Rutger Ch. van Wesel

June 2004

HOGESCHOOL ROTTERDAMDepartment of Economy and Business

INTERNATIONALIZING PENTASCOPE

IN GERMANY THROUGH A STRATEGIC ALLIANCE

Cross-Border Consultancy in Germany

Internationalizing Pentascope in Germany through a Strategic

Alliance

AuthorRutger Ch. van WeselAlbert Verweijstraat 2a3061 SB RotterdamPhone +31 618 229 159Student no. 0743396Email r.vanwesel@chello.nl

OrganizationPentascopeUtrechtseweg 11-133811 NA AmersfoortPhone +31 182 543 643 Fax +31 182 543 644URL

http://www.pentascope.nl

Supervisor PentascopeMr. M. RiriassaHarderwijkweg 3-112803 PW GoudaPhone +31 182 543 643 Fax +31 182 543 644Email

ririassa@pentascope.nlInstituteHogeschool RotterdamDept. of Economy and BusinessKralingse Zoom 913063 ND RotterdamPhone +31 104 536 200URL http://www.hogeschool-rotterdam.nl

Institute SupervisorMr. G.J. van der StarKralingse Zoom 913063 ND RotterdamPhone +31 104 536 200Email g.j.van.der.star@hro.nl

Rotterdam, The Netherlands June 2004

© 2004 The author is fully responsible for the contents of this paper; the copyright of the paper rests with the author. No part of this paper may be reproduced, stored in a retrieval system, transmitted in any way, or by any means, without the prior written permission from the author or Pentascope

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Cross-Border Consultancy in Germany

Preface

Dear Reader,

This report in front of you marks my final project in relation with my studies in International Marketing Management at the Hogeschool Rotterdam. International Business, especially export and import issues, is one of the fields that I interest myself in. My primary goal for this choosing this field of study is to prepare myself for working in an international business environment. In line with my activities of studying at Loyola College in Baltimore, Maryland and interning at the Maryland Department of Business and Economic Development; I decided to challenge myself with enhancing my college degree by attempting to exceed the regular college requirements and write an export policy plan according to the Federation of Dutch Exports (FENEDEX) regulations. A word of gratitude goes out the entire organization of Pentascope, which gave me the opportunity to do this.

I knew that writing an export policy plan, would prove to be a huge challenge. First, I have to thank my supervisor at Pentascope, Mr. Ririassa, for giving me insights in the company’s organizational processes and service delivery. He also initiated interviews with founding members of Pentascope, such as Mr. Dijt and Mr. Pieters, who gave me insights about the idea behind implementation services. Furthermore I would like to thank Mr. Kerckhoffs from Alpha & Omega in providing me with valuable information concerning franchising Pentascope’s services internationally.

In finding the best way for Pentascope to internationalize into the German market, I have to thank Mr. Hirte from Hirte consulting for providing me with information about the consulting environment and its possibilities. Also I have to thank Mr. R. de Jong from Integrify and Mr. B. van Coeverden, who gave me valuable information about internationalizing consulting services.

Furthermore, I would like to thank my supervisor at the Hogeschool Rotterdam, Mr. G.J. van der Star, for helping me structuring and directing my thoughts towards this research by asking questions and supplying critics about fundamental subjects.

I also would like to thank my family for giving a critical view and without whom I could not have completed this research.

Sincerely,

Rutger Ch. van Wesel‘s-Gravenzande, May 2004

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Executive Summary

As an independently and privately owned, Dutch based consulting firm, Pentascope desires to expand its service delivery across Dutch borders. The internationalization of Pentascope’s services, in the field of advice and support for design and implementation of organizational changes with a highly customized approach that aims at the human aspect in that process, is an attempt to service its current clients and establish operations on foreign markets.

Germany, because of its macro-economic attractiveness and cultural compatibility, is identified to be subject to research for international expansion of Pentascope. The German consulting market is highly competitive and has similar outlooks as the Netherlands consulting market for the near future. Competitors such as McKinsey, Boston Consulting and KPMG benefit highly from their reputation where Pentascope does not. Pentascope’s advantage, favored highly by clients, lays in the fact that its competition stops at the design process where Pentascope also supports the actual implementation. This, however, is not exploitable on the German market because implementation is mostly done by relying on in-house capacity. When researched closer, Germany shows problems in its business attitude towards Pentascope’s services because of its lack of experience of German business culture and language.

The main challenges for Pentascope are overcoming barriers dealing with language and experience of German business culture, followed by convincing German companies to hire external consulting advice from Pentascope because of its expertise in the human driven approach for processes of organizational changes.

In determining the best mode of entry for Pentascope on the German market Pentascope was categorized as a location-bound customized project company. This means that a geographic local presence for Pentascope is required to be successful on the German market because that would be the only way to keep control over the servuction quality and manner in which it is offered. This excludes licensing or franchising and points to foreign direct investment as the method for internationalization. Forming an own Pentascope subsidiary, building or acquiring, is not considered to be financially possible. External market influences make companies not to expand their view to engage in new opportunities in a joint venture, but focus on their core business. It was found that the option of using a strategic alliance would be the best way to internationalize into Germany because it overcomes the existing barriers in the best way.

The ideal ally for Pentascope has to offer a complementary good or service. An ally for Pentascope, therefore, is a company that develops software solutions for organizational processes. The alliance could then offer the all-in-one solution of IT solution compared with implementation design and support. This would give Pentascope an argument in convincing clients to hire external consulting for implementation because of its expertise on the solution expertise. In engaging in strategic alliances, Pentascope has to be aware that alliance contracts have to foresee in as much detail as it possibly can.

The alliance will be built on the German companies’ name/reputation and its clients on one hand and Pentascope’s training and knowledge on the other hand. This research determines that Pentascope has to build two alliances, consisting of two consultants from each company, headed by an alliance committee consisting of the CEO and the director of operations from each company. The consultants will be trained in a, especially for the alliance designed, four week training program.

Pentascope has determined that international operations in Germany would have to bring in € 1.000.000,-- in the third year. Feasibility analyses show that this is too optimistic. Following the strategic alliance option, Pentascope’s estimated revenue for the first year will be -/- € 82.000,--. Total result estimates for the first year show a negative amount of € 187.000,--. For the second year the estimations indicate a revenue of € 99.500,-- and total negative result of € 17.500,--. German operations estimations show a revenue of € 163.050,-- the third year. The annual result from the alliance for Pentascope that year is € 26.650,--. These estimates are significantly below Pentascope’s financial goals.

Finally, this research concluded that Germany, although attractive and compatible at a macro economic level, has high barriers which are costly, take to much time and demand

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to many personnel for Pentascope to invest. Furthermore, in Germany, Pentascope will not be able to reach its financial goals. Therefore the final decision is not to internationalize Pentascope into the highly competitive and demanding German market.

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TABLE OF CONTENTSEXECUTIVE SUMMARY.....................................................................................................41. INTRODUCTION.......................................................................................................8

1.1. CORE MISSION STATEMENT....................................................................................81.2. GROWTH STRATEGY.............................................................................................8

2. INTERNAL ANALYSIS...............................................................................................92.1. THE PENTASCOPE WEB.........................................................................................92.2. PENTASCOPE’S SERVICE DELIVERY..........................................................................102.3. PENTASCOPE’S PREPARATION PROCESS...................................................................112.4. PENTASCOPE’S CLIENT USE AND EXPERIENCE PROCESS................................................112.5. PRICING CURRENT PROJECTS.................................................................................122.6. PENTASCOPE’S FINANCIAL STATEMENT....................................................................13

3. EXTERNAL ANALYSIS.............................................................................................143.1. CONSULTANCY MARKET ANALYSIS..........................................................................14

3.1.1. Macro Environment....................................................................................................143.1.2. The Management Consultancy Branch....................................................................15

3.2. CUSTOMER ANALYSIS..........................................................................................153.3. PENTASCOPE’S MARKET SEGMENTATION..................................................................15

3.3.1. Telecom Services........................................................................................................163.3.2. Public Services............................................................................................................163.3.3. Financial Services.......................................................................................................163.3.4. Logistics Services.......................................................................................................163.3.5. Importance Business Line to Pentascope’s International Operations...............16

3.4. MARKET DEFINITION PENTASCOPE..........................................................................173.5. COMPETITOR ANALYSIS.......................................................................................17

4. MARKET ORIENTATION..........................................................................................194.1. PRELIMINARY SELECTION.....................................................................................194.2. COUNTRY ATTRACTIVENESS..................................................................................204.3. COUNTRY / COMPANY COMPATIBILITY......................................................................214.4. BUSINESS PORTFOLIO MATRIX WITH INDIVIDUAL COUNTRY SCORES.................................234.5. CONCLUSIONS...................................................................................................23

5. GERMANY.............................................................................................................245.1. MANAGEMENT CONSULTANCY IN GERMANY...............................................................255.2. OUTLOOKS FOR PENTASCOPE’S BUSINESS LINES........................................................27

5.2.1. Telecom Services........................................................................................................275.2.2. Public Services............................................................................................................275.2.3. Financial Services.......................................................................................................285.2.4. Logistics Services.......................................................................................................29

5.3. PENTASCOPE’S COMPETITOR ANALYSIS....................................................................295.4. CODE OF CONDUCT IN GERMAN BUSINESS ENVIRONMENT.............................................30

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6. SWOT- ANALYSIS..................................................................................................316.1. PENTASCOPE’S COMPETENCES...............................................................................31

6.1.1. Pentascope’s Core Competences.............................................................................316.1.2. Pentascope’s Distinctive Competences..................................................................31

6.2. PENTASCOPE’S CONCERNS....................................................................................316.3. OPPORTUNITIES FOR PENTASCOPE..........................................................................326.4. EXTERNAL NEGATIVE INFLUENCES FOR PENTASCOPE....................................................326.5. CONFRONTATION MATRIX.....................................................................................336.6. PENTASCOPE’S MAIN POINTS OF ATTENTION (MPA)...................................................346.7. CONCLUSIONS...................................................................................................35

7. MARKET ENTRY STRATEGY.....................................................................................367.1. LICENSING OR FRANCHISING VERSUS FOREIGN DIRECT INVESTMENT.................................377.2. LEGAL / CONTRACTUAL ISSUES..............................................................................42

8. MARKETING PLAN.................................................................................................448.1. SEGMENTING THE GERMAN MARKET........................................................................448.2. TARGETING......................................................................................................458.3. POSITIONING PENTASCOPE...................................................................................468.4. STRUCTURING THE ALLIANCE.................................................................................468.5. PENTASCOPE’S PARTNER APPROACH.......................................................................47

9. STRATEGIC ALLIANCE FEASIBILITY.........................................................................499.1. ALLIANCE COST STRUCTURE..................................................................................499.2. ESTIMATES FOR THE ALLIANCE...............................................................................519.3. SCENARIOS......................................................................................................53

9.3.1. Worst case scenario...................................................................................................539.3.2. Best case scenario......................................................................................................53

10. CONCLUSIONS AND RECOMMENDATIONS................................................................5411. ACTION PLAN........................................................................................................56References............................................................................................................................................57ATTACHMENT Ia: The 2002 Consolidated Balance Sheet for Pentascope ATTACHMENT Ib: ......The 2002 Consolidated Statement of Annual Profits and Losses for PentascopeATTACHMENT II: Organization Profile of Location-Bound Customized Services CompaniesATTACHMENT III: Cost Factor Explanations

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1. IntroductionPentascope is an independent Dutch consulting firm that offers its services in the domain of implementing changes in organizational structure and processes. Founded in 1990, it quickly grew to one of the largest firms in the Netherlands. One of the aspects for its rapid growth, is the difference in approach to these changes. Pentascope focuses on quality and the needs of clients recognizing the human aspect. Pentascope goes further than many competitors and does not stop at strategy formulation, but also performs the implementation and/or roll out of the formulated solutions. The final stage of every Pentascope project is a thorough feedback session and evaluation of the project.

1.1. Core Mission StatementPentascope’s core mission is formulated to explain the main reason for its existence and the basic idea behind its operations. The following statement reflects Pentascope’s overall mission and is formulated on Pentascope’s website.

“Guiding people through processes of change in organizations by helping them to make and accept those changes.”

1.2. Growth StrategyStrategically, Pentascope wants to keep and reinforce its current position in the Netherlands while penetrating internationally in regional developed markets. Internationally, besides penetrating regionally, it is Pentascope’s goal to assist its current clients in the international market. Pentascope has researched the general key factors for success of internationalization of consulting services. This research shows that client relationships and knowledge of the local market are the most important factors for successful internationalization.

Pentascope has set as goal to realize € 25.000.000,-- as result from all activities outside the home market of the Netherlands. This has to be realized in 3 to 5 years (2007). For the western European market, Pentascope has a goal of reaching € 2.000.000,-- revenue in three years growing to € 5.500.000,-- revenue in five years by entering two different markets.

This growth strategy resembles the market development strategy cell defined by Ansoff1. Ansoff describes in this strategy companies growing its operations by targeting new markets with its current products or services. Pentascope wants to know the possibilities of internationalization using a franchise model for its services.

1.3. Problem StatementThis report aimed to answer the following questions:

“Is franchising the way for Pentascope to reach its goals for internationalization? If so, what does this contain? If not, what other way would be the best way to internationalize Pentascope?”

If Pentascope wants to internationalize, it needs to know its current key factors for success and whether it is possible to use these on the international market. The key factors for success are found by analyzing the firm’s internal structure and external environment in a situational analysis. The analysis of the internal structure can be found in chapter two and the external environment is explained in chapter three. To find whether these key factors for success can used on the international market, Pentascope has to determine the best country to internationalize to. This is done in chapter five, in which countries are evaluated by cross referencing their macro economic attractiveness to their cultural compatibility with the Netherlands. An in-depth analysis of the determined country is carried out in chapter six. Chapter two to six provide insights in the strengths and weaknesses of Pentascope and the opportunities and threats of the determined market. These insights result in a SWOT analysis, which is carried out in chapter seven. The best strategy for entering the determined market and its resulting contractual/legal issues are described in chapter eight. On an operational level chapter nine concerns the marketing plan for the determined market. This report is concluded in chapter ten by researching the feasibility of the conclusions drawn from the market entry strategy and the marketing planning.

2. Internal AnalysisThis chapter is important in determining Pentascope’s key factors for success. In this internal analysis, the core business will be explained. What do Pentascope’s services encompass and what are the strengths and weaknesses of the business model? First, Pentascope’s internal organization structure is described. In this internal structure, the importance of its standard business units and its consultants are discussed. The Pentascope chain is divided in two parts; the preparation process and the client use process. A model illustration is given following the descriptions of these parts.

2.1. The Pentascope WebFig.2.1 Organizational Sketch Pentascope

1 Dr. K.J. Alsem; Strategische Marketing Planning; 2nd print, 2000

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Since 1997 Pentascope has a network structure. These networks are focused on increasing the level of service and results to clients by using Pentascope’s unique perspective on implementation. The implementation network forms the basis of Pentascope’s activities. Clients in the Netherlands home market turned to Pentascope and expressed their need for assistance in an international perspective. In order to assist clients also internationally, the Pentascope Group added the SBU Pentascope International in 2001. In 2002 Pentascope International took over a group of consultants formerly employed by KPN Royal Dutch Telecom giving Pentascope expertise, experience and network relationships in the telecom sector.

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The Pentascope

Group

Pentascope Implementation Network

Locations:Den Haag; Amsterdam; Amersfoort;

Eindhoven and Groningen

Sectors:Telecom; Healthcare; Public;

Financial Institutions; Trade, Industry and Logistics; Co operations, Real Estate and Construction

Network Partners & Strategic Alliances

Next Dimension

Pentascope International

Seven Business LinesHuman DevelopmentControlICTProject managementQuality & ExcellencePentascope AcademyProcess Support

Six separate companiesMalgilChange CompanyNOVIHome RunRun 2 MoveSupport Plus

Two CompaniesAbility AllianceTriam Management

Four Business lines:Telecom ServicesPublic ServicesFinancial ServicesLogistics Services

Standard Business Units have their own budget and goals. If consultants are needed in another SBU because of their knowledge they are commonly “rented out” to the other SBU at a certain price. Judging from interviews with Mr. L. Pieters, CEO Pentascope implementation network, this complicates and frustrates optimal knowledge flow. To prevent this, project reports are made explicit and stored on a common internal server, from which it can be accessed by everybody within Pentascope for any use. According to Mr. Th. Dijt, CEO Pentascope Group, there is a lack of international knowledge and experience throughout the Pentascope organization.

2.2. Pentascope’s Service DeliveryAll organizations are exposed to changes and have to adapt their internal processes due to evolving markets and changing external environments. These changes occur in phases. A new direction, strategy, IT solution or organizational structure has to be developed and implemented. Most consulting organizations focus on the design part of the change process and pay less attention to the fact that a change should gain acceptance by the organization and that people have to learn and work in the changed situation. Pentascope recognizes that implementation requires attention to both the design part and to the human aspects involved in implementations. Implementing change starts at the beginning; meaning that change starts with the determination, whether the plans of the proposed changes are SMART (Specific, Measurable, Acceptable, Realistic and Time constraint). This will result in researching the possible consequences that the change in organization structure or process brings for both the process and the people dealing with that process. Pentascope supports, guides and suggests organizations in those change processes in order to find an implementation strategy suitable for both management and personnel. The word used by Pentascope is: “Human-driven result-focused”

Fig.2.2 Human-driven Result-focused chart

Pentascope offers an integrated scope on implementation services with expertise in the areas of Program Management, Systems Technology, Human Resource Management, Process Management and Quality Management.

For Pentascope’s business processes and their output are the interface with clients. Modeling and analyzing these business processes enable organizations to develop further and improve its effectiveness and quality of work. 2 Managing the key processes efficiently is crucial to the success of the company. Pentascope uses methodologies following international standards to ensure its service quality level. These standards include Balanced Business Score Card, Business Process Redesign (BPR), EFQM and TQM, Implementation tools, Standard for Interactive Strategy (SIS), Telecom Operations Map (TOM) Telecom Project Management (TPM) and Telecommunications Management Network model (TMN).

2 ISO 9000; Diensten Marketing Management and Waardering door klanten

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Situation before implementing change

Situation after implementing changeMAKE

IMPLEMENT

LEARN

MADE

IMPLEMENTED

LEARNED

2.3. Pentascope’s Preparation ProcessConsultancy depends on people. People interact with other people to deliver the service. Therefore when Pentascope starts a project the first process is making sure that they have the right people, with the right skills and knowledge necessary for the project. Another aspect is money. Before starting complex and large projects that take time, Pentascope has to have enough money to start the process. All these factors come together in Pentascope’s human resource. Realizing that getting the right people is an important part of Pentascope’s process and a major organizational strength, human resource is highly valued in the process.

Consultants are trained and given time to gain experience for projects. This takes effort of everybody in the company, therefore demanding knowledge, skills, people and money to train the consultants. After this consultants are ready to start selling Pentascope’s concept of consultancy using their own existing business network and created new leads. In consultancy business relies heavily on personal relationships3, therefore marketing will mainly be personal and targeted directly to the client in personal contacts. Establishing and maintaining structural, direct relationships between consultants and clients are centered in this process. The goal is to sell Pentascope’s services by maintaining excellent relationships. This process evolves into a sales effort on the new consultant’s side. When in fact, a sales agreement has been reached, the consultant can start to prepare for this project by, again, getting the right people with the right knowledge and skill to bring the project to an end. Training people is important but they are mainly stimulated in developing themselves within existing projects.

2.4. Pentascope’s Client Use and Experience ProcessThe client starts to be involved in the process at the marketing and sales phase. Together with delivering the service (Operations) this phase in the service process can be indicated as the core service delivery. Because the service leans for the most part on human interaction, it demands a continuous feedback stream from both the client and Pentascope consultants in that process; enhancing the service delivery experience for the client and at the same time “training” the consultant in experience. Handling the feedback and dealing with it during the service delivery is therefore an important aspect to deliver a good service and generating new business. This can also be beneficial to other consultants not dealing with this particular project because they can learn from others. As indicated before there might be an opportunity for Pentascope to intensify the knowledge transfer within the company. There is a feedback stream leading to the after sales service involving an evaluation of the core service delivery. In consultancy, relationship networks and management are important factors in generating new business.4 Because of its success on the Netherlands home market it can be concluded that this is a competence of Pentascope’s orientation.

Porter’s value chain5 analysis was build to highlight the important factors in the organization. However, the original format is not suitable for a service company with intangible and complex products that are hard to standardize. Because it is important to take a look at the core and supporting processes in the organization, a service mapping of Pentascope is made by using a flowcharting tool. This tool makes it possible for managers to influence the different dimensions of the service quality in order to reach the desired level of service delivery.

3 Gummesson,1987/1999; Webster, 19924 van Coeverden, 20035 Kotler, Marketing Management, 2000

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Fig.2.3 Blueprint/service mapping Pentascope

2.5. Pricing Current ProjectsPricing is established using the following criteria: Customer segments; the higher quality and added value for the client, the higher the price.

Because of market woes, the client has a strong foot in the negotiating process. Competitors; pricing levels in the market. The table below shows Pentascope’s pricing compared

to competitors (average price level of competition) In the Management Team top 100 research, in which Pentascope came in second, is determined that Pentascope offers the best price/quality relation.6 Reason for this is that Pentascope implements with various feedback streams, reassuring clients with the feeling that they have an influence in the process.

Pentascope’s pricing is based on the rates that the market of these consultancy services can bear. Long-term contracts will be offered at discount prices. Price ranges in Euro per consultant level can be found in the following table. The full costs will be annually adjusted with the alary index quotes.

Table 2.1 Hourly rates of Pentascope consultants compared to competitionLevel Hourly Rates

PSI% of

competitionConsultant 120 - 140 65Senior Consultant

140 - 160 50

Managing Partner

170 - 200 45

Pentascope offers both turnkey projects at a fixed price and contracts with prices based on hours worked. In case of a turnkey project, the exact deliverables and the pre-conditions that have to be met by the customer are described in the first two weeks of the project. The costs of travel & lodging of consultants and their daily allowances are paid by the customer, without mark-up.

6 Kernstof-B, Gb. Rustenburg, T. de Gouw, A.W. de Geus, J.C.A. Smal, R.H. Buurman, derde druk, 2003, p.434

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Client

Human Resource

CLIE

NT

USE

Training

Operations

After Sales Service

Customer Relationship

CoreService Delivery

Experience

Experience

Experience

Feedback Core Processes

Supporting Processes

PSI ConsultantExperience

Experience

Evaluation

MoneyPeople

SkillKnowledge

Marketing and SalesExperience

PREP

ARAT

ION

2.6. Pentascope’s Financial StatementThe financial flow is viewed from Pentascope’s foundation in order to judge Pentascope’s financial governance. Pentascope experienced a rapid growth from its founding in 1990, mainly helped by the extreme growth situation in the Dutch economy. Every year was concluded with a larger profit than the year before. Even when the market changed to a demand market, started because more companies moved into the implementation services, Pentascope’s growth was extremely high. The world wide economic recession had its consequences for Pentascope as well and in 2002 Pentascope reported a loss for the first time in its history. The table below illustrates Pentascope’s annual situation from its founding until 2002.

Table 2.2 Economic Developments Pentascope 1991 – 2002 € 1 Mln. 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002Revenue €

0,6 0,95 1,5 2,1 2,9 5,8 9 13,5 20 24 27 25,4

Growth % 58 58 40 40 100 55 50 48 20 13 -7

Combined with a successful growth of its employees Pentascope’s capacity became to large for the market demand. Pentascope had to downsize its employees, which have to turn Pentascope’s figures in a positive way. Judging from the figures of 2003 (early estimates state a revenue of 25,6 Mln.) Pentascope seems to be on the right path, this measure was successful in stopping the growth of losses. Even though Pentascope experiences rough times, it keeps up investing in knowledge, expertise and quality.

Pentascope is still a privately owned company which allows it to work independently and is subject to stock market fluctuation. It also means that Pentascope does not possess deep financial pockets to buy its way into the international markets and can not work large scale international projects.

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3. External AnalysisThe external analysis is made to determine the opportunities and threats on the Netherlands home market influencing Pentascope’s current operations. In this chapter first, the characteristics of the consultancy market are described by analyzing the macro environment and the branch outlook. Secondly the clients of Pentascope are analyzed. Then the market segmentation is made after that. These analyses result in the market definition. Finally the current competitors are analyzed.

3.1. Consultancy Market AnalysisConsultancy, specialized people helping other organizations and people by applying their expertise and experience, has always existed. Because of the extraordinary economic growth in the second part of the 1990’s, organizations increasingly needed outside help if they wanted to sustain their production capacity and adapt organizationally. Under the current economic woes companies still depend on outside expertise because they have never acquired the expertise themselves. However, organizations are less likely to get outside help because there is less money available as in the 1990’s. Another trend that can be seen is the reorganization in terms of downsizing, lay-offs and mergers. These are a result of the economic restraints and now form the corner stones of the consultancy market.7

3.1.1. Macro Environment Consultancy is a business to business service; there are few macro environment factors that really have a direct influence on the consultancy branch. Relevant factors are the economic environment and its consequences for the business, the European integration and what that means, and technological developments that are used in business.

Economic IssueAt the moment the economic environment in the Netherlands indicates a recession. This has an immediate effect on Pentascope’s business. The consulting branch explains an economic recession as less of a threat than it really is. Consultancy businesses speak of a demand change from services dealing with expansion, human resource and other forms of growth resulting from good economic environment towards a demand for services dealing with lay-offs, downsizing and mergers because of economic recession. However, it is clear that companies are less likely to purchase outside assistance in times where the budgets are tight.

Political/Legal IssueOngoing European integration means on one hand more competition from international companies entering the market. This might be seen as a threat, but can also be seen as an opportunity to engage in co operations in order for Pentascope to get foot in the international market with a company that offers complementary services to Pentascope. Also EU integration may force companies to implement IT audit systems for better internal control and clarification to third parties. An example is that industry and business need to build mandatory risk management systems described in the Control and Transparency Act (KonTraG) and the Basle II proposals.

Contracts in developing countries are mainly appointed through large international organizations such as the World Trade Organization, the International Monetary Fund and the World Bank. For those opportunities it is important to have contacts and lobbyists working Pentascope’s cause within those organizations.

Technological IssueTechnological developments can have a positive effect on business for Pentascope as they have to be implemented within organizations; IT and otherwise. However, in the current economic environment companies are reluctant to purchase new technological systems.

7 Economische Voorlichtings Dienst (www.evd.nl)

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3.1.2. The Management Consultancy BranchFirst a few main points are stated that are important for this research: According to CBS Pentascope’s services fall under CBS# 74141 (Organisatie-adviesbureaus) Number of organizations in the Netherlands according to CBS8: 20.005 Number of people working in this sector in the Netherlands: 38.800

The primary demand indicates Pentascope’s market size. According to the Rabobank9 the current share of the management consultancy is 2% of the entire consultancy market.

Developments in the management consultancy marketConcentration and internationalization of the management consultancy market is a fact. The number of international clients and projects is growing which pushes the companies to make choices in developing international strategies. Most companies will focus their services in a broader perspective while trying to establish international operations. In the beginning of 2003 the outlooks for the consultants were still tough. The job market is still decreasing and lay-offs are inevitable. However, analysts indicate that in 2005 the market will grow as much as 11%, promising better times.10

3.2. Customer AnalysisThere are two main segmentation strategies in the consultancy market that are commonly used. The first strategy, stated by FEACO (The European Federation for Management Consultancy Associations; www.feaco.org), divides the market in five segments: Information Technology (IT) Consulting/IT-Implementation, Corporate Strategy Services, Operations-Management, Human Resources (HR)-Management en Outsourcing Services.

The second strategy covers the division of the market by content and niche. This way the market can be divided into strategic consultancy, functional consultancy and IT-consultancy. Strategic means concentrating on giving strategic advice (Takeovers, strategic solutions on a high level) e.g. Boston Consulting Group and McKinsey. Functional consultancy concentrates on advice, guidance, professionalizing and practical implementation e.g. Pentascope. The last group, IT consultancy, concentrates mainly on implementing soft- and hardware systems. 11

Pentascope’s services can be defined as advice, guidance, professionalizing and practical implementation. Therefore , the best way for Pentascope to divide the market is the latter segmentation strategy in which it can be defined as a functional consulting company. Within the functional consultancy is Pentascope known for its alternative view on implementation as described in the first chapter.

3.3. Pentascope’s Market SegmentationPentascope identifies four main segments; telecom services, public institutions, financial services and logistics services. When defined based on these grounds, companies will be categorized based on their revenue size. This results in two main streams: Large (multinationals and other large companies), middle-large, and small (every company that doesn’t fit in the large). Pentascope offers all its services throughout every identified segment. There are very few small companies that Pentascope offers its services to. A reason is that these companies do not have the resources or the management structure complexity to be interested in Pentascope’s services. This is also consistent with the 80/20 rule which states that 80% of your result is generated by the top 20% of the clients. In this case these companies are segmented as large companies (AAB, Aegon Insurance, Akzo Nobel, Delta Lloyd, DSM, Fortis Bank, Frans Maas, Organon, National Railway Company, Oce, Royal TPG and Royal Dutch Shell). Below follows an indication for the business segments identified by Pentascope. Together with their clients, Pentascope developed interesting new models to have employees change themselves towards a result driven and customer oriented service organization.

3.3.1. Telecom Services The telecom services business line is the most important line to Pentascope’s International operations as 86% of the international revenue is generated by this segment. Pentascope has divided this business line into five main areas: Strategy Development; Processes, systems and organization development; Product & Service Management; Customer Relationship Management and their core implementation services. The telecom market, in which Pentascope is active, is divided into three main segments. These are the mobile operators; fixed operators; and data/IP operators and service providers.

3.3.2. Public ServicesPentascope operates in three main areas: local government, federal government and in the social & health care sector. The change towards a more client driven, process oriented organization is recognizable in all sectors. By implementing cockpit-tools like the Balanced Scorecard, Service Level Agreements and benchmarking figures Pentascope can assist organizations in making results more measurable and more objective.

8 Centraal Bureau voor de Statistiek www.cbs.nl (Dutch central bureau for statistics and analysis)9 Rabobank (www.rabobank.nl)10 http://www.intermediair.nl/branche/consultancy/branche/omschrijving.htm# 2/25/200411 Idem

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IT Consultancy

Strategic Consultancy

Functional Consultancy

Program Management Systems TechnologyHR-ManagementProcess ManagementQuality Management

1 2 3 4

Telecom ServicesPublic ServicesFinancial ServicesLogistics Services

IIIIIIIVV

I II III IV V

CLIENT NEEDS

PSI’s MARKETSEGMENTS

PSI’sSERVICE AREAS

The basic excellence lies in the area of process management: significant improvement of productivity, connected to an increased ability to change. In contrast to the profit sector, which experiences tough times at the moment, the non-profit sector, like healthcare and other public services are offering better results for consultancy.

3.3.3. Financial ServicesIn the financial services business line Pentascope’s main activities are interim management, change management, coaching on management level (mission - vision), project management, re-design of processes, training programs and their core implementation services. Financial services companies include insurance, banking, mortgage suppliers and other money supplying institutions.

3.3.4. Logistics ServicesThe logistics services are the second largest account area for Pentascope’s international revenue. Pentascope defines logistics as any organization that transports and distributes people or goods. Within the Logistics Sector, the European railway companies and postal companies must privatize to cope with the challenging demands of the European Community are interesting for Pentascope.

3.3.5. Importance Business Line to Pentascope’s International Operations.Fig.3.1 Percentage of Revenue per Client Segment of Pentascope’s Operations

86%

2%

2% 10%

Telecom Services

Public Services

Financial Services

Logistics Services

From this illustration it becomes clear that the telecom services business line is the core of Pentascope’s international business. This can be explained by the fact that a large number of former Royal KPN consultants were hired with extensive knowledge and relationship networks in this sector and the three year management contract in Nigeria for privatizing the telecom company. This contract was received with the assistance of the World Trade Organization.

3.4. Market Definition PentascopeThe external situational analysis results in a market definition for Pentascope. Pentascope business can be illustrated as in the model described by Abell (1980)12. From this model it can be concluded that Pentascope satisfies the clients in the needs for (mainly) functional but also (partially) strategic consultancy services in the areas of program management, systems technology, human resource management, process management and quality management to the four main market segments of telecom, public institutions, financial services and the logistics segment.

Fig.3.1 Market Definition according Abell

3.5. Competitor AnalysisPentascope’s main competitors on the management consulting market are:

Quint Wellington Redwood Hey Group 12 Dr. K.J. Alsem; Strategische Marketing Planning; 2nd print, 2000; Chapter 2, p39-40

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BMC McKinsey & Company GITP Management Consulting Deloitte Consulting Twynstra Gudde Berenschot Groep K+V organisatie

adviesbureau PNO Consultants

A.T. Kearney KPMG Consulting Cap Gemini Ernst & Young IBM Business Consulting Services LogicaCMG Boer & Croon Accenture The Boston Consulting Group

The magazine ”Management Team” (June 2003) performed a research among clients of these companies and by giving ratings to know-how, price, service and result, generated a top list of best companies for 2003. In this list Pentascope came in at a 2nd place beating big competitors such as McKinsey & Company and The Boston Consulting Group. Clients judged Pentascope to have the best quality/price relation. The primary reason for this is that Pentascope implements with various feedback streams, reassuring clients with the feeling that they have a say in the process. This is valued very highly in the Netherlands according to the article in Management Team.

The competition on the management consultancy market is fierce and mainly influenced by the following factors: The relationship that the consulting firm has with their clients resulting from past experiences. Secondly, companies search for big (and supposedly secure) companies with good reputations. The fact that Pentascope is not known all over every industry sector is a major weakness.

The only real substitution for consulting services can be made if an organization performs the service itself. On the other hand, it can be concluded that since every consulting firm uses a different way of offering the consulting service they can all be substitutions to Pentascope’s services. With that difference, that most companies concentrate on the change process design, where Pentascope adds the implementation of that design to its services.

It is clear that Pentascope offers a different view, with focus on the human aspect. This means that Pentascope operates in a market niche. However, this niche is developing to be more and more common and separate market segment as more and more companies recognize the long-term benefits of this unique approach on implementation new organizational processes and systems.

To establish a consulting firm is easy. Just register and there are no other requirements necessary. However, for newcomers it is not easy to enter the market and get projects because it relies mainly on existing relationships. Newcomers have to focus on new companies that haven’t worked with consultants before. This is difficult because companies rather work with “established” management consulting firms. Another possibility is to target a niche and supply specific consultancy to that niche.

Pentascope markets itself as a unique company within the market. Judging from the 2003 client satisfaction research, this view is not shared by Pentascope’s clients. For them Pentascope is just one of the many and decisions are made with regard to price, name, reputation etc. Pentascope emphasizes its uniqueness, but in fact it is still possible to identify its services within known parameters.

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4. Market OrientationIn this chapter a determination will be made which country offers the best option to start internationalizing Pentascope. First six countries are selected for macro economic analysis. Pentascope’s services highly depend on cultural influences. These countries are, therefore also judged on their cultural compatibility with the Netherlands. Those analyses are combined in a business portfolio matrix. From this matrix an advice can be given to Pentascope on what country offers the best possibility to start its internationalization in.

4.1. Preliminary SelectionReferring to Pentascope’s international strategies; follow current clients and establish a permanent representation on the international market; Pentascope has to determine the best country to start internationalization in. For Pentascope the international market has a three folded outlook. The world can be divided into developed economies, emerging economies and less developed countries (LDC’s). Judging upfront it seems that developed economies have better outlooks for Pentascope if they want to follow its current clients, to grow with getting new business relations and after that establish a permanent representation on that market. There are also possibilities in the public sector of emerging economies. These markets heavily depend on governmental direction, which means that they offer government contracts, which are mostly guided and initiated by world institutions such as the World Bank, IMF or the WTO. LDC’s don’t show opportunities for Pentascope because companies in these economies don’t have money for purchase of consulting services. The opportunities in developed economies are less time and cost intensive for Pentascope. Moreover, companies in these economies have more money and are more likely to purchase outside consulting services. Current large clients are mainly represented in countries with developed economies. For these three reasons, this research focuses on developed economy countries in determining countries for internationalizing Pentascope. Developed economies are the North Americas, European Union, Australia, New Zealand and Japan.

For Pentascope it is important to internationalize to countries that have the opportunity to help Pentascope internationalize further. The North Americas, Australia and New Zealand don’t offer large possibilities in expanding internationally at a quick rate, because these countries are relatively isolated in the world. Japan is not interesting for Pentascope because of its unique management style that they use. Japan’s culture is so different that Pentascope would have to change its services to adapt. In case of the European Union Pentascope can internationalize quickly, because these markets are smaller and the services that Pentascope offers do not have to be changed much to be suitable for these markets. This reduces internationalization barriers. Also, less economic barriers within the EU help lowering difficulties for internationalization. Another factor is that the entry to the EU, geographically seen, is easiest to accomplish from the Netherlands home market. Therefore this research is targeted at the European Union.

Pentascope has made a selection of six countries within the EU that will be subject to this research. These countries are the United Kingdom, Sweden, Denmark, Germany, Belgium and France. These countries will be researched using several criteria to find the primary and secondary target countries. Examination takes place at macro level and meso level. A filter model, introduced by Harell and Kiefer,13 is used to determine which country offers the best option for Pentascope, by viewing the country’s attractiveness compared to its compatibility with Pentascope.

13 Harrell & Keifer, 1993 Multinational Market Portfolio in Global Strategy Development, International Marketing Review #10

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4.2. Country AttractivenessIn order to judge a country’s attractiveness quickly and thoroughly the countries are judged on their macro and meso economic environment factors listed below. Which country is most attractive for Pentascope for that particular factor will is shown in the table below. First place gets 4 points, 2nd place receives 3 points, 3rd place 2 points and countries in 4th place receive 1 point. Countries that finish in 5th or 6th place receive no points. However, the factors are weighted because some are considered more important to others. The weight is between 1-4; 4 being most important and 1 being less important. For the results see the table below.

Table 4.1 Macro Economic Criteria for Selected Country Criteria United

KingdomSweden Denmark Germany France Belgium Ratings

Attractiveness

Weight

Size 244.100 km2 449.964 km2 43.092 km2 356,970 km2 544,000 km2 30.528 km2 1. FRA2. SW

E3. GE

R4. UK

1

Citizens (2002 est.)

58.8 mln 8,9 mln 5,4 mln 82,2 mln 61,4 mln 10,2 mln 1. GER

2. FRA3. UK4. BEL

1

Use of English in Business

All-over Extensive knowledge and use

Extensive knowledge and use

Less than 20%

None Just in Flanders / Brussels; some

1. UK2. SW

E3. DE

N4. GE

R

2

GDP

GDP per Capita

Growth GDP 2003

€ 1.523 bln

€ 37962,92

1,8%

€ 260 bln

€ 28221

1,5%

€ 160,4 bln

€ 29785

2.1%

€ 1.958 bln

€ 23826

3,1%

€ 1.520,8 bln

€ 24837,30

1,2%

€ 253 bln

€ 29586

1,0%

1. UK2. GE

R3. DE

N4. SW

E

4

Inflation 2004 (Expected)

Inflation 2005 (Expected)

2,4%

2,5%

2,4%

2,2%

2,3%

1,9%

1.1%

1,8%

1,9%

1,8%

2,2%

1,8%

1. FRA2. GE

R3. UK4. SWE

2

Unemployment rate

5,1% 4,2% 5,1% 9,3% 9,1% 11% 1. SWE

2. DEN2. UK4. FRA

1

Currency(16/03/2004)

Pound£ 1 = € 1,46

Swedish KroneSKK 1 = € 0,105

Danish KroneDKK 1 = € 0,13

Euro Euro Euro 1. GER1. BEL1. FRA4. UK

1

Total Imports € 321,5 bln € 67 bln € 51,6 bln € 521,2 bln € 380,2 bln €202,4 bln 1. GER2. FRA3. UK4. BEL

2

Total Exports € 271,3 bln € 83,6 bln € 59,4 bln € 574,9 bln € 411,6 bln €186,7 bln 1. GER2. FRA3. UK4. BEL

1

Service industry % of total

74% 74% 79% 63.8% 71% 73% 1. DEN2. UK2. SWE4. BEL

4

Sources EIU, EVD/CBS, Office for National Statistics

EIU, EVD/CBS

EIU, EVD/CBS, Statistics Denmark

EIU, EVD/CBS, Statistisches Bundesamt

EVD/CBS, EIU, Insee

EIU, EVD/CBS, NIS

By means of a “weighted factor score model”, all factors are used to judge these countries. All scores are added up and these are represented in the following table, which shows the United Kingdom,

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before Germany as being the most attractive for Pentascope to start internationalization according to the macro and meso economic factors.

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Table 4.2 Country attractiveness rankingCountry s1 s2 s3 s4 s5 s6 s7 s8 s9 s10 Total from 76 Percentage RankingBelgium 0 1 0 0 0 0 4 2 1 4 12 15,79% 6France 4 3 0 0 8 1 4 6 3 0 29 38,16% 5Denmark 0 0 4 8 0 3 0 0 0 16 31 40,79% 3Sweden 3 0 6 4 2 4 0 0 0 12 31 40,79% 3Germany 2 4 2 12 6 0 4 8 4 0 42 55,26% 2United Kingdom 1 2 8 16 4 2 1 4 2 12 52 68,42% 1

4.3. Country / Company CompatibilityTo judge the compatibility of these countries to Pentascope, the difference between the Netherlands and their scores on Geert Hofstede’s14 index for cultural dimensions, are used as criteria. This will offer a quick judgment whether the particular country shows large differences with the Netherlands on a cultural level indicating the cultural barrier in internationalization. Pentascope’s service delivery heavily depends on the business culture and therefore it is important to view to what extend it has to change its servuction to the country. The rating is received by counting the difference with the Netherlands. Six factors are considered in this rating. The Power Distance Index; Individualism of society; Masculinity of society and the Uncertainty Avoidance Index. Below is shown what the weight (importance) is of these factors from 4 to 1. Four being most important and 1 being the least important. Moreover the country’s compatibility is viewed in how many of the top 12 clients have a presence in that particular country. This comes forth from Pentascope’s international strategy to be able to assist its current clients internationally. Finally, the investment size needed for start-up is judged for these countries.

Table 4.3.1 Compatibility Factors and their weightWeight

PDI Power Distance Index 3IDV Individualism 3MAS Masculinity 1UAI Uncertainty Avoidance Index 1

How many of Top 12 clients have presence in country 4Money needed for start-up 3

Power Distance Index (PDI) focuses on the acceptance of the degree of equality, or inequality, between people in the country's society.

Table 4.3.2 Power Distance Index for selected countries and their scoreCountry PDI Difference with the Netherlands score Score x weightGermany 35 3 4 12United Kingdom 35 3 4 12Sweden 31 7 2 6Denmark 18 20 1 3Belgium 65 27 - -France 68 30 - -Netherlands 38 0

Individualism (IDV) focuses on whether a society values individual achievement versus collective achievement.

Table 4.3.3 Individualism for selected countries and their scoreCountry IDV Difference with the Netherlands score Score x weightBelgium 75 5 4 12Denmark 74 6 3 9France 71 9 2 6Sweden 71 9 2 6United Kingdom 89 9 2 6Germany 67 13 - -Netherlands 80 0

Masculinity (MAS) focuses on the degree of male values in a society.

Table 4.3.4 Masculinity for selected countries and their score Country MAS Difference with the Netherlands score Score x weightDenmark 16 2 4 4Sweden 5 9 3 3France 43 29 2 2Belgium 54 40 1 1Germany 66 42United Kingdom 66 42

14 Werken met Cultuurverschillen; Geert Hofstede; 2000

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Netherlands 14 0

Uncertainty Avoidance Index (UAI) focuses on the level of tolerance for uncertainty and ambiguity within the society - i.e. unstructured situations.

Table 4.3.5 Uncertainty Avoidance Index for selected countries and their scoreCountry UAI Difference with the Netherlands score Score x weightGermany 65 12 4 4United Kingdom 35 18 3 3Sweden 29 24 2 2Denmark 23 30 1 1France 86 33Belgium 94 41Netherlands 53 0

Reviewing its international strategy, following current clients and assisting current clients internationally, it is important to view how many companies have a presence in the country that is targeted. This is therefore also the most important country/company factor and its weight is set to 4.

Table 4.3.6 Number “big” clients that have presence in selected country Country # companies Score Score x weightDenmark 7Sweden 7France 9 1 4Belgium 10 4 16Germany 10 4 16United Kingdom 10 4 16

The above mentioned factors are important to see how Pentascope fits the country’s cultural profile and the country’s ability to follow the main internationalization strategy. Earlier it became clear that Pentascope does not possess deep financial pockets for internationalization. Below there is a ranking of the countries that indicate the difference in money needed to enter the country. Its importance for Pentascope is three. This ranking is received by viewing the invested time, tax regulations, people needed for startup. The country with the lowest investment needed for startup will lead the ranking.

Table 4.3.7 Investment needed for startup in selected countries and their score Country Investment for start-up (smallest in 1st place) score Score x weightUnited Kingdom 4 12Denmark 3 9Germany 2 6Sweden 1 3BelgiumFrance

By means of a “weighted factor score model”, all factors are used to judge these countries. All scores are added up and these are represented in the following table, which shows the United Kingdom, before Germany as being the most attractive for Pentascope to start internationalization according to the macro and meso economic factors.

Table 4.3.8 Rankings of Compatibility for selected countriesCountry Country / company compatibility (points of 60) Percentage RankingUnited Kingdom 49 81,67% 1Germany 38 63,33% 2Belgium 29 48,33% 3Denmark 26 43,33% 4Sweden 20 33,33% 5France 12 20% 6

The results from the country attractiveness analyses and the country/Pentascope compatibility analyses are shown below. A business portfolio matrix, as shown in figure 5.1, is a way to identify the country which offers the best option for Pentascope to start internationalization in. This is done in two ways. First the country’s individual scores are used to find the best country and second the ranking among the six countries researched are used to fill in the business portfolio matrix. The size of the circle indicates the potential market size for Pentascope.

4.4. Business Portfolio Matrix with Individual Country ScoresTable 4.4 Scores for compatibility and attractiveness of selected countries

Country Country / company compatibility Ranking Country attractiveness RankingUnited Kingdom 49 1 52 1Sweden 38 5 31 3Denmark 29 4 31 3

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Germany 26 2 42 2Belgium 20 3 12 6France 12 6 29 5

Fig 4.2 Business Portfolio matrix (Harrell and Kiefer; International Marketing Review #10) According to Country Individual Scores According to Country Rankings

4.5. ConclusionsHarrell and Keifer (1993) draw the conclusion from this that there are primary (High/High), secondary (High/Medium & Medium/High) and tertiary (Low/High, Medium/Medium & High/Medium) opportunity countries. In this case the United Kingdom seems to be the primary opportunity country for Pentascope to start internationalization before Germany which forms a secondary opportunity. Judging from the above, the UK and Germany do not have many differences and look quite similar to the Netherlands. Pentascope’s servuction, the production and service provision do not have to be changed much to work in Germany and the UK. The Scandinavian countries, Sweden and Denmark, can form a tertiary opportunity. Pentascope has to change its methods to work on the compatibility with these countries if it wants to internationalize into these countries. Even though the United Kingdom shows better opportunity, Pentascope decided that Germany would have to be researched as the country to start its internationalization in.5. GermanyThis chapter clarifies how the German management consulting market looks and what Pentascope will face when entering this market.

Germany has 82,2 million people. That is 230 per square kilometer. Germany, therefore, has one of the highest population densities in Europe only outweighed by Belgium, the UK and the Netherlands. Germans are highly concentrated to specific areas. Most important is the “Ruhr” area which inhabits 11 million people and has virtually no borders between cities. Other important concentrations exist along the river “Rhein”, the “Main”-area (Frankfurt, Wiesbaden, Mainz) and the “Neckar” area (Mannheim, Ludwigshafen). High people/business concentrations consist also around the large cities of Berlin, Bremen, Dresden, Hamburg, Leipzig, München and Nürnberg. The result is that Germany is a highly regionally oriented country. Targeting it for Pentascope would mean researching each region thoroughly. 49,6% of Germany’s population works and its unemployment rate is 9,3% of which a third lives in the former West-Germany (BRD). The economic recession continues to raise the unemployment figures.

Fig. 5.1 People/Business concentration in Germany

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0

0

60

76Country attractiveness

Cou

ntry

/ co

mpa

ny c

ompa

tibili

ty

UK

GER

FR

B SD

High Medium Low

Lo

w

Med

ium

H

igh

6

6

0

0 Country attractiveness

Cou

ntry

/ co

mpa

ny c

ompa

tibili

ty

GER

UK

S

D

FR

B

High Medium Low L

ow

M

ediu

m

H

igh

Areas:1. Ruhr area2. Main area3. Neckar area4. Berlin5. Bremen6. Dresden7. Hamburg8. Leipzig9. München10. Nürnberg

The concentration of people also reflects the concentration of businesses. Of the top 12 clients that Pentascope has in the Netherlands 10 have a presence in Germany. From those eight have a presence in the three largest areas. With reference to assisting current clients abroad, the main focus should be to the Ruhr area, Rhein area and Main area.

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9

1

2

3

4

57

68

10

9

5.1. Management Consultancy in GermanyGerman companies try to cut costs and make more use of the expertise of management consultancy companies. This trend was started by the telecommunications industry that lowered its expenditures for consultancy services significantly. After this branch, others followed quickly. However, this demand is mostly limited to the design part for management consulting. The demand for organizational consulting, functional and strategic combined,– i.e. for projects aiming at cost savings and rationalization – increased by 35.7% between 2001 and 2002. The total revenues of the German management consulting sector amounted to 12.3 billion Euros in 2002 and are thus 4.5 per cent lower than in the preceding year (2001: 12.9 billion Euro). In the year 2001 the sector had still grown by 5.7%. Companies had to postpone their projects or to retract innovative projects entirely.15

The trend within the management consultancy more and more resembles 'integrated solutions', which demands high competence and expertise from consultancy firms. This is positive for Pentascope, because it moves ahead of this trend and it offers an opportunity if Pentascope is able to partner up with a local IT developer. Small and middle-sized companies are expected to fail in pursuing this trend what will push them to start co operations according to BDU research. While classic management consulting (organizational/functional and strategic consulting services) saw an increase in revenues of a total of 10.3%, the development in the consulting areas of IT consulting/IT Services (- 20.1%) and management consulting (- 15.0%) decreased. Development of management consulting, however, proved inconsistent. Clients' demand for organization consulting services increased markedly, while the number of strategic consulting projects decreased by 13.6%. BDU16 explained the unusual development for the consulting industry above all by the clients' reluctance with regard to awarding innovative projects. The development of individual consulting areas – up with organizational consulting, down with IT consulting, strategic consulting and executive staff consulting – underlines, according to BDU, that important investments into Germany's future are no longer made and that development has come to a standstill. Therefore the BDU estimates a slight growth in market turnover in the consulting industry for the year 2003.

In Germany management consultancy can be segmented in the: IT, Strategic consultancy and Functional consultancy. All of these segments experienced growth in its revenue figures in 2001.

Table 5.1 Revenue Management and Marketing consultancy Germany 1997/2001 (Billion Euro)Sector 1997 2001IT 3,2 5,0Strategic consultancy 2,5 3,8Functional consultancy 2,7 4,1

Source: Euromonitor, September 2002

The economic crisis affected the top forty (- 4.2%) as well as the medium- (- 4.7%) and the small-sized consulting firms (-4.8%) of a total of 14,400 firms. The market share of the top forty consultants remained almost unchanged at approximately 50%. The demand for consulting projects has clearly increased in the producing sector which now has a share of 30.9% of the total demand (2001: 25%). This corresponds to an increase by approximately 18%. The IT and media industry saw a dramatic decrease in demand of 20.1 per cent where a negative business development led to a squeeze of the consulting budgets. The trend for those companies is to form co operations with functional and strategic consulting businesses according to BDU.

15 Economic Information Service (economische voorlichtingsdienst www.evd.nl)16 Bundesverband Deutscher Unternehmensberater (www.bdu.de)

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Fig 5.2 Development of German Consulting Market from 1992 until 2002 including 2003 est.

0,0

2,0

4,0

6,0

8,0

10,0

12,0

14,0

Size in Billion Euro

1992 1995 1998 2001Source: Bundesverband Deutscher Unternehmensberater (www.bdu.nl)

Expecting a huge increase in revenue of the consulting industry in the year 2003 has proven to be false, as revenue estimates only show a slight increase. The reason for this is the backdrop of the insecure economic and political developments. It is, however, recognizable that the postponement of projects that has been occurring in 2002 will lead to a considerable investment bottleneck in the clients' companies. Reforms in the areas of labor, taxes and health, the resulting economic dynamics will also lead to a need for more consulting. The improvement of IT and data security counted among the most urgent tasks of the companies. Moreover, due to the Basle II17 provisions the companies are increasingly obliged to introduce comprehensive adjustments in their organization as well as in their strategic orientation in conjunction with the necessary rating procedures. Industry and business would also need to catch up, in order to build up the mandatory risk management systems provided for by the Control and Transparency Act (KonTraG). 18

In 2002 the management consulting firms could not avoid restructuring either. This trend will continue into the end of 2004. The extension or focusing of the service portfolio as well as the optimization of customer relations will become a central task for consulting firms. At present the German Association of Management Consulting Firms (BDU e. V.), organizes about 16,000 business and management consultants working for more than 550 management, IT and executive staff consulting firms. In 2002 the member organizations had a total turnover of about 3.2 billion Euro (3.3 billion Euro in 2001) and first indications for 2003 show a slight growth but not yet back to the level of 2001.

17 Basle II provisions are political measures proposed to counter large-scale fraud in companies as seen recently in the Royal Dutch Ahold and Enron. 18 Bundesministerium für Wirtschaft und Arbeit (http://www.bmwi.de)

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5.2. Outlooks for Pentascope’s Business LinesFor Pentascope it is important to also view the outlooks of its business segments in order to get a total view of the opportunities that the German market offers. After viewing this Pentascope may find itself targeting only one of two segments while entering the German market instead of a four business segment broad targeting or a market broad view.

5.2.1. Telecom Services The telecommunications industry is one of the most promising sectors in the German service industry. Germany has a large expertise and new developments are quickly integrated. The following illustrates how the telecommunications services market developed over the past three years.

Fig 5.3 German Telecom Sector development 2001 – 2003

Source: Verband der Anbieter von Telekommunikations- und Mehrwertdiensten (VATM), www.vatm.de

This sector depends heavily on Deutche Telekom AG that is in the process of being privatized by the government under European guidelines. Deutsche Telekom became a private company in 2000 however it is still struggling with the switch. The market should open in the future for service providers from other European Union countries.19

5.2.2. Public ServicesDemand from the public service also increased by 6% (market share as to the demand side in 2002 of 8.9%, 2001: 8.0%). The main trend here is “full-privatization” under European guidelines. Public services in Germany exist on three levels. First there is the Federal Government in Berlin. Then there is the level of individual federation countries. Finally governmental institutions and privatizations exist on city level. The economic tasks for the government on central, state and city level focus on sectors that supply the community needs. Privatization of telecommunication, railways and energy suppliers are in the completion phase. The new developments are the privatization of other public services such as airports (Frankfurt and Hamburg) and the federal printing company “Bundesdruckerei AG”20

The highest concentration businesses can be found in the Rhein, Ruhr and Neckar areas. Most of the Bundesministeriums (federal departments) are seated in Berlin.

19 Verband der Anbieter von Telekommunikations- und Mehrwertdiensten (VATM), www.vatm.de20 Economic Information Service (Economische Voorlichtingsdienst www.evd.nl)

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2001 2002 2003

€ 25,0 Bln43,3%

€ 32,8 Bln56,7%

€ 25,5 Bln43,1%

€ 33,6 Bln56,9%

€ 26,8 Bln43,3%

€ 35,1 Bln56,7%

€ 57,8 Bln€ 59,1 Bln

€ 61,9Bln

+ 2,2%+ 4,7%

+ 2%

+ 2%

+ 5%

+ 5%

Deutsche Telekom

Other

Fixed-line services € 9,3 Bln 34,7%

Mobile services € 17,5 Bln 65,3%

5.2.3. Financial ServicesThe financial services industry consists mainly of banks and insurance companies. A mentionable development is the trend towards the “Allfinanzkonzept” which encompasses the expansion of financial institutions with other services than their core business.

Banks and insurance companies have reduced their consulting budgets only marginally (by 0.9%), but they have changed the purpose. The demand of banks and insurance companies shifted from IT innovation projects to Pentascope's service offerings of cost-cutting measures and process optimization. Banks also developed insurance activities where insurance companies started to offer banking services

The German Banking sector can be segmented in the Central bank, private trade banks, public saving banks and cooperative banks. The middle and small segment include mortgage, investing and ship mortgage banking. 21

The trend in this sector is a large number of mergers, take-overs and closings due to decreasing profits in this sector in the last couple of years. The focus has shifted towards international investing banks in order to survive in an integrating European Union and a globalizing market. Other trends indicate that banking through the internet is growing rapidly as well as banking services through the telephone.

The top five banking institutions are the Deutsche Bank AG, Bayerische Hypo- und Vereinsbank AG, Dresdner Bank AG, Commerzbank AG, Westdeutsche Landesbank Girozentrale. They had a total possession of 3.500 Bln Euro worth in 2002.22 Most of the companies that had a regional approach start focusing on centralization for Germany. This market is mainly concentrated around Frankfurt, which also houses the European Monetary institutions.

Insurance services had to deal with the weak economic situation and the aftermath of destabilization in the world following the terror threats. The annual figures of the Gesamtverband der Deutschen Versicherungswirtschaft (the union for German insurance >> www.gdv.de) shows a growth of 4,0 percent among its members in 2002 which came from 2,7% in 2001.23

Further growth is believed to show throughout the sector in the coming years, especially in life insurances, pensions24, private health and car insurance. Also in this sector internationalization has been a driving force behind mergers, take-overs and closings. The sector is open for international companies; however, customers stay loyal to German companies. These companies are headquartered mainly around München and the Rhein area (Source GDV)

21 The German Financial Department (www.bundesfinanzministerium.de)22 Die Bank february 2004(www.die-bank.de) & the Bundesverband deutscher Banken, www.bdb.de23 Gesamtverband der Deutschen Versicherungswirtschaft (GDV), www.gdv.de24 Verband Deutscher Rentenversicherungsträger (pensionfundings), www.vdr.de

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5.2.4. Logistics ServicesLogistics are concentrated around two main areas: Bremen and Hamburg because of the harbors on one hand and Frankfurt because of its large international airport, which lays in the economic heart of Germany the Ruhr area. Road, railway, sea and air transport, the four most important segments, reported decreasing results in 2003.25 26 The sector has also dealt with large-scale privatization under EU regulations. The resulting figures state that sea shipments to Bremen and air traffic to Frankfurt became more and more important. The Bremen harbor reported a record annual turnover in 2002 in the sea shipments. Frankfurt reported a product traffic increase of 5,2%. Surprisingly Stuttgart reported an increase of over 30%. This shows that air traffic became increasingly important and that the Ruhr area is the most important area for logistical services.

5.3. Pentascope’s Competitor Analysis2003 estimates indicate that the management consultancy market is growing for the first time since 2001. Pentascope's German competition shows large similarities with the situation on the Netherlands home market. As in the Netherlands competition on the management consultancy market in Germany is also fierce. Furthermore, it is mainly influenced by firstly the relationships that exist with companies resulting from past experiences. Secondly, companies search for big (and supposedly secure) companies with good reputations. This results in choosing big international companies such as McKinsey, Boston Consulting or KPMG. Finally, in acquiring new customers, another disadvantage for Pentascope is that they have no name recognition in Germany what so ever.

German companies are highly focused on maintaining a relationship based on past experiences. A company relationship is valued higher than relationship with a certain consultant regardless where he/she is employed. The attitude towards consulting companies from outside Germany is not that good. Germans wonder how foreigners would be able to understand the German business situations better than Germans and like to stick with business relationships made and proven successful in the past, according to Mr. Hirte. (Director, Hirte Consulting GmbH.)

Large consulting firms, like KPMG, McKinsey, Boston Consulting, etc., form the core competition for projects offered by large multinational companies. Their positive reputation attracts new business because managers feel that they pose less risk than choosing relatively unknown companies such as Pentascope. Competition for smaller sized projects offered by local companies is built up of mostly local consulting firms, because these already established a business relationship with these potential clients.

According to Mr. Rob de Jong, Director European operations of Integrify and Mr. Hirte, Director of Hirte Consulting GmbH, another factor is that Germans, other than the Dutch, like to be told how to change and then implement and perform the change process themselves. Germans mainly choose companies that evaluate the situation and give point to change rather than let outsiders implement changes. German managers want to have the responsibility and think they are able to do it the best way, this is the direct opposite of Pentascope, which guides and assists the company throughout the change process.

To get a foothold on the German market the main international consulting firms acquire small and medium sized consulting firms including their relationship networks. They also, aggressively, buy out consultants from other, smaller consulting firms. Competitors pricing is similar to pricing levels in the Netherlands Pentascope can therefore keep its pricing strategies of hourly rates and turnkey projects also on the German market.

The German market is currently, because of the economic stresses, not highly attractive to start new operations. Most companies focus on their core business rather than develop markets. Software developers experience decreasing sales figures and want to form co operations.

5.4. Code of Conduct in German Business Environment In general, German businesses value company relationships very highly. Many relationships have formed in the past and are kept in place. Although Germans like working with the same person, the relation is essentially with the company. Germans are used to detailed and punctual planning. According to successful Dutch entrepreneurs in Germany, you have to act like Germans to be successful. It is really important to be fluent in the German language. For supplying a service this is important in any case.27

Germans want business to stay business, also in communication. Communication is conducted in a very formal way. Obviously, when using folders and reports, they have to be in perfect German. And the formality also works through in the dress code.28

Company culture

25 Federal department of Transport, Building and Housing (Bundesministerium für Verkehr, Bau- und Wohnungsverfassen http://www.bmvbw.de)26 Economic Information Service (Economische Voorlichtings Dienst www.evd.nl)27 John Mole, Mind Your Manners; Managing Business Cultures in Europe, 199728 Economische Voorlichtings Dienst (www.evd.nl)

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German companies focus on hierarchy and tight responsibilities where Dutch companies focus more on consensus. This means for Pentascope targeting the right level in hierarchy of the company, the top layer.

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6. SWOT- AnalysisThe internal and external situation have been clarified, the strengths and weaknesses can be discussed, the opportunities and threats can be stated and together with the strengths and weaknesses they can indicate the Unique Selling Points of Pentascope on which its long term strategy can be formed. These four factors are put together in a confrontation matrix developed by Doole and Lowe and result in main point of attention (MPA's) for Pentascope.

6.1. Pentascope’s CompetencesIt is important to make an analysis of Pentascope’s competences. This is done to gain insight in, whether and how Pentascope can use its specific knowledge and expertise to support its growth strategy.

6.1.1. Pentascope’s Core Competences CC1.The unique perspective on implementing changes, both organizational structures and process

wise, deals more with how to change rather than what to change. Pentascope implements on the”Human-driven Result-focused –principal.” Their core service is change management. Socially responsible operations as well as customer relationship management is an important aspect.

CC2.Pentascope not only designs plans for organizational changes but also implements them. This is done by overlooking the implementation efforts together with the company in which these are performed. Continuous feedback streams are used to optimize the servuction, which is valued highly by Dutch clients. This resulting in the second place in the Management Team Top 100.

CC3.Another core competence of Pentascope is their ability to get the right people with the right skills and the right knowledge on the right job. Pentascope’s success therefore heavily depends on its human resource efforts including the training of consultants. This reflects the key aspect in Pentascope's business processes.

6.1.2. Pentascope’s Distinctive Competences The distinctive competences reflect its long-term competitor advantage. This part of Pentascope’s competence deals with the core of the service delivery. DC1. Pentascope is not dependent on capital investors because it is privately owned. DC2. The extensive first hand knowledge of and experience in the Telecom market results in a large relationship network because Pentascope took over former KPN consultants.DC3. The development of consultants within the company by getting experience on smaller projects first and gradually grow into larger projects is a competence and leads to a comfortable working atmosphere. DC4. Pricing is significantly below the average of Pentascope’s competition.

6.2. Pentascope’s ConcernsSome issues may make it difficult for Pentascope in its internationalization process. It is important for Pentascope to keep these in mind and to continue to improve them. Listed below are the most important concerns.

W1. An organizational weakness is that consultant exchange between SBU’s is difficult within the Pentascope

Group. Therefore a lot of knowledge and expertise is lost and difficult to use. It also means that there is no single idea throughout the company for internationalization.W2. Explicit knowledge and expertise, made explicit through the reports, are not usable for the German market

because they are in the Dutch language. W3. Pentascope has no name recognition in the German market, which will be tough to establish in Germany.W4. For large-scale international projects Pentascope does not have deep financial pockets, which can stand in the way of growth.W5. Pentascope’s international operations are too dependent on telecom services (86%).W6. Through its current employees/consultants, does not possess sufficient knowledge of the German business culture, which is necessary for an adequate quality of Pentascope’s services.W7. Pentascope , through its current employees/consultants, is not able to deliver service in the German language.W8. Pentascope sees itself as unique where in fact they are not, especially to clients.

6.3. Opportunities for PentascopeAs well as within Pentascope as the German market there exist certain opportunities for Pentascope to take advantage from in its internationalization process.

O1. European integration will mean new regulations concerning companies’ audit processes to be implemented.

O2. The trend that IT developers and consultants seek co operations with functional and strategic consulting companies to overcome decreasing revenue figures is an opportunity for Pentascope.

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O3. The ongoing European integration is a major opportunity, as more and more organizations will structure as an international business in the European market. This provides business for Pentascope and also makes the market more reachable for Pentascope in its goal for internationalization.

O4. Another opportunity is the ongoing technological developments, which will increase organizational reforms providing business for Pentascope.

O5. The world wide economic woes have bankrupt small consultancy firms in Germany. Their clients are searching for new consultancy as the economy shows promising results again.

O6. With rising unemployment figures, reorganizations are increasingly done with large attention to retaining employment.

6.4. External Negative Influences for PentascopeThere are certain issues outside Pentascope’s influence spectrum that may have a negative effect on the internationalization process for Pentascope. Listed below are the most important of them.

T1. The economic woes have changed the market into a demand structure giving companies a strong negotiating position in pricing.

T2. That consultants believe that the economic recession only changes the services demanded, from growth support and advice to downsizing support and advice, is not right. Because of economic recession, companies’ budgets are tight which will result in lower demand and therefore revenue.

T3. Ongoing European integration will lead to more competition in the already highly competitive market. It also means that more companies shift their focus to the use of human-driven result focused services.

T4. Aggressive expansion of large international competitors includes buying consultants from small companies.

T5. German companies mostly look for companies with large reputations, such as McKinsey & Co, KMPG, Boston Consulting Group etc. which is a threat to Pentascope’s establishment on the German market because it is not known.

T6. German companies look for German consultants rather than foreigners, because they think their business culture can better be understood by Germans.

T7. German companies value existing relationships with companies highly and are not quickly prepared to cancel those to enter into a new relationship.

T8. German companies rather implement themselves after advice than letting outsiders implement the proposed changes countering exactly which Pentascope’s services make unique.

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6.5. Confrontation MatrixThe internal and external analysis resulted in the above-mentioned factors to consider in Pentascope’s internationalization process. If Pentascope can form its competences to fit the German market, they may transform into opportunities in getting a foothold on the German market. Now all factors are entered into the confrontation matrix of Doole and Lowe. To give the matrix meaning, the different issues are viewed in combinations to find strong points for the German market (Unique Selling Points; USP’s) and other main point of attention for Pentascope. Only factors concerning the German market entry are described below. Other factors are described in other parts of this report.

Fig. 6 Confrontation matrix (Doole and Lowe 1993)

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Opportunities External negative influencesO1 O2 O3 O4 O5 O6 T1 T2 T3 T4 T5 T6 T7 T8

Com

pete

nces

CC1 MPA1

CC2 MPA2

MPA4

CC3 MPA7

DC1DC2DC3DC4 MPA

3MPA

3MPA

3

Conc

erns

W1W2W3 MPA

5MPA

8W4 MPA

9W5W6 MPA

6W7 MPA

6W8 MPA

8

6.6. Pentascope’s Main Points of Attention (MPA)Certain combinations of issues described above form Main Points of Attention (MPA) for Pentascope in its internationalization process.

MPA1. Pentascope can assist in reorganizations that are aimed at retaining as much employment as possible. Rising unemployment figures in Germany due to the world-wide economic recession can effectively be countered if Pentascope’s services are hired because of its focus on the hu-man aspect in the organization.

MPA2. Implementation of new processes or audit controls, because of European guidelines and di-rected by the ongoing European integration, can offer major opportunities for Pentascope to not only describe the process but also implement those proposed changes.

MPA3. The German market is highly competitive and will be more competitive as ongoing EU inte-gration occurs. However, reviewing the Pentascope’s domestic prices that are significantly lower than its competitors, companies may be more likely to choose Pentascope’s services. This is also true in case of tight budgets because of the economic recession. Thirdly, the demand structure of the market puts clients in a strong negotiating position. Pentascope can counter this with its prices if uses its domestic pricing strategies for the German market.

MPA4. On the domestic market Pentascope is valued for its design and implementation of changes and the continous feedback streams. This provides clients with the feeling that they actually control the process of change and can influence it. This is not valued highly on the German market at all. Germans like to implement changes themselves and not leave that to other people from outside the company. Germans believe that they can do it best themselves because they are best known with the company’s operations. This opposites the idea of Pentascope’s imple-mentation supports service.

MPA5. Potential clients will not think of Pentascope because it has no (0%) name recognition in the German market.

MPA6. Decreasing revenues in the IT software and consulting business directs IT companies to look for partnership opportunities with companies that work in other parts of consulting business such as Pentascope. However, potential allies do not think of Pentascope for partnerhip be-cause it is not know internationally. Furthermore, Pentascope does not possess great knowl-egde of the German business culture and language. Another aspect here is that Pentascope does not possess consultants well enough able to provide its service in the German language.

MPA7. A large threat is coming from potential clients that rather look for German consultants be-cause of their better understanding of the German business culture. Pentascope has to hire unemployed German consultants, let them develop themselves within the Pentascope com-pany by training and gaining experience. This also means that Pentascope will be able to offer its services in German. Maybe these consultants can help transforming Pentascopes services so that they fit the German business better also.

MPA8. The human driven approach is increasingly used in the consulting business and because Pen-tascope is not known in Germany it will be hard to get new business. Pentascope may think that they offer a unique service but they will find that clients do not share that view.

MPA9. The aggressive buying of consultants from small competitors even acquisitioning the entire companies by the large competitors such as McKinsey and KPMG, is tough for Pentascope to counter because it has not the financial means to retain its consultants.

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6.7. ConclusionsExternal influences can either be negative and throw up barriers or they can offer opportunities with challenges. This is just the way they are viewed. For Pentascope it is important to internationalize in a way that it sees opportunities and challenges.

Ongoing European integration intensifies competition but it also provides more potential business be-cause of opening markets. If Pentascope keeps its strategy to price itself significantly below that of its competitors they may be better able to get a foothold on the German market.

German companies with consultancy relationships are reluctant to transfer to new companies. Busi-ness to Business relationships are strong and do not depend on the people that work there. This means that Pentascope has to find a way to work together with already existing companies with busi -ness in Germany. The way to do this is discussed in the next chapter, where the strategy of entering the German market is determined.

As legible throughout the SWOT analyses, there are high barriers for Pentascope to internationalize to the German market. German companies have a negative view on foreign companies, and are more confident with company relations rather than personal. Also competition on the German market is fierce as it is an “established” market for management consultancy. This also is hard for Pentascope to overcome, especially in the light of a shortage of financial means to counter that. In German business culture it is also custom to make, adapt and deal with changes within the company. Without outside guidance this is particularly threatening for Pentascope. Furthermore, Pentascope is lacking knowledge, expertise and language skills necessary for the German market. Overcoming the last indicated factors means investing money, men and time that Pentascope does not have. Judging from the strategic and economic goals of Pentascope, it fails to account for that as well. If Pentascope persists in expanding internationally into highly competitive, established and demanding markets such as Germany it needs to be prepared for a long term investment and overcoming high barriers. Further on it is researched what Pentascope should do if it chooses to go ahead with internationalizing into Germany.

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7. Market Entry StrategyThis chapter is meant to describe possible ways of entry for Pentascope on the German market. This will be done by viewing the various advantages and disadvantages of different options. The way that offers the best possibilities for Pentascope will be thoroughly discussed in this research.

Vander Merwe and Chadwick (1989) built the following matrix in which the degree of tangibility, from pure services to services bundled with goods, is viewed versus the level of customization. This is done to determine the Pentascope's profile. It is important to view how similar companies to Pentascope internationalize, because those companies had to overcome similar barriers.

Fig. 7.1 Vander Merwe and Chadwick matrix

From this matrix it is judged that Pentascope is a Location-Bound Customized Projects firm and that it is consistent with the standard profile for this cell. The typical firms in this quadrant are Project management, Engineering Consulting Management Consulting, and Human Resource Development consulting firms. These companies usually have a profile such as described in attachment II .29

Kasper, Van Helsdingen and De Vries jr. have stated that the process of selecting an entry mode leads through several relevant variables that refer to the basic location of the “servuction process” (production of the actual service). The following steps indicate this process:

1. Distinguishing between entry modes where the production is location bound to the home country (exporting, licensing and franchising) versus the other entry modes where production takes place in the host country.

Assessing these entry modes in terms of:2. The degree of experience, knowledge, desired control and perceived risk.3. Situational influences impacting the entry mode at the beginning and in the future

organization. 4. Availability of resources.

This all influences the choice of operation mode as a process.Firms planning to serve and actually servicing foreign markets may develop and implement three generic strategies to do so. They all are aimed at getting physical access to the new territory and to serve customers.30 They are exporting, licensing or franchising, and foreign direct investment.

For the final decision it is important to categorize Pentascope’s services. Distinguishing people-processing, possession-processing and information-based services31, it is clear that Pentascope’s services are people-processing services, because they involve tangible actions to customers and require that customers themselves are present during the service encounter. Because Pentascope emphasizes the person in the implementation process, it obviously requires employees and management to be present. For, they themselves are part of the servuction process and a high degree of contact with consultants is needed. Result is that Pentascope has to maintain a local geographic presence in order to deliver the service. This shows that the possibility of exporting directly from the home market is not possible. Because, with exports, the bulk of value adding activities takes place in the home country. This leaves licensing and franchising on one hand and foreign direct investment on the other hand, as these entry modes imply transferring value adding activities to the host country in the internationalization process. 29 Vander Merwe and Chadwick in Services Marketing Management, an international perspective; 1999, page 41730 Hans Kasper, Piet van Helsdingen and Wouter de Vries jr.; Services Marketing Management, an international perspective, 1999, page 41031 Idem, page 411

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Deg

ree

of T

angi

bilit

y

Pure services

Services bundled

with goods

Level of Customization

Low High

Location-Free Professional Services

Standardized Service Packages

Location-Bound Customized Projects

Value-Added Customized Services

The option of management contracts is not suitable for the German market. Management contracts are usually used in the public sector. Such contracts are mostly received through supranational organizations such as the World Bank, the World Trade Organization, the International Monetary Fund or the United Nations. These organizations focus their intermediary efforts concerning these matters mostly on markets in LDC’s where little or no consulting experience is. In the European market, efforts are left to local government and these are mostly focused on local companies.

7.1. Licensing or Franchising versus Foreign Direct InvestmentIn this paragraph the degree of experience, knowledge, desired management control and perceived risk of licensing or franchising is reviewed against foreign direct investment resulting in a decision what mode should be the one used by Pentascope in the internationalization process.

The degree of experience demanded by the German market is high. German companies expect solid references and have to be confident that Pentascope has the experience in implementing its services in the German business culture and language and reassuring clients in the continuous feedback streams. Experience solely based on operations on the Netherlands home market will not be enough. There are high doubts in German companies about foreign companies’ capabilities to adapt its organization and provided services to the German market. It seems that partnering together with German companies can overcome this barrier. If Pentascope chooses an entry mode without any kind of partnership it will mean more cost, time and personnel intensity. Another option is to acquire the presence. However, this also gives cost intensive barriers.

Another aspect is the degree of knowledge on the German market. A company can only get sufficient knowledge on the target market by moving into that market. Pentascope should not consider the current level of knowledge to be sufficient to enter the German market on its own and has to look for partnering in entering.

The next issue is the desired level of management control in selecting the optimal entry mode. Pentascope’s concern about the control issue deals with controlling and managing the spread of its view on implementation and the knowledge database built from previous projects. Concerns in this matter deal with how to expose and share Pentascope’s unique perspective with regard to the servuction with future partners in such a way that Pentascope controls the amount and usage for now and in the future. Licensing or franchising may be attractive as it enables a firm, particularly Pentascope with its limitations of management and capital resources, to gain rapid market penetration. That is one of Pentascope’s strategic internationalization goals, because it does not involve direct entry into the market and it avoids head-on competition with local consultancy businesses. The main concern with these entry modes is that the royalties obtained may represent a poor result on the service, with the future risk that Pentascope’s unique method will captured and used by competitors, eliminating Pentascope’s competitive advantage in a market that wants a focus on the human aspect to restrain rising unemployment figures. In case of franchising it can be contractually limited, however franchising poses barriers that further international expansion needs more financial resources and management attention, which for Pentascope is not the ideal situation.

Another aspect is that both licensing and franchising require that Pentascope possesses a rather unique service delivering process, which cannot be packaged in such a way that it becomes saleable. Pentascope’s service delivery is highly customized and is almost not possible to standardize. For starters, Pentascope’s servuction needs to adapt to the German market, and will have to adapt further for ongoing internationalization. This means that, to ensure quality Pentascope should keep this process in its own hands.

In case of licensing Pentascope would lack the desired level of control over their service delivery, which can damage their core idea behind the service delivery. Also, this strategy would mean the inability to realize a local presence and experience curve economies.32

Furthermore, franchising evidently means for Pentascope a lack of control over the quality. Ultimately Pentascope cannot be sure that the service is delivered conform their mission statement and quality demands. If that is the case there is no base for Pentascope to engage in internationalization. For franchising, in the last place, also counts the inability to engage in a global strategic coordination. By establishing Pentascope International as a separate SBU, it is clear that Pentascope’s intention is to engage in a strategy that would allow them to coordinate their operations on a supranational level.33 In contrast it is doubted that Pentascope could reach its financial goals for internationalization. Potential franchisees demand sole deliverance for a certain area. Germany can be segmented into 5 – 6 parts. If they have to meet Pentascope’s goals of reaching € 1.000.000,-- in the third year which should be a “commonly used” 5% of revenue (fee for franchise), the total revenue will have to be € 20.000.000,--. This means 142.858 consultant hours at a rate of € 140,--. This results in 82 people full-time working consultant hours and 14-17 people in every segment. From experience on the home market and the difficulties of the German market, this is not feasible.

32 International Business: competing in the global marketplace; Charles W.L. Hill, Fourth edition, 2001, page 48933 Idem, page 490

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For entering markets Doole, Lowe and Philips34 have discussed the weighing of the amount of control versus the amount of risk. Not all possibilities are suitable for every company however. Below the different options are shown as Doole, Lowe and Philips described them. (only the ones important for Pentascope are described)

Fig. 7.2 Risk and Control in Market Entry

Table 7.1 Different entry modesDegree of

experience neededDegree of

knowledge neededRisk Desired management

controlLicensing Low Low High InsufficientFranchising Low Low High InsufficientForeign Direct Investment

High High Low Sufficient

The nature of Pentascope’s service requires a geographic local presence because it demands both consultants and clients to be present at the servuction. Judging from the entire paragraph Pentascope should choose to use a foreign market entry strategy conform the foreign direct investment method. Foreign direct investment advantages lay in the access to local partner’s knowledge and the sharing of development costs and risks (Joint Ventures, Strategic Alliances). In other cases it can better protect Pentascope’s unique view on implementation services, allowing for engagements in supranational coordination and realization of location and experience economies (Own subsidiaries). The downside would mean higher costs in finance, time and people.

Foreign Direct Investment MethodPentascope should choose to internationalize through a foreign direct investment strategy. Different foreign direct investment methods are the following: Own subsidiary, Capital Investment, Joint-34 Doole, Lowe and Philips, International Marketing Strategy, 1994, page 251

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CONTROL

Co-operation strategies

Joint VenturesStrategic AlliancesCapital Investment

Direct exporting

FranchisingLicensing

Servuction

Own subsidiaryAcquisition

RISK

Ventures, Strategic alliances, Mergers and Acquisitions. Establishing a Sales office only is not an option because Pentascope’s service delivery is done by consultants within a company. Mergers would mean giving up a part of Pentascope’s unique service delivery and therefore also not an option. The main concern with capital investment is that Pentascope is not in control of the quality, the level and the pure nature of the service delivery and that is just what the goal is. Pentascope wants to spread its unique view on implementation of changes while controlling the servuction.

A joint venture is seen as a cooperation that could work on the German market, but not at this moment. Potential partners do not want to expand their view and target new market segments or create new products, because they are thrown back to their core business due to the economic recession. Companies focus on their core business and believe also that the market is not right for engaging in new operations. Therefore the primary decision is, whether Pentascope should choose to establish a wholly owned (or majority stake) subsidiary on one hand or forming a strategic alliance on the German market on the other hand.

Doole's, Lowe's and Philips' successful market entry criteria combined with Alsem's35 successful market entry criteria form the following criteria for Pentascope.

Financial (F): Are Pentascope’s financial resources sufficient for the strategy? Economic (E): Is the strategy according to the economic goals of Pentascope? Organizational (O): Are Pentascope’s organizational objectives and expectations in line

with the strategy? Competition (C): Is the nature and power of the competition on the market effectively

countered? Advantage (A): Can Pentascope’s keep its area of competitive advantage? Timing (T): Is the market development currently allowing this strategy? Internal (I): What is Pentascope’s attitude internally towards the strategy?

Other criteria, important for Pentascope is the level of involvement (IV) and control (CL) of the strategy. Finally, the strategy has to link up with the conclusions of the SWOT confrontation matrix. The table below shows the different criteria and its importance to the foreign direct investment methods. The ranking indicates which option is best suited for Pentascope.

Table 7.2 Factor rankings for selected entry modesF E O C A T I IV CL

Own subsidiary (majority stake or fully owned)

3 3 1 3 1 3 3 1 1

Joint-venture 2 2 3 2 2 2 1 3 3Strategic alliances (majority stakes or fully owned)

1 1 2 1 3 1 2 2 2

The table below indicates the scores that the ranking gives resulting in a total score and the option most suitable for Pentascope.

Table 7.3 Scores for selected entry modesF E O C A T I IV CL Total

Weight of importance to Pentascope on 1-3 scale

3 2 1 2 2 1 2 2 3

Own subsidiary (majority stake or fully owned)

3 2 3 2 6 1 1 6 9 33

Joint-venture 6 4 1 4 4 3 3 4 3 32Strategic alliances 9 6 2 6 2 2 2 2 6 37

Although findings already show that Pentascope should search for strategic alliances as a mean for entering the German market, it is interesting to examine this conclusion more closely. In deciding to establish a wholly owned subsidiary there is another difficulty, namely, whether this should be done as a green-field venture (start from scratch) or by acquisition. According to Charles W.L. Hill, acquisitions have three major points in their favor. They are quick to execute which could help by rapidly building a presence in the target foreign market, which is one of Pentascope’s strategic goals. Secondly, in many cases it could help to pre-empt competitors. However, it is already established that the market is highly competitive and developed. There is also the question whether Pentascope will be able to break existing company relationships. For now the only incentive for German companies to turn to Pentascope is to counter lay-offs with reorganizations. Slowing down large lay-offs may lead to Pentascope’s human driven result focused approach. Thirdly, management has a better feeling in perceived risk towards acquisitions versus, green-field ventures. In Pentascope’s case management focus is targeted at low financial costs and short time. Disadvantages of acquisitioning consist of overpayment, which mostly happens in the bidding process. Companies are seldom the only one chasing acquisition of another company. Secondly, the cultural differences between Pentascope and the German company might seem unbridgeable although it was established earlier that German culture does not differ that much from the Dutch. Finally, the actual implementation of Pentascope’s unique perspective in its service delivery could turn out to be a longer process, because of training for 35 Alsem, Strategische Marketingplanning, 2000, page 178

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consultants adding financial risks. From the findings above it is concluded that Pentascope should not enter the market by acquisitioning. Pentascope is not prepared nor does it possess the means, to desire well-targeted acquisitions. Knowledge on the different companies that would qualify for acquisition is insufficient and the means, finances, are not available for acquisitioning. Therefore Pentascope does not consider this to be a usable approach. The consulting branches mainly use acquisition for internationalizing operations. For example, the large players such as McKinsey, KPMG and Boston Consulting use this strategy for their internationalization. Establishing a green-field venture helps Pentascope to build the kind of organization culture that it wants, but this would a not appreciated slow establishment. Slow means more risky and more expensive. This should also not be chosen by Pentascope as a means of entering the German market. However, if reviewed what the profile for similar companies shows, it can be concluded that setting up a wholly owned subsidiary is used by 38% of the companies (attachment II). In case Pentascope is willing to give up its privately owned status and acquire financial means from third parties, acquisitioning is a logical choice for internationalization.

If Pentascope does not want to give up its privately ownership and therefore is not able to gain sufficient financial means, internationalizing to Germany should be done with a partner with which it can form a strategic alliance. The main reason for this is also stated by Charles W.L. Hill36. This reason emphasizes that a strategic alliance is a way to bring together complementary skill and assets that neither company could easily develop on its own. European integration, in the form of legal changes, may in the future force companies to make organizational changes, implement new processes and work differently (much like that industry and business need to catch up, in order to build up the mandatory risk management systems provided for by the Control and Transparency Act (KonTraG) and the Basle II proposals). Pentascope’s unique view is to help those companies with implementation of those changes and help its employees accept and work with them. However, Pentascope is not by means to develop IT solutions for those changes but does implement those on a management level. Furthermore, IT developers and consultants are facing declining revenues and it has been determined that those companies are looking for partnerships with functional consultancy companies. Forming a strategic alliance will enable both companies to keep their focus on their core business. For Pentascope it is imminent to partner up with a German software develop company so that they, together, can offer the total package deal of product and change process. Partnering up with a German company also will give Pentascope the ability to overcome its material weaknesses concerning the German market. The language barriers, knowledge on German business culture and financially this option is by far the most attractive. This strategy is not limited to one strategic alliance but it could mean multiple ones with different partners because Pentascope wants to focus on more geographical locations and intensify the speed of market coverage.

36 International Business: competing in the global marketplace; Charles W.L. Hill, Fourth edition, 2001, page 495

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7.2. Legal / Contractual IssuesThere is no legal relationship called a “strategic alliance” and the European law does not recognize the term. It is used to describe some form of business relationship but it has no legal value.   However, when describing a relationship as a partnership, for instance, the law recognizes it.

Thus, what the alliance parties must do is specifically define the legalities of their relationship by contract. Because, there is no body of law to which they may turn that would fill in the gaps left unsaid by the contract. While the agreement may refer to the relationship as a “strategic alliance,” the terms of the agreement must cover the specifics of the respective rights and obligations of the parties within that relationship.

It is essential that the parties take the time being very clear about what they intend in their relationship. Trying to “save” a couple of words or trying to make a “simple” agreement and in the process omitting essential provisions that the law will not fill in, may be very short-sighted and in the end. This may cause the relationship to get into legal problems that could have been avoided had the parties truly understood their relationship.

Some ProvisionsThe following are provisions that must be spelled out in order that the “strategic alliance” actually has legal meaning.

1. The actual nature of the relationship. Is it a partnership? A joint venture (which is essentially the same as a partnership but for a more limited purpose)? Is it in reality some form of licensing or cross-licensing agreement whereby one or both parties provide proprietary and other materials to the other or is it some other variation on the type of deal? The differences among these relationships are potentially very substantial as described in the next two examples.

a) If the “strategic alliance” is in reality a partnership or a joint venture (or is deemed to be so by a court), the parties are each deemed to be equal owners as what the law refers to as “tenants in common,” in all of the assets of the partnership or joint venture. By “deemed,” is meant that the law of partnership will assume that they are equal partners unless the parties spell out something else in express terms. By “tenants in common,” the law means that all parties have equal rights to the assets of the partnership or venture. Therefore, merely calling something a “strategic alliance” may be contrary to what the parties actually intend and this can lead to litigation if the project becomes valuable. Thus, to the extent that the partnership or joint venture creates new works and materials, each party to the “strategic alliance” is deemed to be an equal owner of all rights in perpetuity in those works and materials. Further, if each party has contributed some of its previously created and perhaps proprietary materials, the status of those materials is thrown into substantial doubt since if those materials are used to create new works done by the “strategic alliance,” some or all of the rights to the prior materials may now be owned by the “strategic alliance.” Those rights will almost certainly be clouded. Therefore, unless the written contract specifies otherwise and takes pains to define the true nature of the relationship, the parties may end up with unintended results.

b) If the “strategic alliance” is determined to be a partnership or joint venture, the parties have certain rights and obligations with regard to survivorship, inheritance, dissolution, liabilities to third parties for the debts of the relationship or even the debts of the partner or joint venturer incurred during and related to the partnership or venture. This is because even if the agreement does not spell these issues out, the overarching law of partnership will fill in these gaps. If this is not what was intended, then the bare use of the term “strategic alliance” without more may create significant legal issues.

2. What is the term of the relationship? As indicated above, a partnership or joint venture goes on for a very long time unless there is a contract provision dealing with the rights of the parties to terminate the same. Issues arise regarding the continuation of the “strategic alliance” if one or more of the parties wishes or is caused to pull out.

3. How are the participation rights defined. Without more definition, if the “strategic alliance” is a partnership, each partner has equal rights to management decisions, licensing and other exploitation rights of the partnership assets as well as net profit as discussed above. This may not be to the parties’ advantage and therefore, the agreement should cover which party has which rights and obligations with regard to the conduct of the affairs of the “strategic alliance.” Moreover, if the “strategic alliance” is intended to limit the rights of the parties in terms of what they can and cannot do with the assets, that would be more likely to be covered in some form of license arrangement, then without more specifics a court might decide that it was a partnership and therefore, partnership law would control with regard to these issues.

In conclusion; Main issues to be discussed in the agreement are: Definitions, Alliance Structure, Obligations of both parties, Sales and Marketing activities, Duration & Termination, Confidentiality and Financial details. The important point in contract drafting is that there will never be a position in which the contract has to be interpreted by a judge in any way other than the way intended.

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8. Marketing Plan Now that arguments are given in favor of forming a strategic alliance with a business software company to internationalize Pentascope into the highly competitive market of Germany, it is important to describe how Pentascope should position itself in the alliance as well as how the alliance will have to be built.

Resulting from the judgments above, Pentascope has to position itself as a strategic partner. This is done with the STP-principle.37 First the market is segmented to indicate the most promising segments for Pentascope. The second step encompasses targeting those segments to find attractive segments. Finally Pentascope should position itself within that segment as a strategic ally.

8.1. Segmenting the German MarketReferencing the earlier judgment that Pentascope should focus on the segment of software develop and consulting businesses, this branch can be segmented in software for different ends such as gaming, applications, operating systems and many more. The is segment that is interesting for Pentascope the software segment that produces applications meant for organizational processes. This market segment experiences decreasing revenues and face a market that changes demand to functional consulting services, due to the lack of confidence in, and knowledge of, IT consulting. Therefore, Pentascope offers the ideal complementary good for these companies to break through that trend. For Pentascope also offers opportunities to overcome its material weaknesses and get a strong foothold on the German market. Ultimately, Pentascope will need to adapt to the full segmentation strategy, which demands from Pentascope to see every potential ally as a separate segment and differ its approach accordingly implementing customized marketing efforts. Treasy and Wiersema (1993) named this strategy “customer intimacy” because building intimate relationships with clients (in Pentascope’s case are clients the potential allies) and they also stress the importance of customer lifetime value issues.

For Pentascope there are many potential partners. However, most chances lay in the organizational process software sector as this sector is looking for partnerships to break through the demand change trend. As the economic woes are on the verve of turning around many companies are ready to invest again in processional software, even though develop and consulting businesses still face dramatically declining revenue figures. The linked organizational changes are challenging for Pentascope to take advantage of. To find a partner Pentascope should visit IT tradeshows. Germany is also home to the largest IT tradeshow in the world, CeBIT in Hanover. There are many German companies participating with which Pentascope could form an alliance with.

There are many German software development companies that are interesting for Pentascope to form a strategic alliance with. Softguide – der Softwareführer –38 has the most extensive list of German software developers (52.000 companies) and lists about 500 companies that are interesting for Pentascope because they offer software solutions for the organizational process. Pentascope has to target those 500 companies of the Softguide list, by acquiring as much information as possible on the company’s clients, financial position, market share etc. When information is gathered Pentascope should make a short list of 40-50 companies and target those companies by calling them, emailing them and visiting them.

Now that is determined to target a number of German software companies there are three possibilities. Either form a strategic alliance with smaller, similar or larger sized company. Criteria include size of the potential ally, it should be a company of similar size in revenue to Pentascope, and in order to form equal alliance this will be important. It is already known that large companies are partnering up with companies such as Ernst & Young, KPMG and Deloitte & Touche. For Pentascope these are not interesting to target. For this research Atoss Software AG (www.atoss.com) is viewed as an example of a company that Pentascope could partner up with. Atoss offers an integrated software solution for the entire organizational process management. Product adaptation and implementation could be performed by Pentascope consultants.

Reviewing Pentascope’s regional market approach in the Netherlands and the option of forming multiple alliances in Germany it seems that Pentascope has to form alliances with software companies that have regional market approach. Smaller companies often operate regionally, which complements Pentascope’s methods. On the other hand larger, still regionally operating companies might have better market coverage. The alliance can work regionally as well and this would support Pentascope’s idea of adequate and customized services. Atoss Software AG, earlier established to be one of Pentascope’s possible partners, is a company that meets those criteria very well. Smaller companies seem to be most interesting for Pentascope because of their regional approach where as similar sized or larger sized companies often have a pan-national, or even a wider international outlook.

8.2. TargetingIt has already been established that business software companies offer the best partner choice for Pentascope. According to Charles W.L. Hill39, the right partner should have three main characteristics. First, it should fit Pentascope’s strategic goals (follow current clients, start international operations), it

37 Export Management, Kympers 2000; page 26738 Softguide – der Softwareführer – www.softguide.de39 International Business: competing in the global marketplace; Charles W.L. Hill, Fourth edition, 2001

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must have capabilities that Pentascope does not have and cannot achieve (an business solutions in software products). Secondly, the partner should have the same vision on the alliance as Pentascope does. If there are different interests with both partners, the alliance will fail because the partnership cannot be harmonious. Thirdly, neither Pentascope nor its partner should seek to benefit from the partnership over their partners back, if Pentascope engages in such a conduct it will damage future opportunities as well.

Because of the high competitiveness on the market, Pentascope should not focus on companies servicing one business line. Pentascope should search for a strategic ally that supplies its products throughout all of their perceived business lines. If Pentascope decides to use of the same segmentation as they do for the Netherlands home-market they have to consider the following:

Fig 8.1 Business Portfolio matrix of client segments

1. Telecom services2. Financial services3. Public services4. Logistic services

Judging from Keifer’s business portfolio mix Pentascope has a high compatibility with the telecom sector, which for a large part comes from Pentascope’s large knowledge and expertise of telecommunications industry. This market shows also promising economic forecasts for Pentascope to start a stable market presence. Pentascope should therefore look for business software developers that possess a large market share in the telecom segment, but are not only focused on that segment.

Firstly, to lower the risks in selecting a partner according to the characteristics above, Pentascope should do three main things. Collect as much relevant and publicly available information on potential allies as possible. Then Pentascope should find out data and knowledge from informed third parties, including current allies. And thirdly, Pentascope should get to know the partner as well as possible before committing to an alliance, which should also encompass face-to-face meetings.

8.3. Positioning Pentascope It is again emphasized that Pentascope should position itself toward the potential allies. Pentascope has to use "corporate positioning” meaning that it uses the entire company’s image to position itself. In engaging in negotiations with potential allies Pentascope has to use the argument of niche operations. Because the German market does not favor out-house implementation, the focus should be on the design process. Alliances formed with competitors such as KPMG or McKinsey stop at the general design process, which is highly standardized. Pentascope can argue the regional approach is more customized to the clients’ specific needs. Also, the alliance will service smaller, regional companies overlooked as not interesting by its large competitors. This way the alliance can build relationships and a permanent presence on the market. Also the German market is more willing to buy an all-in-one solution rather than multiple ones. It saves costs, time and risk. An all-in-on solution will surely be cheaper than multiple ones. Because it is offered as one and Pentascope knows where the “hurts” are of the software product, they can assess the situation quicker and implement

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Segment attractiveness

Seg

men

t / c

ompa

ny c

ompa

tibili

ty

High Medium LowLow

Med

ium

H

igh

1 2

3

4

organizational solutions quicker than others. Also risk coming with company exposure will be reduced by the all-in-one solution. This argument is the base of Pentascope’s positioning, it can be seen as instrumental positioning strategy.40

8.4. Structuring the AllianceThe structure of the alliance is build around the probability of opportunism by one of the alliance partners41. It is imminent for Pentascope’s international success that they keep improving their service as well as shielding their knowledge from competitors. The focus should always be, for both companies, to engage in an equal alliance for an unspecified period, in which 50% belongs to Atoss Software AG and 50% to Pentascope.

Fig. 8.2 Alliance structure

Pentascope and Atoss Software AG should seek to build trust and informal communications networks between them. The first step therefore will be for the alliance to form a “Team-alliance”, a group equal number Atoss and Pentascope consultants, headed by the alliance committee. The “Alliance Committee” will consist of the CEO and Director International Operations of Pentascope and two people assigned by Atoss (most likely CEO and director operations Germany). The consultants will be the front group that will work on future all-in-one solutions. One condition is that Pentascope selects consultants that are fluent in the German language. Pentascope has to use its competence in human recourse to hire such people. This group will be trained during a 4-week intensive training, where the Pentascope consultants will learn about the software product and the Atoss consultants learn the Pentascope unique perspective on implementation. After this intensive training, this group will be the alliance' face. They will offer the all-in-one solution on the German market. The investment made by the alliance should earn itself back within one year.

Fig 8.3 Alliance inputs

Because this research cannot capitalize both companies inputs there are three different scenarios1. Atoss Software AG and Pentascope are considered to put in equal values into the alliance, in

which case there can be a 50/50 alliance from the start. This means that each company will get 50% of the alliances revenue.

2. Atoss Software AG’s input, when capitalized, is considered to be worth more than Pentascope’s input. In this case there is an unequal alliance and companies have to work out a share system. For example a 70/30 system in which Atoss will get 70% of the alliances revenue against 30% for Pentascope. This will hold for three years, after that an equal alliance system takes over. This can be considered a payment from Pentascope to Atoss for its extra input.

3. Atoss Software AG’s input, when capitalized, is considered to be worth less than Pentascope’s input. In this case there is an unequal alliance and companies have to work out a share system. For example a 30/70 system in which Atoss will get 30% of the alliances revenue against 70% for Pentascope. This will hold for three years, after which an equal alliance system takes over. This can be considered a payment to Pentascope from Atoss for its extra input.

8.5. Pentascope’s Partner ApproachPromotion for Pentascope can be described by the way of making potential partners aware of Pentascope’s proposition. This is done by a communication campaign in which Pentascope tries to establish contact with the potential partners on the short-list that consist of 40-50 companies. The criteria for this short list are: Product is software for organizational processes, size of its revenue, its market coverage, regional approach and market share of telecom businesses. It is best if Pentascope’s

40 Strategic Management, Alsem, 200041 http://www.kmobrief.be ; Nieuwsbrief voor de ondernemer.

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ATOSS-PENTASCOPE ALLIANCE

Atoss Software AG Pentascope

Name/reputationClientsConsultants

TrainingKnowledgeConsultants

Atoss/Pentascope Alliance committee

Product:

Software solution & service + Implementation & adaptation services Pentascope

Atoss Software AG

management level makes initial contact by phone or even on tradeshows such as CeBIT in Hanover. The ultimate goal is to start arrangements for constructive meetings.

The product that Pentascope offers is described in detail in the internal analyses. This encompasses Pentascope’s unique view on implementing organizational changes with their focus on helping employees make, accept and adapt to those changes. Because the market comes out of an economic recession most companies focus on their core business and don’t have time and means to develop new products and services. Adding them by partnering in this strategic alliance is a way to grow business in times when it is difficult for financial and market stress reasons. Moreover, potential clients can be persuaded to buy the all-in-one solution because it means fewer costs for it is done by one consultant company and less risk therefore also. It also has to use the regional approach, which results in a highly customized servuction. Solutions and implementation will be done in a shorter amount of time because consultants know both and can customize on the clients specific needs and wants. The emphasis for the partner should lay in stressing the importance of this strategic alliance for the partners business. These companies have to be looking for expanding their view in applying the implementation services as well.

Because the alliance is focused on the German market its base will have to be in Germany. Evidently clients of the future partner will be in close proximity to that partner. It is clear that the easiest location argument is to stay close to the German partner in that respect. There are two options, either the alliance rents space from the German partner or they rent space in close proximity to the German partner’s head office.

The future pricing structure that Pentascope wants for the alliance is a similar structure as in the Netherlands. Projects are seen in consultant hours (turnkey projects don’t work because Germans don’t want outsiders in their company) which are factorized around € 140,-- an hour. There could be a bonus structure in case the alliance meets certain targets.

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9. Strategic Alliance FeasibilityIn this chapter the feasibility of the strategic alliance option recommended for Pentascope will be evaluated. This is done by reviewing Pentascope’s financial and strategic goals. From that outlook it can be judged what this option's feasibility encompasses. This research will continue with a scenario in which the goals are not reached and a scenario in which the goals are. These scenarios will describe what Pentascope should do in case they have to deal with such a situation. For the costs and estimates of the alliance, this report will indicate figures according to a 50/50 shared strategic alliance. The rate of € 140,-- includes payment for the IT solutions, no separate payments are used.

The first determination is how many consultants and how many alliances Pentascope has to form to reach its goals. The following data is used to judge this.

Table 9.1 FiguresData AmountWorking week 40 hoursConsultant hour € 140, -- an hourAnnual effective working weeks 44 weeksNumber of consultants in the alliance

6 consultants

Consultant hour cost € 39.000, -40 hours * 44 weeks

9.1. Alliance Cost StructurePentascope’s goal for the strategic alliance option is a revenue of € 1.000.000,-- in the third year, which means that in case of an equal alliance the total revenue of the alliance(s) has to build up to € 2.000.000,--

First yearTotal amount of consultant hours needed

Hours per consultant Hours per consultant per week

€ 1.538.461,54€ 140,-- = 10990 hours

10.990 6 = 1832 hours

1.832 44 = 42 hours a week per consultant

Second yearTotal amount of consultant hours needed

Hours per consultant Hours per consultant per week

€ 1.846.153,85€ 140,-- = 13187 hours

13.187 6 = 2198 hours

2.198 44 = 50 hours a week per consultant

Third YearTotal amount of consultant hours needed

Hours per consultant Hours per consultant per week

€ 2.000.000,--€ 140,-- = 14286 hours

14.286 6 = 2381 hours

2.381 44 = 54 hours a week per consultant

It can be concluded that the findings above are not realistic. The amount of hours demanded for a consultant is too high. A regular working week will be about 40 hours. There are four decisions that Pentascope can make:

Increase the price of a consultant per hour Create an alliance that contains more consultants Create multiple alliances A combination of the above

It can be determined that the first option of increasing price is not realistic as well. It goes against Pentascope’s view of offering an option significantly less costly than competitors. If Pentascope chooses to work with the regional approach, it will have clients that cannot afford higher pricing. If the alliance chooses to increase the price the following will come out:

Table 9.2 Hours per consultant if the price is differentPrice per Consultant hour

1st year 2nd year 3rd year

€ 140,-- 42 hours a consultant

50 hours a consultant

54 hours a consultant

€ 160,-- 37 hours a consultant

44 hours a consultant

48 hours a consultant

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= € 22.16

€ 180,-- 33 hours a consultant

39 hours a consultant

42 hours a consultant

€ 200,-- 30 hours a consultant

35 hours a consultant

38 hours a consultant

*the hours are the required hours that every team alliance consultant has to work a week

The second option of adding more consultants to the team but limiting the price to € 140,-- an hour and setting up only one alliance will give the following table of required hours for the consultants.

Table 9.3 Hours per consultant if the number of consultants is differentConsultants in the team

1st year 2nd year 3rd year

6 Consultants 42 hours a consultant

50 hours a consultant

54 hours a consultant

8 Consultants 32 hours a consultant

38 hours a consultant

41 hours a consultant

10 Consultants 25 hours a consultant

30 hours a consultant

33 hours a consultant

The third option of creating more alliances but limit price to € 140,-- and using six consultants in the team alliance will give the following table of required hours for the consultants.

Table 9.4 Hours per consultant if the number of alliances is differentNumber of Alliances

1st year 2nd year 3rd year

1 Alliance 42 hours a consultant

50 hours a consultant

54 hours a consultant

2 Alliances 21 hours a consultant

25 hours a consultant

27 hours a consultant

3 Alliances 14 hours a consultant

17 hours a consultant

19 hours a consultant

Because Pentascope does not want to use higher pricing to reach its goal, the option of combining the multiple alliances with different team sizes is researched as well.

Table 9.5 Hours per consultant if both the number of alliances and the number of consultants is different

#Alliances/#Consultants

1st year 2nd year 3rd year

2 Alliances/ 4 Consultants

32 hours a consultant

38 hours a consultant

41 hours a consultant

3 Alliances/ 4 Consultants

20 hours a consultant

25 hours a consultant

27 hours a consultant

It is concluded that the most realistic option is to build two strategic alliances with 4 consultants. The next matter is an indication for the total investment that comes with that option. This option will be used in judging the financial feasibility of the strategic alliance.

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To make the cost structure visible the following illustration is given. It indicates the money and activities flow between the alliance, partners and clients.

Fig. 9.1 Cost structure for Pentascope

9.2. Estimates for the AllianceThe initial agreement will be for an unspecified number of years with an evaluation point every three years for future engagements. After those three years the alliance' performance is evaluated and future decisions are made. There are multiple evaluation points. Every six months there is a meeting of the Alliance committee in which will be evaluated if the alliance is on the right track considering its goal settings and if not, what can be done get it there.

Based on the experience of the Netherlands home market Pentascope estimates the alliance should be able to sell at least 3.500 consultant hours in the first year, growing to 6.500 hours in the second year and 8.000 hours in the third year. The table below shows that the goal of € 2.000.000,-- revenue in the third year can not be achieved.

Table 9.6 Result for Pentascope in the first year (explanations of cost factors can be viewed in attachment III)Factor IndicationRevenue Alliance (clients pay 3.500 hours to a € 140,-- rate) € 490.000,--Costs Alliance

Overhead Salaries Consultants Training alliance Management Fee Marketing Other (Rent facility and Computer investments)

Total

€ 148.000,--

€ 312.000,--

€ 58.000,--

€ 30.000,--

€ 30.000,--

€ 76.000,--

€ 654.000,--First Year Result for the Alliance -/- € 164.000,--

50% for Pentascope -/- € 82.000,--Costs Pentascope for Alliance

Overhead Initial set-up costs Other

Total

€ 48.000,--

€ 27.000,--

€ 30.000,--

€ 105.000,--First Annual Result of the Alliance for Pentascope before Taxes -/- € 187.000,--

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PENTASCOPE(Costs alliance processes)

THE ALLIANCE(Costs internal processes)

CLIENTS

RESULT ALLIANCE FOR PENTASCOPE

Table 9.7 Result for Pentascope in the third year (explanations of cost factors may be viewed in attachment III)Factor IndicationRevenue Alliance (clients pay 6.500 hours to a € 140,-- rate) € 910.000,--Costs Alliance

Overhead Salaries Consultants Management Fee Marketing Other (Rent facility and Computer investments)

Total

€ 222.000,--

€ 312.000,--

€ 45.000,--

€ 50.000,--

€ 82.000,--

€ 711.000,--Second Year Result for the Alliance € 199.000,--

50% for Pentascope -/- € 99.500,--Costs Pentascope for Alliance

Overhead Other

Total

€ 72.000,--

€ 45.000,--

€ 117.000,--Second Annual Result of the Alliance for Pentascope before Taxes

-/- € 17.500,--

Table 9.8 Result for Pentascope in the third year (explanations of cost factors may be viewed in attachment III)Factor IndicationRevenue Alliance (clients pay 8.000 hours to a € 140,-- rate) € 1.120.000,--Costs Alliance

Overhead Salaries Consultants Management Fee Marketing Other (Rent facility and Computer investments)

Total

€ 266.400,--

€ 320.000,--

€ 54.000,--

€ 65.000,--

€ 88.500,--

€ 793.900,--Second Year Result for the Alliance € 326.100,--

50% for Pentascope -/- € 163.050,--Costs Pentascope for Alliance

Overhead Other

Total

€ 86.400,--

€ 50.000,--

€ 136.400,--Third Annual Result of the Alliance for Pentascope before Taxes € 26.650,--

Table 9.9 EstimationsAlliance Result Alliance Revenue for

PentascopeAlliance Result for Pentascope

Year 1 -/- € 164.000,-- -/- € 82.000,-- -/- € 187.000,--Year 2 € 199.000,-- € 99.500,-- -/- € 17.500,--Year 3 € 326.100,-- €

163.050,-- € 26.650,--

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9.3. ScenariosFor Pentascope, forming a strategic alliance could give € 26.650,-- result in the third year. The estimates above are based on assumptions and experiences; obviously they can either turn out above or below the current figures. There are different reasons why this could happen, but there are some risks that are clear.

Firstly, the amount of hours sold can be different from estimations and secondly, the costs could turn out different from estimations.

9.3.1. Worst case scenarioRevenues could be lower than estimation, because less consultant hours are sold than initially expected. This will mean a drastic drop in result for Pentascope. After six months there will be an evaluation, whether the alliance is on track. Measures are taken upon the reason why the results are less than estimates. Increasing marketing efforts, adding administrative personnel, more investment are measures that could be taken. Evaluation in the first three years of the alliance' operations can only provide guidance measures. Goal evaluations and new goal directions are only made after three years.

On the other hand, the costs may turn out higher than expected. In this case Pentascope should, together with the alliance, evaluate where cost cuts could be made.

9.3.2. Best case scenarioIf Pentascope manages to sell more hours the problems could be that there are more hours sold than consultants can handle, this would imply that they need more people. Pentascope and its partner should implement a training program in which new consultants could be trained to assist the alliance.

Another factor that could boost result could be that the costs as foreseen are not as high, in which case there is no problem and nothing has to be done. It simply means more result for the alliance. There are two decisions that have to be made. Firstly, is the extra result to be reinvested in the alliance? If so, what percentage? And the second decision, how the extra result is to be used by Pentascope? In answer to the second decision; Pentascope should determine to use the extra finance to start new alliances in other European countries.

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10. Conclusions and RecommendationsIn this chapter the conclusions that can be drawn from this report will be summarized and an answer will be given to the main question.

The main reason for Pentascope’s first confrontation of financial loss in 2002 is primarily due to the world-wide economic crisis, as demand for Pentascope’s services is highly influenced by the economic fluctuations. The demand structure showed a decline as the world-wide economic woes started. Although Pentascope describes other reasons for internationalization including arguments to follow internationalizing clients and spreading its unique service approach, the real reason is based on growing revenue quickly to counter the first financial loss faced in 2002. Internal structure was changed with the addition of Pentascope International in 2002. Judging from the internal analysis, it can be concluded that Pentascope’s organizational structure may have to be changed for international operations, which mainly means establishing management commitment in the way internationalization is approached. Unclear is how international operations will affect Pentascope internal organization. Judging from the external situational analysis of the domestic market it becomes clear that the economic woes are turning around and the market shows promising figures again. Therefore, Pentascope should first focus on the new possibilities on the Netherlands home market. When concluded that the Dutch market shows no opportunities for further development, then Pentascope should decide to internationalize.

Although Pentascope sees more opportunities in Germany, and therefore wanted research specified on internationalizing to Germany, this research determined that the United Kingdom shows the best opportunities for Pentascope. The UK market is more similar to the Netherlands home market and turns out to be more attractive than Germany. As for the initial view of Germany’s compatibility with Pentascope, it looked like Germany had a lot in common with the Dutch business culture and Pentascope did not have to change much to be successful. However, when researched closer, Germany has high barriers to overcome for Pentascope. The discrepancy lays in the fact that on a macro economic level the country seems attractive where in fact it shows a different attitude toward the services that Pentascope offers. Germany is highly regionally divided and this research shows that those regional opportunities in Germany are the highest in the Ruhr, Rhein and Main areas, which count for the economic heart of Germany. Berlin and München show opportunities as well, however, the areas are smaller in size. Pentascope should keep their focus on these areas. Within Germany Pentascope can hold the different business lines to categorize their business, however, it is not recommended that Pentascope focuses itself on one of these segments but uses a market wide offering structure. Furthermore, it is doubted that the market is ready for the offering of Pentascope’s services, because it is a Dutch company consulting on German business culture, which is not perceived well in the German market. Also, implementation is viewed as an in-house company matter in difference with the Netherlands. Another reason is that the economic woes have changed the view of getting outside help toward in-house solutions. Finally, Pentascope has to put a lot of effort in adapting to the German market in finding consultants that are fluent in German, train them and adapt its servuction.

This research viewed the possibility of market entry under these difficult circumstances because it needed to provide an answer to the main question stated in chapter one:

“Is franchise the way for Pentascope to reach its goals for internationalization? If so, what does this contain and if not, what other way would be the best way to internationalize Pentascope in order to reach its goals?”

The answer to the first part of the question resulting from this research is that franchise is not the way for Pentascope to reach its goals for internationalization. Pentascope can not control the way the servuction process is done in this form, which means that it loses too much control. The nature of Pentascope’s servuction demands a local presence on that market. Furthermore is it doubted that Pentascope could reach its financial goals for internationalization using franchise because it would mean too many people making to many hours, which is unrealistic from past experiences.

This research determined that the best way for Pentascope to enter the market would be by forming a strategic alliance with a German software company, which makes software for organizational processes. This will help Pentascope to overcome weaknesses concerning the German market and the confidence that Germans will have in the operations. A strategic alliance with an organizational it would be the best suit for Pentascope’s financial goals and that the goal of € 1.000.000,-- revenue from the German market is way to optimistic. This option could in the future, help Pentascope to reach as much as € 163.050,-- revenue from the alliance’ operations in Germany.

Judging from above the final conclusion that can be made is for Pentascope not to internationalize into Germany. The market has too many barriers in language, does not have a favorable view on Pentascope’s services, and is highly competitive and developed. They could all be countered by Pentascope but doing so would imply too much effort and cost.

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11. Action PlanIn this chapter is described which actions Pentascope should take at what time. To ensure a successful implementation of this export plan it is important that Pentascope sticks with these actions.

Year OneActivity

Time in months 1 2 3 4 5 6 7 8 9 10 11 1

2Evaluate, update and adapt export policy plan Make shortlist of 40-50 companies with the given criteriaTarget companies with the alliance idea; end up with 4-5 companies Visit Germany to engage in preliminary talksFinalize alliance (s)Develop training program for alliance consultantsFind & appoint consultants for alliance(s)Train “team-alliance”Setup alliance operationsStart alliance operationsMarketing efforts to partners clientsVisit & sell to interested clientsStart executing projects

Year TwoActivity

Time in months 13 14 15 16 17 18 19 20 21 22 23 2

4Evaluation by alliance committee with consultantsAdjusting goals, implement measuresEvaluation by alliance committee onlyInitiate marketing to “new” companiesVisit & sell to interested “new” clientsStart executing “new” projects

Year ThreeActivity

Time in months 25 26 27 28 29 30 31 32 33 34 35 36

Evaluation by alliance committee with consultantsAdjusting goals, implement measuresEvaluation by alliance committee onlyPerform a client content researchImplement feedback from alliance consultants in a new training programIf alliance is successful; start preparations for new country entry

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