Economies of scope through multi-unit skill systems:
Economies of scope through multi-unit skill systems:
the organisation of large design firms
Marcela Miozzo
Manchester Business School
University of Manchester
Booth Street West
Manchester M15 6PB
Tel: 0161 306 3423
Fax: 0161 275 7143
Email: marcela.miozzo@mbs.ac.uk
Mark Lehrer
Sawyer Business School
Suffolk University
8 Ashburton Place
Boston, MA 02108-2770
Tel: (617) 573 8338
Email: marklehrer@
Robert DeFillippi
Sawyer Business School
Suffolk University
8 Ashburton Place
Boston, MA 02108-2770
Tel: (617) 573 8243
Email: rdefilli@suffolk.edu
Damian Grimshaw
Manchester Business School
University of Manchester
Booth Street West
Manchester M15 6PB
Tel: 0161 306 3457
Email: damian.p.grimshaw@manchester.ac.uk
Andrea Ordanini
Management Department
Bocconi University
Via Rontgen, 1
20136 Milano
Tel. : (39) 0258363623
Email: andrea.ordanini@unibocconi.it
Paper prepared for British Journal of Management,
submitted December 2009, revised February 2009
Economies of scope through multi-unit skill systems:
the organisation of large design firms
Abstract
From a study of three large design firms in Italy, the UK and the US, this paper derives a distinct model of how large knowledge-intensive business service (KIBS) firms organise to manage growth and realise economies in ways that differ from the organisational techniques that are familiar from scale-and-scope studies of large manufacturing enterprises (Chandler, 1962, 1977). Case studies were compiled from interviews conducted at the three firms. Large design firms were selected as a contrasting context to Chandlerian manufacturing firms. Design firms were expected to differ from manufacturing firms in terms of strategy, organisation and the overall possibilities of achieving economies of scale and scope. Our results show that competitive advantage of these large KIBS design firms derives from a particular multi-unit skill system that enables these firms to exploit economies of scope. There are four distinctive organisational features of such KIBS firms. First, multiple business units within the firm play a dual role. These are able both to engage in inter-unit coordination and resource-sharing and to attract business independently, often with heterogeneous business models among units. Second, these firms develop formal organisational routines for involving multiple business units in client projects, thus facilitating the migration of clients’ business from one unit to another. Third, there is an important role for cross-unit strategic ‘insight’ agents. Fourth, these firms expand through the founding of specialised, even idiosyncratic new business units (often with the important role of mastering new technological skills).
Keywords
firm organisation, knowledge-intensive business services, scale economies, scope economies, service industries
1. Introduction
Although we know a great deal about the organisation and management of large manufacturing firms, we know comparatively little about the applicability of such patterns to large service firms. There has been limited research, for example, on whether service firms are organised in the same way as manufacturing companies to realise economies of scale and scope or if organisational patterns in service firms are fundamentally different. Little research to date has examined organisational structure as a way to generate and exploit new forms of knowledge in service firms (Anand et al., 2007). This paper contributes to filling this gap by focusing specifically on a type of service companies representative of knowledge-intensive business service firms (KIBS) and in which economies of scale and scope would seem, a priori, the most difficult to realise: the case of large design firms in which the final service is largely customised for each specific customer and project.
The business histories by Chandler (1977; 1990) showed how, thanks to new communication and transportation technologies in the mid-nineteenth century, new forms of business organisation emerged to exploit economies of scale and scope. Chandler initiated a tradition of scholarly work on organisation, strategy and business capabilities. This tradition identified now-familiar principles of production and organisational techniques to manage scale and scope, especially mass production and the adoption of multiple divisions to reduce complexity and promote more entrepreneurial freedom (Chandler, 1962), as well as vertical integration in order to reduce hold-up by suppliers and other uncertainties in the production process (Williamson, 1975). Techniques such as these remain common among large and powerful manufacturing firms. While some service segments have much in common with manufacturing industries, others, such as the sector of design firms, are quite different.
At the same time, however, our research has focused on larger design services companies that are implicitly or explicitly organised in specific ways to realise economies of scale and scope. The paper begins with the hypothesis that these larger design firms operate as flexible firms – on the one hand, responding to demands by customers for specific service offerings, and, on the other hand, depending on somewhat standardised products and formalised processes to deliver them. We explore this hypothesis by examining the way in which a selected group of large design firms organise to manage growth and realise economies.
Like Chandler, we have examined scale and scope from an organisational perspective rather than from an economic, production-function viewpoint. The central research questions guiding the present study are: 1) How do large knowledge-intensive business service firms manage growth and organise to capture economies of scale and scope? 2) What sources of competitive advantage do such firms attempt to exploit to enable economies of scale and scope beyond (or instead of) the rather abstract declining marginal costs of neo-classical economic theory?
The study reveals that large knowledge-intensive business services (KIBS) firms cultivate particular organisational patterns to exploit economies of scope. The three large design KIBS firms investigated in this study all feature multiple business units, which engage in fairly extensive inter-unit coordination and resource sharing to obtain economies of scope, with coordinated migration of customers’ business from one unit to another, and continuous change involving the founding of specialised new units.
2. Conceptual background
2. 1. Firm organisation and competitive advantage
The pioneering research of Chandler (1977; 1990) argued that patterns of firm organisation and governance conditioned firms’ ability to manage growth and obtain competitive advantages. In the mid-nineteenth century, a number of US firms seized on opportunities opened up by the availability of large-scale transportation and communication infrastructure (railroad, postal services and telegraph), ultimately developing novel practices and forms of organisation. These included investment in large scale manufacturing facilities; in national and international marketing and distribution networks; and in new management systems (especially the multidivisional firm) to administer, monitor and allocate resources for future production and distribution.
A small number of manufacturing firms pioneered the coordination of mass production and distribution, diffusing the twin principles of interchangeability of parts and flow of production on the shop floor (with plant layout designed to maximise throughput efficiency). Systematic research and development organised in the in-house corporate R&D laboratory provided a new source of technological innovation, beginning in the electrical and chemical industries (Hounshell, 1984; Best, 1990). The firms able to master these new techniques gained powerful competitive advantage, became oligopolies, and dominated their industries for decades thereafter, competing strategically by improving products and processes and expanding into new markets. These firms obtained economies of scale (when increasing the input factors of production increases output more than proportionally) and economies of scope (which arise when it is less costly to combine two or more product lines in a firm than to produce them separately, especially by relying on shared inputs).
Further contributions building and expanding on these insights pointed to the role of skill formation in the organisation of firms and their ability to reap economies of scale and scope. Studies of the Japanese (lean) industrial firms stressed the importance of relational contracting with shop-floor workers and incentive schemes (rank hierarchy, long-term employment and seniority promotion, role of personnel departments and unions) in explaining the rise of these firms from the 1950s to 1980s (Aoki, 1990; Womack et al., 1991). Cooperation and relational contracting between employers and shop-floor workers permitted employers to use new technologies to their maximum potential, and new production concepts, such as just-in-time and collaborative relations with suppliers, became new sources of competitive advantage.
Less attention, in contrast, has been paid to the organisation of service firms and to the economies that they can exploit for competitive advantage, especially knowledge-intensive service firms that by nature have to provide highly customised services.
2.2 Management and organisation of service firms and industries
For the purpose of this paper, we focus on service industries as defined by the standard statistical frameworks (e.g. European NACE or North American NAICS).[1] Firms in service industries display somewhat distinctive features compared to manufacturing firms and industries. Five features of service firms in particular suggest ways in which large service firms may be organised and governed differently from large manufacturing firms. This may lead to differences in the ability to exploit economies from manufacturing firms.
First, service firms are characterised by the intangibility of their products. In principle, this makes it difficult for them to pursue differentiation (Enderwick, 1992). Differentiation of service provision is generally achieved by the creation of tangible attributes though marketing. Examples include the standardisation of the interior (such as the case of American Express) or the exterior (such as Pizza Hut) of buildings. Therefore, it is argued that scale economies in service firms are less important than in manufacturing firms and occur mainly in marketing (branding or investment in corporate image), concerning more the provider rather than the service supplied (Campbell and Verbeke, 1994). The emphasis on branding is said to reinforce specialisation by the provider in a narrow set of services (to maintain a clear corporate image for customers) and limit diversification into new products or sectors (Enderwick, 1992).
Second, service firms rarely have R&D departments (with important exceptions such as large telecommunications and IT service firms). More generally, service firms tend to be poorly integrated into national or regional systems of innovation, making little use of R&D facilities offered by institutions such as universities, research institutes, and government laboratories (Miles, 2008). In general, service firms set up product or project development teams on an ad hoc basis (Sundbo, 1998). Many innovations are developed in the course of specific projects for clients, and are therefore not always easy to distinguish from the customisation of the usual service. Some authors refer to the notion of “co-production” of knowledge with clients to denote the way that routine work for specific clients is intertwined with learning and innovation (Bettencourt et al., 2002). Such co-production with clients can be advantageous for the commercialisation of innovations that are nearly market-ready, but this mode of innovation is argued to entail limited coordination of learning experiences within the firm, so it is a challenge to reproduce innovation once developed in subsequent projects (Brady and Davies, 2004). Owing to efforts of innovation scholars to understand innovation in service firms, there has been a shift in the literature to understand one of the main forms of innovation in services – that is, organisational innovation (den Hertog, 2000). However, organisational innovations are difficult to measure and classify; the main indicator used to measure firm-level innovation in innovation studies, patents, is biased against service firms: although patent data provide the longest running historical record of technological activity, they fail to cover most aspects of the evolution of new services. Overall, these complexities in the innovation patterns of service firms suggest we need new models to understand how service firms are organised to exploit innovation and obtain economies.
Third, service firms are characterised by the inseparability of production and consumption, which creates a need for quality assurance, since customers find it difficult to separate the quality of the service from that of the service provider. This means that many service firms seek competitive advantage through investment in skill formation such as employee training (Schemenner, 1986; Enderwick, 1992). As shown for the Japanese manufacturing firms, skill formation may play a role in differentiation. Another implication is that service firms may pursue strategies of customisation and market segmentation favouring the provision of services on a small scale and local basis, to suit local market preferences.
Fourth, because of the importance of labour inputs into many services, there is the risk of too much variety in service quality. Attempts have been made to ensure uniform quality, especially through automation and industrialisation. Indeed, in some services sectors, firms have developed strategies and organisational techniques for large-scale operations, with considerable division of labour, simplification of tasks, and substitution of machines for labour such as in transport, communication, and broadcasting services (Miozzo and Grimshaw, 2006). Fast food chains (e.g. McDonald’s) likewise illustrate the potential in some service sectors for large-scale enterprise applying many of the standardisation and vertical integration techniques familiar from manufacturing companies. Some researchers speak of a trend towards the “industrialisation of services” (Levitt, 1976), with service firms emulating many industrial practices (mass production of standardised products, higher division of labour, increasing technological intensity, etc.). Similarly, other service segments exploit network coverage (especially through ICTs), as witnessed in retail banking. However, these techniques seem to be at odds with the exploitation of proprietary innovations and customisation required in many other segments of the service sector.
Fifth, extraordinary heterogeneity among service firms and industries makes generalisation difficult; no historian has been able to paint a coherent broad-brush characterisation of firm growth in the service sector such as Chandler provided for large manufacturing companies. As indicated, an umbrella concept like “scale and scope” applies less uniformly across service firms than across manufacturing companies (even taking into account the above noted differences among manufacturing firms, e.g. the large US multidivisional firm vs. the Japanese firm). Inter-sectoral heterogeneity necessitates recourse to typologies for service firms. Typologies of innovation patterns in service firms are of some use in describing how different service firms are organised for competitive advantage. Miozzo and Soete (2001) developed a taxonomy of innovating service firms, building on Pavitt’s (1984) sectoral taxonomy of innovation. They argue that there are three broad types: production-intensive network service firms; supplier-dominated firms; and science-based and specialised supplier firms (Miozzo and Soete, 2001).
This last category, science-based and specialised supplier firms, includes the particular segment of the services sector studied in this research: knowledge-intensive business services (KIBS). KIBS are concerned with providing knowledge-intensive inputs to business processes of organisations. This category covers business services founded upon technical knowledge and/or professional knowledge (Miles, 2008). This captures those business services based on social and institutional knowledge involved in many traditional professional services (such as management consultancy and legal services) as well as emerging technical knowledge that is vital in high-tech services (such as IT and R&D services). In professional KIBS, such as accountancy, legal services, and advertising, innovation is on-the-job. Some innovations are mediated by professional networks, with professional (and regional) associations diffusing information about best practice and new services while providing training and quality assurance (Miles, 2008). Other KIBS firms, however, depend on interactive patterns of innovation, being closely involved with their clients in the co-production of innovation (Bettencourt et al., 2002), combining such flows of information with more generic knowledge to generate novel perspectives. For these KIBS sectors, the challenge is to reproduce innovations developed on a one-off basis.
Given this heterogeneity among service firms, different types of service firms will have varying organisational forms and realise varying types of economies. A point of departure for classifying variations in service firm organisation is the framework of Gadrey (1996) and Gallouj (2002), who rework the typology of Salais and Storper (1992). They suggest that different “worlds of service production” can be defined by two axes: standardised vs. customised service products on the one hand and demand-driven vs. supply-driven mode of production on the other. This yields four basic quadrants of service firms and organisations: creative, professional and personalised, Fordist and flexible (Table 1).
Creative services organisations and firms (quadrant 1) depend less on the requirements of specific customers and more on the ability of the service provider to sense what kinds of innovative service offerings will likely find a market. Here, the service relationship is weaker and the autonomy of the producer higher. Technological intensity can be low (e.g. human and social research science in university think tanks) or high (e.g. natural science laboratories). In contrast, professional and personalised services organisations and firms (quadrant 2) are characterised by weakly standardised service characteristics and a strong service relationship, implying mobilisation of the customer’s competences together with those of the service provider’s (high level of co-production). Technological intensity can be low (as in small consultancies or specialised personal services such as for the elderly, for example) or high (as in large international audit and consultancy agencies, for example). In Fordist firms (quadrant 3), the service relation is relatively weak while technological and capital intensity is high. Service products are highly standardised and firm processes are highly formalised (e.g. fast food restaurants, mass insurance, mass tourism and automated banking).
Flexible firms (quadrant 4) – the quadrant of primary interest in this research – requires firms to square the circle. On the one hand, firms have to respond to demands by customers for specific service offerings; on the other hand, these same firms depend on somewhat standardised products and formalised processes to deliver them. According to Gadrey (1996) and Gallouj (2002), service firms manage this tension by producing service offerings made up of varying combinations of highly formalised modules of characteristics. Customisation requires active participation of the client in determining the right combination of modules to obtain a satisfactory solution. Similarly, Hargadon (2003) underlines the importance of combinatorial innovations, including the identification of new uses for old ideas. Technological and capital intensity in the world of flexible service production can be very high (as in certain areas of insurance supply, hotel trade or transport).
Table 1 provides a typology of service firms based on the synthetic work of Gallouj (2002) and Gadrey (1996), including and extending their insights into the different economies exploited by different types of service firms. This framework also makes it possible to identify the ways different service firms accrue economies.
INSERT TABLE 1 ABOUT HERE
Further insight into the economies enjoyed by service firms is provided by recent work on knowledge management in professional service firms such as engineering, advertising, consulting, accounting, and law firms (Hansen et al., 1999; Lowendhal et al., 2001; Suddaby et al., 2008). Hansen et al. (1999) suggest that management consulting firms can be dominated by either of two different value creation logics, which they term “reuse economics” and “expert economics”. The first is linked to a low degree of customisation and involves frequent reuse of knowledge assets, large teams with a high ratio of associates to partners, and an emphasis on obtaining profits from scale and revenue rather than margin. Expert economics, on the other hand, involves high fees for highly customised offerings to unique problems, small teams with a low ratio of associates to partners and an emphasis on high profit margins. These imply different competitive strategies, HR recruiting policies, use of IT and knowledge management strategies (Suddaby et al., 2008). In particular, knowledge management in reuse economics emphasises codification and knowledge management systems, whereas knowledge management in a context of expert economics emphasises personalisation and the development and support of the individual consultant. This suggests that in KIBS firms, organisational mechanisms may be put in place to support codification of knowledge or, alternatively, to support and build up the expertise of individual consultants.
Summing up, we can see that it is difficult to map Chandler’s familiar organisational techniques onto service firms. Service firms display distinctive features in the products and processes of production and innovation compared to manufacturing firms, which suggest they may have peculiar organisational characteristics. Previous research suggests that different types of service firms (according to whether they produced more or less standardised services and whether production is demand- or supply-driven) are organised differently and accrue different types of economies.
3. Method: Rationale, Design and Questions
The research objective was to learn more about KIBS firms in quadrant 4: KIBS providers which attained comparatively large size and multiple units despite offering customised service offerings for customers. The initial hypothesis (as per Table 1) was this would involve some form of flexible production, in which services are rendered from combinations of various “modules” or “templates” of service offerings, thus requiring active client participation to make a more or less precise choice of combinations. This initial hypothesis was, however, simply a springboard for designing an exploratory study rather than a basis for hypothesis-testing per se.
This exploratory study investigated larger-scale firm organisation designed to achieve scale and scope economies in precisely those kinds of KIBS firms in which sources of scale and scope economies are most likely to differ from those characterising manufacturing firms. To this end, large design firms were selected for study. In design firms, offerings have to be tailored to more or less unique requirements of each customer. Spot markets for the end products do not exist. Repeated interaction with customers is required even at the very preliminary stages to define what the output should be. In short, assembly line production is not feasible. Although some KIBS segments manifest some similarities to manufacturing firms in their sources of scope and scale (i.e. certain IT services firms), the focus on design services was motivated by a desire to investigate firm organisation for scale and scope economies in those service firms with apparently few similarities to manufacturing firms.
Case studies were compiled on the basis of interviews conducted at three firms. As Yin (1993) points out, case-based inquiry is particularly appropriate when the analytic goal is to relate a narrow range of phenomena to a broader context. In this case, the motivation for research was to investigate the nature of scale and scope phenomena in creative (design) KIBS firms against the background of scale and scope economies in manufacturing (or for services where scale economies are more clearly feasible). The research objective entails a certain disjuncture between the level of empirical observation and the level of theoretical explanation (Ragin, 1987, p. 8). While empirical observation proceeds at the organisational level of design firms, analysis will be couched at the higher explanatory level of cross-sectoral contrasts informed by prior research on manufacturing companies. Thus, although the data sample in the present study consists of design firms (the observational unit of analysis), analysis will frequently evoke comparative sources of scale and scope among different types of firms (the explanatory unit of analysis) rather than those observable at the purely organisational level of the sample.
Such an approach is not unusual. Case-based research is frequently indicated when, as here, the boundaries between phenomenon (e.g. creative KIBS firms) and context (e.g. comparative sources of scale and scope) are somewhat unknown and in need of explorative clarification (Yin, 1993, p. 13). Based on the analysis of the case studies, we engaged in what Yin (1993, p. 37) calls “analytical generalisation”, building upon previously developed theory as a template against which to compare the results of the empirical study (Tellis, 1997). In an analogous manner, Stake (1995) used the term “naturalistic generalisation” to express the way in which a persuasively conducted case analysis resonates with the broader experience and knowledge of informed readers.
Sample Selection: Large design firms were selected as a contrasting context to Chandlerian manufacturing firms. Design firms were expected to differ from manufacturing firms in the realms of strategy, organisation, and the overall possibilities for achieving scale and scope. Of course, strategy, organisation, and possibilities for achieving economies of scale and scope could vary by KIBS activity even within the realm of design. Such “design” activities as industrial design, interior building design, and billboard design are obviously heterogeneous. In order to find a balance between consistency and variation among the KIBS design firms selected for study, we applied the logic of theoretical sampling (Strauss and Corbin, 1990; Flick, 2007). Three design firms were selected that formed a continuum between a technical orientation at one end and a marketing orientation at the other. One firm specialised in industrial design (technical orientation), another in advertising (marketing orientation), and a third firm in digital technologies for commercial purposes (technical-marketing orientation). The respective pseudonyms of the three firms are Cerebral Engineering, Ad Agency, and Digital Design.
In order to restrict the study to design firms in which scale and scope effects could be presumed operational, we interviewed only larger KIBS design firms (175 employees minimum) with multiple business units, each specialising in a different sub-area of design. In all three firms, these units were not completely separate organisational units as in large multidivisional corporations (Chandler, 1962). The units regularly shared (human) resources and cooperated on projects for clients. At the same time, each of the units could acquire customers autonomously, maintained a unique mix of skills, and often engaged in division-specific kinds of contracts and relationships with clients that differed from those of other units in the firm. There were three such units at Cerebral Engineering, three at Ad Agency, and five at Digital Design. A list of the different divisions, with names altered for anonymity while retaining some idea of the design activities involved, is contained in Table 2.
INSERT TABLE 2 ABOUT HERE
The data collection phase centred on interviews with the different unit heads listed in Table 2. In each of these companies, additional managers at the corporate staff level were interviewed as well, albeit the number and the company positions of these additional managers were usually determined by the recommendations of our primary contacts and were not constant among the three firms. Table 3 summarises the total number of interviews conducted.
INSERT TABLE 3 ABOUT HERE
Interview Instrument and Initial Hypotheses: Semi-standardised interviews with firm managers lasted approximately two hours, with 1-2 members of the research team present at each. Interviews were taped, subsequently transcribed for analysis, and shared with other members of the research team in both full and excerpted form. Semi-structured interviews (Fontana and Frey, 2000) were organised around three sets of questions, each devoted to a specific issue area: 1) Organisation of the firm; 2) The process of value “co-production” with clients; and 3) The strategic development of knowledge and competences by the KIBS firm, including systems for the re-use of knowledge within the firm.
These sets of questions were motivated by findings from previous studies of KIBS firms. It was hypothesised that KIBS firms corresponding to quadrant 4 in Table 1 (including the multi-unit KIBS design firms studied here), so as to be able to harmonise relatively standardised processes with customised offerings, would engage in some form of flexible production and render services from combinations of various “templates” of service offerings involving active client participation in the choice of service combinations needed. Thus, in addition to questions about firm organisation (question set #1), the interview protocol called for detailed questioning about the process of value “co-production” with clients (question set #2). This line of questioning reflects the widespread assertion that in KIBS firms, “clients play a critical role in helping [suppliers] to co-create or ‘co-produce’ the knowledge-based service solution” (Bettencourt et al., 2002: 100). In addition, since it has become commonplace to posit knowledge as the cornerstone of the firm’s competitive advantage (Nonaka and Takeuchi, 1995; Grant, 1996; Spender, 1996), it was hypothesised that firm systems to generate and re-use knowledge would be central to any analysis of scale and scope economies in large KIBS firms (question set #3), since such KIBS firms possess far more cerebral assets than tangible equipment. In the terms of Hansen et al. (1999), design firms could be assumed to foster systems for cultivating some combination of “reuse economics” and “expert economics.” Appendix 1 reproduces the extensive protocol used for the interviews.
Content Analysis: Content analysis was conducted as follows. For each firm, excerpted interview statements were compiled into different topic categories by the researchers who conducted the interviews. Such categories began with three main topics of the interviews: 1) Organisation of the firm; 2) The process of value co-production with clients; and 3) The strategic development of knowledge and competences by the KIBS firm. Researchers in some cases compiled statements into yet finer sub-categories at their individual discretion. This step of analysis aimed at summarising the basic facts about the three companies.
The next step of analysis was to make inferences about the nature of multi-unit organisation in large design firms and their implications for scale and scope economies. In order to facilitate understanding of similarities and differences among the firms, the authors wrote up case studies on the three firms according to a common format which emerged from the research team’s deliberations: 1) Origin and genesis of multiple business units; 2) Heterogeneity of the units; 3) Interdependence of the units; 4) Systems for managing the interdependence of units; 5) Developmental strategy: how the firm manages growth, develops new competences, ensures coherence, selects/rejects clients, etc. The three standardised case studies are included in Appendix 2.
The interview transcripts, the categorised interview excerpts, and the standardised cases were shared among the team. Consistent with the recommendations of Eisenhardt (1989), the research team of five members then spent considerable time as a group sharing impressions and interpretations in order to achieve a consensual view of strategy and organisation among firms in the sample. Sharing sessions consisted of face-to-face meetings, conference calls, emails, and interpretative documents such as PowerPoint plots sent as attachments. The impression- and interpretation-sharing period lasted over three months between the date of the last conducted interviews and the attainment of a consensus concerning the study’s basic findings.
4. Results
Consistent with the method outlined above, the key results can be grouped into three sections: the organisation of the firm; the process of value co-production with clients; and the strategic development of knowledge and competences.
Organisation of the Firm: While a full description of these issues would exceed the scope of the present article, two basic findings are important for gaining insight into the nature and limits of scale and scope economies in large design firms. The first derives from the historical evolution of these design firms. Historically these firms began with a narrow design specialisation, whose breadth of application was not initially known and only unveiled itself over time. Digital Design began as a firm in theatre design that later discovered its skills could also serve the needs of corporations: commercial exhibitions, investor road-shows, marketing campaigns, and eventually even long-term marketing strategy. Cerebral Engineering took root as a specialist in industrial design but eventually realised that its skill set was equally applicable to service firms; as one interviewee put it, the firm one day “walked through the wall” of service industries. Ad Agency began as a traditional communications agency, but the request by a large client for a full advertising campaign on its new streetcar led to enlargement of its activities to include the generation of creative offerings and the design and implementation of the whole marketing and communication strategies of clients. In sum, the expansion of these firms conformed to the diversification rationale articulated by Penrose (1959) and by adherents of the resource-based view of the firm (Montgomery, 1995): the growth of the firm occurs organically to leverage “slack” resources, that is, to exploit underutilised potential residing in design skills which the firms initially considered specialised but were discovered to have a much broader scope of application.
The second finding is that once the firms discovered that they could serve a wide range of markets, they were naturally obliged to create distinct business units that were differentiated in their design specialisation (e.g. in Cerebral Engineering, between product conception, product re-engineering and brand design). These units shared four common features in our case-study design firms. First, each was characterised by high knowledge specialisation. Each unit acted as the home for the cultivation and formation of specialist technical skills and commercial knowledge. In this way, units promoted the firm’s knowledge advantage and enabled it to position itself uniquely within the design industry marketplace.
A second common feature was the actively cultivated and managed interdependency among business units. In these KIBS firms, the various business units were expected to carry out a dual role. On the one hand, they were expected to engage in a high level of inter-unit coordination and resource sharing, yet, at the same time, had to be able to attract business independently. Third, each unit’s quasi-autonomy was not governed by a common business model. In each firm we found that while some units featured a preponderance of one-off project-based contracts (such as for solving specific design problems), other units featured a preponderance of retainer contracts (such as for ongoing brand consulting on corporate identity). While incorporating both kinds of business models was useful for encouraging repeat business with customers, latent tensions arose from reported differentials in creativity among the business models. Oddly, there was no consistent pattern. At Cerebral Engineering the predominantly project-based units were portrayed as engaging in more creative work (hence offering more stimulating opportunities for employees), while at Digital Design the head of the unit doing the highest volume of project-based work confessed that his unit’s work was the least creative in nature within the firm.
And the fourth, and perhaps most critical, common feature of the multiple business units was the design and use of routines for involving multiple business units in customer projects, thereby facilitating the migration of customers’ business from one unit to another,. Among such routines was an important role for cross-unit “strategic insight” agents at either the top or middle levels of management. Despite such cross-unit heterogeneity, multiple interdependencies among the business units of the design firms (resource-sharing, efforts at migration of clients’ future business across units, and multi-unit involvement on many projects, i.e. multiple “points of touch”) meant that the units’ managers, including their heads, remained in constant, personal contact. Some interviewee comments suggested that this places limits on the size of the firm. For instance, because of the intimacy across units and unit heads that has to be maintained to make the system work, Cerebral Engineering considers it necessary to cap the size of its main office (ca. 150 employees) and manage growth by building new offices at other locations rather than at its headquarters.
The Process of Value Co-Production with Clients: Although interviewees were asked many direct and indirect questions about the “co-production” of value and knowledge with clients, the design firm managers virtually never mentioned any creative aspect of such co-production. On the contrary, such questions about co-production tended to elicit responses like the following: “We are pretty good about not feeling constrained or contaminated by ideas provided by our client. The more we know the better. There are messy ambiguous parts of the process and we have to assess the client’s readiness to work within the messy brainstorming practices” (Unit Head, Cerebral Engineering). Thus, while discussions regarding co-production invariably did touch upon the need to listen to and interface with clients, the notion that KIBS firms generate innovative offerings together with their clients was not consistent with the findings of the study. More typical were statements like: “This does not mean that we have no relations with the clients: basically, we cannot do anything without discussing and sharing the issue with the client and getting its OK, but it is an interaction on the output (service offering) rather than on the process” (Unit Head, Ad Agency).
Interviewees consistently conveyed the belief that much of the value added by a KIBS firm comes precisely from having a unique perspective of the problem that departs systematically from the client’s own view of things: “The client always appreciates proposals and being involved in discussing proposals. Generally she/he does not like to actively participate: her/his point is ‘I paid you for this, you have competences that I do not have’” (Unit Head, Ad Agency) and “Our outside perspective, not knowing what the client knows, is what gives us our expertise, it is complementary” (Unit Head, Cerebral Engineering). What statements like these imply is that, at many junctures of the project, design firms consider it unwise to “contaminate” the firm’s own special problem-solving perspective by incorporating too much input from the client once the basic problem has been clarified.
Thus, the idea manifested in our research design – that KIBS design firms would feature flexible production of modular service offerings, thereby requiring active client participation in the choice of combinations - could be only partially confirmed. Clients were portrayed in the interviews as significantly more passive than expected. It was the KIBS firms that most proactively proposed work, crafted contracts, and executed design tasks. On countless occasions interviewees recounted that their clients did not know what they needed – or were told they did not even if the clients might have thought otherwise.
The Strategic Development of Knowledge and Competences by the KIBS Firm: Three main mechanisms for developing new knowledge and competences mentioned by interviewees were a) careful selection of clients and projects; b) the founding of specialised new business units or staff functions; and c) knowledge management tools. Of these, knowledge management tools appeared to be least significant: although all three companies endeavoured to retain learning experiences for later re-use in subsequent projects, the barriers to doing so (cost, time, contextual embeddedness of prior projects, etc.) posed limits on what could be achieved with such tools.
In contrast, the proper selection of clients and projects was considered of primary importance: interviewees stressed the importance of finding a healthy mix of high-margin and high-learning contracts and especially of refusing to undertake projects that furnished neither healthy profits nor opportunities to develop a new range of skills. Finally, new business units could be formed, especially when a certain commercial or technical skill had reached critical mass. One good example is the recent founding of the Digital Media unit at Digital Design, created to exploit the increasing importance of technological convergence in marketing design. Such specialisation by business unit enhances the capacity of the firm to absorb new skills and technologies for delivering knowledge-intensive business services.
5. Discussion
This research disclosed the central importance of multi-unit skill systems and formal routines to involve multiple units in client projects, rather than the hypothesised modularity of service offerings (cell 3 of Table 1), as the central organisational techniques employed by KIBS firms for reconciling the tension between specific offerings for customers on the one hand and the need for formal processes to deliver them efficiently on the other hand. As one unit head at Cerebral Engineering put it, “There is always a Gantt chart. I live by them ...” Another way of putting the matter is that Gantt charts (and other analogous methods for scheduling the work of employees to permit simultaneity of multiple ongoing projects) appear to be more than just a way of managing projects. Gantt charts encapsulate the way in which these KIBS firms leverage the creative skills of both individual employees and units across multiple projects as a source of competitive advantages. These routines for involving multiple units in a client project provide the basis for economies of scope.
These competitive advantages appear to be both static and dynamic in nature. In a static sense, routines for allocating specialised and creative people in different business units to multiple simultaneous projects can promote straightforward efficiency. They do so by leveraging economies of scope across projects on both the supply side (via resource-sharing) and demand side (by setting the stage for follow-on and future contracts). However, there was also a more dynamic sense in which skill allocation routines and decisions were considered an important source of competitive advantage. The interviewed firms gave substantial consideration to the longer-term learning advantages that would accrue to the firm as a result of taking on projects that were unusual or especially challenging.
Table 4 characterises the “archetypal” multi-unit design firm, based on common traits observed in the three organisations. The table distinguishes between static (efficiency-promoting) and dynamic (development-promoting) characteristics. The table reiterates the central empirical finding of tight and multiple interdependencies among the business units of the design firms. From this we infer that multi-unit skill systems are important in design firms, at least as an organisational-managerial principle for competitive advantage. It remains to place this source of competitive advantage into a larger context beyond the sample of interviewed firms.
INSERT TABLE 4 ABOUT HERE
Multi-unit KIBS design firms effectively attempt to leverage economies of scope through the organisational mechanisms disclosed in this research. Multi-unit KIBS design firms arguably aim to exploit sources of competitive advantage that differ from orthodox (i.e. textbook) types of competitive advantage.
To make this point crystal-clear, we draw on the much-cited insights of Treacy and Wiersema (1995). Treacy and Wiersema suggest that firms have to choose from one of three types of competitive advantage. These are: first, operational excellence (based on operative competence, with the objective of leading the industry in terms of price and convenience); second, customer intimacy (based on tailoring products and services to serve the needs of a highly specific customer base, thus securing long-term customer loyalty); and, third, product leadership (based on product innovation or differentiation and the rapid commercialisation of new ideas). These three specialisations are associated with requirements that are mutually inconsistent to a degree. Operational excellence implies a focus on efficiency across the value chain. Customer intimacy entails cultivation of long-term relationships with customers. Product leadership hinges on market-focused R&D as well as organisational nimbleness and agility. Product leadership also implies a focus is on innovation, design, time-to-market, and reaping of high margins in a short time-frame.
Multi-unit KIBS design firms are organised around a multi-unit skill system to leverage economies of scope that fall into none of these categories. Using the three categories of Treacy and Wiersema (1995) and a fourth contrasting category derived from our study of multi-unit design firms, we propose an alternative taxonomy of service firms in Table 5, focused on KIBS firms. This table describes four basic ideal-type categories of service firms organised along two dimensions, one regarding the type of knowledge base (technical or professional) of the firm and the other the formalisation of processes of production. Table 5 incorporates the types of competitive advantage outlined by Treacy and Wiersema (1995) and the associated economies that firms aim to exploit. The table is useful for articulating the organisational and strategic distinctiveness of multi-unit KIBS design firms. While quadrant 1 includes R&D suppliers that have rapidly evolving technical knowledge bases and less formalised process, quadrant 2 encompasses technology-based firms with rapidly evolving knowledge bases and more formalised processes. This category includes integrated solutions providers (Brady and Davies, 2004), the organisation and learning processes of which are often project-based. Examples of this type of firms are large IT services providers, which develop distinctive capabilities by managing the rapidly evolving client- (and industry-) specific knowledge of staff transferred across multiple clients (Miozzo and Grimshaw, 2008), enabling firms to compete through operational excellence and exploit economies of scale and scope. Quadrant 3 encompasses professional service firms, which rely on professionally specialised knowledge bases and less formalised processes, exploiting economies of professional expertise (as argued by Gallouj, 2002) through customer intimacy. Professional service firms focus on building intellectual capital while offering customised, partly intangible services to clients. This is not to deny considerable heterogeneity among professional service firms in their strategies regarding the development of relations to clients, the creation of new areas of practice and the methods by which expert knowledge is constructed (see Suddaby et al., 2008).
The distinct organisational and strategic characteristics of multi-unit KIBS firms are summarised in quadrant 4. These multi-unit professional service firms derive their competitive advantage ultimately from a multi-unit skill system. The main point conveyed by quadrant 4 is that such firms rely on a combination of professional knowledge bases and somewhat formalised processes to provide unique service offerings through the organisational capacity to exploit a multi-unit skill system resulting in economies of scope (as shown in our case studies).
INSERT TABLE 5 ABOUT HERE
The conclusion that the competitive advantage of multi-unit KIBS design firms can be described as deriving from a multi-unit skill system rests on two robust observations from our sample of firms. First, each of these firms began with a strikingly narrow, even idiosyncratic design speciality. Second, strong path dependency accompanied the expansion of these firms from a specialised niche player in design services to a multi-unit design firm serving a broad range of industries. Digital Design’s heritage as a firm offering theatre design services remains visible in the firm’s continued specialisation in designing impressive “shows” for corporations, be it in the realm of investor relations, advertising, brand-building events, or sports and entertainment. Cerebral Engineering’s heritage as an industrial design specialist continues to inform the way the organisation remains dominated by two big “industrial” units, New Product Conception and Product Re-engineering, even as the firm has diversified its customer base from manufacturing into services. Finally, Ad Agency’s key expertise in the area of media and communication tools continues to define its capability to develop creative offerings in the advertising market, although other related capabilities have been accumulated over time in order to provide more integrated communications services. In sum, competitive advantage for large KIBS design firms appears to conform to the diversification logic developed by Penrose (1959) and also posited by the resource-based view of the firm (Wernerfelt, 1984; Montgomery, 1995). The resource-based view aptly applies to both the original design speciality of these firms and the subsequent way this design speciality came to be “leveraged” over a wider scope of application as these firms grew from design specialists to multi-unit service providers serving a variety of clients.
6. Conclusion
Building on prior work on innovation in services, this research consisted of multiple case studies with the aim of exploring how KIBS firms respond organisationally to market opportunities to grow beyond their original design niche and serve a wide range of corporate clients. The analysis showed that these firms managed growth by organising to derive competitive advantage from a unique multi-unit skill system which enables economies of scope. The organisational features of these firms include a dual role for multiple business units within the firm, able both to engage in inter-unit coordination and resource sharing, yet also able to attract business independently, often with differing business models emanating from skill/market differences among business units; the development of formal routines for involving multiple business units in customer projects, thus paving the way for migrating customers’ business from one unit to another; cross-unit strategic ‘insight’ agents; and founding of specialised, even idiosyncratic new business units, especially with a view toward mastering new technological skills like digital media.
One limitation of the study is that the multi-unit KIBS design firms were large in only comparative, not absolute terms. The interviewed firms employed only a couple hundred, not thousands of employees. Indeed, organisational features needed to reap economies of scope ostensibly place inherent limits on the size of the firm. This is an area requiring further research. KIBS firms requiring intimacy across units and unit heads to reap such economies would appear poorly suited to mastering the inevitable anonymity of an organisation consisting of thousands of employees. This confirms the point made by Schemenner (1986), who argued that in such service firms talented employees demand attention and expect advancement in the organisation. In such cases, management systems need to pay attention to pay, benefits and quality of worklife to keep workers motivated and committed to the firm.
KIBS are often considered to be one of the hallmarks of the knowledge-based economy. The KIBS sector consists of firms that have developed to assist other organisations in dealing with problems for which external sources of knowledge are required. Our work points to areas of further research in the exploration of how these knowledge-intensive service firms are organised to manage growth, in particular, the role of business units, the relationships to their client organisations, and the strategic development of knowledge and competences in KIBS firms.
Appendix 1: Interview Protocol
1. Organisation of the firm
a. Organisational structure and key job roles:
-Organisation chart showing main divisions, business units, etc, highlighting horizontal (functional) links and vertical (hierarchical) links
- Explore how this organisational structure is operationalised from the perspective of a project with a client firm. In particular, which division/unit takes responsibility for drawing up and negotiating the contract, who assigns managers to projects, where are project managers located, who manages the finances, who puts the team together and coordinates the tasks of different specialists, who monitors performance?
- How does the firm coordinate activities across internal departments? What are the main challenges facing coordination?
b. Resourcing the project team
- Describe the mix of skills and experience among senior project managers and senior technical/creative employees. Reflect on actual composition of skills versus ideal mix. Which knowledge areas are ‘generic’ and which are considered specialties (hard-to-imitate) of the firm?
- When a project team is put together, what categories of expertise are typically drawn upon? (Information on types of skills/experience related to new hires (e.g. graduates or poached from competitor firms, client firms), redeployment of incumbent staff from other projects/business divisions, or use of freelancers.
2. The process of value co-production with clients
a. Walk us through the phases of a typical customer engagement! What are the various phases of a project from initial contact to project completion? What is the nature of the relationship with the client at each phase? What is the nature of the bidding process – at what stage and how do you arrive at a price? What form does the contract take in your particular division?
b. Project or contract selection: Which projects create new knowledge and which contribute only to bottom line? Who in your division/firm is involved in project selection and drafting of contacts?
c. Client relationship: Do you have special routines for interfacing with clients? How often do you meet/communicate? How is the relationship managed? What does the term “co-production with clients” mean to you?
d. Beyond just problem solving, do you and your clients learn new skills from each other? To what extent do you learn new techniques from the client as opposed to clients learning them from you?
e. How do you track progress on projects and the efficiency of your business processes overall? To what extent do you standardise these across the different projects/assignments?
f. Organising the client interface
- How important is it to have some expertise/knowledge in the client’s business processes?
- Describe any joint working groups that involve client and KIBS firm managers/employees. How often do they meet (conference call/email), how many people are involved, etc
- Are there employees who are 100% devoted to dealing with the client firm?
3. The strategic development of knowledge and competences
a. If I refer to your firm’s “strategy,” what does the term encompass in your company? Who participates in and manages the firm’s strategy?
b. Do you have a chief knowledge officer (CKO) or something akin to that? What does he/she and his/her group do?
c. What kind of ‘information infrastructure’ does your firm rely on? How is information ‘stored’ and made available in the firm? Which of the following are important and why:
individual expertise and talent (Are there processes for managing staff performance of staff and identifying talent?)
- firm-level methodologies or ‘tool kits’
- IT –based information and knowledge-sharing systems
- project management techniques and support systems
- research initiatives and publications
- internal development projects
- investment in courses, training and participation at conferences of employees
d. Overall, how does the firm retain and reutilise knowledge from past projects? At what levels does knowledge accumulate and what tools are used to manage this process? Are there just minor or truly major economies that result from repeating the same type of task?
e. Do you have any systematic (or unsystematic) ways of developing new service products and new internal processes? Do you give employees a fixed chunk of time for creative thinking and innovation? Are there special departments for this? If an employee or group comes up with a new idea, how do they ‘sell’ the idea internally? How difficult is the internal selling process? Is it rewarded systematically? How?
Appendix 2: Three Cases
Case 1: Cerebral Engineering
Cerebral Engineering began as a consultancy in engineering design. After a few years the founders realised that its principles and design expertise could be applied to other fields as well, including services. Eventually the firm became a broadly based design firm spanning both manufacturing and service firms as clients. The firm split its primary design business into two main segments, New Product Conception and Product Re-engineering. New Product Conception essentially takes on cases where the client’s problem has to be clarified before elements of a design solution can be articulated. Product Re-engineering takes on cases in which the client approach the firm with a more or less clear idea of what kind of design work needs to be accomplished. [Origin and genesis of multiple units]
Both New Product Conception and Product Re-engineering work on a project-based contractual basis: deliberations with potential clients would lead to a proposal consisting of a price tag, time line, specification of the final output, and mode of collaboration during project execution. In recent years the firm has taken an interest in diversifying its revenue streams by building up longer-term relationships with clients on a retainer basis. Brand Design became the third unit of the firm with more of a marketing consulting orientation. The bulk of this unit’s revenues come from retainer contracts from a small number of large clients. To maintain growth, the firm’s top managers wish to build up such “trusted advisor” relationships as a counterweight to the project-by-project contracts of its original design units. [Heterogeneity of units]
The three units are interdependent in both the acquisition of customers and in the sharing of resources. A certain natural progression of customer business is built into the firm’s structure in that a brand new customer might in principle first work with New Product Conception in order to rethink fundamental strategic questions of design, later engage the services of Product Re-engineering to design a specific product, and subsequently retain Brand Design for ongoing management of design issues surrounding the firm’s marketing image as a whole. The units tout each other’s services to clients. Beyond this, the units share human resources as a matter of routine. Most employees have specialised skills and experience that necessitate their working on projects in all units. This requires an intense level of cross-unit coordination of project scheduling and allocation (and “horse-trading”) of human resources across projects. One unit head admitted that he “lived in Gantt charts.” [Interdependence of units]
To maintain the needed the cross-unit coordination, Cerebral Engineering relies on weekly meetings of the unit heads and other top managers to assess progress on ongoing projects and discuss the latest opportunities. In addition, an important special sales unit, Sales and Triage, handles inquiries from new potential clients. Sales and Triage’s mission is to filter out client inquiries that are appropriate for the firm (i.e. serious, financially and developmentally interesting, intellectually challenging, etc.), to figure out which of the three units the proposed work would best fit into, and then to assemble a team of employees (often a cross-unit team) to attend initial meetings with the client until a contract with one of the three units is signed. Because of the sheer intimacy across units and unit heads that has to be maintained to make the system work, Cerebral Engineering considers it necessary to cap the size of its main office (ca. 150 employees) and manage growth by building new offices at other locations worldwide. [Systems for managing the interdependence of units]
Development of new competences arises from both organic and planned processes. The perennial high demand for Cerebral Industry’s services has given the firm the luxury of selecting projects that are high-margin, or that provide serendipitous opportunities to develop new skills, or both. Employees can apply for a budget to invest in the acquisition of new skills or knowledge deemed useful for the firm’s operations (examples: studies of the medical market and of the Chinese market). Top management (including the three unit heads) also hires new central staff members on occasion to address new opportunities or skill development. [Developmental strategy]
Case 2: Ad Agency
Ad Agency began its activity in 1997 as a national branch of one of the largest networks of advertising agencies worldwide. At its inception, Ad Agency worked as a traditional communications agency, helping clients to structure and allocate their advertising and communications budgets across different media, leveraging on the expertise and the already established relationships of its global headquarter. After some years, one of the biggest clients asked Ad Agency to design and implement a full advertising campaign for its new streetcar expected to be launched in the European market in 2003. In order to take advantage of this opportunity, Ad Agency developed a new temporary unit – Creative Solutions – with the purpose of developing creative ideas for innovative communication projects proposed by large clients. In doing so, Ad Agency leveraged on the expertise of the CEO who had already worked for a long time as creative director for one of the main competitors of Ad Agency. In recent years, Ad Agency transformed the Creative Solutions unit from temporary to permanent, and decided to further expand its range of activities, because the most attractive prospective clients started requesting fully integrated marketing and communication services, including not only media planning and creative content, but also the definition of the marketing strategy in terms of branding, new products launch and product (re)positioning. A new unit – Strategy – was set up in 2006 to respond to this new challenge [Origin and genesis of multiple units]
The projects usually managed by Ad Agency are of two types: so-called single-unit projects, where the client only requests discrete assistance in media planning or creative solutions, realising the other steps with another consulting firm or in-house; and integrated projects, where the client asks for a combination of different marketing and communication tasks. Any project is activated by the Strategy unit, which controls the relations with the existing clients and is in charge of attracting new ones. This unit has the purpose of interacting constantly with the client, understanding its needs and purposes and co-developing an innovative marketing/communications strategy. The Creative Solutions unit works on the content, and has the purpose of developing the most appropriate messages to communicate the product or the brand of the client to its customers. Staff working in this unit include writers, designers, photographers, and visual directors. The Media Planning unit allocates the communications budget of the client across the different media to implement the communications strategy in the target market. [Heterogeneity of units]
Concerning integrated projects, the tasks of each unit result are highly interdependent, for at least two reasons. First, in general, there is a sequential issue: strategic activities are mostly discussed at the inception of the relation with the client, the media planning tasks represent the final element of an advertising campaign, and the creative effort takes place in the middle. Some decisions taken in one stage have to take into account repercussions they might have on subsequent stages of the client’s relationship. Second, Ad Agency units are interdependent because of the project-based organisation. Each project is handled by a cross-unit team and in many cases the director of the Creative Solutions division is asked to share with the key account manager and the director of the Strategy unit the relationship with the client, in order to improve the understanding in the initial phases of the relations. Similarly, for particularly innovative projects (e.g., guerrilla marketing or tribe marketing), the Creative Solutions division usually takes the lead in the definition of the content of the campaign with the client. [Interdependence of units]
To deal with this complex interplay of tasks, Ad Agency adopted several decisions. First, it kept its size below a certain threshold (currently about 105 employees) in order to maintain high levels of control while guaranteeing an adequate flexibility in organising and performing tasks. Second, each project above a certain value is always coordinated by a pair of top managers (Strategic and Creative directors; CEO and Strategic Director; CEO and Creative Director). This has the purpose of facilitating the adoption of a more holistic perspective in managing pervasive marketing and communication projects during their entire duration (which sometimes lasts more than a year). Third, for projects involving creative solutions, more than one team of creative people is assembled to produce alternative options. These alternative solutions then “compete” against one another to gain the preference of the client, and only the winning solution will then be implemented.
[Systems for managing the interdependence of units]
Ad Agency is striving to grow along two different paths. First, their strategy is to enlarge the size and the value of the projects developed with existing clients. The ideal development is to transform all projects into highly integrated projects in order to make Ad Agency the “strategic outsourcer” for key marketing tasks of large clients. This strategy also aims at improving the retention of key clients as well as the positioning of Ad Agency in an untapped segment of the market for marketing and communication services, namely between small entrepreneurial agencies on one side and big global players on the other. Second, Ad Agency is trying to dedicate more time and resources to client acquisition, by intensifying participation in national and international contests where big players expose potential service providers to fierce competition in bidding for projects. [Developmental strategy]
Case 3: Digital Design
Digital Design started business in theatre design and, thanks to winning a major contract to design exhibition space for an automobile manufacturer (a contract that continues today), quickly established a market presence in exhibition and event design. In the context of privatisations of nationalised companies, this expertise was applied to a fast emerging market in investor road shows to help communicate IPOs. A third specialist area of retail store design was added in the late 1990s in response to the demand from retail firms to establish a better fit between brand image, customer expectations and store experience. Internally, each department drew on logistics and production support from a central team. However, this caused problems of synchronisation – investor road shows demanded fast turnaround of logistics planning at short notice. In 2000, the investors unit developed its own team for logistics. Another new unit set up around this time was multi-media design, established from within the logistics and production hub to respond to demand from investors, exhibition and retail projects. Also, in the run-up to the 2008 Olympics a specialist sports events team was established. In the space of 30 years, Digital Design had expanded to a workforce of 300-350 people in its home office and shifted from a specialist provider of events/exhibition design to a reputable design firm providing multiple services to a range of global client organisations. [Origin and genesis of multiple units]
Digital Design organises its business around five units, each of which is structured around a creative team, a logistics team, a production team and a client services team. The five units are organised to reflect the different products. The marketing unit combines branding design with the design of interactive products to be used at major events and exhibitions (such as interactive exhibition products for auto shows or media shows). The multi-media unit specialises in interactive and social media, website design and online advertising. The retail unit provides expertise in store design, interior design and online retail space. The sports unit engages with a mix of clients to design events and exhibitions associated with sporting events. Finally, the investors unit manages investor road shows for clients (e.g. initial public offerings) and publishes annual reports and perception studies. One unit, the Investors unit, is exceptional in its business model, relying on a market reputation to secure a steady stream of short-term business from hundreds of different clients. For the other four units, managers seek to develop a retainer relationship with a client, to be identified as their preferred design and technical partner. [Heterogeneity of units]
Digital Design aims to initiate and develop a relationship with each client that is founded on multiple areas of experience and expertise. An approach by a client is managed by a ‘leadership team’ from one unit. A member of the cross-unit team called the Ideas Group then assists in identifying the mix of services from different units; the client may approach the firm with a specific task but is typically persuaded that a single project will not solve their problem - a complex solution is offered. Its base model is bow-shaped: first they gather input, build their insight, the strategic platform and then this drives the solution/implementation. Digital Design moves up the value stream, working with the client on the brand, and seeks to ‘resolve’ this across many ‘points of touch’ (across the different units). One unit retains a coordinating role, but each unit involved establishes an operational (not financial) relationship with the client. Individual unit-centred relationships enable experts to communicate new ideas directly with counterparts in the client organisation and grow new business. [Interdependence of units]
The current five-unit form was established in 2007 in response to both changing client needs and a desire to develop a direct client relationship with teams of experts in specific areas of design and communication services. Each unit Director answers directly to the CEO and the Finance Director of Digital Design. Each unit organises its own project work and is responsible for client relationships and attracting new business. Teams of experts are therefore engaged in active projects with clients, as well as in responding to tenders for work or making unsolicited bids. A further feature of the five-unit form is that it is supplemented by the cross-unit team of five experts called the Ideas Group who collaborate in a relatively fluid manner with each unit. Collaboration is especially intensive during the stage of establishing new client relationships (typically one member of the Ideas Group working with a Unit Head and other senior team members). Moreover, Ideas Group members coordinate brainstorming sessions among units in response to client needs, feed in new thinking drawn from design-related conferences and generally continually advance the message and media of Digital Design throughout the firm. [Systems for managing the interdependence of units]
Digital Design’s growth strategy is twofold: build and develop long-term client relations and continually innovate in design services. Client selection is influenced to a great extent by the potential to exercise creativity (with the exception of the Investors Unit). Unit heads and production managers regularly assess ideas for new proposals to develop and deepen the client relationship. Growth is more closely linked with developing business with existing long-term clients than touting for new client business. It captures increasing portions of the value stream by developing different services and capabilities that can be offered to the same (or different) clients. Its aim is to ‘know the client better than they know themselves’. Competences learned from one project are translated and used again; elements of a successful pitch for business are codified, for example, and re-used (Ideas Group). As well as ongoing internal development of skills, new skills are brought in both through headhunting from other design/media firms and regularised use of freelancers; Digital Design uses an online database system which cross-references people by skill-sets to ensure a skill match rather simply an availability match. [Developmental strategy]
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Table 1. Typology of Service Organisations and Firms
| |Service products |
| |customised |standardised |
| |supply-driven |1. Creative service organisations and |3. Fordist firms |
| | |firms | |
| | | | |
|Production mode | |Economies of reputation and prestige |Chandlerian economies of scale and |
| | | |scope |
| |demand-driven |2. Professional and personalised service |4. Flexible or modular production |
| | |organisation and firms |firms |
| | | | |
| | |Economies of professional expertise | |
| | | |Economies of service modularity |
Sources: adapted from Gallouj (2002, p. 179), Gadrey (1996), Salais and Storper (1992)
Table 2. Different Units in the Interviewed Firms
|Firm |Units |
|Cerebral Engineering |New Product Conception |
| |Product Re-engineering |
| |Brand Design |
|Ad Agency |Strategy |
| |Creative Solutions |
| |Media Planning |
|Digital Design |Marketing Strategy |
| |Retail and Leisure |
| |Sports and Entertainment |
| |Digital Media |
| |Investor Reports and Events |
Table 3. Overview of Interviews
|Firm |Corporate Staff Executives |Division Heads (+ Accompanying |
| | |Staffers) |
|Cerebral Engineering |4 |3 |
|Ad Agency |3 |4 |
|Digital Design |1 |4 (+1) |
Table 4. Characteristics of the Multi-Unit Design Firm
|Distinctive organisational characteristics |Sources of competitive advantage enabling economies of scope |
|efficiency-promoting characteristics: |
|1. Dual role of business units: a) able to engage in cross-unit |1. Unique skill system (combinatorial capacity) applied to customer|
|coordination and resource sharing, yet also b) able to attract |projects |
|business independently, often with differing business models | |
|emanating from skill/market differences among business units | |
| |2. Ability to target multiple related, yet heterogeneous market |
| |segments |
|2. Formal routines for involving multiple business units in |3. Multiple points of touch with customers to facilitate project |
|customer projects, thus paving the way for migrating customers’ |execution as well as to promote repeat business |
|business from one unit to another (role of technology convergence | |
|in allowing this) | |
| |
|development-promoting characteristics: |
|3.Cross-unit strategic “insight” agents |4. Selection of clients and projects to promote the firm’s |
| |coherence, longer-term growth, development of key specialist skills|
| |and opportunity for creativity |
|4. Founding of specialised, even idiosyncratic new business units |5. Capacity to absorb new skills and technologies for delivering |
| |new services |
Table 5. Revised Typology of KIBS service firms
| |Knowledge base |
| |technical knowledge |professional knowledge |
| |less formalised |1. R&D suppliers |3. Professional service firms |
| | |(e.g. software services firms) |(e.g. legal services firms) |
| | | | |
| | | |CA: customer intimacy |
| | |CA: service product innovation | |
| | | | |
| | |Economies of reputation and prestige |Economies of professional expertise |
|Formalisation of processes| | | |
| |more formalised |2. Integrated solutions providers |4. Multi-unit service firms (e.g. large |
| | |(e.g. IT services firms) |design firms) |
| | | | |
| | |CA: operational excellence |CA: Multi-unit skill system |
| | | | |
| | |Economies of scale and scope |Economies of scope |
Note: CA = competitive advantage
-----------------------
[1] Service firms and industries, unlike manufacturing, construction or extractive firms and industries, have as their main function the provision of service products. Service products are a service function or set of functions marketed as a commodity or public service. Service products are generally contrasted to tangible goods (although service products can be delivered through a physical medium, such as a CD-ROM, but these physical elements of the service would represent only a small fraction of the overall cost of the service product). Service functions can be provided by firms in any sector (e.g. after-sales services from manufacturing). The classification of service firms and industries is derived from standard industrial classifications, such as the North American NAICS and the European NACE, but these have grown in a piecemeal fashion, and many services activities that were relatively unimportant when national accounts data were developed are today very dynamic sectors (Miles 2008). Moreover, we are witnessing an increasing ‘blurring’ between manufacturing and service activities and firms, with a number of manufacturing firms capturing a greater portion of the value stream by going into the provision of services, including engineering ‘solutions’ or maintenance of high tech complex engineering products. Also, many manufacturing firms are outsourcing manufacturing and apparently ‘recasting’ themselves as service firms, focusing on the more knowledge-intensive elements of industrial activity.
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