Future viability of Dutch law firms

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“Future viability of Dutch Law firms”

Asha van Rooijen

10528733

Amsterdam Business School

University of Amsterdam Executive programs in management studies, Strategy track Under supervision of Professor J. Strikwerda

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Statement of Originality

This document is written by Asha van Rooijen who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Preface

I would like to show my gratitude to several people for their enthusiastic and friendly guidance and cooperation during the writing of my thesis. I experienced this time as very challenging, interesting and above all very instructive.

A special worth of gratitude goes to my supervisor Hans Strikwerda. He taught me a lot with few words. I thank my brother, Ashwin van Rooijen, for his helpful guidance. He taught me to think logically about the structure of my texts. Further, my gratitude goes to everybody who have helped me with great commitment and enthusiasm: Johan Koggink (Van Benthem Van Keulen) Marcel Hielkema (Dirkzwager Advocaten), Martijn Snoep (De Brauw), Chantal van Oijen (Boels Zanders Advocaten), Bas Boris Visser (Clifford Chance), Jurian Hermeler (Nautah Dutihl), Willem Jarigsma (Loyens & Loeff), Michel Hartogsveld (Loyens & Loeff), Cecille Schobben (Kennedy Van der Laan), Jeroen Zweers (Kennedy Van der Laan), Max Hübner (PGGM), Cornelis Blokbergen (ING), Geerte Hesen (Philips), Frits Rebel (SHV Holding, Mammoet), Klaas Evelein (Unilever), Robert Roelofs (ASML), Monique van der Griendt (Dialogue), Cornelie Bol (Dialogue), Gerard Tanja (Venturis Consulting), Hans Schuurman L(aw4ce), Jaap Bosman (TGO Consulting), Bert Hokken H(okken Management & Advies), Rob van Otterlo (The Hague University of applied sciences, University of Amsterdam), Maarten de Haas (Mediatorsfederatie Nederland, University of Amsterdam), Luc Van Deale (LegaDex) and Bart Verheij (University of Groningen).

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Table of contents

Abstract 7

Introduction 9

Chapter 1 The State of the Legal Industry 16

1.1 Increasing diverse competition 18

1.2 Changing client attitude 21

1.3 Exponential growth of technological capabilities 22 1.4 Conclusions of this chapter: fundamental changes in the legal 27 industry

Chapter 2 Competitive survival of law firms in highly dynamic markets 28

2.1 Building competitive advantage 28

2.1.1 “Positioning” view 29

2.1.2 “Resource- or capabilities-” view 30

2.2 Competitive survival: the role of law firm managers and 35 restraining factors

2.2.1 Dynamic capabilities 37

2.2.2 Resistance to change 39

2.2.3 The dominant logic 41

2.3 Conclusions; boundary conditions and restraining factors 43 for competitive survival

Chapter 3 Methodology 45

3.1 Conceptual model 47

3.2 Research question 49

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3.3.1Data collection and analysis method 50

3.4 Limitations of this research 52

Chapter 4 The State of the Dutch legal industry 55

4.1 Drivers of change in the Dutch legal industry 56

4.2 Moderate increasing diverse competition 58

4.3 Slow, but steady changing client attitude 60

4.4 Limited use of increasing technological capabilities 62 4.5 Conclusions: not yet clear signs of potential disruption 64

Chapter 5 Competitive survival of Dutch law firms 66

5.1 Dutch law firms and competitive advantage 68

5.1.1 The niche firm 69

5.1.2 The sector firm 70

5.1.3 The general practice firm 72

5.2 Competitive advantage and future viability of Dutch law firms 77 5.2.1 Perceived ultimate firm objective and used 77 measurements general practice firms

5.2.2 Competitive advantage in a fundamentally changing 79 industry

5.2.3 Sustaining competitive advantage 81

5.3 Conclusion of this chapter: Dutch law firms law capability 87 to innovate

Chapter 6 Conclusions, managerial and theoretical implications 89

6.1 Conclusions 89

6.2 Managerial implications 93

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References 98

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Abstract

This study aimed to define and measure by which managerial actions and policies Dutch law firm managers achieve competitive survival in a fundamentally changing industry. It is found that Dutch law firms must transform to ensure future viability, due to growing unsustainability of the current business model. However, law firm managers are strongly hampered by the dominant logic (prevailing convictions of how the firm makes profits)1, reinforced by great uncertainty about future technological capabilities.

A long history of relative stability, growth and lack of transparency made it possible to focus the law firm’s strategy on short-term profitability and profit-maximization. Now, the legal industry is subject to fundamental changes, caused by changing client attitude, increasing diverse competition and significant impact of technological innovation.2 In the U.S.A and the UK several scholars claim that the legal market is subject to disruptive innovation.3 Consequently, law firm managers must think beyond short-term profitability and profit maximization and focus on achieving competitive survival; the ability to continuously outperform competitors. It requires them to continuously reassess firm goals, adapt strategy and ultimately transform to new business models in order to continue to create value.

Empirical research indicates that, despite the absence of clear signs of disruptive innovation, Dutch law firms are subject to similar changing industry conditions as their Anglo-Saxon and Anglo-American counterparts, which slowly but steadily weakens viability of their strategic position, resources and capabilities. Specifically, the business model of the general practice

1 C.K. Prahalad, Richard A. Bettis, The dominant logic: A new linkage between diversity and performance, Strategic Management Journal

2 Richard Susskind, Tomorrow’s lawyers, 2013. Richard Susskind and Daniel Susskind, The future of the Professions 2015

3 the phenomenon, described by Clayton Christensen, in which new markets and value network are created and eventually disrupt existing markets and value networks, displacing established market leading firms, products and alliances. Clayton M. Christensen, Dina Wang and Derek van Bever, Consulting on the cusp of disruption, Harvard Business Review, 2013

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law firm is increasingly lacking the potential to outperform competitors. While several general practice firms have built competitive advantage, this advantage seems to fade by the aforementioned drivers of change. Nonetheless, most law firm managers endanger rather than pursue competitive survival. While the great majority of interviewees acknowledged fundamental changes in the legal industry, virtually no adjustments have been made in the law firm’s business model. Law firm managers focus mainly on how to do the same things differently, rather than doing different things.4 They make efficiency attempts in order to lower economic costs, but lack sufficient capability to re-conceptualize the logic of their business in the light of changing market and industry conditions. Indeed, the dominant logic of law firm managers has resulted in law firms being locked in their business model and organizational structure. Hence, they must primarily change their perception of the firm’s economic logic in order to develop the ability to transform and achieve competitive survival.

4 Porter, What is Strategy? Harvard Business Review, 1996, Peter F. Drucker, The theory of the business, Harvard Business Review, 1994

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Introduction

After a long history of relative stability, growth and favorable industry conditions, the legal industry is subject to a rapidly changing environment. According to scholars and industry experts, the interplay between drivers of change will irreversibly alter the way legal services are delivered, and cause radical changes in business models within the legal industry.5 This will ultimately lead to disruptive innovation.6 This theory, developed by Clayton Christensen, states that new markets and value networks are created, which ultimately displace existing markets and value networks.

The main drivers of change are changing client behavior, increasing (diverse) competition and exponential increasing capacity of information technology.7 In order to survive in fundamentally changing industry conditions, law firm managers must think beyond short-term profitability and profit maximization and focus on achieving competitive survival; the ability to continuously outperform competitors.. It requires them to be able to continuously reassess firm goals, adapt strategy and ultimately transform to new business models 8 in order to continue to create value.

PURPOSE OF THIS STUDY

This study aims to define and measure by which managerial actions and policies Dutch law firms will achieve competitive survival, given fundamentally changing market and industry

5 Richard Susskind, Tomorrow’s lawyers, 2013. Richard Susskind and Daniel Susskind, The future of the Professions 2015, Clayton M. Christensen, Dina Wang, and Derek van Bever, Consulting on the cusp of disruption, Harvard Business Review, 2013, Report on the state of the legal industry 2016,2015,2014,

Georgetown Law https://www.law.georgetown.edu/news/2016-report-on-state-legal-market.cfm. Law firms in transition survey, Altman Weil, 2016 http://www.altmanweil.com/dir_docs/resource/95e9df8e-9551-49da-9e25-2cd868319447_document.pdf.

6 Clayton M. Christensen, Dina Wang, and Derek van Bever, Consulting on the cusp of disruption, Harvard Business Review, 2013

7 Richard Susskind, Tomorrow’s lawyers, 2013. Richard Susskind and Daniel Susskind, The future of the Professions 2015, The Law Society of England and Wales, The Future of Legal Services, 2016

8Clayton M. Christensen,The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, Harvard College, 1997, 2000, Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010

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conditions. Thus, ex-post success is defined as achieving competitive survival. Ex-ante success comprises managerial actions and policies that lead to the law firm’s survival. It is not attempted to define a static model that determines ex-post success, acknowledging reflexivity between theory, actions and practice; theory teaches what managers should do with respect to practice, thus changing the premises of the theory. Consequently, this model would continuously change, particularly in fast changing markets and industries.

BUILDING AND SUSTAINING COMPETITIVE ADVANTAGE

The first part of this study comprises literature research in the field of strategic management and specifically strategy formulation in highly dynamic and competitive markets and industries. Two opposed but seemingly inseparable perspectives have been essential approaches in strategy formulation and building (sustainable) competitive advantage9; the “positioning-view”10 and the “resource-based view”11. The “positioning view” states that firms can earn rents when they occupy a profitable position within (part of) an industry and defend this position from competitive forces, by building a distinctive value proposition through innovation. Opposed to the “positioning view, the resources-based view focusses on the firm’s unique and scarce resources as the explanation of performance differentials between firms (instead of external markets). This view primarily analyzes the internal organization as the main source of competitive advantage. “Resource-based view” states that a firm that has attained a competitive advantage has created higher economic value (the difference between

9 Michael E. Porter, Creating and sustaining superior performance, Competitive Advantage, Harvard Business Review, 1985

10 Michael E. Porter, How Competitive forces shape strategy, Harvard Business Review, 1979, Michael E. Porter, What is Strategy? Harvard Business Strategy, 1996

11Penrose, E. T. (1959). The Theory of the Growth of the Firm. New York: John Wiley. Bigger Wernerfelt, A resource based view of the firm, Strategic Management Journal, 1984. Jay B. Barney, Strategic Factor Markets: Expectations, Luck, and Business Strategy, Management Science, 1986.Margaret A. Peteraf, The cornerstones of competitive advantage: A resource-based view, Strategic Management Journal, 1993. Jay B. Barney, Firm Resources and sustained competitive advantage, Journal of Management, 1991, Margaret A. Peteraf, Jay B. Barney, Unraveling the resource-based tangle, Managerial and Decision Economics, 2003

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the perceived benefits of a resource-capability combination and the economic cost to exploit them) than its competitors. (Penrose 1959, Wernervelt 1984, Barney 1986, 1991, Peteraf 1993, Peteraf and Barney 2003). Economic value is generally created by producing products and/or services with either greater benefits at the same cost compared to competitors or the same benefits at lower cost compared to competitors.

While the “positioning” and the “resource-based” view approach competitive advantage from opposite perspectives (“outside-in” versus “inside-out”12), both seem necessary for building competitive advantage. Indeed, an advantaged position in a given market and industry (segment), without superior resources to support this advantage is clearly ineffective. Simultaneously, superior resources do not make sense without clear context of a specific position in a market and industry (segment). Thus, abovementioned views on strategy formation are mutually dependent.13

FROM COMPETITIVE ADVANTAGE TO COMPETITIVE SURVIVAL

While the foregoing theories discuss cornerstones for building competitive advantage, this study was introduced with a description of fundamental changes in the legal industry. This study shows how these changes cause firm’s positions and capabilities, which lay at the core of competitive advantage, becoming irrelevant to the market. Indeed, an increasing part of the firm’s competences no longer matter in the legal marketplace. Increasing diverse competition provides higher economic value with alternative legal services. Consequently, law firms must transform (parts) of their business model.

12 The “positioning” view approaches strategy formulation as a derivative from favorable external market positions, followed by innovative strategies. The “resource-based” view analyzes were it is good in and then finds markets and submarkets were it can exploit its resources and capabilities with a distinctive value proposition.

13 See also Roger L. Martin, Strategy Is About Both Resources and Positioning, Harvard Business Review, 2015

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Teece and Pisano stated: “What the firm can do and where it can go is rather constrained by its positions and paths. Its competitors are likewise constrained. Rents (profits) thus tend to flow not just from the asset structure of the firm and, as we shall see, the degree of its imitability, but also by the firm's ability to reconfigure and transform.” Teece and Pisano specifically refer to dynamic capabilities as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.”14 Johannes Strikwerda described the concept of the firm being “in-control”, as the ability not only to create an efficient organization, and to adapt to operational changes, but most importantly the firm’s capability to transform the business model of the organization.15

From the foregoing theories it is concluded that firms, in order to achieve competitive survival must primarily build and sustain competitive advantage with a distinctive value proposition (positioning-view) and superior resources and capabilities (resource-based view). Further, firm managers must have the capability to timely reconfigure and transform the firm’s resource base, competences and value proposition in order to remain relevant and viable in rapidly changing markets.

RESEARCH QUESTION AND CONCEPTUAL MODEL

Based on developments in the legal industry and theories on building competitive advantage and competitive survival, the undermentioned model is conceptualized: Under conditions of fundamental change, business model innovations (input variable) of Dutch law firms lead to competitive survival (output variable), if law firm managers continuously achieve competitive advantage (intermediate outcome) with their actions and policies (moderating variable). It is

14 David J. Teece; Gary Pisano; Amy Shuen, Dynamic capabilities and Strategic Management, Strategic Management Journal, Vol. 18, No. 7. (Aug., 1997), pp. 509-533

15 J. Strikwerda, Bespiegelingen, Over governance, bestuur, management en organisatie in de 21ste eeuw, pag. 62-63, 2014

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expected that actions and policies of Dutch law firm managers determine the strength of the relation between innovation and competitive advantage and the firm’s competitive survival. If innovations are implemented properly, chances of survival increase. However, if there are no innovative responses or poorly implemented innovations, the chance of survival is highly reduced. Furthermore, it is expected that resistance to change, not seeing change or lacking capabilities to act under conditions of change, leads to obstruction of innovative capacity. A phenomenon which has been observed in the U.S.A legal market, and of which it is expected to also exists in the Dutch legal market. Thus, it is expected that there could be a negative relationship between innovation and competitive survival of Dutch law firms.

Figure 1.

OVERVIEW CHAPTERS

This study comprises two sections, of which the first comprises two chapters. Chapter one discusses industry surveys and literature study on changes in the legal marketplace (measured in U.S.A. and UK). Chapter two discusses literature on strategic management (in dynamic and

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competitive markets). Specifically, it describes two opposed views on building and sustaining competitive advantage; the “positioning” and the “resource-based view”. Further, theory is discussed on reconfiguration and transformation of resources and capabilities in order to achieve competitive survival in dynamic industries and important restraining factors managers face here.

In the second section of this research the following research question will be answered: “When and why do Dutch law firms achieve competitive survival, assuming fundamentally changing market and industry conditions?” (chapter three). To this end it is first assessed whether Dutch law firms are subject to similar drivers of change as Anglo-American and Anglo-Saxon law firms (chapter four). It is found that, albeit at a slower rate of change, the Dutch legal market is subject to similar drivers of change as U.S.A. and UK legal markets. Business model innovations are essential to prevent from losing profitable positions in future legal markets. Chapter five primarily assesses to what extent the Dutch legal profession achieves competitive survival, through building and sustaining competitive advantage and reconfiguring and transforming its business model and value proposition. It is found that while niche and sector firms have the potential to achieve both “positioning” and “resource-based” criteria for building competitive advantage, general practice firms increasingly lack potential to outperform competitors. The extent to which general practice firms are capable of achieving competitive survival, is further analyzed. It is found that despite the fact that several investigated general practice firms have built competitive advantage, Dutch law firm managers often lack the capability to reconfigure resources and transform their business model in response to drivers of change. They focus on how to do the same things differently, rather than doing different things.16 Efficiency attempts are made in order to lower economic costs, but

16 Michael E. Porter, What is Strategy? Harvard Business Review, 1996, Peter F. Drucker, The theory of the business, Harvard Business Review, 1994

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law firm managers generally lack sufficient capability to rethink the logic of their business in the light of changing market and industry conditions. It seems that they are strongly hampered by the existing dominant logic, reinforced by great uncertainty about the consequences of (technological) innovation.17 The prevailing dominant logic impairs managers’ ability to reconfigure and transform and causes law firms to be ‘locked’ in their traditional business model, organizational structure and underlying assumptions of profit-maximization.

It is concluded that law firm managers must primarily change their perception of the firm’s economic logic, in order to develop the capability to transform and prevent potential disruption.

IMPORTANCE OF THIS RESEARCH

The premise of this research is to gain understanding of the potential of Dutch law firm managers to achieve competitive survival, and what they have to do to keep the law firm “fit” with their fundamentally changing environment. It emphasizes the need to transform business models under conditions of fundamental change and how the ability to cope with fundamentally changing industry conditions can be restrained by the deeply rooted ‘dominant logic’ among managers. It provides important insights into the challenges traditional professions have to engage in order to create future viability in fundamentally changing industries.

17 C.K. Prahalad, Richard A. Bettis, The dominant logic: A new linkage between diversity and performance, Strategic Management Journal, Volume 7, Issue 6, 1986 Pages 485–501

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Chapter 1

The State of the Legal Industry

This study is concerned with future viability of Dutch law firms. It assesses what Dutch law firm managers have to do to keep the law firm “fit” with their changing environment and to what extent Dutch law firms achieve competitive survival in changing industry conditions. Chapter one discusses fundamental changes in the legal industry. Several scholars claim that the U.S.A and the UK legal markets are subject to disruptive innovation.18 Changing client attitude, increasing diverse competition and significant impact of technological innovation, force law firms to adapt new strategies and transform traditional business models. Section 1.1 describes increasing diverse competition in the legal industry. New types of legal services and legal service providers increase the impetus of competition in the legal market, claiming market share from traditional law firms. Section 1.2 discusses changing client attitude, driven by increasing opportunities in result of technological advances. Clients can choose from a wider range of legal services and simultaneously they are challenged to handle more legal work and greater risks at lower costs. These challenges and opportunities encourage them to reconsider legal sourcing. Section 1.3 describes the effect of increasing technological capabilities, and how increasingly capable systems will bring fundamental change in the way the ‘practical expertise’ of specialists is made available in society. One important phenomenon is commoditization of legal services. This phenomenon concerns legal work with a routine character; activities that have the potential to be standardized, systemized and commoditized. Ultimately it can be computerized by codifying, uncodified legal knowledge in automated routines. Consequently, legal knowledge and services become better accessible and at lower costs or even costless available.

18The phenomenon, described by Clayton Christensen, were new markets and value networks are created and eventually disrupt existing markets and value networks, displacing established market leading firms, products and alliances.

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Finally, section 1.4 concludes with the state of the legal industry. The interplay between increasing diverse competition, changing client demand and further integration of technological capabilities, cause fundamental change in the legal industry.

FUNDAMENTAL CHANGES IN THE LEGAL INDUSTRY

In the article “Consulting on the cusp of disruption”, Clayton M. Christensen, Dina Wang, and Derek van Bever argue that the legal industry in the U.S.A. is subject to disruptive innovation. It concerns the phenomenon whereby new markets and value networks are created, which will slowly disrupt the existing market and value network, displacing established market leaders and alliances. They state that, “the legal industry is grappling with legions of disgruntled but inventive clients and upstart competitors”. Moreover, “the corporate general counsel is well along in the process of disaggregating traditional law firms, taking advantage of new competitors, which reduce costs and increase efficiency through technology, streamlined workflow, and alternative staffing models”.19

According to The Law society of England and Wales, there are three forces which likely will have an impact on firms’ profitability over the next 3-5 years: (i) changing buyer behavior; (ii) the threat of substitute suppliers and services; and (iii) increasing rivalry among the pool of top 200 and large corporate firms.20 Aforementioned forces can be explained with Michael E. Porter’s five-forces competitive framework, which determines competitive intensity and the attractiveness of the industry in terms of potential profitability. It comprises entry barriers, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among competitors. Together, these determine the attractiveness of (parts of) the industry. In order to build a competitive advantage within the industry, the firm must identify a profitable

19 Clayton M. Christensen, Dina Wang, and Derek van Bever, Consulting on the cusp of disruption, Harvard Business Review, 2013

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position with a competitive value proposition, through innovation and defend from (potential) competition (see also chapter two).21 The expectations of the law society obviously affect the attractiveness of the industry in which law firms operate.

1.1 Increasing diverse competition

Industry reports of the U.SA. legal market claim that in recent years, law firms have lost market share of overall legal spend to in-house law departments of corporations and to alternative legal service providers. Altman Weil found in its Chief Legal Officer survey 2015, among 258 corporations, that 51 percent of respondents reported increasing the internal budgets of their law departments, while only 25 percent reported decreased in-house spending. By contrast, 44 percent said they had decreased their outside counsel budgets, while 32 percent reported increasing them. 22

NEW MODELS DELIVERY LEGAL SERVICES

With regard to outside legal budgets, several types of new legal services have established in the legal market. The center for WorkLife Law at the University of California, Hastings College of Law, identified five different models of new entities that are reshaping the delivery of legal services in certain segments of the market: (i) secondment firms that provide lawyers to work on a temporary or part-time basis in client organizations; (ii) law and business advice companies that combine legal advice with general business advice of the type traditionally provided by management consulting firms; (iii) law firm “accordion companies” that provide networks of trained and experienced lawyers to meet short-term staffing needs in law firms; (iv) virtual law firms and companies that typically drive down overhead by having attorneys

21 Michael E. Porter, How competitive forces shape strategy, Harvard Business Review, 1979

22 Altman Weil, Chief Legal Officers Survey, http://www.altmanweil.com/dir_docs/resource/e377d935-7263-4031-b25d-57dbc4d9d16d_document.pdf, 2015

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work from their own homes; and (v) innovative law firms and companies that typically offer specialized services under special fee arrangements or service delivery models that differ significantly from traditional law firms.23 The report describes 44 such new model firms currently operating in the United States and Canada. While many of these organizations are relatively small, some are not. Axiom Law, for example, a law and business company based in New York with 14 offices worldwide, has over 1,200 employees.24 Bliss Lawyers, a secondment firm based in Boston, has a national network of some 10,000 lawyers.25 While many of the alternative service providers described here are focused on the lower, more commoditized end of the legal services market, some have successfully penetrated the higher end market, up in the value pyramid (figure 2) with more complex legal work, by offering highly experienced lawyers to assist in specialized areas of practice.

Figure 2.

Source: Ashurst

23 The center for WorkLife Law at the University of California, Hastings College of Law, Disruptive innovation; new models of legal practice, http://worklifelaw.org/wp-content/uploads/2015/09/Disruptive-Innovations-New-Models-of-Legal-Practice-webNEW.pdf, 2015

24 Axiom Law, http://www.axiomlaw.com 25 Bliss Lawyers, http://blisslawyers.com

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The Law Firms in Transition Survey (Altman Weil 2015) reported that 83 per cent of law firm leaders believe that competition from non-traditional service providers is a permanent change in the legal market. Developments of alternative business structures (ABS), ‘including consolidation, specialization, emerging brands, investment in marketing, technology and new delivery methods hold clues to the future’.26 The law society claims that competition from the Big Four accountancy, firms providing legal services, should not be underestimated. “These four are gaining ground in overseas markets, and perhaps readying themselves for changes to the ABS rules in other regimes, so they can provide legal services in currently closed markets.” It further argues that the most significant competition for law firms serving consumer and retail markets will come from generalist legal businesses with wide practice scope. These businesses provide a range of services and gain most of their efficiencies from automated low-cost high-volume offerings.27

NICHE FIRMS

In addition, the legal market is subject to a growing number of niche firms. These are established by senior lawyers who find opportunities to serve a particular market more competitively than larger, more broad-based or general practice firms. “Niche firms, by specializing, often have the potential to become market leaders in their fields, possessing clarity about what the firm does and projecting a lucid brand message”.28 With a clear value proposition, niche firms distinguish themselves from firms that offer a wider range of attention fields and are less able to communicate their value to potential clients.

26 Altman Weil, Law Firms in Transition Survey, http://www.altmanweil.com/dir_docs/resource/1c789ef2-5cff-463a-863a-2248d23882a7_document.pdf, 2015

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The Law Society of England and Wales, The Future of Legal Services, 2016 28

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1.2 Changing client attitude

Allen & Overy, a Magic Circle firm29; conducted an industry survey in 2014, among approximately 200 senior buyers of legal services at companies with a collective annual legal budget of nearly GBP3.5 billion. The report concluded that “the industry faces unprecedented change. Companies are seeking out innovations in the way they procure, use and interact with providers of legal services”.30 Increasing diverse competition enables corporate clients to choose from a wider range of legal service providers. Advanced technology enables better access to information and the capacity to automate basic tasks. It also enables them to better compare services of different legal service providers and improve transparent procurement procedures. Corporates can hire (high-end) temporary lawyers to manage large complex projects, and send routine processing work overseas.31

Moreover, they effectively unbundle and internalize legal work. In combination with advanced technology they are in better (internal) control of legal issues. Consequently, they lose dependency on external advisors and take a more proactive role in collaboration proccesses. Clients now require relevant, usable advice, with high speed, which forces legal service providers to increase efficiency and different organization and quality of their work.

The foregoing developments are stimulated by the fact that corporate clients are subject to several important challenges. Susskind explains the “more-for-less” challenge as clients, diverse in nature (corporate clients, managers of medium and small businesses, individual citizens), who generally cannot afford legal services when delivered in the traditional way. Changing and difficult economic conditions force general counsel (managers of in-house legal

29 The Magic Circle is an informal term for what are generally considered the five leading law firms headquartered in the United Kingdom

30 Allen& Overy, Unbundling a market; “The appetite for new legal services models”, 2014

31 D. Erten and M. Gordon, Points of Law: Unbundling Corporate Legal Services to Unlock Value, Harvard Business Review, 2012

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departments) to reduce their overall legal budget, while simultaneously they have more legal and compliance work to undertake.

Another important development is increasing complexity of business and legal issues. Heidi K. Gardner stated that professional service firms face a “conundrum”. She refers to clients who face more sophisticated technological, regulatory, economic and environmental demands due to globalization. As a result, they are subject to increasingly complex problems. Corporate clients deal with greater risks as a consequence of increased regulation and heavy fines if they do not comply with this regulation.32

INCREASING BARGAINING POWER

The aforementioned developments cause changing roles between corporate clients and external law firms. The Law Society claims that several factors shift the balance of bargaining power away from law firms toward corporate clients: (i) greater access to information that enables clients to more effectively compare the cost of legal services; (ii) the ability and increased willingness to unbundle legal services and source them to the most cost-effective provider; and (iii) the expanding availability of alternatives to top law firms from which to source work”.33 Thus, ‘buyer power’ is increasing, which affects the profitable positions of law firms in the legal industry.

1.3 Exponential growth of technological capabilities

Changing client behavior and increasing diverse competition are driven by increasing technological capabilities. R. Susskind and D. Susskind describe in “The future of professions” how increasingly capable systems will bring fundamental change in the way the ‘practical

32 Heidi K. Gartner, When senior managers won’t collaborate, Harvard Business Review 33 The Law Society of England and Wales, The Future of Legal Services, 2016

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expertise’ of specialists is made available in society. They claim information technology to be essential to lawyers in order to not only automate current working practices, but to practice laws in ways that we could not have done in the past. Susskind claims many of the innovative technologies to be disruptive. Hence, technology will not solely streamline the current system, but ultimately reshape it. “While we do not anticipate an overnight big-bang revolution, equally we do not expect a leisurely evolutionary progression into the post professional society. Instead, we predict what we call an ‘incremental transformation’ in the way in which we organize and share expertise in society, a displacement of the traditional professions in a staggered series of steps and bounds. Although the change will come in increments, its eventual impact will be radical and pervasive.”

COMMODITIZATION OF LEGAL SERVICES

The foregoing is caused by further commoditization of legal services. As how the futurists, Patrick Dixon, explains in his speech at a conference on the future legal landscape: “everything which can be done twice can be commoditized and everything which can be commoditized can be computerized. Everything which can be computerized can be done for free”. Commoditization of legal services concerns legal work that has a routine character. Activities that can be performed more than twice, in principle, have the potential to be standardized, systemized and commoditized. It concerns activities that can be conducted process-oriented and supported by technology.35 Relevant legal services become increasingly standardized, with support of technology. As a consequence of standardization, these services become cheaper and sometimes even costless available for a wider public.36 This phenomenon directly affects the scale and scope of business provided by different legal service providers.

34 Richard Susskind and Daniel Susskind, The future of the Professions, 2015

35 Future of Law Firms - lawyers, barristers, solicitors, attorneys - conference keynote speaker Patrick Dixon, https://www.youtube.com/watch?v=rI6w8V4Xj6g

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The Law society reported that technology is largely affecting firms, which service mass or process-driven needs, rather than specialist cases. They foresee a push towards automation of routine work leveling by 2020, and expect to see technology stimulating innovative models of delivery or legal service solutions. Technological innovation has already led to more standardized solutions for the delivery of legal processes and the ability to commoditize many legal services. Numerous legal tech companies, universities and law firms are exploring the extent to which the cognitive domain of lawyers can be automated.37 Further, legal technology companies create significant different dynamics and diverse competition in the legal market. Important developments like Blockchain change the boundaries of traditional legal services, for example by the advent of ‘smart contracts’, where contracts are executed based on the fulfilment of conditions logged on a shared database. Working on the basic premise of “if conditions A, B and C are satisfied, X can happen”, examples of contracts that seem, initially, suitable include wills, trusts, title registries and shareholder agreements. The potential implications include reduced costs, more automation in the legal sphere, more certainty and less litigation.38

Further, online dispute resolution (ODR), which broadens access to justice and resolves disputes more easily, quickly and cheaply and is already being successfully put into practice by companies such as eBay, Cybersettle and the Canadian Civil Resolution Tribunal.

ARTIFICIAL INTELLIGENCE

On the 16th of May 2016, the first artificial intelligence lawyer was ‘hired’ at the New York law firm Baker & Hostetler 39, which handles bankruptcy cases. According to Andrew Arruda, CEO and co-founder of Ross intelligence, several other firms have signed licenses to employ

37 The Law society of England and Wales, the future of the legal services, January 2016 www.lawsociety.org.uk 38 Sources: Financier Worldwide, Blockchain – disrupting the future of banking and legal services?

Codex Stanford Conference https://www.youtube.com/watch?v=efr9VctcMe8 39

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ROSS' services. Slaughter and May, a magic circle firm reported in September 2016”, to have their lawyers training a computer to do their boring jobs.” The firm is collaborating with the tech company, Luminance. The program is built on Recursive Bayesian estimation, an algorithm which constantly calculates the probabilities of multiple scenarios, and which is already used in robotics to allow a robot to infer its position at any point. This technology allows highly-trained lawyers who would otherwise be scanning through thousands of pages of repetitive documents", to "spend more of their time analyzing the findings and negotiating the terms of the deal".41

At Codex, Stanford’s center for legal informatics, researchers, lawyers, entrepreneurs and technologists work in advancing legal technology. Codex’s emphasizes on research and development of computational law, the branch of legal informatics concerned with the automation and mechanization of legal analysis. Here the latest research on artificial intelligence in the legal industry is discussed. In one of their conferences they claim that technology is “going to eat law”. They describe how IBM’s Watson has outperformed the smartest human beings. Watson is able to process much larger amounts of information and already more accurate than human beings. IBM’s Watson has proven to be 95% accurate, versus 75 tot 80% accuracy of human beings. Within 5 years this capacity will exceed 99,99999%. 42 The aforementioned concludes that technology is currently able to outperform human beings in handling certain types of legal work. Technology can provide these services faster, more accurate and at lower costs.

TECHNOLOGY AS DRIVER OF CLIENTS CHANGING PERCEPTION OF QUALITY

40 http://www.rossintelligence.com 41 http://rollonfriday.co.uk/TheNews/EuropeNews/tabid/58/Id/4765/fromTab/36/currentIndex/3/Default.aspx 42https://www.youtube.com/watch?v=HvSFy5jpRDw

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David Maister, a leading writer on the professions, claimed in his book Managing the Professional Service Firm that professional services involve a high degree of customization by human beings and that most professional services have a strong component of face to face interaction with the client. According to Maister, these characteristics are self-evident. He states that, “as a consequence, definitions of quality and service take on special meanings and must be managed carefully. Very special skills are required of top performers”. Thus, according to Maister, (ex-ante) measures of success lie within the skills of professionals that serve their clients.43 However, Susskind and Susskind describe ‘mass customization’, where there is no need for human beings and ‘telepresence’ where there is no need to meet in person. They claim that neither of the characteristics mentioned by Maister can nowadays be taken for granted.44 Obviously, client’s perception of quality and measures which indicate good service have changed and will continue to change depending on further integration and acceptance of technology. People get used to none face to face interactions and services. Slowly it becomes irrelevant. Further, David Maister claimed that “professional service” involve a high degree of customization in their work. Little, even management information, can reliably be made routine. However, increasing commoditization shows that this statement is increasingly untenable with respect to a large part of the law firms activities. Further, in conjunction with commoditization, clients’ perception of quality changes. Where quality of more commoditized services depend more on factors like speed and accuracy, quality of bespoke legal work is perceived as “good evaluation” of the skills of the professional. This changing client perception of quality with regard to this service segment, has far reaching effect on the way the law firm can create economic value.

43 David H. Maister, Managing the Professional Service Firm, 1997

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1.4 Conclusion of this chapter

FUNDAMENTAL CHANGES LEGAL INDUSTRY ENDANGER FUTURE VIABILITY LAW FIRMS The interplay of increasing diverse competition, changing client attitude and exponential growth of technological capabilities drive fundamental and irreversible change in the way that lawyers work. This causes significant changes in the legal landscape. The industry report: “The state of the legal industry 2016” claims that “the combined effect of all of these forces has been a slow but steady erosion of the market share controlled by traditional law firms. 45 The erosion began at the lower end of the market with legal process outsourcing firms providing routine document review and e-discovery functions. The scope of change has gained ground to more middle-market activities provided by alternative service providers and networks of experienced lawyers to assist clients through secondment arrangements and increasingly sophisticated software to streamline “pattern recognition” functions traditionally performed by lawyers (such as the drafting of standardized documents or the review and management of contracts). Altman Weil concluded for the U.SA. legal market that just over two-thirds of law firms reported gross revenue and revenue per lawyers increases in 2015. Profits per equity partner (PPP) were up in 65 percent of firms, 23 percent of firms saw PPP decrease in 2015 and almost half of those firms were down sharply (4 percent or more). Many law firm leaders are not optimistic about the ability to maintain increasing profitability. Nearly half (47 percent) of law firm leaders believe a slowdown in profit per partner growth is a permanent trend in the profession.

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Chapter 2

Competitive survival of law firms in highly dynamic markets

This study aims to define and measure by which managerial actions and policies Dutch law firms will achieve competitive survival. The first chapter has discussed fundamental changes in the legal industry. Obviously these significantly affect future viability of the legal profession. In this chapter is is analyzed what managers have to do, to provide the firm with everything it needs for long term survival, given changing industry conditions.

This chapter comprises two sections. Section 2.1 describes cornerstones of building and sustaining competitive advantage, the potential to outperform competitors, as an essential intermediate outcome to achieve competitive survival. Two opposed views on competitive advantage and how these are mutually interdependent are discussed; the “positioning-view” and the “resources-based view, or the capabilities-view”.

Section 2.2 emphasizes managers’ role in achieving competitive survival in dynamic markets and industries and important obstacles they face here. Indeed, competences of the firm can become irrelevant for changing markets and industries. Therefore, a firm can only achieve competitive survival when it is capable to timely reconfigure and transform its resources and capabilities and retakes a profitable strategic position in the market. However, several restraining factors can affect the ability to innovate, a phenomenon which seems to occur on large scale among law firm managers, according to several industry surveys in the U.S.A. Important to this chapter is the fact that “the firm” is not meant specifically as the law firm, but any entity / organization / institution with equal ex-post and ex-ante measurements of success.

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Classical ‘static’ industrial organization theories focused on profit maximization as the ultimate objective of the firm.46 These theories were displaced by more dynamic theories on strategy formulation as markets became increasingly dynamic and competitive.47 During the last decades, strategic management schools centered attention around the way law firms build competitive advantage; the ability to (continuously) outperform competitors.

Michael E. Porter describes competitive advantage as a way of classifying strategies that business use to outperform their competitors. He states that “companies achieve competitive advantage through innovation”. Without constant innovation, a business’s advantages will ultimately be emulated by other businesses, destroying its advantages.48

Two (opposed) views on competitive advantage have dominated strategic management thinking. The “positioning view” and the “resource-based view”, or “capabilities-view”. While both views approach strategy formulation and building competitive advantage from opposed perspectives (external market to strategy versus internal organization to strategy), both seem intertwined and mutually interdependent.

2.1.1 Michael E. Porter’s “Positioning” view

Michael E. Porter defined the competitive forces approach during the 1980’s. It views the essence of competitive strategy formulated as relating a company to its environment. Within this approach, the key aspect of the firm's environment is the industry in which it competes.

46 Neoclassical economics, Towards a strategic Theory of the Firm, Richard P. Rumelt. Bain type Industrial Organization Economics, Joseph S. Bain, 1953, Transaction costs Theory, Oliver E. Williamson, The Economics of Organization, Transaction costs approach, The American Journal of Sociology, 1981 47 Joseph A. Schumpeter, Competition as a process of “creative destruction”

Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process. New York: McGraw-Hill, 1939.

Joseph A. Schumpeter, Capitalism, Socialism, and Democracy. 3d ed. 1942. New York: Harper and Brothers, 1950.

Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle. Cambridge: Harvard University Press, 1936.

48 Michael E. Porter, Creating and sustaining superior performance, Competitive Advantage, Harvard Business Review, 1985

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The structure of the industry strongly influences the competitive “rules of the game” as well as strategies that are potentially available to firms. This approach, finds its origin in the structure-conduct-performance paradigm of industrial organization (Bain, 1959), emphasizing the actions a firm can take to create profitable and defensible positions against competitive forces.49 Porter 'five-forces' framework, provides a systematic way of thinking about how competitive forces work at industry level and how these forces can determine profitability of different industries and industry segments. The five forces are entry barriers, threat of substitution, bargaining power of buyers, bargaining power of suppliers, and rivalry among competitors. Together these determine the potential profit of an industry or sub-segment of an industry. Some (parts of) industries become more 'attractive' because they have structural entry barriers to competitive forces, that allow firms to create competitive advantages. Firms earn rents when they occupy a profitable position within the industry and defend this position from competitive forces, by building a distinctive value proposition through innovation. Thus, competitive strategies, according to Porter, arrive from the firm's favorable position within an industry in relation to competitors and suppliers.

Chapter one has discussed how the important driving forces, threat of substitution, increasing bargaining power among ‘buyers’ of legal services and increasing impetus of rivalry among competitors can instantly change the attractiveness of an industry.

2.1.2 The “resource-based” view

The “resource-based view” focusses on unique and scarce resources as the explanation of performance differentials between firms. Thus, the “resources-based view” aims to understand the internal organization as the main source of competitive advantage. In 1984, Birger Wernerfelt developed “some simple economic tools for analyzing a firm's resource position,

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rather than a product-market position and to look at some strategic options suggested by this analysis.50 Robert H. Hayes stated in 1985 that a firm should analyze were it is good in, instead of what position it currently has in the industry. He stated that those things a firm is good in, might not be easy to imitate for competitors.51

“Resource-based view” states that a firm that has attained a competitive advantage has created higher economic value (the difference between the perceived benefits of a resource-capability combination and the economic cost to exploit them) than its competitors. Economic value is generally created by producing products and/or services with either greater benefits at the same cost compared to competitors (i.e. differentiation-based competitive advantage) or the same benefits at lower cost compared to competitors (i.e. efficiency-based competitive advantage). Margaret A. Peteraf and Jay B. Barney (1986, 1991, 1993, 2003) argued that competitive advantage is directly connected to the core of critical resources of a firm.52 They emphasize the role of these resources in value creation, how these resources are connected with economic value and the generation of rents to which an enterprise has some legitimate claim. Jay B. Barney found four indicators of the potential of firm resources to generate competitive advantage. These should be i) valuable; when they enable a firm to conceive of or implement strategies that improve its efficiency and effectiveness, ii) rare; when they are not possessed by a large number of (potentially) competing firms, iii) inimitable; when firms that do not possess them cannot obtain them, iiii) non-substitutable; when there are no strategically equivalent valuable resources that are themselves either not rare or imitable. The latter should avoid (potentially) competing firms to implement equal strategies, using different resources.53

50 Bigger Wernerfelt, A resource based view of the firm, Strategic Management Journal, 1984 51 Robert H. Hayes, Strategic Planning – Forward in reverse?, Harvard Business Review, 1985

52 Margaret A. Peteraf and Jay B. Barney; Unraveling the resources-based tangle, Managerial and decision economics. Resources-based theory (RBT) is a theory that integrates a management perspective with an economic perspective, which should be understood as a resource-level and efficienct-oriented analytical tool. 53 Jay B. Barney, Firm Resources and sustained competitive advantage, Journal of Management 1991

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Superior resources are also inimitable in the sense that they cannot easily be replicated by competitors.54

FROM SUPERIOR RESOURCES TO BUILDING COMPETITIVE ADVANTAGE

In principle the “resource-based view” did not provide insight in how superior resources would eventually lead to competitive advantage.55 Robert M. Grant explained the relation between resources and (strategic) capabilities in order to provide insights in the process of strategy formulation. He made a distinction between resources and capabilities as follows; i) resources are essential inputs for a firm to build a competitive advantage. They are “basic inputs into the production process” and “the basic units of analysis.” Individual resources of the firm include items of capital equipment, skills of individual employees, patents, brand names and so on. However, few resources are productive on their own. “Productive activity requires the cooperation and coordination of teams of resources”. It requires then ii) “capabilities”; the capacity for a team of resources, to perform some task or activity, like financial control, human resources management, product development and market research. Capabilities use resources in (team) production and are the core of competitive advantage. Thus, while resources are the source of a firm’s capabilities, it is the firm’s capabilities that are the main source of competitive advantage. Robert M. Grant stated that “creating capabilities is not simply a matter of assembling a team of resources. Capabilities involve complex patterns of coordination between people and between people and other resources. Perfecting such coordination requires learning through repetition.

54 Ck. Prahalad and Gary Hamel, The core competences of the corporation, Harvard Business Review, 1990, David J. Teece; Gary Pisano; Amy Shuen, Dynamic capabilitites and Strategic Management, Strategic Management Journal, Vol. 18, No. 7. (Aug., 1997), pp. 509-533

55 Robert M. Grant, The resource-based theory of competitive advantage, Implications for Strategy Formulation, 2001

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Nelson and Winter claimed that “organizational routines are regular and predictable patterns of activity, which are made up of a sequence of coordinated actions by individuals: a capability is, in essence, a routine or a number of interacting routines. The organization itself is a huge network of routines. These include the sequence of routines which govern the passage of raw materials and components through the production process and top management routines, which include routines for monitoring business unit performance, capital budgeting and strategy formulation”.56 Then, iii) integrated, strategic capabilities, or core competencies are capabilities that are difficult to build and therefore to replicate by competitors.57 While capabilities create the ability to build competitive advantage, it is the integration of several capabilities that increase likelihood of sustained competitive advantage.58

Central, critical capabilities have been explained by Prahalad and Hamel (1990), as the “core competencies of the firm”.59 They illustrated how a firm can develop competencies that are difficult to build and to replicate. Then, core competencies are developed through the process of continuous improvements over the period of time, rather than a single large change. They comprise the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technology. Consequently, core competencies must be difficult to build and to replicate by competitors, give access to a wide range of markets and create a perceived benefit for the customer.

COMPETITIVE ADVANTAGE THROUGH KNOWLEDGE INTERGATION

Robert M. Grant added to the “resource- and evolved capability-view”, that knowledge is the strategically most important resource of the firm. He developed knowledge-based theory,

56 Richard R. Nelson and Sidney G. Winter, An evolutionary theory of economic change, Harvard College, 1982 57 Ck. Prahalad and Gary Hamel, The core competences of the corporation, Harvard Business Review, 1990, David J. Teece; Gary Pisano; Amy Shuen, Dynamic capabilitites and Strategic Management, Strategic Management Journal, Vol. 18, No. 7. (Aug., 1997), pp. 509-533

58 Robert M. Grant, The resource-based theory of competitive advantage, Implications for Strategy Formulation, 2001

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building on work of Demsetz (1972) , who argues that, to acquire knowledge efficiently, specialization in specific areas of knowledge is required (stored within the brain of individuals). However, efficient application of knowledge requires bringing this specialized knowledge together. Thus, according to Grant: “the fundamental role of the firm is the integration of individuals' specialist knowledge. Organizational capabilities are the manifestation of this knowledge integration”. Sustaining competitive advantage under conditions of dynamic competition requires continuous innovation through flexible knowledge integration either by: i) extending existing capabilities to encompass new knowledge, or ii) reconfiguring existing knowledge within new patterns of integration. 61

“POSITIONING” AND “RESOURCE-BASED VIEW” MUTUALLY INTERDEPENDENT

The foregoing shows that, whereas the “positioning-view analyses the attractiveness of the industry and competitive advantage through profitable positions the firm can take within a specific industry, the “resource-based view”, or “capability-view” focusses on unique scarce resources the firm possesses as the main source of competitive advantage. The “positioning-view” claims that a firm must primarily take a profitable position within an (attractive) industry and then chooses strategy in order to achieve profitability. However, the firm can only create economic value, if it can arm a favorable position with skills that enable it to perform better than competitors. The latter objective is analyzed by the “resource-based-view”, or “capability-view”, which focuses on unique and scarce resources and capabilities of the firm as primary unit of analyzes. The “resource based-view” claims that firms must primarily analyze the things they are good in, using available superior resources to outperform competitors. Then they

60 Alchian, A. A., and H. Demsetz. “Production, Information Costs, and Economic Organization.” The American Economic Review

61 Robert M. Grant, Prospering in dynamically competitive environments; organizational capability as knowledge integration. Organization Science

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assess which markets and industries might be interesting to enter. Thus, the “positioning” and “resource-based view” approach markets and industries from opposed direction (external market to strategy versus internal organization and unique resources to strategy). However, these contrary approaches, both seem to be essential for the firm to create (and sustain) competitive advantage. Indeed, as how Birger Wernerfelt stated in 1984; “For the firm, resources and products are two sides of the same coin”. Were the “positioning-view” states that firm's activities must correspond to a specific market need, the “resource-based view” states that from resource-based perspective, the firm must have the capabilities not only to serve that market need, but to serve it more effectively or efficiently than other firms.

2.2 Competitive survival: the role of law firm managers and restraining factors

Section 2.1 has focused on competitive advantage. Section 2.2 will focus on competitive survival, the ability to continuously outperform competitors under changing market and industry conditions, and important restraining factors managers face here. Teece and Pisano stated: “What the firm can do and where it can go are rather constrained by its positions and paths. Its competitors are likewise constrained. Rents (profits) thus tend to flow not just from the asset structure of the firm and, as we shall see, the degree of its imitability, but also by the firm's ability to reconfigure and transform.” While superior resources and capabilities are more “efficient” in the sense that they enable a firm to produce more economically and / or better satisfy customers wants, there is no necessary connection between any advantage that a firm has and competitive survival.62

“SUCCES, LIKE FAILURE IS MULTIDIMENSIONAL”

62 David J. Teece; Gary Pisano; Amy Shuen, Dynamic capabilitites and Strategic Management, Strategic Management Journal, Vol. 18, No. 7. (Aug., 1997), pp. 509-533

Robert M. Grant, The resource-based theory of competitive advantage, Implications for Strategy Formulation, 2001

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Peter Drucker, described in 1958 the roles and responsibilities of management in order to achieve long term survival. He stated: "Success, like failure in business is multidimensional”.63 Success is multidimensional, in the sense that firm managers must define ‘survival objectives’. Their interrelation must be managed with hard objectives and measurements, to provide for survival. Drucker asked: "What are the survival needs of business enterprise? What in other words, does it have to be, to do, to achieve – to exist at all?” He states that the firm must supply its product or services, productively, economically, and efficiently (better than the market is able to). And the firm is designed to cope with a changing economy and changing technology. It therefore must not only adapt to change, it must “strive to innovate”. Then, a survival requirement of the enterprise is profitability. Thus, profit is a mean, not an end, adequate to the risks the enterprise assumes and creates in order to survive.

Drucker not only described important foundations for strategy formulation as discussed in section 2.1, he specifically emphasized the role of managers to achieve competitive survival. He claimed that managers have the responsibility to use profits for innovations, instead of focusing on short term profit-maximization. Hence, it is the attitude of managers, that is significantly influencing the firm’s ability to cope with change. While section 2.1 has discussed a profitable industry position and superior resources and capabilities at the core of building and sustaining competitive advantage, section 2.2 focusses on the role managers have in the continuous process of competitive survival, and restraining factors they face here. It discusses “dynamic capabilities”; the ability to reconfigure and transform in order to timely cope with changing markets and industries.64 As how Helfat and Peteraf describe: “Competitive advantage and disadvantage comes about over a period of time and also may shift over time. Therefore, in order to explain competitive advantage, the resource-based view must incorporate

63 Drucker, P. F. (1958). Business Objectives and Survival Needs: Notes on a Department of Business Enterprise, The Journal of Business, 31 (2), 81-90.

64 David J. Teece; Gary Pisano; Amy Shuen, Dynamic capabilities and Strategic Management, Strategic Management Journal, Vol. 18, No. 7. (Aug., 1997), pp. 509-533

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the evolution over time of the resources and capabilities that form the basis of competitive advantage”.65

Johannes Strikwerda referred to the concept of the firm being “in-control”, as the ability not only to create an efficient organization, and to adapt to operational changes, but most importantly the firm’s capability to transform the business model of the organization. The firm is in-control when it succeeds to continuously provide itself with essential resources, which it successfully exploits in order to achieve continuity.66

The previously discussed theories describe the nature of firms as the task to “survive” under conditions of (fundamentally) changing environments. Rather than learning how it can do better and more efficient where it is good in, these theories focus on the ability to respond on market changes by transforming the business model. To this end, firms must have the capability to re-conceptualize their vision of the economic logic of the firm.67

2.2.1 Dynamic capabilities

While Prahalad and Hamel focus on (sustained) competitive advantage (section 2.1), Teece and Pisano, focus on competitive advantage as a function of competitive survival. They specifically refer to dynamic capabilities as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments.”68 Teece and Pisano cite Lenorard-Barton (1992), who describes dynamic capabilities as

65 Constance E. Helfat and Margaret A. Peteraf, The dynamic – resource based view, Tuck School of Business at Dartmouth, Hanover, New Hampshire, U.S.A, 2003

66 J. Strikwerda, Bespiegelingen, Over governance, bestuur, management en organisatie in de 21ste eeuw, pag. 62-63, 2014

67 C.K. Prahalad, Richard A. Bettis, The dominant logic: A new linkage between diversity and performance, Strategic Management Journal, Volume 7, Issue 6, 1986 Pages 485–501

Clayton M. Christensen, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail, Harvard College, 1997, 2000

68 David J. Teece; Gary Pisano; Amy Shuen, Dynamic capabilities and Strategic Management, Strategic Management Journal, Vol. 18, No. 7. (Aug., 1997), pp. 509-533

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