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Weekly UpdatesABSTRACT
Focusing on the International Construction Services (ICS) industry, this paper explores how far these models apply to non-traditional situations. Do such models capture how firms in the ICS industry compete? Do these models help ICS firms develop appropriate strategic responses to the rapidly changing global environment? Do the typologies of existing models fit the characteristics and the cycle (value chain) of an international construction project? This paper argues that existing models do not capture the complexity of the business environment, the ICS firm or its strategic responses. Modifications are proposed to help ICS executives not only assess the rules of the game with greater insight, but also develop viable strategic responses (new rules and if necessary, new games). Research implications are discussed
INTRODUCTION
In recent years the international construction industry has experienced great prosperity and opportunities around the world (Reina, Tuclacz and Schexnayder, 2006). For many firms it has led to increasing industry consolidation. For example, Jacobs Engineering Group plans to acquire the Edwards and Kelcey engineering firm in 2007 because of the opportunities throughout the United States in the infrastructure market of the industry (Rubin, 2007). How do we analyze trends in the global construction industry? Ofori (2003) and Schulte (2004) provide some insight. However, in the broader literature, contemporary models of competitive strategy are often generalized across industries and sectors developed in a manufacturing context.
There are many approaches used to understand the dynamics of industries and strategic responses to global competition in the construction industry. Seminal work applying the global integration and local responsiveness (GI/LR) typology has presented a very concise review of the literature on the converging fields of strategic management and international management. Many authors, led by Porter (the "industrial organization-based" view of strategy), have posited that the nature of global competition depends on the industry and the phase of the value chain (Kogut, 1991). The "process school" emphasizes management actions and strategic processes in the MNC (Prahalad and Doz, 1987). More recently, some scholars, adhering to the "knowledge-based" view of strategy, have proposed that firm-specific resources and capabilities provide much stronger predictions of performance than industry characteristics (Ribiere, Park and Schulte, 2004). Recent research applying the popular GI/LR typology on global firms includes research by Ghemawat and Ghadar (2006) and Vereecke, Van Dierdonck and De Meyer (2006).
One common denominator among these different approaches is that the research on global industries and global strategies has been based primarily on data and cases from the manufacturing sector. This may have limited applicability to construction and other service industries. To accurately answer the questions raised here, executives must understand how well these models fit service industries, including unique project-based industries such as ICS. Historically, services have played an important role in the development of the industrial revolution, including finance, transportation, and communication. In fact, services include a wide range of activities that are an integral part of the value chain of every firm, including manufacturers. Services are tied to the sale of manufactured goods and these are tied to the sale of services; they are interdependent (Enderwick, 1989).
In the particular case of the ICS industry, firm-specific advantages of international contractors are likely to differ from those normally associated with the success of manufacturing MNCs for a variety of unique reasons, some of which are discussed below.
First, in most cases, the nature of the ICS "product" requires local production. Unlike the export of commodities, the final output must be totally constructed in the host country, which creates a series of peculiar consequences for the Contractor-Client relationship over an extended period of time. Exceptions to the immobility of the finished output are off-shore oil platforms, the shipbuilding segment of the industry, and some types of thermal plants. What is exported in the construction business in general is the production process, not finished goods. Second, the fragmentary structure of the ICS; and third, its vulnerability to cyclical fluctuations significantly shape the nature of competition in the ICS industry.
In light of these peculiar characteristics, from an "industrial organization-based" view of strategy it is important to investigate the fitness between the industry structure and the basic strategic responses of major international competitors in this industry. Are strategies adequate for the nature of the ICS industry? More specifically, what is the most effective strategic posture according to Bartlett and Ghoshal's model, widely considered the benchmark model of global, multinational, and international strategy?
INTERNATIONAL CONSTRUCTION SERVICES: A GLOBAL OR A MULTIDOMESTIC INDUSTRY?
The "Global Integration-Local Responsiveness" (GI-LR) framework is a popular and powerful tool to "capture the pressures on a given business" (Prahalad and Doz, 1987, p.18), and will be applied to map the scope of alternative international business strategies used by firms in the ICS industry. This framework examines forces on two dimensions; those promoting global integration, i.e. forces "that necessitate worldwide business resource deployments for strategic pursuits," and those that favor local responsiveness, i.e. "forces that necessitate local context-sensitive strategic decisions." To operationalize these two dimensions in the GI-LR framework (Prahalad and Doz, 1987, p.18), the 14 industry variables used by Roth and Morrison (1990) were applied to the ICS industry. Figure 1 summarizes this grid.
[FIGURE 1 OMITTED]
From the GI-LR grid it is apparent that the ICS industry simultaneously confronts both kinds of pressures, but with an emphasis on Local Responsiveness, reflecting the multi-location nature of the business. On the Global Integration axis, firms in the industry face intense competition (both domestic and international), accompanied by the presence of competitors in all key markets. There also are standardized purchasing practices specifically for some equipment. Although it is not standardized, technology exists and can be "procured" worldwide. On the Local Responsiveness axis, simultaneously, there is a high level of customer service required in all markets, and a great deal of government intervention. Variable factor costs across locations are very important.
Competitors do not market a globally standardized "product" and little standardization of technology exists. Additionally, global economies of scale and global distribution channels are not pressures that ICS firms typically confront. Although the GI-LR framework may suggest that the most appropriate classification of the ICS industry is as a multi-domestic industry (Porter, 1986), there are significant pressures to integrate some key variables of the industry.
This raises several important questions. Is it relevant to focus on the business as a unit of analysis for accurately mapping the industry and determine an appropriate strategy (the Prahalad and Doz approach)? Prahalad and Doz use the business as a unit of measure in their book, The Multinational Mission. Business is defined as "a set of related product markets and tasks, not a company ... [which] covers more than a product line but typically less than a whole industry (p. 13. 1987)." Or is it more appropriate to focus on the firm and the processes involved in the industry? We will explore this issue by exploring phases of a typical international construction project cycle in the context of the GI-LR model. Figure 2 provides an overview of the phases (value chain) of an international construction project life cycle: Pre-contracting, contracting, construction, operations and phase-out. (These phases were determined based on interviews with several key executives in the Washington D.C.-based international business office of an international construction firm).
[FIGURE 2 OMITTED]
At this very preliminary phase, pressures for both Global Integration and Local Responsiveness are both very powerful, although GI forces are more intense than in other phases. A client's process for making a political decision to carry over a project is a major local force. However, political pressure from the international community can also be instrumental in either pushing or killing a project. For example, a sound clean-up project that would provide sanitation for low-income populations would receive intense political support from governments and from environmental pressure groups, which may then encourage a specific local politician to pursue the project.
In contrast, nuclear power plants in the Middle East would probably face a very strong reaction from the EEC, the U.S. government, and Japan. Another example is proposed legislation to build a road in the Amazon rainforest that was killed by some U.S. senators and by Washington-based ecological leaders. Geopolitical alliances among governments also will affect the success of certain projects, as demonstrated by the privileged access that U.S. and British firms had in obtaining contracts for major construction projects to rebuild war-torn Kuwait.
Another key component in this phase is project financing. A firm will need global deployment of financial resources and creative alternatives. Some specific examples could require an international network capability of a competitor to put together a financial package. Multilateral bank financing (IDB, World Bank, Africa Development Bank, European Investment Bank), international commercial bank financing and barter and counter trade arrangements in which specific trading companies are needed to transform outposts into revenues to pay for services.
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