Development of a consulting approach based on 'value innovations' for management consulting business of small and medium-sized companies in Germany

Table of contents

I Preface

II Acknowledgement

1. Introduction
1.1. Aims and Objectives
1.2. Structure
1.3. Methodology
1.4. Research and Procedure
1.5. Limitation
1.6. Resources

2. Market Theory and Business Strategies
2.1. The Market Dynamics
2.2. Business Strategy – Generic Strategies
2.2.1. Ansoff Matrix
2.2.2. Porter’s Generic Strategies
2.3. Business strategy – Analytical Approaches
2.3.1 Porter’s Five Forces
2.3.2 Value Chain Model
2.3.3 Hamel’s Core Competency and Innovation
2.4. Types of Innovation Which Follow These Business Strategies
2.5. Management Consulting Approaches
2.5.1. Market-growth-market-share Matrix
2.5.2. Market-attractiveness-competitive-strength Matrix

3. Why does Industries Named Red Oceans?

4. Blue Ocean Strategy
4.1. The Idea Behind the ‘Blue Ocean Strategy’?
4.2. Value Innovation: The Cornerstone of Blue Ocean Strategy
4.3. Analytical Tools and Frameworks
4.3.1 Strategy Canvas
4.3.2 Four Actions Framework
4.3.3 Eliminate-Reduce-Raise-Create Grid
4.4. The Six Principles of Blue Ocean Strategy
4.4.1 Formulation Principles
4.4.2 Execution Principles
4.5. The Market Dynamics of Value Innovation
4.6. Key Success Factors
4.7. Blue Ocean as a Special Kind of Differentiation
4.8. Strength and Weaknesses
4.9 Results from the Questionnaire/ Interviews

5. Small and Medium-Sized Enterprises in Germany
5.1. Definitions of SMEs
5.2. Current Situation of SMEs
5.2.1 Results from the Literature Research
5.2.2 Results from the Interviews
5.3. Innovation Behaviour and Strategies
5.4. The Consultant-client Relationship

6. Consulting Approach Based on Value Innovation
6.1. Definition of Management Consulting
6.2. Excursion: General Consulting Process
6.3. Consulting and Consulting Concept Characteristics
6.3.1. Results from the Literature Research
6.3.2 Results from the Interviews and the Questionnaire
6.4. Consulting of SMEs
6.5 Design of Consulting Concept ‚Value Innovation’
6.5.1. Framework
6.5.2. Consulting Concept „Value Innovation“
6.5.2.1. Overview of the Consulting Concept
6.5.2.2. Phase 1: Initialisation
6.5.2.3. Phase 2: Analysis of the Actual Status
6.5.3.4. Phase 3: Objectives – Targets of a Solution Concept
6.5.3.5. Phase 4: Solution Concept
6.5.2.6. Phase 5: Implementation Planning
6.5.2.7. Phase 6: Reporting and Presentation
6.5.2.8. Phase 7: Implementation
6.5.3. Summary of Phases and Tools

7. Conclusion

III Bibliography

IV Appendices

Appendix A: List of figures

Appendix B: Questionnaire

Appendix C: Interview guidance

I Preface

Why does ‘value innovation’ play an important role for small and medium-sized enterprises (SMEs)?

Innovation, besides imitation, is the foundation to conduct business and produce goods and services. Each company needs at least at one point or another during its lifecycle innovation to stay competitive within a market. Its importance increases throughout time because of new companies accessing existing domestic markets by overcoming the market barriers and the international integration of markets for global trading. Aside the well-known forms of innovation, a new type called ‘value innovation’ was developed and published in 2005. This new category is embedded as an essential part in a strategy theory recognized as ‘Blue Oceans’. This blue ocean strategy challenges companies to break out of their current market space.

But is this kind of innovation really new and usable for general management consulting?

The term ‘value innovation’ is not new within business science. However value innovation is used at a smaller scale. Nevertheless its meaning within the new theory which defines a new way to develop previously unidentified markets is crucial. It requires an overall new perspective of the management to plan and carry out its business processes. Therefore its advantages are only evident in a general strategy approach.

Can this concept be turned into a consulting model to support SMEs? Why are SMEs the right target group?

Small companies often seek a market niche which can be attained by differentiation in order to survive in competitive markets. Usually the managers are using business strategies like cost cutting or differentiation of products, processes or services to find this niche. This approach originates from the assumption that a group of buyers within the market is accessible or need the traded goods or services at another level of quality, prize, design or function. Could this new theory help establish new niches?

The dissertation will find answers to the questions mentioned above.

II Acknowledgement

I would like to thank Dr. Jörg Schneider, my supervisor, for his support and the interesting and inspiring discussions related to this master thesis.

Special thanks go to my parents and my friend Christin for her support me by making life easier during the dissertation phase.

1. Introduction

1.1. Aims and Objectives

Using the new theory ‘Blue Ocean Strategy’ of strategic behaviour the author is designing a consulting approach for management consulting business of small and medium-sized enterprises (SME) in Germany. The ‘Blue Ocean Strategy’ challenges companies to break out of their current market by finding new unknown market space.

The purpose of the dissertation is to describe the current competitor’s markets as the status quo the participants perceive in their usual strategic approach, to identify then the key success factors and methods of the new theory ‘Creating of Blue Oceans’ as the alternative and mold the main issues of this approach into a consulting product.

The objectives are:

- Identification of issues which could be described as key success factors for this new theory.
- The strengths and weaknesses of the ‘Blue Ocean Strategy’ approach.
- Identifying SMEs as a target customer group and the value of the ‘Blue Ocean’ approach for these target customers.
- A consulting approach for management consulting of SMEs.

The developed consulting concept could be offered to customers within their range of consulting services or be used as an internal measurement in consulting companies to find new areas for business development.

1.2. Structure

In order to meet the aims of this dissertation the following structure is chosen:

Chapter 1:

The chapter 1 introduces the aims and objectives of this dissertation, its motivation, limitations and structure.

Chapter 2:

In chapter 2 the general business strategies for competing on defined market and the sorts of innovations are explained.

Chapter 3:

In chapter 3 the terms of red oceans and blue oceans are defined and later explained how they relate to the used business strategies on the markets.

Chapter 4:

In chapter 4 the theory of ‘Blue Oceans Strategy’ will be presented on an abstract level to familiarize the reader with the key factors and main issues of this approach.

Chapter 5:

In chapter 5 the common definition of small and medium-sized enterprises will be presented in a first step to follow up with the illustration of the current situation for the SMEs in Germany, referring to the results of interviews with market participants or observers and studies of literature.

Chapter 6:

In chapter 6 the consulting concept based on value innovation will be designed. To understand in which way the approach differs from other consulting services, there will be a short introduction into ‘management consulting’ and the ‘consulting process’ in general. After that, the results of the studies within the literature, the questionnaire and the interviews with experts will be illustrated, so that they could be embedded in a last step into the design of the consulting approach ‘value innovation’.

Chapter 7:

In chapter 7 the conclusion will summarise the results of this dissertation.

1.3. Methodology

This chapter describes the way in which the research has been carried out, showing what methods and approaches were used, and explaining why they were found to be more appropriate than other methods and approaches.

Part one:

Part one explains the methodological approach itself. This is an exploration of the philosophical basis, which underlines why the chosen method has been adopted.

The inductive approach was chosen in order to achieve the aims of the master thesis. Therefore, the author has done desk or literature research and conducted field research in form of a questionnaire and interviews with experts.

Part two:

Part two gives an overview about the actual methods or research instruments that are applied specifically for this thesis.

The initial data collection, found and analysed by desk research supported by subject-related literature and internet, built the basis to work on this topic. For a better comprehension of the results and the design in a later chapter, the different aspects of the title of the dissertation like the description of the current situation of SMEs or the principles of consulting concepts needs first to be worked out.

In the next step the fore-mentioned initial data collection has been completed by the information which the author gets from the questionnaire and the conducted interviews with experts. The questionnaire was filled out by 25 consultants who are freelancers and employees of companies. All of these participants have worked in the field of management consulting before. Not to disregard the perspective of the target group itself, some of the interview partners were specifically chosen because of their employment in SMEs in a management capacity.

The questions which have been asked in the questionnaire (see Appendix B) related to the research question and the aims of this dissertation:

1. Current market situation of the consulting company
2. The idea of ‘value innovation’ and ‘Blue Ocean Strategy’
3. Consulting concepts
4. General questions for statistics

The execution of the conducted interviews followed the criteria:

- Structured qualitative interviews with closed and open questions supported by an interview guideline (see Appendix D).
- The interviews have been conducted via telephone.
- All interviews were held in German

Part three:

Part three reflects upon the question of what the consequences are regarding the procedure of executing the research in the described manner.

To perform the collection of the data along the way of the defined process demonstrated to be successful. After a first examination of the results given by the studies of subject-related literature, the author could verify and complete the provided statements by his own experiences, the results from the questionnaire and the interviews. Consequently, the theoretical basis combined with the practical affirmations were worked into the design of the consulting concept. It showed to be a stable method to confirm the answers given by the questionnaire and the interview partners in regard to the findings within the literature research.

1.4. Research and Procedure

The purpose of this dissertation will be achieved by through desk research and the results will be verified by the author’s expertise (7 years as consultant), discussions with other consultants by questionnaire and interviews with several managers of different industries. The method could be described as an inductive approach.

The following reasons support the chosen approach:

- Limited resources do not allow an extensive data collection to fulfil the conditions for a quantitative analysis.
- Using this approach the author could verify the results by his own experiences in the field of consulting business.

To reach the goal the author proceeded in five steps:

Step 1:

The evaluation of available literature on market’s theories, ‘Blue Ocean Strategy’, consulting business and innovation processes.

Step 2:

The results of the literature research will be evaluated by the author’s own consulting experience.

Step 3:

Additional data will be collected by the answers of a questionnaire provided by 25 selected consultants.

Step 4:

The qualitative interviews regarding the situation and perspective of SMEs and the acceptance of the concept “Blue Ocean as a new strategy” were conducted with seven experts.

These qualitative interviews on value innovations will be carried out face-to-face and, with the permission of the interview partners, recorded. Other non onside interviews will be held by phone without recording and supported by an interview guidance which was forwarded in advance.

Step 5:

This last step summarised the interpretation of the interview results based on the supporting literature, concluding in the identification of a set of key figures and creating of the consulting approach.

1.5. Limitation

The main reason for this master thesis is the creation of a consulting concept using ‘value innovation’ as a key factor which was defined by Kim and Mauborgne (Blue Ocean Strategy, 2005). Therefore, value innovation as a cornerstone of the approach ‘creating blue oceans’ will be used according to the authors’ given definition. To maintain the idea of value innovation the concept ‘Blue Ocean Strategy’ will be described on an abstract level.

The term ‘strategy’ or ‘business strategy’ will be used in the dissertation similar to the term ‘strategic management’. Other aspects like the strategy hierarchy and classification of general approaches (industrial organization and sociological approach) will not be ignored because of their lack of significance.

There are many definitions of ‘innovation’ and aspects which are all focusing more or less on the process of creating a new idea, method or device and its implementation. The author decided to use the following definition for this dissertation: Innovation is something new which has to be substantially different from today’s known products, processes or services. Its benefits should show an increase of value either for the buyers or suppliers or both. Other classifications in categories like incremental vs. radical innovations, disruptive vs. sustaining innovation or systemic innovation will be disregarded.

The master thesis is only relating to Germany, the German market of small and medium-sized companies, the cultural and sociological aspects in Germany.

The author decided not to describe all consulting methods and approaches in detail which have no impact on the examined theory. Instead the focus went solely to instruments and issues which the designed consulting process will cover in regard of the portrayed thesis. The author decided not to use the tool ‘balance scorecard’ for the implementation of the strategy.

A condensed description of the market dynamics (industry cost curve) will show the main dynamics of the different markets (red and blue oceans).

1.6. Resources

In order to get a better understanding and the extent of the underlying theory following resources have been used:

Libraries:

- University of Applied Sciences, Ludwigshafen
- Goethe University, Frankfurt/ Main
- ‘Deutsche Nationalbibliothek’ (German National Library), Frankfurt/ Main

Magazines:

- ‘Harvard Business Review’

Organisations:

- Industrie und Handelskammer IHK (Chamber of Commerce), Hamburg
- Institut für Mittelstandsforschung IfM (Institute for Research into SMEs), Bonn
- Bundesministerium für Wirtschaft und Technologie BMWI (German Ministry for Economy and Technology), Bonn
- Bundesverband Deutscher Unternehmensberater BDU e.V. (Federal Association of German Management Consultants), Bonn

2. Market Theory and Business Strategies

This chapter deals with general business strategies for competing on defined markets and typical kinds of innovations discussed in literature to see later where the new approach deviates from the common perspective of the market participants.

2.1. The Market Dynamics

The concept of the industry cost curve describes the interdependence of price, cost, demand, capacity and profit in a selected sector or industry. It is an analytical framework that shows how much output suppliers can produce at a given cost per unit. Using the cost curve as strategic tool for strategic decisions, applies most obviously to commodity industries, in which buyers get the same value from a product regardless to the producer of its suppliers.

illustration not visible in this excerpt

Figure 2-1: Industry Cost Curve

(own design)

What is the market price of a product? Using the figure 2-1 the actual market price of the product settles down at P1. The demand at this price P1-level is Q1(?). Up to this quantity the buyers will pay the price. On the suppliers’ side the companies A, B and C can offer the product at P1, because they can produce the good at this prize or lower.. The operational profit of each company can be calculated by the difference between the individual per-unit costs and P1. Company D may offer its goods, too, but the costs per unit to which it could produce the commodity are higher than the buyer is willing to pay, because of the alternative prize achieved on the market. In the long-run this inefficiency will supersede the company off the market. If company A and B decide to set the price to P2, the demand will decrease on level Q2. Now, only these two companies can offer the product at this level.

On competitive markets, participating suppliers observe each others strategies and react by using the price as leverage.

2.2. Business Strategy – Generic Strategies

Business strategy inspects the question how a business (unit) competes successfully in a market. It describes the strategic decisions about meeting the needs of customers, gaining the advantage over competitors and the choice of products .

2.2.1. Ansoff Matrix

Igor Ansoff presented a matrix that focused on the company’s present and potential future products or areas of engagement. The resulting matrix provides four different growth strategies (as shown in figure 2-2), to grow via existing products and new products and in existing markets and new markets.

illustration not visible in this excerpt

Figure 2-2: Ansoff Matrix

(source: Ansoff, 1965)

The matrix illustrates that the element of risk increases the further the strategy moves away from known issues - the existing product and the existing market. Thus, product development (requiring, in effect, a new product) and market extension (a new market) typically involve a greater risk than market penetration (existing product and existing market); and diversification (new product and new market) generally is faced with the greatest risk of all.

Additional comment: The Ansoff Matrix is a framework to point out opportunities for a company to expand or replace its range of supplied goods or services. In no way is it suitable to define a certain relevant market or is in depth explaining the amount of risk each strategy involves.

2.2.2. Porter’s Generic Strategies

Michael Porter has argued that the strengths of a firm can be described by one of two variables: cost advantage and differentiation. By applying these strengths in view of either total market or niche market, three generic strategies result: overall cost leadership, differentiation and focus. The strategy could be split into cost based focus and differentiation based focus. The following figure illustrates Porter’s generic strategies:

illustration not visible in this excerpt

Figure 2-3: Type of Advantage

(source: Porter, 1985)

Porter argued in order to be successful in the long-run, a firm must select only one of these three generic strategies. Otherwise, with more than one generic strategy the firm will be ‘stuck in the middle’ and will not achieve a competitive advantage. By using the generic strategy the firm could be positioned to leverage its strengths and to defend its position against the effects of the five forces (see next chapter).

2.3. Business strategy – Analytical Approaches

2.3.1 Porter’s Five Forces

Porter’s model (see figure 2-4) can be used as a model for industry analysis. He provided a framework that expresses an industry as being influenced by five forces:

- Supplier Power
- Buyer Power
- Competitive Rivalry
- Threat of Substitution
- Threat of New Entry

Manager can use the model to understand the industry context in which their own company operates. It helps to understand both the strength of the current competitive position, and the strength of the position the company is trying to reach in the future.

Beside this obvious reason, it can equally be used as an instrument to identify whether new products or services have a potential to be successful in a competitive situation.

illustration not visible in this excerpt

Figure 2-4: Five Forces

(source: Porter, 1985)

2.3.2 Value Chain Model

The value chain, also known as value chain analysis, is a concept for business management. The value chain (see figure 2-5) categorizes the generic value-adding activities of an organization. The ‘primary activities’ include: inbound logistics, operations (production), outbound logistics, marketing and sales, and after sales services (maintenance). The ‘support activities’ include: firm infrastructure management, human resource management, technology development (R&D) and procurement. The costs and value drivers are identified for each value activity. In the past the value chain framework quickly accessed in companies the management levels, because of its qualification to use as a powerful analysis tool for strategic planning. Its ultimate goal is to maximize the gain of value while minimizing costs.

illustration not visible in this excerpt

Figure 2-5: Value Chain

(source: Porter, 1999)

2.3.3 Hamel’s Core Competency and Innovation

C.K. Prahalad and Gary Hamel invented the term ‘core competencies’. They pointed out that core competencies are the source of competitive advantage (compare chapter 2.2.2) and enables the company to introduce new products and services. A core competency can take various forms (technical/ subject know-how or processes). These following conditions (specified by Hamel and Prahalad) have to be met to qualify the competency as core competency:

1. It provides customer benefits
2. It is hard for competitors to imitate
3. It can be leveraged widely to many products and markets

There are three tests which have to be successfully passed to identify a core competence as such:

- Provide access to a wide variety of markets (capable of developing new products and services), and
- Contribute significantly to the end-product benefits of end product, and
- Be difficult for competitors to imitate (unique competencies)

Another theory of Hamel regards the marketing strategies. According to the figure 2-6 Hamel created a matrix which has the important conclusion that innovation can only be developed by figure out the unarticulated needs of the demand. It does not make any difference if the customers are known or not.

illustration not visible in this excerpt

Figure 2-6: Hamel

(source: Hamel, 1996)

2.4. Types of Innovation Which Follow These Business Strategies

In this section the sorts of innovations (see figure 2-7) which are part of the business strategies are named and shortly described.

illustration not visible in this excerpt

Figure 2-7: Types of Innovation

(own design)

One part of the questionnaire and the interview guidance regards the types of innovation. The participants were asked to name the known types and to sort them into the categories: part of the strategy ‘differentiation’ or the strategy ‘cost reduction’. The results are as followed (see figure 2-8):

illustration not visible in this excerpt

Figure 2-8: Results from the Questionnaire

(own design)

The majority of the asked consultants know about the different types of innovation and address them to the business strategy ‘differentiation’. In the opinion of the participants the main innovation to support the cost reduction is the process innovation (83 %).

illustration not visible in this excerpt

Figure 2-9: Results form the Interviews

(own design)

The results of the interviews are different which might be caused due to the limited number of participants and that experts explained the business strategies were sometimes used a mixture. As result of the conducted interviews 72 % of the experts are using both strategies depending on the current situation.

The intentions of all the listed types of innovation which can vary among improvements of products, processes and services are:

- Improved quality
- Creation of new markets
- Extension of the product range
- Reduced costs (labour costs, material, energy)
- Improved production processes
- Replacement of products or services

There are several causes of failure known within the innovation process which needs to be addressed for a successful outcome, like an improper or a too unspecified goal definition, poor alignment of actions to goals, wrong participants in the supervising committee or poor communication, access to information and monitoring of results. To decrease the risk of failure the consulting companies developed several consulting concepts to support the innovation process and the strategic management.

2.5. Management Consulting Approaches

The following consulting approaches are based on the market theory described above. Throughout the field of consulting practices, there are some particularly designed to use in strategic management consulting like SWOT-Analysis, Economic Value Added or Innovation Premium. The author selected two consulting approaches which were named from the consultants to show the characteristics. 31 % of the consultants are using the BCG matrix and the McKinsey matrix was named by 48 % of the participants.

[...]