A gas-roundabout in the
Netherlands?
A comparative study on the relative prospective
suitability of Western European countries to
develop and exploit a gas-roundabout.
Benno Mooi (1288075)
Master Thesis
University of Groningen
A gas-roundabout in the Netherlands?
A gas-roundabout in the Netherlands?
A comparative study on the relative prospective suitability
of Western European countries to develop and exploit a
gas-roundabout.
University of Groningen
Faculty of Management and Organization
Landleven 5
9747 AD Groningen
The Netherlands
First supervisor: Drs. L. De Waal
Second supervisor: Prof. Dr. L. Karsten
Benno Mooi (1288075)
Groningen, July 29 2008
Padangstraat 31a
9715 Cl Groningen
A gas-roundabout in the Netherlands?
Preface
This thesis was written as a master thesis at the University of Groningen, faculty International Business and Management.
I wish to thank my supervisor Leen De Waal, who put in great effort to point me in the right direction. It took some time to discover the direction he meant, but in the end I found out that writing a thesis that way was much more logical, easier and more structured.
I also wish to thank my parents who gave me the time I needed to write this thesis, and provided positive stimulants for me to finish it. As they did with all things in my life. In the course of writing this thesis I found out how a thesis should be written. This discovery was not always easy, and required sustained commitment, but resulted in an interesting thesis which I hope you will enjoy reading.
Abstract
Based on Michael Porter’s “Diamond” and Yip’s “Total Global Strategy” a theoretical framework is created to measure a country’s relative prospective ability to develop and exploit a gas-roundabout. This framework was applied on the Western European countries which are theoretically suited for the development of a gas-roundabout which might compete with a Dutch gas-roundabout. This resulted in a ranking of the Western European countries on their relative prospective ability to develop and exploit a gas-roundabout. It also shows strengths and weaknesses in the business systems of the Western European countries relative to the development of a gas-roundabout.
The Dutch business system scored best on the theoretical framework and is therefore the theoretically best suited business system for the development and exploitation of a gas-roundabout. This thesis is interesting for governments of Western European countries, gas and gas related businesses and anybody interested in international competition between business systems.
Keywords:
A gas-roundabout in the Netherlands?
Table of contents: Preface... 3 Abstract ... 3 1. Introduction... 6 2. Methodology... 10 2.1 Research goals ... 10 2.2 Research model... 12 2.3 Research question ... 142.4 Definition of main concepts... 17
2.4.1 Gas-roundabout... 17
2.4.2 Ability to develop a gas-roundabout... 18
2.4.3 Countries... 19
2.4.4 Business system ... 19
2.5 Sources for research... 20
2.6 Research strategy ... 21
3. Theoretical background ... 22
3.1 Porter, Advantage of nations... 25
3.2 Total global strategy by George S. Yip ... 28
3.3 Four future scenarios... 29
3.4 Global Competitiveness Report ... 31
3.5 Theoretical Synthesis & Integration: Sapphire ... 33
3.5.1 Factor conditions... 35
3.5.2 Related and supporting industries... 36
3.5.3 Demand conditions ... 36
3.5.4 Firm strategy structure and rivalry... 37
3.5.5 Chance sensitivity ... 38
3.5.6 Government... 39
3.5.7 Cost drivers ... 39
3.5.8 Scenario’s... 39
3.6 Aspects of the Sapphire and their indicators... 42
3.7 Analysis method... 43
4. Operationalization... 45
4.1 Country selection ... 45
4.2 The five indicators for the Western European countries ... 46
4.3 Operationalization of the indicators... 48
5. Results... 53
5.1 Trade in billion cubic meters ... 53
5.2 Direct export market, ... 55
5.3 The five indicators specified for the western European countries... 56
5.4 Determination of the Four future scenarios ... 58
5.5 Indicators for four Western European countries... 61
6.1 Analysis of the indicators... 62
6.2 Aspects of the Sapphire and the relative score of their indicators... 64
7. Results per country ... 66
A gas-roundabout in the Netherlands?
7.3 Germany... 70
7.4 Norway... 72
8.1 Four Sapphires ... 74
8.2 Analysis... 76
9. Recommendations and Conclusions ... 78
9.1 Conclusions... 78
9.2 Opportunities and threats for the Dutch gas-roundabout... 79
9.3 Critical reflection ... 81
9.4 Suggestions for further research ... 82
Bibliography ... 84
A gas-roundabout in the Netherlands?
1. Introduction
The Netherlands have committed to the development of a gas-roundabout for Western-Europe.1 This is a large scale infrastructural project which, in order to be successful, requires large investments and substantial commitment from both the government and businesses involved. The government needs to create a climate which stimulates companies to invest in a gas-roundabout2 by changing regulations3, taxation systems, infrastructure, create compatible technical standards and enforce favourable trade policies4. It also needs to coordinate its foreign policy with other E.U. members in order to secure reliable supply5’6.
Companies will need to invest in transport capacity, pipelines and storage facilities7. The investments needed in the gas-market in Europe are already substantial8, and will be even larger for the country which creates a gas-roundabout. The Dutch Energy Council
estimates that this will involve investments of several billions of Euros9. According to the International Energy Agency the needed investments worldwide are as high as 1000 billion dollar for the period 2001-203010.
The Dutch government and companies in the Dutch gas-industry believe that the creation of a roundabout in the Netherlands is desirable11’12, but both parties have different
agenda’s and fulfil different roles in the creation of the roundabout. The government tries to create an environment in which companies are likely to invest in projects that align with government goals such as security of supply, environment, profits from gas sales, employment and profitable business systems. The companies in the business system try to influence the government to enable them to develop profitable projects. The
1 Brinkhorst, 2006 2 Brinkhorst, 2006 p. 5 3 Energieraad, 2005 p. 13 4 Yip, 2003 5Brinkhorst, 2006 6 Energieraad, 2005 p. 47
7 Price Waterhouse Coopers, 2008 8 Brinkhorst, 2006
A gas-roundabout in the Netherlands?
government can change regulations, taxation systems, infrastructure, create compatible technical standards and enforce favourable trade policies13 to attract investors in certain fields. These forces and actors result in a specific business system, and the constellation of that business system determines how likely it is that a gas-roundabout turns out to successful for the government and companies involved.
This thesis aims to provide part of the answer to the question:”how likely is the Dutch gas-roundabout to be successful?” by determining the relative prospective suitability of the Netherlands to develop and exploit a gas-roundabout.
To this end the characteristics of a gas-roundabout will be determined, and compared with the characteristics of the Dutch business system. The degree of overlap between these two indicates how suitable the Dutch business system is to develop and exploit a gas-roundabout. If another businesses system is better equipped for a gas-roundabout than the Dutch business system, it is possible that the other business system will also develop a gas-roundabout and will outperform the Dutch gas-roundabout. It is therefore important to know how suitable the Dutch business system is for the development and exploitation of a gas-roundabout, relative to other Western European countries. Therefore, the business systems of other Western European countries are also be analyzed on their ability to develop and exploit a gas-roundabout, which will result in the prospective relative ability to develop and exploit a gas-roundabout for each country.
It is also possible to detect certain weaknesses of the Dutch business system relative to the development of a gas-roundabout in advance, and correct these weaknesses before they present any problems.
A profitability study is beyond the scope of this thesis, therefore this thesis will only focus on the business systems and how they relate to a gas-roundabout, and does not take into account international politics, preferences of gas supplying companies and the political decision process.
Some assumptions will be made, based on which a smaller study may be undertaken. These assumptions are made to limit the scope of the thesis, and are supported by
A gas-roundabout in the Netherlands?
previous studies. The political decision making process is excluded from the thesis because this would require a different research perspective.
The assumption is made that there is a growing need for a liquid (easy to sell and buy) trade and storage facility, such as the government aims for a gas-roundabout to become. A western European country will develop a facility similar to the roundabout. This assumption is supported by several studies, and can be considered as a given fact.14’15 Europe’s gas reserves are dwindling, and gas needs to be imported from increasingly distant countries16. Demand fluctuates a lot, and since pipeline capacity is very expensive, it is uneconomical to serve this flexibility from the source through long pipelines.
Therefore, the necessity for a local trading and storage facility in Western Europe is growing17.
Apparently these factors altogether indicate that there is a big need for a gas-roundabout, and the business system best suited for the development and exploitation of the
roundabout will be able to successfully exploit it. (This thesis does not take into account the politics involved. They may be so large that they offset any (dis) advantages, and therefore result in different outcomes than predicted by this thesis.)
Based on these assumptions the Dutch business system will be compared with the business systems of surrounding countries, to determine which business system is best suited to develop a gas-roundabout.
Because of the unique characteristics of a gas-roundabout, existing international business models are not suitable to analyze the roundabout. Therefore, a combination of different international business models will be made which will result in a normative framework on which the Western European countries will be ranked on their ability to develop and exploit a gas-roundabout. This framework should predict which country is best suited to develop and exploit the roundabout, based on the constellation of the business system in that particular country. Besides this prediction it can also be used to detect certain weaknesses relative to a gas-roundabout in a business system, which can then be corrected before they become problematic.
14 Energieraad, 2005 p.72
A gas-roundabout in the Netherlands?
Based on the outcomes of this thesis, the governments of the countries studied and companies involved can decide whether to develop the roundabout or not. The government of a country that is predicted to be less suitable for the development and exploitation of the roundabout may still decide to develop it for other reasons such as security of supply, political power or job creation.
A gas-roundabout in the Netherlands?
2. Methodology
182.1 Research goals
This research starts from the Dutch desire to create, and the need for19, a gas-roundabout for Western Europe20. It aims to contribute to the knowledge of the gas sector and in specific a gas-roundabout. It will do this by analyzing the business system of the
Netherlands with respect to a gas-roundabout, and compare this to other business systems of other Western European countries. Based on the comparison of the different business systems of the Western European countries with respect to their ability to develop and exploit a gas-roundabout the relative prospective suitability of the Netherlands will be established.
The objects of research are the different Western European countries, and a gas-roundabout.
The research perspective will be based on international business theories, business system theories and government policy theories. Since a gas-roundabout will be developed by a business system which operates internationally, and in which the government plays a role. This research consists of an empirical and theoretical element. It will combine three articles into one theoretical framework, based on which an empirical situation will be analyzed. It will have a problem signalling function for the Netherlands who are developing a gas-roundabout. It will do this by establishing the business system characteristics which are optimal for the development and exploitation of a
gas-roundabout, and then evaluate to what degree the different business systems in Western Europe are similar to, or differ from, this theoretically ideal business system.
A theoretical framework will be developed that accounts for the relevant aspects when developing a gas-roundabout. The Netherlands will then, based on this theoretical framework, be compared to other Western European countries that are also theoretically suited to create a gas-roundabout. This will result in a list of Western European countries
A gas-roundabout in the Netherlands?
and their strengths and weaknesses, relative to a gas-roundabout. A good score in this thesis is no guarantee that a gas-roundabout will be a success, as well as a poor rating is no guarantee for failure. Apart from the business system, there are also other factors in play, such as political power, and political commitment. A gas-roundabout can have a lot of side effects which may make it desirable when the outcomes of this thesis predict the opposite, and vice versa. Which may result in different countries developing a gas-roundabout than would be expected based on this thesis.
The results of this thesis can however play a role in the decision to continue with, or abort the development of a gas-roundabout. To fully answer that question would require a more extensive research, and is in the end the result of political decisions, for which this thesis is only part of the input.
It is also possible that based on this research model certain weaknesses of the Dutch business system relative to a gas-roundabout are exposed. The research model produces indicators which are of importance when developing and exploiting a gas-roundabout. If a country scores poorly on one of these indicators, it is useful to know this in advance, so a country can correct this in before it presents any problems.
A gas-roundabout in the Netherlands?
2.2 Research model
Figure 1. Research model A study will be made of the literature on two important elements. The first element which will be researched is a gas-roundabout, and its attributes, which will result in a definition of a gas-roundabout and its characteristics. The second element which will be researched
Prospective
suitability
Critical indicators Analysis countries Countries A Countries B Comparison of countries Gas-roundabout Gas -roundabout Western Europe International business Business systems Government policy
A gas-roundabout in the Netherlands?
is the literature on Business systems, International business, domestic government policy and the global competitiveness index, which will be combined with the characteristics of a gas-roundabout and will result in a theoretical framework with indicators to asses a country’s ability to develop and exploit a roundabout. The characteristics of a gas-roundabout will be confronted with the Western European countries which will result in a number of countries (Countries A) which can potentially influence the performance of a gas-roundabout in the Netherlands. A small number of indicators which are critical for the success of a gas-roundabout will be determined. These critical success indicators will be researched for all countries (countries A). This will result in a smaller number of countries (Countries B). Based on the indicators from the theoretical framework the data for the remaining countries will be gathered, colour graded and put into a table. In order to be able to asses a country’s relative position on an indicator the scores of the different countries on that indicator will be analyzed to establish whether the differences found are significant or not. Then a second table will be created in which the indicators are grouped on their relative aspect, and are graded on an alphabetical scale from A to D.
Then individual tables will be made for each country based on which the scores of the different aspects of the theoretical model will be calculated21.
These scores will be the input for the conceptual model which was created based on the theoretical framework.
Based on the different conceptual models, and data for each country the countries will be compared with each other and analyzed.
This will indicate the relative prospective suitability of each country to develop and exploit a gas-roundabout.
A gas-roundabout in the Netherlands?
2.3 Research question
From this research model, and the problems described before, the following research question is derived:
“How well suited is the Dutch business system to develop and exploit a gas-roundabout in comparison with other Western European countries?”
To answer this question, some sub questions will need to be answered first, which will be combined to form the answer to the main question
1. What are the characteristics of a gas-roundabout? 2. How is a country/business system defined?
3. How can the ability of a country’s business system to develop and exploit a gas-roundabout be determined?22
3.1 What is Porter’s perspective? 3.2 What is Yip’s perspective?
3.3 What is the perspective of “Four views on the Netherlands”? 3.4 What is the result of the confrontation of these three theories?
3a. Which indicators determine a country’s ability to develop and exploit a gas-roundabout?
3b. Which indicators are critical for success when developing and exploiting a gas-roundabout?
4. Which western European countries are candidates for the development of a gas-roundabout?
A gas-roundabout in the Netherlands?
5. Which countries score at or above threshold levels on the critical success indicators?
6. How well equipped is each of these countries to develop and exploit a gas-roundabout?
6a. How does each country score on the indicators from the theoretical model? 6b. What are the strengths and weaknesses of each country’s business system? 7. How do these countries compare to each other, in their ability to develop and
exploit a gas-roundabout?
First the characteristics of a gas-roundabout need to be defined. Then the definition of a country’s business system will be defined. After this the theoretical framework which will be used to asses a country’s relative prospective suitability will be developed. The articles by Porter, Yip and the “Four views on the Netherlands” will be presented and confronted with each other which will result in the theoretical framework which will be used in this thesis. Based on this theoretical framework and the Global Competitiveness Index a list of indicators will be created which represent the different aspects of the theoretical framework. Based on the specific characteristics of a gas-roundabout and the theoretical model the indicators critical for success will be established.
Based on the characteristics of a gas-roundabout and the European gas market a selection of countries will be made which are theoretically suitable for the development and exploitation of a gas-roundabout. These countries will be confronted with the critical success indicators which will result in a smaller number of countries which are at or above threshold levels on the critical for success indicators.
A gas-roundabout in the Netherlands?
A country might seem well equipped to develop a gas-roundabout, but if another country is better suited for the development and exploitation, it might be unwise to develop a gas-roundabout, since the other country is better suited for this function. There are however many other reasons for the development of a roundabout or similar project which may play a larger role, but they are not under research in this thesis.
This thesis tries to provide additional insights into a gas-roundabout, and the chances of different countries for successfully developing and exploiting it. It does this by assessing each country’s relative prospective suitability.
A gas-roundabout in the Netherlands?
2.4 Definition of main concepts
2.4.1 Gas-roundabout
The first item that needs to be defined is the term: gas-roundabout. This is a physical and virtual trade location for gas. The physical location can be large, and can even be in different countries, it needs however to be a coherent formation of facilities, which interacts well. Therefore, it is easier if the majority is in one country, and under the supervision of a small number of operators. The virtual location does not need to be the same as the physical, but is usually located close to the physical location23, because the virtual transactions need to be performed physically24. The APX Group, a group of European power and gas exchanges, believes25 that it is only possible for the physical infrastructure to play a major role, if the virtual trade takes place at the Dutch gas
exchange, or the Dutch TTF (Title Transfer Facility). Therefore, the Physical and Virtual locations are considered to be inseparable.
There is no clear definition for when a country is a “roundabout” or when it is not. The “roundabout” is a location which has large import and export capacity; therefore the existing pipeline grid is an important element of the roundabout. Local gas reserves in Europe are dwindling26, which means that an increasing part of the gas needs to be imported through increasing longer pipelines27. This means that there is an increasing need for a logistic terminal which creates flexibility and allows for trade28. At the
moment the Dutch TTF is the main player in the gas trade in the region.29 A liquid market, the possibility to change levels of output and the possibility to take gas back from the market are also a necessity for trade30’31. To stimulate trade, it is important that a gas-roundabout can always supply enough gas, and that there are always enough buyers for
23Energieraad, 2005 p. 72 24Energieraad, 2005 p. 97 25APX Group, 2007 p.1 26CPB, 2006 p. 3
27Price Waterhouse Coopers, 2008 28 Energieraad, 2005 p. 99
A gas-roundabout in the Netherlands?
gas. If these two conditions are met, companies will feel save to trade, because they know that they can always sell their gas if they need to.
Furthermore, due to “Swing” (differences in consumption during summer and winter and day and night) demand may change quite a lot32. (From roughly 11 billion m3 in January to 3 billion m3 in August.33)
To be able to guarantee a reliable source for gas, storage facilities are needed. The
pipelines, which transport the gas from e.g. Russia to the Netherlands, are very expensive, and used at near maximum capacity. It is very expensive to meet the variability in
demand by changing levels of output of fields, and transport. Therefore, local storage in Western Europe is cheaper, and therefore necessary34. A gas-roundabout should provide a reliable availability of gas; therefore, the sources need to be as diverse as possible. This means that a LNG terminal (liquid natural gas) is an integral part of a gas-roundabout35’36. Besides these attributes, a cooperating government on the fields of regulation, investment climate and political influence on gas exporting countries such as Russia37 is also a prerequisite.38This thesis focuses on the business systems of the different countries, therefore only the influence of the government on the business system is taken into account. The international political power is not under research in this thesis.
2.4.2 Ability to develop a gas-roundabout
The second item that needs to be defined is the term: “how suited a country is” or “the ability to develop”. Based on the theoretical model the theoretical ideal business system will be defined. The extent to which the characteristics of this ideal business system overlap with the characteristics of the business systems of the different countries determine how suited, or how able a country is.
A gas-roundabout in the Netherlands?
2.4.3 Countries
Because the Netherlands aims to become a gas-roundabout for the Western European countries, only other Western European countries, which are geographically close to the Netherlands, will be included in this research. Therefore, Western European countries are defined as countries that are geographically close to the Netherlands and potential rivals in developing a gas-roundabout. It is necessary to be geographically close because one of the important functions of the roundabout, the supply of swing, is only cost effective within a certain range39. For this thesis, a range of 500 km is chosen, based upon the article “Gas for tomorrow” by the Dutch energy counsel.40
2.4.4 Business system
In a country, there are many actors: government, private companies, and different institutions. Combined they form the business system in a country, and the constellation of this business system determines the strengths and weaknesses of the business system. Therefore, the business system will be defined as “the total of companies, institutions and government agencies involved in a sector in a country.” For this thesis, it is assumed that there is one business system in one country, since all the companies in the gas-sector will be influenced by the development of a gas-roundabout. The business systems are
confined to one country because the government aims for the Netherlands to develop a gas-roundabout, and not a combination of Western European countries. To limit the scope of this thesis only the domestic operations of the business system are studied. The international relations with gas-supplying countries can be considered a relevant aspect of the Dutch gas business system, but will not be studied.
39Energieraad, 2005 p. 100
A gas-roundabout in the Netherlands?
2.5 Sources for research
There are multiple objects of research in this thesis. The first object, which needs to be determined, is the theoretical framework. The theories will be researched in books and articles in scientific magazines.
The second object is a gas-roundabout. The characteristics of a gas-roundabout will be determined based on internet sources and expert interviews. There are many sources on the internet that write about a gas-roundabout, ranging from letters from the minister, to websites of the Gasunie, or consultancy firms on the gas area.
The third group of objects is the different countries. The first broad selection of countries will be done based upon an atlas, the article “Gas for tomorrow” by the energy council and the chart of pipelines.41 After this, the countries that will be researched in depth are selected based on the most important indicators from the theoretical framework.
The fourth group of objects is the business system in the different countries. Based on the theoretical framework the indicators for the business system will be searched on the internet and through interviews with experts. The internet is an immense source of information, care is taken to select only reliable sites such as those from the government, or (inter) national (energy) institutions, to ensure reliable information.
Furthermore, Newspaper articles, TV-broadcasts, magazines and an interview with an expert42 will be used, mainly as sources for background knowledge. If an article is not clearly reliable, the information from this article is crosschecked with other sources to determine its reliability.
The methodological structure for this thesis is derived from the book by Verschuren and Doorewaard43 on research methodology.
A gas-roundabout in the Netherlands?
2.6 Research strategy
This research will be a comparative case study of European countries, which is conducted mainly on basis of secondary sources (internet and interviews). The main component will be desk research and a small part in the field by interviews. It is a combination of
literature research, and secondary research. First, the theories in the field will be reviewed to be able to form a good framework that is able to assess a country’s ability to develop and exploit a gas-roundabout. Then secondary data will be collected from the internet as input for the framework.
The data will be largely quantitative in nature. A large part of the data is depicted in numbers that give a certain weight to an indicator. Where qualitative data is used such as when maps are used to assess a country’s position in the pipeline grid, these positions will be graded with a certain weight depicted on a numerical scale. Based on the
A gas-roundabout in the Netherlands?
3. Theoretical background
In order to rank the western European countries on their relative prospective ability to develop and exploit a gas-roundabout a theoretical framework will be established. This framework should predict how well a country’s business system is equipped to develop and exploit a gas-roundabout.
The theories should predict or explain, based on the constellation of the business systems in the different countries how well equipped they are to exploit and develop a
A gas-roundabout in the Netherlands?
can be used, because there are a very limited number of companies, sometimes only one. Therefore, it is necessary to use both perspectives, to ensure correct outcomes.
Using only Porter’s theory, which is macro oriented, would not suffice in this context. Therefore, a second theory was needed to counterbalance Porter’s focus on survival of the fittest, and to highlight the micro economical aspects of the gas–roundabout. Here the theory of Yip was added, which has a more “government regulated” background to counterbalance Porter’s prejudice. Yip takes a more micro-economical view and uses his framework to show how and why companies successfully expand internationally, and compete successfully. Despite the fact that companies do not really globalize when they develop a gas-roundabout, their potential to do this is a good indicator of their
international competitiveness. In developing a gas-roundabout, the companies, or the business system internationalize, which is normally a prelude to globalization.
Furthermore, by developing a gas-roundabout the business system starts to compete with adjacent systems.
This thesis takes political decisions as exogenous variables. It is however very important to know the general political situation in a country, since this will strongly influence the success of a gas-roundabout. Therefore, the third article, “FOUR VIEWS ON THE NETHERLANDS”44 is introduced to determine where the respective governments of the countries stand. For a country’s ability to develop a gas-roundabout, it is important to have a supportive government because of the size and the importance of the investments needed. This article provides a framework that can be used to determine a government’s attitude. This theory is not oriented towards business systems, or international
competition, as the two previous theories, and is only used to indicate the general attitude of a country concerning national vs. international and public vs. private focus.
The combination of these three articles gives a broad perspective on the chances an industry has when competing internationally. Porter’s framework establishes the strength and the competitiveness of the industry, Yip’s framework predicts how well the company
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or industry will do when expanding globally and ““FOUR VIEWS ON THE NETHERLANDS” indicates the attitude of the government. All three articles are generally accepted and are written by well-established authors.
Porter’s DIAMOND is the main component of the theoretical model, and is
complimented with Yip’s theory. These two theories have different backgrounds, but complement each other, and are therefore combined. From the “FOUR VIEWS ON THE NETHERLANDS” only the classification for the different scenarios was used, which makes it possible to implement it in the theoretical framework as input for, or an indicator of the aspect Government.
A gas-roundabout in the Netherlands?
3.1 Porter, Advantage of nations
45Porter has created a “DIAMOND” which explains and predicts in which industry segments a company or country can gain a sustained competitive advantage. It uses elements of a business system and uses them to predict how well a company in that business system will perform when competing internationally. The model is shown in figure 2 after which the different conditions are explained.
Figure 2: Porter’s Diamond, advantage of nations
The factor conditions are the inputs necessary to produce and compete. These are
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are harder to copy by foreign firms. Factors can also be grouped in generalized (highway system, college educated employees and a supply of debt capital) and specialized factors (narrowly skilled personnel, specific infrastructure and knowledge in specific fields). The specialized factors will be more likely to lead to a sustained competitive advantage because they are harder to achieve and harder to copy. They require more in dept
investment and dedication. So advanced specialized factors have the most chance to lead to a sustained competitive advantage, providing the conditions in the other parts of the diamond are also favourable.
The demand side forces a company or country to develop certain skills that might enable
them to compete globally. The segments served on the home market, the sophistication of the buyers, the anticipatory need of the buyers, early home demand, and early saturation of the home market, are all positive elements, provided that the demand in the home market is an indication of world demand. In addition, buyers that are more independent and a large growth of demand are good for developing a sustainable competitive advantage. It forces companies to rapidly develop state of the art products before world demand forces foreign competitors to develop these products. This means that the company/country has more advanced products, which it can then sell abroad.
Related and supporting industries can help to achieve sustained competitive advantage
if they deliver complementary and concurrent services. They can be a source of schooled personnel, and innovations by combining expertise of different industries. It is not uncommon to see a group of industries flourish together in one country, or even city.
Firm strategy, structure and rivalry can contribute if goals in a company or country
align with each other. They ensure sustained commitment to a certain industry, which enables it to innovate, and create advantages. Domestic rivalry is very important, because it forces firms to innovate. The close proximity of the rivals invokes more direct response and fiercer competition. This may result in some bankruptcies, but the surviving firms will only be stronger.
Government is set apart in the diamond, because its role should be the manipulation of
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Subsidies and protection should only be used in a limited number of cases, since it makes the industry less competitive, and thus less capable of surviving in the global economy.
Chance is an external element of the diamond. It involves major relatively unplanned
events such as wars, oil crises, surges of demand, major technological discontinuities and large shifts in exchange rates. Chance can offset a nation’s advantages, and create others. Adversity gives chances to companies that are especially well suited to deal with them, or invokes innovations needed to deal with them, which may lead to a sustained competitive advantage.
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3.2 Total global strategy by George S. Yip
46Yip has created a theory that explains what the drivers are for companies to globalize. There are four drivers; Market globalization, cost globalization, government globalization and competitive globalization. This theory is different from Porter, because Porter
explains why and how certain industries are successful in certain countries, and Yip explains why companies globalize. There are however also many similarities, because the forces, in both models have a lot in common.
The market drivers: Common customer needs and tastes, global customers and channels,
transferable marketing and lead countries.
Cost drivers: Global scale economies, steep experience curve effects, sourcing
efficiencies, favourable logistics, difference in country costs, high product development and fast-changing technology
Government drivers: Favourable trade policies, comparable technical standards,
common marketing regulations, government owned competitors and customers, and host government concerns.
Competitive drivers: High exports and imports, competitors from different continents,
interdependence of countries, competitors who globalize and transferable competitive advantage.
Industry
globalization
potential
Cost drivers Government
Drivers Market Drivers
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Figure3: Yip, G.S. Total global strategy 2
3.3 Four future scenarios
47The CPB (Central Plan Bureau) has issued a paper that contains four possible scenarios for the future of the Netherlands. This paper was based on another study, Four Futures of
Europe. Since the overall attitude of the government is an important input in the model it
is important to establish what the future expectations of the government are, and
following from this, what their general direction is and will be. It is important to note that the government is a reflection of the people, and can change significantly.
The CPB paper will be used to analyze each government’s perspective, and group these perspectives in the different quadrants of the model.
Figure 4: Huizinga, F., & Smid, B. 2004. Vier vergezichten op Nederland
The model consists of two axes. The horizontal one is the public private axis, this axis measures whether the focus is more on public power or private power, more government interference, or less government interference and more market regulation.
A gas-roundabout in the Netherlands?
The vertical axis measures the orientation of a country, has the country a very
international orientation with a lot of trade and integration of political and economical systems, or has the country a national focus, more isolated and self-sustaining?
A gas-roundabout in the Netherlands?
3.4 Global Competitiveness Report
The Global Competitiveness Report48 produced by the world economic forum will be used in combination with the theoretical framework to create a list of indicators. One of the authors of the report is Michael Porter who also wrote one of the main theories used in this thesis, “the Diamond”, in his book “Advantage of nations”. It is therefore
especially well suited to be used as a basis for indicators since the theoretical background of the Global Competitiveness Report and the theoretical framework are similar. The report ranks 131 countries on their competitiveness, where they define competitiveness as
the set of institutions, policies, and factors that determine the level of productivity of a country.
Based on the theoretical framework and the Global Competitiveness Report it is possible to create a list of indicators. This list will be structured according to the theoretical framework and a gas-roundabout, some aspects will be added which are of specific importance for a gas-roundabout. The result will be a list where all the relevant aspects of the theoretical framework will have their own indicators. After this, the five most
important indicators will be selected, which will be used to determine which countries will be studied more in depth.
This list will be different from the GCR list, and future researchers will have to reorder the list for their specific industry. The ability to temporarily store gas is an important feature for a gas-roundabout, but will be of little importance for the games industry. The GCR uses three levels of economic development, factor driven, investment driven, and innovation driven economy. They state that developing economies should first ensure that the factors are well developed, after which they continue to the next level. The western European countries are all in the highest level of economic development, innovation driven economy. This means that certain aspects that are in the GCR list are no longer important, because they are for all of the countries at threshold levels. For instance, a good legal system is a prerequisite for a well running economy, and is of great importance for developing countries. For the Western European countries, this indicator
A gas-roundabout in the Netherlands?
is of minor importance, because the legal systems are all well developed, and are no factor for possible sustainable competitive advantages.
Based on the five most important indicators the countries that will be the subject of more in depth research will be established.
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3.5 Theoretical Synthesis & Integration: Sapphire
49Porter’s theory, Yip’s theory and “FOUR VIEWS ON THE NETHERLANDS” will be combined to form a framework that will be used to rank western European countries on their ability to successfully establish and exploit a gas-roundabout.
Porter and Yip differ on some important aspects. Where Porter sees favourable trade policies as something that dulls a company and makes it less competitive, Yip sees it as a way to establish market share abroad and thus as beneficial to the company. In this model, which is created for the natural gas case, government help will be seen as beneficial, since the investments that need to be made are so large that without government backing companies will be less likely to make these investments.
Figure 5: Mooi, B. 2008 Sapphire
49 The name Sapphire was chosen because the model is an elaboration on Porter’s diamond, and because of its shape. Related and supporting industries Factor conditions Demand conditions
Industry
globalization
potential
Cost drivers Government Drivers Scenario’s Chance,Sensitivity Market competitiveness drivers
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First, the relationships between the different aspects will be explained after which each aspect will be discussed in more detail.
The four aspects Factor conditions, Firm strategy, structure and rivalry, Related and
supporting industries and Demand conditions determine the Market Competitiveness Drivers. These four aspects all have a positive direct and interaction effect on the Market Competitiveness Drivers, which is the main element of the Sapphire. Each aspect
reinforces the influence of the other aspects. This means that the Market Competitiveness
Drivers score highest when all aspects score high and a low score on one aspect has a
negative effect on the influence of the other aspects on the Market Competitiveness
Drivers.
The Market Competitiveness Drivers form the main element of the Sapphire and have a strong positive effect on the Industry Globalization Potential. The other aspects in the model cannot offset a low score on the Market Competitiveness Drivers. An average or high score on the Market Competitiveness Drivers is required, and then the other aspects of the model can influence the overall performance of the country.
Because of the importance of the Market Competitiveness Drivers, the four aspects will be represented by a larger number of indicators than the other aspects.
There are four different possibilities for Scenario’s which influence the effect of the
Government Drivers and the Market Competitiveness Drivers on the Industry
Globalization Potential The scenario’s can have a positive effect or a negative effect,
depending on the scenario.
The Government drivers have a positive effect on the Industry Globalization Potential.
Chance, Sensitivity has a positive effect on the Industry Globalization Potential.
Cost Drivers have a positive effect on the Industry Globalization Potential.
When all the aspects are combined they result in the industry globalization potential, in other words, they predict how capable a certain industry in a certain country (a business system) is to successfully compete internationally.
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combination of the different theories used to form the Sapphire, and the specific context, a gas-roundabout.
3.5.1 Factor conditions
The most important elements of the factor conditions in the natural gas case are physical and technical structures. Therefore the following indicators are chosen;
Port facilities & LNG terminals, Trade (Pipeline grid capacity import export), Storage facilities, Gas reserves, Roads, telecom, railway, Primary education, Quality higher education.
As mentioned before LNG is an upcoming technology, and is capable of diversifying suppliers. For short distances, LNG is more expensive than pipelines, but for longer distances, LNG is cheaper50. As Gas reserves in the European Union are depleting, gas will need to be imported over longer distances51, making LNG a more attractive
alternative. The expected market share of LNG in world trade is roughly 25% and for the EU 10-15%, of total gas imports52. Therefore, it is a critical element of a gas-roundabout. The roundabout is a physical and virtual location. For the physical element the pipeline grid capacity is important, and in specific the import and export capacity. The local grid, which serves end consumers, is of lesser importance, because serving consumers is no function of the roundabout. The costs of building a pipeline grid and connections with suppliers and buyers are huge; therefore, this is one of the most important elements. In the table, this element is depicted as trade. This indicates the actual trade between countries. An important function of the roundabout is a swing supplier. Therefore, storage facilities are needed. The availability of gas reserves is important because gas reserves can also supply swing, indicate experience with the product, and are the main component of the roundabout. A gas-roundabout is a physical structure and a trade and exchange location. To this end, a good infrastructure is needed. This includes roads and railways, which enables employees of different companies to move around freely, and a well-developed telecom infrastructure, which enables electronic trading. Primary and
50Energieraad, 2005 p. 44
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higher education indicate the overall level of employment. Labourers are needed to build the pipelines and connectors, but the gas sector is also a technologically advanced sector that requires specialized engineers. The primary and higher education are indicators for the level of education in a country.
3.5.2 Related and supporting industries
A high level of sophistication is necessary to achieve sustainable competitive advantage. Therefore the following indicators are chosen; General business sophistication, Quantity
and quality of local suppliers, Financial market, Trade companies, Innovation in cluster.
A gas-roundabout is interconnected with the whole market. Maintenance companies are needed, which rely on suppliers of equipment and knowledge of different fields. Different engineers with different expertise are needed to develop the physical and trading structure. Therefore, the general level of business sophistication is important to establish how well related industries are developed. Quantity and quality of suppliers indicates the specific supplier business sophistication. These suppliers are an important aspect of the costs, and therefore of the prices which need to be charged. The roundabout requires very large investments. An advanced financial market lowers the costs of capital, which is needed to build the roundabout. Furthermore, a well functioning financial market facilitates trade on the roundabout. The presence of trade companies indicates experience with trade, which is important for the roundabout. It will also stimulate trade in gas, which is an essential function of a gas-roundabout. The roundabout has an international function; therefore, it is beneficial if different foreign companies or countries have stakes in the roundabout. More participants lead to more commitment from different users. Innovation in the sector leads to better services and lower costs. These will make the roundabout more attractive
3.5.3 Demand conditions
A gas-roundabout in the Netherlands?
An important function of the roundabout is the facilitation of competition53’54. To this end, the roundabout needs to be large enough to provide a liquid trading place for multiple competitors. Therefore, the domestic market size plus the direct export market (adjacent countries) is important. If a market has a highly sophisticated demand structure, the companies on the supply side are forced to be highly innovative. This means that the companies are better suited to serve different needs of different clients, and are likely to serve them at lower costs, because of their experience.
3.5.4 Firm strategy structure and rivalry
A gas-roundabout requires many different parties to operate efficiently, therefore the following indicators are chosen;
Number of companies, Level of uncoupling, FDI in gas-sector and Labour market efficiency. The roundabout should facilitate competition55 to this end a large number of
companies is needed, otherwise no or little (price) competition will occur. Competition is necessary to keep prices low, and it invokes efficiency and innovation56. Therefore, the number of companies already operating in a country is an important indicator, also the level of uncoupling is closely related to this. All gas companies are formerly state owned, which means that in order to achieve real competition the companies need to be
decoupled. This is also a European Union directive57. FDI, (Foreign Direct Investment) in the gas sector leads to more competition, and commitment to the Dutch gas
sector/roundabout. Labour market efficiency is a function of the costs companies have when operating in a country. A well functioning labour market means cheap well-educated personnel is easily available.
The previous four aspects form the Market Competitiveness Drivers, which have a positive direct and interaction effect. Because these aspects interact with each other they reinforce each other, but only when they are all high. A low score on one of these aspects
53 Energieonderzoek Centrum Nederland, 2007 54 APX Group, 2007
55 APX Group, 2007 56 Porter, 1990
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influences the effect of the three other aspects on the Market Competitiveness Drivers. The Market Competitiveness Drivers are the main determinant of the Industry
globalization potential and have a direct positive effect.
3.5.5 Chance sensitivity
The large investments and time needed to recoup the investments means that a stable political climate is necessary to create trust between private and public parties.
Furthermore, the global relations with the gas supplying countries are important to ensure security of supply. These are the two points where something unexpected is likely to take place, and can have a large influence on the performance of a gas-roundabout. Therefore the following indicators are chosen;
Political stability, Chance of political conflict with gas-suppliers.
The huge investments needed for the development of gas fields58imply that a certain level of demand is required. Furthermore, governments need to actively manage the political aspects of the supply with the supplying countries. Therefore a stable political configuration is important. A constantly changing government cannot exert the same amount of influence as a stable one. Another important element is the chance of a
political conflict with a supplier of gas. Iran is a controversial country which is subject of a lot of economic boycotts, it is however also a country with huge gas reserves. The chance that the government of a country gets into conflict with a supplying country is therefore an important element, which might disrupt the flow of gas. This thesis focuses however on the business system, and excludes international politics, and the political decision making process. Therefore this variable will be treated as exogenous, and will not be included in the model.
The political stability of a country has a direct positive effect on the Industry
globalization potential.
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3.5.6 Government
The influence of the government on the business system is most direct noticeable in;
Burden of government regulations, Macroeconomic stability.
The burden of government regulations is an important aspect of the costs of developing and operating the roundabout. The European Union has centralized directives, which apply for all the members, but within each country the amount of regulations and reporting standards vary. Worldwide gas supplies are large enough to serve the demand. To extract these gas supplies large investments are needed. These investments will only be made if the demand side can be predicted with any certainty. A good macro economic climate is necessary to make the needed downstream investments to ensure demand for the upstream countries such as Russia, Iran and Qatar59.
A low burden of government regulations and a high macroeconomic stability have a direct positive effect on the Industry globalization potential.
3.5.7 Cost drivers
The most important and most differentiating element in this factor is;
Favourable logistics
A central location in the pipeline grid means that the transportation costs are lower, because the distances needed to be covered are smaller. Therefore a central location is beneficial when developing a gas-roundabout. The location will be measured based on the borders which countries share, and the pipeline connections between the countries.
Favourable logistics have a direct positive effect on the Industry globalization potential.
3.5.8 Scenario’s
Four scenarios
The international energy agency has calculated that the global gas market needs investments accumulating to 1.000 billion dollar for the period 2001-203060.
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Therefore the government needs to order the infrastructure in such a way that companies will invest in gas facilities. Infrastructure needs to be available for all parties and should not be used to achieve unfair advantages61 and bottlenecks in the gas transportation system will need to be removed in the whole of Western Europe. The restructuration of the European gas market is only partly successful, and needs to be completed in order to create a functioning market; all these elements require international coordination by governments.
Because gas needs to be imported from increasingly longer distances with more buyers, the foreign policy of European countries needs to pay special attention to the security of supply62.
According to Luciani63 more gas suppliers are needed to ensure competition on the European market. To reach more gas suppliers active government policy will be needed. This means that combined with the complexity of the project, the need for international legislation and the geopolitical aspects64 a supporting internationally oriented government is needed.
Due to the international character of a gas-roundabout it is essential that the scenario under which the government is operating is internationally focused. A national focus will make it almost impossible to develop and exploit a successful gas-roundabout, because this requires international cooperation.
As can be seen, government intervention is still needed. Therefore a focus on the public sector is necessary to successfully develop and exploit a gas-roundabout in Western Europe. It is however not as important as an international focus, which is crucial for success.
Therefore a score on the Public/International quadrant is best for the development and exploitation of a gas-roundabout. The quadrant Private/International is second best. Both National focused quadrants are weaknesses when developing and exploiting a gas-roundabout.
61Brinkhorst, 2006 p.2
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The scenario interacts with the Market Competitiveness Drivers and the Government
drivers. Both international quadrants have a positive effect on the Market
Competitiveness Drivers and the Government drivers, where the international/public
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3.6 Aspects of the Sapphire and their indicators.
The previous aspect of the Sapphire and their respective indicators are presented in the following table.
Table 1: Aspects of the Sapphire and their indicators.
Factors Port facilities LNG terminals
Trade (Pipeline grid capacity import export) Storage facilities
Gas reserves
Roads, telecom, railway overall infrastructure Primary education
Quality higher education Related and supporting industries General business sophistication
Quantity and quality of local suppliers Financial market
Trade companies Innovation in cluster
Demand Market size domestic
Direct export market Sophistication of demand Firm strategy structure and rivalry Number of companies
Level of unbundling FDI in gas-sector
Labour market efficiency Chance sensitivity Political stability
Government Burden of government regulations Macroeconomic stability
Cost drivers Favourable logistics Scenario’s CPB Four scenario’s
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most important ones will be selected. The other indicators will be researched separately, and when all the indicators have been researched, they will be put into the table. When the table for each country is completed, the indicators can be designated to their different aspects and the Sapphire can be formed. Based on the Sapphire each country can be analyzed and each country’s different strengths and weaknesses can be determined.
3.7 Analysis method
When the indicators are measured they will be graded on significance in the difference between the countries. The best performing country will receive the A ranking, second best B, third best C and worst performing country D.
The resulting table will be used to create a table for each country with the performance on all the aspects of the Sapphire model and their indicators.
In order to apply the Sapphire model to each country, the values of the indicators will need to be combined to rank the performance of the aspects for each country.
An A rating will be considered 4 points, B 3 points, C 2 points and D 1 point.
Table 2: Values of the rating
Strong A 4
Medium/strong B 3
Medium/weak C 2
weak D 1
When the aspects are ranked on a scale from one to ten, the sum of the indicators of each aspect needs to be divided by a certain number.
As mentioned before the four indicators; Factor conditions, Demand, Related and
supporting industries and Firm strategy structure and rivalry are the most important
aspects of the sapphire and are represented by more indicators.
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Demand has three indicators which means that the total score needs to be divided by 1,2 to reach the score on the scale one to ten
Firm strategy structure and rivalry has five indicators which means that the total score needs to be divided by 2 to reach the score on the scale one to ten
Chance sensitivity has one indicator which means that the total score needs to be divided by 0,4 to reach the score on the scale one to ten
Government has two indicators which means that the total score needs to be divided by 0,8 to reach the score on the scale one to ten
Scenario’s has one indicator which means that the total score needs to be divided by 0,4 to reach the score on the scale one to ten
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4. Operationalization
4.1 Country selection
Based on the characteristics of a gas-roundabout it is possible to predict which countries are potential rivals in the development and exploitation of a gas-roundabout. An
important element of a gas-roundabout is the supply of swing, according to the article by the Dutch energy council65, the range for cost effective supply of swing is roughly 500 km. Based on this criterion England, France, Belgium, Luxembourg, Germany and Denmark are potential rivals for a Dutch gas-roundabout. The chart of pipelines in Europe66 shows the major pipeline connections, based on this chart Norway is also included. The major oil fields of Norway lie within the 500 km radius. Furthermore Norway has the largest gas reserves of Europe67, and should therefore be included in the list of potential rivals.
Table 3: National annual gas demand figures.68
Billion m3 Year 2006
Netherlands 48.076 Poland 16.368 Slovak republic 5.972
Belgium 15.116 Spain 32.958 Portugal 4.174
France 44.460 Finland 4.750 Czech republic 9.291
U.K. 94.327 Greece 3.330 Austria 8.920
Germany 99.848 Hungary 14.252 Denmark 5.088
Norway 6.318 Ireland 4.633 Sweden 977
Luxemburg 1.394 Italy 84.422 Schweitzer land 3.273
If a country outside the 500 km area decides to develop a gas-roundabout, countries can switch from the Dutch gas-roundabout to the new gas-roundabout. However, the main gas consuming countries are located in Western Europe, 69as can be seen in the table above. Eastern Europe consumes less than Germany on its own, and only Italy is a major
65Energieraad, 2005 p. 100
66Gas Infrastructure Europe, 2006 A 67 CPB, 2006 p. 3
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gas consuming country outside Western Europe. It is therefore not likely that a gas-roundabout will develop in South, or East Europe, since the demand in those regions is limited, and pipeline connections from South to West Europe are limited70. This means that the threat of a roundabout which serves a part of the Dutch target market is not likely to be established in East or South Europe, since the main gas market is situated in
Western Europe.
This results in seven countries which are potential rivals for the Netherlands in the development and exploitation of a gas-roundabout; Belgium, France, United Kingdom, Germany, Norway, Luxemburg and Denmark. These countries will be analyzed on their score on the critical success important indicators of the Sapphire, after which a smaller selection of potential candidates will be made.
4.2 The five indicators for the Western European countries
It is not necessary to research all the western European countries on their ability to develop and exploit a gas-roundabout. The first criterion, the 500 km radius, eliminates a large number of European countries. Furthermore there are some basic elements which a country needs to posses in order to develop and exploit a gas-roundabout, critical success indicators. Therefore the five most important indicators will be used to determine which countries have a reasonable chance to develop and exploit a gas-roundabout. The
underlying logic is that countries which score poorly on the five most important indicators will not be able to outperform the selected countries on the other, less
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with their own gas supply have more experience with the product and can deliver from their own supplies if the demand is higher than the foreign supply.
The second indicator is the level of trade. The roundabout is a trade and transportation location. When a country is already actively trading on the gas market, this country has the needed infrastructure, and expertise to do so. This means that only relative limited investments need to be made to become a roundabout.
The third indicator is the total storage capacity. Storage is used to cope with swing in demand. Without storage on site, the variability in demand would have to be served with variability in production. This means that the production and transportation capacity would need to be much higher, which is very expensive. Storage is also needed to make the roundabout a liquid trading location71. To be liquid the roundabout needs to be able to buy gas back from the market. Liquidity is a necessity for trade.
The forth indicator is the port facilities and the presence of LNG terminals. LNG is an upcoming technology, and is more flexible, and at longer distances cheaper than
pipelines72. The LNG technology makes the gas market more global, since the U.S. and Asia are also potential buyers.73 It is important to make commitments to LNG otherwise all the LNG capacity at the production side will be dedicated to other parts of the world. The fifth indicator is the direct export market. A roundabout needs a large export market to function effectively. A large number of suppliers and buyers is needed to create a liquid trading location74’75, and the investments made need to be recovered, which requires a certain scale.
These five indicators represent the most important elements of the roundabout. If these indicators are not at threshold levels, the country is not well equipped to develop and exploit a gas-roundabout, and will be excluded from further research. These five indicators are represented in table four.
A gas-roundabout in the Netherlands?
Table 4: Five indicators for the Western European countries in billion cubic meters.
Gas reserves trade Storage facilities (Port), LNG terminal Direct export market Netherlands Belgium France U.K. Germany Norway Luxemburg Denmark
Based on this table the first five indicators will be researched for all the countries under study. The countries which score best on these five indicators will be used for further research to determine how they score on the complete Sapphire. A sufficient score on these five indicators is needed to have a good chance in developing and exploiting a gas-roundabout.
In the next section the determinants for this long list will be filled in, in order to get to the short list containing a smaller number of countries.
4.3 Operationalization of the indicators
The Sapphire model is finished. The countries which will be studied are selected and each aspect of the Sapphire model has its indicators. Now the method by which these indicators will be measured needs to be established.
Factor conditions
Port facilities & LNG terminals, will be measured by the ranking of port facilities in the
global competitive index, (the number indicates their ranking worldwide, where 1 is the best, and 131 is the worst) and the number of LNG terminals planned, under construction or already operational.
Trade (Pipeline grid capacity import export), is calculated by predicting import or export
