STRA TEGY

BUSINESS SERVICE FIRMS AND MARKET SHARE

Timothy L. Wilson
Clarion University

Barbro I. Anefi
Umeb University, Sweden

ABSTRACT

Traditional thinking suggests that profitability is linearly dependent upon market share, an

assumption not carefully tested for services. 77us assumption is ezaminedin this study for bminess
services in light ofthe apparent opportunity in this sector for entrepreneurs. Crosr-sectional data
Pom secondary sources suggest that a V-shaped relationship may be a better description of
variation up to nine times average finn size in this sector. This i nterpretation ofresults is imponmu
to the strategy of small business managers because it relates to the plans they might make in
growing their businesses. Normative recommendati ons promise i mprovements for firms entering

the critical intermediate share stage. These include focusing on revenue per employee as an

obj ective, developing professional management assistance formal proj ecification of work (thus
utilizing "virtual organizations" ), and paying aaention to organization while growing.

INTRODUCTION

It has been suggested that the business service sector has represented opportunity for potential

entrepreneurs (Wilson, 1997). Average fum sales in this sector have been assessed to be about

$900 thousand ($896,723) with about 18 employees (Wilson dt Smith, 1996)
—a seemingly

comfortable size for a sole proprietorship. Making matters even more interesting for

entrepreneurs has been the favorable supply and demand characteristics of this sector. Because
of the tendency to be small businesses, competitive firms could be structured around the
capabilities of as few as a single person; on the demand side, there has been a steadily growing
market of industrial customers —fueled in part by tendencies of large firms to downsize.

A previous study of market share's impact on profitability in the business service sector

suggested a linear dependence of profitability on market share (Wilson, 1997). That is, it
appeared firms could improve their profitability by increasing market share. The nature of the
approach used in that study, however, virtually forced a linear dependence. A subsequent review

of the data suggested that a simple linear variation might not be the most appropriate
interpretation of profitability/market share results.

This behavior is important because growth tends to be an objective of businesses, especially small
ones. It has been observed, however, that businesses tend to have problems in growing. Many

41



Journal ofSmall Business Srraregy Vol./0, No. I Spring/Summer l999

organizational life cycle theorists believe that organizations encounter a predictable series of
problems that must be managed if organizations are to grow and survive in a competitive
environment(Jones, 1995). These observations may be especially relevant in the business service
sector. That is, these problems would appear to be particularly severe in businesses that are
dependent not only upon the performance expertise of the principal, but his/her management
guidance as well - as tends to be the case for the average business service firm. In fact, a
subsequent review of cross-sectional market share data indicated some problems in profitability may
occur as these service organizations grow. The purpose of this paper is, therefore, threefold. First,
the dependence of profitability upon market share for firms in the business service sector is re-
analyzed. Second, the probable cause of this observed behavior is discussed. Third, in light of the
observed behavior and probable cause, recommendations are made for managers of small, growing
business service firms. Results should be interestihg to practitioners who must develop strategies
and subsequently organize to implement them. The same results may be important to academics
interested in performance in growing firms, especially business service firms.

BACKGROUND

Business Services - Business services are those services provided for business customers.
"Business customers" in this case refers to industrial, commercial, institutional, and government
organizations that purchase certain services to sustain their ongoing activities. The U.S. Census
of Services lists eight production categories that constitute approximately 80 percent of services
in this sector —computer and data processing, management consulting, advertising, IMtD
laboratories, personnel supply services, detective and security agencies, building services, and
equipment rentals. Usually accounting services, engineering and architectural services, and at
least some portion of legal services have been added to this listing to define the business service
sector from a production standpoint.

To some extent, these businesses may be ideal for creative, inde pendent professionals. They tend
to be built around a key individual, or individuals(Quinn, 1992),and the industrial customer base
tends to be easier to target than consumer-orientedbusinesses(Haas, 1995). Further, downsizing
may provide continued growth in this sector in the future under current economic conditions. On
the one hand, this practice provides insecurity for employees of the downsizing firm. On the
other, it provides opportunities for private vendors. It has been suggested that outsourcing would
grow 23 percent over a recent twelve month period (Ozanne, 1997). In other words, the work
of a downsized staff does not go away. Rather surprisingly, sometimes it is done by the same
people except under dilferent employment conditions —it was reported that when DuPont
reduced its labor force over a seven year period, approximately 30 percent of "downsized" ex-
employees returned as independent vendors or contractors (Clark, 1997).

g~iIP I I -I g I,P ilgggi 9 dd III g I II d ini
not always completely rational, it is "choiceful." That is, a number of design alternatives may
exist for an organization. Actual organizations of course starts with firm formation and evolves
over time. It was suggested that "Often the intuition of the founders leads them to arbitrary
choices of what markets to enter, what technology to use in producing goods, who to hire and
how to organize." Earlier Lindblom (1959)characterized such a decision process as a successive
limited comparison, or a "scientific muddling through," approach —essentially proposing that
normal decisions tend to be made from simple usage of relatively available information. To the
extent that evolution reflects conformity with the environmental demands of a firm, the resultant
organization might be expected to represent some optimal structure for the available resources,
competition and opportunity that presented themselves. Normann (19g3, I g4) was perhaps the

42



Journal ofSmall Business Strategy Vof. 10, itto. 1 Spring/Summer 1999

first to dwell on effective service organizations and their management. He reportedly observed

two types of effective managers in service organizations- those who grew up with, or founded,
the organization and those who could motivate employees. In his opinion, the "best was a
combination" of these characteristics. In perhaps an alternate approach, a formalization of role
specialization has been suggested for professional service organizations(Kotler dt Bloom, 1984).

Quinn (1992, 73-74) noted a company could achieve dominance using fewer resources by
leveraging the intellect of key people by using them in different adhocracies specifically focused
on customer needs. In this regard, Mintzberg (1983,261) indicated that in adhocracies, managers
are functioning members of project teams, with special responsibility to affect coordination
among both team members and with other teams. Distinction between line and staff blurs, and

the support staff plays a key role. Daft (1992, 479), in interpreting Mintzberg, suggested
adhocracies develop to survive in complex, dynamic environments. Team-based structures

typically emerge, and although there may be an elaborate division of labor, it is not formalized.
Coxe (1980), in fact, described such teams and their management in architectural firms.

Quinn (1992, 262) further suggested that leveraging upon key personnel could be a general
strategy. That is, most of the "great" laboratories, consulting firms, business schools, or even
universities grew to prominence around the skills and personalities of only a few —two to five
—key people. Virtually all the value-added contributions of these organizations reportedly came
from deep professional knowledge, reliability and precision delivered with unswerving dedication

(270). Employees with trained intellect and skills were seen as the true value producing
capabilities of a firm. They and their customers, along with the codified knowledge that bound
them together, were the true assets of these organizations (271).

Projects appeared important in these businesses, and the concept of the project as both an
organizational unit and as a work unit in business services was suggested as applicable (Wilson,

1996). For example, Harvey and Rupert (1988)identified the "test" project as being an essential
element of final selection of an advertising agency. Day and Barksdale (1992) also cited
"satisfaction with previous projects" and "has worked on similar projects in the past" (emphasis

added) as an indication of quality used by clients in supplier selection. Lundin et al, have noted
the increased tendency to utilize projects in industry (Lundin dt Midler, 1998) and the use of
temporary (virtual) organizations in them (Lundin gt Soderholm, 1995). Peters (1992), in his
discourse on efYective organizations, went so far as to say "the project is everything."

Nevertheless, Wheelwright and Clark (1992) indicated that project portfolios must be managed
to the degree that they maintain a strategic focus. That is, both the organization and its projects

must serve the purpose for which they were created. A long-term goal of this portfolio
management approach was the development of critical capabilities for the organization.

Profitabili and Market Share - Market share's association with profitability and the attendant

impact on strategy have provided for some interesting discussions in the marketing literature. In the

PIMS description of market share's effect on strategy this attention catching observation was made,
"On the average, a difference of 10 percentage points in market share is accompanied by a
difTerenceof about 5 points in pre-tax ROI" (Buzzell, Gale fk Sultan, 1975). At about the same

time, however, Day (1975)indicated that such an association was not automatic and indeed share
gains could be "pyrrhic victories" if financial resoumes were inadequate to take advantage of gains.

From another perspective, Porter (1980)reasoned that perhaps linear market share dependency was
not to be expected. Rather, low share businesses might be expected to do well because they were

focused, difyerentiated firms and high share firms might do well because they were cost leadership

43



Journal ofSmoll Business Strategy Vol. 10, No. 1 Spri nglSummer 1999

lirms. Firms in the middle, on the other hand, might not do well because they were neither, thus
leading to "V'haped behavior. The strategic implication, therefore, was not to get stuck in the
middle, but rather to pursue one strategy or the other —a view endorsed by Peters (1988). Kotler
(1995,382), citing both the wodi of Porter (1980)and Roach (1981)described a "V-shaped" profit
v. market share curve that related to agricultural equipment firms. High profitability at low share
was associated with focus, while similar profitability at high share was linked to specialized
production, as well as marketing skills and distribution in the segment.

In their discussion of profitability/market share as it related to PIMS and other observations, Buzzell
and Gale (1987)did not assert small share businesses could not be profitable. Indeed, they cited
references that tended to indicate the contrary (Hammermesh et al., 1978, Woo gt Cooper, 1982).
Nevertheless, on one item there appeared to be little give —the relationship between market share
and profitabilityuncovered in the PIMS study was the most likely existing relationship(92 ).

These discussions, of course, were primarily for manufacturing firms and for primarily large fums
at that'. It is not clear where service firms lay in share considerations. Shostack's(1977) seminal
article suggested that services were "different" and a break away from product marketing theory was
in order. Thus, some consideration to share growth strategy would naturally seem to be in order.
ln this regard, Heskett's (1987)observations on services seemed to indicate there were no automatic
advantages to getting large. Managers of large service businesses appeared to have even more
problems than managers of small businesses- "bigger is not better in those situations in which the
factory must be taken into the marketplace... "

Cross-Sectional Studies - Cross-sectional studies have become a rather accepted approach for
making comparative assessments of approaches to strategic management. Possibly the best
known use of this approach has been the PIMS studies conducted at Harvard (Buzzell dt Gale,
1987). Consequently, these observations have become a rather standard inclusion in texts on
strategy (see, for instance, Kotler, 1995). Wilson (1997) has recently used this same
methodology to make observations on marketing strategy in small businesses —employee
productivity, as well as market share, were found to be statistically significant in determining
profitability levels.

METHODOLOGY

An ordinary least squares approach was used to examine the relationship between profitability and
market share, especially at low multiples of average share for firms in the business service sector.
A simple regression expression in which pre tax profitability's dependence on market share was
constructed as was done in the previous study (Wilson, 1997). The data base used in this study
came from two sources —Census of Service Industries (1992) and RMA Annual Statement
Studies (1993). Although the latter source carries a disclaimer, it has been used previously in
research studies with apparent successful results (Wilson, 1997; Davidson 4 Dutia, 1991)and
is a standard reference in small business centers and loan departments in banks. The dates of the
data used in the study were fixed by the availability of census information —1992 was the latest

'here is much material written about market share and strategic advantage that has not been
covered in this selective coverage of the literature. One of the reviewers, for instance, suggested
that the paper by Prescott, Kohli and Venkatraman (1986), Strate ic Mana ement Journal be
included. That research found that the relationship between market share and profitability was
dependent upon the structure'of the industry.

44



Journal ofSmall Business Strategy Vol. l0, No. I Spring/Summer l999

year for which information was available. The RMA compendium of 1993 was for 1992 annual
reports and thus reflected the same timeliness. The census information was used to determine

average firm size for the respective segments and RMA data to determine profitability of various
sized firms'. That is, one aspect of the RMA information was a compilation of income
information into six size ranges, $0 —I MM to &$25 MM. Thus, the combination of profitability
v. firm size and average firm size could be used to develop a profitability v. relative market share

profile for business service segments as reflected in Table l.

"Relative market share" was used as an independent variable and should be discussed within the

context of this study. Usually market share is measured as a percent of total market. Relative
share, which appears to have current attraction (see, for instance, Kotler, 1995), is measured as
a percent of largest firm's share. Neither data source presented data on largest firm size, but
average firm size was available. "Relative market share," therefore, is presented here as a

multiple of average size. This approach facilitated normalization of data to a single scale while
capturing relative size and was consistent with the earlier study (Wilson, 1997). The sample
characteristics also need to be clarified because intermodal averages can be skewed by several

large firms. That possibility seems unlikely here where at least 190 firms determined the average
(Please see Table I, where the median for the number of firms in each size range is 242).

Profit before tax was used as a dependent variable both because it was consistent with previous

studies (Wilson, 1997; Wilson & Smith, 1996) and because of its dependence upon marketing
effort- as opposed to return on investment, which tends to be more financially oriented. A major
question about these data tends to be related to internal consistency and comparability. In other

words, were the figures digested from legal services, for instance, comparable to those for

engineering and architectural services? In this regard, a significant consideration is firm

organization and treatment of salaries. The preface to RMA suggests equivalent treatment in this
regard, so financial data and ratios should be comparable. Finally, simple regression was used

to test behavior because of its precedence. That is, from a theoretical (Buzzell & Gale, 1987;
Kotler, 1995: Porter, 1980; Peters, 1988) and empirical (Buzzell, Gale & Sultan, 1975; Kotler,
1995, Wilson, 1997)standpoint, a simple profitability/marketshare analysis has been used. 7his
work can thus be compared directly with previous studies.

RESULTS

~Di I fDI —6'If iggidgi, 6 I'g if li df ii Ig
from 2908 RMA firms, were compiled and analyzed. These sixty-eight cases were comprised of
information availability in individual SICs representing the eleven business service segments
referred to previously —computer and data processing, management consulting, advertising, etc.
The 2908 RMA firms were the total number of firms that contributed to these sixty-eight cases.
Relative market shares in the range zero to ten were studied with midpoints in range were used to

'ata from Robert Morris and Associates'RMA) Annual Statement Studies used with prior
authorization. As a condition of use the following disclaimer, which appears in each publication
of RMA studies, is included. "RMA cautions that the Studies be regarded only as a general
guideline and not as an absolute industry norm. This is due to limited samples within categories,
the categorization of companies by their primary Standard Industrial Classification(SIC) number
only, and different methods of operations by companies within the same industry. For these
reasons, RMA recommends that the figures be used only as general guidelines in addition to other

methods of financial analysis." Copyright Robert Morris Associates 1997. The authors of course
are responsible for interpretation of the information used in this study.

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Journal ofSmall Business Strategy Vol, /0, No. I Spring/Summer f999

analyze results. T-tests on the point estimates of average values of profitability versus trend values
for the best straight line through the points established the level of significance for the individual
points.

A fairly obvious conclusion in perusing the data was that a significant variation from linearity was
involved. Table I shows five of seven points had statistically significant variations from the trend
line. Further, the groupings- two plus, two minus, and three plus suggest curvilinear, perhaps U
or V-shaped, variation. This relationship was thus explored further.

It is important to note in passing, however, that these results relate to profitability and not profit. In
this regard, two points in Table I might be analyzed. An average size business service finn has sales
of $896,726 (Census of Services 1992, Table 2A). Thus, a finn of 0.5 times average size with a pre-
tax return on sales of 6.57% would have pre-tax profits of about $29,600. A firm of 1.5 times
average size with a pre-tax return on sales of 5.16%on the other hand would have a pre-tax profit
of about $69,400. A typical firm growing by this amount therefore would generate 135 % higher
pre-tax profit dollars even though

profittability

ha decreased 21 percent. The overall results thus
suggest that the apparent egiclency in generating profit decreases at intermediate share and not that
the firms generate a lower amount of profit dollars.

Table I - Sector Profitability for Small Relative Share

Range in No. Firms Mean Trend t -Value Ave. Co.
Rel. Share Represented PBT(%) Value(%) Profit (000)

0- I 640 6.57 4.63 3.18'29.5
I- 2 862 5.16 4.86 0.49 69.4
2- 3 242 4.03 5.09 - 1.74s 90.3
3- 4 273 3.96 5.32 - 2.23s 124.3
4- 5 317 6.80 5.49 2.15s 274.4
5- 75 384 7.58 5.95 2.67'24.8
7.5 -10.5 190 6.19 6.58 0.64 499.5

Definition of Terms:

Range in Rel. Share - Range in relative share used as the independent
variable in analyzing data.

No. Firms Represented - Number of firms in RMA data base whose
profitability is reflected.

MeanPBT(%) - Average of profit before tax for all firms within
the size range.

Trend Value - Value of profit before tax taken from best
straight line through data as percent.

Ave. Co. Profit - Calculated average profit for average size firm
within size range.

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Journal ofSmall Business Strategy Vol. 10, No. I Spring/Summer 1999

Figure I has been constructed for the complete range of data and profit for this study. It is seen to
be a monotonously increasing function of share. In general, firms would, therefore, have an
incentive to continue growing even though their apparent efficiency in generating profit dollars

might decrease as suggested here.

Figure I —Average Company Profit for Small Relative Share

Average Firm Profit
($000, log scale)

600
+

400 +

+
200

+
100

+
+

60

40
+ r

20

10

1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Relative Market Share

Market Share —Linear or V-Sha ed? —Nevertheless, it was firm efficiency that was of interest
in this study. It has been suggested there are two schools of thought on market share's impact
on profitability. On the one hand, PIMS advocates (Buzzell & Gale, 1987) suggested rather
strongly that linear variation should be observed. That is, there should be a continuous increase
in profitability with increasing market share. Porter (1980)and Kotler (1995),on the other hand,
suggested that the variation may be U or V-Shaped. That is, both small specialists and
dominating firms may be profitable, but for firms in between profitability may suffer. Kotler

(1995)has published data that support both arguments and reconciled observations. Essentially,
it appeared to be a matter of how "markets" were measured- either in total or by segment served
(383). If total market was used as a measure, V-shaped behavior seemed likely; if segment
served was used as a base, it was reasoned that linear behavior might be expected.

47



Journal ofSmall Business Strategy Vol. /0, into. I Spring/Summer l999

Figure 2 —Profitability for Small Relative Share

Profit Before Taxes (%)

9.0

8.0
+

7.0 + TREND
LINE

6.0 +

5.0 .... ---""
'"

Segment 2 PBT = 4.48+ 0.28 RMS

4.0 +
Segment I

3.0 PBT = 7.16—1.27 RMS

2.0

1.0

1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0
Relative Market Share

In this regard, the share measurements of this study were most closely associated with the total
market. In accordance with theory, the results suggested indeed that there were statistically
significant deviations from linear variation. The trend line is shown in Figure 2 along with the
original data and sample standard deviations. Clearly, the best straight line fit was not good (as
suggested above) and as can be seen from examination of Figure 2. In terms of usual statistical
measures, the overall trend line had an R' 0.13, which indicated 13% of variation could be
explained by the trend relationship.

Non-linear behavior was tested and an attempt was made to fit two straight lines (a "V"behavior)
to the data. A number of combinations were tried. Virtually any division of points that broke
the trend line into two segments improved goodness of fit as measured by R'f the segments
compared to the trend line. For instance, the two lines of Figure 2 had R's respectively of 0 996
and 0.195. This particular treatment produced the best overall combination of R's for the
available information. It was thus concluded that although there might be some question about

48



Journal ofSmall Business Strategy Vol.10, No. 1 Spring/Summer 1999

how important market share might be in overall variation, it is virtually certain that share addition
initially was associated with a decrease in profitability before increasing monotonously.

Further, because the original information had a cross-sectional base of business services, it was
suggested that this behavior may be common in individual segments. That is, it may just as likely
occur in law firms, for example, as it does in engineering and architectural firms. Clearly the
ability to fit the data in the initial portion of the curve with a straight line was better than with
larger market share data. It is not obvious why this occurred. Perhaps the behavior was
associated with the points at which organizationsbecame effective again. These points of course
would be blurred in cross-sectional results. Rationalization, however, was beyond the scope of
the present research. Nevertheless, it might be noted that even the R'n the second segment is
better than that for the overall trend line. Thus, using two segments to describe the data was
obviously better than using one.

DISCUSSION

The results clearly suggested that initially there is a profitability decrease with market share for
business service firms at low market share. That is, a V-shaped variation best described the
profitability v, market share relationship of business service firms at market shares under 10X
average market share. These results are important because of the general definition of "small
firms". If a size of 200 employees is taken as an upper limit for a small business, then virtually
all the data used in this study related to small firms and thus small business service firm behavior.
These observations should be relevant in assisting in the formation and implementation of small
business strategy and providing benefit to small business and entrepreneurship education. Further,
because of the role of business services in the U.S. economy (Wilson & Smith, 1996) and their
likely continuation due to present corporate practices (Clark, 1997; Ozanne, 1997),these results
are important because of their magnitude of impact.

Actual profit dollars, on the other hand, tended to increase monotonously with share. Thus, there
could be an insidious tendency for firms to grow without regard to their efficiency in growing
profit dollars. That is, because profitable firms tend to increase profit dollars, there may be a
tendency to disregard profitability in its growth. Table 1 suggests, for instance, that Brrofit ma 1

133 1 trggg 3ll g 1 g 1* gtl ~gtugd~23
These results are important for two reasons. First, the tendency for business service firms to
become less efficient as they grow should be recognized by managers. Second, the decrease in
profitability at low relative market shares (0.5 to 3.5)should be regarded as opportunity costs by
managers. That is, if growth could be handled constructively, there may be no reason for the
profitability to decrease. This topic is not incidental —the business service sector, in addition to
providing opportunities for entrepreneurs, represents 5.6%of gross domestic product (Wilson &
Smith, 1996).

There are precedents, of course, for expecting this type variation in the industry, so results are
consistent with at least part of the literature. At the macro-level, V-shaped share curves have
been postulated (Porter, 1980; Peters, 1988; Kotler 1995). In terms of factors mentioned in the
PIMS study, there is reason to suspect that two items generally associated with share effects would
be weaker for service businesses due to their labor intensity —economies of scale probably would
be much weaker and market power at least somewhat weaker. That would leave a third factor,

quality of management, as a factor to associate with high market share businesses. If larger service

49



Journal ofSmall Business Strategy Vol. /0, No, I Spring/Summer 1999

businesses had better managers, then positive share observations should be obtained. That

association would not appear to be automatic —if twenty years of literature on marketing and
managing service businesses has taught anything, it is that service businesses may indeed be

different and a real challenge to manage as Shostack's(1977) article suggested. Thus, growth of
these business services organizations needs to be considered.

At the micro-level, organizations are known to go through turmoil as they grow (see, for instance,

Jones, 1995). Jelinek (1979), in a longitudinal study of Texas Instruments, in fact found
transitional stages were required in the evolution of this firm. It is likewise known that transitions
in business service organizations occur, and that they may relate to organization size. Coxe

(1980), for instance, studied architectural firms; he recognized three stages that went from "no

management" for firms of less than five people, to "shared management" by principals in the
fifteen to twenty people range, and "formal management" by firms of over 100 people.
Promotion, of course, tended to be associated with qualitative performance. These observations
would appear to relate to the present study; share growth from 0.5 average size to 3-4X average
size tended to produce decreased profitability. Using an average business firm size of eighteen
employees (Wilson and Smith, 1996), calculations would suggest that firm sizes of nine to 63
people would be in a precarious profitability position. This size range fits into the middle

segment of Coxe's observations and thus, would appear an area of organizational concern.

Although individual business service organizational situations would require individual attention,

it is likely that the literature provides some guidance in this respect. It would appear that

organizations might be quite individual ized both because of the nature of services (Heskett, 1987;
Shostack, 1977) and the importance of key individuals in these organizations (Quinn, 1992).
Further, it might seem that these organizations might need to evolve over time (Passmore, 1988;
Lindblom, 1959). That might not be the case, however, in a normative sense. Normann (1983)
suggested there are preferences for the management style of effective service organizations, i.e.,
"combination" founder-motivators were found effective in his observations. Mintzberg (1983),
in fact, recognized adhocracies as an organization approach would seem to fit the nature of these
businesses at their start up stage. Subsequent development apparently would depend upon the

accepted mission of the organization (Mintzberg, 1989).

RECOMMENDATIONS FOR MANAGERS

Small business managers may not be so much interested in these general observation, but what
might be done more specifically about this problem. The question becomes, "Can something be
done to prevent a profitability decline in my business service business as the Iirm grows?"

Three premises might be established. First, as the firm grows, the ability of the organization's
founder to let go and adapt is crucial in an organization's survival (Jones, 1995). Second,
individuals are important in the formation and conduct of these businesses(Quinn, 1992). Third,
many professional service Iirms have designated people as (Kotler & Bloom, 1984):

"Finders": those who find business,
"Minders": those who take care of and develop the account,
"Grinders": those who service the account,
"Binders": those who hold the firm together and lead it'

Original reference, David H. Maister (1982). Balancing the professional service firm. SloanM~Ri, F IL n.29.
50



dour nal ofSmall Business Srraregy Vol /0, No. I Spring/Summer l999

Initially, it is the founder who plays all these roles, but as the firm grows the combined

responsibilities become great. This inability to efficiently function in all these roles is thought

to be associated with the probable cause of the observed decrease in profitability.

There are four contributions management might make that could assist in sustaining prolitability

during the critical low share period. First, and perhaps most important, the firm should focus on

sustaining revenue per employee. This focus must be a primary objective during growth. It has

been suggested that a 10,000 thousand dollar increase in revenue per employee could be

associated with more than one-half point increase in pre-tax profitability (Wilson, 1997). Thus,

as people are added to a firm, efforts must be made to cover their salaries, which infers significant

efYort in this area by key people, the finder function.

Second, professional management, the binder function, might be sought earlier in the
growth.'his

suggestion might seem contradictory to the first recommendation, but addition of
professional assistance early in the growth curve would permit more time for key people to find

and implement work. Third, it has been recognized that projects are becoming more important

in society (Lundin & Midler, 1998). Greater use might be used of this organizational form to
implement tasks. Peters (1992)has noted, "the project is everything." It is unlikely, however,
that formal management around projects is yet used to full advantage in small businesses. 1hus,

greater formal use of this approach —its management (Wheelwright & Clark, 1992) and the
virtual organizations that go with it (Lundin & Saderhoim, 1995) could do much to not only

improve the grinder, but also the minder, function of the organization.

Finally, there remains the formal form of the organization. Dafl's (1992, 479) observations on
adhocracies developing to survive in complex, dynamic environments would seem to make them

a preferred form. Team-based structures typically emerge, and although there may be an

elaborate division of labor, it is not formalized, which is essential in projects and virtual
organizations. Mintzberg (1989, 218), however, in his original observations on this

organizational form noted it did not lend itself well to efficiency. That is, adhocracies handle the

extraordinary and not the ordinary, He suggested firms, therefore, might do one of two things.

Either they might find their specialties and move on to a professional organizational form, or

remain problem-solvers and (supposedly) charge accordingly for that specialty. The binder

function would, thus, be enhanced with this appropriate form of organization.

There were, of course, limitations to this study. The information was "macro" in scope and
cross-sectional. The nature of the data thus did not lend itself to studying variations in individual

sectors, nor in individual markets. Neither was it possible to reflect upon firms who might have

made conscious efforts to grow their businesses in an effective manner. Such studies would

require detailed, survey research and thus remains as a future project. Nevertheless, the general

observations of this study should be of use in strategy formulation and implementation as well
as in entrepreneurshipeducation as have tended to be the case in the past (Buzzell & Gale, 1987).

CONCLUSIONS

Cross-sectional results suggest that a decline in profitability, as measured by PBT, occurs in the

range 0.5 to 3.5Xaverage firm size for business service firms. Such a decline is not unexpected,
but represents opportunity costs to firms in this size range. In order to escape this trap, owner

'Note added in proof —Storey (1994, 10) cites observations that British firms do indeed tend
to add professional managers when the reach the size of 10-20 employees.

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Journal ofSmall Business Strategy Vo/. l0, No. I Spring/Summer /999

managers need to overcome the tendency to be all things in a finder-minder-grinder-binder
description of activities. Nonnative recommendations for improvement centered on four themes
from the literature- focusing on revenue per employee as an objective, developing professional
management assistance, formal projectfication, and leaning toward either an adhocracy or
professional model of organization for the firm —depending upon the specialization of the
business.

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Dr. JVltson is Professor of Marketing at Clarion University where he specializes in teaching
industrial and service marketing. He has had two other articles publishedin thisjournal. This
article was originally written while he was visi ti ng professor at Umea University in Sweden.

Dr. A nell is Professor ofManagement at Umed University. She received her doctoratefrom the
Stockholm School ofEconomics and has pursued research interests in the areas oforganizational
structure, management turnaroundi, inter firm competition, public service, and prjoect
management. She serves on several Boards of Directors in Sweden and consults in the areas of
public service and public service evaluation.

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