part of the<br />
profit, this perspective gives useful insights concerning the explaining of firm growth.<br />
Neoclassical foundations <strong>The</strong> main prediction emerging from the neoclassical perspective is<br />
that firms are attracted to some sort of optimal size (Rickard, 2006). This optimal size it the<br />
profit-maximizing level of production and growth is only a means to achieving this size. Once<br />
this is attained, firms are assumed to no longer grow and, consequently, this perspective<br />
becomes very static. In continuation, transaction cost theory (Coarse, 1937; Williamson, 1981)<br />
deals with the optimal boundaries of the firm through upstream or down stream integration.<br />
This is determined by a trade-off between coordination via hierarchy and coordination<br />
through the price mechanism. Factors that affect the level of integration are the frequency of<br />
transactions, uncertainty, degree of asset specificity, and the possibility of opportunistic<br />
behaviour. <strong>The</strong>se factors are relevant in the context of management consulting firms but<br />
predictions made by transaction cost literature most often concern vertical integration, that is,<br />
growth by acquisition (Kay, 2000). <strong>The</strong>refore, transaction cost theory only have a limited<br />
scope for explaining growth as vertical integration is not the order of the day in the <strong>Danish</strong><br />
30
consulting industry. Furthermore, the concept of an optimal size lacks empirical support and<br />
is suggested to have little use in the understanding of why firms grow (Coad, 2006).<br />
Porter’s framework Competitive advantage and growth happen through already existing<br />
entry and mobility barriers or through superior strategic choices, which increase these barriers.<br />
To gain a thorough understanding of these forces, Porter’s framework, which is rooted in the<br />
SCP postulate, supplies a tool for systemizing the analysis of the forces that influence<br />
strategic behaviour and competitive advantage in the industry (Porter, 1980). <strong>The</strong> framework<br />
views the essence of competitive strategy formulation as relating the firm to its business<br />
environment. A Firm can achieve growth and competitive advantages by positioning itself<br />
where it most optimally defends itself or take advantage of industry forces. <strong>The</strong>se forces are<br />
internal rivalry, bargaining power of customers, bargaining power of suppliers, threat of<br />
substitutes, and entry- and mobility barriers. <strong>The</strong> framework deals with industry structure and<br />
Porter’s five forces can thereby be used to identify growth barriers and opportunities primarily<br />
on an industry level.<br />
<strong>The</strong> degree of rivalry between incumbents can be investigated by competitor<br />
identification. If there is a high degree of rivalry in the industry this will most likely mean that<br />
competition is based on either price, quantity, or market share, which will affect the overall<br />
profit, generated in the industry. <strong>The</strong> more rivalry and competition, the more likely it is that a<br />
firm will not be able to earn profits above the industry average. <strong>The</strong>refore, it is important to<br />
identify the number of incumbents and the degree of market differentiation. <strong>The</strong> degree of<br />
rivalry will also affect the cooperation that takes place in the industry. That is, the more fierce<br />
competition, the more one will expect that firms will protect their resources and knowledge<br />
instead of engaging in cooperation with the risk of opportunism.<br />
Bargaining power of buyers describes the degree to which buyers can affect the<br />
price that products in the industry are sold at. If the amount of buyers is small or they are<br />
heavily concentrated, this can increase the power they hold to reduce the ability of the firms in<br />
the industry to earn economic rents. If, on the other hand, demand is high and buyers are<br />
many, this gives firms in the industry an advantage to affect the price of their products, and<br />
thereby earn economic rents. Finally, information plays a significant role. <strong>The</strong> more buyers<br />
are informed about production costs and competing products, the greater their ability to<br />
reduce the rent-earning capacity of suppliers will be.<br />
Bargaining power of suppliers follows the same story as the one above. If the<br />
number of suppliers is large then firms in the industry can easily choose which one to use and<br />
create competition between them, thereby earning economic rents. Contrary, if suppliers<br />
31
provide niche goods or services then their prices are likely to be held above marginal costs,<br />
which lower the overall value appropriation for firms in the industry. In addition, if firms in<br />
the industry are perceived to be earning economic rents, then this might motivate suppliers to<br />
engage in down stream integration and thereby cause increased competition.<br />
An important influence on the demand for the products or services provided by<br />
firms in the industry is substitute products. <strong>The</strong>se products or services are substitutes in the<br />
sense that they constitute a threat from other industries that are likely to undermine the<br />
existing demand. Substitute products and services reduce the monopoly power of firms within<br />
the industry.<br />
Entry- and mobility barriers are defined as factors, which prevent either a<br />
potential newcomer or an incumbent who wants to make a strategic group move in earning<br />
economic rents post entry. Barriers may be structural, institutional, or strategic or a<br />
combination of all three. Structural barriers exist when incumbent firms have a cost advantage.<br />
Examples of structural barriers include economies of scale, sunk costs, patents, and<br />
advertising. Institutional barriers exist when there are certain institutional factors that favour<br />
some industries or firms compared with others. Finally, strategic barriers arise when<br />
incumbent firms engage in entry-deterring strategies in order to keep potential new entrants<br />
out.<br />
However, there are some shortcomings of the Porter framework. When<br />
considering the product life cycle hypothesis (Rickard, 2006) this becomes evident. Products<br />
or services run through a number of stages; introduction, growth, maturity, and decline, which<br />
will effect the conduct of incumbents directed towards entry barriers and production cost<br />
reduction and ultimately the degree of rivalry in the industry. Porter’s framework does add<br />
dynamics to the SCP postulate, but is not a complete explanation of the dynamic nature of<br />
rivalry. Another shortcoming is the fact that is misses the contribution of the individual firm.<br />
Analysis takes place on industry or product market level and does not explain individual firm<br />
growth, but rather the development of the industry or market because of factors outside the<br />
firm.<br />
<strong>The</strong> strategic conflict approach gives a more comprehensive insight in the<br />
dynamic nature of rivalry (Shapiro, 1989). <strong>The</strong> argument is that incumbent firms will soon<br />
realize that they are mutually interdependent (Brickly et. al., 2001) and therefore play a more<br />
interactive game. Strategic interactions with other firms, customers, and markets allow a firm<br />
to capture any value created. Strategic behaviour that firms may engage in range from tacit<br />
collusion to strategic manipulation of rivals’ information about market conditions. In the end,<br />
game theory offers a more dynamic tool to analyze strategic moves over time compared with<br />
32
porter’s framework. However, the focus of game theory is not firm growth but on how to<br />
appropriate value. <strong>The</strong>refore, this approach is best used as a supplement to others theories<br />
when it comes to explaining firm growth. Furthermore, the approach stresses strategic<br />
behaviours such as commitment and reputation, instead for example flexibility and innovation.<br />
As already mentioned, theories from the outside in perspective do have some<br />
shortcomings which allow them to only partially explain firm growth. <strong>The</strong> major reason for<br />
this is that the perspective is rooted in neo-classical economic theory where the focus is on<br />
static, homogeneous, and mobile resources, equilibrium, perfect information, and other more<br />
or less unrealistic assumptions. Clearly, when one considers the management consulting<br />
industry, it is obvious that these assumptions will not be maintained because of all the firm<br />
specific competences and resources that are at play. Hereby, the above-mentioned theories<br />
can only partly explain growth and the contribution from the inside out perspective becomes<br />
highly important.<br />
3.2.3 Tying the ends in the organization design<br />
<strong>The</strong> right organization design will be a result of the chosen industry and position, internal<br />
routines, resources, and relationships, past experience of senior management and the goals of<br />
the firm. <strong>The</strong> central argument is that at the centre of growth strategy is the organization<br />
design of the firm with all its limitations and opportunities. Tacit knowledge and the systems<br />
that surround it are extremely difficult to duplicate, and thereby it becomes clear as to why<br />
firms in the same industry show different levels of success and growth. <strong>The</strong> wrong<br />
organization design will result in decisions, which are made based on inadequate information<br />
and personnel, rather than organizational goals. No two organization designs will be the same<br />
as it is determined in large measures by past experience and the actions and attitudes of senior<br />
managers. Consequently, the organization design imparts heterogeneity on the firm. <strong>The</strong><br />
objective of the organization design is to carry out the variety of activities, which take place in<br />
the firm in a manner that uses the appropriate amount of resources, the skills of the workforce,<br />
and knowledge embedded in the firm and aligns these with the goals of the firm. <strong>The</strong>se<br />
coordinating activities, routines and relationships which are often characterized by causal<br />
ambiguity, creates internally generated and intangible resources which have a crucial<br />
influence on efficiency, strategic choices and competitive advantage. Furthermore, the right<br />
organization design can bring to the firm the ability to change and adapt as the goals of the<br />
firm vary with changes in the external environment. This is done by establishing routines and<br />
systems that encourage learning, risk taking and flexibility.<br />
33
3.2.4 Summary of theoretical contributions<br />
<strong>The</strong>reby, there exist two major discourses in the literature concerning firm growth. However,<br />
as suggested, none of the discussed discourses provides us with a thorough understanding. In<br />
their attempt to stay loyal to their orientation they evidently leave explanations out that are<br />
rooted elsewhere. However, if you combine elements from both, I argue that we can reach a<br />
more complete understanding of firm growth and in the end be better able to create a reliable<br />
model for assessing firm growth.<br />
3.3 SME theory<br />
<strong>The</strong> management consulting industry consists primarily of small and medium firms, and<br />
consequently an in-depth examination of the specific factors at play in this segment will<br />
deepen the theoretical framework. Today, it is accepted that small firms are not just scaled<br />
down versions of large corporations (Storey, 1994). On the contrary, it is acknowledged that<br />
SMEs have certain particular characteristics and that these have large effects on how SMEs<br />
operate and think. Factors that separate small firms from large corporations are among others:<br />
<strong>The</strong> higher degree of uncertainty that small firms operate under (Storey, 1994), the big role in<br />
innovation that SMEs take (Pavitt, Robson and Townsend, 1987), and a much more<br />
personalized way of managing the firm (Storey, 1994). <strong>The</strong>se factors, combined with<br />
characteristics such as a small number of employees, small capital forces, small market shares,<br />
and a degree of co-dependency with other firms make up some of the specifics of SMEs.<br />
3.3.1 SME growth<br />
It is suggested that SME growth may be the result of several different factors. Among these<br />
are the strategic choices of entrepreneurs, the ability to make structural adaptations to the<br />
growing organization, the ability to overcome barriers to growth, or the structural<br />
characteristics of the external environment. Together these explanations lead to two generic<br />
explanations of SME growth; the strategic choice explanation and the industry structure<br />
explanation (O’Gorman, 2001). This discussion is in accordance with the previous distinction<br />
between the inside-out and outside-in perspective.<br />
<strong>The</strong> strategic choice explanation argues that SME growth is a consequence of<br />
the strategic and structural choices made by the founder or manager. By pursuing superior<br />
strategies and managing the firm through stages of growth, the manager can ensure the<br />
success of the firm. Research suggest that small firms who achieve high growth do it by<br />
pursuing a differentiated strategy (Kuhn, 1982) as they operate with few customers, and<br />
competitors and therefore rely on qualitative competitive factors. This also makes it important<br />
34
for SMEs to be able to respond to market changes, and, especially for medium firms, to have<br />
organizational flexibility (Smallbone et al. 1993; Kuhn, 1982). <strong>The</strong> industry structure<br />
explanation argues that the external environment that firms operate in affects growth (Porter,<br />
1980; Aldrich and Fiol, 1994). One perspective, population ecology, takes this argument to<br />
the extreme by stating that growth is a function of environmental selection (Hannan and<br />
Freeman, 1989). <strong>The</strong>reby, growth can be seen as the evolution from one organizational form<br />
to another as the environment changes, or growth can be restricted to one type of<br />
organizational form which forces it out when this form is deselected (O’Gorman, 2001).<br />
3.3.2 <strong>The</strong> entrepreneur<br />
Based on the above discussion of the strategic growth explanation, the<br />
entrepreneur comes to play a significant role in the success of the SME as the decision maker.<br />
Definitions of the entrepreneur differ but usually entrepreneurship refers to business activities<br />
related to growth and innovation (Schumpeter, 1942; Storey, 1994). For the purpose of this<br />
master thesis, the entrepreneur may be defined as the individual(s) who manage a consulting<br />
firm with the intention of growing it and who has the managerial capacity to do so in the face<br />
of strong competition from other consulting firms, both small and large. This opens up for<br />
examining the founders of the firm and whether they bring certain characteristics and skills,<br />
which can lead to competitive advantages. This is especially important in management<br />
consulting firms as the partner or manager add to the firm a certain amount of abstract capital.<br />
Under this category is for example, experience of life, business experience, the<br />
entrepreneurial gene, a specific philosophy, and idea about the purpose of life. All these will<br />
shape the firm’s culture, its path and its competitiveness.<br />
<strong>The</strong> management consulting industry is characterized as a very knowledge<br />
intensive industry. <strong>The</strong>re exist a flow of routines in the firm, which draw on different kinds of<br />
knowledge at the different stages of the value chain. At each stage, there is an opportunity for<br />
management to achieve advantages over competitors by introducing innovative changes or<br />
services because of accumulated knowledge. <strong>The</strong>reby, it becomes clear how big the challenge<br />
is for small firms to grow, as management must be involved in all steps of the value chain.<br />
<strong>The</strong> crucial issue is that the entrepreneur can identify these opportunities. This puts a large<br />
strain on management and it is often more concerned about survival than growth per se<br />
(Storey, 1994). Indeed this survival mode and a possible taken-for-grantedness of existing<br />
routines can convert entrepreneurs into being just managers and become a significant growth<br />
barrier.<br />
35
3.3.3 Strategy and culture in SMEs<br />
Strategy is a continuing process, which has to be reconsidered as external and internal<br />
changes occur. <strong>The</strong> strategic process can be divided into two main elements: Strategic crafting<br />
and strategic execution. However, when we are dealing with small to medium enterprises the<br />
process becomes somewhat narrower and shorter in time scope. Large corporations, who face<br />
less uncertainty relative to SMEs, use a strategic vision to synchronize the decision making<br />
process in the long run. Smaller firms, however, often have vague visionary plans and adjust<br />
the direction in which they are going frequently (Storey, 1994). SMEs are often in a need of<br />
formulating objectives that are more precise as the market situation quickly changes, and<br />
hence lacks specific ideas of strategy execution. Indeed, the plights of small firms are many,<br />
to an extent that much time is dedicated to survival as opposed to creating long-term firm<br />
efforts to ensure sustained growth. <strong>The</strong> lack of a precise and specific strategic vision and<br />
strategy can be an important growth barrier for the firm, as it will hinder execution in practice.<br />
In this connection, firm culture also becomes important. A series of attitudes and<br />
assumptions make up the core values and shape the purpose of the firm, its mission and vision.<br />
Schein (1994, p. 20) defines culture as: “ A pattern of shared basic assumptions that the<br />
group learned as it solved its problems of external adaptation and internal integration, that<br />
has worked well enough to be considered valid and, therefore, to be taught to new members<br />
as the correct pathway to perceive, think, and feel in relation to those problems”. For the sake<br />
of simplicity, it can be useful to describe firm culture in terms of market orientation and<br />
growth orientation (Hougaard and Duus, 1996). Market orientation describes the firm’s ability<br />
gain insight onto its market, that is, to identify customer demand, the players, and suppliers.<br />
Furthermore, it deals with the firm’s ability to share market knowledge inside the firm and its<br />
specific competence with regard to adapting its services and activities to the market. In the<br />
same way, growth orientation deals with the firm’s ability to identify growth opportunities,<br />
define growth targets and its ability to implement decisions based on a growth focused<br />
strategy. By considering firm culture in these terms, firm growth becomes a function of<br />
growth opportunity identification but more important also a function of growth opportunity<br />
implementation, that is the actually exploitation of these opportunities. Firm culture must be<br />
developed around and support both elements.<br />
<strong>The</strong> culture of a firm is largely shaped by its founder. Especially in the context<br />
of management consulting firms, the founding partner(s) will have a dominating influence on<br />
firm culture, and how its market and growth orientation will be in the future. Either the firm<br />
will be build tightly around the core competences that the partners have, or it will be more<br />
broadly build around the partners ability to explore new opportunities. This, in turn, shapes<br />
36
the initial years of the firm’s history and experience. Since culture, history and past<br />
experience have so strong normative characteristics, the future path of the firm will be<br />
dependent upon these factors.<br />
3.4 Creating an integrated approach<br />
<strong>The</strong> two discussed perspectives are, as earlier mentioned, frequently viewed as being in<br />
conflict, but in large measures, we can gain a more complete framework if we view them as<br />
complementary, and add insights from SME theory. <strong>The</strong> outside-in perspective assumes away<br />
many issues relevant for managing an economic organization but does provide predictive<br />
outcomes for firms facing external forces and change. Because the outside-in perspective is<br />
rooted in neo-classical economic theory, it assumes perfect information and rationality in<br />
some degree. <strong>The</strong>refore, no firm can gain a competitive advantage based on strategy and<br />
structure, as competitors would soon copy them. However, if we relax the assumptions and<br />
instead treat the world with uncertainty and bounded rationality and therefore the existence of<br />
firms with heterogeneous strategies and structures, the inside-out perspective comes into play.<br />
<strong>The</strong>reby, these two perspectives come together in the firm’s organizational design as an<br />
internally produced resource whose primary goal is to control decision-making and strategy<br />
and react to external forces (Rickard, 2006). No two organization designs will be identical and<br />
in the case of the SME it will in large measures be affected by the entrepreneurs/managers<br />
and culture. Thus, the organization design can be a source of competitive advantage and<br />
growth by aligning and motivating resources towards the firm’s goals.<br />
In order for an integrated approach to be able to deal with growth as a science of<br />
the specific, the focus will be on growth processes as opposed to growth factors. It is assumed<br />
that successful consulting firms share both internally and externally a series of growth<br />
processes that allow them to gain a competitive advantage over other firms. <strong>The</strong>reby, the<br />
focus is not on the specific factors that give the individual consulting firm an opportunity to<br />
grow but instead on the shared pattern of processes that stimulate growth across several firms.<br />
Here, the strength of a multi-theoretical contribution comes at its right as it opens up for the<br />
possibility to look at growth from several perspectives.<br />
<strong>The</strong> model below is put forward with the intention of structuring the succeeding<br />
empirical work. <strong>The</strong>reby, the model does not describe how a firm can achieve growth but<br />
introduces important elements that must be taken into consideration when investigating<br />
growth. <strong>The</strong> model is therefore not a goal in itself but instead a structure to capture the<br />
processes at play in connection with firm growth in the management consulting industry.<br />
37
Culture<br />
set of strategies Feasible<br />
Model for assessing firm growth<br />
Factor markets Generators<br />
Organization<br />
Source: Own<br />
design Entrepreneurship Feasible set of<br />
making<br />
and competences Product markets Moderators or accelerators resources<br />
Com Competitive petitive advantage<br />
Com<br />
FIRM GROWTH FIRM<br />
By culture, is meant the current performance of the firm, the markets it currently<br />
serves and its history and experience. <strong>The</strong>se elements are all path dependent and will<br />
influence the future opportunities of the firm. <strong>The</strong> firm culture, which among others describes<br />
the firm’s ability to gain market insight and to identify growth opportunities, is an important<br />
element. Inherent, is also the routines which the firm has developed and which in part will<br />
shape its possibility to exploit current resources and competences and explore new<br />
opportunities. Entrepreneurship describes the capabilities and attitude of management. Here<br />
the focus is very much on the creators of the firm and their qualifications in terms of abstract<br />
capital (experience, purpose of life, etc.) and specific capital (which competences do the<br />
entrepreneur(s) bring into the firm). <strong>The</strong> entrepreneur of the firm also plays a big role in the<br />
degree of diversification, which the firm engages in. Whether the entrepreneur develops his<br />
firm in broad or tight terms around his competences will shape the firms future path. <strong>The</strong>se<br />
two elements, culture and entrepreneurship, are considered interdependent. A feasible set of<br />
resources and competences shapes the firms organization design and will in turn be shaped by<br />
it. A set of tangible resources, human and physical, must be managed and developed to<br />
achieve firm specific synergies ranging from intellectual property over core competences to<br />
routines capable of rapid reaction to change. For the firm to exploit the potential value of<br />
these internally generated resources and competences, it calls for both entrepreneurial skills<br />
and strategies. <strong>The</strong> firm’s resources and competences therefore define its set of feasible<br />
strategies. <strong>The</strong>se will be reflected by its history and experience and the entrepreneurial flair of<br />
its managers. <strong>The</strong> set of strategies will describe how the firm chooses to operate on<br />
38
operational and strategic levels and this will affect the organization design as well as the<br />
organization design will affect strategy, as it creates a limit on available strategies. <strong>The</strong><br />
influence from the external environment is captured in factor and product markets. Factor<br />
markets identify the sources, which create growth opportunities for the firm. Herein lies<br />
growth opportunities by the establishment of specific and scarce resources that are difficult to<br />
obtain for competitors and through the possibility for cooperation with firms, which create<br />
relational rents. <strong>The</strong>se factors create a foundation for firm growth and can be viewed as<br />
generators. Product markets identify industrial factors such as market structure, entry barriers,<br />
and substituting products but also customer relations and insight are important factors, as this<br />
information allows management to adapt to these circumstances. <strong>The</strong> degree of rivalry will be<br />
shaped by the set of strategies the firm adopts, and thereby the possibility that competition<br />
will either eat up profits or create profits through cooperation. Growth will either be<br />
moderated or accelerated by these factors. <strong>The</strong>se six elements come together in the<br />
organization design to affect a synthesis of the two perspectives by clarifying that the role of<br />
the organization design is to align the firm’s resources with its strategy and external<br />
environment, in order to achieve a competitive advantage. Organization design imparts<br />
heterogeneity on the consulting firms, and thereby become a mean to achieve competitive<br />
advantage. Hence, the focus is on how consulting firms align and create coherence in the firm.<br />
Furthermore, it is assumed that a competitive advantage is necessary in order to achieve<br />
growth. That is, the market in question is not characterized by unlimited demand and a certain<br />
selection pressure exists. I argue that this is the case in the consulting industry. Hopefully, the<br />
model proves to show that only considering growth from one perspective will miss out on<br />
other equally relevant issues, and that the two perspectives are not opposites but<br />
complementary and interrelated.<br />
3.5 Summary of theory<br />
To reach a comprehensive theory of the growth of the firm it is necessary to explain why<br />
firms expand their horizontal boundaries, and, especially important in the context of this<br />
master thesis, why some firms within the same industry grow at a very high rate while other<br />
firms seem to have a hard time breaking through the “glass ceiling”. <strong>The</strong> organization design<br />
of the firm has been suggested as the focal point of a theory of the growth of the firm<br />
supported by theories from the inside-out perspective and outside-in perspective. <strong>The</strong> resource<br />
based view, in accordance with the competence and capability approach, view growth as a<br />
process of developing, accumulating and productively utilizing internally generated specific<br />
knowledge resources. Growth opportunities is seen as limited by history and experience and<br />
39
the benefit of diversification, for example adding a new partner with different competences to<br />
the consulting firm, is to expand the stock of knowledge resources in the firm. For the firm to<br />
be able to sustain growth it has to have an entrepreneurial managerial ability to identify<br />
growth opportunities and deploy resources necessary to realize them. However, a resource or<br />
competence has to be “tried in the market” in order to realize its value. Recommendations<br />
from the inside-out perspective can lead to an underestimation of the value of market<br />
positioning and adaptation. <strong>The</strong> inside-out perspective therefore brings into consideration the<br />
product market as an accelerator or moderator of growth.<br />
Now the tools to conduct an empirical investigation are in place. <strong>The</strong> model for<br />
assessing growth can give a clear indication of the issues that are at stake in the SME sector<br />
and especially in the management consulting industry.<br />
40
<strong>Chapter</strong> 4<br />
Design and implementation<br />
In this chapter the methodological settings and approach with regard to the interview guide,<br />
the interview process, and the treatment of the qualitative data is discussed and vindicated.<br />
When the goal is to identify an appropriate growth strategy across different firm<br />
sizes, it is important that it is supported both by theory and empirically. This means that there<br />
is a continuous need for theory development throughout the investigation. <strong>The</strong>refore, it is not<br />
appropriate to conduct a population survey where questionnaires are sent to a large amount of<br />
consulting firms, as it will not capture the processes that are at play ex ante and does not allow<br />
for further theory development. On the other hand, a single case study of a consulting firm<br />
does not allow for the wanted degree of generalization. Roughly, empirical investigations can<br />
be placed on a continuum as below:<br />
Continuum of empirical investigations methods<br />
Single case study Multiple case study Population study<br />
Detailed understanding, no<br />
generalization<br />
Detailed understanding and<br />
generalization at the same time<br />
Source: Duus, 1995<br />
High degree of generalization,<br />
statistical significance, no<br />
knowledge of factor interaction<br />
<strong>The</strong>refore, the choice of method in this master thesis falls on the multiple case<br />
study. This allows for a combination of the advantages from the single case study and the<br />
population study. <strong>The</strong> purpose is to generalize from the theory base developed in the previous<br />
chapter by holding this against a number of empirical results in order to be able to develop<br />
further theory. This approach is a combination of explanation building and pattern matching<br />
(Yin 1998). That is, an analysis of the causal explanations and a continuing comparison of<br />
these with the existing and discussed theory. <strong>The</strong> idea here is to conduct an analytic<br />
generalization in relation to theory development rather that a statistical generalization in<br />
relation to hypothesis testing. <strong>The</strong> focus of the chosen discovery-oriented methodology is to<br />
further develop theory, as a consequence of the limited amount of theory on the management<br />
consulting industry. A crucial part in theory development and building is the evaluation of<br />
emergent concepts and existing theories, which consequently supports the preceding theory<br />
base and integrated approach of chapter 3. <strong>The</strong> case study approach is recommended by<br />
several different researchers as being especially appropriate in studies of new areas or areas<br />
41
with inadequate existing theory, as the results commonly are novel, testable and empirically<br />
valid (Eisenhardt, 1989; Despande, 1983).<br />
4.1 Methodology and Settings<br />
A multiple case study can include both qualitative data and quantitative data. In this master<br />
thesis, qualitative data has been chosen as the primary data collection method as it is useful<br />
for directly suggesting theory development and building.<br />
<strong>The</strong> semi-structured in-depth interview is the general framework from which<br />
qualitative date has been collected. <strong>The</strong> point of departure for the nine interviews was the<br />
interview guide, which rests on the integrated approach developed in the theoretical part of<br />
this master thesis. <strong>The</strong> interview guide is based on open-ended questions and projective<br />
question techniques, exemplified by questions such as; “what constitutes growth for you and<br />
your firm?”, and it was always attempted to keep the setting as informal as possible. If,<br />
during an interview, new areas of interest surfaced they were pursued to some extent with out<br />
sacrificing the rest of the interview. <strong>The</strong> interview guide therefore served more as a guideline<br />
rather than a series of question that were to be strictly followed. However, to obtain a relevant<br />
interview the questions were prioritized in order to be sure that certain crucial issues were<br />
dealt with. <strong>The</strong> interviews lasted somewhere between 1 – 1½ hour and was conducted at the<br />
offices of the consulting firms. This allowed for a more thorough understanding of the<br />
individual firm, as there was often a chance to meet other employees and see office buildings,<br />
and how this, for example, relates to firm culture. Prior to the interviews, a pilot interview<br />
was conducted with a small local management consulting firm in order to evaluate the quality<br />
and understanding of the questions, and based on this experience the interview guide was<br />
subject to minor changes. <strong>The</strong> interviews were conducted in the period of the 16 th of May<br />
until the 7 th of July 2008 and a subsequent evaluation of the interview guide was done after<br />
each interview in order to capture experience and new relevant issues for the next interview.<br />
<strong>The</strong> different management consulting firms who were contacted for interviews<br />
were chosen among the members of DMR. This membership list consists of 180 management<br />
consulting firms who adhere to an industry code 7 and thereby definitively falls under the<br />
category management consulting firm and the focus of this master thesis. Initially, the chosen<br />
consulting firms was sent a contact letter (appendix L) and then contacted by phone in order<br />
to establish a concrete meeting. I believe one important reason for the success with finding<br />
relevant firms is that they were chosen among DMR members. Even though this list does omit<br />
many consulting firms, it still represents a long list of diverse management consulting firms<br />
7 http://www.dmr.nu/home.asp?ContentID=205<br />
42
that are generally interested in developing the management consulting industry. If the point of<br />
departure had not been DMR, members it would have been difficult to identify relevant<br />
subjects for interviews. <strong>The</strong> firms interviewed cover a broad range of consulting areas from<br />
strategy/organization, operations, and communications to more IT heavy services. To obtain<br />
the appropriated number of interviews only twelve consultant firms were contacted and those<br />
who declined did so reluctantly because of busyness. It was demanded that interviewees hold<br />
a leading position in the consulting firm and have insight and influence on strategy. All the<br />
interviewees are either CEOs or partners in their respective firms. Consequently, all<br />
interviewees have been promised full anonymity.<br />
Owing to the problem statement of this master thesis, which deals with the<br />
tension between size and growth it was important to consider management consulting firms of<br />
various sizes. As already mentioned, <strong>Danish</strong> consulting firms belong to the SME segment but<br />
it is not directly applicable to divide consulting firms into the small and medium category, as<br />
it does not capture the diversity well enough 8 . <strong>The</strong>refore, an adapted size distribution covering<br />
<strong>Danish</strong> stand-alone management consulting firms was used in accordance with the industry<br />
analysis:<br />
Overview of respondents<br />
Small consulting firms Medium consulting firms Large consulting firms<br />
2-15 employees 16-50 employees 51- 200+ employees<br />
3 firms interviewed 3 firms interviewed 3 firms interviewed<br />
Source: Own making<br />
<strong>The</strong> total number of interviewed firms is thereby nine. However, to create a<br />
more in-depth understanding and to capture the diverse elements of growth factors and<br />
barriers it was attempted to choose one firm in each group which either had experienced<br />
problems to grow or currently experiences growth problems. This proved to be a difficult task<br />
as such information is difficult to obtain ex ante but to some extent, it has succeeded.<br />
However, because of the uncertainty connected with this information, the difference between<br />
high growth firms and low growth firms will only serve as additional information and not be<br />
considered as scientifically evident. Furthermore, the firms were chosen because they were<br />
founded close 2000, give or take a few years as this allows for easier comparing. An overview<br />
of the interviewed firms is presented in appendix M.<br />
8 <strong>The</strong> current definitions by EU is that a firm belongs to the category “small” if it employees less then 50 people<br />
and “medium” if it employees between 50 and 250 (http://europa.eu/scadplus/leg/da/lvb/n26026.htm).<br />
43
4.2 Operationalization<br />
<strong>The</strong> purpose of the empirical analysis is to give a description of and to create a<br />
foundation for understanding growth factors and barriers in the <strong>Danish</strong> management<br />
consulting industry with a special emphasis on their current market situation and<br />
organizational conditions. As already mentioned, the theory base and the integrated approach<br />
presented and discussed in chapter 3 serves as the basis for which the questionnaire has been<br />
developed. In general, it deals with nine different topics and relating questions, all designed to<br />
provide information about the discussed theory base. Appendix N gives an overview of the<br />
operationalization that has been done with this in mind and the interview guide is enclosed in<br />
appendix O.<br />
<strong>The</strong>re are several different measures, which can be applied in order to identify<br />
growth firms. In general, the following are suggested in the literature; size, assets, net capital,<br />
revenue, and growth in the number of employees (Hougaard and Duus, 1996). Each measure<br />
has its own advantages and disadvantages however, because of the complexity of the<br />
concerned industry and the high degree of competition it is very difficult to obtain exact<br />
numbers relating to revenue and profit, etc. <strong>The</strong>refore, to identify the degree of growth that<br />
the individual consulting firms have experienced, number of employees has been the prime<br />
indicator along with the perception of growth and further information supplied by the<br />
interviewee. <strong>The</strong> argument is that in this context growth in the numbers of employees is a<br />
viable measure as it is a consequence of growth or growth expectations in other measures.<br />
4.3 Data analysis<br />
<strong>The</strong> nine interviews were recorded electronically and hereafter partially transcribed with a<br />
focus on emphasizing the most influential opinions and answers related to the theoretical<br />
framework. While transcribing the interviews, attention was paid to the potential risk of<br />
selectively or irrationally disregarding parts of the interviews. This is a potential outcome of<br />
choosing to do partial transcription, and it limits the opportunity to use the disregarded parts<br />
in later analysis. However, the subsequent reading of the data material has been systemized in<br />
a way such that understanding and meaning was slowly developed and elaborated. <strong>The</strong><br />
reading of the material has been done through four steps. First, each interview was reviewed<br />
with the intention of creating a general description and understanding of the specific firm and<br />
its growth situation, see appendix M. Second, the interviews were reviewed in order to<br />
establish the purpose of growth in the management consulting industry. Third, a comparative<br />
review was made, in which the empirical data was considered in sets of three according to<br />
their size, in order to establish significant growth differences across size and situation. Finally,<br />
44
a reading of the data material was done in which growth processes in general was considered.<br />
Here, it was assumed that the large firms represent the more successful consulting firms<br />
whereas the small firms represent less successful consulting firms. This could be done<br />
because the chosen firms have all been founded close to 2000. Hence, the data analysis is not<br />
exact science but instead a qualitative interpretation, which is supposed to identify and create<br />
patterns and processes. <strong>The</strong> empirical analysis will therefore comprehend and decode the<br />
answers of the interviewees in relation to the theoretical framework. A hermeneutic approach<br />
allows for a deeper interpretation and a chance to go beyond the direct answers of the<br />
interviewees to identify patterns and meanings that have not been explicated. Inevitable, this<br />
will bring the risk of scientific bias and consequently, treatment of the data in a highly<br />
objective manner is crucial (Kvale, 1997).<br />
45
<strong>Chapter</strong> 5<br />
Empirical findings<br />
This chapter presents the empirical findings based on the analysis of the nine qualitative in-<br />
depth interviews 9 .<br />
5.1 <strong>The</strong> purpose of growth<br />
<strong>The</strong> point of departure is an understanding of why consulting firms choose to grow. A crucial<br />
insight is that managers of consulting firms are not interested in profitability per se but<br />
instead in a profitable expansion of the activities of the firm. Cost minimization and efficient<br />
allocation of resources are not a primary concern, as much as the development of the firm is.<br />
In the interviews, all firms expressed a wish to grow and saw it as a critical issue for future<br />
success and development.<br />
“<strong>The</strong>re are no alternative to growth in a consulting firm, well maybe there are, but then you are<br />
just keeping yourself occupied. If you want to be taken seriously as a firm, with regard to<br />
knowledge production and development, then there are no alternative to development which<br />
means that we get new strengths, inspiration, and knowledge into the firm”.<br />
CEO of a medium sized strategy and management development consulting firm (F/08:10)<br />
Hereby, it is underlined how consulting firm managers perceive growth as a<br />
dynamic concept. That is, only through growth is the consulting firm able to perceive and act<br />
upon new opportunities. <strong>The</strong>re is, to a very high degree, a focus on the internal organizational<br />
factors and the role of the firm’s internally generated resources. Hence, a growing consulting<br />
firm is a firm, which stimulates the process of resource accumulation in order to create<br />
services that are surplus of current business areas. <strong>The</strong> consulting firm’s productive<br />
opportunities are thereby those growth possibilities that management perceive and act upon.<br />
Accompanying growth is an increasing stock of accumulated resources, and as<br />
mentioned by different managers their organizations do experience strains on the<br />
organizational structure as they grow. Growth opportunities are only valuable if they do not<br />
jeopardize the organizational coherence. For consulting firms, growth opportunities expand<br />
much faster than its actual productive possibilities, as a result of being in the knowledge<br />
business and because they are in continuous contact with customers, where they appropriate<br />
knowledge and have the possibility to transform this into new business areas. <strong>The</strong>reby, the<br />
difference between growth opportunities and productive possibilities is very much dependent<br />
9 All interviews are attached on CD-ROM for further listening. Whenever a quote is used, it can be referred back<br />
to the interview by the capital letter and time designation through appendix M.<br />
46
on the organization design of the firm. If this supports internal development and growth, then<br />
the difference between growth opportunities and actual production possibilities will be small<br />
and enable the firm to choose between a variety of different growth possibilities. <strong>The</strong><br />
successful consulting firms, which were interviewed, had an ability to explore new growth<br />
possibilities and at the same time maintain an organizational ability to coherently develop and<br />
deploy new resources.<br />
“Innovation and change have to be a build-in part of our thinking and our way to organize the<br />
firm. We need one or two ground-breaking projects every year”.<br />
CEO of a medium sized strategy and management development consulting firm (F/35:20)<br />
Consequently, consulting firms choose to grow because of the development<br />
inherent in growth. <strong>The</strong>y do not grow because of the possibility to achieve economies of scale<br />
or market power. <strong>The</strong>se might be important issues, but are not a primary concern of<br />
consulting firm managers. <strong>The</strong>reby, it could be considered that size is of no importance for<br />
these managers however, that is not entirely true. In order to get at a situation where internal<br />
development and resource accumulation is sustained there is a need to be of a certain size.<br />
Several of the interviewed consulting firm managers name this size critical mass. At this size,<br />
the business area or consulting firm, through a process of learning-by-doing, is always adding<br />
to its existing stock of knowledge. Hence, size is a goal in it self but it is not an unconditioned<br />
goal as it stresses the organization with regard to organizational coherence.<br />
”If you want critical mass, if you really want to deliver heavy in business areas, then you need to<br />
be at a minimum 20 consultants. If you want knowledge transfer and a well functioning team,<br />
then you need 20 consultants in a business area”.<br />
CEO of a medium strategy and IT management consulting firm (D/25:45)<br />
This does not imply that there is a size optimum or a size limit to the consulting<br />
firm. Obviously, this is very much dependent of the areas in which the individual consulting<br />
firm operates. <strong>The</strong>reby, growth is seen as a dynamic process and conditioned by an internal<br />
focus on development and growing from the inside. Growth is necessary and must become an<br />
in-build process in the organization design. Even if a consulting firm is content with its<br />
current situation and position in the market, growth is necessary because the environment is<br />
complex and changing. Customers demand more from their consultants and trade-specific<br />
knowledge develop all the time. Consequently, growth in the consulting industry cannot be<br />
perceived as a mean to achieve a static optimum but must be considered a dynamic process<br />
that creates the foundation for further development.<br />
47
5.2 Development through growth<br />
<strong>The</strong> second step in the analysis is an examination of the nine management firms consulting<br />
across size and situation. <strong>The</strong> interviews covered among others; firm history, organization<br />
structure, strategic decisions, the management system and significant challenges and changes<br />
in the life time of the firm. Even though, the examination rests on a relatively small sample<br />
there are clear factors, which allow the firms to be arranged in three discrete stages. Several<br />
CEOs or partners even described how they considered their firm to be in a certain stage:<br />
“<strong>The</strong> stage that we, in actual fact, are in is only stage two. In stage one, we were concerned<br />
with establishing a firm altogether. Stage two is now about establishing the firm in an<br />
economic, professional and managerial sense and stage three will be about the visionary and<br />
exciting growth oriented issues”.<br />
CEO of a medium sized communication consulting firm. (E/08:50)<br />
5.2.1 Stage one consulting firms<br />
In this group, we find consulting firms that are typically managed by one person, the founder.<br />
Typically, he has left his job in another large consulting firm or management position. <strong>The</strong><br />
prime motivation for this was a wish to become master in own house. Furthermore, it was<br />
with an expectation that he would be able to leverage the competences, which he has achieved<br />
in previous job positions, to his own firm and that his current business network will give him<br />
a starting point and an advantage in the start-up phase.<br />
<strong>The</strong> stage one consulting firm is characterised by little or no formal organization<br />
structure, and the founder and employees meet informally to make decisions about daily<br />
matters. Only a few people are employed which typically include someone who manage<br />
administrative work, and a few consultants who support the line of business, which the<br />
founder has laid out. <strong>The</strong> business area that the firm operate in and the services provided is<br />
typically centred on the competences of the founder. <strong>The</strong> main part of employees is connected<br />
to the firm on a freelance basis and is pulled in on assignments when necessary.<br />
In general, firms in this stage find it difficult to grow and do so only in a limited<br />
extent. However, common for them is that they wish to grow. Where they are different from<br />
the consulting firms who have managed to grow, is in the growth vision. Typically, their<br />
growth vision is somewhat more narrow and limited because of the founder’s perception of<br />
growth.<br />
“I have a clear goal for growth. I see the firm in three years as having a maximum of 7 - 8<br />
employees… If we grow beyond 7 – 8 employees I risk losing sight of the assignments and if we<br />
grow beyond 20 employees I risk loosing sight of both assignments and employees”.<br />
CEO of a small management and event consulting firm (C/12:50)<br />
48
<strong>The</strong> consulting firms in this stage seem to experience a kind of “glass ceiling” in<br />
the pursuit of growth. That is, despite their wish to grow, there are elements in their<br />
organizational structure and management practice, which prevents them in doing so.<br />
Growth processes <strong>The</strong> approach to growth in this stage is characterized by a random search<br />
and identification of market driven opportunities. <strong>The</strong> range of services provided is broad and<br />
target a broad market. At this point, it is generally unclear which services will be most<br />
profitable and which clients should be focused on.<br />
“I have to say, it has not been a target-oriented or planned development. It has been very<br />
impulsive. Now there is an area of interest, we need to get involved”.<br />
CEO of a small organization management consulting firm (A/52:40)<br />
<strong>The</strong> types of assignments, which are taken on, are to a large degree very<br />
different and often put the firm under pressure, in both a competence and economical sense.<br />
However, it is also in these new assignments that the small firm finds opportunities to grow<br />
and develop its competences and capabilities. So, even though the firm will most likely<br />
exceed its capabilities this is a necessary development in order to achieve means of growth.<br />
“It might be that we take on an assignment that are so exiting and can give us some experience<br />
and because we might be able to earn money on it in the future. We have done this quite often<br />
but also have to acknowledge that there are many assignments we only do once. So there is a lot<br />
of development but we do not earn any money on this”.<br />
CEO of a small management and event consulting firm (C/34:00)<br />
However, there is a downside to this way of developing capabilities and possible<br />
customer relationships. <strong>The</strong> firm must spend more time and people doing research and<br />
investigating an unfamiliar problem as the firm is learning-by-doing. In the end, it means that<br />
a project or an assignment will be less profitable and maybe even of a poorer quality as firm<br />
competences are stretched. Most often, the firm will not be able to perform these “odd<br />
assignments” cheaper, faster or more competent than rivals who are already focused in that<br />
area. This type of growth is often connected with the risk that a specific customer project is a<br />
one-time project and will therefore never be done again. This means that the firm will have to<br />
undertake sunk costs as it will not be able to leverage new skills.<br />
<strong>The</strong> founder of the firm acts out a significant role in this stage concerning<br />
growth as he brings about the necessary conditions for growth. It is his entrepreneurial skills,<br />
combined with his professional skills, which provide the foundation for growth. His<br />
background and experience constitute the business area that the firm operates in and the<br />
development of the firm takes place in a narrow sense around him. All interviewed managers<br />
49
in this segment agree with the fact that they constitute the most important resource in their<br />
firm at the current stage.<br />
“Drive and enterprise is very much centred on me and the thoughts and ideas about where I<br />
want to go, no doubt about that. Ideas and strategic development lie with me or else we will not<br />
be able to develop our self”.<br />
CEO of a small management and event consulting firm (C/32:40)<br />
<strong>The</strong> business foundation is created around the customer network, which the<br />
founder has established in previous positions. Through this network of relations, the<br />
consulting firm can get orders from customers that are crucial in the start-up phase.<br />
“I asked my old customers (from a previous consulting job) what I need to do better in order for<br />
them to buy my services. So, I definitely used old customers. With them there are some strong<br />
ties, they typically constitute your network”.<br />
CEO of a small organization management consulting firm (A/52:40)<br />
This interdependence between the consulting firm and its customers is decisive,<br />
as the firm both creates its economical foundation and develops it capabilities in relation with<br />
their customers. <strong>Consulting</strong> firms which have one or two big customers from the beginning<br />
will find it much easier to grow as this network creates an economical security for the firm<br />
and allows it to leverage on existing capabilities and routines.<br />
“We need one or two big customers. We need this kind of stability so we do not need to invent<br />
new customers again and again… We use a lot of time attuning expectations through meetings<br />
etc. and this demand a lot of time the first time but not the second time”.<br />
CEO of a small management and event consulting firm (C/14:50)<br />
Typically, the small consulting firms service small and medium sized customers.<br />
<strong>The</strong>y have an advantage in this segment because of a number of factors. <strong>The</strong> price of their<br />
services are below that of the larger and more established consulting firms which opens up for<br />
a market of SMEs who do not set aside a large amount for consulting services. <strong>The</strong> fact that<br />
they are small also allow them easier access to the SME segment because they have a firm<br />
profile which smaller firms better can relate to.<br />
“We can help small and medium sized firms, especially owner managed firms, who are a little<br />
nervous when there comes a Mckinzie consultant where the theoretical ballast and the support<br />
base are top tuned. It can often seem intimidating, both investment wise but also strategically<br />
wise… Where we can make a difference as a small firm is that we help with strategy but also<br />
with carrying it out in real life”<br />
CEO of a small organization management consulting firm (A/20:21)<br />
Another advantage, as stated by small consultant firm managers, is the specific<br />
culture of small consulting firms. <strong>The</strong> small consulting firm is in a highly entrepreneurial<br />
phase where initiatives for future profit are tried in the market. <strong>The</strong> low degree of<br />
formalization and structure allows different initiatives to be made, and in general creates more<br />
50
freedom regarding how employees can tackle different assignments. Contrary to larger<br />
consulting firms, there are often no standardized tools or frameworks which must be used<br />
when handling customer assignments. This improves the flexibility of the small consulting<br />
firm and allows it to better adapt and specialize to the needs of SME clients. This relaxed<br />
culture often attracts experienced consultants who have previously worked in large and more<br />
tightly controlled consulting firms, and now has a wish to continue their trade under less<br />
formalized and strict conditions. Herein, lies the advantage for small consulting firms in<br />
attracting new employees.<br />
“<strong>The</strong> culture must create the framework within which people are not tied on hands and feet with<br />
regard to thinking and work methods… <strong>The</strong>re is not one right way to be a consultant, there are<br />
several ways”.<br />
CEO of a small management and event consulting firm (C/14:50)<br />
Having discussed the growth factors which are specific for small management<br />
consulting firms and which they leverage in order to achieve growth it is, however, important<br />
for understanding the whole story, to consider the duality of these factors. At the same time<br />
these factors become processes of growth, they also become barriers to growth as the analysis<br />
in the next part shows.<br />
Growth barriers <strong>The</strong> manager of the small consulting firm is balancing his role as manager<br />
with his role as consultant. <strong>The</strong> services and assignments, which the consulting firm take on,<br />
are centred on his competences. <strong>The</strong>refore, he often becomes an indispensable person when<br />
dealing with clients.<br />
“You are both the strategist and the owner but you are also the operational consultant who must<br />
go out there and perform… I need to prioritize time to be the administrative director… When I<br />
contact my customers they say; “you are the one we buy”. I can bring along young consultants<br />
to do spreadsheets and stuff but I have to be there all the time”.<br />
CEO of a small organization management consulting firm (A/03:20)<br />
Time for strategy and administration must be prioritized which becomes a<br />
difficult act to balance. <strong>The</strong> manager is tied up with operational work as opposed to long term<br />
planning and strategy. He is often the one who deals with day to day decisions. <strong>The</strong>refore,<br />
these consulting firms often do not have a clear and defined plan for the future. Growth is<br />
opportunity driven as opposed to strategically driven. As a result, stage one consulting firms<br />
navigate the complex and opaque consulting market without the right conditions and<br />
assumptions. Because the manager is often alone in his position, he finds it difficult to discuss<br />
strategic issues and lacks a sparring partner. <strong>The</strong> manager, in effect, becomes a limitation to<br />
growth, as it is only his vision and ideas, which the firm rests upon.<br />
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Even though, the founder has a vast experience and knowledge from previous<br />
jobs it is difficult for him to both maintain this knowledge, obtain new knowledge and<br />
disseminate this to employees in a structured way. <strong>The</strong> transfer and acquisition of current and<br />
new knowledge, which obviously is crucial in the consulting industry, is given a lower<br />
priority.<br />
“A barrier can be that we do not have enough focus on new knowledge. It is my responsibility<br />
and I do not always have enough time to look into it”.<br />
CEO of a small management and event consulting firm (C/01:02:30)<br />
Consequently, there is often a need to specialize in a specific consulting area if<br />
specific competences are to be maintained and developed. However, all the small consulting<br />
firms describe their services as rather broad. In general, there seems to be a misfit between the<br />
size of the firm, the degree of specialization and the consulting services provided. Customers,<br />
who have become better at buying consulting services, know that it is difficult for the<br />
consulting firm to maintain competences and capabilities within a broad range of services.<br />
<strong>The</strong>refore, they do not want to engage the fuzzy and turbid consulting firms in the middle<br />
exactly because they are too broad. Hence, it is suitable for consulting firms to be either<br />
specialised and/or a high-quality provider. However, small consulting firms lack critical mass<br />
in order to reach a sufficient level of quality. In this industry, where the quality of the work is<br />
decisive, the right amount of resources and competences must be present as an assignment is<br />
taken in. <strong>The</strong>re will necessarily be a limit on the size and scope of the types of assignments,<br />
which small consulting firms can solve without jeopardizing their integrity. Often small<br />
consulting firms find themselves balancing their current competences with large and complex<br />
assignment that can lead to a stretch in competences. <strong>The</strong> result can be poor solutions and loos<br />
of reputation.<br />
In connexion with the above, another problem for small consulting firms arises.<br />
Because education and training, as well as carrier possibilities are somewhat limited in small<br />
firms relative to large consulting firms, young consultants choose to begin their carrier<br />
elsewhere. <strong>The</strong> small consulting firms interviewed find it hard to attract new employees with<br />
the right background as opposed to the medium and large consulting firms who do not<br />
experience this as a problem to the same extent. <strong>The</strong>reby, a problem arises concerning how to<br />
secure the consulting firm in the future as new inputs and potential new partners do not<br />
emerge. Instead, it is often the same group of senior partners who manage and control the firm,<br />
which does not promote the exploration of new opportunities.<br />
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“<strong>The</strong> new growth base for our firm does not come from us seniors but from the young<br />
consultants. Furthermore they are also the reason why we can attract more young consultants in<br />
the future…We need to create a food chain”.<br />
Senior partner in a small strategy and operations consulting firm (B/28:50)<br />
Because the small consulting firm typically services small and medium sized<br />
customers, they will often be dependable of one or two larger customers within this segment.<br />
This relationship creates an economical base and security for the small consulting firm. A<br />
large customer is achieved either through personal relations or through retention of a customer<br />
who has increased his consulting use to become a large buyer. However, this makes the small<br />
consulting firm vulnerable. If growth happens through a personal relationship with specific<br />
persons within the customer organization, the consulting firm is very fragile to restructuring<br />
which might take place in the customer organization.<br />
“Relations to customers are decisive. As an example, we just lost our biggest customer the other<br />
day because the person who I have been working with left the firm. After six months of dialog<br />
with the two new persons, who were my contact persons in the organization, they finally decided<br />
on another consultant”.<br />
CEO of a small management and event consulting firm (C/25:42)<br />
In addition to a certain degree of dependence of key customers, small consulting<br />
firms also face difficulties with the fact that their services are some what affected by high<br />
season and low season changes. It clearly makes business a little bit more insecure when there<br />
are periods where the firm only gets few or none assignments and this will affect investment<br />
in the long run. Slow periods must be made up for in busy periods, and the personal risk for<br />
the manager is high in slow periods. <strong>The</strong> key issue it to align the business model to the type of<br />
customer segment that the consulting firm serves. <strong>The</strong>refore, it becomes highly crucial how<br />
the organization design of the consulting firm is put together.<br />
Development of new capabilities and competences in the small consulting firms<br />
does take place but it is not systemized. Often, it is centred on the founder or CEO and his<br />
already existing competences and interests. However, because the founder is often not capable<br />
of opening up for new influences, internal development is somewhat limited. This can become<br />
an important barrier to growth if management, responsibility and development are not spread<br />
out in the organization so that it is not only dealt with by the founder.<br />
“On a strategic level with regard to development and growth I sometimes ask my self the<br />
question; do I have enough competences to carry this firm? My own competences can become a<br />
barrier”.<br />
CEO of a small management and event consulting firm (C/48:15)<br />
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Stage one crisis <strong>The</strong> manager is both the factor that allows the firm to grow in the first place,<br />
but is also the barrier, which prevents further growth. Some managers realize this and some<br />
do not.<br />
“We have had and still do have a managerial problem. <strong>The</strong>re are some senior partners who do<br />
not give room for the young consultants. This has been our Achilles’ heel and is our biggest<br />
problem”.<br />
Senior partner in a small strategy and operations consulting firm (B/26:40)<br />
“I know that if I want the firm to grow then I cannot stay in the position where I am now.<br />
CEO of a small organization management consulting firm (A/04:10)<br />
<strong>The</strong> crisis, which must be overcome, is rooted in the founder’s ability to let go<br />
of responsibility and power, and let other people have an influence in the development of the<br />
consulting firm. Only through this “letting go” can the small consulting firm be able to grow<br />
beyond the small size. As long as the founder will not give room for others in the decision-<br />
making process, future opportunities is limited to his competences. Either finding a<br />
complementary senior partner or the promotion of an employee to the rank of senior partner<br />
can be necessary steps for further growth.<br />
Opportunity driven growth further enhances the crisis, as the consulting firm<br />
cannot focus on any specific areas and plan strategically. <strong>The</strong> firm must overcome the “glass<br />
ceiling” of founder control and establish a grip in a specific niche in which in can leverage it<br />
current competences. This is certainly a difficult task but a very necessary one, because the<br />
foundation for the firm is created here. If this crisis is not overcome, it is most unlikely that<br />
the firm will grow beyond the small size category. Hence, overcoming the crisis lies in<br />
finding and adapting the right structure and design for the firm in which a professionalization<br />
and specialization can take place.<br />
5.2.2 Stage two consulting firms<br />
<strong>The</strong>se firms are founded by partners with different wishes for the future, but these partners<br />
have undergone a strategic change towards one common direction. In all the interviewed<br />
medium consulting firms, there have been not one, but several partners in charge and thereby<br />
these firms have overcome the management crisis evident among small consulting firms.<br />
Stage two consulting firms have managed to align the visions of partners and the services they<br />
provide so that the consulting firm, in some extent, is focusing on a specialized market niche.<br />
<strong>The</strong>se firms have chosen which competences are to become core competences<br />
and capabilities in the search for future competitive advantage. <strong>The</strong> formal structure becomes<br />
heavier and demanding as it must be reoriented toward supporting the firm’s capability to<br />
deliver the chosen speciality. Furthermore, as the firm grows in size and hires more<br />
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employees this also raises the demand of a well functioning structure that can account for<br />
more trivial things such as maternity leave and fixed working hours. Issues, which were not<br />
relevant in stage one consulting firms because of the entrepreneurial culture.<br />
Decision making is still residing with the founding partners who seek to achieve<br />
consensus before acting. Occasionally they consult with younger partners and employees on<br />
some major decisions, but this is more in the interest of sparring, more than actual<br />
participation in decision-making. <strong>The</strong> founding partners retain sole responsibility for devising<br />
strategy, hiring, evaluating and compensating staff. Compensation schemes are more formal<br />
planned than in stage one consulting firms, and account both for those employees who wish to<br />
put in a lot of work and those who work more moderately. Profit is still allocated among<br />
partners at the end of the year, and a part of this is reinvested into the firm.<br />
Grow is driven by a wish to create a viable, strong and independent consulting<br />
firm which is not shaken or threaten by consultants who change job, large customers who hire<br />
other consultant houses, or customers who demand large assignments. Furthermore, there is<br />
also a wish to make the firm independent of the owner so that the firm is not directly<br />
dependent of one to three key persons to secure its future.<br />
“A central challenge is the move from being a small entrepreneurial firm where we three<br />
partners are a part of everything, to becoming a “real-firm” firm with middle managers,<br />
delegation of responsibilities and business areas which run without the founders being a part of<br />
everything”.<br />
CEO of a medium sized communication consulting firm. (E/02:53)<br />
Growth processes <strong>The</strong> growth that has taken place in stage two firms can be characterized as<br />
organic growth. Organic growth represents true growth for the core company and at this<br />
relatively early point in their lives, stage two consulting firms are still too small and internally<br />
focused to grow through acquisitions or mergers. <strong>The</strong> rate of organic growth indicates how<br />
well management have been able to leverage internal resources and competences to obtain<br />
growth. This type of growth is essential in order to have a strong and well-founded resource<br />
and competence base to build future growth on.<br />
“We have reached the size we have now by organic growth and by gathering key persons in the<br />
firm. <strong>The</strong> prerequisite for us to grow is the way we organize the firm more sharply towards some<br />
key business areas and where some employees, on a higher level, takes on responsibility for<br />
developing these. This is the process we are currently dealing with”<br />
CEO of a medium sized strategy and management development consulting firm (F/06:00)<br />
Hereby, the foundation for future growth can be created on core competences<br />
and developing them into strategic business areas. <strong>The</strong> key to achieve growth in this stage is<br />
to align the consulting firm so that structure, strategy, and employees come together around<br />
these areas. It becomes necessary for the firm to restructure around a number of strategic<br />
55
usiness units. <strong>The</strong> interviewed stage two firms all had three core business areas, which<br />
constituted the focal point of their strategy. Employees are clearly delegated so that they focus<br />
their knowledge in one key area instead of drifting around between different types of projects.<br />
This sharp focus on key business areas creates focus, and allows the firm to build a better<br />
structure for developing routines and sharing knowledge.<br />
“<strong>The</strong>re starts to be a bigger meaning with what we are doing. We cooperate more and more,<br />
there is a pattern in the type of assignments we solve, and this lead to the fact that we needed to<br />
become sharper and therefore, we created three clearly defined business areas… You will see a<br />
clearer company profile forming in the future”.<br />
CEO of a medium sized strategy and management development consulting firm (F/16:50)<br />
Furthermore, stage two firms have managed to grow via balanced growth.<br />
Contrary to stage one consulting firms, there is not a direct dependence of one or two major<br />
customers concerning economic security. Instead, these firms have managed to create a broad<br />
customer basis by maintaining a focus on those sector markets in which they are strong and<br />
then leveraging competences to new sector markets.<br />
<strong>The</strong> above growth tendencies create a clear view of consulting firms, which are<br />
very much conscious of devising and following a specific strategy. Growth is, to a much<br />
higher degree, driven by focus considerations as opposed to opportunity driven growth. In<br />
general, growth happens layer by layer, and it is continuously adapted towards and supporting<br />
a clear strategy formulation. Hereby, there are from time to time assignments that stage two<br />
consulting firms turn down because either it does not fit with the core competences of the firm,<br />
or it will not contribute with new competences, which are relevant in relation to firm strategy.<br />
Finally, delivering a poor solution might jeopardize firm reputation.<br />
Stage two firms are driven by identification of strategic openings, market<br />
considerations, and positioning. That is, the founders of these firms have not started the firm<br />
with an idea of doing general consulting work but instead with an idea the somewhere in the<br />
consulting market there was a strategic position open; a specific area which the firm could<br />
specialize in and which, in effect, would shape the strategy and direction of the firm. This<br />
choice of position and business focus translates into the rest of the firm, and affects the<br />
organization design of the firm so that there is a fit between strategy, structure, and market<br />
position.<br />
“We have a position in the market which means that we are somewhat different from our<br />
competitors… We primarily consider this an advantage because we, compared to the classic PR<br />
firms, are experienced to be different. We can be in competition with COWI,<br />
PriceWaterhouseCoopers, freelance journalists, IT firms and many different firms because we<br />
are placed in between different professions. Our customers and we see this as an advantage.<br />
This is combined with a couple of areas where we are market leaders… Finally, we have chosen<br />
a price concept and business model that is a little different… We charge a price, which is<br />
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somewhere between freelance agents and the established consulting firms… This has the<br />
advantage that we can provide our services cheaper and in a longer duration of time”.<br />
CEO of a medium sized communication consulting firm. (E/02:53)<br />
When the consulting firm has decided which core business to pursue it<br />
furthermore becomes possible to plan and organize sales on a more coherent level, as opposed<br />
to the “shot gun” sale approach adopted by stage one firms. <strong>The</strong>reby marketing efforts,<br />
pricing and markets can be controlled and targeted much more directly. <strong>The</strong> firm can create a<br />
much sharper image and establish cross sales of its services.<br />
<strong>The</strong> fact, that stage two consulting firms position themselves deliberately in the<br />
market means that they can relatively easily find and hire new employees, which is a<br />
necessary condition for maintaining annual growth rates at about 20 percent. <strong>The</strong> interviewed<br />
stage two firms did not find it particular difficult to employ the necessary amount of people<br />
because they attract people from various educational backgrounds and not just one specific<br />
type of people. Systems for monitoring and evaluating performance are slowly being<br />
implemented. <strong>The</strong>se systems supply management with information on activities and how<br />
ideas and knowledge diffuse through the firm. Furthermore, these systems helps management<br />
creating an overview of knowledge and development needs and keeps track on the firms stock<br />
of human, physical, and intangible resources. Obviously, a carefully developed compensation<br />
system also supports the recruitment process and plays a major role in attracting the right<br />
employees.<br />
Growth barriers A condition for a firm to be able to follow and carry out a defined strategic<br />
business plan is a focus on the role of management. Obviously, as the consulting industry is a<br />
“people business”, and because much development happens as project learning and on-the-job<br />
training where senior partners is in charge of a project and act as role models for younger<br />
consultants, managers play an important role in the field as consultants.<br />
“More weight on the CEO role is a condition for taking the next step and this is where we are<br />
now… Our ambitions with growth are conditioned by that fact that we, who do have formal<br />
management tasks, deal with this to a larger extent: Strategic recruitment, employee<br />
development and continuous development.<br />
CEO of a medium sized strategy and management development consulting firm (F/03:30)<br />
However, managers focus a lot of their time on selling and producing. This<br />
means that they do not spend sufficient time on the professional management of the firm.<br />
<strong>The</strong>re is a great focus on the consulting trade among managers and not so much on the<br />
managerial aspects of running a firm. <strong>The</strong> consequence is a lacking focus on strategic aspects<br />
and development of mid-managers level, which in the future can be put in charge of business<br />
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areas. This is very much in contrast to the increasing need of coordination and control, which<br />
stage two firms experience. Hence, a growth barrier lies in the “do-sell” cycle which<br />
management easily becomes trapped in.<br />
“On one side we have a professional and planned progress we try to follow so we are not blind<br />
or fumble our way forward. However, on the other side, then we are still a firm where<br />
management is in the field and producing. This means that the resources to deal with these<br />
things [strategic decisions and challenges] sometimes lag behind”.<br />
CEO of a medium sized communication consulting firm. (E/04:20)<br />
Even though, stage two firms have grown substantially since the start-up phase<br />
there is still a lack of critical mass, both in the organization as a whole and more pronounced<br />
in the business core areas. This means that there is always a managerial deficit. Competences<br />
are stretched and continually under pressure, so exploring new opportunities becomes an<br />
activity, which is seldom undertaken. In continuation, growth by diversification becomes very<br />
difficult as all resources are engaged in current activities. <strong>The</strong>re is a lack on a formalized<br />
system or processes to explore new growth opportunities and in turn, these often pass by<br />
unnoticed.<br />
“We had our core business and then we tried something different. This went completely wrong.<br />
<strong>The</strong>re was no synergy and we could not get our competences to work together. We have to grow<br />
competence wise layer by layer as long as we have the size that we have. We simply lack volume<br />
and economy to enter completely new areas”.<br />
CEO of a medium sized communication consulting firm. (E/18:06)<br />
As stage two consulting firms experience growth they inevitable grow in size.<br />
This entails stress on the organizational structure that is felt at all levels. <strong>Management</strong><br />
experience the increase in size by the fact that they have less control over what happens.<br />
Suddenly, they are not in daily contact with every consultant and lose touch with operational<br />
matters. <strong>The</strong>refore, as size increases there is a need to formalize coordination across business<br />
areas and assure the information travels through the firm. Employees, on the other hand,<br />
experience this size increase as well. Where many consultants have chosen not to work in<br />
large consulting firms because of a more rigid structure, a change is happening towards this.<br />
Employees have much less leeway in their activities and their job descriptions are specified to<br />
a much higher degree. Often, they are attached to a specific business area in which they must<br />
develop their knowledge and routines. In general, it means that the firm becomes more<br />
formalized and complex and looses some of its charm. In this respect, there is a growth barrier<br />
in the duality between maintaining a flexible and entrepreneurial firm, while at the same time<br />
struggling with the need of developing a professional and viable firm.<br />
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Stage two crisis <strong>The</strong> foundation of the next crisis is created by the process, which the<br />
consulting firm has gone through in stage two. Through a continuous focus and specialization,<br />
the firm has become very dependent on a few core business areas in which it offers superior<br />
value. However, this also means that the firm becomes unable to respond to changes in<br />
customer requests or new growth opportunities. <strong>The</strong> firm simply does not have the necessary<br />
range of in-house services or consultant capabilities for expansion. <strong>The</strong> crisis is two-fold as it<br />
concerns the development of new services but also establishing a capable staff. Because the<br />
managers have been caught in a “do-sell” cycle some aspects have been neglected. Mid level<br />
managers, the development of new capabilities and knowledge and service diversification.<br />
<strong>The</strong>refore, the crisis that must be overcome is in developing the firm into a “real firm” while<br />
exploring new opportunities for diversification.<br />
5.2.3 Stage three consulting firms<br />
A group of three to four people who were previously very skilled and successful consultants<br />
in other large consulting firms founded these firms through partnerships. However, where<br />
these firms are markedly different is in the fact that they, from day one, had a clear-cut vision<br />
and idea of how to get there, formed by a consensus among the group of founders. <strong>The</strong><br />
founders have identified strategic positions in the consulting market, which offer unique<br />
opportunities and allow their firm to grow. Furthermore, because the founders were a group<br />
they have been able to draw on each other’s skills, and thereby obtain synergy effect in the<br />
very early stages of the start up. Investments have been made in advance, in order to be ahead<br />
of the expected growth and development.<br />
As a stage three firm grows and becomes stronger, both financially and with<br />
reference to resources and capabilities, it gradually starts to broaden its services and maybe<br />
opens offices in other cities. Employees specialize in practice areas and young and newly<br />
qualified consultants are hired. This allows the firm to take on large projects with lower<br />
priced staff and thereby improving the economic advantage of the firm. Furthermore, it allows<br />
senior partners to focus on strategic management. Training programs, knowledge sharing and<br />
compensation schemes are elements which are adapted and improved to fit the growing<br />
organization. However, to support the increasingly diversified firm a decentralized structure is<br />
adopted which delegates responsibilities and improves career opportunities. In the end, the<br />
true stage three consulting firm can be described as a full-service provider, but also as a firm<br />
with several small independent, and to some degree, detached business areas.<br />
Growth becomes a competitive parameter that is highly critical for the future of<br />
the firm. Only through high annual growth rates, and preferable rates, which are higher than<br />
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the industry average, can stage three consulting firms continue to develop and attract new<br />
employees. Experiencing high growth then goes from being an organizational goal, to being a<br />
necessary component for large consulting firms in order to stay competitive relative to the<br />
other large and international consulting firms who operate on the <strong>Danish</strong> market.<br />
“<strong>The</strong>re is no doubt about the fact that the general growth in Denmark will drop. We are used to<br />
growth rates of up to 35 % and this can not continue. However, it is a clear goal for us to have a<br />
significant growth and a growth higher than the rest of the market. And it is not supposed to be a<br />
growth rate of 7 %, no; growth has to so high that it creates opportunities for people. In this<br />
type of firms, if we do not grow, then employees will leave… If new opportunities are not<br />
continuously created then the most talented, who aspire for the next level, cannot move on”.<br />
CEO of a large strategy and operations consulting firm (H/08:20)<br />
Growth processes <strong>The</strong> successful stage three consulting firm is characterized by having a<br />
strong and cohesive organizational culture through which it enables and motivates its work<br />
force. That is, these firms manage to build a significant organizational capability through<br />
culture, which acts out a significant role in reaching the objectives of the organization.<br />
<strong>The</strong>refore, it is highly critical for these firms to direct management efforts towards this area.<br />
Managers openly emphasize and talk about firm culture and its beliefs. Important here is that<br />
the culture of the firm must continuously be articulated, not only in talks and speeches but<br />
also in direct actions. Through initiatives, employees are given a high degree of responsibility<br />
over important elements of the organization design. Once responsibility and agreement about<br />
these elements are reached, employees become vocal advocates of the firm’s culture and<br />
beliefs.<br />
“Two years ago we introduced “process owners”. A process owner is someone who have the<br />
responsibility of developing and running a certain process in the firm; quality management,<br />
recruitment, culture, education and training etc. Large or important management posts. Some<br />
consultants choose to wear that hat and undertake a managerial responsibility”.<br />
CEO of a large strategy and operations consulting firm (H/27:40)<br />
A strong organizational culture supports the entrepreneurial drive, which resides<br />
in the type of people who are hired into stage three firms. A common characteristic for these<br />
people is that they undergo a thorough screening process in order to make sure that they fit<br />
with the organizational culture and that they have an entrepreneurial capability. This<br />
entrepreneurial capability, which is equally important at all levels of the firm, foster new ideas<br />
and improves the dynamic capabilities of the firm. When a stage three firm manages to create<br />
or improve the entrepreneurial capability among its employees to change existing routines and<br />
practices, the firm will leap towards new capabilities and thereby a wider set of growth<br />
opportunities.<br />
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“In reality this has been the basic model; not thinking in professional areas but thinking in<br />
persons and creating the settings in which the individual can get energy and support and<br />
become motivated to work on what one is enthusiastic about… For example the SAP area which<br />
is actually a very peripheral area in our firm has been carried by a contact to a few, like all<br />
other in the firm, truly dedicated persons”.<br />
Partner of a large strategy and operations consulting firm (I/04:20)<br />
Based on an accumulated stock of knowledge and resources combined with a<br />
highly entrepreneurial management and workforce, these stage three firms manage to<br />
diversify. <strong>The</strong> interviewed firms provide consulting services in up to twenty different areas<br />
that are all related to the core competences of the firm. Related diversification becomes a<br />
powerful mean to achieve growth and consolidate the firm as a full-service firm. However,<br />
equally important is also the unrelated diversification that takes place. As these stage three<br />
consulting firms work for and with the most important firms in the country, they get a first-<br />
hand impression of new growth opportunities and how these can be leveraged via unrelated<br />
diversification.<br />
“Some of the business areas which we have launched move away from consulting and into doing.<br />
Further down the hall there is a product development centre, not consulting, they do actual<br />
product development… Where we can see that our customers have problems with critical mass,<br />
consulting does not give any meaning… We want to take in the executing part which some of our<br />
customers cannot lift”.<br />
CEO of a large strategy and operations consulting firm (H/20:00)<br />
Traditionally, unrelated diversification in knowledge intensive industries, such<br />
as the consulting industry, has a low chance of succeeding because of the risk of<br />
overextending employees and diluting resources. However, growth via diversification<br />
demands that senior managers ensure that firm resources travel to their most productive areas.<br />
One way of dealing with this is to create strategic business units within the firm. <strong>The</strong>se<br />
become small relatively self-contained sub-units, which are managed by younger partners<br />
with a high potential for the future. In order to keep the large firm as decentralized as possible,<br />
these business units are responsible for important aspects such as obtaining new clients and<br />
developing the unit’s employees and capabilities.<br />
<strong>The</strong>se large consulting firms typically employ 50 or more consultants and have<br />
critical mass in some areas of their business. Critical mass is used to describe the existence of<br />
a sufficient momentum in a system, such that the momentum becomes self-sustaining and<br />
fuels further growth. Hereby, volume becomes important, as it is necessary in order to achieve<br />
critical mass.<br />
“We have a vision that we want to leave footprints and this demands that we are good at what<br />
we are doing and enough so that we can deliver heavy and solid all the time, that is a critical<br />
mass in what we are doing”.<br />
CEO of a large strategy and operations consulting firm (H/12:00)<br />
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Providing consulting services of high quality, in turn becomes self-sustaining as<br />
firm reputation is gradually spread by word of mouth, through references and by branding.<br />
<strong>The</strong>reby, elements from industrial organization become a more important factor, such as<br />
market leadership and power. By broadening knowledge of the firm and reinforcing<br />
reputation, a large consulting firm can become the preferred consulting supplier. Customers<br />
are under pressure not to choose low quality consulting firms, which do not deliver.<br />
When consulting firms reach a significant size, it also becomes possible to<br />
engage in growth measures more characteristic from industrial organization. Large consulting<br />
firms acquire small 2-5 person consulting firms because they have a specialization, which fit<br />
well with the overall business areas. However, large acquisitions and mergers are not common.<br />
Furthermore, growth takes place as sequential steps in which the firm slowly develops<br />
without offsetting its current capabilities. This can be both by adding new complimentary<br />
services and by establishing new offices in different geographical locations. <strong>The</strong> same process<br />
is used in relation to internationalization where the large consulting firms slowly establish<br />
offices in the Nordic region and subsequently in Asia or Eastern Europe.<br />
Growth barriers As the stage three firm grow to a size of 100-200 employees it becomes<br />
difficult to maintain the unique culture and entrepreneurial spirit from the initial stages.<br />
Because the firm are specialized in several self-managing business areas with their own<br />
operational manager and assigned consultants, these business areas start to resemble small<br />
“profit centres” within the organization. Incentive schemes conditions these “profit centres” to<br />
behave in a manner where they act and think independently and hereby develop their own<br />
sub-culture. A result is a lack of coordination across business areas, different approaches to<br />
customers, and difficulties with sharing personnel for large projects.<br />
“We have a lot of small business units… And unfortunately this is reflected on our web page and<br />
shows that we consists of a lot of small groupings more then it is an expression of our business<br />
areas. In general we do not have 32 different professional areas but only four”.<br />
Partner of a large strategy and operations consulting firm (I/58:20)<br />
Because of the lack of shared firm culture and approach, some employees might<br />
find that the firm is loosing some of the informality and charm they initially appreciated. If<br />
incentive schemes are not designed in a manner, which accounts for both those employees<br />
who want to work hard and those who also want a fun job, some employees will not accept<br />
the increase in organizational complexity. Furthermore, those mid-level consultants who have<br />
held managing positions will expect to be rewarded either by promotion to partner or through<br />
a higher salary and development. If the firm does not manage to sufficiently motivate its<br />
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employees, they will begin to leave for other consulting firms that are smaller and allows for<br />
more individuality or better career prospects.<br />
“Internally it is a constant challenge to maintain an attractive place of work; to keep it fun and<br />
at a high standard. But this is a derivative of growth and being as large as we are”.<br />
Partner of a large strategy and operations consulting firm (I/04:20)<br />
As already discussed, managerial pressure increase along with an increase in<br />
firm size. <strong>The</strong> managerial workload becomes larger and larger, especially if management still<br />
wants to maintain a role as producing consultants. Consequently, managers become the factor,<br />
which inhibit growth because they are constantly in deficit. That is, up until a certain point it<br />
was been sufficient that it only was the management group who developed and planned ahead<br />
for the firm. Mid-level managers where responsible only for operational decision-making.<br />
This was possible because managers were able to maintain an overview of the entire<br />
organization. However, as this is not possible anymore, the consulting firm risk overlooking<br />
important growth opportunities in their respective business areas because they have not direct<br />
control or insight of what is happening. Instead, the mid-level managers who are in charge of<br />
a business area must use the insights, which are gained through customer contact to explore<br />
new growth opportunities, and not only worry about the completion of a project. Hence, if<br />
management does not establish a food chain of new managerial talent that are capable of<br />
thinking strategically and not only operational, then this will naturally impose a growth<br />
barrier. <strong>Management</strong> will become overburdened and miss growth opportunities.<br />
“<strong>The</strong> issue of cultivating strategic managers who are not only operational managers is<br />
important. When we were only eighty to a hundred employees, we could manage with the fact<br />
that only a few people had strategic vision, me as one of those, and then many very skilled<br />
operational managers. But where we are now then it is necessary that the managers of our<br />
business areas are in fact thinking strategically and are capable of developing their own<br />
businesses”.<br />
CEO of a large strategy and operations consulting firm (H/05:15)<br />
An important element in the future growth of the stage three consulting firm is<br />
internationalization. Through a broadening of the geographical scope, the firm can overcome<br />
the natural barrier, which the relative small <strong>Danish</strong> market constitutes. However, this is not an<br />
easy task, as there are no guidelines or “best practice” for internationalizing a consulting firm.<br />
So, in this context, stage three consulting firms actually behave as stage one consulting firms<br />
but on the global market. That is, the largest and most successful consulting firms in Denmark<br />
are slowly trying to establish themselves in other countries through a trial and error approach<br />
which very much resembles the opportunity driven growth characteristic of the initial phases.<br />
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<strong>The</strong>refore, as long as the stage three firm has to struggle with finding the right growth recipe<br />
for the international market, this can constitute a significant growth barrier.<br />
“How we in actual fact handle this challenge, I am not sure we fully realize yet. We try some<br />
things and we launch a lot of ships but in reality we do not know how to deal with this so far”.<br />
CEO of a large strategy and operations consulting firm (H/07:00)<br />
Stage three crises <strong>The</strong> crisis, which must be overcome by stage three consulting firms, is in<br />
creating a “one-firm” firm. Attempts to diversify the firm and to bring in new units that have<br />
not been fully absorbed in the firm have created a firm in need for a common culture and<br />
approach to the consulting trade. However, this is complicated by the firm’s attempts to<br />
internationalize, which furthermore runs the risk of fragmenting the firm. Hence, the objective<br />
for the stage three consulting firm is to re-unify the firm and identify a sensible way to<br />
broaden geographical scope without creating more units that are disjointed. <strong>The</strong> notion of the<br />
“one-firm” firm must be translated down through the hierarchy so that all employees,<br />
especially mid-level managers, act towards this goal. If this does not happen then the firm<br />
runs the risk of organizational inertia and eventually of breaking-up.<br />
5.2.4 Concluding remarks on growth development<br />
<strong>The</strong> three growth stages correspond to a series of internal crises related to management,<br />
control and organizational coordination. <strong>The</strong> resolution of one crisis sows the seeds of the<br />
next crisis and hence, suggests that growth can only take place trough organizational<br />
development. On clear finding from evaluating growth across size, is that firm growth is<br />
dependent of the developmental capabilities of firm managers. Hence, management plays a<br />
pivotal role. Furthermore, as the consulting firm grows and develops it resembles a<br />
professional firm more and more. That is, the managerial and organizational side of the firm<br />
develop the small owner-managed firm to a professional firm where strategy and management<br />
are essential. An overview of the suggested life cycle development and related managerial<br />
issues is presented in appendix Q. Finally, it is important to consider the limitations of the<br />
analysis of growth development. Developmental change did not take place through abrupt<br />
changes, but instead as a continuous process accumulated gradually and incrementally over<br />
time. <strong>The</strong> interviewed firms have also moved back and forth in their developmental stages and<br />
it is never a hundred percent clear where a firm is placed. Development on the individual firm<br />
level has most often been a result of small and less obvious incremental changes and the<br />
manager’s perception of these.<br />
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5.3 Growth processes<br />
<strong>The</strong> final step of the analysis evaluates significant growth processes and strategies that have<br />
been used by the more successful management consulting firms. On the surface, the nine<br />
interviewed consulting firms seem different; they have different competence areas and<br />
customers, vary in size and scope, and appear different on the market. However, there seems<br />
to be some underlying and shared processes, which enable growth and success.<br />
5.3.1 Culture<br />
<strong>Consulting</strong> firms are, like all other organizations, social communities and they develop a firm<br />
specific organizational culture and behaviour. <strong>The</strong> culture in a consulting firm is, however,<br />
some what different from traditional firms. <strong>The</strong>re is only a limited amount of formal rules<br />
concerning problem solving, and often consultants spend a lot of time in the field without<br />
close supervision. Without a clear and present hierarchy, there is always the risk that<br />
employees act in ways, which are contrary to firm strategy.<br />
However, the more successful consulting firms are characterized by having a<br />
strong culture, which serves to reinforce the alignment of strategy, and internal practices with<br />
the way employees act. From day one, new employees are lead trough an introduction<br />
program that teaches them the values of the firm’s culture.<br />
“<strong>The</strong> whole issue around culture is important. No unnecessary bureaucracy… It has to be fun -<br />
we want to be mean something for each other, create energy and be informal… This we are<br />
often credited for by employees who arrive from other consulting houses”.<br />
Partner of a large strategy and operations consulting firm (I/04:20)<br />
Culture refers to the set of beliefs employees hold about how they are expected<br />
to behave and what values they are to share with fellow consultants. In these successful<br />
consulting firms, there is a strong culture, which means that beliefs and values are shared and<br />
accepted across the entire organization. Even though, it is difficult to specify the beliefs of<br />
each interviewed firm as they obviously vary some common themes are present across<br />
successful firms. <strong>The</strong> importance of the consulting trade, work has to be fun but solutions<br />
always of a high quality, and the firm is a unified community are three important beliefs that<br />
carry across the successful firms.<br />
<strong>The</strong> managers of a successful consulting firm actively reinforce firm culture and<br />
beliefs in their daily work. Through formal and informal talks, participation in large projects,<br />
and mentoring they shape it by their behaviour and decisions. Hence, managing culture<br />
becomes an important growth process both in the alignment of the firm, but even more in<br />
periods of change where effective cultural management can create the foundation for moving<br />
in a new direction.<br />
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5.3.2 Entrepreneurship<br />
Entrepreneurship has been a characteristic across all the interviewed firms. However, there<br />
were significant differences between the more successful consulting firms and the less<br />
successful consulting firms in two areas.<br />
First, among some of the interviewed firms entrepreneurship resided only with<br />
the founder who especially in the start-up phase was capable of carrying out different ideas<br />
and develop the firm into a small business. However, as the consulting firm has increased in<br />
size the founder has become overburdened as he maintains sole control over decision making.<br />
<strong>The</strong>reby, instead of challenging existing routines and practices the founder has emphasized<br />
what currently works in the firm. Consequently, the firm becomes entrenched in status quo<br />
and the founder changes from being an entrepreneur to simply a manager, and is more<br />
concerned about survival as opposed to growth. In the more successful firms,<br />
entrepreneurship did not reside only within the management team but in the entire<br />
organization. That is, all levels of employees have entrepreneurial characteristics, and when<br />
new staff is hired, entrepreneurship is one of those traits that are screened for. Hereby, it is<br />
secured that an entrepreneurial capability is broadly present and supported in the firm.<br />
“First of all, a consultant has to be well founded in the consulting trade but it is also a<br />
prerequisite that all consultants, especially those who advance in the firm, wish for things to<br />
develop around them. <strong>The</strong> project just solved and the reference just gained, where can these<br />
bring the firm in the future?”.<br />
CEO of a medium sized strategy and management development consulting firm (F/22:00)<br />
Second, as entrepreneurial skills are very much dependent of previous business<br />
experience and knowledge accumulated in earlier consulting jobs, the interviewed managers<br />
display different entrepreneurial competences. <strong>The</strong> greater the entrepreneurial skills of<br />
management, the more diversified the growth path, which they can embark on. As a greater<br />
range of services and unrelated business areas are explored, there is an increasing need for<br />
entrepreneurial flair and managerial ability to maintain organizational coherence.<br />
Finally, it is important to acknowledge that the consulting industry, to a high<br />
degree, is a person-driven industry. That is, firms, ideas, visions and development happen<br />
mostly because one individual has the commitment to initiate something new. Hence,<br />
consultants are highly educated and most often highly experienced individuals who are not<br />
easy to manage. Instead, they manage others - their customers - by advice and counselling and<br />
are probably not always good at receiving advice and guidance from others. This implies a<br />
significant challenge on the human resource area concerning how these people are best<br />
managed.<br />
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5.3.3 Strategy<br />
<strong>The</strong> most successful consulting firms separate themselves by the fact that they have a clear<br />
and well-defined strategy, but even more so in their strategic execution. <strong>The</strong>re is an actual and<br />
detailed design of the firm’s strategy, which entails positioning, market focus, service focus,<br />
financial objectives and characteristics of employees. <strong>The</strong>reby, these firms are capable of<br />
forming a strategic plan that typically covers the next three years, but more important, they<br />
make it happen. <strong>Management</strong> decides the specific way in which their consulting firm is to<br />
compete against other equally strong consulting firms in the market. <strong>The</strong> strategy, which is<br />
devised, is not oblivious to competitors and market. Instead, these elements are aligned<br />
through a series of clear and focused goals. <strong>The</strong> less successful consulting firms were<br />
characterized by having only a vague idea of how to run their firm. Furthermore, they are<br />
more motivated by that of being in the consulting industry, as opposed to the actual<br />
professional management of a consulting firm.<br />
Through communication of a clear and focused strategy, the more successful<br />
firms create a strong strategic identity, which in turn is reflected in the behaviour of all<br />
employees throughout the firm. Hence, it becomes a guideline, which works in relation to<br />
firm culture, and leads to a broader and deeper understanding of why the firm are offering<br />
some services and not others, and in turn, which growth opportunities fit with firm strategy.<br />
Furthermore, customers who can better understand what the core competencies of the<br />
consulting firm are also recognize a strong strategic identity. Taken together the more<br />
successful consulting firms are better at positioning and focusing their resources and<br />
competences and thereby avoiding strategic drift.<br />
”I believe that you have to set clear and focused goals. You have to follow a strategy and make a<br />
conscious decision, which all employees agree on… Where do we want to be in three years?<br />
Everybody must shake hands and agree on the direction. That spirit must reside in the firm… It<br />
you have the right position and the branding then I do not think that you, as a consultant firm,<br />
will be affected that much by economic fluctuations”.<br />
CEO of a medium strategy and IT management consulting firm (D/32:10)<br />
Consequently, strategic driven growth is characteristic of the more successful<br />
firms, whereas opportunity driven growth is characteristic of the less successful firms. It is<br />
very clear that the more successful firms consider the management of a consulting firm more<br />
in the lines of professional firm management consisting of a board, a CEO, and mid level<br />
managers. <strong>The</strong>re is a focus on the development the managerial qualities necessary to achieve<br />
growth and not just a focus on being good consultants.<br />
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5.3.4 Resources and competences<br />
Resources are pulled into the firm according to what might be called an inverse competence<br />
pyramid. <strong>The</strong> majority of consultants, which are employed, are in the age of 40 and above.<br />
<strong>The</strong>se people are characterized by having at least 10 years of experience from other<br />
consulting houses or industries, they know their trade, and have a substantial educational<br />
background. <strong>The</strong> interviewed managers find that seniority, experience and robustness are<br />
important for customers, and hence only employ a limited amount of young consultants and<br />
newly qualified candidates. Obviously, if a firm is to deploy young consultants it demands<br />
that some of those assignments the firm solves are of a broad analytical character. In the face<br />
of the relative strong lack of labour, it clearly becomes imperative for consulting firms to<br />
attract the best people. Here, the largest consulting firms have an advantage because they<br />
offer more opportunities than the small consulting firms do. However, small consulting firms<br />
are quite able of attracting these “stars” as well, simply because they offer more flexibility<br />
and influence. This raises a question of what it is that makes these people or resources unique<br />
to the extent that they can enable and sustain growth for the firm.<br />
Some consultants have a large customer network that is tied very closely to their<br />
person. That is, if they move from one firm to another then they are able to bring along almost<br />
all their customers, which will mean that a significant amount of customer capital is injected<br />
into the new firm. In addition, some consultants are perceived as gurus in the industry, and<br />
can in that manner supply the firm with something unique. Another way to bring uniqueness<br />
into the firm is by the use of certification. Although still not very recognized in the <strong>Danish</strong><br />
market, some firms adopt a strategy, which necessitates that all their consultants must be<br />
certified and even “best of class” consultants. This allows the firm to send a clear signal to<br />
customers about the perceived level of quality. Finally, some consulting firms employ some<br />
business and economic majors, but also make sure that their resources pool is heterogeneous<br />
by employing candidates from other various fields. <strong>The</strong>se “untraditional” consultants have the<br />
capability to develop competences, which are novel, and allow new opportunities to be<br />
explored. <strong>The</strong> above-mentioned strategies for attaining and deploying resources in a manner<br />
that allows them to become heterogeneous are characteristic of the more successful firms.<br />
That is, consulting firms have to ensure that the resources, which go into the firm, its<br />
employees, are developed into something unique, inimitable and valuable for the firm. This<br />
happens by fitting these resources to the strategy of the firm, its culture and organization<br />
design. Hence, it is not possibly for a consulting firm only to differentiate on having good<br />
consultants because the competitor will most likely employ people with the same level of<br />
skills.<br />
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”<strong>The</strong> industry has in general become much more professional. <strong>The</strong>re are many really skilled<br />
consulting firms and on some fundamental level, we all have the same capabilities. When I were<br />
in Rambøl in the 80s we got by on the fact that we were better educated than our competitors,<br />
we could make reports and analysis that made the angels sing… However, today several firms<br />
can do this so here we cannot differentiate ourselves. Where we instead need to differentiate is<br />
through a different twist or approach to the market”.<br />
CEO of a medium sized strategy and management development consulting firm (F/36:40)<br />
<strong>The</strong> consulting industry is now doubt a very knowledge intensive industry.<br />
<strong>Consulting</strong> firms are in the business of appropriating intellectual insights from smarter clients,<br />
and then broadening, branding, and providing it to the more needy clients at a premium price.<br />
Another difference between the more and less successful consulting firms is the efficiency<br />
with which knowledge is created, selected and distributed. Those mechanisms, by which<br />
employees discover and develop new knowledge, go beyond the individual intellect and<br />
touches upon the utilization of organizational learning.<br />
“Development happen trough the projects we solve. It might sound a little cynical, but this is the<br />
way it is, no matter what people might say. To be able to secure that we are a knowledge firm<br />
where development is incorporated in the daily routines by engaging people who have the basis<br />
for solving an assignment, but are maybe stretched competence wise is where the primary<br />
development happens. You can send them on a lot of courses but it will not give as much as if<br />
you are able to build that mechanism into the firm”.<br />
CEO of a medium sized strategy and management development consulting firm (F/28:35)<br />
“We use professional knowledge teams, development of different concepts, weekly meetings with<br />
professional knowledge sharing and development, seminars three times a year… <strong>The</strong>re is a clear<br />
cut focus on professional development”.<br />
CEO of a medium sized communication consulting firm. (E/37:50)<br />
Routines and processes are systemized and embody the skills of the organization.<br />
Knowledge resources and processes become heterogeneous within the firm as it develops,<br />
coordinates, and exploits those general resources which management choose to pull into the<br />
firm in the shape of employees. <strong>The</strong> learning-by-doing process means that the firm is always<br />
adding to its existing stock knowledge. Capabilities, which are created in a systemized<br />
manner, are so through subtle relationships that depend on the way information and<br />
knowledge is shared and exchanged throughout the firm. Over time, the firm will accumulate<br />
an excess stock of knowledge resources which the reasonable manager will seek to realize<br />
into new and related profitable outlets. Hereby, the consulting firm is able to create<br />
capabilities which rivals will find difficult to duplicate, as they resides on specific resources<br />
and knowledge that are tacit and as such, only valuable in the firm.<br />
This accumulation of heterogeneous resources is reinforced by strategic<br />
recruitment. Largely, it becomes difficult for consulting firms to stand out based on<br />
professionalism. Instead, it is important to hire the right people at the right time. That is, it is<br />
not necessarily another “typical consultant” who is well founded in strategy or operations<br />
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management who will benefit the firm most. <strong>The</strong> crucial issue is to employ people with skills<br />
that can leverage what the firm already exceeds at, and then through a synergy effect, explore<br />
new opportunities and ensure that dynamic capabilities are developed.<br />
“Where we can differentiate ourselves is that we in some areas have a certain twist to the<br />
market. We try to take in different competences… For example, we have a rhetoric employed,<br />
and the meaning is not that she is supposed to be as the rest of us in six months. No, it is to<br />
maintain what she can actually do and that we can use this in our management development<br />
program”.<br />
CEO of a medium sized strategy and management development consulting firm (F/28:35)<br />
5.3.5 <strong>The</strong> factor market<br />
A consulting firm might have an appropriate strategy, but unless the right employees are<br />
present to deliver on that strategy, it is of no use. It is a fact that the pool of potential<br />
candidates is larger in density in the big cities in Denmark. <strong>The</strong>reby, some firms have an<br />
advantage in attracting the right people because of their geographic placement. In addition,<br />
several of the successful firms have attained employees in lumps from large international<br />
consulting firms, because they have been able to match and exceed either salary or<br />
developmental perspectives. Obviously, in order to do this, a consulting firm has to be large<br />
and professional enough to compete on this level. Hereby, some successful consulting firms<br />
profit by the fact that young candidates are trained in the consulting trade in large firms such<br />
as Accenture, Mckinsey or BCG and then snatch them when they are experienced.<br />
Conditions for competence clusters are present in Copenhagen and Århus.<br />
Furthermore, both areas have more or less direct access to higher learning institutions such as<br />
Copenhagen Business School etc. Furthermore, the concentration of industries is very high<br />
meaning that customers are in close proximity. Finally, consulting firms in these two areas<br />
have a more direct access to knowledge heavy public institutions such as DMR. However,<br />
because the management consultant industry is relative new and at the same time a very<br />
knowledge intensive industry, firms only cooperate at a very limited degree. This means that<br />
the potential benefit of competence clusters are not fully realized at present.<br />
“It is difficult to cooperate in this industry because a consulting firm will always use an<br />
assignment to build its references and its customer capital. It demands a high degree of maturity<br />
in order for the parties in a cooperation constellation to be loyal. I have burnt my fingers on this<br />
many times!”.<br />
CEO of a medium sized strategy and management development consulting firm (F/50:45)<br />
5.3.6 <strong>The</strong> product market<br />
External conditions on the product market affect growth at the individual firm level, but only<br />
to a limited extent when compared to other more traditional industries. When perceived by the<br />
interviewed managers, the general perception is that the product market serves to either<br />
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moderate or accelerate firm growth, but that real growth development has to come from<br />
within the firm. Hence, the industry is characterized by only paying little attention to market<br />
structure, competitors, and positioning issues. This can have the affect that external changes<br />
are overlooked, which inhibits growth.<br />
Among the more successful firms, there is an agreement upon the fact that an<br />
economic cool down will mean a further consolidation of the market. Those firms that are<br />
perceived to be in danger are the less established consulting firms. This reason for this is that<br />
customers cannot afford to choose consulting firms who do not deliver the best quality.<br />
<strong>The</strong>reby, there is a perception of “survival of the best” in the industry.<br />
<strong>The</strong> interviewed managers do not perceive the general competition to be tough<br />
and competition is often limited to the strategic group, which the individual consulting firm<br />
operates in. Often the interviewed firms are in competition with the same 5-6 firms, among<br />
which competition, however, is very hard. Hence, many consulting firms exist without a<br />
broad knowledge of incumbents and their development, especially the less successful.<br />
“It is an industry where you do not know much about the competition. I really do not know what<br />
the others are capable of… We do not deal with competitors strategically because of two<br />
reasons; a lack of insight in to what is important and a lack of resources”.<br />
CEO of a small management and event consulting firm (C/01:08:05)<br />
That is, competitor analysis is not applied to a great extent. This also means that<br />
consulting firms compete on quality and references but not price or quantity. However, as<br />
already touched upon, the more successful consulting firms are those who have managed to<br />
position themselves strategically, and thereby leverage their superior quality even further.<br />
Competition wise, the more successful consulting firms have managed to position themselves<br />
just below the range of the large international consulting houses such as Mckinsey and BCG.<br />
This allows them to demand a premium price without rents being eaten by competition.<br />
Customers have increased their bargaining power and consulting firms<br />
experience this through less loyalty, more price bargaining, and incomprehensible buying<br />
patterns. This places more focus on the consulting firms’ ability to leverage existing customer<br />
relationships and use these to support the strategy of the firm. Especially, the less successful<br />
and small consulting firms are suffering under this change in power as they are much more<br />
dependent on one or two large customers.<br />
In line with the lack of labour, which have been a core issue in the past years,<br />
consulting firms experience that employees demand more. This is in terms of a higher pay,<br />
better development, and carrier opportunities, while they at the same time demand a balanced<br />
work life. This underscores how difficult it is for consulting firms to find the right people and<br />
fit these to the firm strategy. Because <strong>Danish</strong> consulting firms primarily employ experienced<br />
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consultants there are no formal training programs as in the large international consulting firms.<br />
This means that it takes longer time to educate new employees in the specific routines and<br />
ways of the firm, and therefore it is crucial that they are retained for a longer duration of time.<br />
As customers become more professional in their consultant handling they also<br />
gain more insight in the consulting trade. <strong>Consulting</strong> firms increasingly experience that they<br />
are opted out because large customers develop their own in-house consulting units.<br />
Furthermore, there is a pressure from those consulting firms, typically the large international<br />
ones, which deliver standardized services based on tools or frameworks.<br />
As the industry is still characterized as very non-transparent, despite efforts<br />
from both incumbents and organizations such as DMR, entry barriers remain small. This<br />
means that established consulting firms can suddenly be in competition with a small one-<br />
person firm. Hence, customer references only create entry barriers to a certain extent. As long<br />
as there are no general support for certification in the industry and only a fraction of the entire<br />
amount of consulting firms are members of DMR, it will be relative easy to get established on<br />
the market. However, once established and recognized it becomes difficult to change the<br />
image of the consulting firm and choose a different path. This implies a high degree of path<br />
dependence concerning those choices that are made in the initial phases.<br />
5.3.7 Organization design<br />
<strong>The</strong> interviewed consulting firms displayed different organization designs on various aspects<br />
of decision-making power, coordination and incentive systems. <strong>The</strong> key insight from the<br />
analysis of these various designs is that it serves as a competitive advantage and strategic<br />
variable. Several core issues of the organization design specific for consulting firms were<br />
identified. <strong>The</strong>se core issues can be viewed as continuums where the consulting firms place<br />
themselves according to their strategy, core competences and place in the market. It was<br />
obvious that the more successful consulting firms managed their organization design in a way,<br />
which employ and develop routines and systems that encourage risk taking, learning, and<br />
flexibility and enables the firm to create value as goals vary with changes in the external<br />
environment. On the other hand, among the less successful firms no conscious choices or<br />
decisions where made as to which direction the firm is going to develop in, in the first place.<br />
Hence, in these firms the organizational structure was less consequent, and as such not able to<br />
carry out its function. Herein lies the difference between sustaining a growth path and<br />
determining the path in the first place. <strong>The</strong> various core issues of the organization design are<br />
outlined below and an overview can be seen in appendix R.<br />
72
Authority structures for controlling decision-making processes can be placed on<br />
a continuum ranging from a traditional partnership, over a construction with only a few<br />
partners to a perfectly professional management. <strong>The</strong> more successful consulting firms have<br />
separated ownership from the professional management of the firm. In most firms, this has<br />
happened by appointing one of the partners as CEO and at the same time limiting the amount<br />
of partners to 2-6 people. <strong>The</strong> less successful firms still operate with a partner structure, which<br />
seems to inhibit growth by less risk taking, less innovation, and by maintaining a very<br />
centralized structure. In general, there is a tendency for the more successful firms to move<br />
away from the partner concept, and instead focus on the professional management of the firm<br />
as a precondition for managing growth. One firm even followed this process all the way<br />
through by abolishing the partner concept and hiring a CEO from outside the firm.<br />
“<strong>The</strong> SWOT analysis showed that the challenges the firm was facing with regards to growth,<br />
was the fact that it was the owners who were in the board, it was the owners who were partners,<br />
and in reality it was the partners who yielded influence on daily operations. This was one of the<br />
reasons why growth did not take place. <strong>The</strong>re were simply too many considerations to be made<br />
in the partner circle, there were no risk willingness… One of the most important things which<br />
happened in the new strategy course was the abolishment of the partner term and a<br />
reconstruction of the firm commercially with me as the CEO”.<br />
CEO of a medium strategy and IT management consulting firm (D/08:40)<br />
<strong>The</strong> employee structure can range from many permanent employees and only<br />
few freelance consultants to very few permanent employees and a large network of associated<br />
and freelance workers. <strong>The</strong> advantage, as stated by those firms who make great use of<br />
freelance consultants, is a cost advantage as they only have a staff to pay when they are<br />
actually working on projects. However, this also raises the need contracts to ensure that both<br />
parts are not subject to moral hazard or opportunistic behaviour. Hence, this constellation<br />
demands an organizational structure where systems for coordinating, monitoring and<br />
evaluating performance are in place. <strong>The</strong> more successful firms employ freelance workers<br />
with the perspective of employing these at a later time.<br />
Incentive systems to reward individual performance range form a high level of<br />
bonuses, performance pay and provision to fixed pay. <strong>The</strong> more successful firms have<br />
managed to create an incentive system, which incorporates the best of both ends of this<br />
continuum. In order to attract and retain the best people these systems accounts for those who<br />
wants to work hard and long hours, and for those who want to balance their work life with<br />
their private life.<br />
<strong>The</strong> development of routines and thereby ways in which new knowledge is<br />
generated and defused is to a great extent dependent of the consulting firm’s strategy. <strong>The</strong> key<br />
choice is between standardized solutions and project based solutions. <strong>The</strong> first, assure the firm<br />
73
has consistency in its problem solving, where the latter allows for a larger range of tasks to be<br />
handled. It is not clear which end of the continuum the more successful firms are in however,<br />
it is clear that these firms have made conscious choices about this and incorporated this<br />
approach in their overall design.<br />
<strong>The</strong> more successful consulting firms have formal introduction programmes and<br />
training/development systems, which serve to generate both new knowledge, but also to shape<br />
resource and knowledge flows. Consultants are expected to devote a specified amount of days<br />
on individual development, as well as participation in research and publications is appreciated<br />
and awarded. Contrary, development in the less successful firms happens on a very informal<br />
basis, and primarily, through on-the-job training and different emerging opportunities.<br />
All the interviewed consulting firms employ senior consultant with a vast<br />
experience and educational background. Using this strategy, consulting firms strive to be<br />
identified with thought leadership and high quality in their solutions. Only a few of the largest<br />
consulting firms employ students or people who have recently finished their education. This<br />
means that they can delegate less demanding work to lesser-paid employees. However, the<br />
chosen competence level must fit the rest of the organization design, such as whether or not a<br />
firm provides standardized or tailor-made solutions. <strong>The</strong> less successful firms have not made<br />
this distinction.<br />
<strong>The</strong> main finding behind the organization design of consulting firms is that it<br />
reveals several opportunities to differentiate from competitors. <strong>The</strong> crux seems to be to select<br />
a direction for the firm, aligning strategy, and then create organizational coherence through<br />
the design. <strong>The</strong> less successful consulting firms were clearly those where the organization<br />
design was not aligned with a growth strategy for the firm.<br />
5.4 Summary of analysis<br />
From the analysis of growth in the consulting industry, a number of important issues and<br />
challenges are raised. A change in the size and division of value in the industry has taken<br />
place. Development in consulting firms is challenged as it often touches upon some<br />
managerial characteristics, which are strongly embedded in the firm. A clear-cut focus on<br />
strategic growth as opposed to opportunity driven growth is crucial in relation to success.<br />
<strong>Consulting</strong> firms must strive to become unique and not copy the practices other consulting<br />
firms. Size does matter, and successful consulting firms establish critical mass in business<br />
areas and thereby sustain development. <strong>The</strong> consulting industry is characterised by a low<br />
degree of professional firm management and focus organization design. <strong>The</strong>se issues imply<br />
sources and limitations to growth, which must be evaluated.<br />
74
<strong>Chapter</strong> 6<br />
Discussion<br />
Based on the empirical findings a number of crucial issues appeared regarding growth in the<br />
consulting industry. This chapter discusses these issues in turn and how this is related to<br />
growth theory (sources and limitations) and the formulation of an appropriate growth strategy<br />
for consulting firms.<br />
6.1 Change in the size and division of value<br />
An important result from both the industry analysis and the empirical analysis seems at first to<br />
be external but will, at a closer inspection, have internal effects on how to manage growth in<br />
the consulting firm. As discussed in the industry analysis in chapter two, a shift is happening<br />
in the balance of power in the consulting market. <strong>The</strong> consulting firm is, like any other<br />
business, a nexus of contractual relationships between its various stakeholders: Owners,<br />
employees, suppliers, lenders and clients (Graubner and Richter, 2003). <strong>The</strong> two most<br />
important stakeholders in this context are the owners (supply side) and the clients (demand<br />
side) who are in a continuous tug-of-war over the value generated by the consulting firms.<br />
In the period of high growth in the industry from 2004 up until now, the size and<br />
division of value have been in the favour of consulting firms. Customers have used consulting<br />
services in almost every aspect of their business, and the demand has been high. This means<br />
that most consulting firms operating in the period after the millennium have been able to<br />
make a profit. This profit has been used for two things, satisfying the demand of owners and<br />
employees and developing the firm. However, the distribution of value is shifting towards<br />
customers. In general, the size and division of value is changing in the favour of customers, as<br />
the ability of the consulting firm to appropriate value diminishes. Inevitably, it will have an<br />
effect on the internal organization of consulting firms.<br />
First, it means that the capacity, which consulting firms have to satisfy the<br />
demand of both employees and partners are diminishing. Traditionally, consulting firms have<br />
been run with highly skilled employees who benefited from generous compensation schemes<br />
or a partner group who divided the profit, but these incentives are becoming weaker.<br />
Combined with the already existing difficulty of finding the right employees, this raises<br />
interesting HR related matters. <strong>The</strong> claim that the war-for-talents (Maister, 1993) will become<br />
an increasingly important competitive arena for consulting firms still holds true, and it is<br />
exactly here that some firms can gain a competitive advantage. <strong>The</strong> argument is that<br />
75
consulting firms must pay closer attention to HR management in order to secure new talents<br />
and retain those already in the firm. This can be done through several different HR practices.<br />
Recruitment must still focus on obtaining the best candidates but not of the same<br />
kind (economic majors, MBAs, etc.). Instead, employees should be found from a much larger<br />
and heterogeneous pool of candidates, which have not traditionally been considered. Hereby,<br />
the consulting firm can expand its horizon and hopefully also its capabilities and be able to<br />
offer something new and unique to the customer.<br />
Training and development is another important HR related matter. In tough<br />
times, senior partners might tend to focus on selling, more than on developing the younger<br />
staff. This is especially the case if management is made up of senior partners and not a<br />
professional CEO. In the long run, this will result in lower value added services and lower<br />
quality. On-the-job training is the best form of development and internal mentoring from the<br />
most experienced consultants facilitates this.<br />
Incentives schemes and motivation have traditionally been constituted by the<br />
prospect of partnership. However, in the future this will not be as motivating as earlier<br />
because of the greater risk a partner bears. <strong>The</strong>refore, consulting firms must develop other<br />
means to motivate employees. More balanced incentive scheme, which do not rely only on<br />
financial incentives but also on non-financial incentives should be developed. Providing a<br />
well-balanced work-life and opportunities for training and development are decisive. In<br />
conclusion, there is a need to examine and evaluate the organization design of the consulting<br />
firm, and if this is in accordance with the changing power balance between consulting firms<br />
and their customers.<br />
<strong>The</strong> discussed change, which I argue is underway in the <strong>Danish</strong> <strong>Consulting</strong><br />
market, is not unique to the global consulting industry. On the US market, large players such<br />
as Arthur D Little and niche players such as Razorfish and Oliwer Wyman have failed to react<br />
and entered bankruptcy or take-overs. Other major players such as Accenture have given up<br />
their partner structures and more are expected to follow suit (Niewiem and Richter, 2004).<br />
Finally, there is another important spin off from this discussion. If conditions get<br />
tougher, differences in strategy will show more openly and the direct effect will show on the<br />
bottom-line. <strong>The</strong>re is an immediate need for <strong>Danish</strong> consulting firms to start contemplating<br />
their management practice and strategy and then align this with the firm in order to find new<br />
ways to create and appropriate value. This will at the centre of the rest of this discussion.<br />
76
6.2 Developmental leadership<br />
As already suggested, growth is imperative in the consulting industry in order to develop as a<br />
firm. However, it was identified in the analysis that one of the most significant barriers to<br />
growth is to be found within the management of the consulting firm, especially significant for<br />
small and medium sized consulting firms. Hence, the growth of the firm is inseparable of the<br />
personal growth of its leadership (Greiner and Malernee, 2005). <strong>The</strong> development of the firm<br />
requires that the founder is capable of reformulating the firm and set aside his position of<br />
power and ownership. A highly critical argument is therefore that if a firm is to grow, this is<br />
very much dependent of the willingness of the founders or partners to change within<br />
themselves. <strong>The</strong>refore, it becomes interesting to consider growth in a developmental<br />
perspective, and how this is related to management.<br />
6.2.1 A developmental perspective in consulting firms<br />
Managers of a consulting firm are by definition change agents in their organization (Avolio<br />
and Gibbons, 1988) and they should be aware of it. This indicates that they should manage<br />
from a developmental perspective. Most often, problems occur because of the tension<br />
between the “pull of the future” and the “hold of the past” (Greiner and Malernee, 2005). This<br />
was typically the case in the small and medium firms. A senior partner would not give room<br />
for young partners or the founder was not ready to find a business partner to share his firm<br />
with. Consequently, it becomes important for managers to understand the duality of growth,<br />
that is, how one situation contains the seeds to for a new crisis and that past solutions will<br />
have to be reconsidered (confer appendix Q).<br />
In the stage one consulting firm, growth was both enabled and inhibited by the<br />
founder. <strong>The</strong>refore, the founder must disregard his own will, in the interest of the firm.<br />
Through this, the firm can overcome the growth barrier of centralization and control, and<br />
establish itself as a real firm with an area of specialization. However, in stage two consulting<br />
firms, the intense focus on professionalism and specialization creates the possibility that the<br />
firm will become too focused and not capable of developing along with emerging market<br />
opportunities. Once again, management must reconsider the strategic direction of the firm in<br />
order to spur further growth via diversification. A stage three consulting firm has managed to<br />
diversify and provides a wide range of consulting services, but also here the firms runs the<br />
risk of entering its next crisis. <strong>The</strong> high degree of diversification will have an impact on the<br />
firm, which will develop into many small sub-organizations, each with their particular<br />
speciality. This can mean that the firm suddenly sends mixed signals, have different<br />
77
approaches to customer handling and the consulting trade in general. In the end, the firm will<br />
either be broken up into subsidiaries or manage to establish itself as a “one-firm” firm.<br />
Some small consulting firms express a wish to stay small in order to be free<br />
from the bureaucratic fuzz of a large organization. However, the above discussion still applies<br />
to these firms. That is, to maintain a viable firm they must still find ways to grow other than<br />
in size or geography. This implies that the small consulting firm should form alliances with<br />
other small consulting firms in order to draw on different practice areas and have the critical<br />
mass of consultants to engage in large-scale projects. <strong>The</strong> problem, however, is still the same,<br />
the need for trust, openness, and allowing other people to have a say in decision-making is<br />
decisive, and the manager must open up in order to enable growth. This discussion suggest<br />
that the managing partner(s) of consulting firms hold within them the key to achieve growths<br />
and that the key is in the ability of “letting go”. Firm growth, especially in a knowledge and<br />
people intensive industry as the consulting industry, requires that senior partners accept a loss<br />
of power and control.<br />
6.3 Growth strategies<br />
<strong>Consulting</strong> firms have a unique position as they can learn from those clients who have<br />
managed to achieve high growth rates and apply that insight on themselves. As discussed in<br />
section 6.1, strategies for creating and developing more value must be explored. Five growth<br />
disciplines; base retention, market share gain, market positioning, related and unrelated<br />
diversification constitute the growth portfolios of companies that knew how to maintain<br />
steady double digit growth in difficult times (Tracy, 2004). <strong>The</strong>se will each be discussed in<br />
turn in the context of consulting firms.<br />
Improving the firm’s customer base retention is the most obvious way of<br />
improving growth, but this is made increasingly difficult by the decreasing loyalty among<br />
customers. <strong>The</strong>refore, consulting firms must actively use these relationships to deliver and<br />
create better value than their competitors. It is not enough simply to rely on a relative laissez-<br />
faire relationship management through senior partners. Instead, the argument is that this must<br />
be put into system. This is done by increasing and systemizing knowledge of customers, in<br />
order to deliver and tailor better projects than consulting firms who do not have this<br />
knowledge. <strong>Consulting</strong> firms can also affect customers’ evaluation of them, and thereby<br />
increase their market reputation as excellent advisors. In practice, this is very much what<br />
happens when customers recommend their consulting firm for the <strong>Danish</strong> <strong>Management</strong><br />
<strong>Consulting</strong> Award 10 . Several of the interviewed firms have been nominated for and won the<br />
10 For more information on this, see www.dmr.nu.<br />
78
award in different categories. Indeed, letting customers become the primary source of<br />
advertisement via word of mouth is the best possible branding strategy for a consulting firms.<br />
Furthermore, consulting firms must leverage the economic advantage they have vis-à-vis<br />
other consulting firms, because customers incur costs of using new consultants as they will<br />
have to brief these about its issues, its personnel and where to collect information. In this<br />
strategy is also the prospect of turning customers in to one-stop shopping customers and<br />
engage in long and continuing projects. However, consulting firms must realize that there is a<br />
fine line between an advantageous cooperation and simply exploiting customers. <strong>The</strong>refore,<br />
new customer openings and relationships must proactively be sought. No consulting firm can<br />
afford to rest on its professionalism and wait for customers to knock on the door. Hereby,<br />
customer relationships become a scarce resource for consulting firms and a way to sustain a<br />
competitive advantage (Barney, 1991). This relationship is characterized as intangible and<br />
difficult for competitors to imitate.<br />
<strong>The</strong> other side of base retention is gaining market share. But how can this best<br />
be accomplished when, as discussed, incumbents have a natural advantage? This strategy is an<br />
obvious extension of adding more customers to your portfolio, but it is difficult to realize. On<br />
the one hand, consulting firms can close the knowledge gap in order to reduce incumbents’<br />
advantage or simply wait for customers to change their consulting provider, but this might<br />
take years and does not prompt growth. Instead, consulting firms should pursue a value<br />
adding strategy in which they differentiate themselves from competitors. Many clam to do<br />
exactly that, but if you take a broad look at the web pages of <strong>Danish</strong> consulting firms, they<br />
appear very much the same! For the most part, they hire the same kind of people, deliver the<br />
same services, and have the same cost structures. <strong>The</strong> key is therefore to be able to<br />
differentiate significantly from competitors through recruitment, value innovation, and cost<br />
structures, as these are intertwined. All elements play an equally important role in the firm.<br />
This will create a unique bundle of idiosyncratic resources and capabilities that competitors<br />
cannot easily copy because of the intangible relationship (Barney, 1991).<br />
Clear market positioning was one of those elements, which distinct high<br />
performing consultant firms, and this should definitely be a core issue for management.<br />
Because consulting firms have their daily walk among the decision makers and CEOs of<br />
<strong>Danish</strong> companies, they are in a unique position to develop powerful insight about new<br />
growth opportunities and changes that are under way in the market. For example, some of the<br />
current top performers in the <strong>Danish</strong> consulting industry were able to identify and implement<br />
LEAN services ahead of competitors and became operational powerhouses. Other consulting<br />
firms have used their interaction with customers to identify opportunities of unrelated<br />
79
diversification, and then positioned themselves in new markets based on the advantage of<br />
clear market insights. Hence, accumulated knowledge, experience and relations will allow for<br />
a strategic advantage (Wernerfelt, 1984). However, this means that lower level consultants,<br />
those who are primarily in the field with customers, must be able to share, not only<br />
professional experience about projects but, equally important, how a certain projects can<br />
benefit strategic decision making.<br />
Even though, it has just been mentioned that consulting firms are in a propitious<br />
position to identify opportunities for diversification, it does not seem to as come as easy as<br />
that. Most of the interviewed firms have burnt their fingers in this attempt. Diversification can<br />
take place when the consulting firm gradually expands its resources and then frees these to<br />
focus on generating profits in new activities (Penrose, 1959). A unique sub-set of growth<br />
opportunities is developed ranging from growth opportunities with current operations, growth<br />
opportunities for related diversified activities, and growth opportunities for unrelated<br />
diversified activities (Rickard, 2006). However, the more diversified the growth path, the<br />
more organizational disturbance is accompanied with the changes that must be made to<br />
existing routines and systems. Diversified growth should build on core competence leverage<br />
(Prahalad and Hamel, 1990). <strong>The</strong> more the consulting firm relies on diversified growth, the<br />
more important is the role of the organization design in supporting, controlling and motivating<br />
the growth process. <strong>The</strong>refore, diversified growth should only be in the mindset of managers<br />
when they identify a clear growth opportunity in a market, and should not be mean simply to<br />
expand the firm.<br />
<strong>The</strong> discussed elements of growth strategy are only realizable if management<br />
devote time and effort to this. If not, then market opportunities will be missed and the<br />
consulting firm risk lagging behind competitors who have managed to think ahead<br />
strategically. Hence, management is a constraining element on firm growth (Penrose, 1959).<br />
6.3.1 Strategic growth vs. opportunity driven growth<br />
<strong>The</strong> analysis revealed an industry where focus is very much on the trade of consulting as<br />
opposed to that of running a business. Most often, firms are started by a few very skilled<br />
people and developed with these founders as the focal point. Growth has taken place through<br />
exploring opportunities in relation to the skills of the founders. Advantages are obvious for<br />
this, short-term revenue, accommodating an important customer’s request and maybe gaining<br />
new capabilities. However, first-time projects draw them away from repeating and leveraging<br />
what they have successfully done in the past, decreases profitability and incur large out-of-the<br />
pocket costs. <strong>The</strong> firm will never be able to accumulate assets, which are vital for a sustained<br />
80
competitive advantage (Dierickx and Cool, 1989). A strategic focus, on the other hand, allows<br />
consulting firms to attract business that are consistent with their overall business plan.<br />
Projects must be chosen so they balance the exploitation of existing routines and the<br />
exploration of new opportunities through learning-by-doing (March, 1991).<br />
<strong>The</strong> interviewed firms express an increasing internal demand for control and<br />
coordination and a continuous managerial deficit. A dynamic vision of firms holds that an<br />
internal momentum generated by learning-by-doing (Penrose, 1959), leads firm growth. New<br />
managerial resources take time and effort to integrate, but once in place, these new<br />
managerial talents will develop themselves and the next level of employees. Hereby, the<br />
accumulated stock of resources is increased and can be directed towards new growth<br />
opportunities. However, growth is limited by the amount of available managerial attention.<br />
<strong>The</strong> most progressive and successful consulting firms have managed to separate ownership<br />
and management by choosing an administrating partner who acts and thinks strategically on a<br />
two- to three-year horizon, and developed mid-level managers capable of strategic thinking.<br />
However, this separation means that partners must commit to this and allow the<br />
administrating partner the power necessary to manage the firm, without direct interference<br />
from other partners. Only a few firms have followed this all the way through, established a<br />
board and a CEO, and thereby abandoned the partnership structure. This focus on strategic<br />
management and the separation of ownership and management follows much of the recent<br />
research on managing professional service firms (Lowendahl et al., 2001; Valcon, 2005;<br />
Morris and Pinnington, 1998).<br />
6.3.2 Organic growth vs. inorganic growth<br />
Organic growth has been the predominant way of developing the firm, whereas inorganic<br />
growth has almost not taken place among the interviewed consulting firms. Where the latter<br />
has been the case, it has often ended in failure or buy-backs. Acquisitions are expensive<br />
growth strategies and the acquiring firm typically pay a premium of 10 – 30 % above market<br />
stock price (Mueller, 1969). This must be added to the costs of integrating the acquired firm<br />
into the culture and organization of the acquiring firm, if potential synergy is to be converted<br />
into realized synergy. Hence, growth by acquisitions is very seldom as path to success in the<br />
consulting industry, which is consistent with empirical evidence on company performance<br />
(Dickerson et al., 2000).<br />
However, this discussion can be further enlightened if we move down a level. It<br />
highlights growth problems among those firms who cannot manage to grow internally, but<br />
require momentum from the outside in the shape of partner driven growth. Creating a large<br />
81
partner circle can create future growth problems. A partnership structure focuses attention on<br />
the consulting trade as opposed to the professional management of a firm. That is, partners<br />
attach more utility to the consulting trade and regard management as trivial and less<br />
prestigious. Furthermore, if a partner is promoted the rank of senior partner then this can lead<br />
to a problem if he is not suited for the task because they are difficult to remove again.<br />
Consequently, a broad partner circle can enhance the problems of overcoming the “glass<br />
ceiling” because it risks creating a decision-making process that is slow, risk adverse and<br />
fragile to partners leaving.<br />
Organic growth is preferable when synergies exist between the firm’s existing<br />
activities and its target. Furthermore, if time pressure is not too great, such as in the case of<br />
the consulting industry, the consulting firm can steadily build a sound internal competence<br />
base, which will become a base for sustained competitive advantage. This argument follows<br />
“economies of growth” and the competence approach.<br />
6.4 Best practice or next practice<br />
“Best practice” has achieved much attention in recent years, and has been used to benchmark<br />
firms and organizations against some kind of desirable condition. In the concept of “best<br />
practice” is embedded an ideal state, which all organizations in an industry presumably will<br />
benefit from (Poulfelt, 2007). However, there are elements of how consulting firms compete<br />
which suggest that following a differentiation strategy is more suitable, that is, opting for<br />
“next practice” instead of “best practice”.<br />
<strong>Consulting</strong> firms, which are knowledge intensive firms, compete differently<br />
from traditional manufacturing industries in that they initially fight to win the best projects<br />
and the best employees (Maister, 1993), but hereafter they cooperate with their rivals. Often<br />
consulting firms are seen passing a project on to another consulting firm because they are<br />
better suited, or even share competences and capabilities on a project and work together. In<br />
the consulting industry, reputation works as deterrent and established firms must seek to<br />
underline their area of expertise. New and small firms who do not have a track record will<br />
find it difficult to win customers. Where industrial firms can lure customers by prize cutting<br />
this is not a good option for consulting firms, as it may be seen as cutting quality (Sheenan,<br />
2004). <strong>The</strong>refore, the business model for a consulting firm should outline a strategy in terms<br />
of which customers they will target, what type of consulting services they will provide, and<br />
how this is done efficiently and effectively. Here, consulting firms must focus on value<br />
enhancement as opposed to cost reduction: Cost is important in knowledge-intensive firms,<br />
but it is not the defining characteristic – the defining characteristic is adding the most value<br />
82
y healing the sickest patients, winning the toughest court cases or designing the most<br />
aesthetically pleasing buildings (Sheenan, 2004. p 56).<br />
According to Porter (1980), firms can achieve above average profitability by<br />
shaping their business model towards low cost or differentiation. However, as suggested low<br />
cost is not really an option for consulting firms because of two things; first, customers might<br />
confuse low cost with low quality, and second, it is very difficult to implement a low cost<br />
strategy due to the cost structure of consulting firms. Premium salaries are typically the<br />
largest expense, and there is only little room to reduce these considering the lack of labour<br />
currently experienced in the <strong>Danish</strong> consulting industry. In addition, consulting firms lack real<br />
possibilities for scale economies. Instead, the key trade-off is the width of their problem<br />
domain, which defines consulting services areas, and the customers to be targeted (Lowendahl<br />
et al., 2001). That is, consulting firms can choose to specialize by focusing on a narrow range<br />
of services, or they can choose to generalize by focusing on broad range of services.<br />
Furthermore, consulting firms can choose a specific level of knowledge re-use in their<br />
positioning choices (Lowendahl et al., 2001; Hansen et al., 1999). That is, a consulting firm<br />
can choose between tailor made solutions, which are unique every time, or<br />
template/framework/tool solutions that are in general recycled solutions. Together, these<br />
trade-offs give a two-by-two matrix that suggest four business models; general stores,<br />
speciality shops, idea labs and boutiques (Sheenan, 2004), see appendix S. Obviously, cost<br />
structure, revenue, and risk varies across these four business models. General stores earn<br />
lower fees but have lower expenses. Speciality shops also typically charge lower fees but have<br />
a great potential of exploiting efficiency. Idea labs earn higher fees but also have high<br />
expenses due to unclear problem definition. Boutiques earn high fees but also face efficiency<br />
issues. In appendix S, numbers in parenthesis represent a suggested distribution of the<br />
interviewed consulting firms. <strong>The</strong>refore, even though they appear quite similar they have<br />
made conscious choices of the business model in which they compete.<br />
This logic can be further elaborated by thinking of consulting firms as problem<br />
solvers, as opposed to industrial firms who transform input to output in the way they create<br />
value. This adds a different set of primary activities contrary to Porter’s (1980) traditional<br />
primary and support activities. <strong>The</strong> primary activities range from problem finding, problem<br />
solving, choice of solution, implementation, and follow-up and control (Stabell and Fjeldstad,<br />
1998). However, not all consulting firms are involved in every primary activity, some<br />
specialize in problem finding or implementation, and others perform every activity. By<br />
intentionally directing attention towards certain different business models and activities,<br />
consulting firm managers are provided powerful insight into new growth opportunities. One<br />
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of the interviewed firms discovered a new niche this way. Having delivered R&D problem<br />
finding and problem solving activities to SMEs, they found that there was a general lack of<br />
implementation power because SMEs often do not have the work force or the time to carry<br />
out the suggested R&D initiatives. <strong>The</strong>refore, the consulting firm set up a business service in<br />
which it conducts R&D for customers, having highly skilled engineers doing the actual R&D<br />
work for customers. Even though, the above suggested business models and activities clearly<br />
simplify the content of the consulting trade, there is especially one significant point to be<br />
emphasized: <strong>The</strong>re is room for differentiation in an industry where incumbents seem very<br />
much alike.<br />
Consequently, a clear recommendation in the answer of “best practice” vs. “next<br />
practice” in the consulting industry can be made. First, according to the chosen business type<br />
and activity focus it is very difficult, if not impossible, to suggest a “best practice” which<br />
covers everything. For consulting firms to all follow the same practice, contradicts the above<br />
discussion. Second, “best practice” fundamentally contradicts with the resource based view,<br />
which holds that sustained competitive advantages stems from practices that are impossible to<br />
imitate. <strong>Consulting</strong> firms should instead ensure that innovation is more predominant than<br />
imitation.<br />
6.5 <strong>The</strong> tension between growth and size<br />
<strong>The</strong> analysis has suggested that there are fundamental differences between small, medium and<br />
large consulting firms. <strong>The</strong> entry rate of new firms in the industry is high because of<br />
extremely low entry barriers. However, only a very small amount of consulting firms manages<br />
to grow big. This indicates a tension between firm growth and firm size. <strong>Consulting</strong> firms<br />
enter the industry on a small scale relative to the size of incumbents, and this put them in a<br />
difficult situation from the beginning. <strong>The</strong>y must grow rapidly in order to overcome the cost<br />
disadvantage, which larger firms do not encounter because they are above the minimum<br />
efficient scale of production. <strong>The</strong>y can economise on repeat projects, learning-by-doing,<br />
reputation, and expanding customer networks. For small firms, this means that growth in the<br />
initial stages is a matter of survival and pursuit of profits. This indicates that small consulting<br />
firms should have an average growth rate higher than large consulting firms. However,<br />
entrepreneurship plays an important role in this context. As Santarelli and Vivarelli (2006, p.5)<br />
states that; “one has to recognize that when dealing with gross entry across all economic<br />
sectors we encounter a huge multitude of “followers” and very few “real” entrepreneurs”.<br />
<strong>The</strong> most successful consulting firms were the ones who entered the industry with a clear<br />
vision and positioning strategy, whereas those firms who enter because the founder is<br />
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overconfident, unsatisfied with his earlier job, or simply do not like to be managed will<br />
probably not survive for long. Those consulting firms who enter the industry on the right<br />
premises will have to grow in size in order to reach a level where they can sustain viability<br />
and future growth.<br />
In this process, organizations mimic biological organisms more than machines<br />
(Tomasko, 2005). <strong>Consulting</strong> firms that grow in size run the risk of bulking up. Too many<br />
complex structures will invariably lead the firm to focus inward instead of outward. Managers<br />
and employees loose sight of their customers and competitors and miss growth opportunities<br />
and growth eventually slows down. <strong>The</strong> point of this discussion is therefore, to consider the<br />
organizational advantages and disadvantages that accompany the growth process and whether<br />
these indicate an optimal size for consulting firms.<br />
6.5.1 Advantages of growth<br />
Growth in a consulting firm entails several advantages besides the possibility of increasing its<br />
economic value. Work is likely to become more inspiring and challenging when a consulting<br />
firm explores new markets or business areas. This will both attract and retain employees in<br />
the firm, as they will feel a high level of personal satisfaction. Much related, promotion<br />
opportunities and high salaries that are present in a growing firm will attract employees. A<br />
prestigious and respected firm name will also attract many, and probably the best, candidates<br />
for employment. In a growing firm, it is therefore easier to achieve commitment to<br />
organizational goals (Roberts, 2004).<br />
“Economics of growth”, as suggested by Penrose (1959), explain the internal<br />
dynamics and effects of growth. As managers gain experience, their administrative tasks<br />
require less attention and as a result managerial resources are continually being released,<br />
which can be directed towards exploring growth opportunities. Hence, the more a firm is<br />
capable of organizational learning, the more successful it will be in the consulting market.<br />
Consultants are desperately in the need of customer contact and experience derived there from,<br />
because it is this knowledge they transform into new capabilities in the future. It follows that<br />
as the consulting firms grows, it is also capable of expanding its customer network and then<br />
include “large and serious” customers that further strengthen its reputation and position in the<br />
market. Growth and size also affects the scope of projects, which the firm can undertake.<br />
Obviously, some large customers will demand that the consulting firm they engage have a<br />
certain amount of resources and availability, which can be focused on their project. <strong>The</strong>refore,<br />
in order to be taken into consideration for large projects the consulting firm has to be of a<br />
certain size. Hence, two cost advantages are contributed; firms can charge premiums for their<br />
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services because of an increased demand and lower marketing costs are incurred because<br />
customers actively seek the services of the firm. Finally, reputation may create competitive<br />
barriers, in that customers will only select among the most reputable consulting firms<br />
(Greenwood and Empson, 2003)<br />
A large and diversified firm is more capable of spreading risk among its<br />
activities, and for some consulting firms where management equal ownership this is an<br />
advantage. Furthermore, one reason why small consulting firms choose to grow by<br />
diversification, even though it stretches their competences and resources, is to create a sense<br />
of security. Hence, growth can be considered a basis for economic security (Whetten, 1987).<br />
6.5.2 Disadvantages of growth<br />
One central disadvantage in growing the consulting firms lies in the “control-loss” argument<br />
(Williamson, 1967). Loss of control may be caused by an increase in size or a high growth<br />
rate. Almost inevitable, as the firm grows, it will add employees and hierarchical levels, and<br />
the founder will fell that he has less control because he is less informed of the state of the firm.<br />
This increases the importance of issues of control and coordination, as they will become more<br />
complex and there is a demand to manage these issues in more formal and complex systems.<br />
Manager-owned firms or firms who rely on a partnership may also be very<br />
reluctant to grow, because this entails a “letting-go” of a tight control over the firm. As<br />
discussed in the previous section “letting-go” is essential for the founder/partner circle of the<br />
consulting firm. A large number of employees or new partners mean that the founder(s) will<br />
have to delegate responsibility and decision-making, in order to motivate these people.<br />
Furthermore, the founder or the partner circle may be much more risk averse and therefore not<br />
interested in growth. Obviously it is their own private savings they gamble with, and this will<br />
keep some firms in a “comfort zone” (Coad, 2007).<br />
Organizational issues will move at the forefront of managerial concern as the<br />
consulting firm grows. Where it initially could make do with little or no organizational<br />
structure and formalization, it now runs the risk of substituting initiative with routine and<br />
bureaucratic stiffness with flexibility. Large firms are stated to be less adaptable and less<br />
responsive than their small counterparts are (Coad, 2007).<br />
Growth also affects the culture of a consulting firm and, as the analysis showed,<br />
all managers considered employees and firm culture to be significant factors of growth.<br />
However, large organizations often become less motivating working environments for<br />
employees, and the energy and motivation of entrepreneurs within the firm are replaced by a<br />
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managerial system, which role is to monitor and coordinate a more routinely method of<br />
production (Witt, 2000).<br />
6.5.3 An optimal size<br />
<strong>The</strong> concept of an optimal size, as briefly discussed in chapter three, concerning both industry<br />
level and firm level, is appealing despite the lack of empirical support. On industry level, the<br />
notion of an optimal size is at odds with observations on the support and skewness of the firm<br />
size distribution found even at much disaggregated levels of analysis (Coad, 2007). On firm<br />
level, an optimal size is inconsistent with time-series analysis of the patterns of firm growth<br />
(Geroski et al., 2003; Cefis et al., 2001). Instead, a stochastic dispersion in firms size, such as<br />
the law of proportionate effect (Gibrat, 1931), seems to do better in empirical work than the<br />
notion of an optimal firm size. <strong>The</strong> analysis, although based on qualitative data, supports the<br />
notion that there is no such thing as an optimal firm size in the consulting industry. Both small<br />
one-person consulting firms and large consulting firms seem to do well and earn profits in the<br />
industry.<br />
Instead, something other than an optimal size is at play in the consulting<br />
industry, namely that of “economics of growth” as presented by Penrose (1959). “<strong>The</strong><br />
knowledge possessed by a firm’s personnel tends to increase automatically with experience”<br />
(1959; p.76), but the challenge is to take full advantage of these knowledge resources.<br />
<strong>The</strong>refore, a firm will grow in order to create value from accumulated and unused resources,<br />
which in turn will generate new resources. Growth is imperative for the development of<br />
consulting firms, and this gives rise to the notion of critical mass. Critical mass is a<br />
sociodynamic term to describe the existence of a sufficient momentum in a social system,<br />
such that the momentum becomes self-sustaining and fuels further growth (Ball, 2004). In<br />
some ways this resembles the term minimum efficient scale used in industrial organization<br />
but has a more developmental perspective. Critical mass can refer to the entire consulting firm<br />
or probably more appropately to core business areas. <strong>The</strong> core issue here is to develop<br />
business areas that have enough critical mass to engage in larger and larger projects, to<br />
develop and share knolwedge internally and across business areas, and probably most<br />
important, to identify future growth opportunities. That is, critical mass is attained in a<br />
business area when all resources does no focus on operational matters but instead on<br />
opportunities for development. Excess managerial resources must be present and focus on<br />
value creating growth opportunities. It is difficult to establish the specific amount of people or<br />
resources which must be present in a certain business area in order to claim criticall mass.<br />
This is very specific and certainly dependent of the kind of knowledge in question and the<br />
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capabilities of employees. However, among the large consulting firms in the survey, critical<br />
mass was suggested to be around 20 people in a business area.<br />
<strong>The</strong>re is no emperical evidence which suggest an industrial threshold size<br />
concerning how large a <strong>Danish</strong> consulting firm can grow. Obvioulsy, the relatively small<br />
domestic market moderate size compared to for example American consulting firms, but the<br />
benefits of internationalization have not nearly been realized. However, based on the industry<br />
analysis it will be quite remarkably if, in five or ten years, there exists a <strong>Danish</strong> consulting<br />
firm with more than 1000 employees, 200-300 seems to be the limit. <strong>The</strong>re is a pattern of<br />
firms building and merging to a size of around 200 and then splitting up because of<br />
organizational stress and incoherence. More often, the threshold size is determined by the<br />
manager’s wish not to grow to larger because it perceivably hurts agility and competitiveness.<br />
Growth results in accumulation of an increasing stock of resources, which in turn, demands<br />
greater organizational capabilities if firm resources are to be managed and coordinated<br />
effectively and effectively. <strong>The</strong>refore, in this respect, this suggests that size does matter in the<br />
consulting industry and that it is imperative that critical mass and bulk form a synthesis<br />
through the organization design.<br />
6.6 Fitting the organization design to growth<br />
By moulding and shaping the firms organization design, entrepreneurial managers can<br />
facilitate the accumulation of new resources and their coordination with existing resources<br />
and create a basis upon which the firm can grow (Rickard, 2006). <strong>The</strong> analysis has shown that<br />
the way in which management consulting firms build and think their organization design is<br />
decisive. <strong>The</strong> internal organization of the consulting firm can be a source of competitive<br />
advantage and hence a strategic variable which must be considered and managed. As<br />
identified in the analysis, the organization design of consulting firms entail specific elements<br />
that have a significant impact on firm strategy.<br />
6.6.1 Governance and ownership<br />
Arguably, the most critical element is that of governance form. Authority structure and<br />
ownership can either consist of a large partner circle where all partners own a share in the<br />
firm, or a professional construction with a board, a CEO and mid-level managers. <strong>The</strong> former<br />
has been the most predominant way of organizing which is also the case for many other<br />
professional service industries (Greenwood et al., 2002). However, the “Rockwool layer”, as<br />
it is often referred to, tends to confuse the concepts of management and ownership (Valcon,<br />
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2005). Hence, if a distinction is made between partnerships and corporations 11 , there are some<br />
limiting conditions of the partnership structure, which must be discussed in relation to growth.<br />
As identified in the analysis, when consulting firms grow, this is associated with<br />
increasing specialization and complexity, a broadening of geographical scope and<br />
diversification of services. Typically, this means that partners become more in numbers and<br />
consequently are more remote from strategic processes. Face-to-face contact is difficult to<br />
maintain and consensus through collegial processes become time consuming and difficult to<br />
manage. In essence, this can result in extra costs as partners sacrifice billable time to internal<br />
management issues and important decisions risk being delayed (Greenwood and Empson,<br />
2003). However, some firms manage to maintain the partnership structure in a limited size but<br />
also introduce professional firm management. Hence, the size of the partnership is important.<br />
Among the interviewed firms, the number of people in a partnership ranged from three to<br />
thirty. As partnerships grow and as some partners are given the task of decision-making, other<br />
partners still expect participation. This means that large partnerships add the costs of<br />
hierarchy to the costs of collegial control, instead of substituting it. Age difference can also<br />
play a disturbing role. Often the objectives of younger partners do not coincide with those<br />
partners who are nearing retirement age. <strong>The</strong> latter group will most likely be more risk<br />
adverse and resist changes and development within the firm.<br />
<strong>The</strong> degree of organizational heterogeneity is another element, which needs to<br />
be aligned with governance. Similar types of services, training and values characterize a<br />
homogeneous consulting firm. Employees have the same educational background and are<br />
socialized into relatively conformist behaviours. However, as suggested earlier, consulting<br />
firms should pursue a strategy in which this homogeneity is challenged in order to create a<br />
unique position in the market. This strategy encompasses the use of freelance consultants and<br />
“top-class” consultants, a specially designed incentive scheme to motivate these and a focus<br />
on specific service areas, which were some of the organization design elements utilized by the<br />
successful consulting firms. Hence, a heterogeneous organization is best managed as a<br />
corporation because heterogeneity further adds complexity to the decision-making process<br />
(Greenwood and Empson, 2003).<br />
<strong>The</strong> general trend for professional service firms are away from partnerships.<br />
Since 1950, the proportion of management consulting firms governed as partnerships has<br />
fallen steadily from 50 % to 17 % (Greenwood et al., 2002). <strong>The</strong> general impression from the<br />
11 <strong>The</strong> legal distinctions between a partnership and a corporation are: 1) a partnership does not have a legal<br />
identity in its own right; 2) it represents an agreement between two or more persons; and 3) each partner is<br />
jointly and severally liable for the debts of the other partners (Greenwood and Empson, 2003)<br />
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empirical analysis follows this trend, and suggests that those firms, which handle growth<br />
issues best, are those, which clearly separate ownership and leadership.<br />
6.6.2 Organizational levers<br />
Organizational levers are the systems, practices and structures that make an organization<br />
successful. <strong>The</strong>y are the primary tools for aligning the consulting firm and enable<br />
management to direct the consulting firm towards high performance and growth. <strong>The</strong> analysis<br />
revealed six industry specific levers which consulting firms can employ to create competitive<br />
advantage (appendix R). <strong>The</strong>se are discussed below:<br />
Organizational structure This is often an overlooked factor in the consulting industry but it<br />
has an enormous impact on performance. Hence, how decisions are made and at what levels,<br />
exposure to experienced consultants, team structures vs. individual structures, a flat vs. a<br />
hierarchal organization, and governance and ownership are core elements, which must be<br />
aligned.<br />
Selection <strong>The</strong> talent base will have a significant impact on the consulting firm’s ability to<br />
execute strategy and deliver services. Furthermore, a competence wise broad talent base will<br />
allow the firm to explore and take advantage of growth opportunities, which can add<br />
uniqueness to the firm. Freelance employees add flexibility and cost incentives but are<br />
difficult to manage and assimilate in firm culture.<br />
Incentives Performance improves when performance is measured and holds people<br />
accountable for generating results. However, these systems must be designed not only to<br />
control performance but also to motivate employees towards improving performance in areas<br />
that make the biggest difference to the consulting firm. In connexion, reward systems play an<br />
important role in keeping teams focused on the project. However, these incentive schemes<br />
should be adaptable to the individual consultant and his or her personal goals.<br />
Strategy To build a high performing consulting firm the organization must be build around its<br />
vision and strategy. Hence, the purpose of strategy is to create fit and avoid strategic drift.<br />
Focus must be on a particular business model and what supports this. If it is not possible to<br />
obtain fit between business areas because of missing synergy effects, then these should be<br />
divided into different units sold to raise capital for the other business areas.<br />
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Development Training and developing employees and managers create a vast impact on<br />
business success. A consulting firm’s ability to improve existing skills and capabilities and<br />
learn new ones, is arguably the most defensible competitive advantage of all. That is, training<br />
and development must be put into system and not left up to random assignments and projects.<br />
Competence focus <strong>The</strong> consulting firm must be rooted in the market and customer priorities<br />
and this lever must be considered in continuation of firm strategy. Using less experienced and<br />
young consultants, demands that projects are defined, use frameworks and probably not<br />
contain a whole lot of contact to high-level management at customers. However, it also entails<br />
lower fees. On the other hand, if projects typically are novel and need tailor made solutions<br />
experience is crucial.<br />
6.7 Summary of discussion<br />
Based on the analysis and discussion it becomes possible to suggest where this master thesis<br />
is heading in the attempt to suggest an appropriate strategy. First, the theoretical contributions<br />
that best explain growth best in the industry stems from the inside-out perspective. <strong>The</strong><br />
process of growth comes from within the firm and its abilities to perceive and act upon new<br />
opportunities. Through resource accumulation, a consulting firm can create uniqueness and<br />
differentiate itself from competitors. Hence, even though the market will enter an economic<br />
slow-down, those consulting firms, which manage to create and sustain uniqueness, will have<br />
the ability to grow, even in difficult times. Second, some issues have been prevailing in the<br />
investigation of growth. <strong>The</strong> role of management, strategic growth, HR management, and the<br />
change in the market are elements which a have had decisive role in the growth process. In<br />
the successful consulting firms, these issues have been managed in ways through different<br />
organizational levers, which have been aligned and allowed them to create unique positions in<br />
the market. Taken together, I now argue that we are prepared to suggest an appropriate<br />
strategy for management consulting firms.<br />
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<strong>Chapter</strong> 7<br />
Towards an appropriate growth strategy<br />
This chapter ties the threads together and considers implications to the consulting industry<br />
based on the preceding work. Hence, the ambition here is to answer the problem statement in<br />
a manner which is as practical applicable as possible.<br />
7.1 What is an appropriate growth strategy?<br />
Often threats to strategy are seen as coming from the outside environment such as changes in<br />
technology, knowledge, or the behaviour of competitors and customers. However, I argue that<br />
the greatest threat to strategy stems from within the consulting firm. Strategy is often<br />
undermined by misalignment in management, organizational incoherence and a misguided<br />
view of competitors and customers.<br />
An appropriate strategy is one that is effective over a longer time span, affects<br />
the firm in many different ways, and focuses and commits a significant portion of resources to<br />
expected outcomes (Andrews, 1997). That is, the decisions behind an appropriate strategy will<br />
define the firm regarding its members, its external stakeholders, and its position in the market<br />
and industry. <strong>The</strong> argument, so far, has been that managers must pursue a strategy in which<br />
they seek to create uniqueness for their consulting firm. <strong>The</strong> “next-practice” approach was<br />
deemed superior to the otherwise appealing “best-practice” approach. <strong>The</strong>refore, the core of<br />
strategy is about defining the firm’s position, making trade-offs and forging fit among<br />
activities (Porter, 1996). An appropriate strategy can be measured in a variety of ways;<br />
success, longevity, or performance metrics, but these measurements do not capture the<br />
importance of growth in the consulting industry. Because of the changing environment and of<br />
sell-by date of knowledge, consulting firms are under constant pressure of developing their<br />
resources and competences. Hence, in order to be successful in any of the above-mentioned<br />
measures, it is imperative that the consulting firm grows, not necessarily in size but in<br />
resource and knowledge accumulation. <strong>The</strong>refore, an appropriate strategy, in the context of<br />
this master thesis, is one, which focuses attention towards growth enablers and barriers and<br />
how to most effectively take advantage of or overcome these.<br />
However, the desire to grow has an ambivalent effect on strategy, which must<br />
not be forgotten, and is arguably the core reason why so many management consulting firms<br />
fail. An appropriate growth strategy entails trade-offs but this often places real or imagined<br />
limits on profitability or revenue growth. For example, focusing on one customer group or<br />
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providing just a few core consulting services means that the consulting firm misses sales to<br />
other customer groups. <strong>The</strong>refore, consulting firms often take incremental steps to improve<br />
short-term revenue, but eventually these steps blur the strategic position of the firm. Attempts<br />
to compete in all areas and directions create compromises and inconsistency, which<br />
eventually erode the competitive advantage of the consulting firm. Organizational motivation<br />
and focus is blurred and profit drops. <strong>The</strong> answer is more revenue sought in short-term growth<br />
opportunities.<br />
Consequently, the vital question in relation to an appropriate growth strategy is;<br />
which approaches to growth reinforce and preserve strategy? <strong>The</strong> argument presented in this<br />
master thesis is clear; management consulting firms must seek to deepen their strategy rather<br />
than broadening and compromising it. Growth must leverage existing competences and<br />
capabilities through activities and create firm characteristics and services that are impossible<br />
for competitors to match on a stand-alone basis.<br />
7.2 Core issues<br />
<strong>The</strong> above argument suggests two important steps towards an appropriate growth strategy.<br />
First, consulting firms must identify the primary growth enablers and barriers they face. This<br />
allows the consulting firm to focus on immediate challenges and relating managerial issues.<br />
<strong>The</strong> life-cycle development model has been proposed as a general framework (see appendix<br />
Q), but should be matched with the individual characteristics of the consulting firm. Hereby,<br />
the specific size and situation of the individual consulting firm is taken into account. Second,<br />
once the primary growth enablers and barriers and their implications have been identified,<br />
they must be managed in a way that reinforce and preserve the strengths of the firm. <strong>The</strong> key<br />
element is what consulting firms should do, in order to ensure that growth and development is<br />
kept in line with strategy. I suggest five core issues, which consulting firms need to act on, in<br />
relation to their primary growth enablers and barriers:<br />
<strong>Management</strong> alignment Developing or re-establishing an appropriate growth strategy<br />
depends on leadership. <strong>The</strong> need for a strengthening of management in the consulting industry<br />
has increased. Often, leadership in consulting firms has degenerated to into a field where<br />
focus is more on the consulting trade and servicing customer in the field. This creates a<br />
resource and qualification deficit when it comes to managing the consulting firm, and there is<br />
a general underestimation of professional management in the growth process. Hence, the first<br />
step towards an appropriate growth strategy is to align management through alignment of<br />
actions and alignment of objectives. A shift towards a professional management structure will<br />
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provide the coordination mechanisms necessary to align the diversity of activities and<br />
resources inherent in a consulting firm. In this way, the CEO is given the authority and<br />
decision making capacity to react upon growth opportunities concurrent with the interest of<br />
the firm. Furthermore, there is a need to agree on the direction and future of the consulting<br />
firm among the decision-makers. Often the decision making process is influenced by many<br />
individual objectives. This means that innovation, such as in the creation of a new practice<br />
area, is often a matter of negotiation and political manoeuvring and important decisions are<br />
either slowed down or down right aborted. In many cases, this implicates that some partners<br />
will have to let go of sovereignty in the decision making process in order to overcome the<br />
“glass ceiling” towards growth. Finally, management alignment should also consider the<br />
development of the next chain of managers. This implies a focus on the development of<br />
middle managers, from operational into strategic thinkers. Hereby, the food chain of the<br />
consulting firm is secured and managerial resources, once accumulated, can be directed<br />
towards exploring new growth paths.<br />
Strategic development An area, which deserves more attention, than what is currently,<br />
receives, is the strategic development of the consulting firm. Most predominant is opportunity<br />
driven growth, but, albeit attractive in the short run, it corrupts strategy in the long run. In<br />
continuation, growth should preferably stem from organic growth rather than acquisitions or<br />
partner driven growth, which have proven not to be very successful in the consulting industry.<br />
Only through a strategy that contains positioning, trade offs and fit among activities can the<br />
consulting firm create a sustained competitive position. Hereby, it can build on already<br />
existing resources and competences. Uniqueness in this industry is far from unobtainable, as<br />
previous discussions have revealed. <strong>The</strong> consulting firm can differentiate itself in an<br />
otherwise alike industry in several parameters. <strong>The</strong>se strategic considerations are highly<br />
critical when you consider how difficult it is to change the position of the firm once it has<br />
become embedded in the minds of customers. Because there is such a high degree of path<br />
dependence, this is the definitive argument against opportunity driven growth.<br />
Organizational adaptation This issue is critical because of the changing market. Where the<br />
role of consultants earlier was characterized by a state of elitism and know-all attitude, where<br />
customers only rarely questioned the conduct of consulting firms this have changed. Today,<br />
customers exercise a great deal of influence on the market by adding price pressure, less<br />
loyalty, more volatility, and quality demands. Hence, the accumulated stock of knowledge<br />
and capabilities inherent in the consulting firm must provide it with the dynamic capabilities<br />
94
to flexible and rapidly respond to these changes. This implies two things. First, because the<br />
industry has been very busy in the last five years, there is a need to consider if the firm has<br />
changed along with the markets and the customers it wants to serve. Second, the capabilities<br />
inherent in routines and learning that are essential in the process of developing new and<br />
appropriable knowledge must be evaluated. <strong>The</strong>re must be a fit between these and the<br />
strategic ambitions which management have for the consulting firm.<br />
HR and incentive structures Too many consulting firms experience a high turn over rate of<br />
employees. It is imperative that the right employees are retrained in the firm, and therefore the<br />
incentive structure and HR matters have to be weighed up. <strong>The</strong> analysis has shown that<br />
motivating consultants today is more demanding than it used to be. Traditionally, the up-or-<br />
out partnership structure was enough to provide motivation among employees and personal<br />
attention from partners to junior consultants were almost not necessary. However, today the<br />
odds of making partner are smaller and time to partnership is prolonged, because the<br />
partnership structure is on its way out. Consultants want a balanced work life, personal<br />
development, and a fun job. Professional careers are available inside large corporations at<br />
salaries, which are competitive to those offered by consulting firms. Consequently, consulting<br />
firms are finding it increasingly difficult to attract and keep the right people in the firm. This<br />
implies an increased focus on HR management, which traditionally have not taken up much<br />
interest in the industry. It means recruiting from a broader pool of candidates, developing<br />
training programs, and creating incentive schemes, which accounts for both hard workers and<br />
those who want a personal life on the side.<br />
Innovation and knowledge management Very much in continuation of the need for<br />
dynamic capabilities, there is also a need to consider the current level of innovation and<br />
knowledge development in the consulting firm. Pressure on operations over a longer duration<br />
of time often places innovation and knowledge development in the back seat. <strong>Consulting</strong><br />
firms are the epitome of knowledge-based organizations. <strong>The</strong>ir product is knowledge and their<br />
key resource is the expertise and competence of their employees. As a consequence, they are<br />
reliant on these employees for competitive advantage through knowledge-based innovations.<br />
However, over time the value of knowledge diffuses, it “commodifies”. In order to remain<br />
innovative and be able to grow, consulting firms must differentiate from competitors and<br />
continue to win deals with existing customers through the development of new business areas.<br />
First, emergence of new and distinctive knowledge, based on differentiated expertise, can lead<br />
the firm towards new activities and customers. This can be created by leveraging current<br />
95
practice or by developing and applying entirely new knowledge. Second, for a new area to be<br />
adopted in the firm there is also a need of an embedding process. This happens through<br />
organizational support via directing personnel, resources, and sponsorship towards new<br />
business areas.<br />
<strong>The</strong> above five core issues are not stand-alone issues but must be considered as<br />
a whole. Hence, the consulting firm must strive to achieve fit and coherence in their<br />
organization. An appropriate growth strategy is about combining all the activities that take<br />
place in the firm and aligning them towards organizational coherence.<br />
7.3 Creating fit<br />
Organizational coherence will enable and mobilize intellectual and knowledge assets in the<br />
consulting firm towards a defined objective through alignment of activities and by effectively<br />
communicating information and knowledge. That is, it is about aligning the five core issues in<br />
the right configuration. This means that capabilities, assets, resources, and activities must be<br />
aligned and structured to adapt and respond to changes in the external environment.<br />
Coherence gives the consulting firm the ability to keep employees focused, and<br />
motivated and encourage new thinking and ideas in an efficiently and effectively manner, as it<br />
grows larger and engages in differentiation. But there is also another vital angle to this<br />
perspective. Competitive advantage comes from the way in which core issues and activities of<br />
the consulting firm fit and reinforce each other. <strong>The</strong>refore the consulting firm must achieve<br />
strategic fit as this will enhance the uniqueness of its position and strengthen trade-offs.<br />
Hence, fit should go beyond simply creating consistency among activities but should focus on<br />
how these activities reinforce and optimize each other. It is also in the degree of fit that the<br />
consulting firm will be able to sustain its competitive advantage, because the system will be<br />
very difficult to imitate. Competitors will find it difficult to untangle, gain nothing from<br />
replicating only a few activities, and lack the specific experience, which has been build up<br />
over time. This reasoning further builds my argument that consulting firms cannot alone<br />
create competitive advantage by providing premium consulting services. Instead, they have to<br />
reconsider how the entire organizational system should be managed, in order to do all things<br />
well and not just excel at consulting.<br />
<strong>The</strong> objective of the organization design of the consulting firm is exactly to<br />
coordinate the variety of activities that takes place, in a way, which uses organizational levers<br />
to align activities towards organizational goals. Hence, these organizational levers, embedded<br />
in the organization design, provide options of organizing which must be understood and<br />
aligned.<br />
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7.3.1 <strong>The</strong> importance of organizational levers<br />
All consulting firms use levers but most do it very poorly. Either they are inadequately<br />
designed or they conflict with each other, resulting in a neutralizing effect. However, the<br />
primary reason why these organizational levers do not help the consulting firm is that they are<br />
not aligned with firm strategy. Hence, it is irrelevant that a consulting firm hires top-class<br />
consultants if for example, a partnership structure stifles initiatives from talented employees<br />
or business areas contradict each other. Used correctly, however, organizational levers can be<br />
the primary tools for building a high performance consulting firm. Two categories of<br />
organizational levers exist, industry specific levers and firm specific levers. Here, six<br />
organizational levers have been identified (appendix R), which I argue are industry specific.<br />
That is, most consulting firms can apply these but this list is not exhaustive and more levers<br />
can be added. However, the most valuable levers are those, which are firm specific. That is,<br />
the ones which are rooted in the experience of management, in the uniqueness of employees<br />
and the flexibility of the organizational architecture. Consequently, I argue that managers of<br />
consulting firms must identify the organizational levers that are specific for their firm and<br />
establish fit with vision and strategy. This is the last and final step towards an appropriate<br />
growth strategy for consulting firms.<br />
7.4 Conclusion<br />
In summary, I argue that an appropriate growth strategy for consulting firms can be<br />
approached through three steps. First, the focus is on identifying the primary growth factors<br />
and barriers, which the consulting firm faces. Second, focus must be directed towards five<br />
core issues that contain crucial building blocks of growth strategy in the consulting industry.<br />
Third, industry and firm specific organizational levers must be identified and managed in<br />
order to create fit among the five core issues, stimulate growth enablers and overcome growth<br />
barriers. Through this strategic agenda, the consulting firm manager can create a unique firm<br />
with a clear competitive advantage. However, this process involves a continual search for<br />
ways to reinforce and extend the unique position. Hence, strategy is not viewed as static but<br />
dynamic and implies an ongoing endeavour to extend uniqueness and toughen fit. <strong>The</strong>refore,<br />
even though management have identified a unique position for their consulting firm it must<br />
continually strive to find new trade-offs and leverage the system of complementary activities<br />
into a sustainable advantage.<br />
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<strong>Chapter</strong> 8<br />
Limitations and scope<br />
In general, the overall methodological process of this master thesis is considered to have in<br />
fact investigated what it intended to do, and consequently it has been possible to answer the<br />
problem statement in a reasonable, practical and scientific manner. However, as the<br />
methodological problems and issues are evaluated it becomes clear that they are related<br />
primarily to the empirical foundation of the master thesis and choice of method. This chapter<br />
contains an evaluation of the methodological approach and a discussion of the scope of the<br />
findings.<br />
8.1 <strong>The</strong>oretical limitations<br />
<strong>The</strong> whole idea behind the methodological approach has been to conduct an analytical<br />
generalization in connection with theory development and not a statistical generalization in<br />
connection with hypothesis testing. This investigation has been directed towards theory<br />
development, because of the lack of specific theory on the subject of this master thesis.<br />
Existing theory has been used to create an integrated approach to firm growth<br />
and has quite roughly been divided into two perspectives. Even though a combination of these<br />
two perspectives has sought to eliminate theoretical weaknesses and bring together the most<br />
influential theories on firm growth and strategy, there is still a risk that important theories<br />
have been left out because they did not fit in with the inside-out or outside-in perspective. A<br />
concrete example is governance theory/transaction cost theory (Coarse, 1937; Williamson,<br />
1981), which have almost not been dealt with.<br />
Identification of growth processes among the interviewed firms has not taken<br />
place by evaluating annual accounts, revenue or capital. Instead, the focus has been on “in-<br />
observable factors” and “invisible assets”. <strong>The</strong>se conditions, which are difficult to measure,<br />
such as culture, entrepreneurship, competences, and capabilities, etc. are increasingly playing<br />
an important role in economical theory. Nevertheless, they give an impression of a somewhat<br />
casual and unstructured approach. Yet, these conditions have been considered important to<br />
consider in relation to firm growth. Consequently, conditions such as how the firm<br />
accumulates and applies information and knowledge, as well as attitudes and motivation of<br />
managers and employees can best be investigated through qualitative methods.<br />
<strong>The</strong> key strength of building theories from qualitative methods, such as case<br />
studies, is the probability of discovering novel theories, while the prime weakness is the<br />
temptation to build theories that try to capture everything (Eisenhardt, 1989). Herein, lie the<br />
98
strength and weakness of this master thesis. In an attempt to balance generalization and<br />
detailed understanding, this master thesis has embraced a very broad approach, which at times<br />
has blurred the focus. However, if an investigation is to have a certain degree of<br />
generalization and detailed understanding then a multiple case study is an appropriate<br />
approach (Yin, 1993). Several other researchers have been successful with a similar approach<br />
(Ulhøi, 1991; Kohli and Jaworski, 1990).<br />
<strong>The</strong> overall approach has combined exploratory research, inductive reasoning,<br />
and a comparative case study approach. Through this multidisciplinary advance, this master<br />
thesis has been able to develop and expand insights concerning the problem statement.<br />
However, it has been necessary to draw on theoretical contributions from such different areas<br />
as economics, organizational behaviour, managerial theories, and sociology, etc. <strong>The</strong>refore, it<br />
has been a significant challenge to identify and fit key issues from those theories to the<br />
specific problem at hand. Furthermore, this has been impeded by the fact that most literature<br />
concerning the consulting industry is based on the US market. This market is much more<br />
mature concerning the consulting industry and findings cannot be directly transferred.<br />
8.2 Practical limitations<br />
Case studies usually combine various data collection methods and can be used to accomplish<br />
different aims, where theory development is the most interesting (Eisenhardt, 1989). To<br />
accomplish this aim, three data collection methods have been applied. First, a secondary<br />
analysis of quantitative data concerning the industry. Second, an informal expert interview.<br />
Third, nine in-depth interviews with managers of consulting firms. <strong>The</strong> implications of using<br />
these three methods will be discussed in turn and finally evaluated overall.<br />
<strong>The</strong> industry analysis rests on quantitative data gathered by DMR. This is<br />
probably the most reliable source of information on the <strong>Danish</strong> consulting industry and the<br />
most updated. However, this also means that other surveys have been disregarded, primarily<br />
because they did not present the newest information. Surveys conducted in the period of<br />
1995-2004 have indicated quite different things about the industry because of the great<br />
changes, which have taken place in the market. Concluding uncritically from these sources<br />
would have painted a wrong and unsatisfactory picture of the industry.<br />
Using secondary information has meant that some issues were left untouched,<br />
because I obviously have not had any influence on what was in fact investigated in these<br />
surveys. Unfortunately, the size and scope of this master thesis did not allow for a quantitative<br />
analysis of the industry as this entails a large amount of work.<br />
99
<strong>The</strong> informal expert interview conducted with special consultant at DMR, Tom<br />
Vile Jensen, served to clarify some of those subjects, which other surveys than those from<br />
DMR showed to be of interest. This interview was only semi structured and roughly followed<br />
the guideline in appendix P. Hence, it served only as an initial and exploratory tool.<br />
Primary data have been based on nine case studies conducted with managers at<br />
<strong>Danish</strong> management consulting firms. It was sought to ensure that the interviewed firms was<br />
as representative of the industry as possible, that different sizes were covered ,and finally, that<br />
three of the firms had experienced growth problems while the rest experienced strong growth.<br />
This was a difficult task and event though, it is assumed to have succeeded, the choice of<br />
firms rest more on the author’s perception of the firms. It was not based on actual information,<br />
and this might represent a subjective bias. However, concerning the practical approach it is<br />
believed that there is a good and sound coherence between the primary data, secondary data<br />
and the expert interview since it all springs from the same place, namely DMR. This master<br />
thesis would of course have benefited from additional empirical data. Hence, because research<br />
rests on a relative small sample size, readers who work in consulting firms should their own<br />
experience against the results and recommendations presented here.<br />
Based on the above discussion, it becomes evident that the population of my<br />
investigation is not the <strong>Danish</strong> management consulting industry, but instead those<br />
management consulting firms that are members of DMR. DMR covers 180 consulting firms<br />
out of approximately 7500 firms, but these 180 firms are considered to be serious and<br />
professional consulting firms and therefore represent a segment that is appropriate to analyse.<br />
Finally, the use of the hermeneutic approach in the analysis might imply a<br />
certain degree of subjective researcher bias. This is due to the foregoing understanding on<br />
behalf of the researcher concerning the phenomenon in question. However, throughout the<br />
entire master thesis is has been a primary concern to continuously be as objective as possible.<br />
Where this objectivity might be brought in to question, is in relation to the choices of the<br />
theoretical frameworks adopted in this thesis. To some extent these perspectives present the<br />
subjective choices of the researcher, and run the risk of neglecting other theoretical<br />
viewpoints with explanatory powers, which otherwise would have surfaced in the interviews.<br />
8.3 Scope<br />
Based on an assumption that this master thesis has in fact investigated what it intended to do,<br />
it makes sense to consider how these findings can be used in practice besides what has been<br />
discussed in the chapter seven.<br />
100
To a certain extent, the whole structure, which this master thesis builds on, is a<br />
limiting factor concerning scope. Because, an exploratory and inductive reasoning have been<br />
applied this means that specific knowledge and information have surfaced underway, which in<br />
turn have shaped the remaining research. Hence, the theoretical approach was developed<br />
specifically with the problem statement in mind. On the other hand, because the purpose was<br />
to answer the problem statement in both a detailed manner but also a generalized manner this<br />
opens up for a possibility to generate the findings beyond the <strong>Danish</strong> management consulting<br />
industry. Throughout the master thesis, consulting firms have been assumed to belong to<br />
respectively the SME sector and the professional service firm (PSF) sector. <strong>The</strong>ory and<br />
knowledge gained from these sectors have been used to open up the black box of consulting<br />
firms, and it is thereby interesting to consider to what extent findings of this research can be<br />
reversed to these two sectors.<br />
Besides service firms the SME sector also covers manufacturing firms that do<br />
not employ more than 250 people. <strong>The</strong>se firms face conditions that are very different from<br />
those which consulting firms face. Barriers to entry are higher because of scale economies,<br />
sunk costs, investments and patents. Technology plays a larger role than it does in the service<br />
industry. It is difficult to enter an industry without an innovative product and as a result,<br />
competition will be much fiercer. <strong>The</strong>reby, some firms in the SME sector face competitive<br />
parameters, which are very different from those consulting firms face. I argue that the<br />
findings of this study cannot be transferred to the SME sector without adapting the preceding<br />
theoretical framework to emphasize the outside-in perspective.<br />
On the other hand, the PSF sector in general faces challenges that are very<br />
similar to those specific for consulting firms. <strong>The</strong> essential keys to success in the PSF sector<br />
are human talent and alignment (Lorch, 2000). <strong>The</strong> work of professional service firms<br />
depends on the talent and intelligence of the people delivering it. <strong>The</strong> best firms hire the best<br />
people and motivate them to stay committed to the profession and the firm for a long period.<br />
<strong>The</strong>y develop organizational practices that motivate employees to serve clients well, and it is<br />
through this alignment that PSF become successful. I therefore argue that the challenges,<br />
which PSF in general face, can be addressed and acted upon by adopting the framework<br />
suggested in this master thesis. Hence, the scope of the findings, especially the suggested<br />
approach to an appropriate growth strategy, can be beneficial in industries such as law,<br />
accounting, advertising and architecture, as well as a broader range of consulting firms.<br />
101
<strong>Chapter</strong> 9<br />
Conclusion<br />
<strong>The</strong> purpose of this master thesis have been to examine how <strong>Danish</strong> management consulting<br />
firms currently build and sustain competitive advantage, and how this can be translated into<br />
an appropriate growth strategy for the individual management consulting firm.<br />
<strong>The</strong> <strong>Danish</strong> management consulting industry is characterized by few large and<br />
fast growing consulting firms and a long tail of small enterprises. In general, the large<br />
consulting firms reap the majority of industry profits, while the small consulting firms seem<br />
to struggle with growth and survival. Based on the premise that the industry is heading<br />
towards more tough times, it is relevant to consider how growth strategy can be managed.<br />
<strong>The</strong> main conclusion is that those consulting firms, which manage growth best,<br />
are those firms that have managed to separate leadership from ownership. Through this<br />
separation, these consulting firms have created the foundation for strategic and focused<br />
growth as opposed to opportunity driven growth. This opens up for a focus on the<br />
development of complementary competences and the capability of employees to think and act<br />
strategically. Hereby, future growth will build on the development of mid-level managers,<br />
services, and products from an already existing competence platform. Hence, consulting firms<br />
cannot alone rely on growth through competent consultants and by adding new partners into<br />
the firm. Instead, the firm must create alignment between goals and strategy, resources and<br />
competences, as well as management and employees. This happens through the careful design<br />
of the organization in which positioning, trade-offs and fit are considered.<br />
Based on this knowledge, this master thesis has been able to suggest an<br />
appropriate growth strategy. Initially the consulting firm must identify its primary sources and<br />
limitations of growth. Through these, focus must be directed towards five core issues, which<br />
create the foundation for growth strategy. <strong>The</strong>se core issues are: Alignment of management,<br />
strategic development, organizational adaptation, HR and incentives structures, and<br />
innovation and knowledge management. Finally, by deploying industry- and firm specific<br />
organizational levers, the consulting firm must create alignment across these five issues in the<br />
organization design. Hence, this research has shown that growth must be initiated from within<br />
the firm.<br />
Several other perspectives have emerged through the research, which are<br />
relevant for growth, and which can create additional insights into the sources and limitations<br />
of growth in the industry. First, the immediate challenge for the <strong>Danish</strong> consulting industry is<br />
to identify appropriate strategies for internationalization. When faced with unknown markets,<br />
102
incomplete information, and a state of incertitude, enterprises typically develop in foreign<br />
markets by adopting a process, which evolves incrementally. However, are there any<br />
possibility of avoiding the initial stages of internationalization and gaining a grip on the<br />
international market faster? Networks and strategic alliances could be the answer, and further<br />
research into the relationship between these and the management consulting industry could<br />
generate crucial insights. Second, the degree of collaboration across consulting firms is a<br />
relative unknown size. Several consulting firm managers have expressed a wish for more<br />
collaboration in the industry but this only takes place in limited extent. By considering<br />
relationships as the unit of analysis this might open up for a deeper understanding of value<br />
creating linkages between consulting firms and, equally important, the factors that impede the<br />
realization of relational rents. For both perspectives, it is obvious that the role of DMR is<br />
important. Both in establishing and inspiring research but also as a link between different<br />
consulting organizations and firms. Finally, this master thesis has advocated that consulting<br />
firms should separate leadership from ownership. However, actual research on governance<br />
forms in the <strong>Danish</strong> professional service firm sector is missing. If this was conducted, it might<br />
be possible to identify correlations between specific governance forms and measures such as<br />
size, profit and revenue. Hereby, we would get closer to an answer about the appropriateness<br />
of the partnership.<br />
It appears that there are enough issues to be dealt with for consulting firms. Not<br />
only in relation to the professional management and development of the firm, but also in<br />
relation to internationalization and cooperation in the industry. Hence, even though an<br />
external slowing down might take place in the market, it seems essential to direct attention<br />
and speed up on the internal lines of the management consulting firm. Thus, the next wave of<br />
growth can be founded.<br />
103
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<strong>Danish</strong> <strong>Management</strong> Association (DMR):<br />
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<strong>Danish</strong> Statistics<br />
http://www.dst.dk/<br />
DMR - Branche analyse 2006/7:<br />
http://www.dmr.nu/log/dmr403/library/BRANCHEANALYSE%202006_2007.pdf<br />
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http://dmr.nu/log/dmr403/library/Tendensundersøgelse2007.pdf<br />
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Internet sources<br />
114
Appendix<br />
Content<br />
Appendix A<br />
Overall structure ................................................................................................................................................. 116<br />
Appendix B<br />
Number of active firms in the industry ................................................................................................................ 117<br />
Appendix C<br />
Revenue distributed across customers in 2006 .................................................................................................... 117<br />
Appendix D<br />
Number of firms distributed across firm size in 2007 .......................................................................................... 118<br />
Appendix E<br />
Revenue distributed across firm size in 2007 ...................................................................................................... 118<br />
Appendix F<br />
Overall revenue of the industry ........................................................................................................................... 119<br />
Appendix G<br />
<strong>The</strong> management consulting industry’s share of GNP ........................................................................................ 119<br />
Appendix H<br />
Service distribution .............................................................................................................................................. 120<br />
Appendix I<br />
Customer prioritization ....................................................................................................................................... 121<br />
Appendix J<br />
Life cycle model for professional service firms ................................................................................................... 121<br />
Appendix K<br />
Significant differences between the outside-in perspective and the inside-out perspective ................................. 122<br />
Appendix L<br />
Contact letter ....................................................................................................................................................... 123<br />
Appendix M<br />
Overview of the interviewed firms ....................................................................................................................... 124<br />
Appendix N<br />
Operationalization ............................................................................................................................................... 126<br />
Appendix O<br />
Interview guide .................................................................................................................................................... 127<br />
Appendix P<br />
Topics of semi-structured expert interview.......................................................................................................... 130<br />
Appendix Q<br />
Life cycle development and related managerial issues ....................................................................................... 131<br />
Appendix R<br />
Core issues concerning the organization design of consulting firms .................................................................. 132<br />
Appendix S<br />
Business models for consulting firms .................................................................................................................. 133<br />
115
Problem statement:<br />
What is an appropriate growth strategy for <strong>Danish</strong> management consulting<br />
firms relative to their current size and situation in the market?<br />
Appendix A<br />
Overall structure<br />
Exploratory research • <strong>Industry</strong> analysis and expert interview <strong>Chapter</strong> 2<br />
Inductive reasoning<br />
Comparative research<br />
Analytical and practical<br />
approach<br />
• Literary studies of growth theory and development of<br />
an integrated approach to firm growth<br />
• Research design and implementation<br />
• Analysis of data<br />
• Discussion<br />
• Towards an appropriate strategy<br />
• Limitations and scope<br />
• Conclusion<br />
Source: Own making<br />
<strong>Chapter</strong> 3<br />
<strong>Chapter</strong> 4<br />
<strong>Chapter</strong> 5<br />
<strong>Chapter</strong> 6<br />
<strong>Chapter</strong> 7<br />
<strong>Chapter</strong> 8<br />
<strong>Chapter</strong> 9<br />
116
Source: DMR industry analysis 2006/7, p. 12<br />
Appendix B<br />
Number of active firms in the industry<br />
Appendix C<br />
Revenue distributed across customers in 2006<br />
Source: DMR industry analysis 2006/7, p. 10<br />
117
Appendix D<br />
Number of firms distributed across firm size in 2007<br />
66%<br />
11%<br />
21%<br />
5%<br />
7%<br />
10%<br />
12%<br />
Omsætning 151+ mio. kr.<br />
Omsætning 51-150 mio. kr.<br />
Omsætning 21-50 mio. kr.<br />
Omsætning 11-20 mio. kr.<br />
Omsætning 0-10 mio. kr.<br />
Source: DMR industry analysis 2006/7, p. 12<br />
7%<br />
6%<br />
Appendix E<br />
Revenue distributed across firm size in 2007<br />
55%<br />
Omsætning 151+ mio. kr.<br />
Omsætning 51-150 mio. kr.<br />
Omsætning 21-50 mio. kr.<br />
Omsætning 11-20 mio. kr.<br />
Omsætning 0-10 mio. kr.<br />
Source: DMR industry analysis 2006/7, p. 13<br />
118
18.000<br />
16.000<br />
14.000<br />
12.000<br />
10.000<br />
8.000<br />
6.000<br />
2008 (Est.)<br />
2007<br />
2006<br />
2005<br />
2004<br />
10.842<br />
10.510 10.031<br />
10.106<br />
Source: DMR industry analysis 2006/7, p. 6<br />
Appendix F<br />
Overall revenue of the industry<br />
11.849<br />
Appendix G<br />
<strong>The</strong> management consulting industry’s share of GNP<br />
Source: DMR industry analysis 2006/7, p. 6<br />
14.408<br />
16.275<br />
2001 2002 2003 2004 2005 2006 2007<br />
0,69%<br />
0,77%<br />
0,90%<br />
0,96%<br />
1,02%<br />
0,00% 0,20% 0,40% 0,60% 0,80% 1,00% 1,20%<br />
119
Distribution among services<br />
Source: DMR industry analysis 2006/7, p. 9<br />
Revenue distribution for the service advising/consulting<br />
HR-rådgivning<br />
7,2%<br />
(8,1%)<br />
Forandringsled<br />
else<br />
9,4%<br />
(12,4%)<br />
IT-rådgivning<br />
16,3%<br />
(15,2%)<br />
Projektledelse<br />
16,7%<br />
(18,5%)<br />
Strategisk<br />
Rådgivning<br />
19,2%<br />
(22,2%)<br />
Organisation/<br />
Operations<br />
<strong>Management</strong><br />
31,2%<br />
(23,7%)<br />
Source: DMR industry analysis 2006/7, p. 9<br />
Appendix H<br />
Service distribution<br />
120
Large<br />
Size<br />
Small<br />
Young<br />
Source: DMR industry analysis 2006/7, p. 11<br />
Crisis: Need to agree<br />
on growth vision and<br />
target market<br />
Stage I<br />
Exploring<br />
Appendix I<br />
Customer prioritization<br />
Appendix J<br />
Life cycle model for professional service firms<br />
Crisis: Need to<br />
broaden services and<br />
develop staff<br />
capabilities<br />
Stage II<br />
Focusing<br />
Age<br />
Crisis: Need for<br />
common approach<br />
to clients and<br />
shared ownership<br />
Stage III<br />
Diversifying<br />
Source: Malernee and Greiner, 2005<br />
Stage IV<br />
Institutionalizing<br />
Mature<br />
121
Appendix K<br />
Significant differences between the<br />
outside-in perspective and the inside-out perspective<br />
Ethos Closed systems, free of change and surprises, static<br />
orientation.<br />
Outside-in theories Inside-out theories<br />
Open systems, change and unforeseen situations<br />
occur on almost daily basis, dynamic and<br />
development oriented.<br />
Market perception To a high degree predictable. Not predictable, complex and volatile.<br />
Focus Product markets and industries. <strong>The</strong> firm is<br />
described based on its placement herein.<br />
Factor markets, internal firm competences and<br />
capabilities<br />
Firm goals Maximizing of profit. Superior long-term competitive advantage which<br />
Role of the manager Assessing quantitative sizes and implementing these<br />
for optimal production.<br />
Competitive advantage Is gained through superior choices of strategy that<br />
Normative directions<br />
Resource characteristics<br />
Examples of theoretical<br />
exponents<br />
enhances strategic and structural barriers to entry<br />
and barriers to mobility. Advantages come from<br />
market power achieved by low market costs or<br />
product differentiation.<br />
Analyze the industry and adapt the firm to the<br />
conditions. External diagnosis is of most important<br />
and implementation is less important as it is<br />
considered unproblematic.<br />
Capital, labor and natural resources. All are<br />
considered homogeneous and perfectly mobile.<br />
• Neoclassical theory<br />
• SCP paradigm<br />
• Porter’s five forces<br />
• Strategic conflict<br />
results in the survival of the firm.<br />
Collecting, assessing and understanding<br />
information. Creating, choosing, implementing and<br />
adapting strategies.<br />
Is gained and developed of rare, valuable, difficult-<br />
to-copy and non-substitutable physical, human or<br />
organizational resources med the goal of achieving<br />
innovation.<br />
Analyze the environment generally and on a long<br />
term basis. Build firm competences, capabilities<br />
and resources in consideration with a long term<br />
vision of the firm. Information seeking and<br />
gathering as well as implementation are considered<br />
interesting.<br />
Adapted from Hougaard and Duss, 1996<br />
Financial, physical, legal, human, organizational,<br />
informational and relational resources. All are<br />
heterogeneous and imperfectly mobile.<br />
• <strong>The</strong> theory of the growth of the firm<br />
• Evolutionary approach<br />
• <strong>The</strong> resource based view<br />
• Core competences<br />
• Dynamic capabilities<br />
• Managerial theory<br />
122
Hej __________<br />
Appendix L<br />
Contact letter<br />
Mit navn er Jesper Kristensen, og jeg er studerende ved Syddansk Universitet i Odense. Mit studie har været<br />
fokuseret omkring strategi, organisation og ledelse (Cand. Merc. i international management) og da jeg ved siden<br />
af har arbejdet i et mindre konsulent firma, fandt jeg det naturlig at skrive et speciale omhandlende konsulent<br />
branchen i Danmark.<br />
I den forbindelse har jeg gennem et samarbejde med Dansk <strong>Management</strong> Råd (DMR) fået fastlagt specialets<br />
rammer og problemformulering. I korte træk drejer det sig om, at identificere en række ”best practice” tiltag som<br />
det enkelt konsulent firma kan benytte sig af med henblik på at opnå fremtidig vækst.<br />
Jeg er nu så langt i forløbet, at det er på tide at få indsamlet empiri bestående af ca. 10 semi-struktureret interviews.<br />
I den forbindelse har jeg som udgangspunkt kigget på DMR’s medlemsliste over konsulenter. Det er mit indtryk, at<br />
jeres firma, __________, kan give en interessant indsigt i hvorledes man kan håndtere vækst i konsulentbranchen.<br />
Jeg håber derfor, at I vil finde det interessant at deltage som case-studie firma og deltage i et interview af ca. 1-1½<br />
times varighed. Interviewet vil være med en enkelt person og denne bør have en ledende position i firmaet og have<br />
indflydelse på fremtidig strategi og vækstmuligheder.<br />
Detaljerne omkring specialets indhold og interviewets indhold vil selvfølgelig blive præciseret når vi mødes. Der<br />
vil ingen steder i specialet blive nævnt firmaets navn, så det er kun mig som forfatter, som kender denne<br />
sammenhæng. Jeg vil også medbringe en fortrolighedserklæring som kan udfyldes. Forventelig bliver specialet<br />
publiceret i en forkortet version på DMR hjemmeside, ligesom I selvfølgelig er velkomne til at få en elektronisk<br />
udgave af det færdige resultat.<br />
Jeg håber dette brev har skabt interesse, og jeg vil inden for et par dage kontakte jer telefonisk.<br />
Med venlig hilsen<br />
Jesper Kristensen<br />
Tlf. 22 33 45 53<br />
Jesper_kristensen@hotmail.com<br />
123
Appendix M<br />
Overview of the interviewed firms<br />
Interviewee Short firm description Interview<br />
date<br />
Small organization management consulting firm<br />
This firm was founded in 2001 by the interviewee who is the CEO and sole owner of the firm. It<br />
currently employs 4 people and 15 freelance consultants. <strong>The</strong> firm is based in a large villa in northern<br />
30-05 2008<br />
CEO of a small<br />
organization management<br />
consulting firm<br />
Sjælland, which it shares with a few other small consulting firms. <strong>The</strong> firm deals with management<br />
consulting, organization development, education psychology and human resource management on<br />
strategic, tactical and operational levels. In addition, it offers seminars, educations and workshops. <strong>The</strong><br />
general business concept combines rational, emotional and spiritual elements. In addition to the more<br />
A<br />
traditional consulting services, the firm also offers teambuilding and “fire walking”. Since its<br />
foundation, the firm has experienced growth but only to a limited extent. <strong>The</strong> greatest barrier to future<br />
growth, as stated by the owner, is to find the right persons to share management with. Its vision it to be<br />
among the top 5 consulting firms in Denmark measured in quality and awareness.<br />
Senior partner in a small<br />
strategy and operations<br />
consulting firm<br />
B<br />
CEO of a small<br />
management and event<br />
consulting firm<br />
C<br />
CEO of a medium<br />
strategy and IT<br />
management consulting<br />
firm<br />
D<br />
CEO of a medium sized<br />
communication<br />
consulting firm<br />
E<br />
www.mindweiss.dk<br />
Small strategy and operations consulting firm<br />
This firm was founded by the leading partner in 1992 as a sole practitioner firm. Around 2000 three<br />
additional senior partners where drawn into the firm (including the interviewee). In addition to the four<br />
senior partners, 5 partners are associated on a freelance basis. <strong>The</strong> firm has offices in Århus, Odense<br />
and Copenhagen are is geographically spread out. <strong>The</strong> firm offers a broad array of services; strategy,<br />
organization, supply chain management, marketing, LEAN, IT governance and logistics. Most<br />
consultants are CMC certified. <strong>The</strong> firm has only experienced limited growth because of a very rigid<br />
partnership structure.<br />
www.dragsteddevelopment.dk<br />
Small management and event consulting firm<br />
This firm was founded in 2001 by the CEO and owner and based on Fyn. He currently is the sole<br />
owner and manager and employs 5 people with various backgrounds. In addition, there are about 30<br />
freelance employees connected to the firm. <strong>The</strong>se people do not have a traditional consulting<br />
background but are more experienced in areas such as outdoor and recreational education. <strong>The</strong> firm<br />
provides outdoor courses which focuses on management and employee development in a teambuilding<br />
framework. In addition, the firm also has an event service where it manages company parties,<br />
excursion, seminars etc. <strong>The</strong> firms marked by a high degree of season dependence. Recently, the firm<br />
has experienced high growth and has problems with finding the right and qualified employees to<br />
deliver high quality products.<br />
www.target-people.dk<br />
Medium strategy and IT management consulting firm<br />
This firm was founded in 1998 as a partnership structure but in 2006 realised that growth problems<br />
was related to this. <strong>The</strong>refore, it abandoned the partnership structure and hired an external CEO (the<br />
interviewee). His job is to run the firm and he does not function as a consultant. <strong>The</strong> firm provides<br />
services in areas such as program and project management, IT management and organization<br />
development. <strong>The</strong> firm balances it employs between a permanent staff, associated consultants and<br />
freelance consultants. In total, it employs around 40 consultants. All consultants are highly experienced<br />
and educated and hold top level certifications. <strong>The</strong> goal is to reach a size of approximately 100<br />
consultants. It has it offices in central Copenhagen.<br />
www.ipteams.dk<br />
Medium sized communication consulting firm<br />
This firm was founded in 2002 as two separate firms who worked together extensively and then<br />
merged in 2004 into one firm. <strong>The</strong> two founders serve as managers and partners and the firm employs<br />
23 people. It provides analyses, branding, strategy, PR, graphic design, and crises-, web- and change<br />
communication. Most employees have an educational background in communication. After the merger,<br />
the firm experienced high growth and the challenge is to grow without losing flexibility. <strong>The</strong> firm<br />
deliberately sets its prices just below the large players, which allows it to attract assignments from the<br />
public sector. It is based in central Copenhagen.<br />
www.operate.dk<br />
07-07 2008<br />
16-05 2008<br />
10-06 2008<br />
04-06 2008<br />
124
CEO of a medium sized<br />
strategy and management<br />
development consulting<br />
firm<br />
F<br />
Manager in a large<br />
management consulting<br />
firm<br />
G<br />
CEO of a large strategy<br />
and operations consulting<br />
firm<br />
H<br />
Partner of a large strategy<br />
and operations consulting<br />
firm<br />
I<br />
Medium sized strategy and management development consulting firm<br />
<strong>The</strong> CEO (and shareholder - 70%) founded this firm in 2002. In addition, 3 other shareholders have<br />
ownership in the firm (10 % each). However, a process of broadening ownership to around 10<br />
shareholders is taking place. <strong>The</strong> firm employs 20 consultants with various backgrounds. Among<br />
others traditional consulting, rhetoric and journalism. It provides services in three areas; strategy and<br />
development, competence development and interim management. It has its offices in Århus, Ålborg<br />
and Copenhagen.<br />
www.pluss.dk<br />
Large management consulting firm<br />
This firm has been included to examine the effect of mergers in the industry. Formerly a successful<br />
consulting firm focusing on management development, this firm was acquired by a large international<br />
corporation in 2000. After this, the firm has been placed under strict control from its American mother<br />
company Manpower. However, since the merger the firm has experienced very low growth rates and<br />
extensive problems of retaining skilled employees. <strong>The</strong> firm has gone from employing 75 consultants<br />
to only 12 permanently employed staff. It provides services in people development and the majority of<br />
consultants are psychologists. It is based in northern Sjælland.<br />
www.rightmanagement.dk<br />
Large strategy and operations consulting firm<br />
This firm is one of the leading consulting firms in Denmark. Three persons who are currently also<br />
partners in the firm founded it in 2000. <strong>The</strong> firm has its offices in northern Sjælland where 130<br />
consultants work. <strong>The</strong> turnover is around 160 million kr. this year. It provides consulting in two main<br />
areas; strategy and operations. Its services covers strategic development, supply chain management,<br />
LEAN, innovation and product development, activity based costing, performance management,<br />
process optimization, transfer management and sourcing and purchase. It has experienced growth rates<br />
among the highest in the industry. Currently it is opening offices in eastern Europe and Asia. <strong>The</strong> firm<br />
has won the consulting award from DMR several times. Since its start, it has experienced double-digit<br />
growth rates.<br />
www.valcon.dk<br />
Large strategy and operations consulting firm<br />
This firm is currently the largest <strong>Danish</strong> owned consulting firm in Denmark. It employs more 200<br />
people, has a yearly turnover of 270 million kr. and sees double-digit growth rates. It is organized in a<br />
number of sub divisions. Currently there are around 30 partners of various levels and approximately 50<br />
joint owners in the firm. It provides services in areas such as strategy & growth, (service) operational<br />
excellence, leadership & projects and IT & infrastructure. It has offices in Denmark, Norway and<br />
Sweden.<br />
Source: Own making<br />
www.implement.dk<br />
03-06 2008<br />
09-06 2008<br />
04-06 2008<br />
02-06 2008<br />
125
Topic of analysis Purpose of analysis<br />
Life cycle stage • To analyze which life cycle stage the concerned consulting firm is in.<br />
History and<br />
experience<br />
Appendix N<br />
Operationalization<br />
• To identify which conditions are specific for the consulting firm in relation to the life<br />
cycle stage it is in.<br />
• To asses the circumstances in the consulting firm which have shaped its history and<br />
experience.<br />
• To determine to what degree these circumstances are path dependent.<br />
• To understand how the consulting firm understands growth.<br />
Entrepreneurship • To identify to what degree entrepreneur ship acts out a significant role in relation to the<br />
Feasible set of<br />
strategies<br />
Feasible set of<br />
resources and<br />
competences<br />
growth that the consulting firm have experienced.<br />
• To understand how the consulting firm builds its strategy and how this is related to<br />
growth.<br />
• To see if the consulting firm has a defined growth strategy.<br />
• To identify how the strategy of this firm might be different from other consulting firms.<br />
• To understand how the consulting firm bring about resources and competences through<br />
management decisions.<br />
• To understand how these resources and competences are translated into firm specific<br />
resources and core competences.<br />
• To identify how the firm addresses changes, both internally and externally.<br />
Factor markets • To determine if there are any specific circumstances on the factor market which are<br />
critical for the growth of the concerned consulting firm.<br />
• To analyse to what degree the consulting firm uses relations and networks as a growth<br />
factor.<br />
Product markets • To determine which factors on the product acts out a significant role in relation to the<br />
Organizational<br />
architecture<br />
growth of the consulting firm:<br />
- <strong>The</strong> degree of competition and rivalry<br />
- <strong>The</strong> role of buyers<br />
- <strong>The</strong> external environment and the general economy<br />
- <strong>The</strong> possibility for creating new business areas (mobility barriers)<br />
• To analyse how the organizational architecture of the consulting firm affects growth:<br />
- Incentives and reward systems<br />
- Authority and hierarchy<br />
- systems for coordinating, monitoring and evaluating performance<br />
- Ownership model (CEO vs. partner)<br />
<strong>The</strong> future • To understand what the consulting firms consider important in the future in order to stay<br />
competitive.<br />
Source: Own making<br />
126
Introduktion<br />
Interview guide<br />
semi-struktureret interview<br />
• Kort introduktion til emnet og opgaven samt formålet med denne<br />
o Eventuelle begrebsdefinitioner klarlægges for respondenten<br />
• Kort om interviewets forløb (ca. 1-1½ times varighed)<br />
Appendix O<br />
Interview guide<br />
• Snak om fortrolighed, såfremt det ønskes af virksomheden, underskriv evt. fortrolighedserklæring<br />
Formalia<br />
Tænd for diktafon!- TEST DEN - Snak højt og tydeligt!<br />
• Navn, position (job), ansættelsestid (i virksomheden, i position)<br />
• Hvilket ansvar indebærer dit job?<br />
• Hvad er din daglige rolle i virksomheden?<br />
Life cycle stage<br />
Culture<br />
• Hvor mange ansatte er der i firmaet (konsulenter vs. Non-konsulenter)?<br />
• Omsætning eller andre nøgle tal<br />
• Hvor længe har firmaet eksisteret?<br />
• Hvad er pt. de centrale udfordringer for dit firma?<br />
• Hvordan reagerer organisationen på de disse udfordringer?<br />
• Hvad er firmaets målsætning på længere sigt<br />
o Ønsker firmaet at vokse eller ej?<br />
o Hvor meget? Er der en grænse for firmaet? En optimal størrelse?<br />
• Hvilke signifikante faser er firmaet gået igennem?<br />
• Hvad forventer du den næste fase bliver?<br />
• Hvilke barrierer eksisterer i forhold til at komme dertil?<br />
• Hvad var motivationen for firmaets opståen?<br />
• Er de oprindelige stiftere/partnere stadig i firmaet og hvad er deres rolle nu?<br />
• Hvordan er ejerforholdene?<br />
o Børsnoteret eller lignende<br />
• Hvordan vil du beskrive jeres kultur og hvordan hænger den sammen med firmates historie?<br />
• Hvad er styrken/svagheden i jeres kultur i forhold til vækst?<br />
• Hvordan er jeres markedsorientering?<br />
127
o Hvilken form for konsulentvirksomhed beskæftiger firmaet sig med?<br />
o Er der tale om nicheydelser eller mere brede ydelser?<br />
o Er der nogen bestemt markeder som i koncentrerer jer om?<br />
• Hvordan er jeres vækst orientering?<br />
o Hvordan betragter i vækst<br />
o Hvordan opstår vækst (eksternt i miljøet eller internt i firmaet)<br />
• Hvorledes har den organisatoriske struktur ændret sig gennem tiden?<br />
o Hvordan var firmaet som udgangspunkt organiseret og har dette ændret sig?<br />
• Hvilke forhold i firmaets historie og erfaring begrænser jer i fremtidige beslutninger?<br />
Entrepreneurship<br />
• Hvordan er iværksætter ånden i firmaet?<br />
• Hvilke egenskaber har stifterne/nuværende ledere af firmaet bidraget med?<br />
- Livserfaring, erhvervserfaring, særlig lyst til at starte firma?<br />
• Hvordan bliver firmaets retning skabt? Snævert omkring iværksætterens kompetencer eller er de bredt<br />
skabte?<br />
• Hvorledes er ledelsen/iværksætterne involveret i værdi kæden? I alle led eller er der et særligt fokus?<br />
• Hvordan definere du de vigtigste egenskaber hos lederen af et konsulent firma?<br />
Feasible set of strategies<br />
• Hvad betyder vækst for jer?<br />
• Kan du ganske kort beskrive hvordan firmaet er vokset?<br />
• Hvad har I gjort for at vokse/har i en vækststrategi?<br />
• Hvad gør jeres firma bedre end andre konsulent firmaer?<br />
• Hvad kan konsulent firmaer generelt gøre for at vokse?<br />
• Hvilke strategiske udfordringer står jeres firma overfor?<br />
• Hvad er de positive og negative konsekvenser af jeres vækst?<br />
• Hvilke særlige vækstfremmere/vækstbarrierer har i oplevet?<br />
Feasible set of resources and competences<br />
• Hvad er jeres konkurrencemæssige fordele i forhold til andre firmaer?<br />
• Hvad er firmaets vigtigste ressourcer?<br />
o Hvordan er disse unikke for firmaet?<br />
• Hvad ser du som værende jeres vigtigste kerne-kompetencer?<br />
o Hvorledes er dette noget som er specielt i forhold til resten af branchen?<br />
• Hvordan vedligeholder I jeres ressourcer/kompetencer?<br />
o Uddannelse/nye medarbejdere/knowledge management<br />
• Hvordan reagerer firmaet overfor forandringer?<br />
• Hvilke formelle systemer benytter I jer af med hensyn til at forstærke jeres forandringsberedskab?<br />
Factormarkets<br />
128
• Hvilke særlige forhold på faktormarkedet er med til at give jer en fordel overfor andre konsulent<br />
firmaer?<br />
o Politisk støtte?<br />
o En regional iværksætterkultur?<br />
o Leverandør relationer?<br />
o Samarbejde med universiteter og andet?<br />
• Hvorledes har I mulighed for at tilvejebringe særlige ressourcer som kan være svært tilgængelige for<br />
Productmarkets<br />
andre virksomheder?<br />
• Hvilke eksterne generelle branche vilkår spiller en rolle for jeres vækst?<br />
• Gør i nogle tiltag for at sikre jeres position i branchen?<br />
• Hvordan oplever i konkurrence intensiteten og hvorledes hæmmer antallet af potentielle/eksisterende<br />
konkurrenter og substituerende produkter jeres vækst?<br />
• Hvorledes opfatter i samarbejde med andre konsulenter og gør i det?<br />
• Hvad gør i for at påvirke køberne forhandlingskraft?<br />
• Skaber i på nogen måde forhold som gør det sværere for potentielle konkurrenter at komme ind på<br />
markedet samt at manøvrerer rundt?<br />
Organizational architecture<br />
• Hvordan er jeres firma organiseret?<br />
• Hvordan bliver beslutninger på operationel/taktisk/ strategisk niveau taget?<br />
• Hvordan benytter i formelle systemer til at evaluere og belønne individuel performance?<br />
• Hvorledes koordinere og kontrollerer I de aktiviteter/projekter som finder sted?<br />
<strong>The</strong> future<br />
Andet<br />
• Hvordan ser du fremtiden for din virksomhed? For konsulentbranchen generelt?<br />
• Hvordan skal I konkurrere i fremtiden?<br />
o Hvad skal i konkurrere med og på?<br />
• Hvad bliver vigtigt i fremtiden for at sikre sig overlevelse som management konsulent i branchen?<br />
o No cure-no pay<br />
o One stop shopping<br />
o Certificeringer<br />
• Yderligere kommentarer, tilføjelser m.m. i forhold til emnet, som ikke er blevet berørt?<br />
Diktafonen slukkes!<br />
Interviewet afsluttes med tak til respondenten for deltagelse<br />
Efterrationalisering af interviewet sammen med respondenten:<br />
• Nogle underlige/uforståelige spørgsmål?<br />
• Hvad kan jeg gøre bedre?<br />
• Noget som der mangles?<br />
129
Appendix P<br />
Topics of semi-structured expert interview<br />
Emneroversigt til ekspertinterview med Tom Vile Jensen, DMR<br />
Branchens struktur:<br />
• Hvordan vil du karakterisere den danske management konsulent branche med hensyn til:<br />
o Størrelse?<br />
o Vækst?<br />
o Profit?<br />
o Overskuelighed og gennemsigtighed?<br />
• I hvor høj grad er branchen konjunktur følsom?<br />
• Er der noget karakteristisk billede af hvem som betjener hvem? Eksempelvis at små firmaer<br />
bliver betjent af små firmaer?<br />
• Strukturelle og politiske tiltag?<br />
• Hvordan spiller den offentlige sektor en rolle i forhold til den private sektor?<br />
• Er der lave adgangs og exit barrierer i branchen?<br />
• Hvad og hvordan konkurreres der i branchen?<br />
Branchens vækst:<br />
• Hvad er jeres/branchens vækst forventninger?<br />
• Hvorledes spiller følgende faktorer en rolle i denne vækst/vækstbarrierer?<br />
o Fusioner/opkøb?<br />
o Netværk og relationer?<br />
o Branding og markedsføring?<br />
o Udvikling af kompetencer?<br />
o Anskaffelse af ressourcer (gode medarbejdere)<br />
• Oplever i nogen særlige fastholdelses ”kneb”, i form af:<br />
o One-stop shopping?<br />
o No cure no pay?<br />
o Gratis foranalyse?<br />
• Størrelse, profit, vækst, er der en form for sammenhæng eller inkonsistens?<br />
• Hvad driver udviklingen i branchen?<br />
• Er der vækstmæssigt nogen forskel på små og store konsulent huse?<br />
• Hvad er branchens vækstbarriere?<br />
Branchens udfordringer:<br />
• Hvad er vigtigt for kunderne?<br />
• Hvilken betydning har det for konsulent firmaerne at de skal være proces orienteret og ikke<br />
kun opgave orienteret?<br />
• Bliver der stillet flere krav til konsulenterne?<br />
• Hvordan oplever i interessen for DMR og branche organisationer generelt?<br />
• Har mindre konsulent huse har brug for kompetence løft?<br />
• Er der behov/opbakning for certificering?<br />
• Er der tale om opdeling i et A og B-hold?<br />
• Har de små firmaer kompetencerne til at hjælpe andre firmaer godt nok?<br />
• Forventninger om fremtidige udfordringer?<br />
Andre relevante emner?<br />
130
Appendix Q<br />
Life cycle development and related managerial issues<br />
Stage one firms – identifying Stage two firms – becoming Stage three firms – diversifying the<br />
growth opportunities<br />
professional and specialized firm and going international<br />
Strategy Opportunity driven. Focus driven. Strategy driven.<br />
<strong>Management</strong> Managed by one person, the<br />
founder who has previous<br />
experience in the industry.<br />
Organization<br />
structure<br />
Little or no formal structure exits.<br />
Allows for flexibility and better<br />
adaptation and specialization to the<br />
needs of SME clients.<br />
Decision making Resides solely with the founder.<br />
Development Happens on an informal basis and<br />
primarily via on-the-job training.<br />
<strong>The</strong> driver of development is the<br />
founder.<br />
Culture Informal and relaxed, highly<br />
affected by the founder.<br />
Purpose of<br />
Growth<br />
Primary growth<br />
processes<br />
Primary growth<br />
barriers<br />
Limited growth visions which are<br />
centered on the ideas and visions of<br />
the founder.<br />
<strong>The</strong> customer network and<br />
entrepreneurial skills of the founder.<br />
Dependent of one or two large<br />
customers within that network.<br />
<strong>The</strong> founder balances the role of<br />
both consultant and manager. Lack<br />
of a sparring partner. Lack of an<br />
area of specialization or niche<br />
service. No critical mass in any<br />
service areas.<br />
Crisis Overcoming the “glass ceiling”<br />
<strong>The</strong> dominating founder must take a<br />
step back in order to enable further<br />
growth. For example via sale of the<br />
firm, taking another partner into the<br />
firm or promoting a trusted<br />
employee to the rank of senior<br />
partner. Hereby the creation of a<br />
professional and specialized firm<br />
can take place.<br />
Managed by two or more persons<br />
who have come to an agreement on<br />
the focus and development of the<br />
firm.<br />
A formal structure with back office<br />
administration, compensation<br />
schemes and formalized work<br />
processes. Size slowly becomes an<br />
issue as the organizational<br />
complexity rises.<br />
Takes place between the senior<br />
partners who rely on consensus for<br />
both the strategic and operational<br />
running of the firm.<br />
Primarily takes place trough projects<br />
as learning-by-doing but is to a<br />
larger degree supported by internal<br />
competence development,<br />
knowledge sharing and seminars.<br />
Focused on professionalism and task<br />
oriented.<br />
To establish a sound firm that is not<br />
constantly under threat by internal<br />
and external changes.<br />
Focus on strategic business areas.<br />
Focus and positioning relative to the<br />
market. Strategic recruitment. Cross<br />
selling of services.<br />
Managers are still caught in a do-sell<br />
position. Still hampered by a lack of<br />
critical mass. To establish the<br />
capabilities necessary for<br />
diversification.<br />
Establishing the “real” firm<br />
It is necessary to further develop the<br />
firm in a professional sense with a<br />
formal structure, extended<br />
compensation schemes and strategic<br />
planning. <strong>The</strong> key to further growth<br />
lies in diversifying the services the<br />
firm provides and developing the<br />
capabilities of employees to support<br />
this.<br />
Source: Own making<br />
Managed by a group of senior partners<br />
who have had a clear vision and<br />
strategic plan from the start.<br />
A decentralized structure with several<br />
small business areas that are managed<br />
by mid level partners. At the top of the<br />
hierarchy is the board which one or<br />
more of the founders are member of.<br />
<strong>The</strong> group of founding partners<br />
continues to make strategic decisions<br />
but delegate operating decisions to<br />
mid level partners.<br />
Happen in a much larger extent via<br />
systemized efforts to share and<br />
develop knowledge, as well as outside<br />
institutions, such as universities and<br />
are<br />
A cultural plurality characterized by<br />
that fact that the firm consists of<br />
several small business areas.<br />
To stay competitive with regard to<br />
attraction the right employees and<br />
maintaining a market leader position.<br />
Creating a strong, entrepreneurial and<br />
unified firm culture. Related and<br />
unrelated diversification. Maintaining<br />
a market leader position. Employing<br />
the best. Having critical mass in key<br />
business areas. Broadening<br />
geographical scope.<br />
Not being able to maintain a unified<br />
culture because of the increase in size.<br />
Employees leaving for smaller firms.<br />
<strong>The</strong> firm risk ending up with several<br />
small business areas with different<br />
approaches to consulting and<br />
customers. Not developing mid level<br />
partners who can think strategically.<br />
Finding the right recipe for<br />
internationalization.<br />
Creating the “one firm” firm<br />
It is necessary to direct managerial<br />
efforts towards creating a “one firm”<br />
firm in order to prevent fragmentation.<br />
Mid level managers must be motivated<br />
to act strategically and not only<br />
operational and in the general interest<br />
of the firm.<br />
131
Appendix R<br />
Core issues concerning the organization design<br />
Authority structures and ownership/organizational structure<br />
Professional management Few partners among which one<br />
serves as CEO<br />
Many freelance workers, relatively<br />
few little permanent employees<br />
Performance pay, provision and<br />
bonuses<br />
Standardization, tools and<br />
frameworks<br />
Large training and development<br />
programmes<br />
Employee structure/selection<br />
Combination of mostly permanent<br />
employees but also some free lance<br />
workers<br />
Incentive systems<br />
of consulting firms<br />
Many partners in a traditional<br />
partnership<br />
Many permanent employees, no<br />
freelance workers<br />
A combination Fixed salary<br />
Strategy<br />
A combination New approach every time, project<br />
based<br />
Methods of learning, training and developing employees<br />
Small introduction programmes<br />
and little training<br />
Competence focus<br />
Junior consultants Mostly senior consultants with<br />
some junior staff<br />
Source: Own making<br />
Only informal training and<br />
development<br />
Senior consultants<br />
132
Broad service<br />
domain<br />
Narrow service<br />
domain<br />
Appendix S<br />
Business models for consulting firms<br />
Recycled solutions Tailor made solutions<br />
General stores<br />
(2) - Pluss leadership, Right management.<br />
Speciality shops<br />
(3) – Target People, Operate, Mindweiss.<br />
Source: Adapted from Sheenan, 2004<br />
Idea labs<br />
(2) – Implement, Valcon.<br />
Boutiques<br />
(2) – Dragsted Development, IP Teams.<br />
133