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Commercial Pressure, Local Responsiveness and Synergies in Globalized Engineering Services

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This paper investigates how medium-size engineering service companies working traditionally in national markets have engaged with challenges of globalisation and competition from multinationals. The Nordic region has many smaller domestic engineering services companies in the industry, which are under pressure in their established national and wider international markets. The research uses mixed-methods with empirical data from a desk study of sector development supplemented by qualitative studies of individual companies. It also includes comparative case study analyses of two medium-size engineering service companies with headquarters in two different Scandinavian countries. Among the companies studied there is a plethora of strategies and diversification into other revenue generating activities. Mergers and acquisitions are the most important strategies among the largest companies. Also there are a number of network strategies involving local resources from sister companies etc. The case companies illustrate many of the findings. They both have a multidisciplinary profile in the Nordic region while establishing a more limited presence in North America and elsewhere in Northern Europe. They are also developing a global business focusing on separate areas such as large bridges, environmental consulting, developmental consulting and industrial engineering. The research reveals an array of different strategic positions that combine local, regional and global elements resulting in unique strategic “bundles”. The paper adds to strategic technology management concepts and approaches by identifying the strong role of emergent strategy moves made by senior managers in the companies. It complements established theory and practice concerning the Resource-Based View and Knowledge-Based View as well as on network operations and extended enterprises.
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Complexity of innovation systems in the future digital world 1
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Economic and societal impact of technology
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International Association
for
Management
of
Technology
IAMOT 2017 Conference Proceedings
ABSTRACT
COMMERCIAL
PRESSURE,
LOCAL
RESPONSIVENESS
AND
SYNERGIES
IN
GLOBALISED
ENGINEERING
SERVICES
CHRISTIAN
KOCH
Chalmers University
of
T
ec
hnology, Civil a
nd
En
vironmental
En
gineering, Sweden
kochch@chalmers.se
DAVID
BENNETT
Chalmers University
of
Technology,
Te
chnology Management and Economics, Sweden
Aston University,
Bu
siness School,
UK
University
of
South Australia
Bu
siness School, Australia
david.bennett
@c
halmers.se (Corresponding)
This paper investigates how medium-size engineering service companies working t
ra
ditionally in
national markets have engaged
with
challenges
of
globalisation and competition from
multinationals. The Nordic region
has
many smaller domestic engineering services companies in
the
indus
try
, which are under pre
ss
ure in
their
established national and
wider
international markets.
The
re
sea
rch
uses
mixed-methods
with
empirical data from a de
sk
study
of
sector development
supplemented by qualitative studies
of
individual companies.
It
also includes comparative
case
study
analyses
of
two
medium-size engineering
se
rvice companies
with
headquarters in
two
different
Scandinavian countries. Among
the
companies studied
there
is
a pletho
ra
of
strategies and
diversification
into
other
revenue generating activities. Mergers and acquisitions are
the
most
important
strategies among
the
largest companies. Also there are a
number
of
network
strategies
involving local resources from sister companies etc. The
case
companies illustrate many
of
the
findings. They both have a multidisciplinary profile in
the
Nordic region while establishing a more
limited presence in North America and elsewhere in Northern Europe. They are also developing a
global business focusing on separate areas such
as
large bridges, environmental consulting,
developmental consulting and industrial engineering. The re
sea
rch rev
ea
ls
an
array
of
different
strategic positions
that
combine local, regional and global elements re
su
lting in unique strategic
"bundles
".
The paper adds
to
strategic technology management concepts and approaches by
identifying
th
e strong role
of
emergent strategy mov
es
made by senior managers in
th
e companies.
It
complements established
theory
and practice concerning
the
Re
source-Based View and
Knowledge-Ba
sed
View
as
well
as
on network operations and extended enterprises.
Key words: engineering servi
ces;
competitive strategy; Nordic coun
trie
s;
international collaboration;
strategic technology management
INTRODUCTION
The
North American Indus
try
Classification System defines
the
"engineering services" industry
as
comprising establishments primarily engaged in applying principles
of
engineering in
the
design,
development and utilization
of
machines, material
s,
in
str
ument
s,
structure
s,
processes and systems.
The
ass
ignme
nt
s undertaken by these
es
tablishments may involve any
of
the
following activiti
es;
th
e
International Association
for
Management
of
Technology
IAMOT 2017 Conference Proceedings
provision
of
advice,
the
preparation
of
feasibility studies,
the
preparation
of
preliminary and final
plans and designs,
the
provision
of
technical services during
the
construction
or
installation phase,
the
inspection and evaluation
of
engineering projects, and related services
(NAICS,
2012).
Engineering services firms are working increasingly
within
a multinational business environment. The
very largest have become global players by extending
their
reach beyond traditional domestic and
regional markets, often through mergers and acquisitions. However, a second group
of
medium-size
engineering services firms on
the
other hand have extended
their
international reach through
the
use
of
external resources (outsourcing), by relocating internal activities (the captive arrangement
of
foreign direct investment),
or
through cooperative ventures
with
partners.
In
countries like China
and India cooperation
with
local firms gives
access
to
highly qualified engineers
at
a relative low
level
of
remuneration compared
with
expatriate counterparts
from
Western countries.
Paper background, aim
This paper considers how
the
second group
of
medium-size engineering service companies, which
have worked traditionally in domestic national markets, are engaging
with
the
challenges
of
globalisation and competition from
the
larger multinational companies
that
use
their
size
and reach
to
become dominant players in world markets. Its focus
is
on
the
Nordic region (The Scandinavian
countries
of
Sweden, Denmark and Norway together
with
Finland), where there are many smaller
domestic engineering services companies in
the
industry, which are under pressure in
their
established national and
wider
international markets. For various historical reasons
the
Nordic
region
has
many such smaller domestic companies in
the
industry,
but
they
are subject
to
increased
competition in both
their
established national and
wider
international markets The paper's purpose
is
to
investigate
how
these Nordic medium-size engineering service companies, coming
from
a
tradition
of
working in national markets, have applied
the
concepts
of
strategic technology
management and
other
business strategy approaches in response
to
the
challenges faced by
industry globalisation.
The
investigation is predicated on
the
proposition
that
strategies
for
extending
the
enterprise such
as
outsourcing, strategic partnerships,
joint
venturing and
technology/knowledge transfer
can
enable
them
to
co
mpete on a more equal footing
with
the
larger
players.
Sector
-
background
In
2016
the
revenue
of
global engineering services companies globally was reported
to
be
USO
773
billion
with
annual growth since 2011
of
3.3%.
The industry comprised 747,000 busine
sses
employing 4,081,000 people
(IBIS
World, 2016). The
size
of
companies in
the
sec
tor
ranges from very
small firms
with
just
a handful
of
people
to
those
with
over 50,000 people employed. The largest
currently
ha
s more than 90,000 employees. Compared
with
engineering companies involved directly
with
manufacturing
they
generally have a
low
level
of
capital intensity and high labour intensity.
They operate in a range
of
infrastructure and utilities sectors including transportation, energy and
power, building and road construction,
as
well
as
projects
for
the
industrial and manufacturing
se
ctor
s.
They engage in a wide range
of
activities including design and management services
for
co
nstruction and infrastructure project
s,
environmental projects and industrial automation. Their
portfolio includes construction management, process management (e.g. assessing engineering and
product problems), project planning, project management and economic assessments. Relative
to
tho
se
in many
other
Western countries
the
engineering
se
rvi
ces
companies in
the
Nordic countries
International Association
for
Management
of
Technology
IAMOT 2017 Conference Proceedings
are comparatively small. For example Table 1 shows
that
only one percent
of
Swedish companies in
the
sector have more than 100 employees
(STD,
2016).
Table
1:
Size
di
s
tribution
of
Swedish engineering services companies
Number
of
Number
of
Employees Companies
501- 16
101-500 47
51-100 49
21-50 156
11-20 200
3-10 960
0-2 9,700
Total 11,128
LITERATURE
CONTEXT
Several strands
of
literature are
pertinent
to
this research. They come from
the
general disciplinary
areas
of
Business Strategy, Management
of
Technology, International Business, and Services
Outsourcing.
Within
Bu
siness Strategy
the
principal
lit
era
tur
e relevant
to
this
work
is
concerned
with
the
resource-based and knowledge-based views (Barney, 1991), which advocate building core
competencies within
the
firm
as
being
an
effective
ba
sis
for
achieving success in a fast-changing
competitive environment.
Th
e
Bu
sine
ss
Strategy
literatur
e also deals
with
trade-offs between global
integration/synergy and local
re
sponsiveness, which recognises
that
with
a more fragmented global
marketplace, dis
tinct
local customer needs, local
so
urcing imperatives, heterogeneous costs, and
trade barrier
s,
the
le
ss
the
degree
of
globalisation and therefore
the
grea
ter
the
imperative
for
localisation (Brock and Siscovick, 2007;
De
Wit
and
Meyer
2014).
In
Management
of
Te
chnology,
the
subjects
of
technology strategy and technology partnerships are
most germane
to
the
researc
h.
Betz (1998)
es
tabli
shes
a coherent argument
for
taking a strategic
manageme
nt
view
of
technology by linking economic goals, core competencies, managing
innovation in product development within
the
project management context, technology planning,
invention, implementation
of
technology in products and services and manufacturing, organizational
structure, technology substitution, forecasting
of
the
rates and directions
of
technological change
and po
ssib
le discontinuities,
to
ge
ther
with
research strategy and planning.
The
International Business literature
that
is
of
interest
to
engineering service firms relates
to
the
area
of
international partnerships, mergers and acquisi
tion
s (M&As). For example, Hagedoorn and
Guysters (2002) investigate under which conditions companies prefer strategic technology alliances,
M&As,
or
a combination
of
these,
as
alternative external
so
ur
ces
of
innovative capabilities.
In
their
research
they
find greater endogenous innovative capabilities in
M&A
s
of
engineering services firms
that
in
other
types
of
service business. Blessmann and
Savel
berg (2012) also investigate
the
role
of
M&As in
co
n
so
lidating
the
engineering
sec
tor.
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for
Management
of
Technology
IAMOT 2017 Conference Proceedings
Finally, Services Outsourcing (or offshoring when done internationally) emerges
from
the literature
as
one
of
the
principal means whereby engineering services firms are seeking
to
be
globally
competitive while retaining the flexibility associated
with
companies in the medium-size group
that
is
the
focus
of
this study (Koch and Bennett, 2013).
In
their
s
tudy
of
outsourcing over more than 30
years Hatonen and Eriksson (2009) observe
that
it
has
changed from being strictly cost focused
during
the
1980s towards
now
having a more cooperative nature. Therefore cost
has
become only
one, often secondary, decision-making criterion.
So,
as
a corporate strategy, outsourcing
has
evolved
from the transactional approach
to
a more developmental form in which the outsourced process
is
co-developed
with
the outsourcing provider.
Mcivor
(2010) identifies services outsourcing
as
being
either task-oriented
or
business-process-oriented. Engineering services
use
both types in
their
design, management and technical s
upport
activities.
Mcivor
also
sees
standardisation
as
a means
of
facilitating outsourcing
to
specialist vendors,
but
this
is
le
ss
feasible
for
the
more
be
spoke business
environment within which most engineering services firm operate. Messner (2008) considers
international outsourcing
of
engineering services in
the
construction industry and concludes
that
it
will clearly have
an
impact,
but
may
not
mirror
the
trends in
other
service
or
manufacturing
industries. Messer argues
that
most offshore outsourcing
has
been done
for
large capital facility
projects
that
require many engineering hours, with
such
projects being undertaken only by the
larger engineering companies in high-income markets throughout
the
world.
He
also suggests
that
some engineering companies have focused on systemising
the
work
of
global virtual teams
to
benefit from offshore engineers, although many have
not
revised
their
standard business practices
to
use
lower cost engineers
for
providing services. This
is
because
of
the concern
that
us
ing lower
cost engineers will have a negative impact on the quality
of
engineering services, thereby
decreasing,
or
even negating, any benefits from reducing engineering labour costs. This even
causes
some
to
argue
for
"nearshoring"
or
"reshoring", which results from a conscious decision
to
move
previously offshored
va
lu
e creation activities back
to
domestic locations
or
to
reintegrate
outsourced value creation activi
tie
s back into the organisation
(Bals
et
al, 2016; Baumer
et
al, 2012).
METHOD
Based
on the
issues
and questions identified from the literature this paper invest
iga
te
s the national
markets and players in engineering services
in
the
four
main Nordic countries
of
Denmark, Sweden,
Norway and Finland. The research
is
based on a mixed-methods approach
with
empirical data
derived
from
desk study
of
how
the
sec
tor
ha
s developed, supplemented by qualitative studies
of
individual companies.
The
desk study
has
reviewed
the
ten largest engineering services companies in
the world and made comparisons with the ma
jor
co
mpanies in
the
Nordic region. This aspect was
part
of
an
ongoing longitudinal study
of
small and medium
-s
ize
engineering service companies
in
Denmark (small = 0-1,000 employees; medium = 1,000-20,000 employees). The research was
undertaken within a theoretical framework comprising five elements, i.e. competency theory;
leadership and teamwork; general knowledge areas; international expansion; and cultural i
ssues.
Th
e paper provides
two
case
studies
of
medium-size engineering
se
rvice companies
with
headquarters in different Scandinavian counties. One
has
an
87 year history and approximately
6,500 employees. The
other
ha
s a
37
year history and around 3,000 employees. Empirical data
for
the
case
studies were gathered from externally published materials a
nd
internal company
documents together
with
information collected through the semi-structured interviews.
Case 1 Engserv A
This
co
mpany
ha
s a well-established multidisciplinary profile
(STD
2002-2016),
yet
at a time profiled
it
se
lf
globally on specialist civil engineering design services.
It
strategic profile is thus a mixed one.
Through organic growth and acquisitions
it
ha
s around 100 branch offices worldwide and tripled its
number
of
employ
ees
over the last 20 years. H
alf
of
the offices are
in
Denmark, Norway and Sweden
International Association
for
Management
of
Technology
IAMOT 2017 Conference Proceedings
with
the
remainder focused on North America and a
few
key markets in
the
emerging economies
within
Europe, Africa and Asia.
The
concentration
of
offices mirrors where
the
multidisciplinary
profile
is
in operation. The Nordic presence
of
the
company
is
extensive and supports a strategy
of
providing multidisciplinary professional services in locally responsive manner. Disciplines includes
industry engineering,
IT
, energy, environment, management, civil engineering and building desig
n.
Projects emanating in this area might
be
partly solved in
the
company's international offices,
for
example using Eastern European, Indian
or
Chinese located employees
or
external partners. Thus its
competitive strategy involves using competitively priced engineering services beyond Western
Europe. This integration occurred over
the
last
ten
years.
It
was initiated in
an
emergent manner and
was
for
long very dependent on business
unit
managers and senior project managers accepting this
element into
their
projects
at
a local business area level
of
their
operations. The strategy was
further
enabled by a more permanent and stabilised local organisation in one Eastern European country and
also in India, streamlining
the
processes
of
distributing project execution. Also
an
extensive
IT
infrastructure include technical
CAD
systems, and
ERP
was put in place
to
support this.
Both locally and in its international civil engineering activities
it
is
a recurring observation
that
Engserv A teams up
with
other
providers using temporary employees borrowed from
other
engineering services companies and outside agencies etc.
Such
employees are sometimes called
"hired guns" (Barley and Kunda, 2004) and have become
an
essential part
of
the
knowledge
economy. They provide numerical and functional flexibility
for
firms
that
lack sufficient permanent
resources
to
undertake every part
of
a project.
Case
2
Engserv
B
Engserv B
is
an
engineering consultancy company predominantly working in industrial engineering
{STD
2016).
It
ha
s doubled its
number
of
employees over
the
last 15 years
to
nearly 3000. Since 2000
the
company
ha
s undergone a continuous international expansion. More than 40 offices are
now
established,
with
half
of
them
located in
the
Scandinavian countries. Its presence elsewhere in
cl
udes
Europe and
the
BRIC
countries (Brazil,
Russia,
India, China). The expansion reflects a strategy
whereby Engserv B follows
so
me
of
its large customers,
for
example in
the
automotive industry,
which prefer using
ju
st one
or
a
few
co
nsultancy partner
s,
no
matter
where
they
operate.
Engserv B
has
also acquired a series
of
companies in
the
Nordic market.
To
integrate these new
acquisitions, distributed business management and organisational processes have been used,
focusing on project management competences, standardisation, and human resource management
(HRM). Another element
of
the
company's strategy
is
to
use
competitively priced engineering
se
rvices in
Ea
stern Europe, India and China.
De
spite
it
s
growth
and more international configuration,
Eng
se
rv B
is
still
too
small compared
with
most competitors
to
be stable, and
is
therefore seen
as
a company
that
might be acquired by a
larger player in
the
future. Consequently Engserv B
has
its own strategy
to
grow larger through
further
acquisitions. Management
has
developed and fine-tuned a procedure and a team
organisation
for
the
acquisition processes
to
enable a smooth transfer
of
new
or
ganisational
elements into
the
overall business organisation. This includes a systematic search for, and organising
of, engin
ee
ring co
mpet
en
ce
synergi
es
at
a
time
when
co
ntinued presence and local branding
is
a
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for
Management
of
Technology
IAMOT 2017 Conference Proceedings
priority.
Five
major acquisitions over
the
last
ten
years have been integral
to
the
international
expansion alongside establishment
of
new offices in
four
countries.
COMPARATIVE ANALYSIS
The
five largest providers
of
engineering services in terms
of
people employed are all based in North
America
USA
and Canada. They are
AECOM
(with headquarters in
Los
Angeles, California, employing
95,000 people), Bechtel Group Inc, (al
so
with
headquarters in
San
Francisco, California, employing
53,000 people), Fluor Corp. (with headquarters in Irving,
Texas,
employing 44,000 people) and
SNC-
Lavalin Group Inc. (with headquarters in Montreal, Canada, employing 39,000 people).
Beh
ind this
group
of
the
very largest companies there are a number
of
other
s (with between 15,000 and 30,000
employees). These are based in
the
Netherlands, France, Germany Japan, Australia,
the
UK
and
China (where a large company was created in 2002 by the State Power Corporation)
as
well
as
North
America. (Technavio, 2014). Within
the
Nordic countries the largest engineering services
firm
in
terms
of
people employed
is
based in Sweden (Sweco
with
just
under
15
,000 employees
after
a
recent acquisition). Among
the
55 companies in Europe
with
more than 2,000 employees, three are
Swedish,
two
are Danish,
two
Norwegian and one Finnish
(STD,
2016).
There
is
consequently a lack
of
concentration in
the
Scandinavian area
that
does
not
correspond
to
the
critical
mass
among engineering services globally. However, a series
of
dynamics are pushing
for
further
concentration.
The
synergies
of
the
European single market include common standards
for
engineering design, materials, fiscal issues, tendering and contracts. Moreover
the
global
concentration includes
both
supplier industries (materials and
IT)
as
well
as
customer industries.
These dynamics are
pu
shing
for
mergers and acquisitions in
the
Scandinavian market, which also are
underlined by
the
relative economic and industrial strength
of
Scandinavian economies. However
counter dynamics also exists
from
the
parts
of
the
industry in Scandinavia consisting
of
medium
-s
ize
companies
that
prefer using locally present engineering consultants, and even "in-house"
consultants used regularly
over
international professionals. There
is
also a tendency
of
maintaining
local markets in and around cities where clustering occur. Finally, in Scandinavia
the
public sector
is
often a major client
for
engineering services and frequently
has
a local bias when choosing suppliers.
DISCUSSION
Both companies have
used
extensive collaboration
with
universities and large clients
as
a main
element
for
continually developing competences
of
new
technologies and finding
how
to
manage
them
strategically. Moreover adoption
of
various knowledge management practi
ces
are also
common. Engserv A have also prioritised
the
development
of
internal IT competences and
operational units, where
the
company's own IT architecture can even
se
rve
as
a testbed
for
external
services offered.
On
the
other
hand Engserv B
has
been more focused
on
managerial and
organizational approaches
to
managing new technological development.
Where
the
company perform overall business strategies, these also tend
to
be supplemented by
more project by project oriented practices where a numberof
ad
hoe alliances, local collaboration,
so
urcing
of
competencies, mutual lending
out
of
employees,
joint
projects etc. means
that
the
total
strategy becomes bundled
of
a number
of
elements.
International Association
for
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of
Technology
IAMOT 2017 Conference Proceedings
The
analysis shows how both companies have active strategic approaches towards mergers and
acquisitions and demonstrates
that
they
realise growth in key existing markets
as
well
as
from new
emerging market
s.
Nevertheless
the
i
ss
ue here
is
whether
their
expansion
is
occurring fast enough
to
consolidate
their
position
as
independent companies
or
whether
it
is
more likely
that
they will be
the
object
of
acquisition by much larger engineering companies, which have more comprehensive
capabilities when
it
comes
to
operating globally and exploiting
the
emerging engineering "pools" in
China and India, which are providing engineers
at
a lower cost and enabling global engineering
services
to
create competitivene
ss
with
almost disruptive character (i.e. offering large s
ca
le high
value engineering in Scandinavia
at
25%
lower
price).
The
analysis also s
how
s
that
the
engineering service market
has
become a disruptive area
dominated by a
few
large global players compared
with
the
past where companies have operated in
protected local markets.
It
reveals
an
array
of
strategies combining local, regional and global
elements
re
sulting in unique strategic "bundles". As
with
many
other
industries in
the
service and
manufacturing sec
tor
s there
ha
s been a tendency towards outsourcing
of
engineering services
with
currently
the
largest destination being India, which accounts
for
25
percent
of
outsourced
engineering
(NASSCOM,
2006). China
is
also
an
important
loca
tion
with
it
s role expected to increa
se
in coming years, while several
other
newly developing countries host offshored engineering,
including
for
example
the
Philippines and Malays
ia.
An
important
question, given
the
industry's high
labour intensity and n
ee
d
to
work
closely
with
customers,
is
whether outsourcing provides
the
responsiveness necessary
to
counter
the
drive towards synergy and economies
of
scale.
Consequently
the
whole Nordic region
ha
s tended
to
become a single "domestic" market.
Eng
se
rv B illustrates a particular solution
with
trade-off
of
the
international synergy, local
responsivene
ss
and tension in engineering servic
es.
Lo
cal responsiveness would normally imply
proximity
to
local customers,
but
Eng
se
rv
B's
more
import
a
nt
customers are large corporations
with
an
internationali
sa
tion
strategy. This means
that
responsiveness involves following
the
customer
abroad.
As
Engserv B
ha
s a
limit
ed international office network,
the
synergy aspect
is
l
ess
difficult
to
handle, even
if it
ha
s been a
cha
llenge
for
the
company and led
to
standardising project
management models and competen
ces
.
Eng
serv A on
the
other
hand
is
forced
to
create
sy
ne
rg
ies
in
its large civil engineering services. Here
the
cu
s
tomer
is
a one-of-a-kind type,
so
Engserv A needs
to
dr
aw
on a
se
ries
of
offices
to
provide designs. Also this strategic situation coexists
with
another
ten
sion between global reach and extensive pre
se
nce lo
ca
lly in a
number
of
Scandinavian
town
s and
cities, where providing
multidi
sciplinary
se
rvices require synergies between many
sm
all local offices.
CONCLUSION
This paper's purpo
se
is
to
investigate how Scandinavian medium-size engineering service companies,
coming from a tradition
of
working in national markets, have applied
the
concepts
of
strategic
technology manageme
nt
and
other
business strategy approaches in response
to
the
challenges
faced by industry globalisation. Together
with
their
more project oriented practices
their
total
strategies becom
es
bundled
of
a number
of
elements including local collaboration
an
d international
expansion.
Both case companies have clear strategies
for
coping
with
the
globalisation dynamics. They
orche
st
rate expansions, have established
mor
e offices, and acquired
othe
r smaller and medium-size
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for
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of
Technology
IAMOT 2017 Conference Proceedings
companies in
their
areas
of
operation and
inter
es
t. Nevertheless
the
question remains
whether
their
expansion is being done sw
iftly
enough
to
consolidate
their
po
si
tion
as
independent compani
es
or
if
they will instead be subsumed through
the
acquisition s
tr
ategies
of
the
larger engineering
companies
th
at ha
ve
mor
e comprehensive capabilities
for
operating globally.
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