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7 Internationalization of the construction industry
A quick overview of international construction markets
With the globalization of the world economy, today’s construction business is fast becoming an internationally interdependent marketplace. Construction yields on the order of USD4.6 trillion annually and contributed 6.6% to the global gross domestic product (GDP) in 2011 (Davis Langdon 2012). A significant part of that total is attributable to international contractors. With the rise of modern industrialized countries, more and more complex civil engineering projects are being procured, and the increased scale of these projects has provided a launching pad for international construction. For instance, data published by Engineering News-Record (ENR) shows that ENR’s top 225 international contractors in 2011 earned USD453 billion in revenue from construction projects outside their home countries, which represents a four-fold increase over the USD106.5 billion recorded in 2001 and nearly 20% more than the revenue from the previous year (ENR 2012).
International construction has been defined as the situation in which a company, resident in one country, performs work in another country (Ngowi et al. 2005). Although nowadays most big construction companies have both domestic and overseas interests, international construction encourages a global outlook by focusing on competition in overseas markets (Lu et al. 2009). Advanced technology, fast transportation, convenient communications, effective knowledge transfer, integrated markets and trade liberalization have all helped to lower traditional barriers and transform construction into a fiercely competitive international marketplace where construction companies rise and fall. A clearer understanding of the competition and performance involved in this market would be helpful to all stakeholders, especially international contractors themselves.
According to ENR, international construction markets can be divided into eight parts: general building, manufacturing, power, water/sewer waste, industrial process/petroleum, transportation, hazardous waste and telecommunications. It can be seen from
Figure 7.1
that in the product dimension, transportation and industrial process/petroleum are the most important submarkets. Compared with their revenue just three years earlier, transportation and industrial process/petroleum have shown 16.7% and 17.8% increases, respectively (ENR 2012), and it is these sectors that are the main engine for the recovery of the international construction market. In contrast, the traditional submarket general building has not shown any sign of recovery. ENR (2012) reported USD91.1 billion revenue in the general building market, which is almost 3% lower than the revenue in 2008. Since the barriers to market entry in the general building sector are generally much lower and the competition is much fiercer than in other submarkets, many international contractors are reducing their presence in this sector (ENR 2012).
Geographically, multinational construction can be further divided into six regional segments: North America, Europe, Latin America, Asia, the Middle East and Africa. Similarly, as shown in
Figure 7.2
, many of these geographical submarkets have shown recovery. ENR (2012) attributed this recovery to pent-up demand due to the stagnant market of the previous three years. In addition, the stimulation policies of the governments of some countries, such as China, may also have boosted their infrastructure markets, thus providing opportunities for international contractors. As the largest potential market that is far from the centre of the global financial crisis, Asia recorded revenue of USD112.2 billion in 2011, a 63.8% increase from 2008 (ENR 2012). In contrast, the European submarket, which was directly hit by the crisis, reported an 11% drop in total international revenue compared to 2008, indicating a slow recovery process.
Figure 7.1
Revenue of product markets (USD) 1992–2011 (ENR 2012)
Figure 7.2
Work awarded by regional markets (USD) 1982–2011 (ENR 2012)
Figure 7.3
Evolution of the concentration ratio 1993–2011 (ENR 2012)
Apart from fluctuations in market revenue, the structure of the market has also been altered by the financial crisis. Many mergers and bankruptcies pertaining to international contractors have been reported by ENR in the past three years. The concentration ratio of the top four international contractors (C4) is an indicator used to reflect the competition in a particular market and can be calculated as the percentage of the outputs attributed to the four largest firms in relation to a given market segment (Clark 1985). As shown in
Figure 7.3
, the concentration ratio has shown an obvious ascending trend in difficult years. Because of the financial problems and other risks raised by the financial crisis, many small international contractors cannot sustain themselves in a tough market. Ye et al. (2009) confirm that international construction competition has intensified since 2002. The regained power of the largest international contractors in difficult times is proven by the trend in concentration ratio.
Evolution of international contractors
Ngowi et al. (2005) argue that international construction has traditionally implied companies from advanced induztrialized countries carrying out work in newly induztrialized countries or developing countries. It has been demonstrated by ENR over many years that contractors from advanced induztrialized countries (i.e. those based in America, Europe and Japan) have dominated the international construction market. With better technology, management capacity and financial skills, these contractors were more competitive and able to take advantage of global development. However, more recently, contractors from developing countries have joined the international construction market. This has weakened the dominance of the advanced induztrialized countries. ENR (2012) reported that where the Engineering News Record 225 used to be dominated by US, European and Japanese firms, there now are groups of firms on the list based in China, Turkey and the Middle East. It can be seen from
Figure 7.4
that international contractors from China and Turkey now occupy more than one third of the positions in the top 225 international contractors, indicating their emergent influence in this market.
Figure 7.4
Home countries of top 225 international contractors (ENR 2012)
However, compared with the relative stability of the top 225 international contractors, there has been a significant shuffle within the top 50 contractors. These represent the dominant group in the international construction market and are usually contractors from developed countries. Hochtief, a German company, has kept first place in the international market since 2004. The Swedish company Skanska, the French company Vinci and the American company Bechtel have all stayed in the top 10 international contractors for more than 10 years, underlining the dominance of contractors from developed countries. Meanwhile, contractors from developing countries are gradually gaining power in the top group in the international market. As
Figure 7.5
shows, the number of Chinese international contractors within the top 50 increased from four in 2008 to nine in 2011. China Communication Construction Group, for example, was ranked 10th in 2011, and its international revenue in that year was USD9,546.9 million, an increase of more than 100% compared with their revenue in 2008 (ENR 2012). Another Asian country, South Korea, has also expanded its position in the top group of international contractors and has contributed to the bloom of the Asian construction market. However, a traditional international participator, Japan, is progressively losing its power in the top group.
Construction companies grow, compete, evolve and perish in the international landscape. Today’s international construction is more complicated than ever. The uncertainties of global economic conditions and unstable emerging markets have all cast a cloud over the market. However, risks are always accompanied by opportunities. To gain a competitive position and maintain sustainable growth in this environment, international contractors must achieve a deep understanding of their dynamic environments and shape their strategies according to evolving conditions. The following sections of this chapter will describe a new tool that can be used to measure and analyse competition and organizational performance in the international construction market.
Figure 7.5
Home countries of top 50 international contractors (ENR 2012)
Niche comparisons: toward a new approach for measuring and analysing competition and organizational performance
Research into various aspects of international construction has been prolific. By and large, these studies can be classified into two categories. In the first category is research in which the trend and framework of the international construction market is analysed from a macro perspective. An example is Bon and Crosthwaite (2001); they investigated future market trends based on their annual worldwide surveys conducted over the course of the last decade. Also, Ye et al. (2009) investigated the international construction competition trend over the past 28 years, and Ofori (2003) and Ngowi et al. (2005) reviewed the trajectory of the international construction industry as well as the methods for analysing and comparing the performance of international construction contractors. Research in the second category compares companies’ strategies in international construction markets across different jurisdictions through analysis from a micro perspective. This has typically been done using a SWOT analysis (strengths, weaknesses, opportunities and threats) based on interviews and case studies (Lu 2010; Lu et al. 2009; Zhao and Shen 2008), by using Dunning’s eclectic paradigm that emphasizes the ownership, location and internalization advantages of international construction companies (Low and Jiang 2004; Low et al. 2004) and by using Porter’s competition theories in surveying the competitive advantages of Turkish international construction companies (Öz, 2001). Kale and Arditi (2002) and Korkmaz and Messner (2008) also studied the competitive positions of construction firms mainly based on Porter’s competition theories.
Although it is heavily dependent on theories from mainstream management, international construction is a research discipline in its own right that has helped to improve our understanding of competition in the international construction market significantly over the past 20 years.
Moore (1996) saw an economic environment as an ecosystem and claimed that new understandings of company management could be gleaned by studying it from an ecological perspective. However, such studies have rarely been applied to international construction. Organizational ecology, which focuses on organizations and populations from an ecological perspective, was established more than 30 years ago (Baum and Shipilov 2006). Compared with other mainstream management theories, organizational ecology places more emphasis on evolution and natural selection, which considers environment as the primary mechanism for explaining the performance of an organization (Whittington 2001).
The organizational ecology theory is sometimes criticized as being passive, as it places more emphasis on the natural selection process but neglects the initiative of organizations. However, a clearer understanding of the relationship between organizations and the competitive environment in which they operate is necessary, especially in a risky international market. By establishing a proper relationship with the environment, international construction companies are more likely to perform well.
Since international construction is complicated, it is difficult to describe the international status of a company in a holistic sense; hence the introduction of niche theory is warranted. As one of the most important subtheories in organizational ecology, niche theory was initially propagated in the natural bioecology field in relation to multidimensional spaces for organisms or species to survive (Tisdell and Seidl 2004). With its empirical and quantitative characteristics, niche analysis enables a more accurate understanding of the success or failure of an organization by considering its interactions with its environment.
The remainder of this chapter is divided into three sections. First, an NW/O-L (niche width, niche overlap and location) framework is outlined to transfer the conceptual niche to specific constructs. Niche theory is reviewed in conjunction with other theories to identify their similarities and distinctions. Second, the specific parameters included in the NW/O-L framework – niche width (
NW
), niche overlap (
NO
) and location (
L
) – are elaborated upon. Third, the
NW
,
NO
and
L
of top international contractors are calculated. With cluster analysis, they are divided into groups according to their niche. The context and performance of the different groups is then described and compared. The final part of the chapter provides conclusions and suggestions for further research.
Niche theory
The term ‘niche’ was initially defined in the bioecology field and first introduced into economics as a concept by Hannan and Freeman (1977). Niche in economics is taken as an N-dimensional environment, with each dimension showing the level of relevant environmental condition. Tisdell and Seidl (2004) specified that a niche for a firm is associated with the ability of the firm to stave off competition from other firms and consequently gain a degree of security or comfort. Dimmick et al. (2004) suggested that niche theory explains how a company competes and coexists in a limited-resource environment. A proper niche in the environment may enable a company to gain a stronger competitive advantage and avoid threats from both rivals and the environment. In order to help understand the niche of an organization, the niche concept is translated into the following specific and meaningful constructs: niche width, niche overlap and location.
The NW/O-L framework
Organizational niche width (
NW
) has been defined as the variance in resource utilization in the N-dimensional environment (Hannan and Freeman 1989). In line with this concept, organizations pursuing strategies based on a wide range of environmental resources possess a wide niche and would be classified as generalists, whereas organizations following strategies based on a tight band of resources hold a narrow niche and are considered to be specialists.
NW
and its implications for organizational performance is a traditional issue in organizational studies (Boone et al. 2002; Dobrev et al. 2002; Ramirez et al. 2008; Sorenson et al. 2006). It is generally understood that a specialist will always outperform a generalist in any stable environment because the generalist must carry ‘extra capacity’ that sustains its ability to perform in different environments (Hannan and Freeman 1989). In contrast, in a variable environment, specialists have trouble surviving long unfavourable periods, whereas generalists do not (Baum and Shipilov 2006). Hannan and Freeman (1977) argued that the specialist maximizes its exploitation of the environment and accepts the risk of having that environment change, while the generalist accepts a lower level of exploitation in return for greater security.
Niche overlap (
NO
) is defined as the fraction of the focal organization’s niche covered by the niche of another (Hannan et al. 2003). In general, organizations in two different niches have a potential for competition that is directly proportional to the extent that their organizational niche overlaps (Baum and Singh 1994). High overlap indicates that companies are substitutes or they serve the same needs and the differentiation is small, whereas low overlap indicates that different needs are served and the differentiation is great (Ramirez et al. 2008).
NO
is thus often adopted as an indicator to reflect the competition among organizations. Small values for
NO
imply less threat of competition among organizations and are seen as positive indicators for organizational performance. The reverse is true where
NO
is large.
Carroll et al. (2002) considered that organizational viability depends not only on
NW
and
NO
but also location (
L
) within an environmental space. This location is not the geographic location in new economic geography (Fujita et al. 2001) but the niche location in the multidimensional resource space. It assumes that resources are unevenly distributed in a multidimensional environment. The joint distribution of each dimension displays a unimodal peak representing what is called ‘the market centre’, where it is more bountiful or lucrative than others areas. The relatively infertile areas distributed around the market centre are designated as the peripheral area. Where
L
sits, relative to the market centre, is critical to an organization (Dobrev et al. 2002). Companies located near to the centre usually gain more market resources and opportunities. However, fierce competition in the market centre results in a high exit rate. Over time, only a few large companies reside in the centre of the market, while most companies are distributed around the peripheral area. Carroll (1985) demonstrated that generalists are more likely to be located in the centre of the market, since a position in this resource-rich area provides generalists with the potential to reap scale advantages and to grow and expand further. In contrast, specialists seem to face more competition threat and risks than their generalist competitors, as their assets may be fully exposed to the intense competition of the central location.
By integrating niche width (
NW
), niche overlap (
NO
) and location of organization (
L
), an NW/O-L analytical framework can be established. As shown in
Figure 7.6
, with
NW
and
L
, it is easier for contractors to understand their niche in the multidimensional international construction environment, such as their market resource utilizations and distance from the market centre. Furthermore, contractors can see whether they are in an appropriate niche. As generalists are supposed to be at the centre of the market and specialists at the periphery, Area I and Area IV seem to be more suitable niches for contractors. As a whole, this NW/O-L framework can help contractors distinguish their niche and improve their probability of sustaining it.
Similarities and differences with other theories in international construction
In a strict sense, the niche concept is not entirely new to international construction researchers. Porter’s (1980) generic strategies theory, emphasizing cost leadership, differentiation and focus, is a widely adopted theory in international construction studies. In particular, differentiation is concerned with creating something that is perceived by consumers and the market as special, which is similar to the concept of the
NO
in niche theory. The focus implies that a company would compete in limited market segments and is related to the idea of
NW
. However, the essence of niche theory is different from Porter’s theory. Niche theory is in favour of environment-driven structures for the survival of organizations. It emphasizes the natural selection process, arguing that a proper niche or environment is the primary mechanism for explaining the performance of an organization (Hannan and Freeman 1989). In contrast, Porter’s generic strategies focus on strategic analysis, planning and choice and their effects on organizational performance (Korkmaz and Messner 2008). Whittington (2001) concluded that the main difference between these two theories is that Porter suggests that the performance of the companies is determined by endogenous factors such as the organizational structure, product categories, managers’ decisions and the like, while niche theory is concerned more with emergent processes of natural selection, recognizing the exogenous factors (environment and the degree of fit with the environment) as the main effect on company performance.
Figure 7.6
The NW/O-L framework
Dunning’s eclectic paradigm is one of the most important classic theories in internationalization frameworks. It can be represented by an OLI model, suggesting that the determinants of internationalization rely on the ownership (O), internalization (I) and locational (L) advantages that may be exploited by firms (Dunning 2000), and serves as a platform for explaining international activities, including construction. Based on this paradigm, Low and Jiang (2004) developed an OLI+S model and applied it to the international construction industry. The specialized field (S) that a firm is involved in and the particular country where a company is located (L) are closely related to the concept of
NW
. However, Dunning emphasizes comparative advantages by concentrating more on the added value that a particular field or country may offer to multinational corporations instead of the various resources utilized by them. This approach explains the extent and pattern of the foreign value-added activities of firms in a globalized sense, but not the position of organizations in a multidimensional resource space.
SWOT analysis investigates both an organization’s internal and external conditions (Weihrich 1982). The strengths and weaknesses of enterprises are usually considered as internal factors, which are formed in a long development process, while opportunities and threats are external factors over which enterprises have no direct control. The philosophy behind a SWOT analysis is that an organization should establish a fit between its internal strengths and weaknesses and the opportunities and threats posed by its external environment (Lu 2010). However, with an emphasis more on resource-based principles (related to both internal and external resources), the outcome of a SWOT analysis can be complex, as it involves such things as competition and business sustainability. Furthermore, as it is mainly based on questionnaires and interviews, SWOT usually takes the form of a subjective evaluation.
Based on the four generic approaches to strategies suggested by Whittington (2001), the differences between niche theory and traditional frameworks are summarized in
Figure 7.7
.
Figure 7.7
Differences between niche theory and traditional frameworks
Data
Ye et al. (2009) claim that it is difficult to collect data on business competition and to identify those contractors who have international operations, while Ruddock (2002) found that data on construction activities is usually poor and erratic in both domestic and international contexts. In such circumstances, ENR is a valuable resource because it provides a comprehensive historical database of international construction activities and the major actors involved (Drewer 2001). The ENR annual survey started in 1979 following the expansion of international demand for construction. It collects data from the top 225 international contractors (top 250 from the 2013 edition), including each firm’s revenue and details of their submarkets, thereby offering a relatively objective and comprehensive longitudinal database for studies of international construction. Although some researchers might question the validity of the ENR data, since it is self-reported, it can be supplemented by data derived from other public sources such as company yearbooks. As most international contractors are listed companies, they are required by law to reveal data to their shareholders and maintain its integrity. Based on the ENR reports, and by comparing datasets from other sources to achieve concurrent validity, it is possible to determine the niche of international contractors and the influence of this niche on their performance. To produce a time axis, six years’ data reflecting the performance of organizations from 2004 to 2009 were gathered for this purpose. This period was selected as one of relative stability given the effects of the global financial crisis did not appear in the data until 2010.
Zoning international construction markets and organizations
The international construction market represents the competitive environment in which international contractors operate. When applying niche theory, the environment should be defined from the outset by using an N-dimensional approach (Hannan and Freeman 1989; Hutchinson 1978). According to ENR, general building, industrial process/petroleum and transportation are the three most important submarkets with abundant resources for international contractors.
‘General building’ is a traditional market in international construction. Chiang et al. (2001) considered that the traditional building sector is labour intensive and does not require proprietary or advanced technology. The low entry barrier means that competition in this sector is more intense than in others.
‘Transportation’ markets expand fast. This is ascribed to bustling economies in developing countries and investment from both the public and private sectors. The former creates a huge demand for transportation projects and the latter finances the projects that satisfy this demand. Stimulus packages in many countries after the subprime crisis in 2008 further reinforced the transportation market.
According to ENR, the main regional markets for international construction activities are Europe, Asia and the Middle East. The African market has also witnessed a dramatic expansion since 2007.
The Middle East market fluctuates in terms of its oil production and related construction projects. As a result of a rise in oil prices and following huge expansion plans in the oil, gas and petrochemical sector, there is huge potential in this market for transportation, infrastructure, petrochemicals and water related projects.
Asia contains more than 50% of the world’s population. With many developing countries and relatively high population densities, Asia has long been recognized as a market with the greatest potential for international construction activities (Raftery et al. 1998). The Asian market continues to play an important role in international construction, though the financial crisis in 1997 depressed this market for years. Following an international construction boom worldwide, Asia rebounded in 2003, and it is now the second-largest market in international construction.
Europe, which can be generally divided into West Europe and East Europe, is the world’s biggest regional market. West Europe is a vast and stable market with modest cross-border activity, while emerging East Europe offers more opportunities. East Europe has been fuelled by building and urban infrastructure needs and foreign investment.
Africa shows huge potential construction demand, yet economic difficulties prevent this demand from being translated into projects. African international revenue began to rise in 2001, driven by North Africa (Egypt, Algeria, Nigeria and Libya). An influx of oil revenue into Africa has driven this market, making it the fastest-growing regional market in the world.
Ngowi et al. (2005) explained that international construction has a pattern whereby companies from advanced industrialized countries (AIC) carry out work in newly industrialized countries (NIC) or developing countries. This was supported by ENR in the 1980s, as contractors from advanced industrialized countries (i.e. those that were based in the US, Europe and Japan) dominated the international construction market. With better technology, management capacity and financial skills, these contractors were well placed to compete in the global marketplace. However, more and more developing countries, generally belonging to NIC, have joined this market. Compared with AIC contractors, the advantages of these new competitors include lower labour, material and equipment costs, advancement in certain technologies and good relationships with developing countries (Lu et al. 2009; Zhao and Shen 2008; Zhao et al. 2009), and given usually lower and aggressive bidding prices, they provide fiercer competition in the international construction market. International contractors therefore need a proper niche in order for their business to be sustainable.
Modelling the NW/O-L framework
Niche width is an important indicator that reflects organizational resource utilization. Both dimensions of product and geography are considered in the NW calculation. For the product
NW
of organization i (
NWip
), the definition of niche width proposed by Hannan and Freeman (1989) is adopted:
Where ur stands for the international revenue of product r within the total international revenues of organization i. R is total number of products, including general building, manufacturing, power, water, sewer waste, industrial process/petroleum, transportation, hazardous waste and telecommunication. When the contractor is concerned with only one product, the niche width has the minimum value of zero. When the contractor’s revenue is equally distributed across all the product categories, its niche width approaches the maximum value as logR.
Owing to a limitation in the ENR data where revenue data based on the geography dimension is not available,
equation (7.1)
for
NWip
cannot be simply applied to geography
NW
of organization i (
NWig
). However, the
NW
ig is identified as an important indicator to reflect the contractors’ resource utilization in the geography dimension. In order to overcome the data limitation, some researchers use the span covered by the niche to reflect the resource utilization of the company. For example, Baum and Singh (1994) defined the niche of day-care centres as the span of ages that they are authorized to enrol. Dobrev et al. (2001) characterized the technology niche of an automobile manufacturer as the difference in sizes between the largest and smallest engines that they produce. This study defined the NWig as geographical span of organization i that they have engaged in:
where n is the number of countries in which organization i has a presence and N is the total number of countries with international construction activities.
Baum and Singh (1994) considered that
NO
among two organizations are, in general, asymmetric, i.e., NOij ≠ NOji. The company with large size will exert a larger pressure on the company with small size than vice versa. Based on this hypothesis,
NOij
is defined as the organization i’s
NO
with organization j, indicating the amount of competition threat that the organization i has received from organization j (Sohn 2001). It is calculated as:
where wir indicates the intensity of resource r used by organization i. For the product dimension, wir stands for the ratio of organization i’s international revenue on product r within the total international revenue of TIC 225 for product r. Where the geography dimension is concerned, resource r denotes total project numbers
1
of TIC 225 in region r. R (r = 1,…, 6) that comprise North America, Europe, Latin America, Asia, the Middle East and Africa. In order to estimate the
NO
of an organization comprehensively, the niche overlap of organization i (
NOi
) is defined as:
where N = 225, and
NOi
represents the whole competitive threat that organization i has received from other companies.
Since the market environment is assumed to be unevenly distributed, location to the market centre (environment with more resources) becomes important to the company.
L
in this study is defined as the distance away from the centre of the market. The market centre must be described first. As the centre of the market is difficult to describe quantitatively, this study follows the definition by Dobrev et al. (2001) and assumes the largest organizations form the market centre. It thus can be defined as:
where Centrer represents centre for product/geography r.
For product analysis, is the minimum revenue of product r among the top four international construction firms, while is the maximum revenue of product r among the top four firms. For geographical analysis, is the minimum project number in region r among the top four, and is the maximum project number in region r among the top four. As
Figure 7.8
and
Figure 7.9
show, though fluctuating, these centres coincide with the main markets analysed earlier, demonstrating an asymmetric distribution of the environment resources. General building, industrial process/petroleum and transportation (product dimension), and Europe, Asia and Africa (geography dimension) are the centre of the international construction market.
Figure 7.8
Centre of product dimension (2004–2009)
Figure 7.9
Centre of geography dimension (2004–2009)
L
of organization i (
Li
) is then calculated with Euclidean distance.
For company i’s Lip in the product dimension, Ur is international revenue of product r (r = 1,…, 9), while for Lig in the geographical dimension, Ur is numbers of projects in the region r (r = 1,…, 6).
NW/O-L and performance
Good performance of an organization is usually associated with more profits, additional growth and improved market position. However, most of these indicators often lack integrity and standardization across different countries for evaluating a contractor’s actual performance. Since this chapter focuses on the performance of international contractors, a project-oriented international revenue approach is chosen to measure performance. To diminish the influence of inflation and exchange rate fluctuations on the revenue of international contractors, the ranking of TIC 225 is introduced as a proxy. Though this indicator may not comprehensively reflect the performance of international contractors, it is an available and trusted indicator. Based on the ranking data of ENR, Han et al. (2010) investigated strategies for contractors to sustain growth in the global construction market, and Low and Jiang (2004) compared international construction performance at country level.
International contractors may choose different competitive strategies. Will contractors with different niches show different performance? In order to prove whether a contractor’s niche is related to their performance, cluster analysis is used with international contractors divided into groups according to their niche.
The basic principle of cluster analysis is to classify a set of values or variables into a proper number of groups or clusters (Harrigan 1985). Since the proper number of clusters is initially unknown, a hierarchical cluster process is chosen utilizing the Ward method (Ward 1963) to estimate the numbers of clusters and their centroids for group classifications. Based on the
equations (7.1)
to
(7.6)
, NW/O-L of TIC 225 in 2009 is introduced into this model. The dendrograms for both product and geography dimensions are calculated separately. With a further analysis of the two dendrograms, TIC 225 is classified into three groups based on their niche within the product dimension, while in the geography dimension there are two clusters.
Tables 7.1
and
7.2
show the cluster analysis results. It can be concluded that different niche groups generally show distinguished performances (ranking), indicating that a contractor’s niche is highly related to its performance in the international construction market.
In the product dimension, all 17 contractors concentrated in Cluster 1 belonged to the top 50 contractors in 2009. According to
Table 7.1
, these contractors controlled nearly half of the international revenue of TIC 225 in 2009, indicating their superior power and performance in the international construction market. Referring to their niche, it can be seen from
Table 7.1
that they generally have a wide niche (generalists), distributed near to the market centre with a small niche overlap, and thus they mainly fall in the area IV shown in
Figure 7.6
. According to
Table 7.3
, more than 40% of their revenue comes from transportation, which was the largest market centre in 2009 (see
Figure 7.7
). This indicates that contractors from Cluster 1 tend to be located in the prolific resource space. Most contractors in Cluster 1 belong to AIC, such as the US, Germany, France and Spain, which supports the argument by Ngowi et al. (2005) that with experience in the international market, contractors from AIC are more likely to occupy market share than competitors from other countries.
Most TIC 225 companies belong to Cluster 2, contributing 53.5% of revenue to international construction in 2009. In contrast to contractors in Cluster 1, contractors in this group primarily present a narrow niche, are located in the peripheral area of the international construction market and show a relatively large niche overlap. It can be concluded that most contractors in Cluster 2 are consistent with the characteristics of Area I of
Figure 7.6
. Cluster 2 is mostly composed of contractors from China and Turkey. As new players in the international construction market, most of the contractors from NIC are still specialists operating in the peripheral area. The high entry barriers in the market centre still prevent most NIC contractors from entering.
Table 7.1
Cluster results in the product dimension
There are 18 contractors in Cluster 3. These contractors all belong to the top 151 to 225 group and contributed less than 1% to international construction revenue in 2009, suggesting a relatively poor performance in the international construction market. Compared with the other two clusters, contractors in Cluster 3 show a mean niche width of 0.33, which is between Cluster 1 and Cluster 2. However, the average niche overlap and distance from the market centre are much larger for this group than for the other two groups, implying that they encounter greater competition threats than contractors in the other two groups. Most contractors in Cluster 3 belong to the Area II in
Figure 7.6
.
Table 7.3
indicates that general building accounts for a significant portion of revenue for these contractors. Since the competition is more fierce in the traditional general building market (Chiang et al. 2001), it is understandable that the niche overlap of Cluster 3 is large.
In order to provide an intuitive understanding of international contractors’ niches, the distribution of the TIC 225 for different clusters has been drawn (
Figure 7.10
). The horizontal axis represents the niche width of contractors, while the vertical axis shows the location in relation to the market centre. The proportion of the bubbles demonstrates the niche overlap.
As
Figure 7.10
shows, contractors in Cluster 1 stay within a particular niche compared with the other two clusters. As mentioned, contractors in Cluster 1 mainly fall in Area IV of
Figure 7.6
. It seems that contractors within this area have relatively little competition and good performance, highlighting the proper niche for these contractors. Contractors in Cluster 2 are very different compared with those in Cluster 1. Though they do not exactly fit into Area I of
Figure 7.6
as assumed previously, the general distribution of most contractors shows that they cannot enter into the market centre via the product dimension. Most contractors generally live in peripheral areas with a narrow niche. As most bubbles in Cluster 2 are larger than those in Cluster 1, it indicates that they encounter more competition threats than their competitors in the market centre. Contractors in Cluster 3 are mainly generalists living in peripheral areas. However, they have to bear more competition than their specialist competitors, indicating that this niche is not ideal for contractors operating in the international market.
Table 7.3
Revenue share of different clusters (product dimension) (%)
Figure 7.10
NW/O-L of TIC 225 in 2009 (product dimension)
Contractors are divided into two clusters in the geography dimension. As presented in
Table 7.2
, 40 out of the 78 contractors in Cluster A belonged to the top 50 contractors in 2009. Contractors from Cluster A generated nearly 80% of international construction revenue, illustrating their superior performance compared to Cluster B. Similar to contractors in Cluster 1 of the product dimension, contractors in Cluster A of the geography dimension also drop into Area IV of
Figure 7.6
, suggesting that this is the preferred niche for the international contractors in both the product and geography dimensions. As shown in
Table 7.4
, the European revenue share of contractors in Cluster A accounts for a large portion of their total revenue, and the proportion is much higher than that of their counterparts in Cluster B. As Europe was the richest market centre in 2009 (
Figure 7.9
), their dominant position in this market meant that they had a superior performance in the international construction market. Most contractors in Cluster A come from AIC, such as the US, Japan and some European countries. The relatively similar cultural environment and geographic proximity to the European market have offered the contractors in Cluster A more advantages than their competitors, which further raises the entry barriers in this market. Meanwhile, there are 16 Chinese contractors in this group, suggesting that some contractors from NIC have benefited from the worldwide expansion process.
Table 7.4
Revenue share of different clusters (geography dimension) (%)
Figure 7.11
NW/O-L of TIC 225 in 2009 (geography dimension)
Contractors from Cluster B mainly have a narrow niche and a large niche overlap and are located far away from the market centre, which coincides with Area I in
Figure 7.6
. The majority of the members in Cluster B come from China and Turkey, implying that most contractors in NIC with a narrow niche in the geography dimension still focus on regional work rather than exploring the worldwide market. The Middle East, Asia and Africa are the main targets of Cluster B (see
Figure 7.11
).
It is shown that contractors in Cluster A generally show a small niche overlap, indicating their sustained ability in this competitive environment. By contrast, most contractors in Cluster B suffer from high competition in the peripheral area. Compared with the distribution of TIC 225 in the product dimension, a contractor’s niche in the geography dimension is more regular. There is a significant relationship between
NWg
and
Lg
. The contractors near the market centre are mostly generalists, while specialists are mainly scattered in the peripheral area. Most contractors choose their niche carefully and keep within the proper niche bounds as shown in
Figure 7.6
.
Conclusion
Cluster analysis has revealed a link between an organization’s niche and its performance. However, as cluster analysis is approximate, the specific mechanism through which niche can be translated into organizational performance needs further study. Niche theory can be thought of as negative since it emphasizes natural selection without considering the activities of companies. Although a clear understanding of a contractor’s status in the environment is important for the sustainable development of the organization, organizational performance is complicated, and any isolated theory framework is not comprehensive. Cheah and Wong (2004) have suggested that the different theoretical fields should be viewed as complementary rather than mutually exclusive; therefore, further studies should focus on using a more combined view to investigate the niche and performance of international contractors.