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ENTREPRENEURSHIP AND INNOVATION - ORGANIZATIONS, INSTITUTIONS, SYSTEMS AND REGIONS Copenhagen, CBS, Denmark, June 17 - 20, 2008

RIDERS OF THE STORM Bruce Tether Imperial College [email protected] Andrea Mina University of Cambridge [email protected] Bruce Tether Imperial College Lonodon [email protected]

Abstract: In this paper we use the capabilities view of the firm to explore the development of product and industrial design (PID) consultancy firms (and the broader industry to which these firms belong) in the UK. Traditionally, the capabilities framework has been applied to large, often high-tech, product-based manufacturing firms. Little attention has been paid to the development of capabilities in professional service firms. By contrast, we develop and apply a capabilities framework to small, knowledge-based, professional service organisations. We study the development of these businesses, their routines and capabilities, from roughly the mid-1980s to the mid-2000s. This twenty year period has seen considerable economic turbulence in the UK, including both good times and bad for the PID consulting industry, such that the businesses have had to confront dramatic technological and demand side changes. Our analysis is informed by a set of specialised secondary (including archival) sources combined with an original set of interviews with twenty of the most important principals and managers in the UK sector. The emerging picture is one where a great variety of adaptive behaviours have been developed by firms and where versatile capabilities based on a fundamental understanding of the design process have proved extremely important in the growth and transformation of long-lived firms.

JEL - codes: O12, -, -

Riders of the Storm Versatile Capabilities and Survival Strategies in the UK Industrial Design Consulting Sector

Abstract In this paper we use the capabilities view of the firm to explore the development of product and industrial design (PID) consultancy firms (and the broader industry to which these firms belong) in the UK. Traditionally, the capabilities framework has been applied to large, often high-tech, product-based manufacturing firms. Little attention has been paid to the development of capabilities in professional service firms. By contrast, we develop and apply a capabilities framework to small, knowledge-based, professional service organisations. We study the development of these businesses, their routines and capabilities, from roughly the mid-1980s to the mid-2000s. This twenty year period has seen considerable economic turbulence in the UK, including both good times and bad for the PID consulting industry, such that the businesses have had to confront dramatic technological and demand side changes. Our analysis is informed by a set of specialised secondary (including archival) sources combined with an original set of interviews with twenty of the most important principals and managers in the UK sector. The emerging picture is one where a great variety of adaptive behaviours have been developed by firms and where versatile capabilities based on a fundamental understanding of the design process have proved extremely important in the growth and transformation of long-lived firms.

Introduction In this paper we use the capabilities view of the firm to explore the development of product and industrial design (PID) consultancy firms (and the broader industry) in the UK. The capabilities based view, as with much of the management and evolutionary economics literature, seems to have been developed with large, often high-tech, productbased manufacturing firms foremost in mind (e.g., Lazonick and Prencipe, 2005; Harreld et al., 2007; Teece, 2007). Zahra et al. observe that “researchers have not given much attention to the process by which … capabilities develop, emerge or evolve …in younger firms that have limited resources, knowledge bases and expertise in building and integrating diverse capabilities” (Zahra et al., 2006, p. 920). Equally, little attention has been paid to the development of capabilities in professional service firms, although a few studies exist. In contrast to most studies in this tradition, therefore, we seek to apply and develop the ideas provided by the capabilities framework to organisations that are small, even micro businesses, providing knowledge-based, professional services. Although this paper reports work in progress, we seek to follow the development of these businesses, their routines and capabilities, through time, from roughly the mid-1980s to the mid-2000s. This twenty year period has seen considerable economic turbulence in the UK, including both good times and bad for the design consulting industry, such that the businesses have had to confront dramatic technological and demand side changes within their environments. The evolution of the sector is part of a broader process of structural change in the UK economy that has fundamentally altered the balance between manufacturing and services, with the growth of business services as sources of the UK’s competitive advantage. A study of survival and growth strategies of design consulting firms is an ideal exercise to scope the nature and direction of adaptive behaviours in turbulent environments, and provides a good opportunity to understand how survivors have managed to ‘ride the storm’ of structural economic change. Part 1: Conceptual Framework: Strategy, Environments, Routines and Capabilities Strategies and Environments In the context of this paper, strategy connotes a set of broad commitments made by a firm that define and rationalise its objectives and how it intends to pursue them (Nelson, 1991). Strategy tends to define, in a general way but without giving the details, a desired firm structure, whilst “structure involves how a firm is organised and governed, and how decisions are made and carried out, and thus largely determines what the firm actually does, given the broad strategy. … Strategy and structure both call forth and mould organisational capabilities … [whilst] at any time the practice routines that are built into an organisation define the set of things the organisation is capable of doing confidently” (Nelson, 1991, p.?). Strategy is about both what the firm (or rather its key decision makers) is seeking to achieve, and how is it seeking to achieve that. Strategies (and to a lesser extent structures) are much more easily changed than capabilities and routines: whilst it may be easy for a firm to declare a new strategy and destroy its existing structures, capabilities and routines, it is a major task to get a new structure in shape and new capabilities and

routines operating smoothly (Nelson, 1991). Strategy should therefore cohere to the structures, capabilities and routines of the firm, in that whilst these should influence strategy, strategy should also maintain the coherence amongst them and guide their further development. Firms are often assumed to have simple objectives, such as maximising profits. In our case, few if any of the firms we have studied have sought to maximise profits. Instead, the primary objective of many if not most is to ‘stay in the game’ and practice design. This reflects two things: first, that design is a vocation, and practitioners will not quickly or willingly switch into other activities that are evidently more profitable (although they may be tempted to move into in-house design positions, particularly in large well resourced firms), and secondly that environmental turbulence ensures these businesses cannot stand still. Aside from the objectives of the key decision makers in the organisation, any strategy should pay attention to both the extant structure, capabilities and routines of the organisation, and to the environment within which the firm is operating, and is likely to operate in the near future. Environments may be (relatively) inert or fast changing yet predictable (e.g., Moore’s Law), but they can also be turbulent and fundamentally unpredictable in shifting between being supportive and hostile. Most importantly, as evolutionary economists have made clear, the effectiveness of strategy is an emergent property of the system and depends on 1) the relative performance of the whole population of firms operating in the sector 2) the time-varying distribution of market opportunities, which firms cannot really alter in the short run. The fine line between reactive and proactive change and between efforts to influence the environment against the capacity to passively adapt to change, are still contentious points in the literature and often cannot even be resolved ex post, that is to say when the outcomes of the competitive process are known, also because the recollection of the chosen course of action might emphasise intention over serendipity. We now consider routines and capabilities, which are the fundamental concepts in the behavioural view of the firm. Routines The concept of routines is a basic building block in understanding organisations from a behavioural or evolutionary perspective. They are regarded as the primary means by which organisations accomplish much of what they do (March and Simon, 1958; Cyert and March, 1963; Thompson, 1967; Nelson and Winter, 1982). Nelson and Winter use the term to refer to all regular and predictable behavioural patterns of the firm: “most of what is regular and predictable about business behaviour is plausibly subsumed under the heading ‘routine’, especially if we understand that term to include the relatively constant dispositions and strategic heuristics that shape the approach of a firm to the nonroutine problems it faces” (Nelson and Winter, 1982, p 15, emphasis in original). The regular and stable character of routines provides predictability and allows for coordination. The coordinative power of routines derives from their capacity to support a high level of simultaneity, which, within the degrees of freedom of the routine, derives

from the fact that within routines reasonably accurate expectations about the behaviours of others can be formed, which enables the simultaneous activities of individual participants to be mutually consistent (Becker, 2004, p.654). Thus routines reduce cognitive costs and save time by imposing closure. Becker (2004) provides a review of the literature on organisational routines. He notes that routines have been understood as recurrent patterns that are collective, in that they involve multiple actors: as such, routines are distinguished from the habits or skills of individuals. Organisational routines have been understood as, on the one hand, patterns of action (or activity), of behaviour (which is the observable subset of action) or interactions (which is a subset of actions that involve multiple actors), or, on the other hand as cognitive regularities or cognitive patterns (e.g., routines as rules, standard operating procedures, etc.). “Behavioural patterns and cognitive regularities are clearly different. They are regularities on two different levels, cognition and activity. … The fact that authors sometimes refer to cognitive regularities, and sometimes to activity regularities when they use the term ‘routine’ is a major source of confusion” (Becker, 2004, pp. 645-646). With regard to cognition, cognitive resources are limited, such that neither all alternatives, nor all consequences of any one alternative can be fully known, and attention has to be allocated selectively. “Routines economize on the limited information processing and decision-making capacity of agents … The semi-conscious processing of repetitive events requires less cognitive resources, as routines guide search by experience and reduce the space of behavioural options that managers should scan. … This procedure leads to an increase in the available cognitive potential that may be used to attend to non-routine events” (Becker, 2004, p. 657) However, an area of disagreement and confusion in the literature is the extent to which routines are characterised by ‘mindlessness’ – such that routines are essentially executed subconsciously - or are ‘effortful accomplishments’, in which those involved are very much aware of the routine and its cognitive requirements. Of course, this relates to what is meant by knowing - actors may be very much aware of the procedural aspects of the process in terms of ‘do what’, but not necessarily be aware of why they are required to, or are following, a particular pattern of action. As ‘successful solutions to particular problems’ (Dosi et al, 1992, pp 191-192) routines are widely considered to store knowledge, and especially tacit knowledge, which cannot be held in repositories such as documents or databases. Feldman and Pentland define organizational routines as ‘repetitive, recognisable patterns of interdependent actions, carried out by multiple actors’ (Feldman and Pentland, 2003, p. 95). Drawing on social theory, and the duality of structure and agency, they distinguish between the ostensive and performative aspects of routines. The ostensive aspect relates to the ideal or schematic form of a routine: it is the abstract, generalised idea of the routine, or the routine in principle, whilst the performative aspect consists of specific actions by specific people, in specific places and times: it is the routine in practice

(Feldman and Pentland, 2003, p. 101). Feldman and Pentland consider that theory of routines has omitted, or severely underplayed, considerations of agency. Routines are embedded in an organisation (or possibly between organisations) and its structures and are, to a greater or lesser extent, context specific. The application of general rules to specific contexts always involves incomplete specification and missing components, which leads to local interpretations and implementations. As they develop, or evolve in a path-dependent manner (David, 1997), routines therefore become – to some extent - idiosyncratic to their context, which can make them increasingly difficult to transfer effectively from one context to another. In other words, routines that are highly effective in one organisation may prove to be wholly ineffective in another even if they can be replicated. An important aspect of routines is their capacity to change, the sources of change (e.g., internal diktat, improvisation, external force majeure, etc.), and the nature of change (e.g., continuous accretion or punctuated equilibrium). Whilst routines are stable patterns of interaction or cognitive regularities, they are not necessarily static. Reasons for not changing routines include cost (whenever a mode of executing a particular task is changed this entails costs) – often in the context of uncertain benefits. Also, from a satisfysing perspective, as long as an existing routine is perceived to provide satisfactory results no conscious effort will be spent on changing it. External regulations can also restrict the potential for change. We now discuss capabilities, and dynamic capabilities. Capabilities1 Capabilities are the organisational equivalent to the skills of an individual: “To be capable of some thing is to have a generally reliable capacity to bring that thing about as a result of intended action. Capabilities fill the gap between intention and outcome, and they fill it in such a way that the outcome bears a definite resemblance to what was intended” (Dosi et al., 2000). Like skills of an individual, organisational capabilities may exist (or be possessed) even if they are not exercised, although exercising skills and capabilities tends to strengthen them or make them fitter. Also, like skills of an individual, a high degree of accomplishment can make an organisational capability look easy when it is in fact very difficult or complex. In general, the production of outputs or provision of services by a specific firm that is enabled by capabilities is the operation of a complex system (involving the skills of individuals, equipment and organisational arrangements), which is itself the product of a long and complex process of investments in training, technologies and organisational change. Thus, at the organisational level, the feasibility of an intended action reflects an accumulation of individual skills, equipment and organisational arrangements that have been generated by a series of past specific decisions that implemented and re-implement for the provision of past outputs or services. Concerning the relationship between capabilities and routines, Dosi et al (2000) “think of ‘capability’ as a fairly large-scale unit of analysis, one that has a recognisable purpose expressed in terms of the significant outcomes it is supposed to enable, and that is shaped 1

We do not discuss competencies, which sometimes overlaps with the concept of capabilities.

by conscious decisions both in its development and deployment.” Some but not all organisational routines are equivalent to capabilities. Other routines are smaller-scale, and are building blocks of capabilities, although routines are not the only building blocks of capabilities. Another important distinction between routines and capabilities is that routines involve no presumption regarding their evident purpose, whereas capabilities are purposeful: “The capabilities discussion relates specifically to a realm of behaviour infused with intentionality, conscious deliberation, planning and expertise – as contrasted with the quasi-automatic character of performance of low-level operating routines” (Dosi et al, 2000). In short, capabilities are means of solving problems. The concept of capabilities was introduced by Richardson, who observed that ‘organisations will tend to specialise in activities for which their capabilities offer some comparative advantage … [and] it will pay most firms for most of the time to expand into areas of activity for which their particular capabilities lend them competitive advantage’ (Richardson, 1972, p. 888). Richardson developed this concept from Penrose (1959), who argued that that profitability and growth of a firm should be understood in terms of its possession and development of unique and idiosyncratic resources. Whilst both Penrose and Richardson relied on the differences between firms in the capabilities they poses, Richardson focused on the distribution of economic activities between firms and the ways in which these activities were coordinated, whereas Penrose was concerned with the sources and directions of development of individual firms (Loasby, 1999, p. 49). Richardson also observed: It is convenient to think of industry as carrying out an indefinitely large number of activities, activities related to the discovery and estimation of future wants, to research, development, and design, to the execution and coordination of processes of physical transformation, the marketing of goods, and so on. And we have to recognise that these activities have to be carried out by organisations with appropriate capabilities, or, in other words, with appropriate knowledge, experience and skills (Richardson, 1972, p 888, emphasis added) Richardson thus recognised future-oriented activities as building on existing capabilities within the firm, and dynamics are implicit in his original concept of capabilities, yet dynamic capabilities – which relate to the ability of firms to change intentionally, both proactively and reactively - have received considerable specific attention from management scholars and evolutionary economists: •

In 1997, Teece et al. popularised the concept of dynamic capabilities, which they defined as the firm’s ability to integrate, build and reconfigure internal and external competences to address rapidly changing environments. “Dynamic capabilities thus reflect an organization’s ability to achieve new and innovative forms of competitive advantage given path dependencies and market position” (Teece et al., 1997, p. 516).



Eisenhardt and Martin (2000) define dynamic capabilities as: “The firm’s processes that use resources – specifically the processes to integrate, reconfigure, gain and release resources – to match and even create market change. Dynamic capabilities thus are the organisational and strategic routines by which firms achieve new resource configurations as markets emerge, collide, split, evolve and die” (Eisenhardt and Martin, 2000, p. 1107)



Zahra and George (2002) claim dynamic capabilities are essentially change oriented capabilities that help firms redeploy and reconfigure their resource base to meet evolving customer demands and competitor strategies.



Zollo and Winter (2002) define a dynamic capability as “a learned and stable pattern of collective activity through which the organisation systematically generates and modifies its operating routines in pursuit of improved effectiveness.



Zahra et al. (2006, p. 918) define dynamic capabilities as ‘the abilities to reconfigure a firm’s resources and routines in a manner envisioned and deemed appropriate by its principal decision-makers(s).”



Teece claims: ‘Dynamic capabilities include difficult-to-replicate enterprise capabilities required to adapt to changing customer and technological opportunities. They also embrace the enterprise’s capacity to shape the ecosystem it occupies, develop new products and processes, and design and implement viable business models. It is hypothesized that excellence in these ‘orchestration’ capacities undergirds an enterprise’s capacity to successfully innovate and capture sufficient value to deliver superior long-term financial performance.’ (Teece, 2007, p. 1320). Teece (2007) considers that dynamic capabilities can be disaggregated into sensing, seizing and transformational activities.

This set of definitions remains rather confusing, as some relate to abilities and others to activities. Meanwhile, further confusion arises because the activities referred to may relate to the formation of the ability to change, as well as to the actuation (or execution) of that ability, and the consequences of deploying the abilities. And different authors take different views. For example, whereas Winter (2003) sees dynamic capabilities as capabilities that govern change (and the rate of change) of ordinary capabilities, Teece (2007) considers this to be just one element of dynamic capabilities (Teece, 2007, footnote 31). And while Eisenhardt and Martin (2000) see higher level capabilities, such as product development capability because it results in new products for the firm, Zahra et al (2006, and Winter, 2003) consider new product development as an extant (or substantive) capability operating through a set of routines. For Zahra et al the ability to change product development routines would be a dynamic capability: “The firm may have a strong substantive product development capability while having a weak or no corresponding dynamic capability to change. Without a substantive product development capability it cannot have a dynamic product development capability” (Zahra et al., 2006, Note 1). Given this confusion, it is not difficult to see why some critics have found the concept tautological, particularly when studies have identified ‘dynamic capabilities’ in

retrospect rather than ex ante: firms that survive and prosper are considered to have done so because they possess dynamic capabilities. We consider that it might be useful to distinguish between different types of (dynamic) capability: rigid and versatile extant (or substantive) capabilities, and prospective capabilities. Here, rigid substantive capabilities are those that are highly fit for a specific purpose in an environment. They are contrasted with versatile extant capabilities which are those that are those that are applicable to a variety of environmental conditions. Firms based on rigid substantive capabilities tend to be specialised and emphasise efficiency through the fitness of their routines and capabilities. An illustration is drawn from the studies undertaken by the UK’s National Institute for Economic and Social Research which compared British and German textile manufacturers. Prais (1995) and his colleagues found that in British firms, the workers tended to have narrow and rigid job-specific skills which meant that they tended to be assigned to fixed tasks. Prais also found that managers in British firms tended to defer the implementation of new equipment and sought to purchase simpler models to reduce the complexity of implementation. This was due to several factors, including the low level of shop-floor skills, but also reflected an inability of British managers to implement new technologies, at least in part because of the strong separation between management and the workforce. By contrast, the more flexible and dynamic skills sets of their German counterparts as well as the closer management-workforce relations meant the German firms were equipped with newer and more flexible technologies, had workers better able to adapt to change and, thus, were better able to engage with and uphold innovation. In a static world the British firms could survive and even prosper, but they suffered in a dynamic world, as the limitations in the skills, technologies, routines and capabilities of the British firms restricted the competitive strategies available to them. For example the frequent changes in textile design implemented by the German firms relied on operators being able to read directly from sketches. This allowed the German firms to engage in small batch production and rapidly switch production in response to changes in demand, thus they were able to respond rapidly to shifts in demand, achieving high value added. The British operators, by contrast, more often relied on physical demonstration by supervisors which meant switching production was costly. The limited abilities of British operators coupled with simpler technologies available to them meant these firms engaged in the ‘strategy’ of long production runs, which meant the British firms were unable to switch rapidly in response to changes in demand, and consequently they tended to compete on volume, and price, the part of the market that was increasingly under threat and most easily entered by producers based in lower cost places of production, such as East Asia. In our terms, the British textile manufacturers were characterised as having rigid extant capabilities, whereas their German counterparts maintained versatile extant capabilities. The British sought to compete through scale and specialisation, the Germans through

scope and adaptability. Maintaining versatility is costly (relative to specialisation), and the benefits of versatility depend on the extent of turbulence in the market. Beyond rigid and versatile extant capabilities (which should be considered to vary along a spectrum, rather than be two distinct types) the firm may choose to invest in prospective capabilities to develop ‘future-options’. The word prospect relates to the future. The first two definitions in the Collins English Dictionary of this term are: (1) probability or chance of future success, especially as based on present work or aptitude; (2) a vision of the future; what is foreseen; expectation. Meanwhile, prospective means looking towards the future, and a prospector is someone who searches (usually for the natural occurrences of gold, petroleum, etc.). Here, prospective capabilities relate to both the firm’s strategy (what its top management is seeking to achieve, and how it is seeking to achieve it), and to the expected environment that the firm is likely to face. For example, a firm that is highly specialised and that competes on price may envisage that its market will be vulnerable to competition from lower cost producers and therefore seek to develop means to move into alternative markets. Note that the firm may invest in futures that it does not expect to happen, particularly if it anticipates that an event of low likelihood may have a catastrophic effect on the firm. Thus both the likelihood of a future and its significance need to be considered. This relates to building real options (Kylaheiko et al., 2002), which conventionally is the right, but not the obligation, to undertake some business decision, typically the option to make a capital investment. Investing in prospective capabilities is partially about creating real options in the sense of developing the ability but not an obligation to engage in some business activity. Both maintaining versatile extant capabilities and investing in prospective capabilities are ways of dealing with change and uncertainty, and to some extent they substitute for one another: i.e., firms can deal with an uncertain future by maintaining versatile rather than rigid capabilities, or they can invest in prospective capabilities to replace or change their rigid capabilities to better fit a new environment. Firms with rigid extant capabilities that do not invest in prospective capabilities will have very little capacity to change, and will find themselves at the mercy of market forces Part 2: An Empirical Exploration into UK Industrial Design Consultancy Firms Motivation and Objectives In this section we illustrate, rationalise and discuss the emergence and evolution of product and industrial design consultancy firms over the past twenty years. Three are three overall motivations and objectives for the study: •

Firstly, we were motivated by the general neglect of what have variously been identified as professional service firms (PSFs), knowledge intensive business service firms (KIBS), or strategic services in the management and evolutionary economics literature. Whilst firms in these sectors account for a growing and

substantial share of economic activity, they have received relatively little scholarly attention. •

Secondly, design is a pervasive component of a great variety of innovation processes in manufacturing and service sectors. It embraces activities that are essential in shaping not only the aesthetics but also the functionality of goods and services and that are increasingly pointed to as a key source of competitive advantage in global markets. Relative to R&D, design has received little attention from innovation scholars.



Thirdly, while its contribution to productivity is being acknowledged, the mechanisms through which this kind of creative business is made sustainable and the mechanism through which it participates in system-wide processes of structural change remain relatively unexplored.

Research Strategy and Data Collection Studying design consultancies in general, and product and industrial design consultancies in particular is difficult, not least because these firms do not have a standard industrial classification, so few official statistics are collected concerning ‘the sector’. Also, to gain an appreciation of sectoral change over the last twenty years it is necessary to identify where the long-term ‘memory’ of the system resides. We adopted the following strategy: •

We began with the directory of design consultants in the UK that was compiled by the Design Council in 1986. The Design Council is the UK governmental agency that is tasked with promoting the use of design in industry, and whilst the council continues to exist, it appears that this directory was a one off. Having obtained this directory, we asked ourselves how many of the businesses included have survived, and what changes have the businesses made in order to survive and grow. This paper concerns the second of these questions rather than the first, and our starting point was the larger businesses amongst these that have survived (a very large number of design consultancies at any point in time are very small businesses including sole-traders).



Further background research, including the use of the British Design Innovation database to identify consultancies engaged in, and in particular specialised in, product and industrial design.



We also accessed the archive of Design Week, the industry’s weekly magazine. Design Week was founded in 1986, and (to date) we have sourced information from the electronic archive which goes back to January 1995.



We also used companies own web-sites to gather information about their services, clients, processes, etc.



Last but not least, we have also conducted semi-structured interviews (20 to date) with principals and managers in some of the longer-lived and most important product and industrial design consultancy firms.

What is Product and Industrial Design (Consulting)? Design is notoriously difficult to define (Moggridge, 2007, p. 647), but in English, the word design can be a noun or a verb, and has several meanings, as Heskett illustrates with the nonsensical yet grammatically correct sentence: “Design is to design a design to produce a design” (Heskett, 2002, p. 3). In other words, to design is to create an intermediate output (in the form of a sketch, plan, etc) that is then used to produce a final output (sign, product, system, etc). Heskett argues that design reflects the fundamental human ability to separate conceptualization from action: “design, stripped to its essence, can be defined as the human capacity to shape and make our environment in ways without precedent in nature, to serve our needs and give meaning to our lives” (Heskett, 2002, p. 5). A more restricted approach is to consider design to be the core activity undertaken by people trained in and active in applying the methods associated with one or more of the design disciplines, which include but are not limited to graphic and communications design (including identity and branding), architecture and planning, interior and exhibition design, fashion and textiles, and product and industrial design. The application of ‘design thinking’ is central to these disciplines. In general, design thinking is based on inductive, creative processes that are not based on deduction or calculation, but rather based on understanding and synthesizing the problem (subject to constraints) then proposing and selecting amongst solutions. Moggridge (2007, p. 649) outlines five core skills of design: • • • • •

The ability to synthesize a solution from all of the relevant constraints, understanding everything that will make a difference to the result. The ability to frame, or reframe, the problem and objective. The ability to create and envision alternatives. The ability to select from those alternatives, knowing intuitively how to choose the best approach. The ability to visualise and prototype the intended solution.

Whilst this suggests a linear process, the design process is typically iterative, and – according to Moggridge - the most productive approach is often unstructured: “The [design] process does not look like a linear system diagram, nor even a revolving wheel of iterations, but is more like playing with a pinball machine, where one bounces rapidly in unexpected directions” (Moggridge, 2007, p. 650). Moggridge also stresses that designers are not taught to explain their reasoning and claims: “When a problem is complex, with lots of constraints, it is much easier to recognize a good solution than to explain it” (Moggridge, 2007, p. 650). Product design concerns the design of three dimensional physical objects. It therefore contrasts with two-dimensional design disciplines such as graphic design. The objects

developed by product designers can vary widely in their complexity, from simple static goods like furniture through to complex machinery. Industrial design was originally associated with improving the aesthetics and styling of mass produced products, with the primary intention of making these products more appealing. However, most industrial designers now seek to go beyond aesthetics and styling to develop products that ‘fit’ the people that use them and the industrial processes that produce them. According to the Industrial Design Society of America, aside from paying heed to the context of production and marketing: The industrial designer's unique contribution places emphasis on those aspects of the product or system that relate most directly to human characteristics, needs and interests. This contribution requires specialized understanding of visual, tactile, safety and convenience criteria, with concern for the user. Education and experience in anticipating psychological, physiological and sociological factors that influence and are perceived by the user are essential industrial design resources. (from the IDSA website) Consequently, whilst product design often involves engineering and developing the internal functionality of the product, industrial designers tend to deal with the parts of a product that people interact with, and aim to make the lives of the user more comfortable, pleasurable and efficient. In order to create better products, industrial designers often study people at work, at home and in motion. They also undertake work that goes beyond the product itself, to include packaging, exhibits, interiors and, occasionally, corporate identity. As information technology has become increasingly complex, some industrial designers have sought to simplify human-computer interfaces, through the development of ‘interaction design’ (Moggridge, 2007). Both product and industrial design are typically organized into sequential stages, which typically begins with exploration, seeking inspiration and an understanding of the context of the project, before moving to concept development (during which several rival concepts may be developed) then design selection, evaluation and testing, before moving to design for implementation, and finally delivery. The number of phases identified by different practitioners varies, as does the emphasis they place up on them. Some designers and agencies emphasize the front end of conceptualization, whereas others are more oriented to implementation; others still stress their capacity to undertake the whole process from beginning to end. Design consultants are businesses which undertake design and design-related tasks for clients. There is some debate within the industry as to whether some businesses are consultants of contractors. The Design Consulting Industry in the UK The mid-1980s also saw the first attempt to ‘map’ the design consultancy sector in the UK through a Design Council sponsored study (McAlhone, 1987). McAlhone identified around 2,700 design consultancies in the UK and found the industry to be “extremely healthy, growing fast and vigorously extending its skills” (McAlhone 1987, p. 7). She

also found “the majority of consultancies have been set up in the past ten years … [and] their mobility and growth create the dominant atmosphere of thrust and energy” (ibid, p. 31). The mean size of consultancies in McAlhone’s study was 11 people, whilst the modal size was 1-to-5 people. Overall, the industry was estimated to employ around 30,000 people and have a turnover of around £2billion in 2006 values. Table 1 Estimates of the Size of the Design Consulting Sector in the UK Year Agencies Total Turnover Total Fees Exports Employment 1985 # 2,700 £1.1bn [£2.1bn] n.a. £175m [£0.3bn] 32,600 1995* 3,000 £3.1bn [£3.8bn] n.a. £358m [£0.4bn] 41,000 2000 4,000 £6.5bn [£7.2bn] £4.8bn [£5.3bn] £1.0bn [£1.1bn] 76,000 2001 4,000 £6.7bn [£7.3bn] £5.0bn [£5.4bn] £1.0bn [£1.1bn] 82,000 2002 3,700 £5.9bn [£6.3bn] £3.9bn [£4.2bn] £1.2bn [£1.3bn] 67,000 2003 4,500 £5.3bn [£5.6bn] £3.6bn [£3.8bn] £630m [£0.7bn] 68,300 2004 4,000 £3.9bn [£4.1bn] £3.1bn [£3.2bn] £550m [£0.6bn] 69,600 2005 4,500 £4.6bn [£4.7bn] £4.0bn [£4.1bn] £700m [£0.7bn] 71,000 2006 4,500 £4.3bn [£4.3bn] £3.3bn [£3.3bn] £830m [£0.8bn] 65,000 Source: British Design Valuation Surveys, except * Sentance and Clarke, 1997 and # McAlhone, 1987. Income figures in brackets are corrected for inflation (RPI ex. housing) to 2006 values. These figures understate the true size of the industry as they are mainly based on surveys of its members by the British Design Innovation (BDI). The data should however reflect the broad trends in the industry.

Although there are no detailed figures, the industry is known to have suffered badly in the recession of the early 1990s, with the collapse of several high profile companies (e.g., Michael Peters and Smith and Milton). The industry recovered with the growth of the UK economy through the mid-to-late 1990s. The late 1980s and 1990s also saw the rapid diffusion of new technologies – particularly information technologies and digital manufacturing technologies into design (e.g., Computer Aided Design – CAD) and the emergence of new design disciplines such as interaction design (Moggridge, 2007) which focuses on human-computer interactions. The period since the Millennium seems to has (until recently) been characterized by decline. The BDI surveys reveals turnover falling from its peak in 2001 to £4.3billion in 2006, a decline of over 40%. Reasons for the post Millennium decline include the dot.com crash, problems with the US economy (which is the UK design sector’s largest export market) especially following 9/11 2001, and a decline in the number of large scale projects. The downsizing of larger businesses has led to the formation of many new micro consultancies which tend to compete by offering to work for lower fees, which then forces the larger businesses to reduce their fees and/or diversify their offer. The BDI surveys also found employment in the sector has declined, by 17,000 or 21% to 65,000. The steeper decline in turnover and fees than employment, with the number of agencies remaining roughly constant implies pressure on prices. Another reason for the pressure on the industry is that it is largely based in (and around) London, and that city’s economy has been booming in recent years, leading to substantial

growth in costs, which are difficult to live with in an industry under pressure. But whilst the sector is under pressure, it is still much more substantial than it was 20 years ago. Table 2 Larger Product and Industrial Design Consultancies operating in the UK Name

Year Started

DCA IDEO

1958 1969, as IDEO 1991

Smallfry 1971 Industrial Design Consulting 1972 Kinneir Dufort 1977 PDD 1980 London Associates 1981 Pearson Matthews 1983 Seymour Powell 1984 Renfrew Group c.1985 Team Consulting 1986 Priestman Goode 1986 Tangerine 1989 Creactive Design 1989 The Alloy (formerly Random) c.1991 as Random; 1999 as Alloy Therefore 1993 Factory Design* 1997 Factory split away from Seymour-Powell in 1997

Current Employment c.70 c.500 worldwide; c.55 in London c.8 c.21 c.40 c.75 c.15 c.20 c.50 c.30 c.30 c.30 c.10 c.16 c.18 c.25 c.10

In summary, the design consulting sector is largely comprised of small and very small firms. Half the firms on the BDI’s database employ no more than five people, and half turnover less than a quarter of a million pounds. Even this probably underestimates the significance of small and very small firms in the industry, as membership of the BDI is based on a subscription, which is relatively cheaper for larger firms). Table 2 identifies the older and larger PID consultancies active in the UK. Sources of Environmental Turbulence The last quarter century has seen considerable environmental turbulence which needs to be appreciated if the development of product and industrial design consultants is to be understood. Quite simply, theirs is not static world. Below, we outline some of the factors that have impacted on the industry over the last quarter century or so. •

Demand: o The decline in the UK manufacturing base. Traditionally, PID consultants provided services on request to manufacturing firms. The severe decline in the UK’s manufacturing base since the late 1970s has reduced the scale of the ‘obvious market’ for design consulting services. It also meant that many in-

house design teams were disbanded or reduced in size, which led to many experienced designers setting up as sole traders or as consultants – thus expanding the supply side whilst the demand side was contracting. On the other hand, the UK’s residual manufacturing base is arguably stronger, and on average more likely to understand the benefits of investing in design. o Market shocks. Design consulting is a highly cyclical market because it tends to grow symbiotically with other sectors of the economy. Furthermore, since it provides intermediate inputs to markets which are themselves cyclical, it is badly affected by shocks such as 9/11, in the immediate aftermath of which many contracts were cancelled overnight. •

Supply of Skilled Labour: The growth in design graduates. Design is now one of the most popular university subjects, and the UK’s universities have been encouraged to expand to fulfil demand. Critics argue that this has lead to a decline in the quality of design students, and has lead to an over supply of aspiring designers. As design is a vocation which requires relatively little capital investment, many new graduates set up businesses from home and charge very low fees in order to get started and some work in. This arguably undercuts the market for design consultancy services, or at least forces the more established firms to find ways of differentiating their offer such that they can justify their higher fees. On the other hand, the growth in the supply of design graduates, and the growth of new disciplines notably design management, should have been beneficial to established firms not least for the following reasons: o Lower average staff costs (many ‘new graduates’ might lack commercial experience, about which managers often complain, but ‘are willing to work for peanuts. For 21 year olds who want to break-in, making a substantial return on their skills is not a priority’). o Higher ICT skills (although these might undermine the skills of the older hands and/or might be integrated with more difficulties and at higher costs in existing process. o Whilst many of these graduates have not become designers they have take up managerial positions and became more sympathetic buyers of design than had previously existed.



Technological change. New technologies have had a massive impact on design (or at least most design firms). When McAlhone (1987) undertook her study of British Design Consultancies in the mid-1980s, she found that three-quarters were using computers, but only a minority were using computer aided design (CAD) (18%) and computer aided drafting (16%), and just 11% used e-mail. Even amongst product and engineering consultancy just a third had CAD and 22% computer-aided drafting. McAlhone concluded “overall, design consultancies have only partially come to grips with information technology. They widely use computers as an administrative aid, but not as a creative design tool” (McAlhone, 1987, p. 29). Today ICTs are ubiquitous, and very widely used not only as administrative tools but as part of the creative process. New technologies have become widespread: the telex and fax have been replaced by the email and

internet. Periods of rapid technological change are characterised by uncertainty, and firms face classic dilemmas, such as when to buy into new equipment (particularly as prices are constantly falling), and which system to buy and train into (wrong choices can be very costly). Not only have new technologies impacted on the design process, they have opened up new opportunities, and changed the division of labour. For example, the development of digital manufacturing technologies and rapid prototyping has enabled firms to move into bespoke and small batch manufacturing. They have also reduced the need for physical proximity between the design firms and its clients (and manufacturers), permitting a much more dispersed system of production. In conjunction with the increased accessibility (through increased provision and falling costs) of travel, particularly air travel, ICTs have helped internationalise the market for design. On the one side, this has exposed UK design firms to increasing competition from low cost producers, most notably from China. To an extent, design is a matter of effort, and Chinese designers apparently cost one-fifth those in the UK – this makes it increasingly difficult to justify using UK designers, particularly for the more mundane aspects of the design process. On the other hand, these technologies have enabled UK designers to develop opportunities abroad, notably in Japan, Korea and Taiwan (we discuss this further below). •

Fragmentation. Design consultants are creative businesses led and staffed by creative individuals, but holding these businesses together can be challenging, as experienced staff often leave to establish their own businesses (as well as for rival consultancies), both for greater financial rewards but also for greater creative freedom. McAlhone observed twenty years ago, “No one needs capital to start a design consultancy – just guts, a drawing board, and a mouth” (McAlhone, 1987, p. 30), and the situation is little different today – reputation is key, and capital requirements are typically low (whilst the internet means that specialist software can now be accessed on a ‘pay as you use it’ basis, rather than bought up front, whilst other equipment can often be accessed through universities and colleges). This danger of fragmentation is often greatest after a recession, during which a consultancy may have accumulated debts, which then need to be repaid, which reduces the returns payable to employees. This has implications for how the business is controlled, and the extent to which it is rational for business owners to try to maintain their design teams through tough times if they suspect this loyalty will not be reciprocated.

Strategies and Capabilities for Survival and Growth In this section, we review a variety of strategies unveiled by our empirical research that design consultancies have engaged in to survive and grow. We also consider the implications of these strategies for the capabilities of these businesses. [The strategies reported are in no particular order].



Specialise. Designers typically emphasise the design process rather than the domains to which the process is applied. Indeed, designers often revel in the variety to which the design process can be applied. However, some design firms have chosen to specialise in certain domains, a notable example being Pearson Matthews in healthcare products and medical devices. Interestingly, it appears that companies can develop these specialisms almost by accident, with one commission opening the door to a stream of others. There are benefits to specialisation, particularly in highly regulated activities such as medical equipment, as the firm has much fuller knowledge of the possibility space as shaped by the current regulatory framework.



Focus on International Markets. Some consultancies (e.g., Tangerine and TKO) have sought to develop their international client base, particularly in east Asia. Whilst this has not impacted to a significant extent on their design process, it has required that they develop complementary capabilities in terms of understanding how to forge and develop business relationships in other cultures. Initially at least, most of this activity concerned re-skinning East Asian products to make them suitable for western (European) markets, but the strengthening of relationships has also seen the consultancies offer additional services, like consumer insight for European markets.



Migrate Capabilities. A common behaviour has been the migrating of capabilities way from products to similar applications. o From Products to Structural Packaging: In the 1980s and 1990s, the packaging of products became increasingly important to sales and marketing, and PID consultants were well placed to engage in structural packaging work because of their capabilities in 3-dimensional design (rather than traditional 2D design of graphics and branding consultants, that had previously dominated packaging). Related to this, firms also moved from designing products to designing display cases. In effect, this migration tended to move PID consultants closer to the marketing function in their client firms, relative to the engineering function which had been their main channel of contact. o From Products to Interiors: A similar migration from that above is a discernable shift of some firms from designing products into designing interiors. In particular, several consultants won commissions to design seats for aircraft and/or trains (e.g., Priestman Goode, Seymour Powell, Tangerine), and some of these have subsequently gone on to design the entire interiors of aircraft or trains. And one or two have taken this migration a step further, using this experience designing accommodation in confined spaces to design ‘Japanese style’ hotel rooms which combine very small spaces with high specification in terms of equipment (e.g., Priestman Goode have designed the Yotel rooms). The benefit of these projects to design consultancies is that they tend to be larger scale

projects, with better resourced clients (i.e., the fees are higher) where the risks are greater for the client (consequently, they tend to be more risk averse, and form relationships with more established and reliable consultancies), and which are more interesting (which helps prevent fragmentation of design firms, as designers know they will not be able to access similarly challenging work on their own account). These projects also involve a more developed of a division of labour, with designers, engineers and marketing personnel often work collectively on projects, o From Products to Services: An even more radical shift is from designing products to designing services, but interestingly very few of the PID companies we studied had undertaken this to any significant extent – the major exception being IDEO. Instead, and IDEO aside, service design seems to be being pioneered by new entrants, including the Engine Group (which was started by two product designers from Priestman Goode) and Live|Work. Designing services does appear to require the development of new capabilities from those traditionally used in product and industrial design (in particular, an understanding of people and the skills of service employees is crucial). •

Moving Upstream and Down. o From Designing to Consulting: Another notable shift amongst many of these firms is their increased provision of consultancy services not directly connected to actually designing anything. For example, several provide design management consultancy and training for in-house design teams. Some firms have developed new capabilities, for example by developing anthropological and ethnographic methods they now provide more consumer and user insight consultancy than previously (e.g., Seymour Powell’s foresighting and insight team). At an extreme, some design principals have become brand guardians external companies – for example, Richard Seymour is brand guardian Dove (with Unilever) and Guinness (with Diageo). This relates to common tension between whether the client really seeks to engage capabilities of the firm, or with the skills of a particular individual within firm.

for for the the the

o From Consulting to Making: A counter trend to seeking to move upstream, and shifting the emphasis of the business away from actually designing to providing complementary services, is moving downstream into manufacturing. This has been facilitated by rapid manufacturing technologies, which make bespoke and small batch manufacturing economic. Some consultancies recognise that a significant proportion of their client base do not actually want to manufacturer their own products,

or to be responsible for overseeing the manufacture of their products (e.g., these may be research and/or marketing based firms). Some firms have also decided to design and manufacture products on their own account (although these firms none of these firms has, as yet, ceased to provide design consultancy services. o Innovation Broking. A third take on this is the provision of innovation broking services by at least one larger consultancy (PDD) – this service (through a separate business – Carbonate) identifies promising inventions from independent inventors and from universities and tries to find commercial partners for these projects, adding value by developing prototypes and undertaking user research etc. •

Reorganisation. Firms have also reorganised to proactively and reactively engage with the environmental turbulence they have faced. Whilst some firms have established new teams or departments with specific functions (e.g., Seymour Powell’s foresight and insight teams, and Renfrew Group teamed up with and biotechnology consultancy Ivotech to establish Bio Design Group, a joint venture to offer product design and biotech development skills to the healthcare industry), others have downsized. In particular, there is evidence that some firms are moving to more networked approaches to providing design services. One interviewee explicitly referred to the Hollywood model, by which teams of designers from micro-businesses and freelancers are assembled on a project-byproject basis. Engaging in this mode requires strong social networks and good knowledge of the skills of designers who might contribute to a lesser extent to such projects.

Conclusions Not so long ago, governments of advanced economies tended to regard manufacturing as ‘special’, that is as a core economic activity upon which wider prosperity is based. Today, governments of the same advanced economies are more likely to regard creative, knowledge based activities as ‘special’. This is exemplified by the European Union’s Lisbon Strategy. A similar shift seems to be taking place in the research agenda of innovation economists and management scholars. However, it is fair to say that a number of major theoretical frameworks developed over the past 20-30 years, including the capabilities literature, were primarily informed by empirical studies of large, often high-tech, product-based manufacturing firms. Service firms, and SMEs, have been systematically underrepresented in spite of their relative importance for employment and value added. To address this gap, we used a capabilities framework to understand the growth and survival of small, knowledge-based, professional service organisations in the UK product and industrial design sector. We have followed the development of these businesses from roughly the mid-1980s to the mid-2000s, a period characterised by deep structural change in the British economy.

Analyses of archival sources and in-depth interviews with experienced principals and managers reveals far greater variety of survival and growth strategies than had been anticipated. The adaptive and creative responses to a turbulent business environment range from substantial changes in the product markets supplied to a shift towards the provision of pure consultancy services. Nevertheless, three factors seem to be quite constant in explaining the survival of many firms. The first is a fundamental understanding of the design process and its changing requirements in terms of input (including ICT) and outcome (what does the client need?). The second and very much related factor is the development and constant mobilization of versatile capabilities, which are (dynamic) capabilities that are applicable to a variety of environmental conditions. While firms based on rigid substantive capabilities tend to be specialised and emphasise efficiency through the fitness of their routines and capabilities, firms with versatile extant capabilities, which typically involve higher skilled and higher paid labour, can respond to fluctuations in supply and demand by redeploying an envelope of flexible but coherent resources which are then translated in incrementally different routines. The third factor is the development of relational capabilities. There is a tendency in the capability literature to look inside organisations to the detriment of the structure and dynamics of social connections between the firm and its clients, collaborators and competitors. This is unfortunate, because in rapidly-changing environments, and especially in those where the business has a very personal nature (nothing is more personal than talent), these are essential gateways to new business opportunities. To be sustainable, however, it is highly likely that the capacity to reach out to the resources distributed in the system and outside the firm cannot be confined to the entrepreneur-founder, but need to shift at least in part to the organisation. This obviously poses an old principal-agent problem (through the expansion of firms’ relational capabilities opportunities often emerge for younger staff to leave and start a new business) that the firm needs to actively prepare for. The market for product and industrial design services is highly volatile and a key condition for the wealth of the sector seems to be the degree of ‘permeability’ of its capabilities and of its client base. On the one hand, many commentators have reported that firms which could greatly benefit from working with designers cannot perceive the opportunity and do not value their services as a source of competitive advantage. On the other hand, designers seem not to excel at marketing and often show diffidence towards the more commercial processes involved in the trade of their talent. At the same time, many of them show lower sensitivity to profit than to the prestige they associate with the profession. While this attributes favourable features to the supply of design services market, including lower average staff costs for higher skills, it does constitute a barrier to the growth of the businesses. In scoping the various survival strategies we have reported in this study, most of them appear to be accidental or ‘emergent’, as Minztberg (????) suggests. This does not mean to say that survival in a completely random outcome of myopic choices but that the strategic decisions that are recognised as key events were largely unanticipated before the right opportunities came up. In this respect, what mattered for firms was not having developed efficient routines as much as having nurtured versatile capabilities.

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