Corporate strategy, business strategy, strategic planning, strategic marketing, vision, and mission – quick, can you tell the difference between them. OK, perhaps it's an unfair question but it seems that many writers and consultants use these words so freely and without adequate explanation that most managers probably feel somewhat foolish for not knowing. In reality, many of these concepts are overlapping and are extremely relevant to the PSF if one accepts the context of the PSF and its unique nature.
The word strategy comes from the Greek word 'strategos' and refers to the art of the general. In modern business, strategy is about considering the longer term future of the firm in terms of what clients you would like to serve and in what markets(and hence those you do not) and how you would like your firm to look, say in 5 years time. Much of strategy is about being effective, making the right choices and doing the right things. Strategy thinking and concepts have gone through a number of progressions in the last 40 years from what could be called highly programmatic and prescriptive schools of thought to views that see strategy as more organic, intuitive, and iterative. The western view of strategy and strategic planning as a yearly activity that in the past (at least in large corporations) was dominated by strategic planning departments (which have all but disappeared) and decisions made being basically fixed, has been infused with eastern concepts primarily stemming from Japanese management that see strategy as an evolving concept based on the unfolding of events. This view of strategy as being both hard and soft is a view that I believe holds most relevance to the PSF in Asia due to the unique aspects of the PSF and the cultural distinctiveness of the region.
I Strategy in the PSF
In traditional organizations and theory, strategy has been considered the domain of top management and that their job is to strategize and once developed, sell the strategy and get buy in from the rest of the organizational members. In the PSF, there are problems with this type of approach. Firstly, top management (or partners) are really part time managers at best as they are responsible for driving the majority of revenue for the firm by working on the firms key accounts. Secondly, professionals are highly intelligent and independent workers and do not take well to what they perceive as an undue top down influence and control. David Maister suggests that firms take a bottom up approach to strategy meaning that practicing professionals at all levels have a major say in the strategy process, particularly for their own practice areas. Senior partners should act as facilitators to ensure that strategy is being taken seriously. It is important to note that eliciting each technical area of the firm to embark on their own strategy process can contribute to the fiefdom mentality that already exists in many firms. Strategies at each practice area level should fit into the firms overall strategy and incentives for information sharing etc should be put in place to encourage the necessary team work. Additionally, most professional firms have a number of practice areas and may require different strategies for each due to the necessities of the market place. Finally, professionals are the most vital asset of a PSF and it is their knowledge that sets them apart. There is strong case for strategy to be set at the individual level also in terms of what the professional should be achieving and how that ties into the firms overall strategy.
Another issue that seems specific to the PSF is the very close interaction between provider and client and the high degree of customization. Since serving and satisfying clients individually is such a high priority for professionals most firms will willingly take on additional work offered by the client even if that work is time consuming and out of line with what it wants to do. At first this may not seem like a problem but when one considers that all firms have finite resources and distinctive capabilities, working on projects that take up time and fill billable hours means potential opportunities elsewhere are being missed. This can come back to haunt you a few years down the road. Whilst it may not be too late for the laggard firms to play catch up it certainly makes things harder and whilst you are playing catch up your competitors are developing the strategies that will keep them one step ahead. Its very tempting for a PSF to ignore strategy when times are good and all sorts of work is coming in the door but it is important to realize that strategy is about trade offs. No firm can be all things to all people (or many things to a few clients) without having a clear understanding of the risks presently involved in what the firm is doing and not doing for the future. Developing a competitive advantage that can be sustained over the longer term takes time and will be based on the core competencies (distinctive strengths) of the firm, recognizing and harnessing those competencies in order to leverage the right business opportunities is not a one shot affair. Another problem for the PSF is the lack of tradition in terms of cross functional communication between different practice areas and even partners handling different clients. The partnership structure can be a major inhibiting factor here and each firm must figure out how they can best develop a suitable strategy. Another factor that impacts the PSF is that of regulation. In recent years, accounting firms have been fairly aggressive in treading the turf previously covered by law firms but with the implantation of the Sarbanes Oxley act (2002) there has certainly been a slow down in this trend.
II Strategic Planning, Marketing, and Competitive Advantage
The concepts of strategic management are well developed in manufacturing industries as well as more typical services such as banking etc, yet little is really know about effective strategic planning and management in the PSF. Certainly, strategy is part of strategic planning and involves the commitment of firm resources that are not easily reversible and affect the long term future of the firm. This distinguishes something which is strategic to that which is merely tactical (i.e. lowering prices). The traditional view of strategic planning is that a company finds a fit between itself and the environment. In essence, the firm would analyze both its macro and micro environment and based on its objectives and capabilities, develop a strategy and plan to create this fit. The problem with this line of thinking is that strategic planning is often thought of as a one shot affair whereby a firm can take a 2 day retreat, and with follow up, create a strategic plan that remains in place and untouched for a significant length of time. However, we know that competitive advantage erodes over time and what was once a successful strategy may no longer be appropriate. Another issue revolves around the involvement of marketing in the strategic planning process.
Take this example:
A mid sized law firm based in Singapore generates the vast majority of its revenue from domestic sources. Recently, several of its clients have been expanding their business into China and have asked the firm to provide legal services to its international operations. The firm has done this on an ad hoc basis for a while but as competitive intensity has increased in its domestic market the firm is considering internationalization along with its clients as a viable growth strategy.
The kind of questions that the firm should ask are:
- Who are appropriate partners and how can they help us to provide the needed service to our clients?
- Shall we set up an office or develop a network based on independent partners?
- What services will the client need and could we leverage these into business with other firms in the region?
- What capabilities will we need to develop to sustain this strategy?
There are all good 'strategic planning' questions, aren't they? In my view, they are but they are also essentially marketing questions as they refer to the value created for the client. Perhaps in some companies the divide between strategic planning and marketing is acceptable (although I can't really fathom how) but in the PSF it absolutely cannot be as the 'firm management and marketers" are one in the same. The professionals live and breathe a plan everyday in their interaction with clients and other stakeholders. In this respect, marketing and strategic planning questions are essentially the same questions as value created for the client is at the heart of all strategic management and marketing. Within the PSF, close collaboration between senior partners, practice group leaders, and dedicated marketing staff is absolutely essential to the creation of a strategic planning process that is going to be effective. That process must be flexible and ongoing and one that does not involve masses of paper or bureaucracy. From my experience, many professionals are unsure of the strategic planning process in terms of its value to the PSF. These reservations are understandable when viewed from the perspective of traditional strategic planning and the inflexibility it can create which is at odds with the highly customized and flexible approach needed by professionals when dealing with clients. It is also the perception that a strategic plan is an all encompassing firm wide force that does not allow for the idiosyncrasies of different practice areas and market conditions. This dynamic between a formally defined strategy and strategic direction and the necessary flexibilities inherent to the PSF are dynamic forces that require careful consideration in the adoption of a formal strategic planning process.
At the heart of strategic management and planning is the creation of a competitive advantage. A competitive advantage is basically a set of superior assets and capabilities that allows your firm to provide customer value that your competitors cannot easily match. For example, the Big 4 have networks of offices on a global basis that allows them to provide seamless services to their clients when and where they need it. Coupled with their ability to enforce high levels of consistency and quality control through myriad independent partners provides them a sustainable advantage which is hard to match. These firms have not stood still however, they are continually reevaluating the value they provide to clients through new services and continued global reach. The idea is that an advantage does not stay an advantage forever as competitors develop new ways of doing business or play catch up with incumbent firms. The concept of sustainable competitive advantage is depicted in the figure below:
Competitive Advantage Cycle
(Source: George S Day (1997) Maintaining the Competitive Edge: Creating and Sustaining Advantages in Dynamic Competitive Environments. In Day, G.S., Reibstein, D.J., and Gunther, R (eds) Wharton on Dynamic Competitive Advantage. Wiley)
A sustainable competitive advantage (SCA) is one that gives you a long term advantage over your competitors and cannot be easily copied. It is based upon the idiosyncratic bundles of resources of the firm (known as the Resource Based View of Strategic Management). These resources are the assets, capabilities, knowledge, and business processes of the firm that are combined in such a manner to create core competencies which are essential to continued operations of the firm. According to George Day, the creation and sustenance of advantages is an iterative process with on going demands for investment dollars and management energy and foresight. It is the intangible resources of the PSF that are likely to be the most important and lead to the creation of core competences that are distinctive from competitors and hence the basis for SCA. According to Constantinos Markides (of the London Business School), there are 3 major characteristics of competences that define whether they are strategically valuable:
- It is rare – for instance, the success of the Big 4 is partially based on their international network of independent firms operating under the banner and standards of their coordinating entity (i.e. KPMG). The skills and processes needed to manage such a global network is something that takes substantial learning and is a major barrier to other firms wishing to adopt similar business models.
- It is not easy to imitate – because the exploitation of intangible resources leads to a firms services and culture, it is not made up of one activity or of individual pieces of knowledge. The knowledge and capabilities are part of the fabric of a firm and exist within the social context that is not easily understood or articulated by even those within the firm. This intricate weaving of resources creates competences that are very hard to replicate by other firms. Firms such as McKinsey and Co often go on unscathed even if large numbers of consultants leave at the same time (which has happened in some offices).
- It is not easy to substitute – if existing competences cannot easily be replicated then firms may look to substitute other assets to search for a SCA. For example, if a PSF stands out because of its ability to provide services across a broad scope of practice areas or industries, a competitor can begin forming alliances with other firms to create the same type of service provision for its own client base.
I have seen many PSF's list their core competences as their practice areas. This is clearly ludicrous and fails to take into account that a distinctive competence is one that is valued by the market place. If you have specialized skills or knowledge in certain practice areas due to extensive industry experience or other factors then that is what should be stated in a manner that demonstrates clear benefit for the client. In terms of this resource based view of strategic management, firm leaders must consider what competences lead to a SCA and how they can be nurtured and managed for the future. Much knowledge in the PSF is tacit and whilst the typical apprenticeship programs aim to pass on this tacit knowledge, it is great importance to codify valuable types of knowledge and imbed these within the processes and structure of the firm. Any PSF will want to consider how the firm learns and accumulates new skills which in turns needs consideration of how incoming work affects the resources of the firm and whether that work is strengthening or weakening the strategic position of the firm. One can also see a number of professional service associations (such as the ABA) starting to develop individual competency systems that help professional focus on developing the needed skills to compete effectively in the evolving professional environment. This is a good thing and could be tied into the firms overall competency assessment and strategic planning processes.
I am sure that a number of professionals reading this section are still thinking what are typical examples of competitive advantage in the PSF? Research by Sharmistha Bagchi-Sen and Linda Kuechler (2000) found that SME accounting firms used a number of bases for competitive advantage. These include flexible specialization, speed of delivery, collaboration with other provider firms, and specialized skills. The authors found that those more successful firms did not compete on price and were more proactive than their less successful counterparts. Pro activeness is an important facet of strategic planning in terms of analyzing and responding to environmental challenges and trends.
The resource based view (RBV) of strategic management is particularly pertinent to the PSF due to the high reliance on intangible sources of advantage that create a firm's competencies. PSF leaders must realize that strategy is dynamic and should never be set in stone whilst at the same time providing a coherent direction for the firm. Strategy is also a creative process based on internal and external factors with a good deal of intuition and foresight thrown in.
III Strategy & Performance in the PSF
Performance measurement for the PSF is an area that whilst beyond the scope of this post, is an area of considerable controversy. Financial return is not the only measure of performance used in most commercial organizations and particularly for the PSF, other measures are extremely important. This section deals with existing research on professional firms and the strategy – performance linkage, as well as concepts in strategic thinking developed specifically (or highly relevant) for the PSF. Readers are referred to works such as Client at the Core (by Bruce Marcus and August Aquila) for more ideas about performance management.
The following extract is from the Wall Street Journal Law Blog:
Thirteen years ago, this newspaper asked "did success spoil Skadden Arps?"
The article questioned the firm's evolution from an M&A shop to a full-service firm, with multiple practice areas and offices far beyond New York. As the firm increased its overhead, conflicts and the number of lower-margin practice areas, it took a slide down the American Lawyer profits-per partner ranking. "What the hell's wrong with us?" the article quoted an M&A lawyer as asking. The same question wouldn't be posed today. Skadden topped the 2007 AmLaw survey of U.S. firms, as measured by gross revenues. With the M&A market now struggling, diversification is a good thing with their broadening strategy into numerous practice groups. Their profits, by the way, weren't too shabby either.
One may infer from this article that putting all your eggs in one basket is not advisable and that a diversification program that spreads risk over several business practices is a logical strategy. On the other hand you have firms like Slaughter and May which rakes in over two million pounds in per partner profits by limiting itself to about 12 practice areas and relying on an international 'best friends network' to serve clients overseas. Both firms are obviously successful yet follow quite divergent strategies. Using the matrix identified in the figure below we can begin to get some insight into these firm strategies. The four alternative growth strategies have varying degrees of risk. A firm using a market penetration approach would likely upgrade its selling effort (as well as cross sell) to get clients to use the firms services more frequently or market to non client firms in similar businesses with similar needs. This requires little adaptation on the firms part and has a high chance of success. When selling existing services to new markets, a firm would be involved in market development. For example, an accountancy firm that has traditionally offered services to commercial organizations may find that non traditional businesses such as non profits or educational institutes to be viable targets for their services.
Markets/Clients
Existing New
Market Penetration | Market Development |
Service Development | Diversification |
Existing
Services
New
Service and Competitive Development Matrix
(See Zeithaml, V.A, and Bitner, M.J (2003) Services Marketing: Integrating customer focus across the firm. 3rd Ed. McGraw Hill, Irwin)
Service development involves offering new services to existing clients or markets served. Hence a law firm may offer litigation services on top of its existing family law services. The fourth alternative, and probably the most risky, is that of diversification. This involves creating new services and marketing them to new clients/markets. If we take a look at the strategy of Skadden, one can see their strategy falls into the diversification quadrant of the matrix as they have experienced both geographic diversification as well as creating new practice areas to serve new types of clients. Diversification is often considered the most risky approach as a firm is entering unfamiliar markets by offering services it has little experience in offering. On the other hand, diversification may offer a substantial upside in revenue growth. How does one decide which approach is suitable, and in what situation? Much will depend on management's world view and how they see the firm as well as the competitive environment. For example, how does one go from what is essentially a single practice firm in one geographic area to a multi practice firm operating on an international basis? If you view your firm's services as the competences of your firm then you are unlikely to see possibilities that allow you to create superior performance. Referring back to the RBV of strategic management, one can consider your services as end branches of a tree that stem from the roots of that tree. The roots are your core competences and are the basis of your competitive position. Similar to a firm like 3M, which has taken its competences in substrates and coatings and applied them to a number of industry leading products, a PSF can study and understand its true competences and leverage these to tap as yet unexplored opportunities. Hence a firm which has successfully diversified either geographically or service wise (or both), may seem to outsiders to be involved in haphazard expansion or unrelated diversification, but may in fact be leveraging its core competences in areas such as research, practice group management, client management skills etc and successfully applying those in previously un tapped markets. This is not to say that all firms should engage in diversification but rather to consider their strengths as bundles of resources that can be studied, understood and used in a strategic management framework. According to Gary Hamel and C.K. Prahalad (Harvard Business Review, 1990), a core competence should potentially provide access to a variety of markets as well as make a significant contribution to customer benefits of the end service.
In terms of actual strategy decisions and PSF performance, some studies have identified key aspects of those firms that could be considered more successful than their counterparts. For example, in a study of global law firms, David Brock and colleagues (2006) found that firms which utilized a balanced approach to diversification outperformed other firms in terms of per partner profitability and profitability growth. This balanced approach is known as an analyzer strategy (based on the Miles and Snow typology) and is a combination of a firm which defends its existing service market domains and concurrently searches (prospects) for new opportunities. The study supports the contention that excessive diversification has a negative impact on firm performance due to the dilution of firm resources known as the costs of excessive scale and scope. Whilst the results of this research maybe hard to generalize to other professional settings or smaller law firms, it does highlight the advantage of taking a proactive strategic management approach which outperforms firm using a reactive strategy (known as reactors). The research cited earlier in this chapter (Bagchi-Sen and Kuechler, 2000) examined the strategic orientation of SME Public Accountancy firms. The authors found that firms which could be classified as proactive, functionally diversified, and /or internationally oriented fared better than their reactive counterparts. The competitive advantage of the successful firms was based on customization of services for specific groups of clients, speed of delivery, collaboration with other producer service firms, and specialized skills. One could think of these bases of competitive advantage as core services that lead to the end services that clients actually buy. One must then, as a PSF leader, consider what are the core competences that create these core services? The point of highlighting these two studies and posing questions on core competences is to demonstrate that strategic management practices which are applicable to the PSF are indeed workable and that any group of professionals involved in the strategy process of their firm can take these concepts and ideas and use them to enhance the strategy process of their firm and their overall strategic competitiveness.
IV Conclusion
Strategy is not a one time search for competitive advantage or an annual exercise that is based on a two day retreat facilitated by an outside consultant, it is an ongoing process that realizes positions that are at best temporary and require on going adaptation and innovation. Many traditional strategic management concepts are not applicable to the PSF and this chapter has tried to highlight those that indeed do work in this context and are highly practical. Additionally, strategic management as discussed here is highly relevant to the PSF and does contribute to successful performance although defining firm performance is perhaps somewhat more difficult for a PSF than it is for traditional organizations. PSF leaders would do well to take a proactive approach in determining the future of their firm and not rely on external pressures that often force a firm to change when it is already too late.
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