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Nils Laacks
The Role of Networks in the Internationalization of Management Consulting Firms: A
critical View on traditional Theory
ISBN: 978-3-8366-4096-1
Herstellung: Diplomica® Verlag GmbH, Hamburg, 2010
Zugl. Fachhochschule für Technik und Wirtschaft Berlin, Berlin, Deutschland,
Bachelorarbeit, 2007
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Outline of Contents
List of figures and tables
vii
Abbreviations
viii
1
Introduction
P. 4-5
2
Definitions
P. 5-6
2.1
Services... P. 6-8
2.2
Management Consulting... P. 8
2.3
Networks... P. 8-9
3
The Management Consulting Market
P. 9
3.1
Key Data... P. 10-12
3.2
Knowledge... P. 12-13
3.3
The Role of Trust and Reputation... P. 13-16
3.3.1 Institutional Problems... P. 16-17
3.3.2 Transactional Problems... P. 17
4
Internationalization Theories
P. 18
4.1
The Uppsala Model... P. 19-21
4.2
Transaction Cost Theory... P. 22-23
4.3
The Eclectic Paradigm ... P. 24-26
4.4
A Network Approach... P. 26-28
5
Internationalization of Management Consulting Firms
P. 28
5.1
Motives for Internationalization... P. 28
5.1.1 Proactive Reasons... P. 29
5.1.2 Reactive Reasons... P. 29-30
5.2
Different Forms of International Market Entry... P. 30
5.2.1 Exports... P. 30-31
5.2.2 Wholly-owned Subsidiary... ......... P. 32-33
5.2.3 Market Entry through Co-operations... P. 33-34
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6
Implications
P. 34-37
7
References
P. 38-45
- 3 -
Figures and tables
Figures
Figure 3.1
Global consulting market growth 1998-2005 (%/p.a.)
P. 11
Tables
Table 2.1
Typology of services
P. 7
Table 3.1
Five key areas for consulting services
P. 10
Abbreviations
BDU
Bundesverband Deutscher Unternehmensberater
(German Association of Management Consultancies)
FDI
Foreign Direct Investment
FEACO
European Federation of Management Consultancies Associations
(Fédération Européenne des Associations de Conseils en Organisation)
OLI
Ownership, Location and Internalization
SMEs
Small and Medium-sized Enterprises
- 4 -
1
Introduction
The French economist Jean Fourastié had already predicted the expansion of the service
sector in his early work in 1949. Accordingly, the economies of the developed countries
were prognosticated a division into the three major branches agriculture, manufacturing
and services with an increasing domination of the latter over time. In fact, the actual
growth of the tertiary sector even surpassed Fourastié's expectations. "Knowledge-
intensive business services constituted the fastest growing sector in Western economies
at the end of the twentieth century" (Lowendahl, 2000, p. 142). Within this group of
knowledge-intensive business services management consulting represents one of the
fastest growing business models.
Before the first economic slowdown in the consulting industry started in 2000, the
global market for advisory services had grown at rates between 10 and 15 percent. In
Europe, the turnover of the consulting sector rose about twenty-seven percent annually
during the second half of the nineties (Glückler, 2001, p.2). Growth today represents
one of the key success factors in the consulting business and firms have to reach certain
growth rates in order to stay competitive. There are mainly two different strategies for
enterprises to achieve the goal of prosperous growth. Firms can either follow the
strategy of diversification or internationalization (Glückler, 1999, p. 30).
An increasing number of consulting firms decides to expand business activities into
international markets in order to stay competitive and take advantage of new
possibilities associated with globalization. Empirical studies have shown that the
propensity of firms to internationalize not only accounts for large multinational
corporations but also for small and medium-sized firms (Glückler, 2004a, p. 3).
Therefore, scientists and economists have put attention to the internationalization efforts
of management consulting firms. Nevertheless, scientific literature about the
internationalization of these business models is still scarce. Most of the existing theories
are based on empirical findings that refer specifically to material goods and are thus
often criticized for not adequately reflecting the unique characteristics of services.
Numerous internationalization theories have been developed during the last forty years.
While common theories focus on aspects such as transaction costs or knowledge about a
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particular market, approaches that are more recent underline the central role of
relationships and international networks.
In my study, I will challenge systematically the traditional approaches of
internationalization and examine if a more complex view has to be favored. This relates
specifically to the role networks play these days in the internationalization process of
management consulting firms and the way this is being reflected in different theoretical
frameworks.
In the first part, I will give some general definitions of key terms that represent the basis
of my analysis. The following section cites some of the particularities of the industry as
evidence for the high environmental uncertainty on the management consulting market.
Subsequently, the main internationalization theories are introduced and critically
reviewed in reference to their transferability to the service sector and the respective
consideration of networks. Do the prevailing internationalization approaches still reflect
the altered conditions of today's economy, particularly those in the service sector?
Which theoretical framework does recognize the specific characteristics of management
consulting services in the most appropriate way?
Afterwards, different motives for the internationalization of management consulting
firms are reviewed before I will conclude the main part with different market entry
strategies. Finally, I will reiterate the main points and assess the implications for future
theory and research.
2
Definitions
As noted above, the research concerning management consulting is rather young. In
contrast to that, a great number of literal works has already been devoted to different
forms of networks and the service industry. Boyer (2002, p. 159) points out that services
have especially gained scientific interest in the last decades after Europe has basically
caught up with the U.S. in terms of a clear movement towards a service economy. The
vast majority of net jobs are already being created in the tertiary sector.
For all of these three terms there exist different interpretations and definitions. In the
case of management consulting, there is a generally accepted definition that will be
stated in the next passage. Services and networks, however, are subject to a huge
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amount of research and scientific studies and, therefore, various definitions exist. The
definitions given in this paper are pertinent to the specific context of the main topic.
2.1
Services
Service goods are difficult to define due to their heterogeneous character. The fact that
most products today often represent combinations of products and services further
complicates the issue (Svensson, 2000, p. 15; Lehmann, 2005, p. 5).
Lehmann (2005, p. 4) points out that there are nonetheless certain characteristics that
constitute services. Accordingly, one of the characteristic traits of services lies in their
intangibility. Consequently, services cannot be touched, transported or stored. The
creation is directly linked to their consumption and they are tailor-made for the
customers.
Services can be divided in commercial services such as business and financial services
and non-commercial services such as infrastructure support services or health services
and education (Strandskov and Pedersen, 2002, p. 2). A further differentiation has been
made into low contact services such as online banking and high contact services such as
management consulting services. In reference to internationalization efforts the latter
"differ considerably from low contact services in terms of such aspects like local
presence in the foreign market, customization, cultural sensitivity etc" (Strandskov and
Pedersen, 2002, p. 2).
Barth et al. (2000, p.11) have classified service goods according to their results of
empirical research into four categories based on the service's contact intensity and
variety. In the course of the researcher's cluster analysis, these two factors turned out to
be the most effective distinctive features and led to the typology of services shown in
Table 2.1.
- 7 -
Table 2.1: Typology of services
Source: Following Barth et al. (2000, p. 11)
Mass services such as call centers are characterized by high contact intensity with
customers and low variety of this service. In most cases, they are highly standardized
and, thus, customers have little influence on the actual configuration of the service
(Barth et al., 2000, p. 9). Effective strategies for this type of service are a high
customer-orientation and the striving to build strong brands (Fähnrich, 2006, p. 19).
The term "service factory" describes services like online banking that have the common
feature of low contact intensity and low variety. These forms of services are therefore
ideally suited for standardization (Barth et al., 2000, p. 9). Suitable strategies include
automatization and economies of scale (Fähnrich, 2006, p. 19).
The third box of the quadrant contains the so-called service shop. Examples for services
in this category are insurances and IT outsourcing. These kinds of services are
distinguished by low contact intensity and high variety. Fähnrich (2006, p. 19) suggests
among other possible strategies the production of complex service models.
- 8 -
In the last field of the matrix, knowledge-intensive professional services can be found as
the most complex form of services. This cluster includes management consulting
services, investment banks and advertising agencies. They require high contact intensity
and occur in numerous variations (Barth et al., 2000, p. 10). Customer and knowledge
management in this case represent appropriate strategies (Fähnrich, 2006, p. 19).
2.2
Management Consulting
A widely used definition of management consulting originates from Milan Kubr's guide
to the profession (Kubr, 1996, p. 8):
"Management consulting is an independent professional advisory service assisting
managers and organizations in achieving organizational purposes and objectives by
solving management and business problems, identifying and seizing new opportunities,
enhancing learning and implementing changes".
The definition reflects the large scale of tasks that a consultant has to perform. Starting
with the analysis of economic problems and the search for the best solution, a consultant
in many cases also accompanies the implementation of the developed solution.
Based on the already mentioned categorization of services, management consulting
represents a commercial and high contact service that can be identified in many
varieties.
2.3
Networks
Alexander Gerybadze's (1995) definition of a strategic network is used here because I
want to purposely avoid following one of the common definitions in received literature
that only concentrate on social networks. Gerybadze defines strategic networks in an
economic context as a sort of "organization of complex projects" in which the
participating actors have to meet certain demands (Gerybadze, 1995, p. 140). They have
to "pursue a rather long-term perspective, need to rely on goal congruence and must be
willing to agree on relatively unstructured tasks in a rather flexible way". Furthermore
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they have to cope with often "loosely specified contracts and trust relationships must
prevent that one agent mis-uses loosely specified contracts and tasks in his favor"
(Gerybadze, 1995, p. 140).
The definition is particularly suitable for management consulting because the business
is mostly dominated by project work and, as will be shown in my paper, requires a great
deal of the features mentioned above.
Podolny and Page (1998, p. 59) "define a network form of organization as any
collection of actors that pursue repeated, enduring exchange relations with one another
and, at the same time lack a legitimate organizational authority to arbitrate and resolve
disputes that may arise during the exchange. This definition of a network form of
organization includes a wide array of joint ventures, strategic alliances, business groups,
franchises, research consortia, relational contracts, and outsourcing agreements".
Sydow and Winkler (2005, p.335) in this context point out that it is only appropriate to
talk about service networks if the production of services represents the centre of efforts
within the network
3
The Management Consulting Market
Profound technological, economic and sociological changes in the late 19
th
century
paved the way for the management consulting industry. In the United States and the
United Kingdom, big companies were established and with publications from Frederick
W. Taylor and other economists, the methods of working were increasingly being
analyzed. The fact that working methods and conditions were subject of scientific
interest soon led to the emergence of consulting firms (Bäcklund, 2003, p. 3). Arthur D.
Little founded the first consulting firm in 1886. With more firms making use of these
services further companies such as E. Booz (1914) and J. O. McKinsey (1926) followed
(Mohe and Höner, 2006, p. 7).
After a veritable market for management consulting had been developed in the U.S. in
the 1930s, the big American consultancies expanded their services in Europe in the
1960s and, by doing this, have given impetus to the development of today's strong
European consulting market.
- 10 -
3.1
Key Data
The American market for management consulting still represents the most important
market with the highest turnover. The European market, though, is catching up and
reached a combined turnover of 61.6 billion Euro in 2005. Germany and Great Britain
as the largest European markets accounted for 19.7 percent and 18 percent of total sales
(FEACO, 2006).
According to the European Federation of Management Consultancies Associations
FEACO (Fédération Européenne des Associations de Conseils en Organisation),
management consulting firms can offer their services in the five areas illustrated in
Table 3.1.
Table 3.1: Five key areas for consulting services
Source: Agnes (2006, p. 4) following FEACO (2006)
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- , 2007, The Role of Networks in the Internationalization of Management Consulting Firms: A critical View on traditional Theory, Hamburg, Bedey Media GmbH, https://www.diplom.de/document/227515
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