Market potential of the Czech Republic for IT Consulting firms - Focus SAP Implementations

Table of contents

List of Figures

List of Tables

List of Abbreviations

1 Introduction
1.1 Goals and limitations
1.2 Organisation and contents

2 Strategic management & professional service firms
2.1 Definitions
2.1.1 Basics of strategic management
2.1.2 Professional service firms
2.2 Strategic management – past and present
2.2.1 Corporate planning
2.2.2 Competitive advantage – key determinant of success
2.3 Resource-based management
2.4 Positioning strategies

3 International expansion
3.1 Motives to expand abroad
3.1.1 External and internal influences
3.1.2 Market and financial imperfections
3.2 Analysis of potential markets
3.2.1 International market screening
3.2.2 Assessment of a single country’s potential

4 Macro-level analysis of the Czech Republic
4.1 Transformation process
4.1.1 Liberalisation
4.1.2 Macroeconomic development
4.1.3 Structural and institutional reforms
4.2 Political and regulatory environment
4.2.1 Outline of political development
4.2.2 Regulations and incentives for foreign investors
4.3 Cultural characteristics
4.4 Foreign Direct Investment

5 Analysis of the Czech IT market
5.1 Five forces framework
5.2 Potential of IT market – proxy variables
5.2.1 E-business
5.3 SAP Implementations
5.3.1 SAP CR s.r.o.
5.3.2 Customers
5.3.3 Competitors
5.3.3.1 Intensity of competition
5.3.3.2 Success factors
5.3.4 Evaluation of the market potential - market nicher strategy

6 Conclusion

Bibliography

Attachment 1: Investment decisions

Attachment 2: Czech Republic in figures

Attachment 3: SAP Partners in CZ

Attachment 4: SAP Customers in CZ

Attachment 5: Letter of inquiry

Attachment 6: Questionnaire SAP partners

Attachment 7: Questionnaire SAP customers

Attachment 8: Market characteristics

Attachment 9: Success factors

List of Figures

Figure 1-1 Structure of the thesis

Figure 2-1 Illustration of interdependence between strategy and environment

Figure 2-2 Common elements of successful strategies

Figure 2-3 Positioning of consulting companies

Figure 3-1 Screening potential markets for investments

Figure 3-2 Link between the analysis of macro- and micro-environment

Figure 4-1 Comparison of GDP growth in CZ and BRD during 1990 – 1998

Figure 4-2 Comparison of Foreign Direct Investment in % of GDP in Different Regions

Figure 4-3 Assessment of country risk and average growth rates in CEE

Figure 4-4 Countries of origin of major investors in CZ during 1990 – 1998

Figure 5-1 Model of five competitive forces

Figure 5-2 Market share of SAP CR s.r.o. in 1998

Figure 5-3 SAP customers in CZ during 1994 – 1998

Figure 5-4 Factors influencing customers’ choice of SAP R/3

Figure 6-1 Map of the Czech Republic

Figure 6-2 Foreign investment matrix

Figure 6-3 Composition of GDP in CZ in 1998

Figure 6-4 Comparison of GDP development in CZ and BRD during 1995 – 1998

Figure 6-5 Unemployment rates in CZ and BRD during 1995 – 1998

Figure 6-6 Comparison of inflation rates in CZ and BRD during 1995 – 1998

Figure 6-7 Development of FDI in CZ compared to GDP during 1995 – 1998

Figure 6-8 Composition of Foreign Direct Investment during 1990 – 1998

Figure 6-9 Development of the exchange rate CZK/DEM during 1996 – 2000

List of Tables

Table 2-1 Famous definitions of strategy

Table 4-1 Starting points for reforms in 1990 in CSFR, H, PL

Table 5-1 Development of position of SAP in CZ during 1996 – 1998

Table 5-2 Segmentation of the Czech market on the basis of industries

Table 5-3 Represented industries in market research

Table 5-4 Market segmentation on the basis of turnover

Table 5-5 International presence of existing competitors

Table 5-6 Key success factors of IT consulting company

Table 6-1 Development of macroeconomic indicators in CZ during 1995 – 1998

Table 6-2 Characteristics of SAP Partners

Table 6-3 Characteristics of SAP customers

Table 6-4 Factors influencing the customers’ choice of SAP R/3

Table 6-5 Success factors – view SAP Partners

Table 6-6 Success factors – view SAP customers

List of Abbreviations

illustration not visible in this excerpt

1 Introduction

Increasing competition, concentration and globalisation in consulting are strongly motivating firms to search intensively for new market opportunities and not adopt a mere strategy of following clients abroad. This search is however only one factor of success, which the consulting guru Roland Berger stresses. Other factors relevant to this thesis include: strong differentiation from competitors (e.g. market - nicher strategies), image development, leadership in creative and innovative solutions and successful recruiting.^[1]

Having said this it must be clear that with the fall of the Berlin Wall and the opening of the Eastern block new opportunities have arisen not only for manufacturers but also for service providing companies. One has to realise that it meant access to in total 26 new potential markets with over 400 million people and a combined GDP of around USD 1,000 billion.^[2]

The CEE region was very attractive in the 1990’s, when many global companies established themselves on the markets, most likely following their clients. Further, a very important reason to expand into the region could have been in many cases that it was an easier or more profitable option than home-market penetration. Also, the companies must have had a kind of competitive advantage in terms of know-how and experience over the firms already serving the market and the competition was right after the opening probably not so intense.

Later came a phase of sobering when it was recognised that changes will not take place from one day to the next and that these countries will be facing serious and unprecedented problems for a while. Nevertheless, success of many consulting firms in the regions shows that the markets still have something to offer and it is necessary to realise that the political and economic changes in CEE were and still are a strong incentive for many firms to reconsider their strategies for the European market.

Czech Republic being one of the most developed transition economies, a member of CEFTA and right in the middle of the CEE region, can be either regarded as a representative country of the region or can be looked upon as a gate to other Central and Eastern European countries.

1.1 Goals and limitations

The determination to expand abroad especially in the form of foreign direct investment involves very important and complex decisions that have to be based on a detailed analysis and understanding of opportunities as well as threats. The main goal of this thesis is to provide a framework for this decision making in the context of the formulation of long-term competitive strategy.

The thesis is divided into two main parts. The first, theoretical one, should outline the approaches to strategic management in consulting companies with special focus on international expansion. It attempts to provide sound background to strategic management in order to answer the following: Which principles can be used to manage a consulting company successfully? How should FDI decisions be involved in the strategic management?

Furthermore, a broader theoretical framework for analysing market opportunities will be introduced, which can be applied to any other market a company might decide to enter. An answer to the following question should be found in the text: What analytical proceedings should be carried out before final decision to invest in a country is made?

The second, analytical part, will be based largely on the tools described in the first part. The goal is to provide detailed description of the business environment in the Czech Republic in order to give a qualified answer to the following question: Is Czech Republic a strategic opportunity for an IT consulting firm?

It has been realised by many firms that the CEE market might have an attractive potential and therefore should be paid at least a minimal attention. Nevertheless, I do not want to overestimate its importance and on the following pages I will try to make a critical assessment whether the Czech Republic should be regarded as a potential opportunity or not.

Last but not least, the provided theoretical frameworks and analysis of the Czech IT market can be regarded either as a form of present or future knowledge (i.e. something a company should have in order to sustain or develop its present market position).

Short explanations to the limitations set. In this thesis I will not attempt to develop any empirical models, my main interest will lie in model-building at a verbal or a conceptual level, that an IT consulting company may use to analyse the opportunities of international expansion.

In the theoretical part only an overview of reasons to expand abroad is given and not a detailed analysis is carried out. The same applies to techniques for international market screening.

In the analytical part I will follow a very narrowed concept of country screening – an analysis of the market potential of a single country. In this focus I will be putting myself at a risk of two common errors. First, in my analysis I will not study in details other countries, which could have better potential. Second, I will spend time on analysing the market potential of the Czech Republic and come the conclusion of rather poor prospects for an entry. Nevertheless, even negative conclusions will prevent an IT consulting company to make losses because of investments into the Czech Republic.

For the reason of limited time I will not carry out a thorough comparative analysis of market opportunities in Central and Eastern Europe. For illustration I will refer in the macro-level analysis of the Czech Republic to the development of Hungary and Poland, which can be seen as the biggest rivals for foreign investors.

There is also limitation to the persuasive power of the data gained from market research. Proceedings will be explained in the next chapter, here is focus on the explanation of limited meaningfulness of results. Due to rather hesitant behaviour of respondents I have chosen to concentrate on the development of trust to all SAP Partners (was possible as there are only 36 of them in total) and only to half of customers. My aim was to receive back as many questionnaires as possible from these two groups. Despite my hard work the success was around 30%, to be more specific 33% in case of SAP Partners, 36% in case of customers (here however has to be taken into consideration that not all customers were contacted). These factors can to some extent cause misleading interpretation of the reality. Despite my attempts to make objective conclusions, there is a possibility that some experts in IT consulting in the Czech Republic would disagree.

1.2 Organisation and contents

This thesis is divided into 5 chapters. The first chapter introduces the topic, sets the objectives and limitations. Last chapter summarises findings of the analytical part, i.e. whether or not the Czech Republic can be regarded by an IT consulting as a strategic opportunity for an investment. Second and third chapter provide theoretical background to the analysis carried out in fourth and fifth chapter. Following paragraph summarises individual chapters in more details.

The second chapter focuses on strategic management in professional service firms. Basic concepts of strategic management and professional service firms are defined and reasons for underestimation of strategy in consulting firms and dangers involved are summarised. Further, the development of theoretical frameworks in strategic management is outlined, especially in respect to the possible use of different approaches in consulting companies. Finally, emphasis is put on the description of resource-based management, including the important role consulting company’s leaders play, classification of customers’ requirements and designing positioning strategies.

Third chapter summarises motives a company may have to expand abroad and how it should analyse the market potential before final decision to invest in a foreign country is made.

Fourth chapter concentrates on the analysis of the macro-environment of the Czech Republic. Having mentioned that changes in CEE were unprecedented, it follows that Western managers are sometimes not aware of specific characteristics of the business environment. For this reason a lot of attention has been devoted to a detailed analysis. A company must in my point of view understand profoundly the macro- as well as the micro-environment if it decides to invest into this country. The chapter is divided into five subchapters, the first focuses on the description of transformation including an outline of macroeconomic development, second on the political and regulatory environment, third on the cultural characteristics. The fifth subchapter compares the attractiveness of the Czech Republic for FDI with other CEE countries and provides an overview of the development of FDI inflow and summarises current problems.

Finally, fifth chapter analyses thoroughly the Czech IT market. At first I have attempted to assess the market potential on the basis of proxy variables, including the market potential for e-business activities. As second step the market of SAP implementations is studied in details. The analysis is based on a slightly modified theoretical framework of five competitive forces (M. Porter) and to large extent on the results gained from own market research. As the market research is of crucial importance to the results presented in this thesis, in the following paragraph the proceedings will be described.

The market research was carried out during 1.10.1999 – 31.1.2000. Included were all SAP Partners in the Czech Republic and simple random sampling of present SAP customers. I have regarded from the very beginning traditional techniques of sending out questionnaires inefficient as I have expected little response. The method was actually tested on couple of customers and my expectations proved right.

Most consulting firms and some customers were thus called and asked for co-operation. I have proposed to all respondents to send them my questionnaire via e-mail, consulting firms all agreed, some customers required a printed version to be posted to them. This fact in my point of view possibly indicates more flexible and modern organisation of consulting firms.

After the phone conversion, letter of inquiry, questionnaire and short structure of my final thesis were sent out, structure was included to provide more details and gain trust (please see Attachment 5, 6, 7 for letter of inquiry and questionnaires).

Naturally, consulting companies showed more interest in co-operation, one motivation factor could be interest in the results of my research, another opener and friendlier company’s culture. Having contacted all SAP Partners in few cases reminded them of their promise, I have received 12 questionnaires back, which means the success of my proceeding was 33%.

As for the customers, 70 have been contacted at random out of the total of 140 customers and 25 filled in questionnaires have been received. The success was therefore 36%, the persuasive power of the results is however only 18%. It was often rather difficult to reach the right person. I have always attempted to address the Chief Information Officer, in many cases two to three persons were involved, before it was agreed who is competent to fill in my questionnaire. Many of the customers involved in the market research showed interest in the results of my work and will receive a complete elaboration in Czech language.

Structure of final thesis

illustration not visible in this excerpt

Figure 1 - 1 Structure of the thesis

2 Strategic management & professional service firms

The goal of this section is to explain why is strategic management important even for a small consulting company and which theoretical concepts are applicable to manage successfully. The first two chapters will provide the necessary background to strategic management and professional service firms, including definitions of terms used in strategic management and basic characteristics of professional service firms.

2.1 Definitions

The first question I would like to answer is following: What is the main task of strategic management? Strategic management designs a pattern of actions that has to be followed in every major function and department – purchasing, production, finance, marketing, human resources, R&D and others.^[3] Nevertheless, this definition would be misunderstood if one would under strategic management understand only formulation of a strategy, another two aspects include setting performance targets for the firm and finally appraising the performance. In the following chapter I will give an overview of terms related to strategic management.

2.1.1 Basics of strategic management

Strategy is not a detailed plan or programme of instructions, it is a unifying theme that gives direction and coherence to the actions and decisions of an individual^[4] or organisation. Though its primary purpose is to guide management decisions toward superior performance through establishing competitive advantage (for definition of competitive strategy see paragraph below), strategy also acts as a vehicle for communication and co-ordination within the firm.

Finally, strategy functions as a link between the firm and its business environment.^[5] A company’s actual strategy is usually partly planned and partly reactive to changing circumstances. In this thesis I will focus primarily on strategy as forming a link between the firm and its external environment. Figure bellow illustrates the interdependence between strategy and the business environment.

illustration not visible in this excerpt

Figure 2 - 1 Illustration of interdependence between strategy and environment

The interdependent parts of the figure above include a company, its business environment, strategy which is governing the interplay between the two, objectives strategy is aimed at, and the other side of the coin, performance actually achieved by successful strategy implementation. In order to be able focus more specifically on the part of strategic management concerned with international expansion, a difference between corporate and business strategy has to be emphasised.

Corporate strategy defines the scope of the firm in terms of the industries and markets in which it competes. Corporate strategy decisions include investment in diversification, vertical integration, acquisitions and new ventures, the allocation of resources between the different businesses of the firm etc.^[6]

Business strategy is concerned with how the firm competes within a particular industry or market, i.e. how the firm should establish a competitive advantage over its rivals.^[7]

Competitive advantage is anything that favourably distinguishes a firm or its products from those of its competitors in the eyes of its customers or end-users.^[8] Another common definition is that it is the ability of the firm to outperform rivals on the primary performance goal – the profitability.^[9]

Additionally, institutional strategy refers to how a company defines and shapes its basic character and vision, i.e. what builds a sense of purpose among employees and creates commitment to the goals and mission of the enterprise.^[10]

It is often assumed that strategic management is only a task for large companies, which are not able to co-ordinate their actions effectively without a common goal setting. The opposite is true. In chapters 2.3 and 2.4 I will focus on the need of concise strategy in consulting companies, where a lot of emphasis is put on flexible organisation and adaptive decision making.

The table below illustrates the complex definitions of strategy, a careful reader already recognises the different focus individual authors have in strategic management, I will explain the development of strategic thinking in Chapter 2.2.

Strategic decisions are primarily concerned with external rather than internal problems of the firm and specifically with the selection of the product-mix that the firm will produce and the markets to which it will sell.

Ansoff, I.: Corporate Strategy, 1965

A strategy is the pattern or plan that integrates an organisation’s major goals, policies and action sequences into cohesive whole. A well-formulated strategy helps marshal and allocate an organisation’s resources into a unique and viable posture based upon its relative internal competencies and shortcomings, anticipated changes in the environment, and contingent moves by intelligent opponents.

Quinn, J.B.: Strategies for Change, 1980

Table 2 - 1 Famous definitions of strategy

There are two main aspects to the business strategy, which are interrelated in real life but separable for the purpose of strategy analysis: formulation and implementation.

Strategy formulation is the entire direction-setting including the conceptualising an organisation’s mission, setting performance objectives, and crafting a strategy.^[11]

Strategy implementation involves full range of managerial activities associated with putting the chosen strategy into place, supervising its pursuit, and achieving the targeted results.^[12]

In this thesis I will not focus on either of the two aspects in details, my goal is only to explain the concepts and emphasise the importance of clear strategy formulation in consulting companies.

The implementation of a strategy will be left out completely, although I do realise that implementation is of crucial importance for the success of a strategy.

Formulation of a strategy

There are three basics steps that lead to successful strategy formulation. First of all, the goals stated for a company or an individual have to be simple, consistent and also long-term. Secondly, strategists formulating a strategy have to understand profoundly the competitive environment. Having set clear goals for the company is not sufficient for success if not linked and continuously adapted to the environmental changes. Third requirement emphasises the necessity of effective exploitation of internal strengths while protecting areas of weaknesses, i.e. an objective appraisal of resources.

illustration not visible in this excerpt

Figure 2 - 2 Common elements of successful strategies^[13]

I will concentrate entirely on the first two prerequisites of successful strategy formulation. Setting simple consistent and long-term objectives especially with regard to international expansion and gaining profound understanding of competitive environment, i.e. the Czech IT market. The main goal is to provide a framework for decision making concerned with internationalisation, i.e. analysis of potential market opportunities and not a theoretical concept for successful strategy formulation and implementation.

In the next chapter I will narrow the range of companies that strategic management will be applied to in this thesis, i.e. define what a professional service firm is, so I can concentrate in the next chapter on one type of these firms – the consulting firm. Further, the reasons for underestimation of the strategic management in consulting companies will be summarised. This chapter will conclude the definitions of concepts on which chapters 2.2, 2.3 and 2.4 will be based.

2.1.2 Professional service firms

There is an increasing trend to outsourcing of business services. This trend is rooted in several factors. Firstly, many firms put a lot of emphasis on flexible organisation and “lean production”, which is also closely related to the extreme requirements of cost-efficiency. Secondly, the increasing level of specialisation and expertise required in a large number of areas does not even allow the companies to utilise all the expertise in-house. They therefore engage professional service firms to solve their individual problems.

A professional service has the following characteristics:

- is highly knowledge intensive, delivered by people with higher education, and frequently closely linked to specific knowledge
- involves a high degree of customisation
- involves a high degree of discretionary effort and personal judgement by the experts delivering the service
- requires substantial interaction with the client representatives involved
- is delivered within the constraints of professional norms of conduct, including setting client needs higher than profits and respecting the limits of professional expertise^[14]

In order to make the definition of services and professional service firms complete, I will list five key general features that distinguish the service these firms deliver from a product. First of all, the service is intangible, is produced and consumed simultaneously, there is no possibility to store the service and finally very often there are low entry barriers into the service sector, especially in the form of low initial investment need.^[15] This rather advantageous factor is however very likely to cause high degree of competition.

Professional service firms include: law-firms, auditors, management consultants, architects, information technology consultants and others. In this thesis, the focus will be entirely on the last group mentioned.

It was and still is very common for professional service firms to neglect strategic management and the growth is typically driven by effort, competence and personal relationships of individuals and their ability to convince clients of their problem solving capabilities.^[16] The reasons for underestimation of strategic management will be summarised in the following paragraph.

Firstly, one of the key determinants of success of consulting companies is high flexibility, innovation and responsiveness to clients needs. Some practitioners fear that strategic management would cause bureaucratic and routine procedures, formal and rigid structures. Consequently the company would not be able to respond flexibly to changing client needs.

Second reason for the lack of focus on strategic issues is the limited time of senior consultants allocated to managerial tasks. The company’s success is very often dependent in its early stage of development to a large extent on the senior management. On their individual skills of problem solving as well as maintaining and acquiring new clients’ relationships.

Finally, external factor, namely the competitive situation, has allowed the consulting firms to de-emphasise issues of efficiency and effectiveness as they are often presented in proactive strategic management. The emphasis on the uniqueness of each problem and solution has made comparison of services and firms extremely difficult. The pricing is usually a matter of negotiation and consulting firms have been in the past able to avoid price competition in the free market.^[17]

In order to understand the complexity of strategic management, I will in the next chapter summarise the trends in development and connect the different approaches to strategic management in consulting firms.

2.2 Strategic management – past and present

The following two chapters should answer two questions: how did strategic management develop and what were the most important contributions of different approaches? Which of these theoretical frameworks can be used in practice to manage a consulting firm?

2.2.1 Corporate planning

Strategic management occurred for the first time under the term strategic or corporate planning in 1950s and 1960s as a result of increasing need of managers to co-ordinate decisions and maintain control in growing enterprises. The main leaders of this approach, Ken Andrews and Igor Ansoff, proclaimed the idea that strategy requires the achievement of fit between the external situation (opportunities and threats) and internal capability (strengths and weaknesses).^[18]

The diffusion of strategic planning was also closely related to the trend of diversification as large corporations came to view their management skills unbounded by industry divisions. Corporate planning became at this stage focused on the management of growth through diversification and as a result portfolio planning matrices spread widely. Furthermore, strategic planning became part of enthusiasm for scientific techniques for decision making so concepts such as: cost-benefit analysis, linear programming, and econometric forecasting etc. developed.

The different portfolio planning methods with emphasis on market shares and market growth are however according to experts (especially management consultants using these theories to advice their clients) not easily applicable to consulting firms. Consultants are used to changing in size and competitor ranking with every large project added or completed. As a consequence, neither the market, the market growth, nor the market share can be measured in the same way as in traditional product markets.^[19] For these reasons I will therefore not get into detailed descriptions of individual models.

2.2.2 Competitive advantage – key determinant of success

Later on in late 1970s and 1980s situation changed dramatically, as managers became aware that they have to abandon their strategic plans in favour of more flexible approaches and focus less on planning for diversification and more on achieving competitiveness. This transition from corporate planning to strategic management was associated with increasing focus on competition as the central characteristic of the business environment and competitive advantage as the primary goal of strategy.^[20]

The contributions of this wave do not lie in the development of new conceptual models (they have built to a large extent on traditional theories and models) but in carefully structuring the kinds of formal analyses that should be undertaken to develop a successful strategy.

One very important outcome of this approach is the conclusion that many strategies fit certain generic classifications and are not being created individually but selected from a limited set of options based on detailed analysis of the firm and its environment.^[21] I will shortly describe in the following paragraph the most commonly used analytical frameworks developed by Michael Porter, who is recognised as the leader of this approach to strategic management.

The first analytical tool, the framework of five forces is used to analyse the industry structure and competition. This theory will be used as theoretical base for micro-level analysis of the Czech IT market, I will therefore not get into detailed description at this stage.

Secondly, the concept of generic strategies is used to distinguish the core business of a company. Porter believes that firms cope with the five competitive forces within their industry in adopting one of three potentially successful generic strategies to outperform other firms in the industry: cost leadership, differentiation and focus.^[22] The objective of cost leadership is to achieve an overall cost leadership in an industry (e.g. for an IT consulting firm it would mean offering services at the lowest possible prices to all scope of customers regardless of size and industry).

The differentiation strategy means that the company pursuing this goal has to create something that is perceived industry-wide as unique (for a consulting firm it could mean achieving a high reputation for its services). The final generic group is focusing on a particular industry segment or a geographic market. The entire strategy is built around serving a particular target very well and rests on the premise that the firms is thus able to serve its narrow strategic target more effectively and efficiently than competitors who are competing more broadly.^[23]

The generic strategy emphasising focus seems in my point of view the most suitable one for a rather small consulting company. Furthermore, it has to be also taken into account, that according to Porter the worst strategic situation occurs if a firm is not able to follow and dedicate its resources to any of the above mentioned generic approaches as the company is not likely to gain a competitive advantage over its competitors.

Thirdly, the concept of “generic industry environment” is based on the presumption that industry environments differ strongly in their fundamental strategic implications along three key dimensions: industry concentration, state of industry maturity and exposure to international competition.^[24] Porter describes five generic environments: fragmented, emerging, mature, declining and global.

Fragmented are industries where the level of industry concentration is low, i.e. no firm has a significant market share and can strongly influence the industry outcome.^[25] This is in my point of view type of industry structure possibly applicable to the market of IT consulting. Emerging industries are newly formed or re-formed industries, which have been created by technological innovations, emergence of new consumer needs and others. An essential characteristics of this industry structure is that rules of behaviour within the industry are absent and there is high degree of uncertainty in technological and strategic positioning as well as in the expectations of customers’ behaviour.^[26] This type of industry structure could have prevailed on the Czech IT market directly after the opening of the country, by now the market should have reached average standards.

Last type of industry structure, which could possibly apply to the analysed market is a global industry. A global industry is one in which the strategic positions of competitors in major geographic or national markets are fundamentally affected by their overall global positions. Global industries require a firm to compete on a world-wide, co-ordinated basis or face strategic disadvantages.^[27] I will attempt to analyse whether the market of IT consulting in the Czech Republic can be described as global market or whether local and small firms without a global position are also accepted.

Finally, the last two types of generic industry environments do not correspond to the likely industry structure of the Czech IT market: mature industry can be described by modest growth, declining even experiences an absolute decline in sales over a longer period of time. Although the Czech market may not be growing fast it is in my point of view not result of the industry maturity, rather it is due to temporary economic situation.

The last famous framework to be described is the concept of value-added chain. It is based on decomposition of firms’ activities to primary and support activities in order to be able to apply strategy analyses of various kinds. According to some experts this framework is difficult if not impossible to adapt to a firm where no linear production process with input, transformation and output exists.^[28] I will thus not burden the reader with a non-relevant description.

During the late 1980s and early 1990s, the emphasis of gaining competitive advantage moves towards the internal aspects of the firm. A resource-based view of the firm took the lead and pointed to the firm’s resources and capabilities as the primary source of its profitability and the basis for formulating its longer-term strategy. This approach is in my opinion most interesting for the analysis of strategic management of consulting firms. The next chapter will therefore concentrate on the description of this theory only.^[29]

2.3 Resource-based management

Given the high degree of innovation, the responsiveness to unique client needs, and the unpredictability, which future target projects will be won, strategic management in consulting companies cannot be centred on the development of long-term plans. Strategy is however necessary in order to achieve co-ordinated activities in a highly decentralised and non-routinised structure.

The critical decisions in consulting companies concern the recruiting of new professionals (the most valuable asset of consulting companies) and the portfolio of projects. If the firm has no strategy, the evolution of both project portfolio and the types of competencies available from the employees will most likely be opportunity driven. The result is that the strengths built in terms of relationships and competencies are ad hoc and not further leveraged after the specific project is completed. Cumulative reputation building and learning requires an exactly opposite attitude, namely focus and conscious choice of the direction for growth. The strategy in consulting companies involves primarily the development and communication of the firm’s vision, clear goals and the prioritised sequence to be followed.

As I have already mentioned in the previous chapter resource-based management is in my point of view the most suitable framework for strategy formulation. It necessarily includes traditional theories concerned with choice of markets served, services offered and management of activities at operational level. There is however a third crucial process, the accumulation of resources, which is new.

Resources critical to the firm’s success differ across industries and can be divided into two major categories, tangible and intangible resources. Tangible resources include two categories, financial and physical assets. Intangible resources can be subdivided differently, commonly used in resource-based management is the division into human resources (in terms of labour input) and information based resources.

For consulting companies are in my opinion most important information-based resources, which consist of the firm reputation and the competence available to the firm. Further, competence is an overall concept, which includes knowledge, based on existing information, skills, acquired through daily operations, and talents, which allow people to perform certain tasks in a superior way.

Now having described the resources, I will move to the basic ideas of resource-based strategic management. In general, there are three fundamental questions, which need to be assessed. First two are concerned with the short-term performance, i.e. the efficient use of existing resources. A third question focuses on the long-term competitive position of the firm.

First question, do we have the necessary resources ? Second, will the project contribute to efficient resource use ? Third, will the project contribute to the desirable resource accumulation ?

Finally, the information-based resources that the consulting company is to a large extent dependent on and therefore has to manage effectively, are usually only partially owned and controlled, by the firm. The more resources a company is not able to control the more vulnerable it becomes. An integral part of the strategic management of consulting companies is therefore the management of the firm’s vulnerability. To illustrate the possible management of this vulnerability, information-based resources will be narrowed on the competence, thus leaving out the important role of firm reputation for a moment.

There are in general four groups of competencies within a consulting company, which are crucial to the success: individual competencies, group (team based) level competencies and competencies at the organisational level. Short explanation of the possibly confusing terms: team based competence means, that a certain group of people working together bring out a outstanding results and if they do not work in this group, synergy is not achieved. In extreme case, if one team member leaves, others follow. Organisationally controlled resources include excellent practices, methods and procedures, databases to support consultants’ work and so on.

Finally, additional category of competencies has to be taken into account, namely managerial competencies in terms of recruiting, motivating and managing the company. Although recognised as crucial for the company’s success, most professionals do not seek managerial responsibilities.^[30]

From the previous paragraph follows a fourth question, which should be added to the original three questions on which resource-based management relies. Will the project increase, decrease, or stabilise the firm’s degree of control over the resources accumulated ?

The senior management has three possible ways at hand to reduce the firm’s vulnerability. Firstly, it may attempt to minimise the dependence on individual professionals and their personal competence. This can be done at the expense of the innovation of solutions these individuals deliver, the company is therefore running a risk of being able to offer only standardised services. Second strategy aims at linking key individuals more tightly to the firm and reducing the probability of losing them. Third strategy emphasises increasing the organisationally controlled competence without reducing the individually controlled resources, i.e. involves a reduction in the relative impact of the individuals without reducing the absolute value of their contributions.

Having presented the resource-based approach to strategic management in consulting companies and indicating that usually senior consultants or partners have a “part-time” job to manage the company, I will briefly emphasise the importance of good quality leadership.

It has hopefully become clear from the text so far, that senior managers do play a crucial role in the flexible, decentralised, and informally organised firms, where a high degree of independent judgement of individual consultants is required in order to deliver outstanding service and succeed in a highly competitive environment.

Over the years of intensive development of consulting companies it has come to the point that almost all of them have very much the same mission everywhere: deliver outstanding service, provide fulfilling careers and professional satisfaction to the employees, and achieve financial success. This mission is formulated in slightly different ways but all consulting firms have to fulfil three basic goals: good quality service (happy clients), satisfaction to employees (motivation to bring results) and success of the firm as such (follows from both previous points).

What are the main factors that determine success and distinguish the most successful consulting firms from the average one in the same market? It is according to many experts neither the most creative strategy nor unique management system, nor the most smart or talented employees. It is the energy, drive, enthusiasm, motivation, morale, determination, dedication and commitment of everybody involved. While many factors appear to play a role in creating this dynamism, one stands out above all others: the skills and behaviour of the practice leaders.^[31] They are the ones who give the firm direction that it will follow, not only as far as the strategy is concerned but also the operational guidelines, concepts and support, working atmosphere and general “company’s spirit”. And they are also the most important people to coach their employees, as the company will only become a leader if its employees will fulfil their potential.

I will not get into further details of describing the importance of good quality leadership. I will rather turn my attention to the external side of strategic management, the market positioning. It is not enough to have excellent consultants with the most innovative ideas, there must be clients that they deliver them to.

2.4 Positioning strategies

With the competition intensifying, it is becoming progressively important for a consulting firm to differentiate its services from those of its competitors. In order to achieve this the firm needs to position its services with a view to establish and maintain a distinctive place in the perceptual place of target customers.^[32]

Clients of consulting companies can be according to the US consultant Maister David^[33] divided into three broad categories: Clients who are looking for expertise, others searching for experience and finally those looking for efficiency. The consulting firm should decide, which type of clients they are tempting to serve as all processes within the company are influenced by this decision (from marketing company’s services, practice development to hiring).

Clients looking for expertise are those who have large, complex, unusual, high-risk projects and will seek out the most creative, talented, innovative individual or firm they can find. For a consulting company to be successful in this segment prominence, reputation and unique solutions will be key to winning clients. Nevertheless, these firms very often build up the reputation of individuals rather than the firm’s.

The next group of clients are aware that their problem has already existed elsewhere and has been solved. They are therefore looking for experience with such projects; the reputation and costs are not critical factors of influence to them. Goal of the company targeting this segment is to create an image of an experienced organisation based on collective knowledge derived from past experience. This collective knowledge is the value added that the consulting company brings to clients. There is no emphasis on key individuals although there should be some focus on deepening knowledge and specialisation of individuals in specific areas of choice.

The third group of clients knows that their problems have been solved successfully in the past by a broad range of firms. Their key criteria of choosing consultants are therefore a quick start, flexible arrangements, reliability and low cost. The value-added of this type of consulting firm is more based in its operating systems, procedures and marketing programme, rather than on the individual talents of the professionals or the collective knowledge of the company.

Having described the positioning from the point of customers’ view, i.e. what sort of value they are looking for, I will again shift my angle of looking at positioning from the side of the consulting firm. According to Lowendahl^[34] consulting companies can choose to develop along two dimension to position themselves on the market and differ the company’s strategy from the competitors’. Firstly, by the way the management utilises the resource the company possesses, i.e. the management of firm’s vulnerability. Secondly, what types of projects are targeted for value creation, i.e. the company’s strategic focus.

It has been described in details in the previous paragraph that there is a difference in terms of what kind of strategic resources are critical to firm value creation, whether they are individually controlled, team-based or organisationally controlled. The way a company manages the control over its resources is one dimension along which it can differ from the competitors.

As for the strategic focus, generally speaking there can be four types of differentiation.^[35] Firstly, the consulting company can focus on the development of long-term relationships with the existing clients and building of strong interpersonal ties. Another consulting company may put emphasis on the development of always new and unique solutions through creative inputs of their professionals. This type of company is targeting customers, which are looking for expertise. It is very common that this type of firms rely largely on the personal skills and interests of the partners and strong individuals.

The third type of strategic focus emphasises the experience the firm has with similar projects. Finally, the fourth strategy concentrates on the adaptation of ready made solutions.

Very important for this thesis is a fact that the consulting firm adopting one of the two last strategies, offering its clients either the experience gained or the efficient adaptation of ready made solutions, expands the served markets primarily through the search for new geographical areas or client niches, where the same or similar services are needed. Figure 2-3 illustrates how the two dimensions can be brought together.

illustration not visible in this excerpt

Figure 2 - 3 Positioning of consulting companies^[36]

In the rest of the thesis I will focus on a consulting firm, which attempts to position itself in segment C, i.e. offers the potential customers creative solutions and experience with similar projects. The internal aspect of the firm’s strategy concentrates on the accumulation of team-based resources.

Furthermore, as mentioned above it is a company searching for new opportunities and niches in existing as well as new markets. Analysis in the following chapters of this final thesis is carried out under the assumption that this particular company sees a potential opportunity in entry into the Czech Republic.

3 International expansion

The pre-requisite of the previous chapter was that a consulting company searches for niches in existing as well as new markets. Further, I have mentioned already in the introduction that international expansion might be for a company an easier and more profitable than home market penetration. The goal of this section is to look at expansion abroad from a slightly different perpective, not only as a pure search for new opportunities but also as an aim to utilise existing resources. In this chapter I would like to list some reasons for a company to expand abroad, relating them where possible to the expansion of consulting company.

3.1 Motives to expand abroad

In the first chapter an overview of external and internal factors influencing a company to expand abroad will be given. I define external influences as the need to attract new sources of demand and profit, internal as motives of firms to take the most advantage of their investments. Further, in chapters 3.1.2 the focus will be on motives for expansion caused by market and financial imperfections, i.e. immobility of factors of production, changing value of currencies and an effort to reduce risk of firm´s investments.

3.1.1 External and internal influences

Firms often expand abroad when their home market has reached the point of saturation and the firm therefore tries to attract new sources of demand in foreign markets (the saturated home market is not a necessary prerequisite, the firm may want to increase its total sales by expanding its operations). Another motive is also associated with increasing total sales and the resulting profits: the firm enters new markets where it expects to gain excessive profits (decision is usually based on the excess profits earned by other corporations within the industry). The company planning its entry into the industry usually tries to undercut the prevailing excessively high prices and thus acquire a large market share. In reality, the opposite tends to happen, as competitors prevent the newcomer from taking away their business by lowering their prices just as it attempts to break into the market.

The next motive for an international expansion is the aim to fully benefit from the investments a company has made either in form of economies of scale (lower average cost per unit resulting from increased production)^[37] or in form of economies of scope. An example of economies of scale for a consulting firm could be the aim to increase return on investments into human capital by using the know-how gained through training of employees for similar type of projects as carried out at home in foreign countries. That means increase the scale of same or similar activities that investment = know-how (in this case professional knowledge) is used for.

The second motive involved in the aim to increase benefit from investments is the goal to take advantage of economies of scope.^[38] Economies of scope exist when one investment can bring profit for more than one activity where the investment is being used, i.e. in the case of consulting companies an investment in the firm’s infrastructure (intranet, head-office etc.) can bring out benefits for several different projects. Increased profits are a consequence of more efficient work. To differentiate economies of scope precisely from the economies of scale, it is the aim to increase the scope of different activities the investment = know-how (this time for instance organisational) is used for. The motive to take advantage of the learning can be seen as part of economies of scope as effects of learning curve are gained through investments into human capital (training) as well as experience, which can than be reused effectively on similar projects in future.

3.1.2 Market and financial imperfections

Next chapter focuses on motives, which occur due to market and financial imperfections. Whereas market imperfections arise due to the immobility of factors of production and the limited access and unequal flow of information among market actors,^[39] financial imperfections arise from the different level of risk involved, currency values and controls and tax rates in individual countries.

It has long been recognised that market imperfections occur and that companies engaged in the international trade (often regarded as multinationals) operate under oligopolistic conditions (i.e. factors of production are immobile and flow of information is unequal).^[40] The market imperfections give a company the possibility and therefore the temptation to exploit its resources or skills that are not available to competitors (monopolistic advantage). If all factors of production, information, products and services were perfectly mobile, accessible and available without transformation costs than the monopolistic advantages would not exist. Factors of production, information or products would move wherever a deficiency exist, remove this deficiency and force the market price down. In this ideal case of market with a perfectly competitive industry structure, the prices of products and services would be identical across the world and firms would have no incentives to invest abroad.

Before proceeding with other incentives for international expansion I would like to emphasise the fact that capital and success factor of many companies is very often embodied in their trademark, general marketing or organisational skills, in the case of consulting companies in their know-how. It has been emphasised in Chapter 2 that information-based resources are most important for company’s success and these characteristics cannot be separated from the company. This interdependence of the firm, its employees and their know-how and the difficulty, if not impossibility, to unbundle services and sell them apart from the firm is a strong incentive for a consulting firm to establish a subsidiary abroad.

The most important motive to expand abroad associated with financial imperfections is the goal to reduce business risk by diversifying investment portfolio. Although I will mention in the following chapter that market similarity can be also a criteria for a company choosing a country for its entry (this is based on the assumption that the company expects the same sort of demand and behaviour of market actors and therefore does not have to adapt its product or services greatly to the customers’ preferences). The motive of international diversification does not say the right opposite, it only looks at international expansion from slightly different perspective.

[...]

---

^[1] Berger, R., Consulting-Markt wird von sieben Trends geprägt, Management Berater, 11/99

^[2] Stern, N., Capital flows to Eastern Europe and the former Soviet Union, p.1

^[3] Strickland, T., Strategic management, p.2

^[4] Individual is used here deliberately, as successful representatives of politics, business and many other fields always differentiated themselves with clear strategy that they followed

^[5] Grant, R.M., Contemporary strategy analysis, p.4

^[6] Grant, R.M., Contemporary strategy analysis. p.19

^[7] Grant, R.M., Contemporary strategy analysis, p.52

^[8] Keith, H., A review, synthesis and interpretation of the literature on the competitive advantage, Journal of strategic marketing

^[9] Grant, R.M., Contemporary strategy analysis, p.174

^[10] Hamermesh, R.G., Making planning strategic, Harvard Business Review

^[11] Strickland, T., Strategic management, p.20

^[12] Strickland, T., Strategic management, p.20

^[13] Grant, R.M., Contemporary Strategy Analysis, p.10

^[14] Lowendahl, B.R., Strategic management of professional service firms, p.20

^[15] Das, R., Strategic management of services, p.22

^[16] Lowendahl, B.R., Strategic management of professional service firms, p.70

^[17] Lowendahl, B.R., Strategic management of professional service firms, p.72

^[18] Mintzberg, H.,Quinn, J.B., The strategy process, p.43

^[19] Lowendahl, B.R., Strategic management of professional service firm, p.30

^[20] Grant, M.R., Contemporary strategy analysis, p.17

^[21] Mintzberg,H.,Quinn, J.B., The strategy process, p.60

^[22] Porter, M.E., Competitive advantage, p.35

^[23] Porter, M.E., Competitive advantage, p.39

^[24] Porter, M.E., Competitive strategy, p.189

^[25] Porter, M.E., Competitive strategy, p.191

^[26] Porter, M.E., Competitive strategy, p.219

^[27] Porter, M.E., Competitive strategy, p.275

^[28] Lowendahl, B.R., Strategic management of professional service firms, p.30

^[29] This part is due to insufficient other sources of relevant literature to a large extent adopted from Lowendahl, B.R., Strategic management of professional service firms, p.69 - 100

^[30] Lowendahl, B.R., Strategic management of professional service firms, p.55

^[31] Maister, D.H., Managing the professional service firm, p.207

^[32] Das, R., Strategic management of services, p.45

^[33] Author of the book Managing the professional service firm based theories presented in the book on his long term experience in consulting as well as co-operation with clients and other consultants. Parts of the book were published in The American Lawyer and Journal of Management Consulting.

^[34] Author of the book Strategic management of professional service firms, one of limited academic publications on the specific characteristics of strategic management in professional service firms

^[35] Lowendahl in his book Strategic management of professional service firms describes only three forms of strategic focus, does not include the fact that some customers could be looking for value added embodied in experience. To be more specific, he distinguishes between expertise and experience along the other dimension, the management of resource base - firm’s control of resources. In his point of view, individually and team-based controlled resources bring expertise and experience, organisationally controlled bring efficiency

^[36] Partly adopted from Lowendahl, B.R., Strategic management of professional service firms, p.115

^[37] Madura,J., FDI in International financial management, p.412

^[38] Shapiro, C., Corporate strategy and FDI in Multinational financial management, p.684

^[39] Perfect mobility and accessibility of factors of production and unlimited access the information about trends, competitors, customers are one of the basic prerequisites for the theoretical model of perfect competition

^[40] Shapiro,C., Corporate strategy and FDI in Multinational financial management, p.679