A brief history of strategy consulting

Photo Christopher McKenna / Director, Centre for Professional Service Firms at Saïd Business School, Oxford / February 2nd, 2012

SYNDICATED FROM

L’Ecole de Paris

Big consulting firms play a crucial role in the strategic management of companies. But how did they themselves design strategies of their own? During a seminar in the Ecole de Paris, Christopher McKenna (Oxford University) looked back on the history of an industry characterized by a somewhat ambiguous relationship to innovation.

The first strategy consulting firm was created in 1886 by Arthur Dehon Little, a chemist from the Massachusetts Institute of Technology. Other people came in afterwards and gradually institutionalized the field of management consulting. Although Arthur D. Little opened the way, he refused to follow the general trend when the field he had created started to grow – according to his opinion – on much too homogenous standards. His consulting company declined from then on.

The pioneers’ dilemma
Arthur D. Little wanted to deal with the complex problems confronted by companies, those other consultants couldn’t solve. He was thoroughly opposed to any kind of systematization when it came to sharing of ideas and strived to come up, in each case, with a unique solution. He had always refused to enter the professional association of management consulting.

Ultimately, his strategy didn’t work out very well: you can’t commit in solving matters that are unknown. Other consultants took far less risks, by dealing with well-known situations and transposing ideas from one organization to another. In fact, the profession grew on the ground of homogeneity rather than innovation.

Precisely because other consulting firms were unable to find appropriate solutions to their problems, the DuPont Company built a ground-breaking model, which was subsequently propagated by other consultants. During a long period of time, DuPont held the monopoly on explosives in the U.S. and the First World War meant a considerable increase of the company’s assets. Once the war was over, they had to think of other products to sell. In other words, they needed to diversify their offer. That’s when they realized that their technology could be used for other purposes, for instance for chemical products such as nylon, paint or varnish. DuPont also possessed General Motors, so they supplied the automotive giant with high-quality paints, in different colors. How did they organize these new activities? DuPont seized the opportunity to take deal with a problem that consulting firms had been unable to solve. That’s when departmental structure was born. They reshaped their organization according to the different products: explosives, stains, and paints); opposed to the former structure based on functions: sales, production, R&D. Later on, this type of structure extended to other great firms, like GM and Standard Oil. Consulting firms like McKinsey or Booz Allen Hamilton took interest in this increasingly successful model. From the 1930s and onwards, the major part of their activity was dedicated to transposing it from one firm to another.

At a start, McKinsey wasn’t among the leaders. But James McKinsey, who directed the firm in the 1930s, came up with several very bright ideas. He launched the General Survey, an interview with company managers by the means of a fix questionnaire. He also rationalized the commercial approach of the firm. Martin Bower, his successor, went a step further by developing a new recruitment and cultural adaptation method for employees. McKinsey set a system for recruitments, one for sales and another for serious, stereotyped consultants. The company was much less successful that other, more daring, consultant companies. But on the long term, McKinsey’s choices proved to be right: unlike his competitors, McKinsey contracted with business clients, like the diamond giant De Beers, rather than more prestigious, yet less lucrative institutions, such as Harvard and Yale Universities or large hospitals. The more the profession grew, the more McKinsey strengthened his position.

From strategy to structure
In Strategy and Structure (1962), historian Alfred Chandler exposed his well-known thesis, according to which, structure follows strategy. However, the consulting activity developed in reverse order: they first took interest in the organization of firms, and then only in strategy.

From the 1940s to the 1960s, consulting firms contributed greatly to the rise of “multidepartmental” structures, which still are the spine of many great groups. Consultants didn’t invent this model, yet they were very active propagating it. From the 1950s on, they have been considered as the mind architects of the organizations they worked for and designed everything, from structure to plans and functions. McKinsey, specifically, played a leading part in propagating this model in the U.S. and then, once done with the American market, to Europe. By the end of the 1960s, the company had a base in the U.K. and backed the reorganization of great public institutions: National Health Service, British Rail and Bank of England. Gradually, the American model prevailed in most European firms.

From the mid-1960s, consulting firms started to sell strategy, rather than structure. By the end of the 1980s, consultants played a whole new role in firms: they would legitimize their strategy. The growth of strategic consulting led to some sort of unification of practices or, to speak as Paul DiMaggio and William Powell, to an “institutional isomorphism”. The story tells that these two renowned researchers started to work on this theory the day they heard consultants from McKinsey boast the benefits of multidepartmental structures to managers of two different firms…

The predominance of this model was such that it seemed almost impossible for an organization not to adopt it, without threatening its own legitimacy. The WNET television channel for instance, was advised to adopt this model at the end of the 1970s. “Why should WNET seek to resemble General Motors?” asked one of the board chairmen. “Even if this TV channel adopted the structure, it would lack the strategy. It would inappropriate and inefficient.” The consultants acknowledged these were good arguments; however, they also warned that investors would leave WNET, if the company didn’t submit to the dominant model. That, to their eyes, would be seen as truly inefficient. WNET was forced to look like other firms, whatever its own strategy and organization.

When theory steps in…
In the 1960s, In the US, there were three major consulting firms: McKinsey, Booz Allen Hamilton and Cresap, McCormick & Paget – the latter is owned by Citibank. Their activity was flourishing. In 1960, Booz Allen Hamilton produced 1000 reports for 500 clients, had 300 employees and generated a 12 million dollars turnover. At the beginning of the 1970s, the situation changed. The economic crisis had struck. The dominant model had been extended to most firms and consultants were no longer needed as much. The idea that had been the basis of their success had been depleted. They had to find something else, sell a completely new product. The new idea didn’t grow out of any of these three companies, but from an outsider, The Boston Consulting Group.

McKinsey consultants were very keen on theory, but they weren’t very good at producing it. By their own reckoning, they used the Harvard Business Review as a tool for commercial propaganda. The Boston Consulting group was able elaborate theories and offer real products. Researchers like Michael Porter followed this movement and wrote studies to back up or refute the arguments sold by these consultants. The Boston Consulting Group became famous thanks to two theoretic offers which renewed views on strategy: the experience curve and BCG Matrix. This new context of analysis aimed at helping firms to better allocate resources within their portfolio of activities.

The Boston Consulting Group’s legitimacy came from the quality of its recruitments. The expansion of the consulting activity in Europe also played a great part in importing the legitimacy of consulting activity, and more particularly, of some specific companies. Until the mid-1960s, a firm would never publically recognize that it hired consultants: that could have meant it was going through hard times. Consultants, on the other side, never unveiled the name of their clients. European firms were the first to publicly announce that they had hired American consulting companies, to give clear warranties of their legitimacy. This kind of transparency even surprised McKinsey, who had never known that much publicity! The legitimization came from another context, another culture, one that was itself in search for legitimacy.

The influence of the Boston Consulting Group specially increased when the British government ordered, in 1975, a study on the future of the motorcycle industry, in the U.K. The national firms had seen their sales collapse, principally in favor of Honda, who taking hold of the American market. The analysis from Boston Consulting Group only confirmed the decision already taken by the government to put an end to this dwindling industry. A double issue of legitimacy was at stake: on one hand, the legitimacy of the British government, that wanted to find support to back the decision; on the other, that of the consultant, who wanted to appear next to prestigious clients, like McKinsey with the BBC, Post Firm, British Rail and Bank of England.

The other consultants reacted by bringing new ideas into the market. For example, the 7S model exposed in 1982 by two McKinsey consultants in their book In Search of Excellence (1982), that promoted corporate culture as the main boost for competitive edge.

The emerging of a legitimacy function
Consultants cover two principal functions: they bring ideas and they support legitimacy. These two functions are not exclusive to strategic consulting. They can also be found in accounting, when knowledge is brought by management control and legitimacy by financial audits. In consulting, knowledge comes from a healthy practice code and legitimacy, from management audits. Consultants are often mocked because it is said they sell something the firm already knows. However, there is no more reason to mock consultants than financial auditors: all contribute to some form of crucial legitimization.

Throughout history, strategic consulting is narrowly bound to the way the liability of company managers was engaged. In the 1930s, consultants also worked in finance, until an act prohibited companies to simultaneously sell consulting and financial services. Bankers, who were afraid of endorsing new responsibilities in their decision-making, decided to hire independent management consulting firms to ensure accounting audits and management audits. They would have to make sure that the firms they were investing in were well run. At the same time, insurances covering managers’ liability appeared. They would play a very similar role than management audits, but with more security regarding law pursuits. Managers favored this solution.

However, a new trend appeared in the U.S., during the 1980s, when a series of legal actions involved the liability of managers. Insurance fees went immediately through the roof. Subsequently, firms turned to management audits again, to bring legitimacy to their managers’ decisions.

The rise of the consultants
At a start, firms such as McKinsey or Arthur Andersen never recruited highly qualified employees. McKinsey, in particular, looked for people from the industry world. After the death of its founder James McKinsey, the firm was directed by Marvin Bower, who had a law and business degree from Harvard. Bower tapped the pool of qualified employees. Still, they needed to find an institutional way to hire enough well-trained collaborators. In this context, consulting firms and business schools evolved hand into hand. It wasn’t after a time, that these firms recruited beyond Harvard, into Columbia, Chicago or Stanford Universities.

They then turned to European business schools to find national collaborators. Today, most MBA students are prepared to work in consulting or finance.

In a fifty years’ time, consultants managed to create a profession and an industry that drains many highly qualified professionals. For a young professional, consulting can prove most exciting: it offers an excellent opportunity to move from a firm to another and to discover very different environments. Students are attracted by this kind of profession that reproduces, in life-size, exercises they practiced at university or cases they studied and that they feel they can handle: reading a report, understanding an organization, solving a problem, moving from one firm to another… In fact, students from universities that don’t offer case-study as a part of the syllabus aren’t as much interested by consulting than others.

What would business strategy professors teach, if consultants didn’t exist? Without consultants, this discipline wouldn’t even exist! They have created it, supported its growth, through practice, and formalized the knowledge into a field that could be taught. Researchers have produced knowledge in the field of strategy, but they aren’t the source this knowledge. This being said, before even the consultants arrived, journalists were the first to work on firm strategy issues. Peter Drucker, for instance, was greatly helped by journalists. How can we define this field? Teaching strategy consists in learning to analyze and understand an environment, building a healthy project, based on strong edges of the firm and connecting this project with the organization. To achieve this, we can call on models that proceed from different horizons, as well as several disciplines: sociology, economy, psychology…

Strategy will probably never achieve the level of complexity of law or medicine. Actually, it never claimed to do so. Consultants don’t refer to an academic knowledge; they draw conclusions from observations and transpose these from one organization to another. It is an empirical knowledge above all.

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The seminar that served as a basis to this text was organized by the Maison des sciences de l’homme and the Management multiculturel et performances de l’entreprise Chair (Renault-École Polytechnique-HEC).

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