The Contribution of Strategic Group Membership to Foreign Market Entry in Fragmented Industries

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The Contribution of Strategic Group

Membership to Foreign Market Entry in

Fragmented Industries

By Dirk Blaauw Nieuweweg 42H 9711 TH Groningen 1784471 24th of August 2013

Master thesis Strategy and Innovation Management Supervisor: René van der Eijk

Second supervisor: Wilfred Dolfsma University of Groningen

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Abstract

The concept of strategic groups has been regarded as a unit of analysis rather than a governance mechanism to overcome industry fragmentation and coordination issues. The Dutch water sector provided the right context to research what contributions strategic group membership make to foreign market entry in a fragmented industry. It was found that strategic group membership contributes to foreign market entry. It makes the bundling of critical resources possible, so that firms can collectively offer these as a package. In addition, the group aids in having access to more network contacts that can possibly provide access to new resources.

Keywords: Strategic group, Water industry, cooperation, internationalization, industry fragmentation, network contacts, resource based view, group formality

Acknowledgements

I would like to thank a few people for their support.

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Executive summary

This research aims to find what contributions strategic group membership has on foreign market entry in the contexts of a fragmented national industry. This research uses the Dutch water industry as a setting to investigate and answer this research question. This industry is widely believed to be fragmented into many niche firms that possess specialized knowledge and technology. These niche firms have difficulties to export their niche solutions as such.

Literature mentions cooperation as a solution to the above mentioned problem for firms in fragmented industries. The existing body of literature provides several forms of cooperation to overcome these difficulties, one of which is to join or form a strategic group. In this way it is possible to bundle resources and offer a complete, rather than a niche solution to potential foreign clients. Moreover, firms can decrease their transaction costs by repetitive coupling. Additionally, the number of network contacts increase and firms can engage in inter-organizational learning.

The methods of this research are qualitative, as no prior research has focused on the feasibility of strategic groups to overcome industry fragmentation and to internationalize. Interviews were conducted with two separate strategic groups in the water sector in order to confirm or disconfirm the constructs that were formed a priori. In addition, secondary sources with respect to the constructs on all member-firms.

The results of the interviews were analysed thoroughly. It was found that strategic group membership contributes to foreign market entry and dampens the negative effects of industry fragmentation. It makes the bundling of critical resources possible, so that firms can collectively offer these as a package. In addition, the group aids in having access to more network contacts that can possibly provide access to new resources. To a limited extend, the strategic groups contributed to internationalization by the saving of costs that were established by cooperating. Strikingly, no inter-organizational learning occurred in the researched strategic groups. Furthermore, both groups were governed without formal governance mechanisms, which is inconsistent with the existing research on business groups and formality.

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1. Introduction

In the past decades, business networks, alliances and the value that these create have received much academic attention (c.f. Holm et al. 1999; Child et al. 2005; Dyer & Sing, 1998; Jones et al., 1997). Multiple theoretical perspectives have been developed and are relevant with regard to cooperative strategy such as game theory, transaction cost theory, resource-based theory and many more (Williamson, 1979; Barney, 1991; Dyer & Sing, 1998). This paper will add to this by discussing the concept of strategic groups; meaningful collections of firms or substructures within an industry (Peteraf & Shanley, 1997), as a form of cooperation between firms. More specifically, it will examine whether strategic group membership can contribute to foreign market entry. Strategic group analysis has been used for multiple purposes. Pioneering scholars on the topic such as Hunt (1972) Porter (1980) mainly used strategic group analysis to explain intra-industry differences. Later, business group analysis and cognitive strategic groups have built on the concept of strategic groups to further analyse it and regard it as a form of cooperation (Carney et al., 2011; Khanna & Palepu, 2000; Peteraf & Shanley, 1997). However, strategic groups as a governance mechanism have not yet received much attention. Therefore, this research will use the water industry in the Netherlands to shed new light on strategic groups. The industry is highly fragmented (Allen&Overy & Rebel, 2013) and has difficulties with exploiting its superior quality knowledge in foreign markets. Therefore the theoretically interesting question arises: ‘How can a fragmented supplier base use strategic groups to effectively exploit high quality knowledge around the globe?’ In the context of this research, fragmented industries are characterized by many small and medium sized firms and the absence of a market leader that can shape industry events (Dess, 1987), such as the initiation of international activities. The aim of this research is to examine whether the affiliation to a strategic group can contribute to foreign market entry of firms in a fragmented national industry.

1.1 The Dutch water industry

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always take part in the competition for foreign projects (Allen&Overy & Rebel, 2013). In the context of the Dutch water industry, a system integrator would be a single prime contractor organization that is responsible for designing and integrating externally supplied products and services into a system for an individual customer (Davies et al., 2007). In the case of large water projects, contracts often include multiple types of proceedings which an SME cannot all provide. Therefore, consortia and alliances need to be formed in order to be successful in both domestic and foreign markets (Allen&Overy & Rebel, 2013).

More specifically, this research will focus on strategic groups as a form of cooperation. Two groups of firms named the Lizard group and Holland Delta are researched. It will be examined whether a strategic group-form of cooperating is feasible in this research setting and beyond. The groups will be introduced in section 4.3 and 4.4, respectively.

1.2 Aim of this research

This paper will examine whether strategic group affiliation is an effective manner to dampen the negative effects that fragmentation have on the pursuing of international opportunities. This research regards strategic groups as intra-industry collections of firms that are linked to each other via formal and/or informal mechanisms and pursue similar strategies. This definition results from a thorough examination of the existing literature of strategic and business groups, and will be justified in the literature review on strategic groups in section 3.4.5.

Previous reports provide ample evidence which points to the notion that cooperation is needed in order to gain a better position on the international market and compensate for industry fragmentation (Allen&Overy & Rebel, 2013; Topsector Water, 2011; The Netherlands Water Partnership, 2013).It would therefore be of interest in what way strategic group membership can contribute to the foreign market entry and thereby positively influence the industry’s competitiveness.

Therefore, the research question this paper aims to answer is:

How can strategic group membership contribute to foreign market entry in the context of a fragmented national industry?

The sub questions that will help to answer the research questions are:

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The answers to these questions will also address an interesting gap in the existing literature, as strategic groups have been regarded as a unit of analysis rather than a way to overcome fragmentation in an industry. Moreover, strategic group affiliation has not been known for contributing to foreign market entry yet. This paper therefore aims to research whether strategic groupings are effective mechanisms to overcome fragmentation and induce foreign market entry.

1.3 Scope of this research

As described earlier, this research will examine the above mentioned practical and theoretical problems and investigate whether strategic group membership can be of help to firms in fragmented industries that wish to expand geographically. Prior to this research, no strategic group research has focussed on the feasibility of strategic groups as a governance mechanism to foster internationalization. Therefore, this paper aims to narrow this gap in the existing literature. Fundamentally, this paper examines whether strategic groups are, next to a unit of analysis as introduced by respected scholars such as Hunt (1972) and Porter (1980), an effective manner to cooperate and internationalize. This will be tested in the context of the fragmented Dutch water industry.

However, this research will not examine whether strategic group affiliation is the most appropriate governance mechanism for internationalization purposes and to overcome the negative effects of industry fragmentation. This research will solely focus on what the contributions of strategic group affiliation are to foreign market entry and whether affiliation can overcome the negative effects of industry fragmentation. Therefore, no comparison will be made with non-members and other governance mechanisms. In addition, this paper will not further go in to detail on how strategic groups should be managed effectively, nor will it cover partner/member selection and selection criteria.

2. Outline

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3. Literature review

3.1 Coordination and cooperation between firms

Much research has been done on how firms should obtain a competitive advantage. Through history, research has shifted from the industry wide (Porter, 1979), via the firm (Barney, 1991), to a relational level of competitive advantage (Dyer & Sing, 1998). Dyer and Sing (1998) identify four potential sources of achieving relational rents via inter organizational cooperation: relation-specific assets, knowledge sharing routines, complementary resources and capabilities, and effective governance. A relational rent is a supernormal profit jointly generated in an exchange relationship that cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic contributions of the specific alliance partners. However, there are also possible negative consequences to cooperating. Often, alliances suffer from instability (Das & Teng, 2000). Das and Teng (2000) defined alliance instability as a major change in the relationship status between parties from the perspective of at least one party. Amongst others, Larsson et al. (1998) describe that cooperating firms can find themselves in a learning race. Firms are not always noble partners in an alliance and can try to internalize another firm’s knowledge and terminate the alliance afterwards. It is suggested that long-term orientation of the alliance and inter organizational trust would diminish the chance of opportunism. Safeguards such as contracts and trust need to be in place to protect the firms against exploitative partners (Larsson et al. 1998). However, this increases transaction costs considerably. Transaction cost (TC) theory suggests that cooperation between firms is justifiable if it is a more economical choice than accessing resources and capabilities via either markets or hierarchies (Williamson, 1979). The latest versions of transaction cost theories take multiple perspectives on transaction costs. One of the perspectives that TC theory takes is that the TCs are the costs which are made to coordinate and connect all the links in a product/service chain (Dyer, 1997; Den Butter, 2010). In a case where many small and medium sized enterprises (SMEs) serve a market, the coordination of cooperation between these firms becomes more problematic. Historical distrust between firms that have been competing with each other, together with the rather individualistic behavior that SMEs typically show, are not leading to a fertile situation for cooperation (Mezgár & Kovács, 1998). However, when market conditions call for having access to additional resources, the spreading of risk and increased speed of organizational learning, alliances are an excellent choice to bridge the gap between the point in which an organization stands, and where it aims to be.

3.2 International Expansion

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growth is through geographical expansion. Not only for multinational enterprises (MNEs), but also for SMEs it can be appealing to offer the same or similar products or services in other markets (Barringer & Greening, 1998). Economic reasons are therefore one of the most important reasons for expanding geographically. Another motive for international expansion is the prospect of organizational learning. The importance of organizational learning for firm survival and innovation has been widely established in literature (c.f. Barkema & Vermeulen, 1998; Hitt, Hoskisson, & Ireland, 1994; Huber, 1991) Geographical diversity and the diverse market conditions that firms encounter fosters learning. The additional information that is gathered through conducting business in foreign markets creates a stronger knowledge structure and usually fosters superior abilities relative to purely domestic firms (Barkema & Vermeulen, 1998) In addition, hedging differences in market conditions between multiple environments is another common motive to internationally expand (Barkema & Vermeulen, 1998; Kogut, 1985). Moreover, investments in R&D are more likely to be recouped when applied to a larger number of operations in multiple countries. Furthermore, it is more likely to profit from innovations when they are traded in foreign markets, as well as in their domestic markets (Hitt, Hoskisson, & Ireland, 1994). This motive is especially relevant in unstable market conditions that for example crises can induce. Although these motives for international expansion seem to be equally relevant for MNEs and SMEs, SMEs have more difficulties with regard to internationalization (Barringer & Greening, 1998). Planning and managing growth through geographical expansion is time-consuming and shifts the focus from the core-business towards more peripheral activities. For SMEs especially, with little slack resources and relatively few employees, developing and/or transferring knowledge and skills takes a gigantic effort (Barringer & Greening, 1998).

3.3 Fragmented industries

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strategy such as in strategic groups in fragmented industries is inexistent. He proposes that in fragmented industries there is a trade-off between controlling critical resources and accessing information and competitive advantage on the one hand, and a loss of autonomy and increasing complexity on the other hand (Dollinger, 1990). In addition, accessing these assets is more difficult and thus costly in fragmented industries than in oligopolistic or coordinated industries; due to the competitiveness, there are no slack resources to spare, nor is there economic power. This makes the rise of a collective strategies difficult (Dollinger, 1990). Although he underlines that it is difficult, he does not support the notion that collective strategies do not occur in fragmented industries. He proposes that collective strategy is able to emerge from repetitive relationships within the industry. Therefore, fragmentation does not need to impede the development of a collective strategy. Drawing from game theory, he proposes that repetitive action between two players in the industry should take place whenever the payoff for cooperation is larger than for non-cooperation. Hereafter, mimetic adaptation of the positive-sum game takes place. This is the inception of collective strategy (Dollinger, 1990). In the light of the above mentioned characteristics of fragmented industries in combination with Dollinger’s notions, strategic groups in fragmented industries deserve academic attention. This paper will regard fragmented industries as defined by Dess (1987); an industry in which there are many small and medium sized enterprises, and in which there is no market leader that can shape industry events. This implicitly means that firms are not necessarily direct competitors of each other. In theory, each firm in the industry could serve another niche.

The above mentioned coordination problems are discussed thoroughly in literature. Next to these problems, a range of theoretical and practical solutions are found by various scholars. These solutions are particularly applicable to fragmented industries when coordination efforts need to be made, for example when small and medium sized firms aim to internationalize. These governance mechanisms are briefly reviewed in the next section.

3.4 Governance Mechanisms

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3.4.1 Overview of four main governance mechanisms in literature

Governance mechanism

Definition Difference Author(s)

Network Governance A structured set of autonomous firms cooperate and create products and/or services based on implicit open-ended contracts that are socially, but not legally, binding

No legal

agreements have been made. Firms can be active in different

industries.

(Jones, Hesterly, & Borgatti, 1997) (Provan & Kenis, 2008)

Industry Architecture Division of labour within an industry that specifies the roles of different types of firms within the industry and their interdependencies. Agreement between firms to work together. One dominant partner orchestrates. All within the industry.

(Jacobides, Augier, & Knudsen, 2006) (Ozcan & Eisenhardt, 2009) (Tee & Gawyer, 2009)

Strategic group Strategic groups are intra-industry collections of firms that are linked to each other via formal and informal mechanisms and pursue similar strategies. It is clear who is or is not an affiliate.

Agreements between firms

within one

industry. All firms are equal in principle.

Sometimes legally binding.

(Porter M. E., 1980) (Hunt, 1972) (Peteraf & Shanley, 1997) (Khanna & Palepu, 2000)

Transaction management

The ability to keep the costs of trade transactions as low as possible so that the value creation from these transactions is optimized Firms engage in cooperation to keep costs at a low. No specific grouping form is set. (Den Butter F. , 2010) 3.4.2 Network Governance

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They found three basic types of network governance modes. First, the participant-governed network is a network that is governed by the members themselves either formally; for instance through regular meetings, or informally, by more uncoordinated efforts. Second, the lead organization-governed network is where there is one organization is involved in all key decisions and major network activities, instead of having the inefficiency of sharing the decision-making power amongst all parties involved. This form of governance is mostly used in supplier-buyer relationships. Lastly, the network administrative organization (NAO) model is a network form of governance where a separate legal entity has the responsibility to coordinate all activities and take care of the network. Where a lead-organization is a member of the network itself, the NAO is not a member of the network, but rather an external administrative entity. The authors theorize that different configurations of factors such as trust, the number of participants, and the goal congruence should determine which governance mode will thrive (Provan & Kenis, 2008).

3.4.3 Industry Architecture

Another possible governance mode could be industry architecture. Following Jacobides, Augier and Kudsen (2006), industry architecture can be defined as a division of labour within an industry that specifies the roles of different types of firms within the industry and their interdependencies (Ozcan & Eisenhardt, 2009). One dominant party in the industry determines how the other parties in the industry interact, this can be either dictated or by working together, depending on the dominant party. After the initial ties are formed and have proven to be successful, the industry architecture becomes the blueprint for structuring partners’ interactions and structures (Ozcan & Eisenhardt, 2009).The concept of industry architecture focuses on the value chain of an industry and on the way in which the activities among the value chain get divided amongst the industries’ firms (Tee & Gawer, 2009). Cowhey, Aronson & Richards (2008) explain that industries usually have well-established rules to which the firms in that industry obey. Moreover, every firm in such industries plays a certain role. Industry architecture answers the questions ‘who does what’ and ‘who gets what’, therefore defining the division of labor between firms in the industry as well as the division of surplus in industries (Tee & Gawyer, 2009).

3.4.4 Transaction management Perspective

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production results in an increasing importance to connect the linkages in the production chain. Especially, by coordinating these linkages it is possible to create value. In order to connect these linkages, directing becomes important (Butter, 2010). Only the parts in the production chain where a firm has a competitive advantage will be maintained. Hereafter, innovation that facilitates the connection between the different parts, and thus lowering transactions costs and therefore create value. This will result in the maintenance of the competitive advantage (Butter, 2010). According to Den Butter’s (2010) research, innovation directed to the increased efficiency of transaction management is essential to enlarge the competitive advantage of the Netherlands. Den Butter (2010) explains the important role of directing in order to connect the linkages in the production chain. Despite the fact Den Butter (2010) focuses primary on the production chain, the fundamental finding is that directing coordination between firms is of importance.

3.4.5 Strategic Group

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group members need not to regard the group all exactly in the same way. However, they should be able to, to a certain extend, be able to predict each other’s actions. Extracting from these above mentioned streams in literature, this paper will define strategic groups as follows:

Strategic groups are intra-industry collections of firms that are linked to each other via formal and informal mechanisms and pursue similar strategies.

3.5 Focal governance mechanism: Strategic Group

The focal type of coordination of multiple companies is the strategic group. Strategic groups have been studied extensively over the past decades. Pioneers on the topic such as Hunt (1972), Porter (1973) and McGee and Thomas (1986) have been laying the foundations by focusing on strategic groupings with respect to the understanding of differences across firms within an industry. Peteraf and Shanley (1997) build on this theory by arguing that firms are cognitively dividing their industry environment in order to reduce uncertainty and manage bounded rationality issues. Peteraf and Shanley (1997) define strategic groups asmeaningful collections of firms or substructures within an industry. Porter (1980: 129) defines a strategic group as s a group of firms within the same industry making similar decisions in key areas. As mentioned before, this research will regard strategic groups as intra-industry collections of firms that are linked to each other via formal and informal mechanisms and pursue similar strategies.

This concept has been chosen for various reasons. Strategic groups have been largely regarded as a unit of analysis (c.f. Hunt, 1972; Porter M. E., 1980), rather than a governance mechanism used to overcome industry difficulties. Moreover, although the concept of diversified business groups in Asian countries have been proven to be successful in various aspects, such as innovation, profitability and overall performance (Carney,et al., 2011; Khanna & Palepu, 2000), intra industry groups of firms in Western countries have not been researched. This paper therefore aims to narrow this gap in literature.

The following section briefly describes on which theoretical fundaments the concept of strategic groups are built.

3.5.1 Transaction Costs Theory

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increases trust and decreases opportunism and transaction costs (c.f. Dyer & Sing, 1998; Schrader, 2001) In addition, in an institutional environment in which it is difficult to enforce contract agreements, business grouping is the result of the wish of firms to decrease the chances of opportunism and thereby increase its success (Hoskisson, Cannella, Tihanyi, & Faraci, 2004). Especially in fragmented industries is which many specialists are active, the minimization of transaction costs through cooperation is an area in which value can be created (Den Butter , 2010).

3.5.2 The Resource Based View

The resource based view (RBV) is one of the fundaments of strategic group forming, as access to resources and knowledge cannot always feasibly be reached through make or buy decisions (Das & Teng, 2000; Barney , 1991). Tsang (2000) found that in uncertain environments the strategic choice to ‘make or buy’ specific knowledge or other resources in infeasible. Often, cooperation between firms stems from the need for access to social and strategic resources (Eisenhardt & Schoonhoven, 1996).

In a similar vein, it has been argued that strategic groups increase the individual firm success as it increases market power and creates political influence (Carney et al., 2011). Moreover, research has shown that firms affiliated with business groups might profit from the notion that they are good partners, which increases their chances of future partnering (Morck, Wolfenzon, & Yeung, 2005). Khanna and Palepu (2000) further reasoned that this reputation effect increases the likelihood of access to foreign capital and technological resources.

3.5.3 Social network Theory

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for networking and internationalization purposes is therefore a feasible strategic choice for SMEs with the goal to be a global firm from inception.

3.5.4 Social Learning Theory

Peteraf and Shanley (1997) investigated strategic groups with regard to the extent to which there is a common identity. A strong group identity can either have positive or negative consequences. A positive consequence could be an increased level of collective action of the firms within the strategic group. This group, depending on the strength of the identity of the group, will act jointly and respond similarly to macro-level changes because of their micro-level inter-firm processes. On the other hand, a strong identity could lead to higher levels of resistance to change or a myopic view of the industry domain (Peteraf & Shanley, 1997). Joint learning and inter organizational learning, however, is believed to be one of the main reasons for being affiliated to a strategic group, from the social learning theory (Peteraf & Shanley, 1997).

3.5.5 Methodological discussion

Although the concept of strategic groups has been researched widely, there has been uncertainty about the actual existence of the groups as a unit of analysis such as in Hunt (1972). The accepted form of factor analysis and algorithms were based both on firm specific aspects such as size and marketing variables and on the assumption that strategic groups actually exist (e.g. Barney & Hoskisson, 1990). Reger and Huff (1993) built on this critisism by applying a different perspective on strategic groups, namely a cognitive one. Interviews within the industry were conducted to identify firms with similar strategies and applied three different types of cluster analysis which all confirmed that managers in fact cluster firms cognitively instead of the notion that strategic groups are artificial groups generated by clustering techniques (Reger & Huff, 1993). The former method for researching group existence is particularly relevant when strategic groups are used to analyse differences in firm performance within an industry, whereas the latter one is more relevant when strategic groups are looked at from a networking point of view as in this research.

3.5.6 Contradicting view

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are a feasible solution in situations other than institutional voids as found in emerging economies remains.

3.6 Overview Strategic group research

Table 1 - Overview of strategic group research

Terminology Definition/Implication Author(s)

Strategic group Grouping of firms according to strategy to minimize economic assymetry within each group within and industry and explain intra industry differences in performance

(Hunt, 1972)

Strategic group A group of firms within the same industry making similar decisions in key areas. This can be used to analyse intra industry differences.

(Porter, 1980: 129)

Strategic group Analytical tools to verify the existence of strategic groups are insufficiently accurate. Strategic group analysis can therefore not be used to analyse intra industry differences

(Barney & Hoskisson, 1990)

Cognitive strategic group Cognitive categorization of firms into strategic groups to overcome uncertainty and bounded rationality issues

(Peteraf & Shanley, 1997) (Reger & Huff, 1993)

Business group Legally independent firms tied together in formal and informal ways, in order to overcome institutional flaws/ access resources/ gain political power/ minimize transaction costs

(Carney, et al., 2011) (Khanna & Palepu, 2000) (Tsang, 2000) (Hoskisson, et al., 2004)

Business group Business groups are only relevant in a certain context, therefore have a negative

effect on the

internationalization- performance relation

(Gaur & Kumar, 2009)

3.7 Formal to informal strategic groups

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on intra-organization formality and informality, where formal social networks are defined as networks which are prearranged and created by management (Chandler, 1962) and informal networks are emergent and ungoverned organic structures (Mintzberg, 1973). The network formality is influenced by institutional and environmental factors, which call for formal, informal, or a mixture between formal and informal network mechanisms. It has been recognized that networks are not necessarily bound to organizational boundaries (Mintzberg, 1973). However, little group research has been conducted on the specific implications of different formality levels in group structure. Amongst others, Khanna and Palepu (2000) have established that for diversified business groups often formal systems of coordination are in place, next to informal relationships. As such, in this type of group it is uncommon to merely rely on informal safeguards such as trust, reciprocity, and so on. As with most abstract notions such as network formality, there is a continuum along which networks or groups can be placed. The following two examples are placed at the two ends of formal and informal strategic groups.

3.7.1 Formal group: The case of Formosa Plastics Group

The Formosa Plastics Group (FPG) is a group of companies that is mainly active in the ‘plastics’ value chain (Formosa Plastics Group, 2013a). Over the course of the first forty years of business, the group became increasingly vertically integrated. As a consequence, the group had to be strategically aligned to keep transaction costs as low as possible and remain competitive as a group. Therefore, the group has established a group administration office, which performs audits, implements group-wide information systems, and so forth. The founder of the first businesses in the group is the Taiwanese businessman Wang Yung-ching. Nowadays, his family owns a minority stake in most of the companies of the group (Yeh, Lee, & Woidtke, 2001). This extend of vertical integration brings the benefits of being vertically integrated, whereas it avoids being committed to a fully owned vertically integrated business. Moreover, the group saw opportunities in the United States of America (USA), China, Vietnam, and Indonesia to further invest in downstream activities and secure the natural resources in these countries (Formosa Plastics Group, 2013b). The markets were chosen carefully, after which the group could easily compete; its products are of high quality, yet they are reasonably priced (Formosa Plastics Group, 2013b).

3.7.2 Informal group: The case of The Small Business Consortium (USA)

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'FPG'

-

Formal

---

Informal

-

'SBC'

The group’s purpose is for each individual organization to grow in the highly competitive environment. In order to achieve this, they put each other’s information forward, and team through subcontracting when a client’s requirements exceed the skills and knowledge of one individual firm. In this way, members of this strategic group can remain specialists, while at the same time they can bid and take part in larger integrated contracts. The group as a whole has 191 employees and offers 33 consulting programs and achieved a total of $31.6 million in revenue (The Small Business Consortium, 2013b).

Figure 1 – Strategic group formality continuum

3.8 Literature review summarized

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4. Methodology

4.1 Industry selection

This study takes the Dutch water sector as the focal industry. The industry is widely believed to be fragmented. However, it is not a fragmented industry as described by Porter (1980). It could best be described as an industry that is in a relative near state to monopolistic competition. There are many niche players that focus on specific technologies. The negative effects of this fragmentation that there is relatively little coordination in the industry and that the Dutch water industry as a whole is not leveraging its full potential on the global market (Allen&Overy & Rebel, 2013). In the water industry, often integrated contracts are offered. In these integrated contracts parties agree on the execution of multiple types of proceedings. As the Dutch water sector is highly fragmented, and most players are focussing on niches within the industry, this fragmentation is believed to be hampering the internationalization process of firms within the industry (Allen&Overy & Rebel, 2013; The Netherlands Water Partnership, 2006; The Netherlands Water Partnership, 2013). Therefore, this industry is believed to be suitable to examine whether strategic group affiliation can contribute to foreign market entry in a fragmented industry setting.

4.2 Choice for Case Study Research

Case study research was deemed most suitable to investigate the research question at hand, since no prior research on the suitability of strategic groups as governance mechanism to act against industry fragmentation has been done yet. In addition, it has not been researched whether strategic group membership can serve as catalyst to the internationalization process. As there are no prior theories in this field, no theories can be tested. Therefore, this research uses case study research in order to gain a more complete understanding of strategic groups and there effects on the internationalization process and on the negative effects of fragmentation. Moreover, the importance of gaining a better understanding on strategic groups can be valuable to both practitioners and theorists.

4.3 Sample – The Lizard Group

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touch with other firms in the industry. A meeting was called and the technology was explained. Currently, 12 firms and 2 knowledge institutes are now cooperatively using the technology without any contractual obligations. It can therefore be stated that this group of firms cooperates in an informal manner. The group has bi-annual meetings to discuss the technology and verify whether there are projects in which the firms can cooperate and complement their resources. In addition, most firms have frequent contact with at least two other firms which also use Lizard.

Table 2 - The Lizard Group

*Interviewed firms

**Interviewed firm is a relatively small division of the MottMacDonald Group

4.4 Sample – Holland Delta

Holland Delta is a strategic group that was created due to cooperative efforts of Nelen&Schuurmans and Intech. The group specializes in the monitoring of dike and dam security. Both N&S and Intech had ambitions to be involved on the international market. As both firms were too small to become noticed or recognized as suitable firms for large dike and dam projects, they decided that they needed to form a consortium and act as one entity if they wanted to win tenders in foreign markets. The different types of proceedings, and eventually profits, could be divided after a tender was won and executed. Some members of this group are also involved in the Lizard group. However, this

Firm Staff Locations Main Business

Tijhuis Ingenieurs 35 3 Water/soil

Euroconsult MottMacdonald** 100 1 Land/Water/ Environment Acacia* 11 1 Groundwater Wareco* 60 2 Water/Soil/Foundation

Water Insight* 7 1 Water/Water pollution

Future Water* 9 2 Multiple water specializations

Bureau Waardenburg 70 1 Ecology/ Environment/ Landscape Oranjewoud (Antea Group) 9425 80+ Soil/Water/ Infrastructure/

RoyalHaskoning DHV 7000 100+ Water/Infrastructure/ Industry/ Energy Fugro 14 000 100+ Water/Energy/Buildings Infrastructure

Intech BV* 3 2 Dams/Dike Inspection

Nelen&Schuurmans* 65 1 Water Management

Deltares 800 2 Delta knowledge institution

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group’s main goal is internationalization in the specific area of dike and dam security and therefore also has specialized partners outside of the Lizard group. Currently, the group has executed several pilot projects. The group expects, however, that they will soon grow beyond executing pilot programs only.

Table 3 - Holland Delta

Firm Staff Locations Main Business

Intech* 3 2 Dam/Dike inspection

Nelen&Schuurmans* 65 1 Water management

RoyalHaskoningDHV 7000 100+ Water/Infrastructure/ Industry/ Energy

FutureWater* 9 2 Multiple water specializations

HansjeBrinker* 15 2 Remote sensing for Oil/Gas, Manmade objects, Water-related subjects

Deltares 800 2 Research and knowledge institution on Water

related subjects

Miramap -5 1 Dike and drought scan

Empec Services -5 1 Ground penetrating radar

*Interviewed firms

4.5 Data Collection

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Due to time constraints, the interviews took place via telephone. Each informant was asked if the timing of the phone-call was convenient and whether they would like to contribute to the research. If the timing was not convenient, appointments were made for a time that suited the interviewee. Eight interviews of approximately 30 to 40 minutes were executed. The interviewees were mostly managing partners and were at least project-manager of a group related project. Following Bijlsma-Frankema and Droogleever Fortuijn (1997), constructs were developed a priori and placed in a qualitative data matrix, where the comparison of the constructs across interviews was made possible.

4.5.1 Reliability and validity

In order to ensure maximal reliability of the insights that are gained during the interviews, all types of bias need to be taken in account (Van Aken, Berends, & Van der Beij, 2012) . First, researcher reliability was ensured by having a standardized interview in which the influence of the researcher is minimized. Despite the fact that open questions are asked, the same procedure is followed for each interviewee. Second, instrumental reliability was ensured by verifying whether the interviewer understood the answer correctly by summarizing the answer of the interviewee and asking whether this was what the interviewee meant. Each interviewee was interviewed separately, and each construct was explained and asked for in the same way in order to minimize differences in interpretation across informants.

Third, response bias was minimized by asking non-suggestive open questions and by aiming to create a friendly conversation in which there are no wrong answers to the questions and by non-suggestive further questioning. Fourth, in order to prevent selection bias, two strategic groups were researched, and each firm in the sample was researched either via interview and secondary sources or through secondary sources alone. Both large and small sized firms were interviewed and during the exploratory stage, non-group members were interviewed in order to gain better insight in the industry. Lastly, situation bias was prevented by interviewing different interviewees during different timeslots.

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strategic groups as governance mechanisms to internationalize in a fragmented industry. Therefore, external validity, or generalizability, is limited.

In the literature review above, internal validity is ensured. Ample literature has confirmed the interest of researching the research question at hand.

4.6 Data analysis

The data analysis and collection are developed in an iterative process as this improves the understanding of the researcher during these processes (Hartley, 2004; Eisenhardt, 1989). The above mentioned qualitative data matrices aid the data analysis process by providing an overview of similarities and differences across the interviewed firms. Information obtained from the interviewees was compared with the information from secondary sources such as corporate websites and documents obtained from the website. No hypotheses were formulated before the data analysis process. Instead, each firm’s cooperative activities were researched via secondary sources. Hereafter, the interviews were started open-mindedly in order to confirm or disconfirm what was stated in the secondary sources.

Every firm that was researched via primary and secondary sources was first subjected to a test whether they were in fact member of the strategic group at hand. This test contained criteria that are based on the literature review given above. When the test disconfirmed membership, the data was set aside. In other words, only confirmed members of the group were analysed with the help of the interviews. For the firms that were not interviewed, strategic group membership was confirmed on the basis secondary resources in combination with the interviews that were conducted with their fellow group members. Several constructs were built as to analyse all parts of the research question. Each construct was compared across the multiple researched firms in order to find consistencies or inconsistencies. Following Brown and Eisenhardt’s (1997) iterative process of data analysis, the level of abstraction was raised as the process continued. By raising the level of abstraction, more generalizable insights could be obtained. However, each individual interview was reread regularly, so that deviation from the original interview was prevented.

4.7 Constructs

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Multiple criteria were used to establish whether a firm was a member of the strategic group at hand. First of all, cooperation takes place within the same sector, as strategic groups are by definition intra-industry groups (Peteraf & Shanley, 1997). In addition, firms need to cooperate within the group on multi-lateral level. That is, relationships should not merely be between two of the partners within the group (Carney et al., 2011; Khanna & Palepu, 2000). Moreover, the basis for cooperation does not necessarily have to take place on one aspect of business. Instead cooperation to cut costs, engage in R&D or market entry activities, reputation purposes and so forth are all taken into account. However, partners need to be strategically linked, i.e. the cooperation should have strategic purposes. In this way, firms in the group have complementing and similar strategies (Peteraf & Shanley, 1997). Lastly, members must perceive the group as such. This criterion was taken into account in order to increase the reliability of this research; if group members do not consider themselves member of the group, it is assumed they are not. This construct was filled out for each firm, either on basis of secondary sources on the group and the corporate website alone, or on the basis of both interviews and secondary sources. Reciprocity of relationships was established either via interview or company websites.

The second construct is ‘the reason for membership’. In order to get a better view on the reasons for cooperating in group-form, it was asked during interviews what the reasons for cooperation in group form are. If possible, secondary sources were used to gain further insight into this construct. Based on the extensive literature review, it was expected that reasons for strategic group membership would reside within the areas of social learning theory, social network theory, the resource based view, and the transaction costs perspective.

The construct of industry fragmentation was especially important to explain well, with respect to the reliability of the results. Most interviewees knew exactly what industry fragmentation entails and the subjects knew what the negative effects of industry fragmentation were. However, each interviewee was given the above mentioned definition of Dess (1987). For this construct, it was asked whether the interviewee experienced the negative effects of industry fragmentation. If so, it was asked whether strategic group membership mitigated these effects.

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27 Table 4 - Constructs

Constructs Operationalization Author(s)

Strategic group membership Is the group intra-industry? Is there cooperation on a multi-lateral level? Cooperation takes place related on any business-related aspect. Group perception of each member.

(Carney et al., 2001; Khanna & Palepu, 2000; Peteraf & Shanley, 1997)

Reason for group membership What are the exact reasons for joining a strategic group? Expected reasons stem from: RBV, social network theory, social learning theory, and transaction costs theory.

(Barney J. , 1991; Eisenhardt & Schoonhoven, 1996; Ellis, 2000; Zhou, Wu, & Luo, 2007; Khanna & Palepu, 2000; Peteraf & Shanley, 1997; Williamson, 1979; Den Butter F. A., 2010) Negative effects of industry

fragmentation

Do interviewees regard their firm as residing in an industry in which there are many small and medium sized enterprises, and in which there is no market leader that can shape industry events. Do they experience negative effects from this?

(Dess, 1987)

Strategic group membership aiding foreign market entry

Do firms that experience negative effects of industry fragmentation use strategic groups to enter foreign markets? What do they use it for?

(Dess, 1987)

4.8 Methodology summarized

This methodology section started with the justification of the choice of industry and type of research. Hereafter, the researched sample was introduced in detail. This section resumed with the description of the data collection and analysis strategy. In addition, remarks on this paper’s validity and reliability were made. This section concluded with the introduction and description of the constructs that were used during the interviews.

5 Results

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qualitative data matrix. Table 5 and 6 show the qualitative data matrices with the results that were gained during the interviews.

5.1 The Lizard group

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29 Table 5 - Qualitative data matrix of The Lizard group

Interviewees Constructs

Euroconsult MottMacdonald

WaterInsight Nelen & Schuurmans

Future Water

Strategic group membership

Cooperates with Deltares, N&S, Future Water Cooperates with Deltares, N&S Coop. with Acacia, Fugro, RHDHV, Tijhuis Ingenieurs, Intech, EMM, Future Water, WaterInsight, Deltares, Wareco Cooperates with N&S, Intech, RHDHV, Deltares, WaterInsight, EMM Reasons for strategic group membership

‘We save costs on software

development, and we gain contacts in areas in which we are less present and would like to become more active.’

‘We get in touch with more firms, we save costs on software development, and since our clients already used Lizard we are extra customer friendly.’ ‘We want to become more active on foreign markets; therefore we need more contacts that have connections in foreign markets.’ ‘To us it is about divisions of tasks, let’s all do what we’re good at so we can achieve synergies. We know that our presentation software wasn’t the best, so we contacted N&S’ Negative effects of industry fragmentation ‘Building consortia is our bread and butter; we use industry fragmentation to our advantage.’ ‘Without the right partners we cannot become active on foreign markets.’ We are a niche player, we need partners in order to generate (foreign) business ‘It is always a challenge to get in touch with the right firms to deliver a great service to the client.’ Strategic group membership aiding foreign market entry

‘It is always useful to have many contacts so we can build the consortium that will have the largest chance of winning a tender.’ ‘The Lizard group and platform gave us the edge we needed, in order to become active in Eastern Europe.’

‘Since the Lizard group has started we became far more active on foreign markets.’ ‘We were already quite active on foreign markets. However, cooperating makes things less hard.’

Green – Confirming the construct

Yellow – Neither confirming, nor disconfirming the construct

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30 Table 5 Qualitative data matrix of The Lizard group, continued Interviewees

Constructs

Acacia Water Wareco Intech BV

Strategic group membership Cooperates with RHDHV, Oranjewoud, Wareco, N&S Cooperates with RHDHV, Acacia Water, N&S Cooperates with Future Water, N&S, Deltares Reasons for strategic group membership ‘When synergies in processes and technology can be achieved we are always eager. Currently we are looking for Lizard’s Potential.’

We gain more contacts and get in touch with others’ clients. This will generate business ‘We gained more contacts and can therefore find more firms that have complementing processes and technologies so we can create synergies.’ Negative effects of industry fragmentation We experience these negative effects; there is a lack of coordination in the Netherlands’ water industry.

‘We often need partners to successfully do business, this takes time and energy.’

It is especially hard to co-compete with the larger, more established firms. Cooperation is needed. Strategic group membership aiding foreign market entry ‘Building consortia is the best way to get something done in foreign markets.’

‘We are hardly active in foreign markets. However, the contacts that we have gained might help us to become more active.’ We can offer a broader package when we are bundling our resources. This increases the chances of foreign market success. Green – Confirming the construct

Red – Disconfirming the construct Black – Not applicable

5.2 Holland Delta

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31 Table 6 - Qualitative data matrix of Holland Delta

Interviewees Constructs

Nelen & Schuurmans Intech BV Future Water Hansje Brinker

Strategic group membership

Very active within the group. Very active within the group Averagely active in the group Limitedly active in the group Reasons for strategic group membership We wanted to become a global player; this group will strengthen our position.

In order to achieve success we need to bundle our dike-technologies and offer the full package in order to convince foreign clients.

The goal of this group is to become more active on the international dike-security market. So is ours. We deny no opportunity to generate business in the water-industry; therefore we became the preferred supplier of Holland Delta. Negative effects of industry fragmentation We just have to combine niches to become a credible player on foreign markets. Especially the larger firms try to boycott small firm success on foreign markets. We have to pool resources in order to become more attractive to foreign clients We possess specialist knowledge; we have to cooperate in order to survive. Strategic group membership aiding foreign market entry

We are now active in Asia, and the group might aid us in becoming active in the dike-security markets around the world. The strategic group gives us the advantage of being “larger” and thus more credible This group makes foreign market entry less hard; combined effort takes place. We are limitedly active in the water-industry; by joining we hope to become more active.

Green – Confirming the construct

Red – Disconfirming the construct Black – Not applicable

5.3 The strategic groups compared

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Table 7 - Strategic groups compared

The Lizard group Holland Delta

Aim to synergize Aim to internationalize

No specific focus Focus on dike and dam security

Informal Informal

In principle unlimited amount of members A set amount of members Overlapping knowledge and technology between

members

No overlapping knowledge and technology between members

Set meetings twice per year No set meetings Created on the basis of a common visualization

system

Created on the basis of willingness to internationalize

These groups have similar levels of formality and comparable goals. The most striking result with regard to formality is that both of these groups rely on informal safeguards against opportunism. No contracts have been signed in either case. In addition, no central governance bodies are in place. These relatively loosely organized groups rely on trust stemming from multiple conversations between affiliates.

It is deemed that these groups show ample similarities. Therefore, the constructs of this research are subjected to both groups in the same way. By applying a bird’s-eye view, three main themes emerge for both of the strategic groups. These results are quite strong, as both strategic groups produced similar results in different cases. The similarity between the themes that were brought forward by both strategic groups made that the results are presented in the same subsections of this chapter. Strategic group membership contributed to foreign market entry and dampened the negative effects of industry fragmentation for most of the interviewed firms in three ways. The emerged results showed that having contacts, having access to resources, and saving costs were three of the main contributions of strategic group membership on foreign market entry in their fragmented industry. The following section will provide clarification on these factors for both strategic groups.

5.4 Contacts

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‘Amongst other reasons, we joined the Lizard platform to get in touch with clients (Dutch or foreign) of our fellow users. Via the platform, potential clients have access to the data we provide and they can see how valuable it is. If they want to interpret it, however, they will need to use our specialized service that we have carefully built up and improved over the years. In this way, we can offer additional services to clients of fellow Lizard users’

In this way, Wareco got in touch with two firms with which they currently tackle two projects which without this cooperation could not have tackled. Wareco also stated that it is not concerned about appropriation issues, as the extremely specialized knowledge is very difficult to transfer outside the firm’s boundaries.

In a similar vein, Nelen&Schuurmans (N&S) and Euroconsult MottMacdonald (EMM) have actively sought each other within the group. The one firm mainly had contacts overseas in developing countries, whereas the other mainly had contacts in the Netherlands. EMM stated:

‘We have a mutual relationship where we share our clients and contacts so we can offer complementing solutions. In this way we can both benefit from each other’s contacts.’

Furthermore, EMM is a firm that is mostly creating tenders. It is important for the firm to be able to get in touch with firms that increase the chance of winning a particular tender. Being part of a group with multiple types of specialized knowledge is a large benefit for the firm. N&S expressed that it is not uncommon for member firms to keep track of the public tender calendar (aanbestedingskalender in Dutch) and when an interesting opportunity presents itself, they team up with their contacts within the group.

5.5 Resources

Gaining access to critical resources was the most important reason for firms to seek out partners that were also connected to the Lizard platform and the Holland Delta strategic group. Specialized knowledge and technologies were the resources that were mentioned most often. However, access to one’s reputation and influence were other drivers for group membership that were mentioned a few times.

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‘It was clear from the beginning that Intech alone could not satisfy all the client’s needs, we therefore needed more technologies to cater to every need the client had. We sought partners who could inspect dike and dam security from outer-space, aeroplane, and on site. In addition we needed to visualize the conclusions in an adequate manner (N&S). Lastly we required a partner with a great deal of influence in the area (RHDHV). This resulted in the consortium (Strategic group) Holland Delta’

‘Five years ago, we (Intech) wouldn’t have dreamed about going international. Opportunities presented by chance. However, by having competent partners we have made it possible to internationalize.’

Complementing resources are always sought after by niche firms in the water industry. This notion holds for international projects in particular. However, informants often claimed that the amount overlap in resources needs to be kept to a minimum in order for the cooperation to be successful. Difficulties and ambiguities in which firm is in charge of which proceeding, Acacia Water stated, leads to ineffective cooperation and ultimately disappointment.

Where niche firms in the sample see the fragmentation in the industry as hampering and ineffective, one firm has made use of the fragmentation by making group-forming its main resource. EMM, a relatively large firm in the fragmented industry stated:

‘Building consortia is our bread and butter. We know that we cannot always win tenders on our own. We need partners whom increase the chance of winning the bid and we made that our core competency.’

5.6 Costs

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‘We could have created a system in which we could show the conclusions of our research for our clients. However, this system (Lizard) was already in use by our clients and freely available for us to use. This has been saving us a great deal of time and money’

EMM stated that saving costs by having access to the Lizard System made market entry less difficult: ‘For a project in Nepal we needed an information-platform which N&S could provide us with. We decided to become partners because we did not have to build an information platform from scratch in this way. Next to that, they had specific knowledge we could use for the project.’

For the Holland Delta strategic group, however, most cost-savings were established in a more indirect way. The largest cost-saving to the group came with the established relationships that RHDHV had in the geographical area of the pilot projects. As the other firms are all small firms with relatively few financial resources, this cost saving resource actively contributes to the other firms’ ability to internationalize. Building relationships is seen as costly and time consuming.

5.7 Large versus small sized firms

It was found that for large sized firms such as EMM and RHDHV, industry fragmentation is limiting their firm’s abilities for foreign market entry to a very small extend. If these larger firms in the sample could not execute one type of proceeding, this was outsourced to a firm who could do so. Often, these firms choose local partners in order to increase the chance of winning the tender and to create goodwill with the client whom often is a national or regional government. In addition, one of their core-competencies is to form consortia in which they are the hub-firm. Nonetheless, these larger firms tend to be in favour of growing further and saving costs. In the case of EMM, the reason to join the group was that it would save a tremendous amount of software developing in combination with the gaining of contacts in the Netherlands. Lastly, larger firms stated that through strategic group membership, better access to extremely specialized knowledge is gained. Therefore, a superior service to foreign and domestic clients can be offered.

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36 Table 8 - Small vs. Large sized firms in Strategic groups

Small firms Large firms

Joining a strategic group Forming a strategic group

Specialized knowledge General knowledge

Niche solutions Overall solutions

Limited by industry fragmentation to a large extend

Limited by industry fragmentation by a small extend

5.8 Results summarized

This results section reported on both strategic groups’ view on the constructs at hand. The differences and similarities between the two strategic groups were presented. Hereafter, a bird’s eye view on the results revealed that the two strategic groups are different in terms of goals, structure and composition. However, a large amount of overlap was found with respect to strategic group affiliation and internationalization. The differences and similarities were compared and analysed thoroughly. It was found that firms in both of the strategic groups are mainly affiliated to these groups for network contacts, to access resources, and/or to save costs in order to overcome fragmentation and be able to internationalize. Moreover, it has been found that large firms have different reasons to be affiliated to a group than small and medium sized firms. In the following section, the existing body of literature was used to compare these findings with, in order to examine the value of the results. Consequently, the following section of this paper will go further in to detail on the implications of strategic group membership with regard to internationalization purposes and will address voids in the findings of this research.

6 Discussion

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based view. Moreover, strategic group formality is discussed. In addition, a void in the results with respect to organizational learning is addressed and explained. Lastly, strategic group membership is explained from an institutional perspective.

This research clarified and confirmed previous findings that network contacts are critical facilitators of the internationalization process. Especially small and medium sized niche firms in the sample depend on their contacts for the pursuing international opportunities, as presented in section 5.4. This research especially contributed to a broad base of new and small venture internationalization theory. This theory already suggested that network contacts are of utmost importance to access market knowledge, technologies, share financial risks, gain access to additional relationships, and so forth (Zain & Ng, 2006; Bell, 1995; Oviatt & McDougall, 1994; McDougall, Shane, & Oviatt, 1994). These findings broadened this understanding and contributed in stating that small, yet established, firms which focus on a specific niche also rely on network contacts for internationalization and actively look for these contacts prior to internationalizing for the same reasons as the firms researched in small venture internationalization. In addition and most importantly, tentative evidence has been found that firms actively seek the needed contacts by joining or forming a strategic group. Thereby it can be stated that strategic group membership contributes to foreign market entry by increasing a firm’s number of contacts. The following propositions are derived from the above paragraph:

Proposition 1: In fragmented industries, firms with more network connections perform better than firms that are not.

Proposition 2: In fragmented industries, firms with more network connections are more active in foreign markets than firms that are not.

The Contribution of Strategic Group Membership to Foreign Market Entry in Fragmented Industries