Department of Marketing and Management, University of Southern Denmark, Odense 2008

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Master Thesis: Cand. Merc. International Management

Supervisor: Professor Marcus Becker Autor: Jesper Kirkegaard Kristensen

Acknowledgements First, I would like to thank Danish Management Association (DMR) for motivating and inspiring this master thesis towards a direction, which corresponds to my own personal and professional interests, namely strategy and consulting. Especially Tom Vile Jensen, special consultant at DMR, deserves great thanks for his contribution and help, both economic and information wise. This has been an enormous support throughout the whole process, and I sincerely hope that this master thesis will contribute to the important work that takes place at DMR. Furthermore, great appreciation goes to all the consulting firm managers who have

taken time out of their busy schedule to participate in this project. I know it has been difficult to find the time, but I was always met with great hospitality and sincere interest. Without their openness and helpful attitude towards my interview questions, I would not have been able to conduct my research. Finally, I would like to dedicate thanks to Professor Marcus Becker, University of Southern Denmark, for providing valuable feedback and guidance in my work. Ultimately, I give great thanks to everyone who has contributed to my master thesis, as well as provided me with support and assistance through out the process.

Jesper Kirkegaard Kristensen Odense, 22/9 2008

Danish summary Mange konsulentvirksomheder har kunnet leve fornuftigt de senere r p grund af den generelle gode konomiske udvikling, ogs selvom de ikke har haft en strategi og er get hovedkulds efter vkstmulighederne i markedet. Sprgsmlet er, hvor udbredt denne tendens har vret blandt virksomhederne, og dermed hvor svagt/strkt konsulentvirksomhederne og deres organisationer str rustet i de kommende r, hvor markedet ikke vokser s strkt, og hvor kundernes krav stiger markant. Dette speciale omhandler strategi og vkst i management konsulentbranchen samt, hvorledes dette bedst kan hndteres i forhold til de vkstfaktorer og -barrierer, som branchen p nuvrende tidspunkt og i fremtiden str overfor. Den danske management konsulentbranche er prget af enkelte store og hastigt voksende konsulentvirksomheder og herudover en bred vifte af mindre foretagender. Generelt set er det de strste virksomheder, som hster strstedelen af profitten, mens der blandt de mindre virksomheder er en strre kamp for overlevelse og vkst. Set i lyset af at branchen sandsynligvis er p vej imod svrere tider, er det derfor relevant at se p, hvorledes vkststrategi kan og br hndteres. Ledende personer i en rkke forskellige management konsulentvirksomheder er blevet interviewet med henblik p at bne op for en dybere forstelse af strategi og vkst i en ellers meget broget og lukket branche. Konsulentvirksomhederne er blevet valgt sledes, at de reprsenterer henholdsvis sm, mellem og store konsulentvirksomheder samt ud fra, at de er etableret omkring r 2000. Gennem en komparativ analyse af disse virksomheder har det vret muligt at identificere signifikante vkstprocesser og -barrierer p tvrs af strrelse samt kendetegn ved de konsulentvirksomheder, som hndterer vkst og strategi bedst. Ydermere er analysen blevet styrket af en brancheanalyse, som har haft til forml at belyse de udfordringer, som branchen str overfor. P et brancheplan viser analysen, at der generelt er sket et skifte fra et slgers marked til et kbers marked. Kunder fravlger one-stop-shopping, er mindre loyale og presser priserne. Overordnet set er kundernes forhandlingskraft steget, hvilket udfordrer konsulentvirksomhedernes strategi og stiller hjere krav til professional virksomhedsdrift. P et virksomhedsplan viser analysen, at vkst er ndvendig for konsulentvirksomheder som en forudstning for internt at kunne udvikle sig kompetencemssigt. En konsulentvirksomhed, som fravlger vkst eller ikke er i stand til at vkste, kan ikke udvikle sine kompetencer og risikerer dermed at miste sine konkurrencemssige fordele. Ydermere vil analysen vise, at danske konsulentvirksomheder vokser gennem tre signifikante stadier, der hver isr er

kendetegnet ved en vkstkrise. For sm konsulentvirksomheder ligger den primre vkstbarriere hermed i, at stifteren er bde ejer og leder. Dette skaber interessekonflikter og hmmer fremtidig vkst. For konsulentvirksomheder af mellemstrrelse bestr den primre vkstbarriere i evnen til at identificere muligheder for komplementr diversifikation; herunder de ansattes egenskaber til at sttte disse vkstmuligheder. Store konsulentvirksomheders vkstbarrierer skal findes i deres evne til at samle et fragmenteret firma med mange forskellige specialer i en samlet organisation og udvikle mellemledere, som tnker i samme retning som organisationen. Afslutningsvis er de vkstprocesser, som er karakteristisk for de mere succesfulde konsulentvirksomheder, blevet identificeret med henblik p at kunne nrme sig en anvendelig vkststrategi.

Hovedkonklusionen er, at de konsulentvirksomheder som har oplevet strk vkst, er dem, som har formet at adskille ledelse og ejerskab. Ved at adskille ledelse og ejerskab kan konsulentvirksomheder skabe grundlaget for strategisk og fokuseret vkst. Herigennem bnes op for et fokus p udviklingen af medarbejdernes kompetencer inden for ledelse og forretningsudvikling samt, at virksomheden udvikler sine kompetencer komplementrt. Sledes vil fremtidig vkst bygge p udviklingen af mellemledere, ydelser og produkter fra en allerede eksisterende kompetenceplatform. Konsulentvirksomheder kan alts ikke alene vre sikker p at skabe vkst gennem et hjt fagligt niveau og ved at tilfje flere partnere med et hjt fagligt fundament i virksomheden. I stedet skal der skabes en langt strre grad af tilpasning mellem konsulentvirksomhedens ml og strategi, dens ressourcer og kompetencer, samt ledelse og medarbejdere gennem designet af organisationen. P baggrund disse resultater foresls en tilgang til vkststrategi i konsulentbranchen ud fra tre trin. Konsulentvirksomhederne m indledningsvis identificere de primre vkstmuligheder og vkstbarrierer, som de str overfor. Herigennem skal fokus rettes mod fem kerneomrder, der danner grundlaget for en vkststrategi. Disse er: Ledelsestilpasning, strategisk udvikling, tilpasning af organisationen, HRM samt innovations- og vidensudvikling. Sidst skal konsulentvirksomheden identificere de branche- og virksomhedsspecifikke organisationelle virkemidler, hvormed den kan opn tilpasning blandt de fem kerneomrder. Gennem denne strategiske agenda kan konsulentvirksomheden skabe en unik position med en klar konkurrencemssig fordel og dermed danne det fremtidige grundlag for vkst.

Table of contents CHAPTER 1

INTRODUCTION ................................................................................................................................................. 1 1.1 MOTIVATION ................................................................................................................................................. 1 1.2 CHALLENGES IN PRACTICE ............................................................................................................................ 2 1.3 PROBLEM STATEMENT ................................................................................................................................... 3 1.4 FOCUS AND STRUCTURE ................................................................................................................................. 4

CHAPTER 2

THE DANISH MANAGEMENT CONSULTING INDUSTRY ........................................................................ 6 2.1 STRUCTURE ................................................................................................................................................... 6 2.2 GROWTH IN THE INDUSTRY .......................................................................................................................... 11 2.3 CHALLENGES FOR THE INDUSTRY ................................................................................................................ 14 2.4 THE FUTURE ................................................................................................................................................ 17 2.5 SUMMARY OF INDUSTRY ANALYSIS ............................................................................................................. 17

CHAPTER 3 THEORIES OF FIRM GROWTH .................................................................................................................... 19

3.1 THE CONCEPT OF GROWTH ........................................................................................................................... 19 3.1.1 The tension between growth and size ........................................................................................................... 20 3.1.2 The dynamics of growth ................................................................................................................................ 21 3.1.3 The sustainability of growth ......................................................................................................................... 22

3.2 THEORETICAL CONTRIBUTIONS.................................................................................................................... 23 3.2.1 Inside-out perspective ................................................................................................................................... 24 3.2.2 Outside-in perspective .................................................................................................................................. 30 3.2.3 Tying the ends in the organization design .................................................................................................... 33 3.2.4 Summary of theoretical contributions .......................................................................................................... 34

3.3 SME THEORY .............................................................................................................................................. 34 3.3.1 SME growth .................................................................................................................................................. 34 3.3.2 The entrepreneur .......................................................................................................................................... 35 3.3.3 Strategy and culture in SMEs ....................................................................................................................... 36

3.4 CREATING AN INTEGRATED APPROACH ........................................................................................................ 37 3.5 SUMMARY OF THEORY ................................................................................................................................. 39

CHAPTER 4

DESIGN AND IMPLEMENTATION ............................................................................................................... 41 4.1 METHODOLOGY AND SETTINGS ................................................................................................................... 42 4.2 OPERATIONALIZATION ................................................................................................................................. 44 4.3 DATA ANALYSIS .......................................................................................................................................... 44

CHAPTER 5

EMPIRICAL FINDINGS ................................................................................................................................... 46 5.1 THE PURPOSE OF GROWTH ........................................................................................................................... 46 5.2 DEVELOPMENT THROUGH GROWTH ............................................................................................................. 48

5.2.1 Stage one consulting firms ............................................................................................................................ 48 5.2.2 Stage two consulting firms ............................................................................................................................ 54 5.2.3 Stage three consulting firms ......................................................................................................................... 59 5.2.4 Concluding remarks on growth development ............................................................................................... 64

5.3 GROWTH PROCESSES ................................................................................................................................... 65 5.3.1 Culture .......................................................................................................................................................... 65

5.3.2 Entrepreneurship .......................................................................................................................................... 66 5.3.3 Strategy ......................................................................................................................................................... 67 5.3.4 Resources and competences ......................................................................................................................... 68 5.3.5 The factor market ......................................................................................................................................... 70 5.3.6 The product market....................................................................................................................................... 70 5.3.7 Organization design ..................................................................................................................................... 72

5.4 SUMMARY OF ANALYSIS .............................................................................................................................. 74

CHAPTER 6

DISCUSSION....................................................................................................................................................... 75 6.1 CHANGE IN THE SIZE AND DIVISION OF VALUE ............................................................................................. 75 6.2 DEVELOPMENTAL LEADERSHIP .................................................................................................................... 77

6.2.1 Developmental perspective in consulting firms ............................................................................................ 77 6.3 GROWTH STRATEGIES .................................................................................................................................. 78

6.3.1 Strategic growth vs. opportunity driven growth ........................................................................................... 80 6.3.2 Organic growth vs. inorganic growth .......................................................................................................... 81

6.4 BEST PRACTICE OR NEXT PRACTICE ............................................................................................................. 82 6.5 THE TENSION BETWEEN GROWTH AND SIZE ................................................................................................. 84

6.5.1 Advantages of growth ................................................................................................................................... 85 6.5.2 Disadvantages of growth .............................................................................................................................. 86 6.5.3 An optimal size ............................................................................................................................................. 87

6.6 FITTING THE ORGANIZATION DESIGN TO GROWTH ....................................................................................... 88 6.6.1 Governance and ownership .......................................................................................................................... 88 6.6.2 Organizational levers ................................................................................................................................... 90

6.7 SUMMARY OF DISCUSSION ........................................................................................................................... 91

CHAPTER 7

TOWARDS AN APPROPRIATE GROWTH STRATEGY ........................................................................... 92 7.1 WHAT IS AN APPROPRIATE GROWTH STRATEGY? ......................................................................................... 92 7.2 CORE ISSUES ................................................................................................................................................ 93 7.3 CREATING FIT .............................................................................................................................................. 96

7.3.1 The importance of organizational levers ...................................................................................................... 97 7.4 CONCLUSION ............................................................................................................................................... 97

CHAPTER 8 LIMITATIONS AND SCOPE ............................................................................................................................ 98

8.1 THEORETICAL LIMITATIONS ......................................................................................................................... 98 8.2 PRACTICAL LIMITATIONS ............................................................................................................................. 99 8.3 SCOPE ........................................................................................................................................................ 100

CHAPTER 9

CONCLUSION .................................................................................................................................................. 102

REFERENCES .................................................................................................................................................. 104

APPENDIX ........................................................................................................................................................ 115

It is a little like the tailors son who wears dirty

clothes. We have not been good at developing our

own internal managers like we do at our

customers We run change courses for other firms,

but that medicine we have not taken ourselves.

Manager in a large management consulting firm

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Chapter 1

Introduction This master thesis seeks to investigate how Danish management consulting firms currently

build and sustain competitive advantage, and how this can be translated into growth, development, and strategy for the individual firm. The hope is that the findings of this master thesis will contribute to the understanding of the different growth factors and barriers that are at play in the Danish management consulting industry, and that it can benefit managers of consulting firms in a practicable manner.

1.1 Motivation The state of the Danish management consultant industry is good. Firms experience very strong growth, which even exceeds the growth of some technological sectors (Danish Statistics). However, there is a less positive side to this as well. The biggest consulting firms make the majority of the profit in the industry. In general, many small management consulting firms have a difficult time overcoming growth barriers, and research show that 90 percent of all consulting firms fail in their first 5 years (Hasek, 1997). Based on conversations with the Danish Management Association (DMR) it quickly becomes evident that there is a tension between small and large consulting firms.

Profit end revenue is consolidated around a few large consulting firms. 80 % of the revenue goes to 20 % of the firms so it is to a large degree the major players who bear the brunt and reap the benefits.

Tom Vile Jensen, special consultant in DMR

Most small management consulting firms stay small their entire life or evidently perish. This raises the question about whether there exists a best practice in the management consulting industry, and whether the large management consulting firms seem to stimulate a best practice for growth and success. Moreover, this is especially relevant now where the Danish economy shows signs of a recession following a period since 2004 where the Danish consulting industry experienced increasing growth. Economic growth creates work for consulting firms and has made it possible for many new consulting firms to start up with the prospect of making a profit. However, experience shows that when times get tough it is often

consulting services that are among the first to be cut away by clients. The management consulting industry faces a period where clients will be more reluctant and critical in their use

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of consultants and competition will be intensified. This creates new challenges for the Danish consulting industry.

This master thesis is initiated in cooperation with the Danish Management Association (Dansk Management Rd)1 which is a branch association for Danish management consulting firms and represents more than 175 consulting firms. DMRs mission is to; develop and maintain professionalism and ethics within the Danish consulting industry, develop and improve conditions for consulting firms in Denmark, and develop Denmark as a knowledge-based society. Through several pleasant discussions with DMR director Susanne Andersen2 the topic of the master thesis was determined. The cooperation with DMR is of great significance as DMR offers expert information on the Danish management consulting

industry on a continuing and systemized basis. Where this master thesis differentiates itself from information already present in DMR is that it offers a bottom-up approach. Hereby, is meant that as where DMR offers knowledge from an industry perspective, this master thesis draws its conclusions from a firm perspective where growth, strategy and development are investigated in a number of Danish management consulting firms.

1.2 Challenges in Practice Initially, it is crucial to identify growth factors and barriers on an industry level. That is, the external environment which consulting firms face must be assessed via an industry analysis in order to identify current and future challenges that are relevant in the context of this master thesis.

There is an immediate need to dig deeper into the tension that exists between growth, size and success in the industry. As already mentioned, only a very small number of management consulting firms manage to grow beyond a size of five to ten employees. To get a thorough understanding of this creates a two-fold challenge. On the one side, it is important to understand how management consulting firms grow. That is, to identify measures, which the individual consulting firms, takes in order to grow, but also to understand the external factors that have had an impact on their growth. Equally important, is to understand why only a few firms experience a distinct growth while many fail on this path. It is not clear what stimulates growth in the industry, and where potential answers must be found. Therefore, an integrated approach and a theory base, which forms the point of departure for examining and systemizing the factors of industrial, resource, and relational character that enables and inhibits growth, must be developed. Since there is general

1 For further information about DMR consult the organizations webpage at www.DMR.nu.

2 In may 2008 Bjarne Lundager Jensen, has been appointed director of DMR.

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lack of existing frameworks and knowledge regarding a best practice in the industry, this creates an empirical and explorative challenge. Based on theory the challenge is to create a model that can be used on a general firm level, but also allows for insight on the individual firm level. Furthermore, as I have chosen to approach the problem via an entire industry with an expected internal heterogeneity there is a challenge in balancing generalization and detail.

Finally, a challenge lies in opening up the black box of strategy in consulting firms. It is an industry where the players do not like to share too much about their strategy and competitive advantages, and where most industry information and knowledge is collected from a top-down perspective. Thus, a challenge lies in achieving an inside perspective from the management consultants themselves and their take on how to devise and execute strategy.

1.3 Problem Statement The management consulting industry has experienced a significant change over the last decade. Where consultants earlier made their living providing general services such as market analyses of remote countries, strategies for going global, fusions and so on, today customers demand much more specific services. There seems to be a rising degree of professionalism among customers of consultant services, and they demand cutting-edge competences and quick and swift problem solving. In addition, the competition on the Danish consulting market has increased significantly. International consulting houses, as well as a long tail of micro consulting firms provide their services (Brsen, 2005). However, there is still a need and demand for consultant services. What have changed, as the global market have become more complex and competitive, is that customers who demand consulting services have much higher standards - hot air and buzzwords do not cut it anymore.

Therefore, owing to the above described development and challenges in the Danish consulting industry, it evidently appears that consulting firms, in general, must seek proactive measures in every aspect of their organization in order to be able to survive and compete in the future. However, good advice stops here as there does not seem too be much guidance for consulting firms on how to overcome growth barriers. This consequently leads to the following problem statement for this master thesis:

What is an appropriate growth strategy for Danish management

consulting firms relative to their current size and situation in the market?

In order to arrive at a full understanding of the problem statement it is necessary to break it down into subcategories. First, a category of descriptive research questions is supposed to create the basis for understanding the complex and broad management consulting

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industry. Second, a category of research questions will focus on firm growth, and how this is related to size and other firm factors. Finally, a category of research questions will explore how empirical findings can be tied together to formulate a growth strategy, as well as a general understanding of how the industry can enable growth and overcome growth barriers. These research questions will not be explicitly answered, but serve as a guideline throughout the research.

Research questions concerning the industry: 1) What characterizes the Danish management consulting industry? 2) Are there major significant differences between Danish management consulting firms with regard to

size?

3) How do the findings of research question 1-2 affect growth at the level of the individual management consulting firm?

Research questions concerning firm growth: 4) What is the motivation to grow? 5) How do management consulting firms differentiate across size, and do this allow them to be categorized

into significant life cycle stages?

6) How does growth enablers and barriers relate to factors such as: a. Firm culture?

b. Entrepreneurship?

c. Strategy?

d. Resources and competences?

e. Factor and product market influences? f. Organization design?

Research questions concerning growth strategy: 7) How can the findings of research questions 1-6 be translated into growth strategy that accounts for the

specific size and situation of the individual consulting firm?

1.4 Focus and structure The focus of this master thesis is on Danish stand-alone management consulting firms. The industry definition of a management consulting firm is (Danish Statistics):

The management consulting industry is a designation for the type of firms that:

1) Deliver knowledge and advising about management and business development to decision makers and managers in private firms, organizations, and public institutions and/or

2) Work with educating and developing management in private firms, organizations, and public institutions with the purpose of developing organizations, business systems and people.

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The term Danish stand-alone narrows the focus down to those firms, which have been founded in Denmark and operate as pure management consulting firms. This focus leaves out large international firms such as Mckinsey & Company and The Boston Consulting Group, and consulting firms where consulting is a secondary service tied up to a primary function such as Rambl Management or Deloitte. The argument for this is that the mentioned types of consulting firms have a completely different economic and organizational structure or stem from primarily an American market, which offers very different conditions than the Danish market.

The structure of this master is very much shaped by the adoption of a holistic approach, which means that the entire management consulting industry is considered. Neither a purely theoretical approach nor an analysis of a single consulting firm will provide the level of general answers needed. Therefore, this master thesis concerns the Danish management consultant industry as a whole. The level of analysis will be both on firm level as well as on industry level. That is, I consider the topic from a top-down perspective (the industry analysis) and a bottom-up perspective (the empirical part of this master thesis) through three steps.

First, I adopt an exploratory research approach in order to clarify the problem. This is done through an industry analysis that rests on secondary data and an exploratory expert interview. The purpose is also to explore new dimensions of the topic. Second, in order to come to a full understanding of the complex notion of growth, and how this is related to the Danish management consulting industry, I find that it is important not to lock in, a priori, on a specific theoretical framework. This runs the risk of omitting important elements because of the use of a specific paradigm. Instead, I choose to open up this complex problem by accepting that there is no single right answer, and that investigating the problem cannot be done by simply pulling together available evidence. I hope, by going from the known to the unknown, to be able to add something new to the field by adopting inductive reasoning, which is essentially a method of discovery. This is done through the development of an integrated approach to the theory of firm growth. Third, comparative research is conducted in a number of Danish management consulting firm that each display different levels of growth, size and success. Through this assessment of growth factors and barriers, I hope to be able to identify significant factors, which enable or inhibit growth and relate these findings to the stages of development of consulting firms. Finally, all three elements is gathered and discussed in order to end up with a number of practicable implications. For the sake of simplicity, the overall structure of this master thesis is illustrated in appendix A.

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Chapter 2

The Danish Management Consulting Industry The point of departure of this master thesis is a description of the structure of the industry, growth, challenges, and future perspectives. The purpose is to create a foundation for understanding the industry from a top down perspective in the context of this master thesis. As already mentioned, the management consulting industry is a diverse industry with many different players. Thus, measures such as industry size, turnover, and demand are always estimates. The results presented in this chapter rests upon three sources; an industry analysis3 and a tendency analysis4 conducted by DMR and supported by the most recent numbers, and an expert interview with Tom Vile Jensen, special consultant in DMR (see appendix P). The two surveys are conducted on a yearly basis and builds on qualitative questions among DMR members. Thereby, they represent the newest source of information. In my search for information of the management industry, other surveys and articles have popped up, but they have the disadvantage that they do not rest on the newest information. As the industry is developing fast, it is important that conclusions be made from recent information. However, where results from other surveys have been interesting these issues have been discussed in the expert interview, in order to either confirm or disconfirm their robustness and relevance.

2.1 Structure The strong growth that has taken place in the consulting industry has attracted management consultants with very different backgrounds. In addition, the consultant industry, as a whole, is a relatively young and diverse industry. Many different types of consultant services take place every day and range from coaching and teambuilding to more integrated and big projects that help firms with strategy, organization, operations, etc. Firms range from one- person spare-time firms over highly professional firms who employ several consultants to

global firms who have more than 20.000 employees on their pay check. At a first glance, the industry appears very diverse and broad, but a little investigation can shred a little light upon the industry.

3 Branche analyse 2006/7. http://www.dmr.nu/log/dmr403/library/BRANCHEANALYSE%202006_2007.pdf

4 Tendensundersgelse 2007. http://dmr.nu/log/dmr403/library/Tendensundersgelse2007.pdf

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History The Danish management consulting industry had its beginning in the 60s and 70s, but was more seriously founded in the late 80s where some of the first real consulting firms were created. Traditionally, the role of the consultant was based on technology and rationality, but to a higher degree, the role developed into what it is to day where the focus is on evolution and revolution in the way an assignment is considered (Poulfelt, 1998). Where the focus originally was on the professional content, this changed into a focus on the relationship between the consulting firm, the organization and the concrete assignment. A more process oriented and organic consultant role was developed where the task of the consultant was to help line management to define and understand the problem at hand. Thereby, consulting changed into management consulting and today management consulting services cover many areas. Obviously, an industry so diverse will attract many different players.

Players The amount of active management consulting firms in the industry is steadily rising. It is estimated that there is an increase of about 10 % firms every year. In 2006, it was established that the amount of active firms was 7.550, see appendix B. This indicates an industry where players enter the market and still expect profit to be made. At this point in time, the market does not seem to be saturated. It is possible to classify the Danish management consulting industry into five strategic groups. These are:

Big international consulting companies: This group represents firms such as Mckinsey & Company, The Boston Consulting Group, IBM Business Consulting, and Accenture among others. Typically, these firms employ around 100 to 300 consultants in their regional office. Strategically they are run from US offices and are supported by international organizations with several thousands employees. To a large degree, they provide standardized solutions based on tools and frameworks, as well as they have very well defined career paths for their consultants.

Large concerns with build in consulting departments: This group of consulting firms is either departments or subsidiary companies of large international concerns. Consulting services are tied in with another primary function such as accounting, engineering, or architecture. Examples are; Deloitte, Rambl Management, Cowi, and PricewaterhouseCoopers where consulting services are build into a large business that allows them to draw on synergies internally in the concern.

Stand-alone Danish management consulting firms: This group represents the largest number of consulting firms and is to be understood as firms, which has consulting as their only business. Furthermore, they have been founded in Denmark and have achieved their growth on the Danish market. This group can be further divided into small (1-15

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employees), medium (16-50 employees), and large (51-200+ employees) management consulting firms.

Micro firms and sole practitioners: Here we find the array of micro firms that provide some kind of consulting service either on a full time basis or as a side occupation to their regular job. Often, the consulting services they provide have a character of being either social events or teambuilding without a larger degree of theory, knowledge, or tools behind. The kinds of services and the regularity with which they are provided does not allow these firms to be characterized as true management consulting firms. Contrary, this group also represents sole practitioners. This is typically the consulting professor or the

consulting guru who has been in the game for many years and posses a huge amount of theoretical knowledge, which he provides/sells to senior management of large corporations. No doubt useful, but they do not constitute the essence of a firm.

Non-commercial consulting firms: These government-owned or -sponsored organisations play an important role through their specialization on for example small and medium enterprises or certain industry sectors. DMR is an example. They are, however, run in a non-commercial fashion and growth is most likely not a core issue for them.

On the demand side, the largest customer group is made up of the manufacturing industry and the public sector, which combined make up for little more than 50 % of industry revenue. The second largest group is the financial sector, which constitutes almost 10 % of the sector. Finally, there are many different customer segments which make up for 40 % of industry revenue, with revenue shares of 1 5 %, see appendix C.

Types of services: It is possible to divide consulting services into different areas such as strategic consulting, HR consulting, change management, project management, operations management, IT consulting and outsourcing, etc. However, this does not provide much information for several reasons. First, some consulting firms provide advice that does not easily fall into one of these areas, for example consulting activities that are of a much more

general character. Second, even for the more traditional service providers, it is difficult to pinpoint an assignment as pure IT consulting because, due to a process orientation, it often entails more. Third, a lot of consulting work is often, in its essence, only outsourcing. That is, firms hire in bodywork for certain projects which they do not have the capacity to lift themselves. Finally, services change all the time and new consulting areas arrive in the industry such as LEAN or coaching. Instead, what is interesting is to consider the parameters with which consulting firms can differentiate their services. The three most significant parameters are; mass, high-

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end/low-end and specialization/full-service. First, mass indicates how many consultants a consulting firm has at its disposal. This is critical in some customer segments, as large companies will demand a large workforce over a long duration of time. Only the largest consulting firms can provide this. Second, high-end/low-end refers to the type of people a consulting firm employs and their level of education. Are they masters, PhDs, MBAs, certified consultants, etc. or do they have hands-on approach? Some customers demand the best because then they cannot be held responsible for a project gone wrong, but this solution is obviously very expensive. Third, specialization/full-service refers to the amount of service areas in which a consulting firm claims to have capabilities. A broad range of services can allow a consulting firm to cross-sell services, and thereby, become the sole provider and trusted consultant of a customer. As indicated, the range of services provided spans a broad spectrum. It is suitable to deepen the knowledge of these on the individual firm level as it indicates different strategic choices.

Size distribution The consulting industry is relatively young and therefore not fully consolidated. Small players can enter the market in the form of one- or two-person firms and still expect profit to be made. On the other hand, it is relative easy to leave the market again or limit the level of activities and services provided to almost none. To be able to understand the whole story of the structure of the industry it is very important to take into consideration the size distribution that is at play. Appendix D shows the percentile number of consulting firms distributed among firm size. Almost two thirds of the industry is made up of small consulting firms with revenue of zero - 10 million Danish kr. About one fifth of the industry consists of firms with revenue of 11 20 million Danish kr. while approximately the last fifth of the

industry has revenue, which exceeds 50 million Danish kr. These numbers provides a picture of an industry characterized by a large amount of small players and only a few big. It is worth noticing the difference in the above size distribution concerning the changes that have taken place compared with 2005 (numbers in parenthesis). The group of the smallest firms has increased from 65 % to 66 % while the second smallest group has decreased from 18 % to 12 % of the entire industry. This indicates that some small firms manage to grow but also that several leave that market again or perish. It is very difficult to say anything about an average size of consulting firms in Denmark, but based on numbers provided by special consultant Tom Vile Jensen, an estimated average size in terms of employees is eight. This is well below the size of the large consulting firms who employ somewhere between 50 and 200 consultants. The size of management consulting firms allows them to be characterized as small and medium enterprises (SMEs).

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Revenue distribution The inequality in the industry becomes clear when considering how revenue is distributed among firm size. As appendix E shows, firms with revenue of 51+ million Danish kr. made 76 % of the total revenue made in the industry in 2006. This means that despite the fact that the industry is characterized by a large amount of small players and only a few big, revenue is concentrated among the big players. 12 % of the industrys players make up for 76 % percent of the total industry revenue while 66 % of the players make up only 6 %.

Degree of competition and concentration The industry has a concentration ratio of approximately 880 HHI5 points (DMR industry analysis 2006/7, p. 18). This supports what was earlier stated about the industry. It is characterized by a large amount of firms on the one hand and a large amount of customers on the other hand. Competition is based on providing the best service, quality, and results to customers.

The consulting industry is a relatively knowledge and workforce intensive industry. It is characterized by a very low need to make investments, and thereby there are very low entry and exit barriers. So fare, there exist a number of different consulting and project management certificates but these are only used and accepted by consultants and customers to a very low degree. In general, the industry is not driven by authorizations, specific educations, or certificates.

This has a significant impact on the way that the individual consulting firm seeks to do business and define its strategy. That is, most consulting firms pursue a diversification strategy in order to clarify the difference between them and other firms. In addition, competition is to a great degree determined through the customer network that the individual consulting firm operates within. The name of the firm, its references, and the reputation of the individual consultant employed are important elements in the creation of a large and wide clientele. Once this is established the firm has a strong competitive position compared with other firms who do not have the same amount of clients. Thereby, experience,

5 HHI is the Herfindahl-Hirschman index, a commonly accepted measure of market concentration. It is

calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. The HHI takes into account the relative size and distribution of the firms in a market and approaches zero when a market consists of a large number of firms of relatively equal size. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases (Rickard, 2006). An industry where the HHI is between 1000 and 1800 are considered a moderately concentrated industry. An industry of 1000 points or less means that many small firms with a well-functioning competition characterize the industry.

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knowledge, and competence of the individual consultant become important parameters of competition.

The industry is clearly clustered around two areas in Denmark; Copenhagen and rhus. However, this does not seem to be a problem when addressing the question about customers choice of consultants. There is no connection between the geographic placement of consulting firms and their customers. Often, consulting firms serve customers on a countrywide basis and are not limited to doing business in their geographic region. However, clusters can have another significant impact on the industry. Namely, that of the creation of competence clusters.

Competition does not happen on a general industry level across strategic groups, but instead among those consulting firms who provide the same range of services. Therefore, even though competition is characterized as being very hard, it is normally only a few firms who do actually end up competing about a concrete project. This further emphasizes the arguments that competition in the industry is very much network and customer based. Most often, the large consulting firms service large firms and the other way around. Finally, the fact that the industry earns its living from knowledge and the people it is embedded within, as well as the fact that there is to some extent a high degree of competition clearly affects relations and cooperation across consulting firms. This practically does not take place.

2.2 Growth in the industry The Danish consulting industry has since 2004 experienced a significant growth progress. For many consulting firms a growth rate higher than 20 % has been quite usual. In 2006 the average growth was 22,5 % and in 2007 the industry expected a growth rate of 22,9 % (DMR industry analysis, p. 6). In 2006, the industry had revenue of 14.408 billion kr., which means that it equalled that of the Danish audit industry, and almost doubled that of the Danish law sector (Danish Statistics). Appendix F shows the development of the industrys revenue.

The same figure also shows an industry that is relative sensitive to fluctuation in the state of the market. That is, the activity will more or less follow that of the general

economy. When firms experience hard times, services provided by management consultants are usually among the first to be cut away. The management consulting industry is central in the change and development of private firms, as well as public institutions and organizations. The effect of a global market booming has been felt in all areas in consulting services, be it strategy and organization, management development, IT, HR or operations to name a few. A growth rate as high as the one experienced now has increased the industrys significance within the Danish economy. Appendix G shows the industrys share of the

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Danish GNP. If the expected growth in 2008 is achieved it will mean that the industrys exceeds 1 % of GNP.

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

Growth factors:

Reformations in the public sector: The restructuring of the public sector are expected to provide the consulting industry with a lot of work the next couple of years. Many firms specialize in this area and

some even build their entire consulting business around the public segment. In general, there seems to

be a greater accepts for public administrations to set aside money for consulting services.

Raised quality demands in the public and private sector: The public sector is under a still increasing

pressure to administrate the money of taxpayers in the best possible way. Therefore, many of those

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consulting services that were initially developed to the private sector have found its way into the public

sector. For example, an award for best consulting service was awarded to Valcon for implementing lean

principles in the administration of Copenhagen municipality. Private organizations also need to be

better functioning today in relation to offering a good, effective, and carrier advancing work place. Managing human resources will continue to be in focus, and the mean is better-managed and well-run

organizations. Consulting firms can play an important role in stimulating management and

organizational development.

Capacity problems in private companies: The general lack of labour in many private companies means that there is a greater need to coordinate and optimize production and business practices. This raises the

demand for consulting services in areas such as operations and IT. Often firms also accept that their

employees are tied up with work, and therefore hire consultants to be in charge of temporary projects. Strong international competition: Currently, with the high degree of global competition, Danish firms

need to be as effective and efficient as possible concerning product development, new market

penetrations, and internal business procedures in order to stay competitive.

The fast development of the information technology area: The fast developing IT support services that

take place in many business areas demand that firms stay up to date in this area and never relax. Therefore, the demand for IT systems such as ERP and CRM systems will still be high, especially the

implementation of these.

Growth barriers:

A general economic cool down: The ministry of finance expects growth in GNP to drop from 2,2 % in

2007 to 1,6 in 2008 (DMR industry analysis, p. 19). Significant decline in investments in the private sector: In 2006 the growth of investments was at a

staggering 15 %, but it is expected that there will be a significant decline in investments to a level of around 2 % in 2008 (DMR industry analysis, p. 19).

Lack of a qualified and educated work force: The consulting industry is experiencing a very difficult

time find enough qualified employees to keep up the current expansion and have to turn down orders and thereby money. The lack of qualified work is also seen in a demand of higher wages among

consultants and an increased use of headhunting.

Higher degree of competences in firms: Many private firms have during the period of high growth hired

academics who traditionally would not be employed in that sector. A good example is the engagement of a communication or HR employee which can take away some of the need of consulting services

because the competences are already within the company. In general, this development means that

many firms have in them the sufficient competences to do large analytic tasks, and the demand for consultants will move more in the direction of facilitating and implementation. In some service areas,

for example strategy, this can lead to a smaller demand or change in the service profile.

If you compare the Danish management consulting industry with its European counterparts, it is among the leading. With the second highest growth rate, only topped by Great Britain, and a GNP share that are higher than any European country it is safe to say that

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Denmark, also on an international level, is among the more well functioning industries in the European management consulting industry (DMR industry analysis, p. 21).

2.3 Challenges for the industry Based on the discussion about the structure of the industry and the growth factors and barriers that are present, it is possible to identify a number of challenges, which confronts the management consulting industry.

Supply side/Firm driven One major challenge, which almost all consulting firms seem to agree with, is the scarcity of qualified labour. Among DMR members, 37 % have experienced to turn down a project or job and thereby revenue due to lack of labour (DMR tendency analysis, p. 5). Consulting firms find that customers on the Danish market do not demand new graduates or junior consultants. Instead, the demand is on senior consultants, people with a broad experience but also detailed knowledge and often with no less than 3-5 years of experience as a consultant. These circumstances narrow down the recruitment basis on a market where the lack of labour is already high. In practice, this means that consulting firms experience a claim of higher wages and benefits among employees, less qualified applicants, a bigger flow of employees, and an increased use of headhunting. It is most likely that this lack of labour will hamper growth to such an extent that it is not possible to maintain current growth rates.

The high degree of busyness in the industry has of course played a significant role in making the industry as large and important as it currently is. However, this might have some future caveats. First, the strong demand for consulting services could mean a risk that new consulting firms with out the necessary professional skills and foundation for doing consulting work have been founded. The industry might have attracted an array of less qualified consulting firms and even some without any raison dtre at all because of the low degree of entry barriers. Combined with the fact that the industry is only controlled to a very small extent, this means that customers who do not have any great experience in buying and using consulting services might end up buying and implementing poor advice. Furthermore, already established consulting firms might be temped to hire employees who are not fully qualified which again affects the result. The individual well-qualified and skilled consulting firm must therefore continue to make visible its quality and professionalism either through certificates and/or branding. In addition, there is also a risk that the busyness can have a downside effect on the already well established and recognized consulting firms, namely, the possibility that

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some firms prioritize capacity and quantity in their projects more than quality. It is very important that consulting firms follow their projects all the way through, and not just deliver some report on the desk of the management at the firm they advise. Likewise, internal competence development and strategic planning run the risk of not getting enough attention as daily operation and customer projects are prioritized on a here-and-now basis.

In general, the above-discussed busyness and its effects might mean that several firms are in need of a bit of strategic soul-searching, and here a slow down in the growth might actually be an advantage. Those consulting firms who survive and prosper in the next couple of years will be those who have not fallen through when it comes to securing future ethics, quality, and professionalism. For an industry where ethics, quality, and professionalism is decisive in order to maintain customer respects and thereby to obtain growth this is a very significant challenge.

Demand side/Customer driven The industry is to a large extent buyer driven, and its direction is shaped of what customers demand. Often, diversification happens because a customer demands additional services outside the scope of the consulting firm. To maintain the customer relation, the consulting firm contracts external experts who have the specific

knowledge to do the job and eventually hire them into the firm. In the Danish management consulting industry the main part of services is in the area advising/consultancy. It constitutes 63 % of all consulting services. Outsourcing and development/implementing are only respectively 2 % and 6 %. Finally, other services such as recruitment, markets analysis and education make up 29 %. Appendix H shows the distribution of services. A further insight shows an interesting development of the services in the category advising/consulting. Appendix H also shows that the area organization and operations management has increased in revenue while strategy consulting has gone down almost 3 %. In general, this development indicates a movement from services of a more analytic character to services where implementation is also a part of the task, which customers

demand. Consulting firms can therefore no longer rely on general consultant services and standardized products. Instead, customers demand specific competences and results that can be seen on the bottom line. That is, projects and assignments are to a considerable degree characterized by process orientation as opposed task orientation. This means that consultants must act in completely different terms, which broaden the demand of skills present in the consulting firm. To much higher degree empathy, understanding of the customers situation and follow-up services are important elements of the competitiveness of consulting firms. Furthermore, customers have become very experienced in buying and using consultants.

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Management consultant services are generally considered expensive among customers. However, price is not decisive for how customers choose their consultants. Indeed, as appendix I shows price is only ranked on a 10th place over how customers prioritize when they choose a consultant. This indicates that firms believe that price and the increase in performance that a consultant will provide is in good accordance. This fits well with the fact that delivery of concrete value to the firm is ranked as the highest priority. For the consultant firm this means that customers demand high, visible, and sustainable results when it comes to delivering value to the customer. Ranked as the second most important factor, is existing relations with the customer. This backs up what was earlier stated about customer networks and competitiveness. Often consultants engage in a direct and intimate relationship with their consultants, and this demands a high degree of respect and trust from both sides. This means that there is a high degree of second time buying in the industry. Once a close and tight customer network has been created, it can become a stabile factor of future business and growth.

There is a tendency in the industry towards an imbalance between the size of the customer and the size of the consulting firm. Most often, large companies demand that the consulting firm can provide regarding resources, competences, and work force. Often small and medium consulting firms do not have the capacity to serve these large companies in addition to their regular clients. There seems to be consistency in that large companies hire large consulting firms.

This can have a less positive outcome in two ways. First, it means that small and medium consulting firms only to a certain extent get the experience and competences necessary from working with large clients. In line with the increased professionalism, this can mean that small and medium firms risk appearing less professional and suitable for serving large clients simply because they do not have the experience and know how. In the end, this might further consolidate the industry and sharpen the bias between small and large consulting firms. Second, if the argument is taken to its extreme, it means that the industry is split up into an A-team and a B-team. One the one side, the industry consists of consulting firms of an appropriate size who have the required skills, resources, competences and experience to provide valuable consulting services to the market, whereas, one the other side, there is also a large portion of small consulting firms who are in need of a quality and competence boost.

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2.4 The future Despite signs of an economic cool down most consulting firms, expect an increase in future demand. It continues to be the private sector, with manufacturing companies as the most dominating purchasers, who drives demand but the public sector is still important. Together these two groups account for over a fourth of the turnover in the industry (DMR tendency analysis, p. 2). However, it will become difficult to maintain the current growth rates because of two main reasons. First, because the Danish market to some extent has become saturated. The relationship between supplier and buyer seems to be at an appropriate level. The Danish market is relatively limited in size. That is, there is a limit to the size of firms operating in Denmark, both international and domestic. The fact, that the Danish market is relatively small compared for example to the American market, indicates that the size we see of the large consulting firms of around 250-300 employees is a maximum size, at least within the phase they are now. Currently it is difficult to obtain the volume and strength necessary to grow beyond that size. Therefore, the next big issue will be to figure out how Danish management consulting firms best can leverage their competences internationally. Second, because of the growth inhibiting factors discussed above, with the high lack of labour as the primary reason, growth will necessarily drop. The industry is relatively labour heavy and growth rates of 20 % will roughly mean that an intake of 20 % on the employee side is needed. The above discussion indicates that a consolidation process will take place in the Danish management consulting industry in the nearest future. It will be in part driven by a competence shortage caused by the lack of labour, and in part by that fact that firms seem to demand a deeper aspect of services from one consulting firm. Practices such as no cure - no pay and free pre-analyses that have not previously been utilized, might become parameters for competition in the future. Furthermore it means that those small and medium consulting firms who have only barely managed to survive the last couple of years will experience hard times because of a lower activity level, and it will not be as attractive as it have been to establish a new management consulting enterprise.

2.5 Summary of industry analysis The tension between size and success in the industry shows an industry where only a few firms manage to grow extremely fast, while the majority of firms seem to struggle in their pursuit of growth. Successful consulting firms are to a much greater degree able to leverage existing resources and capabilities towards customer contact and retention, internal development, and recruitment. All these elements play an important role in the growth of the

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firm as the development of the consulting firm very much happens trough learning-by-doing. This raises an important question for the remainder of this master thesis. What constitutes the primary growth factors and barriers across firm size? Thereby, the industry analysis indicates that there is some significant differences across size but does not allow for a deeper insight.

If existing consulting firms want to stay competitive and sustain their growth rates, satisfy customers and dodge a possible recession there are some areas, which demand attention on the individual firm level. There is a need to consider the strategic management of consulting firms in a new perspective. Focus on consulting capabilities alone must not put in the shade professional management and business. Innovation must be incorporated in a systematic manner in the firm in order to maintain competitiveness. Human resources should be considered as a core issue, concerning both recruitment and retention to secure that the best possible resources enter and stay in the firm. Finally, for the largest consulting firms, as the home market is consolidating there is a need for, and future growth possibilities in, establishing a global presence either through internationalization or alliances.

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Chapter 3

Theories of firm growth The literature offers several different theories for systemizing the analysis of firm growth. Looked upon in isolation these theories each uncover interesting ideas and phenomena, but in the end, findings are of a partial character. This is a logical consequence because of the choice of theoretical perspectives and the use of specific theoretical and explanatory models. However, this leaves a need for a more holistic understanding of the characteristics of high growth firms, as well as growth barriers in low growth firms. Therefore, there is a need to integrate theoretical perspectives in order to understand the full story of the theory of the growth of the firm. The purpose of this chapter is to review the growth literature with a focus

on the sources of growth and the limitations to growth. Hence, the first step is to investigate the concept of growth and the effects of growth in a dynamic perspective. Second, theoretical contributions to growth theory are assessed with regard to their explanatory value when considering external and internal growth factors and barriers. Third, SME theory is considered in an attempt to define growth even closer, as Danish management consulting firms belong to this segment. Finally, an integrated approach on how to evaluate growth factors and barriers and consequently, growth strategy, is developed which builds on the findings of the first three steps. This integrated approach will in turn shape the way in which the empirical work is done.

3.1 The concept of growth The point of departure of this theoretical framework is briefly to touch upon what growth is. Growth can be manifested in many different ways; selling more, hiring more people, expanding, broadening geographic scope, generating bigger profits, or increasing stock prices. No general guidelines or definitions seem to exist for high growth firms, and some researchers have even denied that it is possible to generalize about what growth is (Penrose, 1959). Growth may result in both quantitative results and qualitative results. Measurements such as; size, assets, net capital, revenue, or number of employees are strictly of a quantitative character, but may not capture all of the things there are at play in small firms. Qualitative measures such as value added, a sense of belonging, motivation, and attractiveness should not be left out. Owing to this, growth, in this master thesis, is considered in terms of a range of indicators and draws on contributions from several different theoretical fields. However, one condition that must hold is the fact that in order for a firm to experience growth it must have an advantage over its competitors. A competitive advantage leads to profits and the possibility

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of growth. Hereby, a certain degree of selection in the industry is assumed. Hence, it is not possible for a firm to grow if it does not excel in some areas of its business.

3.1.1 The tension between growth and size The law of proportionate growth (Gibrat, 1931) explains the skewed growth distribution that will take place over a period of years, and implies that some firms will grow faster than others will. More formalized, Gibrat hypothesized that over a given time period the percentage change in the size of an individual firm in an industry is independent of the firms initial size. There are several explanations to why there are such large variations in the growth rate of

individual firms within the same industry or strategic group. Evidence show that the most elementary fact about firm growth is that firms follows a random growth path (Geroski, 2000). Often, it is more or less isolated events or shocks, which mark the path to success, such as a unique innovation, and these, have a permanent effect on the size of the firm. Consequently, growth cannot be considered a process, which follows a predetermined law or trend. However, to consider growth as a pure game of random events and luck does not leave much motivation or influence for managers.

Traditional growth strategies involve economies of scale and scope and mergers and acquisitions. These strategies require a certain firm size in order to be effected, which, at least in the starting years of a consulting firm, will not be relevant. Therefore, the focus of firm growth is on the firms ability to develop the resources, which exist in the firm, and how these resources can support the firms ability to innovate, diversify, and be flexible in order to manage organizational change (Tecce et. Al. 1997). For small firms, this is in the hands of management, which has to be capable of exploiting current routines and exploring new opportunities as they occur. Adding this to the operational role that the manager of a small firm has, size becomes a factor, which can limit growth, as management is simply overburdened. If we develop the line of thought further to encompass the firms organizational capability, which rests on firm specific culture and behaviour, the link between management and its workforce becomes clear. It is necessary if a firm is to achieve growth to constantly enable and motivate its employees in an optimal way. When the effort of both management and employees are aligned, successful product innovation or process innovation will provide learning and foundation for further development and innovation and consequently growth. That is, success breeds success. On the other hand, for a small firm a product or process innovation, which fails, is closely connected with reduced growth, profit loss, and maybe even bankruptcy. Therefore, the uncertainty associated with starting a firm or a diversified activity within an already existing firm is affected by the cost of capital. For

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small firms, which are often person-owned or run as a partnership, there is a considerable amount of risk to be aware of and in effect they will pay a risk premium, for example a higher interest rate, in order of acquiring the necessary funds. Small firms will not have the sufficient cash flow to engage in large investments, which again provide a barrier to growth. Instead, they rely on opportunity driven growth and do many first-time projects, which they cannot repeat and leverage successfully to the future projects. Furthermore, these first-time projects strain the firms profitability and incur large costs as the firm is learning by doing. The attractive force of opportunity driven growth is obvious, as it allows the firm make some profit and engage in new businesses. The downside to this is that growth becomes random, less profitable, and driven by occurring opportunities, rather than a careful market analysis and a strategic response and positioning to those opportunities. The idea is that strategic growth will allow a firm to focus its image and position it as an expert in well-defined areas. Thereby, future business will be consistent with firm specific competences and resources and build credibility and expertise in strategic areas. The goal is to repeat and improve past successes and thereby increase efficiency and profit margins. The above discussion give rise to the idea that there is some kind of glass ceiling which small and medium firms have to burst through in order to achieve growth. This breakthrough is where opportunity driven growth is changed into strategic growth, and this raises the question of how firms achieve this, and especially, how small and medium sized firms manage it. The next logical step is therefore to consider the dynamics of growth.

3.1.2 The dynamics of growth Firms grow by passing through a discrete series of growth stages (Kazanjian, 1988). If the firm does not solve strategic and structural problems connected with the transition from one stage to the next, this will eventually prevent the firm from growing. Organizational growth

models have been developed by several authors, Greiner (1972), Kimberly and Miles (1980), Churchill and Lewis (1983), Scoot and Bruce (1987) among others. In general, these models are concentrated on the types of problems small and medium firms encounter. There is some predictability in organizational development that allows it to be divided into different stages. How many stages there are in a certain life cycle model stems from the type of research carried out (Yusuf, 1997), but most often we see four or five stage models. The contribution of these models is a framework for gaining insights into the options that firms face at a given time. A life cycle model will contribute to this master thesis with an opportunity to differentiate the growth factors and barriers that consulting firms experience across firm size and development.

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The choice of life cycle model falls on Greiners organizational life cycle (1972). On first hand, this might seem as an odd choice as the originating research is more than thirty years old and as it focuses on industrial firms. However, this framework has undergone a development of its own, and has been adapted to professional service firms and their distinct growth stages (Malernee and Greiner, 2005). The model is presented in appendix J. In this model, firms pass through situations of evolution and revolution. Growth stages correspond to a series of internal crises related to managerial and organizational issues of coordination and control. In each stage of its life cycle, an organization is dominated by a specific focus, exploring, focusing, diversifying and institutionalizing. Each stage is ended by a crisis that threatens organizational survival, and brings about a revolutionary change through which the firm passes to its next life cycle stage. In addition, each stage is dominated by a different strategic approach to the market and a specific set of managerial practices. These allow the firm to evolve through the stage, but this stage-specific strategy and practice are rendered useless in the next stage. Between each stage is the crisis, which predicts a revolutionary and necessary change for the firm in order to adapt to the market, future growth and survival. That is, in the resolution of one crisis are the seeds for the next crisis.

An important thing to keep in mind is that the organizational life cycle model is based on a study of American professional service firms. Hence, market conditions are very different from the Danish market. Other general critical issues of life cycle models are; they fail to capture the details, they assume continuity and they do not take into account external factors (OGorman, 2001).

3.1.3 The sustainability of growth Research has shown that industry factors may be less significant when explaining firm profitability and growth (OGorman, 2001). The choice of a high growth market does not condition growth for the individual firm, as the demand of a high growth industry creates pressure on resource constrained firms. In the end, this may result in a lack of internal development and organizational failure. Furthermore, when measuring the impact of industry factors over time, the explanatory significance of these seem to reduce significantly (Rumelt, 1991). In essence, the choice that an entrepreneur faces is whether to enter an industry or not, and not so much which industry to enter. Therefore, this choice is very much path dependent of the founder(s) and his experience. This path dependency puts limits on future strategic choices of the business and consequently its growth strategy. Superior competitive strategies are decisive for achieving growth relative to competition and a foundation for sustained growth. Five growth disciplines constitute the growth portfolios of companies that knew how

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to maintain steady double-digit growth in difficult times. These are base retention, market share gain, market positioning, related and unrelated diversification (Tracy, 2004). These superior competitive strategies must create and develop resources and capabilities that can be used to sustain the growth process within the firm. Because management hold different path dependent assumptions of how to conduct strategy, and because of causal ambiguity within the relationship between resources and success, some firms will continue to succeed while others fail.

Usually growth is an unquestioned positive and has become synonymous with bigness. Growth as an expansion or increase in magnitude is deeply entrenched in the way we think. Even though, increases in size, profitability and scope are often connected with growth, they are not what drive it. In the long run, expansion is not viable goal in itself. Because of organizational inertia, both structural and cultural, failure happens when market conditions shift. According to John Kay, a leading Oxford economist: It is rare for the market power and scale economies associated with market dominance not ultimately to fall victim to the hubris, the insulation from the market, and the sheer bureaucratic inefficiency that goes with such size, (Bryan and Kay, 1999, p.106). In relation, firms often find it difficult to sustain high and fast growth rates. Three important factors, which relate to issues already discussed in this chapter, can be the end of sustained growth if not managed properly (Tomasko, 2005). A fast growing firm, which expands in size, can create inhospitable surroundings. That is, a growing firm will become the objective of more competition from other large firms and customers might be reluctant to do business because of the sheer size. To sustain a high growth demands that the resource intake is equally high. At some point, the supply side will come under so much pressure that the only choice is to make do with low quality resources. Hence, resource constraints are another factor to consider. Furthermore, when firms grow they will experience organizational limits. Management, culture, and employees are lost in the pursuit of efficiency as complexity and hierarchy increase. These factors are very much at stake when one considers the Danish management consulting industry where large international competitors are present, labour is scarce, and competition is based on internal knowledge and customer relationships.

3.2 Theoretical contributions If you consider the vast amount of different investigations and theories of firm growth, it is possible to discover some main categories across economical and behavioural theories. Two different theoretical schools of thought exist, which both consider competitive advantages but vary when it comes to explaining how firms achieve growth and sustain it. They differ based

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on the view they adopt, that is how for example the firm, its environment, and its markets work. Roughly, it is possible to label them outside-in theories and inside-out theories (Alexander, 1992). Outside-in theories are concerned about firm growth as a consequence of external circumstances, primarily assessed in a product market perspective. This category of theories rests upon several main assumptions. First, the environment of the firm allows itself

to be easily and straightforwardly analyzed. Second, firms can easily adapt to its environment. Third, theories are externally oriented and operate within a static universe. On the other hand, inside-out theories see the firms environment as changeable and very difficult to analyze. There is a great focus upon the problems, which occur in firms because of friction. That is, firms are considered highly dependent of their firm history, resources, and existing routines. Growth is considered a consequence of circumstances and settings in the internal situation of the firm and factor markets. This group of theories is thereby internally oriented and contains in it a focus on organizational development. In appendix K, the most significant differences between the outside-in orientation and the inside-out orientation are outlined.

3.2.1 Inside-out perspective The inside-out perspective focuses on the presence of specific competences inside the firm. Firms are considered to be facing both implementation and friction problems and to be dependent of specific historic and resource conditions. Penrose (1959) opened up the black box of the firms internal processes and focused attention on the firm, not as a production function, but as a flesh and blood organization characterized by firm specific resources. It is based in developmental economic thought, and states that firm specific resources and competences are crucial for development and growth. This section therefore deals with theories, which explain the internal processes of the firm and how they relate to firm growth.

The theory of the growth of the firm Penroses (1959) idea of firm growth holds that it is led by an internal momentum generated by learning-by-doing. As managers increase their experience, administrative tasks require less attention and work, and they become routine. This means that excess managerial talent can be released and focused on exploring value-creating opportunities and training new managers. Thereby, a firm will grow in order to create value from unused resources, which in turn will create new resources. This is what Penrose calls economies of growth. This also means that growth in any period is limited by the amount of managerial attention. Hence, economies of growth which are imbedded in the growth process are the reason why firms grow. There are no advantage linked to size as such,

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and firm size is considered a consequence of growth. This contradicts with the neoclassical perspective, which is discussed later, because there is no optimal size. This is the main factor to why Penroses theory has, to some degree, been marginalized in economic discourse (Montgomery, 1994). For Danish consulting firms this dynamic perspective of firm growth seems strong because it focuses on the role of firms internally generated resources, which in the case of growth are much more elemental than economies of scale6.

However, her ideas of firms as idiosyncratic configurations of resources have been very influential in the strategic management literature. This is another key concept in the theory of the growth of the firm, and these resources act out a significant role in gaining a sustained competitive advantage if they can be characterized as rare, valuable, inimitable and non-substitutable (Dierickx and Cool, 1998).

Evolutionary approach The evolutionary approach sees the firm as a processor of

knowledge resources that provide the firm with the flexibility and speed necessary to respond successfully to changes in the external environment (Nelson and Winter, 1982). Routines and learning are central to the process of gaining new knowledge, and these capabilities must be coordinated and developed within the firm. This implies that firms are likely to grow idiosyncratically as they use and evolve their knowledge base. That is, capabilities are constantly being modified over time, which in turn means that each firms growth is likely to be path dependent. Hence, previous experience and the repertoire of routines constrain future direction, and opportunities for diversified growth must be complimentary to current activities in order to maintain complementarities and coherence. Furthermore, the central premise of the evolutionary approach (Nelson and Winter, 1982) states that competition shapes both market and organizational structures, and thereby forces those firms out whose organizational form does not create flexible capabilities to match the changing environment. In the consulting industry, we see many firms entering and leaving all the time, which might indicate that th