biggest is best? strategic assumptions and actions in the canadian audit industry

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Biggest is Best? Strategic Assumptions and Actions in the Canadian Audit Industry Royston Greenwood David J. Cooper C. R. Hinings John L. Brown University of Alberta Abstract Thepaper examines the stated reasonsfor recent mergers between members of the (former) Big Eight accounting firms. The reasons are expressed in terms of hypotheses about the perceived advantages of very large size and the hypotheses are tested using 1986-9datafrom the top 1000 Canadian companies. Thefocus of the paper is thus on the link between perceptions, merger behaviour, and the history and trend of the audit industry. Rhumb Cet article examine les raisons invoqukespour les fusions rkcentes entre les membres ah (autrefois) grosses huit maisons de comptabilitk. Les rabons sont knonckes en termes hypothktiques ah avantages p erp & la grosseur; les hypoth2ses sont aaminkes utilisant les statbtiques & 1986-9 des 1000 plus grosses compagnies canadiennes. Cet article se concentre sur les liens entre lesperceptions, lafirsion conahite, l’histoireet les orientations de l’industrie de vkrification. Many firms appear to invest considerable energy in developing mission statements, strategic plans, and imple- mentation strategies. There are similar pressures for na- tions to think and act strategically. Individuals, organiza- tions and governments are urged to think proactively and entrepreneurially in a competitive world (Porter, 1980, 1990). Of course it is extremely difficult to demonstrate convincingly that such thinking is effective. However, some limited attention has been paid to the link between talkand action (Brunsson, 1982,1985,1989; March, 1989) and between espoused theories and theories in use (Argyris & Schon, 1974). This paper explores the relation between how managers in the accounting and audit industry in Canada talk about the strategic nature of mergers and the way that industry seems to operate. The growing maturity of the audit industry interna- tionally, and the removal of strictures against advertising, have made competition between accounting firms more vigorous (Wootton, Tonge, & Wolk, 1990). Furthermore, We gratefully acknowledge the financial support of the Social Science and Humanities Research Council, the J.D. Muir Fund, and the Francis Winspear Fellowship Fund of the Faculty of Business, University of Alberta. Theauthorsalso thank theeditor andthreeanonymous reviewers for their comments. Address all correspondence to Royston Greenwood, Centre for Profes- sional Service Firm Management, Faculty of Business, University of Alberta, Edmonton, AB, Canada, T6G 2R6. 8 ASAC 1993 308 the belief that clients are willing to switch auditors has put additional pressure on accountingfirms to represent them- selves competitively (Cypert, 1991). As Russell Palmer, formerly CEO of Touche Ross International, noted: The maturation of the professional ... can be seen in fierce pricecompetition that, not long ago, would have been considered undignified. The fighting is almost hand-to-hand between firms that, trying to secure footholds in companies, offer to conduct audits at the lowest passible cast.. . . (1989, p. 85) A basic strategic response of the larger accounting firms to tighteningcompetitionhas been pursuit ofgrowth via merger in order to secure the perceived advantages of large size. Mergers, of course, are not new to the account- ing world. Almost all of the industry leaders - the exceptionis Arthur Anderson -evolved through mergers in order to establish broad geographical coverage and a depth of technical capability (Penny, 1961;Wootten et al., 1990). A significant difference between the mergers that occurred in the late 198Os, however, and those more typical of earlier years, is that the earlier mergers tended to involve one of the largest accounting firms and one or more regional or local firms. The more recent mergers, in contrast, have been “mega mergers” (Cypert, 1991) i.e., between firms within the (then) Big Eight. Revue canadienne des sciences de I’administration Canadian Journal of Administrative Sciences - 10 (4), 308-321

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Biggest is Best? Strategic Assumptions and Actions in the Canadian Audit Industry Royston Greenwood David J. Cooper C. R. Hinings John L. Brown University of Alberta

Abstract The paper examines the stated reasons for recent mergers between members of the (former) Big Eight accounting firms. The reasons are expressed in terms of hypotheses about the perceived advantages of very large size and the hypotheses are tested using 1986-9 data from the top 1000 Canadian companies. The focus of the paper is thus on the link between perceptions, merger behaviour, and the history and trend of the audit industry.

Rhumb Cet article examine les raisons invoqukespour les fusions rkcentes entre les membres ah (autrefois) grosses huit maisons de comptabilitk. Les rabons sont knonckes en termes hypothktiques ah avantages p e r p & la grosseur; les hypoth2ses sont aaminkes utilisant les statbtiques & 1986-9 des 1000 plus grosses compagnies canadiennes. Cet article se concentre sur les liens entre lesperceptions, la firsion conahite, l’histoire et les orientations de l’industrie de vkrification.

Many firms appear to invest considerable energy in developing mission statements, strategic plans, and imple- mentation strategies. There are similar pressures for na- tions to think and act strategically. Individuals, organiza- tions and governments are urged to think proactively and entrepreneurially in a competitive world (Porter, 1980, 1990). Of course it is extremely difficult to demonstrate convincingly that such thinking is effective. However, some limited attention has been paid to the link between talkand action (Brunsson, 1982,1985,1989; March, 1989) and between espoused theories and theories in use (Argyris & Schon, 1974). This paper explores the relation between how managers in the accounting and audit industry in Canada talk about the strategic nature of mergers and the way that industry seems to operate.

The growing maturity of the audit industry interna- tionally, and the removal of strictures against advertising, have made competition between accounting firms more vigorous (Wootton, Tonge, & Wolk, 1990). Furthermore,

We gratefully acknowledge the financial support of the Social Science and Humanities Research Council, the J.D. Muir Fund, and the Francis Winspear Fellowship Fund of the Faculty of Business, University of Alberta. Theauthorsalso thank theeditor andthreeanonymous reviewers for their comments. Address all correspondence to Royston Greenwood, Centre for Profes- sional Service Firm Management, Faculty of Business, University of Alberta, Edmonton, AB, Canada, T6G 2R6.

8 ASAC 1993 308

the belief that clients are willing to switch auditors has put additional pressure on accounting firms to represent them- selves competitively (Cypert, 1991). As Russell Palmer, formerly CEO of Touche Ross International, noted:

The maturation of the professional ... can be seen in fierce pricecompetition that, not long ago, would have been considered undignified. The fighting is almost hand-to-hand between firms that, trying to secure footholds in companies, offer to conduct audits at the lowest passible cast.. . . (1989, p. 85)

A basic strategic response of the larger accounting firms to tighteningcompetition has been pursuit ofgrowth via merger in order to secure the perceived advantages of large size. Mergers, of course, are not new to the account- ing world. Almost all of the industry leaders - the exception is Arthur Anderson -evolved through mergers in order to establish broad geographical coverage and a depth of technical capability (Penny, 1961; Wootten et al., 1990). A significant difference between the mergers that occurred in the late 198Os, however, and those more typical of earlier years, is that the earlier mergers tended to involve one of the largest accounting firms and one or more regional or local firms. The more recent mergers, in contrast, have been “mega mergers” (Cypert, 1991) i.e., between firms within the (then) Big Eight.

Revue canadienne des sciences de I’administration Canadian Journal of Administrative Sciences

- 10 (4), 308-321

BIGGEST IS BEST?. . . GREENWOOD, COOPER, HININGS, & BROWN

The impact of the recent mergers is illustrated in Table 1, which gives the change in size and industry ranking of the larger firms from 1987 to 1990, using worldwide revenues. Table 2 gives similar data for Canada, which is the basis of the empirical work presented in the body of the paper. It shows that Thome, Ernst and WhiMey, itself a product of a mega-merger a few years previously, merged with Peat Marwick Mitchell to form the largest accounting and audit firm in Canada in 1990. Similarly, the second largest firm was the result of a mega-merger between Touche Ross and the recently combined Deloitte Samson.

The recent mergers have implications for the struc- ture of supply of audit and accounting services and, possibly, for their quality and price. It is unsurprising, therefore, that these issues have been the focus of recent studies (e.g., Minyard & Tabor, 1991). The focus of the paper, however, is different to the economist’s concern with the structure or concentration of supply within an industry (e.g., Danos & Eichenseher, 1986; Zind & Zkghal, 1989) or with price and quality outcomes (e.g., DeAngelo, 1981; Simunic, 1980). Our focus is upon managerial beliefs and assumptions about the existing and evolving

Table 1 Impact of Mergers upon Rank Order (By World-wide Revenues) ofAccounting Firms: 1987 and 1990

Firm

Rank by revenue Revenues (‘90) (billions) Firm

Rank by revenues Revenues

(billions) (‘87)

KPMG Peat Marwick 1 5.400 KPMG Peat Marwick 1 3.250 Ernst & Young 2 5.006 Deloitte - Touche 3 4.200 Arthur Anderson 4 4.160 Arthur Anderson 2 2.315 Coopers & Lybrand 5 4.100 Coopers & Lybrand 3 1.998 Price Waterhouse 6 2.900 Price Waterhouse 4 1.804

Ernst&Whinney . 5 1.778 Arthur Young 1 6 1.702

1.500 Deloitte, Haskins & Sells .. 7 Touche Ross 1 8 1.450

* Merged to become Ernst & Young. ** Merged to become Deloitte - Touche. Source: Public Accounfing Repori, February 15, 1991; March 15, 1988.

Table 2 Impact of Mergers Upon Rank Order (By Canadian Revenues) of Accounting “Big SidBig Eight” Firms: 1987 and 7990

Firm

Rank by revenue Revenues (‘90) (billions) Firm

Rank by revenues Revenues

(‘87) (billions)

KPMG Peat Marwick, Thorne 1 533.689 Deloitte - Touche 2 412.000 Ernst & Young 3 300.000 Clarkson Gordon* 2 217.0 Price Waterhouse 4 246.800 Price Waterhouse 6 146.0 Coopers & Lybrand 5 227.500 Coopers & Lybrand 5 170.6 Arthur Anderson 6 121.000 Arthur Anderson 8 50.9

Deloitte Samson* * * 3 176.6 Touche Ross* * * 4 175.0 Peat Marwick Mitchell** 7 135.0

Thorne, Ernst & Whinney** 1 250.0

* Clarkson Gordon renamed Ernst & Young. **Merged to become Peat Marwick Thorne. ***Merged to become Deloitte-Touche. Source: The Bottom Line, April, 1989; April, 1991.

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BIGGEST IS BEST?.. . GREENWOOD, COOPER, HININGS, & BROWN

relationship between firm size, market share, and market growth. Such assumptions precede and influence the decision to merge, which in turn create the structure of

That is, we are concerned about the managerial motivations and assumptions underpinning the strategic decision of whether, and with whom, to merge. We identify stated beliefs about why mergers are advanta- geous and examine how far those beliefs are supported by the actual structure of the audit industry. We are interested in the extent to which the rationales of senior managers link to the history and trends of the industry. Linking behaviour to historic trends can be regarded as an attempt to explore the connection between action and intentions; how managers rationalise and attempt to legitimise their behaviour. Rather than impute the motives for mergers, as is common in most of the economics literature, we exam- ine managerial discourse about the strategic logic of the mergers (both consumated and abortive).

The paper has four sections. The first establishes the motivations for the recent mergers. The information presented comes from a combination of sources. Thirty interviews (each lasting 11/2 - 2 hours) were conducted in the Canadian national offices of six of the former Big Eight partnerships. Zind and ZCghal(l989) argue that it is more appropriate to refer to the Big Seven in Canada, since Arthur Andersen does not seem to operate in the same submarket as the others. While this may be impor- tant for studies of industry concentration, we include Arthur Andersen in our study as they share many of the strategic, particularly international, orientations of the other multinational accounting firms. For reasons of confidentiality, the names of these firms and of the offic- ers interviewed cannot be given. The firms examined also provided access to confidential documents relating to the mergers (or contemplated mergers, in some instances). We basically used these confidential sources to alert us to the espoused reasoning behind the mega-mergers. In this paper we generally use a third source, the lengthy reports on the major mergers which appear in the professional literature, to exemplify the motivations of the architects of these mergers.

The second section of the paper outlines our methods and explains our focus on disproportionate market share. In the third section we present the results and thereby explore the link between the managerial assumptions established in section one, and the structure and recent dynamics of the audit industry. In effect, we examine the validity of managerial discourses about the strategic ben- efits of mega-mergers. The paper concludes witha discus- sion of the results and presents some directions for future research.

supply.

Motivations To Merge

The strategic decision to merge rests upon the percep- tion that large size offers competitive advantages. In one sense, the advantages of size have been for some years distinctive of the larger international firms. That is, being a member of the (former) Big Eight was regarded as a major competitive advantage over smaller, though still significant firms. However, of central importance to thepresentpaper, the recent mergers reveal a belief that being one of the Big Eight or Big Six is no longer sufficient: Equally important is afirm’s ranking within the elite group. Recent mergers were clearly not regarded primarily as a means of securing market share at the expense of non-Big Eight firms (al- though such gains are anticipated), but as a means of gaining from other (smaller) members of the (then) Big Eight. In effect, the intriguing twist of recent years has been the emergence of an assumption that being “number 1”is better than being number 4, which is better than number 8, and so on. Big is good, but biggest is best, became the core assumption behind the mega-mergers.

Advantages of Size

The supposed advantages of size, as perceived from within the accounting industry, are several. The first advan- tage is that the largest companies overwhelmingly seek the imprimatur of a Big Eight auditor. This is encouraged by banks, stock markets, and other suppliers of capital, While this would not explain the logic of the mega-mergers, being one of the biggest is consistently seen as important in order to capture increased market share, particularly in the mature audit industry. In competitive tendering situations, auditors believe that it is only the very largest firms, or the market specialists (a point we turn to below) who are invited to submit proposals for large assignments:

If you are number 1 you will be automatically asked to bid for an audit engagement. If you are smaller, it is less certain. Being big, in other words, helps the marketing presence and provides access to the important potential clients (Interview, national partner).

A second advantage is the opportunity to use size to defray across a large base of revenue-generating employees, the costs of managerial overheads, suchas marketing expenses, human resource management expenses (including the vital tasks of recruitment, professional training and research and development), investment in computer technology, and litigation expenses. John Palmer, National Executive Part- ner of Thorne, Ernst & WhiMey, announced that large size

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BIGGEST IS BEST?. . . GREENWOOD, COOPER, HININGS, & BROWN

would provide his firm with “a larger revenue base to support investments in new services and technology” (Jeffrey, 1989, p. 1). Such economies of scale enable the large firms to be price competitive, an advantage widely acknowledged to underpin the recent mergers, since, “be- yondthepress releases, it’s clearthat the mergers are driven by a pressing need to cut costs as competition for clients heats up” (Business Week, 1989, p- 3).

Porter (1980) has suggested that competing through price is only one of several possible strategies, and differ- entiation is a salient alternative. It is difficult, however, for accounting firms to compete by differentiating the audit service per se. Although Simunic (1980) found a small but significant “Price Waterhouse effect” in the U.S., the majority of clients do not perceive differences in .audit products that provide a competitive advantage to individual firms or for which payment of a premium is warranted. Palmer (1989) stresses the point that “in the eyes ofclients, an audit is an audit, and often little or no added value is perceived in choosing one firm or another” (p. 85). How- ever, accounting firms do have specialised capabilities in related areas - e.g., taxation, financial advisory services, and management consultancy - that complement the audit service and help the large accounting firm promote its distinctive competence. Large size, in other words, is believed to enable the accounting firm to differentiate its service by virtue of the capabilities and expertise of the ancillary services which can be “cross sold” to the client.

A rather different form of differentiation arises from the specialisation which the large firm can afford inparticu- lar industries, a capability increasingly demanded by cli- ents:

When making a competitive proposal, the thing that often wins is your ability in a specific industry; and it’s difficult to have that if you don’t have size and geo- graphic range (Meikle, 1988, p. 14).

Meikle, Chairman and CEO of Deloitte Haskins & Sells in Canada, prior to the merger with Touche Ross, is here suggesting that because clients are demanding more industry-specific know-how, accounting firms are increas- ingly pursuing a strategy of specialisation (i.e., product differentiation by industry) which is possible primarily through realisation of economies of scale. Alan Dilworth, Chairman of Touche Ross, Canada, justified the merger with DH&S in terms of the need to improve client service through specialisation: “We need more specialisation and greater people and cash resources to compete” (Ferguson, 1989, p. Dl).

Specialisation by industry is regarded as more feasible if the firm is large. A critical mass of specialisation in an important industry can be developed only by a very large firm. Each of the Big Eight claimed to practise industry

31 1

specialisation, but being mega-large was seen as allowing a firm to specialise in a broader range of industries, i.e., the firm cansecure economies of scope. Bob Turnbull, former Chairman of Thorne, Ernst & Whinney, stated the advan- tage ofthe Thorne Riddell-Ernst & Whinney merger injust these terms:

the new organization will allow us to provide our now more than 40,000 clients with an even broader range of services and expertise from 53 locationsacross Canada. The synergistic effect of our two firms will be tremen- dous (Turnbull, 1986, p. 1).

The desire to develop industry specialisation, which, it is argued, can be achieved only by obtaining large size, is based on the assumption that the market for audit and accounting services is no longer generic, but differentiated into industry-based niches or segments. To capture market leadership in any markethndustry niche requires a special- ised capability.

A final advantage of size is the ability to service clients’ overseas interests and operations. This argument is not new and is attributed by some as the dynamic underlying the growth of the modern accounting firm (Cypert, 1991; Penney, 1961). Accounting firms are re- peatedly stressing the growing internationalisation of busi- ness and the necessity of accounting firms to follow suit. Being large is associated with tight and extensive interna- tional coverage (Daniels et al., 1989). Although it is possible that Canadian merger activity is little more than a consequence of international trends in the audit market, the international agreements of most of the multinational ac- counting firms allow for considerable national autonomy. For example, Clarkson Gordon became the Canadian part- ner in Ernst and Young, not Thorne Ernst and Whinney (which merged with KPMG Peat Marwick). The mergers between Deloitte Samson and Touche Ross and between Arthur Young and Ernst & Whinney, were justified partly in terms of the ability to serve international clients better (Greising & Nathans, 1989; Strauss, 1989). Thus, Richard Murray, executive director of Touche Ross International, commented in the Wall Street Journal:

A strong motive for merger among Big Eight firms these days is the need to cure weaknesses in interna- tional market penetration (May 19, 1989, p. B 2 ).

So, too, was theearliercreationofThome Ernst& Whinney:

International strength is increasingly important ... To serve its clients effectively, wherever their operations are located, any major CA firm must be able to draw uponastrongnetworkofassociatedprofessionalsaround the globe (Thorne, Ernst & Whinney, 1986, p. 1).

Revue canadienne des sciences de I’administration Canadian Journal of Administrative Sciences

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BIGGEST IS BEST?. . .

Niche domination

GREENWOOD, COOPER, HININGS, & BROWN

Market domination

We are not suggesting that size is pursued for its own sake, Rather, being the biggest is believed to increase market visibility, and support a strategy of price competi- tiveness plus product/service differentiation. Such a strategy is expected to lead to a disproportionate increase in market share.

Disproportionate Market Share and Market Leadership and B r e d h

The concept of disproportionate market share is that if a firm (for example) doubles in size (in the present case, doubles its professional complement) it will more than double its market share. That is, the beliefunderlying the recent mergers within the former Big Eight is not that a bigger firm obtains more clients, but that a bigger firm acquires disproportionately more clients by using the advantages of its larger size.

Underlying the above perceptions about the advan- tages of especially large size are two dimensions of the strategic positioning of accounting firms in relation to the market. The first dimension is market leadership, which concerns the attainment ofa disproportionately high share of clients and business in particular market segments. The second dimension is market breadth, in which a firm seeks a significant presence (i.e., a presence at least proportionate to its workforce) across many or all market sectors. The two dimensions are combined in Figure 1.

Figure 1. Strategic Positioning of Firms

High

E a 3 - c. e,

2 LOW

r:

Market breadth

LOW High

Diffuse 1 pe1;:ion 1 penetration

Four market S C ~ M ~ ~ O S are given in Figure 1. If a firm successfully achieves market leadership across most or many market sectors, it effectively combines leadership and breadth to achieve market domination. High market leadership in a small number of market sectors, however, combined withdisproportionately low market presence in other markets, gives niche domination. Widespread mar- ket share across many sectors but without market leader-

ship in any of them gives diffuse penetration. Failure to obtaineithermarket leadership inany sectors and apropor- tionate share of the work across most industries, suggests weak penetration.

In terms of the arguments advanced above, the mega- mergers were perceived as means of achieving market domination. Mega-size was expected to promote market leadership in many market sectors plus proportionate mar- ket presence in all market sectors. This logic may be expressed in the form of three hypotheses:

Hypothesis I : Larger accounting firms will gain a disproportionate market share relative to their size.

This hypothesis is crucial, as it reflects the argument that biggest is best. As it stands, it says nothing either about the source of advantage or the time period over which the shift will occur. Greater market share might be in the form of marginal improvements across all industry sectors, or by concentrated but significant gains in specific niches. The following hypotheses direct attention to the source of market advantage:

Hyporhesk 2 : Larger accounting firms will secure market leadership in specific market segments.

Hypothesis 3 : Larger accounting firms will secure market leadership in specific market segments combined with high market breadth (is., proportionate shares across industry sectors where leadership is not obtained).

The three hypotheses cover the supposed advantages of size, with the exception of the ability to service clients’ overseas interests, which is not covered in the present paper. The hypotheses are complementary but independ- ent. Thus, hypothesis 2 may be valid even if hypothesis 1 is not supported. Hypothesis 1 may be supported but not hypothesis 3. However, if hypothesis 3 is supported, then hypothesis 1 is also supported. In the assumptions and perceptions of senior players in the accounting world, however, all three hypotheses are believed to be valid. Size in the present paper is measured by number of professional staff. Use of number of employees as the index of size is well established in the organizational literature (e.g., Pugh et al., 1968; see, in particular, Child, 1973), but is particu- larly appropriate in accounting firms, which are labour- intensive and whose revenues are conditional upon leveraging economies from expensive professionals (Maister, 1982). Data on employees and accounting firm clients is based on the self reports of audit firms, as reported by the Canadian Report on Business 1000.

Before proceeding with the tests of the hypotheses we should stress that we have thus far presented the explana- tions for mergers in terms of market trends and opportuni-

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BIGGEST IS BEST?. . . GREENWOOD, COOPER, HININGS, & BROWN

ties. Ina moment we examine whether the assumed market trends can be detected in data about the industry over a four year period. Before doing so it is worth noting an altema- tive perspective on merger activity, prompted by the institutional analysis of mimetic action (DiMaggio & Powell, 1983). The initial (but aborted) merger talks be- tween Price Waterhouse and both Arthur Anderson and Deloitte Haskins &Sells may have created a convulsion of mimetic activity within the Big Eight, as each firm became concerned that it would be outflanked by mergers between other firms. Each of the Big Eight began contemplating possible mergers with each of the others. The mergers that occurred may then be seen as a reaction to the perceived threat of other mergers. One partner in a national office described i t to us as the “lemmingeffect.”Thisperspective does not undermine the logic in the above hypotheses in that if you are going to merge then there are advantages to disproportionate size and market share. It does suggest, however, that the mergers that have occurred may have been less deliberate and carefully analyzed than the initial, aborted ones. Talk of strategy, especially after the merg- ers, is connected to logics ofjustification and legitimation. We return to this argument in the conclusion.

Methods

The supposed market advantages of very large size andmarketsharewere tested usingdatafrom the Canadian Report on Business I000 (ROB lO00). The companies in the ROB 1000 are the largest corporations listed on Cana- dian stock exchanges, by assets, and are ranked by after- tax profit, excluding extraordinary gains and losses. Be- cause they are the largest firms in the country, they are particularly sought after as clients by the major accounting firms.

A limitation of our study is that our findings relate only to the success of accounting firms in getting ROB 1OOOclients. This ignores strategies based on clients in the public and not-for-profit sectors and implies that all ROB lo00 clients are equally regarded by accounting firms. We feeljustified inrestnctingour analysis to the ROB 1000for two reasons. First, our study is of the stated assumptions of managers and the extent to which they appearvalid. There is little doubt that the Big Eight treat the ROB 1000 as the critical testingground of their firm’s performance. It is the accounts of these firms that the mega-mergers are intended to capture. The second reason is pragmatic: We do not have access to data about firms outside the ROB 1000.

The analysis of who audits whom, and the ranking of accounting firms, is based on 1989 data. It therefore relates to the situation immediately prior to the mergers that created Peat Marwick Thorne and Deloitte-Touche, and the renaming of Clarkson Gordon as Ernst and Young.

It does not matter for present purposes, however, that the analysis is of the Big Eight rather than the Big Six, because the supposed benefits of size presumably existed in the pre- merger era. Indeed, our interviews with national partners indicated that the mergers were regarded as a response to trends already evident within the industry.

Market share is measured first by the number of clients from the ROB 1000. Where a company uses two auditors, each firm is credited with the client. As a result, the total number of possible clients in the ROB lo00 is 1024.

Numbers of clients does not fully indicate whether the larger companies have a disproportionate market share. As noted above, the strategy of using size to generate market share is based on the assumption that an increase in size (number of professionals) by (say) 20% will lead to a greater than 20% increase in clients. Relative market share for this purpose, therefore, is defined as the difference between (a) the percentage of all Big Eight employees in a given accounting firm (an index of a firm’s share of the professional workforce), and (b) the percentage of all of the Big Eight’s 1000 clients audited by the firm. For example, suppose that there are three accounting firms as follows:

Firm Firm Firm Total A B C

Total Market (a) % of professionals 50% 40% 10% 100 (b) % of clients 70% 30% 0% 100 (c) Relative total market

share (i.e., (a) minus (b)) +20 -10 -10 0

Market Share in Industry X

(e) Relative market share (d) % of clients 35% 45% 20% 100

in Industry X -15 t 5 +10 0

In this case, viewing column (c), Firm A has achieved a disproportionate total market share relative to Firms Band c..

Industry specialisation is revealed by the extent to which a firm’s market share within a given industry is higher than the firm’s share of the total professional workforce. For example, Firm A has achieved a market share of 35% in industry X, significantly below what one would expect for a firm of that size. Firm B, on the other hand, has a market share of 45% in industry X, despite having only 40% of the workforce. This suggests that, for this industry sector, industry specialisation is occurring in Firm B (and Firm C), but not in the larger Firm A.

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relative to firm size. lhorne Ernst & Whinney em- ployed 17.9% of the workforceand had 19.1% of the ROB 1000market. Clarkson Gordonemployed 15.2% of the workforce and had 16.5% of the market.

Results

Hypothesis 1

the twosmallest firms had disproportionately smaller market shares. Peat Marwickemployed 11.0% of the workforce and had 9.5% of the market. Arthur Anderson employed 6.3% of the workforce and had 3.9% of the market.

Hypothesis 1 proposed that larger accounting firms (those at the top rather than the bottom of the Big Eight) would have disproportionately large market shares. How far the hypothesis is correct is indicated in Table 3, which shows the size of accounting firms and market shares. Although the table provides a static picture only (we will move to trend data shortly), it provides descriptive data about the Big Eight in Canada in 1989 and shows their market shares in different segments (by size) of the ROB 1000. If the hypothesis were correct, the larger firms would have market shares somewhat greater than their share of the professional workforce. The reverse would hold true for smaller €irms. In this analysis, we assumed that each firm had approximately the same mix of workforce, that is, that the workforce was of equal average quality.

In fact, there was no simple relationship between market share and workforce sue. At the very top and bottom ends of the Big Eight list, the hypothesis was supported, in that:

These statistics modestly supported the hypothesis, The position of the intermediate accounting firms was ambigu- ous. Thus:

DeloitteSamson(ranked3)and ToucheRoss(ranked 4) each had disproportionately low market shares. Deloitte Samson, with 13.5% of the workforce, had 9.7% of the market. Touche Ross, with 12.9% of the workforce, had 11.0% of the market.

In contrast, both Coopers & Lybrand (with 11.8% of the workforce) and Price Waterhouse (11.4% of the workforce) had disproportionately high market shares (16.2% and 14.1%, respectively).

From this discussion, which points to the non-linear nature of the relation between size and market share, it is the two largest firmshadslightly larger market shares,

~~ ~~ ~ ~~ ~

Table 3 Market Share of the Big-Eight Accounting Firms, Adjusted for Firm Size, 1989

(1) (2) (3) (4) (5) (6) Relative market share

No. of Workforce Number of clients (%) Market share (column 3 minus 5) Accounting professionals share Top 201- 501-ROB Top 201- 501- ROB Top 201- 501- ROB firm (000s) (%ofX) 200 500 1000 1000 200 500 1000 lo00 200 500 loo0 lo00

(%) (%> (%) (%>

1. Thorne, Ernst & Whinney

2. Clarkson Gordon 3. Deloitte Samson 4. Touche Ross 5. Coopers &

Lybrand 6. Price

Waterhouse 7. Peat Marwick

Mitchell 8. Arthur Anderson

3,035 2,569 2,288 2,180

(17.9) (15.2) (13.5) (12.9)

30 44 84 158 44 45 48 137 12 23 45 80 35 27 29 91

(14.4) (17.7) (22.5) (19.1) (21.1) (18.1) (12.9) (16.5) ( 5.7) ( 9.2) (12.1) ( 9.7) (16.8) (10.9) ( 7.8) (11.0)

-3.5 -2 4.6 1.2 6.0 2.9 -2.3 1.3

-7.8 -4.3 -1.4 -3.8 3.9 -2.0 -5.1 -1.9

1,991 (11.8) 24 41 69 134 (11.5) (16.5) (18.5) (16.2) -.3 4.7 6.7 4.4

1,928 (11.4) 42 34 41 117 (20.1) (13.7) (11.0) (14.1) 8.7 2.3 -.6 2.7

1,857 1,067

(11.0) ( 6.3)

12 29 38 79 9 5 19 33

( 5.8) (11.7) (10.2) ( 9.5) ( 4.3) ( 2.0) ( 5.1) ( 3.9)

-5.2 .7 -3 -1.5 -2.0 -4.3 -1.2 -2.4

All 16,915 = x

(100.0) 208 248 373 829 (100.0)(100.0)( lOo.O)(l00.0) 0 0 0 0

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BIGGEST IS BEST?. . . GREENWOOD, COOPER, HININGS, & BROWN

unsurprising that the rank order coefficient between these two variables was 0.095. There is thus no simple link between a firm’s share of the professional workforce and its share of the ROB 1000 audit business. Examination of column 6 of Table 3 indicates the complex pattern. While the rank order correlation between size of accounting firm and relative market share for the entire ROB 1000 is only 0.214, the correlation is 0.8 for clients in the 201-500 range of the ROB 1000.

From a strategic management perspective, therefore, there is little support for the pursuit of additional size as an essential prerequisite for effective market performance. Such decisions, however, are not prepared on the basis of a single year’s ranking of relative firm performance: of equal and perhaps greater significance may be the trend in market share. Trends are likely to be more noticeable by firms, and thus Table 4 focuses on the movement of clients over the four year period, 1986-89. It is important to recognize that the number of accounts that changed is based on the 1989 ROB 1000. That is, we identified whether companies in the ROB 1000 for 1989 had changed auditors since financial year 1986. Clearly, the companies in the ROB 1000 in 1989 were not necessarily in the 1986 list. We chose 1986 as a starting point, since prior to that time there had been mergers (to create Thorne, Ernst and Whinney and Deloitte Samson) which would seriously affect the data on auditor changes. We suspected that the periodafter 1986wouldexhibit higherthannormalswitches because of the prior mergers.

Before analyzing that table, it is important to note that the late 1980s exhibited relative stability (most accounts did not change) rather than movement and change within the audit industry, although client threat of switching may have been quite real to accounting firms. Between 1986- 89 a total of 229 accounts switched firms, i.e., an average of approximately 7% per year. As far as the Big Eight were

concerned, the extent of switches was even less. Over the three years there were only 141 auditor changes between these firms, and they gained 44 clients from non-Big Eight firms (and lost 22 to them).

The important issue for present purposes is whether the higher ranked Big Eight firms benefited from their size by capturing net gains in market share, especially from the other members of the Big Eight. Table 4gives the direction and incidence of account gains and losses. The main feature is that over the three year period, five of the eight firms registered net gains in market share; of these five firms, the largest gain was by the largest firm, which captured 20 (54%) of the 37 gains. Being the biggest seems to have worked for Thorne, Ernst and Whinney during the late 1980s. Further analysis of Table 4 shows that Thome, Ernst and Whinney’s net increase of 16 represented 69% of the net increases. The second largest increase was only 7 accounts, by Arthur Anderson (of which five involved other Big Eight Firms). The net gains of Touche Ross (5) and Coopers and Lybrand (3), shown in Table 4, were largely from non-Big Eight firms.

Table 4 indicates that there was no simple relationship between ranking in the Big Eight and market share or market gain. It was possible to have a disproportionately large market share (as in the case of Coopers & Lybrand and Price Waterhouse), without being at the head of the ranking. However, the very largest firm did have a dispor- portionate market share and was accumulating its market share ata fasterrate thanany other firm. This suggests that rankingperse was not a competitive advantage (e.g., being number 3 was not better than being number 5 ) but that being number 1 (or perhaps 2) provided an emerging competitive edge. This condition was most evident in the few instances where the switching of auditors occurred. Only in this highly qualified sense is hypothesis 1 sup- ported.

Table 4 Direction of Accounts Gained and Lost: 1986- 1989

To 1 2 3 4 5 6 7 8 Non-Big Losses to Gains from Net From TEW CG DS TK C&L PW PMM AA Fight smaller larger smaller larger change

1. Thorne, Ernst & Whinney

2. Clarkson Gordon 3. Deloitte Samson 4. Touche Koss

Lybrand 6. Price Waterhouse 7. Peat Marwick

Mitchell 8. Arthur Anderson

5. coopers &

Non-Big Eight

* 4 4 1 5 0 3 1 2 8 2 2 1 5 0 1 4 5 4 * 3 2 2 1 2 1 4 3 1 * 3 0 1 1 5

*

6 5 2 4 * 3 4 1 5 9 0 2 0 2 + 2 3 5

2 2 2 2 6 0 * 0 0 0 2 0 2 0 0 0 0 *

6 3 3 9 1 4 2 5 2 22

20 15 11 10

13 10

0 0

na

8 9 8

17 13

14 4

na

40 19 10 17

22 2

5 2

na

-- +20 4 0 6 -4 6 +5

11 +3 10 -11

11 +2 9 +7

na na

315

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BIGGEST IS BEST?. . . GREENWOOD, COOPER, HININGS, & BROWN

Hypothesis 2

Table 5 gives the market share for each of the eight accounting firms, within each industry. The “market size” column indicates the number of ROB loo0 companies withineach industry. Not included areindustries where the number of companies is less than 20, such as agriculture, forestry, and fishing. The second column, Big 8 market share, shows how far the large firms dominate each indus- try sector.

There was considerable variation in the market portfo- lios of each firm. For example, Price Waterhouse had market shares ranging from 0% (the retail industry) to 30% (transportation, communications, electricity, gas and sani- tary services) and Touche Ross had market shares ranging from 3.9% (metal mining) to 14.8% (industrial and com- mercial machinery). Such statistics provide prima facie evidence that firms were more successful in some indus- tries than others, and suggests that industry specialisation had occurred. The chi-square test (302.48; p= 0.OOOl) confirms the obvious, that it is extremely unlikely that the share held of each industry by individual accounting firms was due to chance. The hypothesis, however, is that the larger a firm becomes, the more successful it will become in practising industry specialisation. Put another way, being towards the “top” of the Big Eight ranking should enable a firm to use its specialised industry capabilities to dominate specific industries and gain market leadership.

Dominationis defined inthree ways: first, by whether a firm is the leader in the industry (i.e., has the largest market share); second, by the scale of the market lead (the difference betweenits share and that of the largest competi- tor); third, by whether the firm has a market share dispro- portionately high relative to the size of its professional workforce.

The relevant data are given in Tables 6 and 7. Table 6 reveals that the two largest firms - Thorne, Ernst & Whinney and Clarkson Gordon are market leaders inseven of the thirteen industry categories, including the three largest industries (metal mining; oil and gas extraction; finance, insurance, and real estate). Smaller firms have strength in fewer and smaller industries (except Coopers & Lybrand, which is a leader in four industries, including the large metal mining industry).

The extent to which the larger firms were able to capture disproportionate market shares is indicated by comparing their shares of the workforce with the market shares in the industries in which they were the market leaders (see Table 7). For the hypothesis to be supported, the market share would have to be higher than the workforce share. Unsurprisingly, the chi-square test indicates that the variationin the share of the workforce in each industry was unlikely to be due tochance (334.2;p= 0.OOOl). The figures seem to support the hypothesis: In the majority of cases,

market leadership has led to a market share above that of workforce share. We are led to conclude, therefore, that larger accounting firms tend to be market leaders in (a) more industries, (b) larger industries, and (c) to an extent beyond that which would be expectedfrom the size of their workforce. This conclusion relies on the assumption that there are no other systematic variations across the large accounting firms (e.g., relating to quality of management or workforce). The beliefs of the architects of the mega- mergers seem to correspond to the situation in Canada in 1989. However, the pattern is not without exceptions. One firm in particular, Coopers & Lybrand, stands out as an exception to the pattern. The evidence would suggest, in other words, that the hypothesis was generally supported (very large size tends to enable a firm to capture market leadership in a range of industries) but it is still possible for medium-ranked firms to practise industry specialisation successfully and gain selective market leadership.

Hypothesis 3

The logic of hypothesis 3 is that larger firms will be able to practise industry specialisation across a wider range of industries than will smaller competitors. Furthermore, they should be able to develop specialisations without sacrificing a level of proficiency in other industries. In other words, the very large accounting firm will be able to develop significant market leadership in a spread of indus- tries combined with a significant presence in all other industries. Smaller firms, in contrast, will find it difficult to achieve market leadership in as many industries, or to achieve a combination of leadership in some industries whilst retaining a proportionate or reasonable presence in others.

Table 7 shows for each firm the average market share and the degree of variation across the industry sectors. For the hypothesis to be supported, the larger firms should exhibit the combination ofa high average market share and a low coefficient of variation. The results in Table 7 are in the predicted direction and support the hypothesis. That is, larger firms were better able to develop market leadership across a broader range of industries without sacrificing undue market presence in industries where a specialised capability had not been compiled. The rank-order coeffi- cient between a firm’s relative size and the coefficient of variation of its market shares was -0.874, significant at the .05 level. The bigger the accounting firm, the more likely that it has similar market shares across industries. Smaller firms tend to operate in niches.

316

Revue canadienne des sciences de I’administration Canadian Journal of Administrative Sciences

- 10 (4), 308-321

Tabl

e 5

Mar

ket S

hare

of S

elec

tive

Indu

stry

Sec

tors

: 19

89

E

SIC

In

dust

ry

code

se

ctor

(4

@)

RO

B lo

o0 m

arke

t sha

re b

y fir

rns (

% o

f col

. (a)

) B

ig 8

m

arke

t M

arke

t sh

are

size

* N

o.

(%)

TEW

C

G

DS

TR

C&

L PW

PM

M

AA

Avg

.

B.

10

Met

alm

inin

g 15

2 12

0 (7

9)

19.7

11

.8

7.2

3.9

19.7

9.

2 3.

9 3.

9 9.

9 13

O

il an

d ga

s ext

ract

ion

132

118

(89)

21

.2

12.1

6.

8 4.

5 16

.7

15.1

9.

1 3.

8 11

.2

D.

20

Food

and

kin

dred

pro

duct

s 26

24

(9

2)

15.4

15

.4

3.8

7.6

19.2

26

.9

'3.8

0

11.5

24

Lu

mbe

r, w

ood

prod

ucts

, exc

. fu

rnitu

re

20

12

(61)

25

.0

0 10

.0

10.0

0.

5 15

.0

0 0.

5 7.

6 33

Pr

imar

y m

etal

s 22

20

(9

1)

18.1

9.

1 4.

5 9.

1 22

.7

9.1

13.6

4.

5 11

.3

35

Indu

stria

l, co

mm

erci

al

mac

hine

ry.. .

27

23

(8

5)

11.1

14

.8

11.1

14.8

7.

4 7.

4 11

.1

7.4

10.6

36

El

ectro

nic

equi

pmen

t, ex

c.

com

pute

rs

36

32

(89)

13

.9

16.7

2.

8 8.

3 13

.9

5.6

. 25

.0

2.8

11.1

37

Tran

spor

tatio

n equ

ipm

ent

20

18

(90)

5.0

25.0

10

.0

10.0

5.

0 20

.0

5.0

10.0

11

.3

E.

Tran

spor

tatio

n, co

mm

unic

atio

ns,

elec

tric,

gas

.. .

80

80

(100

) 17

.5

15.0

12

.5

10.0

9.

5 30

.0

1.2

6.2

12.5

F.

W

hole

sale

trad

e 47

33

(7

0)

10.6

6.

4 2.

1 12

.8

19.1

6.

4 8.

5 4.

2 8.

8

2 G

. R

etai

l tra

de

42

28

(67)

16

.7

11.9

7.

1 4.

7 21

.4

0 4.

8 0

8.3

54

Fina

nce,

insu

ranc

e, re

al

FE

CL k

H.

+g

es

tate

19

0 16

2 (8

5)

13.1

18

.4

4.7

13.1

12

.1

13.1

10

.5

0 10

.6

g 5'

20

a8

E

rn

I.

Serv

ices

54

43

(8

0)

16.7

16

.6

11.1

9.3

9.3

3.7

9.3

3.7

9.9

g H.

>2

$8

To

tal

848

713

(84)

2. B

15

2 2

3 z 5

.

8 0

p

8 x 5

*N

umbe

r of

RO

B lo

o0 fi

rms i

n th

ese

indu

stri

es.

$0

5. g

c. w 8

g'

BIGGEST IS BEST?. . . GREENWOOD, COOPER, HININGS, & BROWN

Table 6 Market Leadership, by Accounting Firm: 1989

Accounting firm (by size)

Market leader in.. .

Market Market Market size share (%) lead (%)

~~ ~~ ~

Thome, Ernst & Whinney metal mining oil & gas extraction lumber/wood products services

19.7 21.2 25.0 16.7

0 4.5

10.0 1.0

152 132 20 54

industrial/commercial/machinery transportation equipment finance/insurance/real estate

27 20

190

14.8 25.0 18.4

0 5.0 5.3

Clarkson Gordon/Ernst & Young

Deloitte Samson

Touche Ross

Coopers & Lybrand

--

industrial/commercial machinery 27 14.8 0

metal mining primary metals wholesale trade retail trade

152 22 47 42

19.7 22.7

0 4.6 6.3 4.7

19.1 21.4

26 80

26.9 30.0

7.7 12.5

Price Waterhouse food and kindred products transportation, etc.

Peat Marwick Mitchell electronic equipment 36 25.0 8.3

Arthur Anderson --

Table 7 Comparison of Market Share, by Industry, with Proportion of Workforce

% market share by industryb Workforce (SIC code) Coefficient

Avg. variation sharea of ("/.I B10 B13 D20 D24 D33 D35 D36 D37 E F G H I

1. TEW 2. CG 3. DS 4. TR 5. C&L 6. PW 7. PMM 8. AA

17.9 15.2 13.5 12.9 11.8 11.4 11.0 6.3

24 24 17 36 20 13 16 6 17 15 25 15 21 15 14 17 0 10 17 19 28 15 9 18 22 21 9 8 4 14 5 13 3 11 13 3 11 6 14 5 5 8 14 10 17 9 11 10 18 7 15 12

24 19 21 7 25 9 16 6 9 27 32 14 12 12 17 29 21 10 9 6 22 30 9 0 15 5 5 10 4 0 15 13 28 6 1 12 7 12 12 5 4 0 7 6 9 3 1 1 6 6 0 0 5

19.2 37 15.8 38 8.8 46

10.8 35 17.0 56 14.2 69 9.5 83 4.8 81

All 100.0

'See column (3) Table 3. % of ROB loo0 accounts held by Big Eight (i.e., column @)Table 5).

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BIGGEST IS BEST? ...

High (4+)

(2-3)

(0-1)

e, V 3 Medium - c) e,

Low % E

GREENWOOD, COOPER, HININGS, & BROWN

Dc Market domination VI Niche domination C&L

111

TE&W

CG VIII I1 V Selective penetration

PW

I Weak penetration IV VII Diffuse penetration DS; PMM; AA, TR

Discussion and Conclusions

The starting point of the paper was to examine the motivations and beliefs underpinning the recent spate of mergers within the Big Eight. Although there are always problems in the temporal connection between what firms say and what they do, we examined the stated reasons for the mega-mergers and assessed the validity of the various assumptions in favour of size and a high ranking within the Big EightBig Six. Using data on the ROB 1000 compa- nies, the following tentative conclusions can be stated:

a firm’s ranking within the Big Eight was not linked to its proportionate market share. A modest ranking could be highly successful (as indicated by Coopers & Lybrand) in terms of market share of ROB 1000 clients. However, there is some evidence that being one of the very largest firms provides a competitive advantage in obtaining market share (as indicated by Thorne, Ernst & Whinney and Clarkson Gordon). a firm’s ranking within the Big Eight was not strongly associated with proportionate market growth. A mod- est ranking could besuccessful (as indicated by Arthur Anderson and Touche Ross) although, significantly, the largest growth was exhibited by the very largest firm (Thorne, Ernst & Whinney). a firm’s ranking within the Big Eight appears to be associated with the successful development of broadly- based industry specialisation and market leadership. The very largest firms (Thorne, Ernst & Whinney, Clarkson Gordon) had developed market leadership in

a broader range of significant industries than had smaller firms. However, Coopers & Lybrand had pursued an apparently successful but more selective strategy of industry specialisation and market leader- ship.

These tendencies may be depicted in terms of the two dimensions identified earlier- namely, market leadership and market breadth. Market leadership, it will be recalled, refers to the attainment of disproportionately high market share within an industry. The strategic position of the Big Eight Firms in Canada in 1989 is shown in Figure 2. In that figure, high market leadership refers to the number (range) of industries in which market share is exercised. Market breadth refers to the number of industries in which a firm attains at least a proportionate market share. The higher the number of such industries, the higher the market breadth.

The material summarised in the early part of this paper leads us to offer some further speculations. It would seem that the most attractive strategic position in Figure 2, and the one that underlies the motivation for mega-mergers, is cell IX (market domination). That cell represents a propor- tionate presence in all or the majority of industry markets plus significant market leadership in several of them. In 1989, Thorne, Ernst & Whinney were the only firm in Canada to have attained that cell, althoughClarkson Gordon and Coopers & Lybrand were close. Placing Thorne, Ernst & WhiMey b i d e the cell, of course, is partly a function of the numbers used to distinguish high from medium and low. It would be more accurate to regard Figure 2 as displaying the relative positions of the Big Eight. Cell V,

Figure 2. Strategic Position of the Canadian Big Eight, 1989

LOW (0-4)

Market breadth

Medium (5-8) High (9+)

Scores TEW C&L CG PW TR PMM DS AA

Market breadth 12 8 10 6 3 3 4 0 Market leadership 4 4 3 2 1 1 0 0

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BIGGEST IS BEST?. . . GREENWOOD, COOPER, HININGS, & BROWN

occupied by Price Waterhouse, represents a different strategy, combining market leadership in some indus- tries with good presence in most markets. The way in which firms talk about strategy suggests to us that the weakest position is regarded as cell I, where minimal market leadership is combined with modest or weak presence in all markets. Three of the four Canadian Big Eight firms that were in that cell have subsequently merged (Peat Manvick Mitchell with Thorne, Ernst & Whinney, and Deloitte Samson with Touche Ross).

The mega-mergers may be seen as a response by firms who feel that they are languishing in cell I to the belief that competitive advantage is likely to reside in very large size, rather than a strategy of selective penetra- tion. The data presented above give some support to these beliefs, although whether such a competitive advantage would be available to more than two equally ‘big’ firms is not clear. The merger between Peat Marwick Mitchell and Thorne, Ernst & Whinney is consistent with the attempt to be thelargest firm: It transformed the position of Peat Manvick Mitchell from that of a weak penetrator to a dominant one and sustained the advantage held by Thorne, Ernst & Whinney. The Deloitte Samson - Touche Ross merger similarly took two languishing firms to a size where they would hope to emulate the benefits demonstrated by Thorne, Ernst & Whinney. How far Price Waterhouse will be able to sustain its strategy of selective penetration in the face of these mega-firms, and how far Ernst & Young (formerly Clarkson Gordon) and Coopers & Lybrand will retain their market performance (given their post-merger fall in relative size) are, as yet, unanswered questions.

Future Directions

The startingpoint for our analysis was to understand the stated motivations for the mega-mergers and to examine whether there was empirical foundation for the assumptions underlying the motivations. We haveshown that the driving motivation to merge appeared to be to move towards the market domination position in Figure 2, a position pre-empted by the early merger between Thorne, Riddell and Ernst & Whinney, which produced the first mega-firm in terms of size. Senior managers in the accounting industry recognised that the relative ad- vantages of such size might be significant (as borne out by our analysis in Figure 2) and began to negotiate mergers of their own. The result, we suspect, is that the dynamics of the industry have been destabilised. Before the Thorne, Ernst & Whinney merger, the industry was characterised by several large players of approximately comparable size, who could pursue slightly different strategies, with no firm achieving market domination (although Clarkson Gordon and Coopers & Lybrand had

320

some potential to do so). Once Thorne, Ernst & Whinney had been created, however, our interviews suggest that there emerged a widespread concern that a Big Three might develop with each seeking the “market domination” position at the expense of other players. The selective strategy of Price Waterhouse could become untenable and those firms who had weak penetration in figure 2 were likely to be amenable to merger discussions. Hence the spate of merger negotiations.

In other words, our analysis indicates that there are market advantages associated with mega-size, but logi- cally these can only be available to one, or at most two, players. Combining high market leadership (achieved by nurturing industry specialisation capabilities) with market breadth (achieved by high visibility plus price competi- tiveness achieved through economies of scale) cannot be successfully achieved by each of the Big Six. The spate of mergers- which began with Thorne, Ernst & Whinney - may have created a new set of dynamics in the audit industry, the implications of which are not yet complete.

Arelated question is to do with financial performance. Our discussion and analysis has focused upon aspects of market share. Whether or not market leadership or breadth is linked to financial performance is not self-evident from the analysis, and future work should push to incorporate the link. Certainly, given the labour intensity of accounting firms, a successful push for market breadth should be reflected in financial returns, although little is knownof the cost structures of different firms.

A third line of research concerns the impact of mega- size upon the governance and organization of these firms. Organizational size has long been associated with particu- lar structural features. Larger organizations are more functionally specialised, complex, and structurally for- malised than are smaller ones. The mega-mergers have created firms of such scale that traditional patterns of governance and organization (Greenwood, Hinings, & Brown, 1990) may prove inappropriate. There are possi- bilities of movement towards more “corporate” structures, which would be worth monitoring. A critical line of research is to understand how far such changes occur and what are their impact uponquality ofwork and the working practices of accountants, questions thrown into relief by the mega-mergers but perhaps insufficiently considered in their formation.

Finally, our discussion about the linkbetween talkand action suggests that more research should be focused at the strategic statements and actions of individual firms. This would have a number of advantages. It would permit analysis of the autonomy of national firms to pursue their own strategies, for the differential impact of mergers in different countries suggests that accounting firms differ in terms of strategic autonomy. Second, more informed longitudinal analysis of the continuities and ruptures be-

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BIGGEST IS BEST? ... GREENWOOD, COOPER, HININGS, & BROWN

tween talk, action and outcomes would be possible. Firm case studies would enable us to examine how specific organizational ideologies operate at the interface of choice and action. And by focusing on individual firms in the context of an industry network, it would be possible to examine mimetic processes. We could then assess the degree of similarity in strategies between firms and the way in which superficially similar strategies are in fact constituted and taken up in specific ways by individual firms.

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