Qualitative Market Research: How to conquer Germany?

Qualitative Market Research: How to

conquer Germany?

A study about possible entry strategies for the Germany Industrial market

With the advent of economic globalization, internationalization has become one of the most important strategies for many firms that seek opportunity to achieve further growth. Internationalization demands extensive market research and forces firms to think about how to enter a specific market.

This study delves into the German chemical, oil&gas and power markets to determine the attractiveness and the proper entry mode strategy for Dutch industrial service provider Stork Technical Services. Results are presented as limitations and suggestions for future research are given.

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Master Thesis Business Administration – Business Development

Qualitative Market Research: How to

conquer Germany?

A study about possible entry strategies for the Germany Industrial market

University of Groningen:

Faculty of economics and business

Master BA Business Development

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st

Supervisor: Prof. Dr. P. S. Zwart

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st

Supervisor: Dr. H. van der Bij

Stork Technical Services:

Supervisor: Drs. E. Oortwijn

Euvelgunnerweg 12

9723CT Groningen

Author:

Henk-Jan Hamster

Hardewikerstraat 2D

9712GT Groningen

Student number: s1830600

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PREFACE

This paper has been written on behalf of the Master Thesis project, last hurdle in obtaining my master Business Development at the University of Groningen. In this thesis I had the chance to graduate by the company Stork Technical Services, region North East in Groningen. I was involved in the ambition to expand the business towards neighbor Germany where, perhaps surprisingly, Stork is not an established name in the market yet. During this period I conducted my research and learned a lot of new insights, but I also had the opportunity to learn about the organization Stork, meet new people and to visit numerous locations.

Many people have helped me in writing the thesis and therefore I would like to show my gratitude. First of all I would like to thank Harm Jan Martens for giving me the chance to graduate at Stork Technical Services in the first place. Second, my special thanks to my supervisor at Stork, Erik Oortwijn for his guidance, support and insights. Third, I would like to thank the remaining members of the Sales team NO, Marijn Nossent and Arjen Hoitzing for their guidance, support and most of all for all the fun.

Off course, I also seize this opportunity to express my gratitude to Prof. Dr. P.S. Zwart, supervisor University of Groningen, for all his guidance, support and criticism.

Finally, I hope that I have made a contribution with this thesis to the ambitions of Stork Technical Services in Germany.

“

Most managers are nearsighted. Even though today’s competitive landscape often stretches to a global horizon, they see best what they know best: the customers geographically closest to home.

”

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EXECUTIVE SUMMARY

Stork Technical Services (STS) has the ambition to expand their generic services (mechanical and electrical services, parts of the rental services, the Business line IS&S, the product line Boiler services and the product line Engineering & maintenance support) to Germany. STS is a Dutch industrial services provider with a widespread footprint in the Benelux, South America and the Middle east. Its customers in the region north east Netherlands are large industrials in the petrochemical market. Examples are Shell (NAM), DSM, PPG, BioMCN and Akzo Nobel. The chemical, oil&gas and power (COGP) markets are the focus markets of the company.

The goal of this research is to determine the attractiveness of the German COGP markets for the generic services of STS and to explore the appropriate entry mode strategy for STS in the German COGP markets. In order to deal with this subject, the following research question was formulated:

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What is the attractiveness of the German Chemical, Oil&Gas and Power market(s) for STS generic services and which entry mode decision fits’ best the most attractive market(s)?

’

The research consisted of two parts. First, a literature study was conducted to gain insights in theoretical implications of the various entry mode strategies available in business literature. Also, the question how to conduct a solid market analysis was answered. The literature study resulted in an conceptual model, which functions as a guideline for this study. Second, secondary and primary data was collected to give answer to the formulated research question.

The results of this research showed that the German chemical and oil&gas markets are indeed attractive markets for STS generic services. The power market however was labeled as not attractive for STS due to multiple constraints. Second, analysis proved that an acquisition is the best entry strategy.

Thus, this study concludes that STS generic services should enter the German chemical and oil&gas markets through an acquisition strategy to reap maximum profit.

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TABLE OF CONTENTS

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INTRODUCTION……….7

1.1 Company profile………..7 1.1.1 History………7 1.1.2 The organization……….8 1.1.3 Current market………9 1.2 The opportunity………9 1.3 Corporate strategy……….9 1.4 Goal of research……….10 1.5 Research question……….10 1.6 Sub questions………10 1.7 Theory………11 1.8 Research Methods………11

2. THEORETICAL FRAMEWORK………12

2.1 The Concept of business strategy……….12

2.2 Market analysis………..13

2.2.1 Industry analysis………..14

2.2.2 Customer analysis………..15

2.2.3 Competitor analysis………..16

2.3 Entry mode strategies for service firms……….………….17

2.3.1 Theory……….17

2.3.2 Entry mode models……….……..19

2.3.3 Factors influencing the entry mode decision……….….20

2.3.3.1 Level 1: Equity or non-equity………..20

2.3.3.2 Level 2a: Exporting or contractual agreements……….22

2.3.3.3 Level 2b: Joint venture, acquisition, Greenfield……….……23

2.4 Conceptual model……….………….24

3. RESEARCH METHODOLOGY……….27

3.1 Research design Market analysis……….27

3.2 Research design Entry mode analysis………..28

3.2.1 Level 1: Equity or non-equity……….28

3.2.2 Level 2a: Exporting or contractual agreements……….…..31

3.2.3 Level 2b: Joint venture, acquisition, Greenfield………..32

3.3 Quality criteria for research……….…35

3.3.1 Controllability……….………...35

3.3.2 Reliability……….…………..35

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4. RESULTS……….……….37

4.1 Market analysis……….……….37 4.1.1 Industry analysis……….………..37 4.1.1.1 Chemical market……….……….37 4.1.1.2 Oil&gas market……….39 4.1.1.3 Power market……….………41 4.1.2 Customer analysis………43 4.1.2.1 Chemical market……….……….43 4.1.2.2 Oil&gas market……….……….46 4.1.2.3 Power market……….………47 4.1.3 Competitor market……….…….48 4.1.3.1 Direct competitors……….…….49

4.1.3.2 Original equipment manufacturers (OEMs)……….51

4.1.3.3 Local competitors……….…52

4.1.4 Conclusion market analysis………..………...53

4.2 Entry mode analysis……….…56

4.2.1 Results level 1: Equity/ non-equity………..….56

4.2.2 Results level 2a: Exporting or contractual agreements…….………….………60

4.2.3 Results level 2b: Joint venture, acquisition, Greenfield……….….…..61

4.2.4 Conclusion Entry mode analysis……….…..62

5. CONCLUSION………..64

6. LIMITATIONS AND FUTURE RESEARCH……….67

6.1 Limitations……….68

6.2 Future research……….68

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APPENDICES……….……75

Appendix 1……….………..76 Appendix 2……….………..77 Appendix 3……….………..78 Appendix 4……….………..79 Appendix 5……….………..81 Appendix 6……….………..82 Appendix 7……….………..89 Appendix 8……….………..99 Appendix 9……….………100 Appendix 10……….……….101 Appendix 11……….……….102 Appendix 12……….……….103 Appendix 13……….……….105 Appendix 14……….……….113 Appendix 15……….………….…116 Appendix 16……….……….120 Appendix 17……….……….121 Appendix 18……….……….122 Appendix 19……….……….123 Appendix 20……….……….130

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1. INTRODUCTION

With the advent of economic globalization, internationalization has become one of the most important strategies for many firms that seek opportunity to achieve further growth (Luo et al., 2005; Sapienza et al., 2006). The term ‘Internationalization’ means the outward movement of the international operations of a firm (Welch and Luostarinen, 1988). This can involve the process of adapting the firm’s operations to cope with the strategy, structure and resources of international environments (Calof and Beamish, 1995). While internationalization can be a source of growth or profitability for firms, it can also generate huge losses since it is very risky for firms to survive in an international environment. Empirical evidence shows that success in the home countries does not guarantee success internationally (Bianchi and Ostale, 2006). An important aspect of a successful international endeavor depends to a great extent to the firm’s choice of entry in that foreign market. (Barkema et al., 1996; Barkema and Vermeulen, 1998).

This thesis focuses on two elements. Firstly, a market analysis will be conducted. Subsequently, an entry mode analysis for Stork Technical Services (STS) to enter the German market will be executed. STS is a large Dutch manufacturing and service providing company that plans to expand their international operations. In order to deal with this matter in a proper way, this thesis is structured in the following manner. Firstly, this chapter will begin with a brief description of the Stork organization. After that, the business opportunity that drives this thesis will be formulated and motives will be explained. The fourth paragraph will focus on the main goal of this research. Subsequently, the research question and the sub questions will be given. Finally, theories used in this study are briefly explained, as the same goes for the research methods. Chapter two deals with the theoretical foundation and ends with a conceptual framework that serves as the backbone of this study. Chapter three will further elaborate on the research methodology, followed by the results of this study in chapter four. A conclusion will be drawn in chapter five. Finally, limitations and suggestions for further research will be given.

1.1 Company profile

This paragraph will begin with a description of the company Stork followed by the business opportunity that serves as motive for this research.

1.1.1 History

Stork Technical Services enjoys a rich entrepreneurial history tracing back to the early 1800s, when a schoolboy named Charles Theodorus Stork visited a steam-powered textile mill in Enschede. When he left school, he bought three looms with money he had borrowed from his father, to start the Weefgoederenfabriek C.T. Stork & Co. (C.T. Stork & Co. woven goods factory). At 13, he was the youngest entrepreneur in the Netherlands and the foundation of the company was set. After this initial success Charles Theodorus Stork realized that due to the rising textile industry in that region there was a strong need for machinery repair shops. Followed by the advice of Charles, his brother Coenraad opened a modest forge and repair shop in the village of Borne, near Hengelo. After the dead of Coenraad, Charles Theodorus took over the company. After the government decided to build railway connections in that region, allowing ease of access for product delivery from manufacturing

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sites to customer locations, Charles Theodorus decided to move his factories at the intersection of

the railways in Hengelo. Charles and his brother Jurriaan Engelbert and their brother in law H.J. Ekker then opened the Machinefabriek Gebr. Stork & Co. on September 4, 1868. The company profiled itself as social and innovative and in 1881 the company established the first pension fund in the Netherlands for their employees. Founding father Charles Theodorus Stork died in 1895 at the age of 73 in his hometown Oldenzaal, leaving a company behind that would develop into a conglomerate with more than 26, 000 employees in the twentieth century.

1.1.2 The organization

Today, the organization divested its business units Stork Prints and Stork Food Systems in 2007 which leaves the organization with two out of the four former business units: Stork Fokker and Stork Technical Services. Fokker is a leading player in the market for electrical systems, aero structures, landing gear, aircraft maintenance and technical and supply chain management services. Stork Technical Services (STS) on the other hand is specialized in asset management for industrials. Briefly, STS manages the production sites of its customers by doing maintenance, repairs, modifications and extensions. A total of nine business lines (BL’s) are offering more than 35 product lines (PL’s) in a business-to-business environment to succeed in this ambition. STS focuses mainly on the chemical, oil, gas and power (COGP) market segments. STS believes that these markets have many similarities and therefore they are often seen as one market. STS can offer a broad range of general and specialist industrial services and is therefore an important professional partner for its customers. For a complete overview of all the BL’s, see appendix 1. Appendix 2 is presented to give inside in key financial figures of STS. The figures represent the year 2010.

In 2009, the business unit STS was revised from an organization containing more than 53 independent constituent companies, to a matrix organization. The new organization is assumed to operate as one company. STS is aiming at better coordination between the geographical regions and the BL’s, which all have their own expertise. In this way an integral proposition can be offered to customers. Briefly and simplified, the sales process begins with an annually made Sales Plan, derived from the Operational Budget. If an enquiry is received from a customer, an opportunity review is done to ensure that projects are strategically relevant and financially attractive. The opportunity review can be seen as a process. Much discussion with the customer takes place at this moment and if required, qualification documents are prepared and brought to attention. At the end this results in a ‘bid-no bid’ decision. If the outcome of that decision is to ‘bid’ on a project, a proposal of what the corresponding business line(s) can offer to accept a particular project is send to the customer. This proposal includes a cost estimate, risk analyses and technical specifications regarding the project. Finally, if STS gets the order, an order review will ensure that STS accepts orders that are in line with the proposals. If the size of the project exceeds a particular amount, a so-called Tender Board decides on final order acceptance. If the deal is arranged, resources will be allocated to the project, goods and services will be procured and the execution of the project can take off.

Important question is, how does STS attract customers? Basically, the idea is that the geographical sales representatives’ inventory particular needs by customers and recommend the appropriate discipline within the business lines. Furthermore, they are dedicated to manage long term relations and to create opportunities and generate leads. In succession, technical sales in the business line are

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involved in scope definition, proposal content related issues, and technical discussion with customers

and possibly follow up work. Geographical sales and technical sales work closely together to achieve their own specific goals.

1.1.3 Current market

According to the current market place of STS and generic services in particular the majority of revenues are still being realized in the domestic Dutch market. The region North East is strongly represented in the ‘Chemiepark’ in Delfzijl and the industrial area ‘Emmtec’ in Emmen. Furthermore, the activities of the NAM in the region are very important. As mentioned earlier, focus is on the chemical, oil&gas and power sector. The mature Dutch market is characterized by minimal growth potential and price pressure. Most important competitors in The Netherlands are Cofely GDF Suez and Imtech N.V.

1.2 The opportunity

This research will be conducted within STS region north East (NO) at the local head office in Groningen. The two BL’s that are traditionally strong in the NO region are mechanical and electrical services, often referred to as the generic services.1 See appendix 3 for a detailed summary of the two BL’s in the region north East of the Netherlands. Important customers for the region NO are for example RD Shell (NAM), Gasunie, DSM, PPG, BioMCN and Akzo Nobel. The generic services want to expand the business to Germany because they acknowledge that the German COGP market is very large and promising. Furthermore, the German COGP market is known as a solid market and is expected to grow in the coming period. Based on the results of exploratory meetings, this expectation appears to be correct as regions such as Wilhelmshaven, Emden, Bremen and Hamburg are encouraging, because oil refineries, gas processing plants, power stations and large manufacturers are located in that area. Germany offers potential for STS to grow and to expand their current marketplace. Furthermore, the expansion is in line with the general growth strategy of STS. This strategy is explained in more detail in section 1.3.

So far, STS is active with very specialized product lines in the targeted area serving a limited amount of customers. The physical locations of these operations are settled in South Germany and in the Ruhr area. Briefly, the opportunity is to enter the German COGP markets with the generic services to enlarge the footprint of STS in Germany. In that way a strong combination of generic and specialized services can be offered to customers.

1.3 Corporate strategy

The goal to access the German market with generic services next to the specialist services is in line with the corporate strategy of STS which state that: “In the year 2015, Stork Technical Services has the ambition to be the leading global industrial services company with end-to-end service offering and focus on high margin technical services unit’.

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In fact, mechanical and electrical services are part of what is often called the generic services. The generic services of STS include mechanical and electrical services, parts of the rental services, the Business line IS&S, the product line Boiler services and the product line Engineering & maintenance support.

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To offer both commodity services like mechanical and electrical services and highly specialized

services is in line with STS’s ambition to offer end-to-end industrial services worldwide.

Furthermore, the strategy is grafted on growth in terms of net sales. In 2010, the net sales reached 1 billion euro’s and the ambition is to exceed the 1, 5 billion euro’s in 2015.2 Looking for growth potential in foreign markets is in line with the business strategy and possibly necessary to succeed in this aspiration.

1.4 Goal of research

Derived from the business opportunity described above the goal of this research is:

To determine the attractiveness of the German COGP markets for the generic services of STS and to explore the appropriate entry mode strategy for STS in the German COGP market.

1.5 Research Question

Based on the business opportunity and taken the main goal of this research into account, a research question can be formulated. The main question of this thesis will be:

Research question

What is the attractiveness of the German Chemical, Oil&Gas and Power markets for STS generic services and which entry mode decision fits’ best the most attractive market(s)?

Figure 1: Research question

Now that the research question is made clear, sub questions derived from this statement will be formulated in the next paragraph.

1.6 Sub questions

The first step in the process is to verify the potential of the targeted markets, based on a market analysis. After the attractiveness of the markets have been identified, a proper entry mode strategy can be determined.

Sub Questions 1-3

1) To what extent is the German chemical market attractive for STS’s generic services? 2) To what extent is the German oil & gas market attractive for STS’s generic services? 3) To what extent is the German power market attractive for STS’s generic services?

Figure 2: sub questions market analysis

This study will assess the three markets individually, despite the many similarities. The reason is that by separating the markets detailed information about expected growth, trends and specific customer needs will come to surface. This will lead to a more fruitful analysis. The related sub questions are

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shown in figure 2. After market analysis has been done, opportunities and threats will be identified

for each market and a preliminary conclusion about the attractiveness of the COGP markets can be drawn. Subsequently, an appropriate entry mode strategy will be determined for the most attractive COGP market(s). By doing so, STS will be able to enter the German market with a strategy that will generate maximum benefits.

Sub Question 4

4) What is the most appropriate entry mode for STS’s generic services to enter the most attractive

German COGP market(s)?

Figure 3: Sub question market entry analysis

Now that the approach of this research is comprehensible and the research question is explained, the next paragraph will elaborate on the theories which will be used to answer the sub questions above.

1.7 Theory

The research area described in the previous chapter is part of the much broader literature stream of strategic marketing. Firstly, the next chapter will elaborate on business strategy, marketing strategy and the way market analysis plays a crucial part in this marketing process. Goal is to highlight and identify important aspects of strategic (marketing) management and to examine which tools literature offers a researcher to analyze new markets. First theory will make clear that pursuing a global approach can be an effective strategy. The elements of a market analysis are described next, followed by a section that will give some details about entry mode strategies to enter new markets. Also, different models to describe the entry mode decision will be treated.

Based on theory, a conceptual model extracted from literaturewill be used in this study to determine the attractiveness of the chemical, oil&gas and power markets in Germany. A conceptual model is presented to determine the appropriate entry mode in alignment with the characteristics of the German COGP markets.

1.8 Research Methods

Research will be done in two ways. After literature provided the necessary theories to conduct this study, desk research will be done to gather and analyze secondary data. The source of this data are media sources, such as the Internet, data within STS and previous studies. Also government and supranational institutions, trade associations and annual reports are valuable secondary sources. Field resource will be done to collect primary data which could not be obtained through desk research. Interviews will be held to collect specific customer information to find out customer needs and to acquire the necessary information regarding the entry mode decision. In chapter 3 the research methods will be elaborated further.

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2. THEORETICAL FRAMEWORK

The development of new markets is often derived from the broader corporate strategy or business strategy. Internationalization of business-to-business firms is of growing importance in the current market place (Jahn, 2005; Shenkar, 2004). Paragraph 2.1 will give a brief definition of a business strategy and the options a firm has to compete in the marketplace. This will include the link between a business strategy and the internationalization option. Development of new markets always calls for a market analysis to determine the potential and attractiveness. Theory has offered researchers several tools to examine new markets. This is the next step in the theoretical framework and will be elaborated in paragraph 2.2. This is necessary for the next step: determine the proper entry mode for the German COGP markets. Theory about entry mode decisions will be discussed in paragraph 2.3. This chapter ends with two conceptual models, presented in paragraph 2.4.

2.1 The concept of Business Strategy

In scientific publications, management books, and company statements the term business strategy is used in many different contexts and with different interpretations. In recent years the term ‘business strategy’ or ‘human strategy’ have been widely adopted by management to describe the activities associated with the statement of an organization’s overall goals and objectives and the means by which they are to be achieved (Baker, 2000). Andrews (1971) stated that a business strategy is the pattern of major objectives, purposes, goals and essential policies and plans for achieving those goals. Alsem (2007) formulated a more concrete definition of what he called a corporate strategy. After the mission and the vision of the firm are determined, objectives will be chosen. At the corporate level three choices have to be made to choose proper objectives:

1. Where to compete? (choice of scope of activities) 2. How to compete? (choice of value strategy)

3. With whom to compete? (alone or in collaboration)

The first two questions determine where and how the firm wishes to grow. It can grow within existing markets, new markets and with new products. Also, a decision needs to be made about with whom to compete: alone or in collaboration with others. Aaker (2005) mentioned largely the same steps but added different dimensions to these choices. He stated that a proper business strategy consists of four dimensions: a customer value proposition (perceived benefits of the firm’s offering), assets and competences (competitive advantage of a firm), the functional strategies and programs (programs that support the value proposition) and the product-market investment strategy. The product-market investment strategy involves the scope of a business and is defined by the products its offers and chooses not to offer, by the markets it does and does not serve, by the competitors it chooses to compete with or to avoid and by its level of vertical integration.

Product –market combinations can be used to identity basic growth strategies for a company. Ansoff (1965) developed a famous matrix for this kind of purposes. The matrix first appeared in the September 1957 issue of the Harvard Business Review in an article entitled ‘Strategies for diversification’. According to the growth matrix of Ansoff (1965) the expansion of STS’s generic services can be classified as a market development attempt. The services STS has to offer are not new to the market or new to the firm, but the German COGP markets are definitely new to STS generic services. Figure 4 gives a representation of the Ansoff-model.

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Figure 4: Product-Market growth matrix. Source: I. Ansoff, 1965:

As the product-market combination is determined and the company’ goals are formulated, the decision must be made how to reach these objectives. A business strategist has innumerable strategic options to choose from. Widespread strategic options include quality (or differentiation), focus (on product or market), value, innovation, customer intimacy or going global. The focus in this thesis is clearly on the ‘going global’ option which lies at the intersection between business strategy and international business. Choosing the ‘going global’ option is well debated in literature. Many authors, like Hutt and Speh (1992) emphasize that industrial firms that restrict their attention to the domestic market alone are overlooking the enormous potential of international markets. Operating in various countries can neutralize competitors, enhanced the firm’s flexibility and can be a source of sustainable competitive advantages. Levitt (1983) argues that making your environmental analysis or business intelligence activities international is extremely useful to identify competitors, gain a throughout understanding of markets and to spot trends in the industry.

There are, despite the obvious advantages, also some dangerous drawback related to internationalize the business. Peng (2007, 2009) but also Rugman and Verbeke (2007) mention for example cultural distance and controllability of operations as factors that could cause problems in the internationalization process.

Based on the theory above, STS pursues a going global strategy through market development. To do this, information about the targeted market is necessary. A firm may be viewed as an open system (Katz and Kahn, 1966). It exists because of its match with a specific environment. This logic applies especially for international markets because firms lack the knowledge, experience and feeling that they have obtained in their home market through the years. Foreign markets can be analyzed using a market analysis. The next paragraph will give a to-the-point description of the market analysis.

2.2 Market Analysis

In this paragraph, the term marketing strategy is examined and subsequently the elements of a market analysis will be given. A company must adopt a forward market orientation so it can anticipate on and exploit changes market (Kohli and Jaworski, 1990). A marketing strategy is therefore of primary importance of a firm (Baker, 2000).

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Out of the many definitions in literature the recent one of Varadarajan (2010) is the following:

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Marketing strategy refers to an organization’s integrated pattern of decisions that specifies its crucial choices concerning products, markets, marketing activities and marketing resources in the creation, communication and/or delivery of products that offer value to customers in exchanges with the organization and thereby enables the organization to achieve specific objectives.

’

This definition constitutes a broad explanation containing virtually all strategic marketing issues. The part ‘crucial choices concerning markets’ encompass strategic questions such as where to compete, when to enter a market and how to enter a targeted market. To determine the potential of the new market, intelligence is needed. According to Baker (2000) it is necessary to carry out a wide-ranging evaluation and analysis of market factors to develop strategy decisions, like entering new markets. Much of the literature on market analysis begins with the premise that information plays a critical role in the success or failure of organizations. This widespread belief among business academics and practitioners leads to the argument that more information always leads to better business decisions. Many authors go so far as to say that the growth and even survival of today’s business entities will depend on their strategies for handling and processing information. All managers seek to keep themselves informed of changes in the marketplace and their own organization (Glazer 1991; Turner 1991; Ruekert 1992; Maltz & Kohli 1996; Wierenga & van Bruggen 1997; Dawes et al. 1998; Li & Calantone 1998; Yeoh 2000). Authors like Alsem (2007) and Aaker (2005) stated that a market analysis contains of four elements: An industry analysis, a competitor and customer analysis and a distribution analysis. Because distribution plays only a minor role in the core business of STS, part of the fact that its main offering is a service attempt, the focus will be on the remaining concepts. 2.2.1 Industry Analysis

Especially in the current global setting, the need for a firm to be able to understand the environment and its dynamics is increasingly important (Young & Javalgi, 2007). A distinction can be made between the firm’s direct action environment and its indirect environment (Moenaert and Robben, 2010).

The indirect environment is concerned with the macro context of a firm. The macro environment does not influence a firm’s processes and performance directly, but only in an indirect manner. The indirect environment can be divided into the political environment, economic environment, the social environment and the technological environment. Hence, the acronym PEST. A PEST analysis is often used to analyze the macro environment. Moenaert and Robben (2010) professed that an exhaustive inventory of PEST elements is often not feasible. Furthermore, suppliers do not have much influence on elements of a PEST analysis, such as government decisions. Therefore, the information is often not that valuable. This study will concentrate on the direct environment of the firm due to the lack of feasibility of a comprehensive PEST analysis for the region Germany.

The direct environment will be investigated using an industry analysis. Aaker (2005) stated that the primary objective of an industry analysis is to determine the attractiveness of a market or (sub) market to potential participants. Second objective is to understand the dynamics of a market. An industry analysis can contain several different elements. To determine the market demand, Alsem (2007) stated that elements as market size, potential size and (sub) market growth are the main

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important market factors to determine demand. The goal of the industry analysis is to obtain an

impression of future opportunities and threats from the perspective of the industry as well as changes in the attractiveness of the market (Alsem, 2007). To look deeper into opportunities and the attractiveness of markets, this study also will focus at key success factors and trends/ developments in the market. The importances of these factors are also stressed by Aaker (2005).

The industry analysis will be used to answer sub questions 1-3: to determine the attractiveness of the German COGP markets. Factors that will be used in this study are actual market and potential market and (sub) market size, market growth, key success factors of the market and trends/ developments. 2.2.2 Customer analysis

Goal of a customer analysis in B2B markets is to create a successful marketing strategy to isolate the unique dimensions of each major sector or customer. The first logic step of a customer analysis is segmentation. Segmentation is often the key to sustainable competitive advantage. Segmentation means the identification of customer groups that respond differently from other groups to competitive offerings (Aaker, 2005). STS segmented their customers in three groups: chemical industry, oil&gas industry and the power industry. Based on theory, this has the most overlap with a multiple segments strategy instead of its opposite, the focus strategy. The focus strategy focuses on a single segment, which may result in creating efficiency, low costs, commitment and competitive advantages over competitors. The multiple segment strategy allows firms to serve several segments with different characters. Advantages are flexibility, broad product lines, serving both the low end and the high end of the market and there could evolve synergies between the segments. Within each segment of STS, the company size, sector and location will be determined of the most important firms. These factors are based on the demographic variables for business markets situated in Alsem (2007).

The second step is to identify motivations: What lies behind the purchase decision of customers in each segment? Aaker (2005) argues that, especially in B2B markets purchase behavior of your industrial customers is vital because that determines largely the score of projects. The importance of purchase behavior was also stressed by Bonoma and Shapiro (1983). They concluded that the purchase behavior of customers is essential in a B2B environment. This study will use the factor purchase behavior in the customer analysis because it is important for STS to know what the procurement policies and tender strategies of customers are.

Third, the needs of the customer will be identified. A market definition does not reflect the product which a firm sells, but the need which they fulfill (Moenaert and Robben, 2010). Organizations, but also individuals buy goods and services because they respond to a certain need. In essence, the goods and services itself are unimportant for the customer. Furthermore, in defining needs of industrial markets, the term derived demand is important: the demand for an industrial follows on from the demand for the products or services of their customers. If you look it in a pro-active perspective, the purpose of industrial suppliers or service providers is to enhance the competitiveness of their customers (Park and Zaltman, 1987). Hence, customer needs is an important factor to analyze customers.

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Altogether, the factors that will be included in this study are company size, geographical

concentration, sector, purchase behavior and customer needs. The customer analysis will be used to answer sub questions 1-3.

2.2.3 Competitor analysis

Scholars emphasize the importance of competition in conducting an external analysis. Baker (2000) described it as follows: a firm’s ultimate success or failure depends upon its ability to position itself effectively vis-à-vis other firms seeking to serve the same end-use markets.

Literature named several techniques as value chain analysis, identifying critical success factors (CSF) or skills and competences and benchmarking as critical to remain or become competitive. Nevertheless, the ‘Five Forces’ analysis by Michael Porter became the standard method to determine the competitive environment. Porter provided a framework that models an industry as being influenced by five forces: Power of customers, power of suppliers, threat of new entrants, threat of substitute products and rivalry within the industry. The model enables firms to better understand the context in which the firm operates and to seek and develop an edge over rival firms. In recent years, the model is from 1979, the model was challenged by other authors. The choice of the five forces appears to be arbitrary and it is not an exclusive or exhaustive list. Furthermore, the dubious assumption in the model that buyers, competitors, and suppliers are unrelated and do not interact and collude and that uncertainty is always low, allowing participants in a market to plan for and respond to competitive behavior were challenged (Coyne and Subramaniam, 1996). These critics weakened the model. This study will not use Porter due to the fact that the model assumes that winning is to be found in competition: A firm can only grow if the competition in the market grows weaker. This is not in line with the purpose of this study because options as collaborations and acquisitions will also be explored. Hence, the focus will be on the individual competitor.

This approach of understanding competitors and their activities can provide several benefits. First, the strengths and weaknesses of a competitor can suggest opportunities and treats that will merit a response. Furthermore, future competitor strategies may allow you to predict emerging opportunities or forecast future reactions of key competitors. Finally, it enables a firm to identify strategic uncertainties that will be worth monitoring closely over time (Aaker, 2005). Besides the purpose of a competitor analysis, Alsem (2009) identifies different levels of competition.

Product-form Competition: Competition between brands, sharing the same segment.

Product-category Competition: Competition between product/ services with the same characteristics

Generic Competition: Products/ services or alternatives that congregate the same needs of customers.

Budget Competition: Competition for ‘consumers’ money’. The definition of the market is very broad, for example how much capital wants industrial companies invest in maintenance or asset management?

These four dimensions represent a continuum from a narrow market definition with few competitors to a very broad definition with increasing competition. Alsem (2009) speaks about interplay between

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market definition and the identification of competitors. While the level of competition depends on

the market definition, in turn the level of market definition depends on the level of planning within a firm and the planning horizon. See figure 5 for a representation of this logic.

Figure 5: Choice of level of competition based on Alsem (2009) pg 187.

As mentioned, there are numerous factors that can be used in a competitor analysis. The factors used by Porter are already discussed. Trends, history, ownership, corporate governance, products, quality control, facilities, marketing activities, personnel and patents are all categories that are part of the competitor analysis (Fleisher and Bensoussan, 2007). West (1999) argues that not all factors are even valuable for analysis. Basically, the goal of a competitor analysis is to gain insight in the strength and weaknesses of important competitors and to map future behavior (Alsem, 2009). Furthermore, while it is important to monitor competition, West (1999) argues that firms have to be careful to avoid the trap of ‘paralysis by analyses’. This phenomenon comprises information overload as the analyst lose the ability to estimate the marginal value of information. A selective approach emphasizing a number of key indicators of proven relevance is preferred (West, 1999).

Based on Alsem (2009), Aaker (2005) and West (1999), this study will use selected indicators that truly say something about the strength and weakness of a competitor. This information will be used to answer sub questions 1-3. The following factors will be analyzed: ownership and structure, financial history, production locations and product portfolios, (international) markets served and strategic positioning.

2.3 Entry mode strategies for service firms

The next paragraph will elaborate on entry mode strategies and the implications for service firms. First theory will be consulted about the relationship between entry decisions and service companies. Second, a model to determine the entry mode will be proposed and consequently the environmental factors influencing the decision in the model will be treated. Theory is consulted because of the fact that literature offers researchers different approaches to determine entry modes in new markets. This paragraph will elaborate on the best approach, suited for this kind of complicated issues. 2.3.1 Theory

As explained in paragraph 2.1, today’s marketplace is becoming more and more global as both niche players and mainstream corporations must develop more globally in order to sustain and develop their strategic positioning and to renew their sources of competitive advantage (Couturier and Sola, 2010). The fact that internationalization can be beneficial is evident. The question that rises next is how a service firm should enter a foreign market? This is a crucial question because an inappropriate

Level of planning Business Unit Level: STS Region NO Planning horizon Long/ medium term: 2 a 3 years Market definition Narrow market definition: Generic services for COGP industry

Germany Level of competition Product category competition: Generic services at individual firms

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entry mode may block opportunities and substantially limit the range of strategic options open to the

firm (Alderson, 1957). Service firms may enter foreign markets using a variety of entry modes. Examples of the most common entry modes are given in figure 6 (Couturier and Sola, 2010; Kumar and Subramaniam, 1997).

Entry Mode options

Export Sending goods or services to another country for sale, without having a physical location in that country

Contractual agreement A legally enforceable agreement between two or more firms with mutual obligations

Joint venture A formal alliance between two commercial firms, formalized by one or more business contracts where they mutually participate in activities

Acquisition A purchase of a majority interest in another company or a part of it

Green field An investment with 100% ownership in an physical structure in a foreign region

Figure 6: Common entry mode options

Because of the inseparability of a service offering, many services cannot be exported (Root, 1987). Customers may demand specific adaptations and information exchange to suit local requirements in foreign markets (Edvardsson, 1988). Services with a high degree of intangibility and buyer-seller interaction frequency, and simultaneous production and consumption, are location-bound and must be available in-full from the day of foreign market entry (Anand and Delios, 1997). Simply looking at market factors, an acquisition is an attractive option when a firm wishes to enter an oligopolistic, static or declined market and the green field strategy is more appealing when there is rapid expansion in a market (Knickerbocker, 1973). Finally, a joint venture is considered as the smartest move when the chosen entry market is different from the firms’ domestic culture. Japanese car manufacturers entering the US market used the option of a joint venture many times to minimize the potential cultural shock between domestic and host country (Hennart and Park, 1993).

Figure 7 visualizes the various modes of entries related the commitment to invest resources and control.

Figure 7: Entry modes related to control and commitment Source: Claver et al, 2007.

Export Contractual agreement Joint Ventures Green field Acquisition

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All in all, the choice of foreign market entry mode is critical and additionally largely related to control.

Several studies pointed out that control is crucial as it ensures achievement of the ultimate purpose of the organization, it is the single most significant factor that determines risks and returns, the amount of relational friction between buyers and sellers, and ultimately, the performance of the investment abroad (Barkema et al., 1996; Barkema and Vermeulen, 1998; Khoury, 1979). The issue of control over foreign markets is for service firms especially important as it allows them to supply timely and good quality services to international clients, which protects their reputation. Literature suggests a high control mode when personal relationships, conducting research on-site and adaptation to the needs of the foreign buyers is necessary.

High control entry modes are also preferred when brand name value is high (Klein and Leffler, 1981). Often ‘soft’ services (production and consumption occur simultaneously, the firm is an integral part of their product) choose for a high control entry mode, because of the necessity for customization and the frequency of buyer-seller interaction. In turn, soft control entry modes like exporting or licensing are tempting when a firm is exposed to high risk or when demand conditions are uncertain (Gatignon and Anderson, 1988). With the above described theory in mind, how to determine the appropriate entry mode? To facilitate the adoption of an appropriate entry mode it is necessary to use theoretical models that have proved themselves empirically (Anderson and Gatignon, 1986; Dunning, 1977). The next section will deal with this topic.

2.3.2 Entry Mode Models

Entry modes have been modeled in two ways. One is to model as a continuum of increasing levels of resource commitment, risk exposure, control and profit potential from export to the wholly owned subsidiaries (Chu and Anderson, 1992). The logic is that managers are assumed to consider all the modes of entry at the same point of time. The other is from a hierarchical perspective (Kumar and Subramaniam, 1997). Managers first structure various entry modes into a multi-level hierarchy and define a set of evaluation criteria for each level. Basically, managers consider only a few relevant factors at each different level of the hierarchy. The first level is between equity and non-equity entry modes. This qualification is based on the amount of resource commitment that is necessary to establish operations in foreign markets. The equity mode requires a major resource commitment from the firm. A non-equity mode like exporting requires considerably less resources (Kumar and Subramaniam, 1997). The equity and non-equity mode also differ considerably on the risk, return, control and integration characteristics. In the second level, the decision area is around which specific strategy within equity or a non-equity mode is to be considered. A hierarchical level is used by managers to reduce uncertainty and complexity in the decision making process by splitting up the decisions. See figure 8 for a representation of the model as it was presented in the Kumar and Subramaniam (1997) article

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Figure 8: A hierarchical model of the mode of entry decision. Source: Kumar and Subramaniam (1997)

Scholars have argued that a hierarchical model performs better in complex situations (for example entering a new foreign market or a known market with high entry cost due to competition and other factors) due to three reasons. First of all, a hierarchical model recognizes that managers have a limited analytical capacity. Simon (1955) concluded this important factor in his studies. Decomposition of a decision into a hierarchical process leads to a more manageable situation. In scientific literature this line of reasoning is often referred to as a cybernetic strategy. Second, a hierarchical model recognizes that various entry modes dramatically differ from each other. The circumstances suitable for a green field operation differ from those that call for an export endeavor. It is wrong to compare those choices at the same level. Lastly, Pan and Tse (2000) argue that not every environmental factor affects the entry mode at the same level. For example: country specific factors largely affects an equity/ non equity entry decision but not decisions at lower levels.

Indeed, when making complex, highly uncertain and irreversible choices about entry mode decisions, a hierarchical perspective is recommendable. Because of these arguments, this study uses the hierarchical model of Kumar and Subramaniam (1997).

2.3.3 Factors influencing the Entry Mode decision

In general, external factors (home country factors and host country factors) and internal factors will determine the entry mode decision of a firm (Claver, Rienda en Quer, 2007; Root, 1987; Reid 1983; Tse et al, 1997; Zhang, 1994). These factors help to determine the attractiveness of the different entry strategies. Within these broad themes, different factors can be distinguished. Firstly, the factors influencing the equity/ non-equity decision in the model of Kumar and Subramaniam will be discussed.

2.3.3.1 Level 1: Equity or Non-Equity

Internal Factors:

1)The degree of service differentiation is the first important internal factor according to Root (1994). Highly differentiated product or services with distinct advantages over competition give sellers a significant degree of pricing discretion. Consequently, those offerings can absorb high transportation cost and import duties and still remain competitive. Weakly differentiated offerings must compete on a price basis in the target market, perhaps only possible through local production. Subsequently, this pushes firms into equity investments. High differentiation leads often to export, or licensing

Choice of Entry modes

Equity Non Equity

Exporting Contractual Agreements Acquisition

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(Root, 1994). However, if the firm offers services or product related services the firm is almost

obligated to perform the service in the foreign market, because of the difficulties exporting services. Depending on the features of the service offering, franchising, agreements and subsidiaries are all possibilities. Based on literature a positive relation between low service differentiation and equity mode decision is suggested.

2) Resource commitment is the next internal factor important for the equity/non equity judgment. Theory suggest that the more abundant a companies’ resources are, the more numerous its entry options. Although influencing, the resource determinant must be joined with a willingness to commit the resources to the foreign market development (Root, 1994). Commitment enables managers to select entry modes with a wider range. Hence, a firm with high resource commitment is more likely to choose equity entry modes. Moreover, the choice of equity/ non-equity entry mode also depends on the firm's surplus resources. Reid (1983) has shown that if a firm opts for occasional or indirect exports (through agents for example) few resources are needed. However, the establishment of subsidiaries requires a surplus of these resources. Availability of those resources is critical.

External Factors:

3) Geographical distance, or closeness as Davidson (1983) called it, is an external factor with weight. Logically, when the distance is large, transportation cost can make it impossible for non-equity modes. Not only distance is important, but also a history of trade between countries can lead to understanding and hence to simplify economic investments in each country (Tse et al, 1997).

Next in line is the 4) cultural distance between the home country and the host country (Root, 1994). Cultural values, language and social structures are of general significance. If managers are not familiar with the culture of a host country, they will become fearful of their capacity to manage operations elsewhere. Furthermore, cultural differences foster high cost regarding to information acquisition. Thus, cultural distance favors non-equity investments.

5) Political risk is a subject that determines the degree of commitment a firm wants to have in a foreign country. Political risk is concerned with the uncertainty over the continuation of present political conditions and government policies in the foreign host country that are critical to the profitability and/or the business arrangement (Root, 1994). Government regulations and government policies are components of the political risk factor and have a decisive influence on the entry mode choice. For example, restrictive import policies obviously discourage a non equity mode like exporting (Hall, 1977) and restraining investment policies discourages generally speaking equity decisions like green fields and stimulates joint ventures or acquisitions. Many host countries allocate certain areas as zones for foreign prioritized operations. In these zones, there are special arrangements made to help businesses with special benefits (Gatignon and Anderson, 1988, Kim and Hwang, 1992). It is for foreign companies easier and less risky to operate in these zones and consequently they are more inclined to do an equity investment (Zhang, 1994). In case of governmental policies, expectation is that the presence of governmental help has a positive relationship with an equity investment. Consequently, low political risk encourages an equity decision.

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The 6) dynamics of the targeted countries economy is important for the equity/ non-equity decision. A rapidly growing economy favors an equity expedition and it is empirically demonstrated that low growth economies points in the direction of a non-equity decision (Nakos en Brouthers, 2002). Based on the above factors the equity/non equity decision will be made. Furthermore, an overview of the determinants will be presented in the conceptual model discussed in paragraph 2.4. Before we look at this scheme the factors influencing the lower levels of the model of Kumar and Subramaniam (1997) will be presented. When going one level down, different factors will influence the decision. 2.3.3.2 Level 2a: Exporting or contractual agreements

The choice between exporting or pursue contractual agreements like licensing depends largely on the following three factors: Experience, size of the firm and competition.

Internal Factors:

1) Experience in foreign markets is the first factor. Root (1994) mentioned that exporting will be a good learning experience for firms going international for the first time. Exporting enables firm to adopt an exploratory, experimental behavior to obtain knowledge about foreign markets and its ability to compete in them. Different scholars found out that experience in international endeavors led to decreased uncertainty with respect to foreign markets (Claver, Rienda en Quer, 2007) which subsequently led to increased resource commitment (Erramilli, 1991). Hence, if the level of experience in foreign market is high, resource commitment is to be expected and a firm is eager to develop contractual agreements.

2) Size of the firm is also important for resource commitment in foreign markets. As Root (1994) stated, a firm with limited resources is constrained to use entry modes that call for small commitment. Indeed, firm size is frequently a critical factor in the choice of entry. Theory claims’ that if firm size is large, a more resource committed strategy (contractual agreements e.g.) ought to be followed.

External Factor:

Finally, the factor 3) competition is a major influence on the choice between export and contractual agreements. Scherer and Ross (1990) discusses in their book ‘Industrial market structure and economic performance’ that the intensity of competition is associated with the number of competitors that are active or have the ambition to become active in a particular market. Basically, the increase of the number of firms in an industry will increase the level of competition creating a collective decrease of earning as rate of growth, which can easily lead to a zero-sum game. Therefore, high competition demands flexibility. This will result in firms picking low resource commitment strategies because those decisions allow firms to adapt to the market (Kim and Hwang, 1992). Hence, fierce competition will lead to export endeavors instead of more resource demanding contractual agreements.

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2.3.3.3 Level 2b: Joint venture, acquisition, Green field

In this section we compare the joint venture with the acquisition mode and subsequently the green field option with the acquisition strategy due to the rising degree of control and commitment between the strategies. The following factors are evaluated: Competition, transaction costs, degree of complementary assets, cultural distance, political risk.

External Factors:

Several scholars argued that the decision between acquisition, joint venture or green field is based on the 1) competition in the market (Stigler, 1952; Yip, 1982; Scherer and Ross, 1990; Hennart, 1991). When deciding to enter a foreign market using an equity strategy, different arguments push the competition factor. When fewer firms control most of the entire market share of an industry, they can individually and collectively profit more by cooperation than by competition (Stigler, 1952). Under such conditions, if the investor creates new capacity in this market, it will usually provoke aggressive responses from established firms, especially from market leaders (Yip, 1982). The authors Meyer & Estrin (2001) state that a firm is more likely to choose acquisition over green field when investing in a host market with a high level of industrial competition. When a new entrant is trying to avoid or reduce resistance from established host country firms, an acquisition is preferred.

2) Transaction costs is the next factor influencing the choice between the green field option and the acquisition or join ventures. In general, when a market is competitively full, transaction cost (TC) theory assumes that the market will regulate transactions through price mechanisms. Under such conditions, the market will replace opportunism and asymmetrical information transaction with efficiency. However, when markets fail, market transactions will be marked by uncertainty and complexity. People are apt to behave opportunistically, and information will be asymmetrically shared between all of the trading parties (Williamson, 1975). For that matter, in an imperfect market, bringing together resources previously held by different firms incurs high transaction costs either in the market for corporate control, or in the host markets for complementary assets (Meyer & Estrin, 2001). When the host equity market is imperfect, a firm's acquisition activity may be delayed while it searches for suitable targets, analyzes their economic viability, conducts relevant negotiations, and endures inefficient bureaucracy. This may be especially true in host markets in the developing world. The firm's acquisition activity may thus be inhibited by high market transaction costs owing to a lack of resources and bargaining power in the host market. Hence, this theoretical perspective in mind it is to be assumed that high transaction cost and bureaucracy will favor the green field mode instead of acquisition or joint ventures.

3) Complementary assets are the third factor. A product or service will always fail in the marketplace unless its commercialization is supported by complementary assets (Teece, 1986). Basically, complementary assets are the supportive products and activities that allow firms to obtain the profits associated with the given product or service. Examples are brand image, real estate, market power, marketing channels, network relationships, and raw materials.

The firm may attempt to acquire complementary assets through the host market. However, it may encounter hurdles with high transaction costs in its quest to acquire the complementary assets it needs in the host market. Hence, the conclusion can be made that the higher the need for

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complementary assets specific to the firm’s offering and to the new market, the higher the likelihood

the firm will choose an acquisition or a joint venture over the green field option.

4) Cultural distance is an important decision-making determinant for the firm's foreign entry mode choice (Barkema et al.; Kogut & Singh, 1988) and is the fourth factor influencing the choice at this level. This factor is important because the differences between home and host market culture affects how a firm operates in the international market. In general, high post-acquisition costs from international acquisition are the result not only from different national cultures between home and host market but also from the interactions between two organizational cultures (Kogut & Singh, 1988). Thus, the acquired firm is often troubled by "double-layered acculturation" problems resulting from cultural distance between the acquirer and the acquired firm (Barkema et al., 1996). Based on this described logic, in order to reduce the risks of cultural distance between home and host market, the investor is more likely to enter through green field (Barkema & Vermeulen, 1998; Caves & Mehra, 1986; Kogut & Singh; Wu. 1990). This relation is widely spread in literature, based in several empirical studies. Hence, In order to reduce foreign investment risks due to cultural conflicts, the investing firm is likely to choose a green field entry strategy over the joint venture or acquisition option.

5) Political risk is the fifth factor discussed here. Many host countries allocate certain areas as zones for foreign prioritized operations. In these zones, there are special arrangements made to help businesses with special benefits (Gatignon and Anderson, 1988, Kim and Hwang, 1992). It is for foreign companies easier and less risky to operate in these zones and consequently they are more inclined to do a green field investment (Zhang, 1994). So, when a host countries’ regulation towards foreign investors is limitative the logic is that firm’s choice a joint venture over the green field or acquisition option.

2.4 Conceptual model

Based on the theory discussed in previous paragraphs, two conceptual models can be made. A conceptual model distinguishes variables which are relevant for the research question.

First, threats and opportunities will be determined based on an industrial analysis, using the factors actual market size, potential market size, market growth, key success factors and trends/ developments. Furthermore, the financial history, production locations, product portfolios, (international) markets, ownership and structure and the strategic positioning will determine the competitor profile. Lastly, the customer size, sector, geographical concentration, purchase behavior and the customer needs (for services) are used in the customer analysis. These analyses result in a summary of opportunities and threats for the chemical, oil&gas and power markets. Subsequently, the attractiveness of the three markets will be determined in order to give answer to sub questions 1-3. This is the first part of the research. After that, the best appropriate entry mode for the most attractive market(s) (defined by sub questions 1-3) will be determined. A representation of this logic is displayed in figure 9.

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Figure 9: The conceptual model market analysis

Second, the factors degree of service differentiation, resource commitment, geographical distance, cultural distance, political risk, and dynamics of the targeted market will be studied to investigate the most appropriate choice concerning non-equity or an equity based investment in Germany. Going a level downwards, the experience in foreign markets, size of the firm and the competition influences the independent non-equity variables, if those equity modes prove to be the best option. On the other hand, the variables competition in the market, transaction costs, degree of complementary assets, cultural distance, and political risk will influence the independent equity variable modes. A representation of the conceptual model (figure 10) is presented on the next page.

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