China as a new market for management consulting firms

China as a newmarket for management consulting firms

Introduction

This documentconsiders the possible new business opportunities that may be created for management consulting forms thanks to the continued expansion withinthe Chinese financial market, and the increase in adoption of the type ofservices we can offer in thecountry.

This recommendation is based on anassessment of existing business capabilities, benefits and opportunities aswell as the challenges we see within the country. The analysis is triggered bythe following news item:  “Before long the Chinese will dominate listof 100 top influential people in finance” (Ross, 2013)

The Chinese Context

To date, there is still a clearly biasedWestern perception of China. This view has a tendency to be extreme and irrational,which can be c as a possible product of our imagination fueled by movies andliterature for example.  As a managementconsultant firm, we have the responsibility to frame our decision to ourshareholder in the correct context for the decision making process, and “provide general management advice within strategic, organizational, oroperational context” (Canback, 1998). As such, we should follow theengagement model we advise on, and we feel that the possibility of enteringthis market as a management consultancy firm specialising in supporting alreadyestablished financial institutions in China or firms looking to establish afootprint in the country is a positive strategic decision for our firm.

A key element to take into considerationis the concept of China's economic re-emergence. Most analysts consider the country to be an emerging market however, we feel this ismisleading and may skew the possible decision to take. China considers itselfthat it is experiencing a phase of re-emergence as opposed to emergence. As wesee in the SWOT analysis below; “Failure to understand and appreciate theChinese culture will definitely damage our relationship with local partners andclients” (Zhao, Zuo, & Zillante, 2011). We must thereforedevelop this understanding of cultural differences further.

To clarify the concept of re-emergence; the global expectation is that Chinawill surpass the United States’ economy by 2020, and the by 2030 approximately,China will once again represent  20% of world economy, which will becomparable to the size of that economy in 18th century!

To grasp the underlying dynamic of theglobal financial industry it should be noted that it is a mistake to understandthe strength of China's economy by statistics (ie. China produces as much steelas the next 38 countries combined; more cement than the rest of the world puttogether; that it is the world's largest market for TVs, refrigerators, mobilephones, cars; or that it has more than twice as many Internet users as the US). (Ross, 2013) The trend in ForeignDirect Investment (FDI) is changing. Since 1978 the trend was that FDI was cominginto China from mainly the USA, France and other strong economies. The current estimatetoday is that that overseas direct investment (ODI) will be higher than the FDIin next 5 years. This is driven by the fact that China has become the firsttrade partner of the African continent with an expected ODI investment of $200billion in the next 5 years. For these reasons, financial institutions and manyprivate equity funds companies are looking to invest in China, and/or arelooking to become partners with local Chinese financial companies to invest inthe wide range of opportunities in Africa.

This economic growth and aggressiveinvestment trend, provides excellent potential for our management consultancyservices. According to 51Consultant.com, the turnover trend in managementconsultancy has increased substantially year over year. The latest figuresavailable from 2005 show that 30.7 percent of all companies, and 50.9 per cent among listed firms had usedconsultancy services by the end of 2004 (Huihua & Rong-Ruey, 2011). This clearlydemonstrates an acceptance on the local market of companies such as our and theservices we can offer. The IBISWorldIndustry Report of Global Management Consultants further estimates that China'smanagement consultancy industry would generate approximately $29 billion inrevenue and experience annualized growth of 11.6 per cent. (Huihua & Rong-Ruey, 2011).We must however ensure that all staff gets upskilled in theirunderstanding of the possible pitfalls of doing business in China. This isrecommended in the Journal of Managementin Engineering for example, to ensure an easier transition into the Chineseway of doing things; “We have engaged specialist consultants to offer regularseminars and workshops so that our foreign employees are well prepared in termsof cultural differences.” (Zhao, Zuo, & Zillante, 2011).

Whatwe can see in the workflow above, clearly shows that account management in this multinationalcompanies involves developing a specific management plan for each client. (Karantinou, Exploring Relationship Management in Professional Services: A Study of Management Consultancy., 2001). The manner toengage with our potential clients mustbe different in China than in the western regions we are operating in as thecompany philosophy will be very different, mainly driven by the Confucian approach to the collective. TheChinese culture is one of “high context” putting the emphasis on relational and collectivistic values asopposed to the logical and action-oriented approach to doing business in theWest. As a consequence, we must make sure we address these relational values first before we attempt to engage in a workingbusiness opportunity with the prospect.

Reviewing the earlier SWOT analysis, itbecomes clear that although many foreign consultancy companies have existingprocesses to review data to make decisions, most of the information and the casesthat are taken into considerations are outside of China and consequently do not fulfill Chinese conditions to engage in business (Zhao, Zuo, & Zillante, 2011) which leads to theexpected failure of many of theprojects that may have been started in the past. This word of caution isfurther strengthened by the review of Huihua & Rong-Ruey who have foundthat “that the success of consulting projects does not stem solely fromeconomic reasoning, but can also be strongly influenced by internal andexternal political and social factors” (Huihua & Rong-Ruey, 2011).

Pitfalls to avoid

From a socio-economic perspective, it isessential for us to understand that, we mustn't frame what we see on the map asa single “Asian” nation state. We can safely say there is almost as muchdifference between India and China as there is between Europe and India forexample. There are 56 ethnic groups in China (the overwhelming majority (90%)are Han), and we can almost consider the country as the Europe of thefar-east!  This level of variation on anethnic perspectives adds an additional layer of complexity to the alreadycomplex “engagement model” described earlier.

A further pitfall to take into considerationwhen evaluating the decision to break into the Chinese economy  isthe level of competition within the country. In China, foreign companies will be in a position where they will have to compete with state-ownedenterprises (SOEs), or companies with local (state owned) partners oraffiliates. These SOE are often funded by public sector banks. This is veryimportant to take into account because neither the Chinese companies nor thebanks have been under pressure to show profits (Khanna, Palepu, & Sinha, 2005). Despite a distinctimprovement over the last number of years, there is however still a concernaround corruption or in lesser form a lack of transparency in regards to financialreporting. There have been reported cases of SEOs that can “for years pursue strategies that increasetheir market share at the expense of profits”. (Khanna, Palepu, & Sinha, 2005). This may logicallyput western companies at a competitive disadvantage.

Conclusion

Taking the perspective from Porter’s 5forces (see diagram) the main threat we see to the strategy to enter theChinese market is the possible inequitablerivalry from the existing SEO-type firms as outlined above. The market wewill enter has gained maturity over the last number of years, and we feel the bargaining power of buyers is at anacceptable level to consider China as a viable market. There is already anestablished management consulting industry in the country, which, according toHuiHua’s research provides strong evidence that the adoptionof management consultancy has a positive effect on firmperformance (Huihua & Rong-Ruey, 2011). This is somethingmanagement consultancy firms should be able to leverage, and wefeel some can actually become the threat of a substituteservice provider on the market and as a consequence win market share rapidly.

Considering the size of the potentialmarket and its maturity, it is recommended more organisations start to develop a clear plan to enter intothe Chinese financial services management consultancy industry. Part of thisstrategy must to be partner with a local organisation and ensure our employeesare equipped with the best level of understanding of the cultural differencesas possible, and enable them to customise their cultural behaviour (Molinsky, 2013). Taking theseapproaches should ensure a long term success in the Chinese market. 

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