Management Consulting and the Creation of a Market for ''Strategy

STRATEGY FOLLOWED STRUCTURE: MANAGEMENT CONSULTING AND THE CREATION OF A MARKET FOR ‘‘STRATEGY,’’ 1950–2000 Christopher McKenna ABSTRACT Purpose – This chapter traces the creation of a market for strategy by management consulting firms during the second half of the twentieth century in order to demonstrate their impact in shaping debates in the subject and demand for their services by corporate executives. Design/methodology/approach – Using historical analysis, the chapter draws on institutional theory, including institutional isomorphism. It uses both primary and secondary data from the leading consulting firms to describe how consultants shifted from offering advice on organizational structure to corporate strategy and eventually to corporate legitimacy as a result of the changing economic and regulatory environment of the time. Findings/originality/value – This study provides a historical context for the emergence of corporate and competitive strategy as an institutional History and Strategy Advances in Strategic Management, Volume 29, 153–186 Copyright r 2012 by Emerald Group Publishing Limited All rights of reproduction in any form reserved ISSN: 0742-3322/doi:10.1108/S0742-3322(2012)0000029010 153 154 CHRISTOPHER MCKENNA practice in both the United States and around the world, and provides insights into how important this history can be in understanding the debates among consultants and academics during strategy’s emergence as an academic subject and practical application. Keywords: History of strategy; management consulting; legitimacy; Boston Consulting Group; McKinsey & Company; institutional isomorphism Popular writers and management theorists have long acknowledged that the academic subject of strategy has been profoundly influenced by those management consultants who theorized, packaged, and sold the new discipline to their corporate clients starting in the early 1960s (Business Week, 1973a; Hayes, 1979; Lieberman, 1987; Peters, 1994; Seeger, 1984).1 From the infamous ‘‘BCG Box’’ to the ‘‘McKinsey Matrix,’’ the names of the leading management consulting firms remain imprinted on the academic discipline of strategy as it is taught to students in business schools around the world (Mintzberg, 2004). Far from a purely theoretical subject, pragmatic MBAs have come to accept that developing a new strategy is as much about weighing the competing claims advanced by rival consulting firms as it is about evaluating the particular value of the relevant theories in academic texts (Bower, 1982). Strategy theorists, however, have done far less research in understanding how the ideas emanating from these professional firms have reflected the particular ‘‘core competence’’ and regulatory environment in which the consultancies were themselves situated.2 It is noteworthy, for example, that the Boston Consulting Group (BCG) revolutionized management consulting by offering novel theories about strategy during the 1960s and 1970s that their consultants claimed were universally applicable across all industries in part because the BCG consultants had to overcome the potential liability that they were not trained as industry specialists. During the 1960s, when antitrust laws encouraged corporate executives to look beyond industrial boundaries and create conglomerates, BCG’s universal- istic approach would be particularly well received (Berg, 1965; Lubatkin, 1983; Reed & Luffman, 1986). Yet, conversely, McKinsey & Company re-emerged as a leading strategy consultancy during the mid-1980s just as the crisis in corporate liability gave their industry expertise particular weight as professional gatekeepers (Coffee, 2006). Thus, the strategic theories proffered by the leading management consulting firms were a product not Management Consulting and the Creation of a Market for Strategy 155 only of economic cycles and marketing acumen, but also of the interaction between legislative and regulatory changes set against the firms’ idiosyncratic historical competencies. While BCG’s promotion of the conglomerate form of organization declined during the 1980s, their initial support for conglomeration was itself a natural consequence of the consultancy’s expertise in guiding the construction of corporate portfolios (Kipping, 1999).3 In the historical development of consulting, management consultants crafted strategies to reflect and accentuate their particular skills and the broader economic environment in which they were operating. Management consultants, of course, were particularly influential in reshaping large organizations to resemble one another. Following Paul DiMaggio and Woody Powell’s work on ‘‘institutional isomorphism,’’ management theorists have recognized that consultants have been one of the most powerful forces in the dissemination of corporate structures, strategies, and management tools to their clients across economic sectors and throughout the world; like ‘‘Johnny Appleseeds’’ in Powell and Dimaggio’s evocative description (DiMaggio & Powell, 1983). Yet, once those norms are set – new structures installed, corporate strategies agreed, and management tools institutionalized – just how do the established institutional models change? The missing links are the management consultants who have an economic incentive to promote and sell new organizational models, thus restarting the process of institutional isomorphism. The leading management consulting firms have operated as both the enforcers of institutional isomorphism and the institutional entrepreneurs who actively devised new ways to rethink their clients’ operations. Thus, the commercial logic of these agents of institutional isomorphism is not simply convergence upon a single standard but also the constant search for new models to be commodified and resold to the large organizations that are already clients of the consultants. This chapter explores the relationship between the academic discipline of strategy as generally presumed by theorists to be the interaction of theoretical concepts and evolving economic circumstances, and the more messy reality that novel strategic frameworks have tended to emerge from the sale of new models derived from the particular operational strengths of the leading management consulting firms within the context of changing regulatory environment. Drawing on the internal archival records of the leading consulting firms and their corporate clients, this historical analysis will contextualize the changing and contingent nature of strategy over the fifty-year history of the American consulting firms that dominated the production and distribution of strategy during its emergence as an academic 156 CHRISTOPHER MCKENNA field. In particular, this chapter will review the three epochs of strategy as demanded by corporate clients, sanctioned by government officials, and provided by entrepreneurial consultants: the 1950s to mid-1960s when strategy was equated with organizational structure, the mid-1960s to mid- 1980s, when strategy was considered a form of economic theory, and the mid-1980s to the end of the 1990s when strategy became a system of corporate legitimacy. To understand the origins and impact of any market, and particularly the market for strategy, one must first understand the influence of the consultants who have guided its development over the past fifty years. THE EARLY HISTORY OF MANAGEMENT CONSULTING From the 1920s on, a new type of professional service emerged that focused on controlling the white-collar bureaucracy of large companies, not their line workers. They provided ‘‘business surveys’’ for companies interested in learning new methods of cost accounting and departmental organization. Unlike the self-taught engineers who led the scientific management movement, the university-trained accountants, engineers, and lawyers who founded the leading management engineering firms – Stevenson, Jordan & Harrison and Ford, Bacon & Davis in New York, and Booz Allen & Hamilton and James O. McKinsey & Company in Chicago – offered executive-level advice on administration and organization. Management engineers assisted not only large corporate clients but also the bankers for these companies by restructuring troubled companies, merging rival firms, or analyzing possible acquisition targets.4 In the 1930s and 1940s, management engineering firms, now better known as management consulting firms, proved themselves increasingly useful to American corporations both as sources of new ideas and, equally important, as a means to avoid corporate liability for malfeasance.5 In the depths of the Great Depression, and with the creation of the Securities and Exchange Commission (SEC), corporations believed that they could avoid shareholder lawsuits if they hired consultants to certify their actions. As a result, between 1930 and 1940, the number of management consulting firms grew, on average, 15 percent a year from an estimated 100 firms in 1930 to 400 firms by 1940, and, during the 1940s, the number of new firms continued to grow Management Consulting and the Creation of a Market for Strategy 157 at nearly 10 percent a year so that by 1950 there were an estimated 1,000 management consulting firms in existence (Association of Consulting Management Engineers, Inc. (ACME), 1964, Table 2). In the late 1930s and the early 1940s, contemporary observers, from both the academic and the business world, perceived that this rapid growth of management engineering was distinct from the scientific management movement – eschewing the ideology of Taylorism, management engineers studied the top of the

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