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Green Enterprise and Sustainability towards Business Federation in Professional Service Firms with respect to Globalization

EZENDU ARIWA and CARSTEN MARTIN SYVERTSEN
  1. EZENDU ARIWA, Postal Address: London Metropolitan Business School, London Metropolitan University, United Kingdom Email: [email protected]
    Ezendu Ariwa is is Chair of Consumer Electronics Chapter, UKRI and Chair of Broadcast Technology Chapter, United Kingdom & Republic of Ireland (UKRI). He holds the position of Visiting Professor, University of Lagos, Nigeria. Visiting Professor, Gulf University, Bahrain. Visiting Professor in ICT and Visiting Resource Expert at the Islamic University of Technology, Bangladesh; Visiting Affiliate of the Green IT Observatory, RIMT University, Australia and Visiting Affiliate of ICT University, USA. Ezendu is a Chartered FELLOW of the British Computer Society (CITP, FBCS) and a Fellow of the Institute of Information Technology Training (FIITT). He is also a Fellow of the Higher Education Academy of United Kingdom (FHEA), member of the Elite Group of The British Computer Society (BCS), member of British Institute of Facilities Management and Fellow of Global Strategic Management, Inc., Michigan, USA. Member of Institute of Electrical & Electronic Engineers (MIEEE), Member of the IEEE Consumer Electronics Society/Chapter UK&RI, member of IEEE Computer Society, member of the Association of Computing Machinery (MACM) and Council member of UK Council for Healthcare Informatics Profession (UKCHIP).
  2. CARSTEN MARTIN SYVERTSEN, Østfold University College, Norway Email: [email protected] Carsten M. Syvertsen, an American and Norwegian citizen (double), is an associate professor in strategy and organizational design at Østfold University College in Norway. He conducts teaching in the knowledge management field in Asia and Europe. His research focuses on the creation, the use and the transfer of knowledge in the contexts of entrepreneurship and innovation, with a concentration on business practices at international markets. He received his Ph.D. from IESE Business School, University of Navarra, in Barcelona (Spain).
Copyright: © E. Ariwa and C.M Syvertsen, 2013

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Abstract

We present the business federation as a new organizational form. We illustrate how professional service firms can achieve economic growth by operating locally within an international network. Within the business federation, local offices gain access to resources through an extreme form of delegation. The article illustrates how the business federation functions using five organizational design parameters. In order to achieve scale effects, information technology is essential. Information technology can be seen in relation to political struggles amongst professional service firms. In order to achieve an entrepreneurial spirit within professional service firms, we argue that a great degree of autonomy is required. We are of the opinion that only through radical change is it possible for professional service firms to focus on how innovation can be used as a weapon in a more complex and turbulent market place.

Keywords

professional service firms, new organizational forms, the business federation, knowledge creation, and innovation.

INTRODUCTION

In the high growth environments that evolved after World War II, new strategies, structures and systems offered much needed discipline, focus and control. Today’s economic environment is very different. Companies are redefining their strategies and reconfiguring their operations in response to globalization of markets, intensification of competition, shorter life cycles, and a growing complexity of relationships with various interest groups.
Now there is a need for organizational flexibility, more creative leadership practices and organizational models that pay increased attention to changing customer requirements. There is also a need to focus on the intersection between information technologies and politics. Information technologies play important roles in new organizational forms with a focus on flat structures and decentralization. How politics can we used as means to make organizations more efficient and effective, while focusing on information technologies, is a great challenge in many firms. At the same time entrepreneurial processes are important in these organizations. Combining information technology with entrepreneurship is illustrated in the organizational model we call the business federation in this article.
Change and uncertainty are constant in the new economic landscape. There are great possibilities in this uncertainty. Being entrepreneurial allow firms to identify and explore business opportunities. An entrepreneurial strategic posture firms enable firms able to repress business threats. Being agile allow firms to stay nimble and flexible, open to new evidence, ready to reassess past choices, and change direction as business opportunities are explored and exploited.

THE IMPORTANCE OF PROFESSIONAL SERVICE FIRMS

It was not till the 1980s and 1990s that professional service firms received a significant interest from the academic world. This limited research interest is striking since the diversity and number of these firms has increased substantially in industrialized countries in the last decades. This applies to everything from financial services, management consultants and engineering firms. In the UK financial services, including management consultancies and accounting firms, now employ over one million people and account for 9 percent of GDP (Treasury, 2005: 14). Recent figures from National Statistics indicate that employment in service sector jobs show that this sector is the heart of the knowledge economy. The sector has increased from “61 percent of all jobs in 1978 to 82 percent in 2005” (National Statistics 2006). Across the European Communities (EC) the claim is that “up to 30 percent of the working population is estimated to be working directly in the production and diffusion of knowledge”(EC2004:19).
Professional service firms rely on a high degree of autonomy, frequently linked to scientific knowledge. Authority is in the hands of professionals in the sense that they ultimately make key decisions. Professionals attain, develop and retain authority by the use of knowledge rather than through managerial titles. Although management is vital for the success of professional service firms, the paradoxical fact is that professionals do not like others to have authority over them, supporting the idea that value creation can take best place by not supervising and interfering with their decision making tasks. The reason for this is found in the reversed power structure, as control over the most critical resources for value creation is found in the minds of the professionals, and not with the owners of the firm’s equity (Løwendahl et al, 2001). We have witnessed a shift in the management literature from the industrial organizational perspective (Porter, 1980, 1985) towards the resource based perspective (Wernefeldt, 1984; Barney, 1991; Peteaf, 1993) and, finally, towards the dynamic capability approach (Teece et al., 1997). Teece et al. (1997) argue that the dynamic capability approach can be “…. especially relevant in a Schumpeterian world of innovation-based competition, price/performance rivalry, increasing returns and the creative destruction of existing competencies”.
Researchers have often chosen to view organizations as autonomous entities striving for competitive advantage from either external industry sources (.e.g. Porter, 1980) or from internal capabilities (i.e. Barney, 1991). However, the image of atomistic actors competing against each other in an impersonal market place is becoming increasingly inadequate in a world in which organizations are embedded in networks of professional relationships.
Alliances with multiple partners are used extensively in professional services to provide highly complex and customized services. Examples of professional services using alliances include investment banking (Eccles and Crane, 1987; Podolny, 1993, 1994), management consulting (Aharoni, 1997), design engineering firms (Aharoni, 1993; Sabbagh, 1996), global media services (Parisotto, 1997) and architecture services (Abbott, 1988).

TOWARDS THE BUSINESS FEDERATION IN PROFESSIONAL SERVICE FIRMS

There is no doubt that those industries and occupations classified as part of the professional service community are big business and a major source of value creation in the wider economy. It is often taken for granted that knowledge work has now usurped “physical” and “material” labor in the creation of surplus value, and concomitantly that knowledge work forms a separate category of work from “material” labor (Rikowsky, 2003). The claim is that the principal stimulus for surplus value in the knowledge economy is knowledge creation and innovation. Knowledge creation and innovation are initiated by using information technology as tools in political struggles, and by focusing on entrepreneurial processes at local levels.
Authors have gone far to promote clearly defined organizational models for creating knowledge, as in the case of the hyper dynamic structure provided by Nonaka and Takeuchi (1995), and the N-form structure proposed by Hedlund (1994). Our research is related to the these lines of thought as professional service firms operating on the international stage will try to achieve local adaptation and scale effects as a result of being part of larger internal networks. This line of thinking should suit well in the times we live in. Wanting to be a part of a strong entity, having a great degree of autonomy, is appreciated in today’s professional lives.
We introduce the business federation as an organizational form consisting of local units, the corporate level, and supply levels. Within the business federation local offices gain access to resources through an extreme form of decentralization in the sense that it is not that top management delegate to local offices, but rather that local units give top management permission to handle certain tasks because it is most efficient to do it that way. The center does not direct or control, but rather advice, coordinate and influence, being well aware that initiatives generally come from local levels (Handy, 1992, 1994). Through such steps professional service firms can determine the availability of assignments and clients (Bettencourt et al, 2002; Skjølsvik et al., 2007).
Within the business federation the role of the local manager is similar to that of an entrepreneur. The entrepreneur searches for new services in order to serve local markets. An entrepreneur can be regarded as a motor combing for ideas and resources in new ways. The entrepreneurial aspect is important since local managers need to be quick in making and implementing decisions in response to demands set by complex and dynamic client wishes.
We regard our model as a strategic internal network consisting of local units. Local units can co-operate due to the availability of local complementary resources (Barringer and Harrison, 2000; Das and Teng, 2000: 32-33). Local units can also help each other overcome resource limitations by pooling resources as well as realizing synergies (i.e. Lunnan and Haugland, 2007). Our model explicitly mentions the need for tailoring services to local needs.
A key responsibility of the corporate level in the business federation is to continuously search for new services that can provide value to local offices.
Traditional means of corporate control is infrequent and exceptional since it makes little sense to interfere in entrepreneurial processes at local levels. At local levels social means of control become more important to support entrepreneurial processes, through the use of culture, ideology and sanctions. Culture refers to shared cognitive maps that guide actions, decisions and inferences in a professional community (Schein, 1985). Ideology can be regarded as an integrated sets of beliefs that bind professionals to a firm. Ideology can help to reduce mental uncertainty as it identifies and crystallizes a firm’s agenda (Schein, 1985). There may be collective sanctions, which involve punishing group members who violate common group goals, norms and values (i.e. Greenwood and Hinings, 1996). Culture, ideology and sanctions can be regarded as congruent mechanisms. These factors can reinforce one another promoting coordination within a given firm. The supply level is made up of units whose responsibility is to develop services in order to strengthen the competitive position of local offices. This level acts as facilitator, supporting the value creation of local units, by upgrading and adapting services. Its role is to stimulate transformations of activities within local units.
Information technology plays an important role as a tool for achieving efficiency and effectiveness, paying attention to political struggles that are common in organizations nowadays. Such services are used in order to develop products and services, and for strengthen the competitive position of local units. Their role is to stimulate the constant transformations of activities within the local units.
Each supply unit is a profit center, not a cost center. The local units can buy internally or Externally while pricing aspects are governed by market rules. However, corporate level can require that goods having been developed by supply services become compulsory for all local units. Normally, this applies to essential features, such as when a logo describes a corporate image.

THE BUSINESS FEDERATION AND A BUILDING BLOCK SYSTEM

A number of management thinkers and researchers advocate a process of renewal of corporations which inevitably will lead them to behave more in accordance with federalist principles (Simon et al., 1950; Drucker, 1954; March and Simon, 1958; Provan, 1983; Bartlett and Ghoshal,1995; Handy 1992, 1994). However, these authors only provide a partial understanding of the importance of federalist behavior. We describe federalist behavior though the use of a building block system consisting of autonomy at local levels, the extent local offices share resources, ownership of resources at local levels, lack of hierarchical control of local units, and how corporate services can be used. The building block system represents a guide for how to keep professional service firms, operating at international markets together. We link the building blocks to entrepreneurship and information technologies. While autonomy, ownership and resource sharing at local levels are related to entrepreneurial processes, there is a clearer link between information technology on one hand, and control mechanisms and corporate services on the other.
Autonomy. Autonomy places decision making directly in the hands of those who are closest to the markets, i.e. the professionals at the local levels. Autonomy refers to the options professionals have to make independent decisions. Professionals are goal oriented and tend to be opportunistic about where they direct their efforts in order to reach their goals.
They are presumed to specialize in cooperation with peers, except among the newest associates who have not yet chosen a specialty. While specializing may result in performing more narrowly defined tasks, the depth in which tasks are conducted requires a high degree of knowledge. Within the business federation autonomy refers to the exclusive rights professionals have to acknowledge the knowledge of colleagues, for example through peer reviews. Professionals take advice and seek support from peers and junior experts, more on an informal basis than through formal procedures.
Ownership. The business federation suggests that the ownership structure should be a part of the incentive system. Demanding professionals require flexible organizations with a broad range of offerings as well as the ability to tailor-make services to individual needs. Without a well- functioning ownership structure, firms may lose in the professional market. The professionals are a firm’s key resource. They expect to have a great influence over generated resources. This means that external ownership is not common. In many cases it is more natural with partnerships, by using up-or-out promotion policies. This means that all professionals are excluded from tenure, except those who are offered partnerships.
Because promotion to a partnership has consequences for the firm’s growth the choosing of a new partner must be evaluated with care. Choosing of a new partner must be evaluated with care. Electing additional partners means that professional service firms must increase fee earnings, and that new non-partner professionals must be employed in order to gain the benefits of “leverage” since such employees cost less. It is generally assumed that partnership models, with the use of up-or-out promotion policies, are sensible choices since a firm’s reputation among clients and other market intermediates are closely related to the perceived quality of the partners.
Resource sharing (interdependence). Within the business federation local units work interdependently. The federation’s distinguishing feature with respect to resource sharing is its inter strategic business unit collaboration. The challenge is to design lateralrelations that allow local units to share resources. The logic behind the sharing of resources is that it implies a better and cheaper solution than duplicating resources in local units, or by allocating such services from corporate level to local units.
Control mechanisms. Control mechanism can be used by headquarters in order to be reasonably confident that unpleasant surprises do not occur at local units. By using control mechanisms it is more likely that local units willingly transfer allocate knowledge to pursue the interests of the corporation as a whole.
Formal and social means of control can be used within professional service firms. Whereas formal means of control by specifying how people in the organization may behave, social means of control utilize organizational norms and values to encourage desirable outcomes.
The key difference is that formal means of control may be regarded as strict evaluations of performance, while social means of control rely more on normative considerations in order to influence behavior. Formal means of control rely more on delegation, the aim of social control rely on desirable behavior that an organization can accept as legitimate.
Corporate services. A trend in the business literature is the recognition that certain tasks are best taken care by headquarter compared to local units because of possibility to achieve scale and scope effects. Through the use of corporate services management consulting firms can leverage cumulative experiences found in the client base while local offices can concentrate on promoting entrepreneurial processes.

DISCUSSION

How knowledge can make professional service firms more innovative

The ability to innovate is regarded as a source to develop competitive advantage. Scholars explain that the development of competitive advantage requires the mastery of two divergent tasks (March, 1991; Nerkar and Roberts, 2004). A professional service firm can center its attention on sets of techniques in order to cultivate valuable and commercially viable products and services, often referred to as the exploitation of knowledge (March, 1991; Leonard-Barton, 1992). Firms can continually acquire sets of knowledge that can serve as seeds for future competitive advantage. This is in the business literature often referred to as the exploration of knowledge (Nelson and Winter, 1982; March, 1991). In this paper we focus on the exploration of knowledge, as it can be a source of competitive advantage, when focusing on local offices in professional service firms operating in international markets as the empirical setting.
The creation and sharing of knowledge is by nature dynamic. By definition the use of dynamic capabilities involve adaptation and change, building on foundations provided by Schumpeter (1934, 1939, 1942, 1947), Penrose (1959), Nelson and Winter (1982), Barney (1986), Teece at al. (1997), Zollo and Winter (2002), and Helfat and Peteraf (2003).
Capabilities imply a link between knowledge, skills and tasks (Johannessen et al. 2005). Knowledge is in our opinion the most important element in the capability concept as it indicates how professional service firms can apply, develop and integrate capabilities in a strategic manner (Hamel and Prahalad, 1994; Leonard-Barton, 1995; Grant, 1996).
There are a number of conceptual avenues that can be followed when studying knowledge as a dynamic force in professional service firms. We use an approach derived from evolutionary economics, illustrating that the use of dynamic capabilities are dependent upon organizational routines (Nelson and Winter, 1982). Organizational routines are closely linked to entrepreneurial processes at local levels in the business federation.
We find routines interesting as they can be a source for creating new knowledge. By focusing on routines, professional service firms can use information filters that constrain the range of knowledge being explored (Henderson and Clark, 1990). If a professional service firm decides to search outside a given core knowledge, it can difficult to comprehend and apply (Nelson and Winter, 1982).
When studying how knowledge can be created and shared we make a distinction between explicit and tacit knowledge (Polanyi, 1962, 1967). Explicit knowledge is relatively easy to imitate (Nonaka and Takeuchi, 1995). Explicit knowledge seems to be more accessible for a growing number of professional service firms, for example when using the internet and public registers. On the other hand it is important to focus on tacit knowledge as it to a greater extent is based on intuition, although it is difficult to communicate to others as information (Polanyi, 1962, 1967).
In research literature, the definition of innovation includes concepts of novelty, commercialization and/or implementation. In other words, if an idea has not been developed or transformed into a product, process or service, or has not yet been commercialized, it cannot be regarded as an innovation.
Definitions of innovation are presented by Schumpeter (1947), Zaltman (1973), Rowe and Boise (1974), Kirzner (1976, 1985), Dewar and Dutton (1986), Utterback (1994), Damanpour (1996), Afuah (1998), Fischer (2001), Garcia and Colantone (2002), McDermott and O’ Conner (2002), and Benner and Tushman (2003). Based on writings dealing with innovation, we distinguish between market based innovations and technological innovations. Market innovation refers to how new knowledge is embodied in distribution channels, product applications, as well as customer expectations, preferences, needs and wants (Afuah, 1998). We are of the opinion that market innovation mostly takes place at local levels within the business federation framework, and is closely linked to entrepreneurial processes.
By technical innovation we mean the extent to which a new product fulfills key customer requirements. Technological innovation is linked to the use of information technology, mostly taking place at the corporate level and at supply levels.
By combining market-based innovations with technological innovations it is possible to illustrate how professional service firms can move from a situation with unclear priorities to a situation with a more clean-cut strategic focus. However, this is a statement with modifications. Even if we can explain, ex post, how and why a professional service firm has moved from archetype X to archetype Y, or from position A to position B, it will not be fine-tuned enough to show how, de facto, change takes place (James, 1996; Orlikowski, 1996; Feldman, 2000). We are of the opinion that only through radical change in marketing and technological practices will it be possible for professional service firms to focus deeply on how innovation can be used as a source in more complex and turbulent business environments.

THE RELATIONSHIP BETWEEN INNOVATION AND KNOWLEDGE CREATION

The relationship between innovation and knowledge creation is complex, and little research has been conducted in this line of research. We regard innovation as an enabler to create value in professional service firms (i.e. Von Krogh et al., 2000). We suggest that innovation depends on knowledge creation, and that innovation is more related to market-based activities, often involving collective efforts.
We are of the opinion that explicit knowledge is related to knowledge exploitation, while there is a closer link between tacit knowledge and the exploration of knowledge. Explicit knowledge is related to the use of information technology at the corporate level while there is a closer link between tacit knowledge and the use of entrepreneurial processes at local levels. Tacit knowledge can help local units to be engaged in new business processes, while head office to a greater extent will be engaged in existing processes through the use of explicit knowledge.
We believe that the exploration of tacit knowledge resulting in new processes is the main driver of knowledge creation within professional service firms. A framework can be used as basis for offering tailor made services to clearly defined market segments, which again can lead to path-breaking innovations (Schumpeter, 1947; Nelson and Winter, 1982; Galinic and Rodan, 1998; Fleming, 2001; Nerkar and Roberts, 2004). In this way professional service firms can become more entrepreneurial using new processes as tools.
We are of the opinion that only through radical change in marketing and technological practices it is possible for service firms to focus deeply on how innovation can be used as a weapon in more complex and turbulent business environments. How explicit knowledge can be transferred into tacit knowledge within local offices is illustrated in figure one at next page, built on inspiration from Papadiuk, and Choo (2006), and Syvertsen (2008).

CONCLUSION

In this article we use the business federation as a conceptual framework to understand the dynamics of professional service firms. Research into the business federation, using professional service firms as the empirical setting, is a new and unexplored field, but of increasingly importance. In this article we use the business federation as a conceptual framework to understand the dynamics of professional service firms. Research into the business federation, using professional service firms as the empirical setting, is a new and unexplored field, but of growing importance. The operationalization of the business federation using building blocks as a framework is still at an early research stage.
The business federation provides an intuitive logic for how professional service firms can achieve local adaptation and scale effects as a result of being a part of an international network. Firstly, the business federation stresses that local offices are the driving forces of entrepreneurial activities. Secondly, it is not head office that delegates responsibilities within the business federation but rather that local offices that give head office the permission to execute certain tasks because they are handed in a more efficient way at the top, for example by introducing supply services (corporate services) in order to support a collaborative culture.
The architecture of business organizations is in transition. Across the business landscape companies are searching for new architecture that can serve them more effectively in a changing business environment. This is done in an escalating pace of change with intensified competition, deregulated markets, segmented markets and shifting preferences.
We believe that these changes will alter the ways in which we regard professional service firms, and, most of all, how organizations are designed in such kinds of firms. Professional service firms are challenged, among other things, in the following ways:
• Competition has forced them to find ways to lower costs of internal coordination, in terms of both time and money
• Demand for competitive innovations has caused them to look for ways to improve accountability and to empower teams at all levels
• The global economy has pushed professional service firms to identify their true competitive advantage through tailormaking without the “mass” that traditionally has been required. In the tailormaking both infrastructure and entrepreneurship plays important roles within the business federation.
• The role of the local entrepreneur is her/his ability to provide new business concepts based on existing firm capabilities. The entrepreneur develops informal networks through which they provide access to people and resources.
When giving managers advice on how to implement principles from the business federation, it is important to stress that it should not be necessary to first implement traditional forms such as the vertical functional organization, the multidivisional organization or the matrix organization. Such organizational forms seem more suited to more stable environments than firms face today. These organizational forms seem to the inadequate in knowledge-intensive environments as they can create unacceptable levels of inefficiencies due to sub optimalization.
An alternative route for managers wishing to implement federated principles can be to try principles of the network organization such as multiple roles and responsibilities. Thereafter, firms can analyze internal conditions in order to find out if it is reasonable to sub-units can be organized as own profit centers, in accordance with federalist ideas. The internal market network is not a laissez-faire marketplace but an alliance among entrepreneurs. Key to its effectiveness is a collaborative culture in which individuals, skills and technologies can move freely among units and be organized around solutions.
 

Figures at a glance

Figure 1
Figure 1
 

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