Strategic Group Analysis in the Construction Industry

Irem Dikmen1; M. Talat Birgonul2; and Cenk Budayan3

Abstract: The aim of strategic group analysis is to determine whether clusters of firms that have a similar strategic position exist within
an industry or not. Findings of strategic group analysis may further be used to investigate the performance implications of strategic group
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membership. The objective of this paper is to identify the possible strategic groups that could exist within the Turkish construction
industry by using a theoretical framework applicable for the construction industry and alternative statistical cluster analysis techniques.
The achieved results pinpoint the existence of three clusters and significant differences between the performances of firms in each cluster.
All of the firms in the strategic group that have the highest average performance utilize a quality differentiation strategy and have the
necessary resources and capabilities that give them the opportunity to differentiate their services from others. Also, they use a systematic
approach and have a collaborative environment for strategic decision making. Findings of strategic group analysis can be used by
professionals to understand the current strategic position of a firm within the competitive environment and formulate strategies to shift to
a better performing cluster.
DOI: 10.1061/共ASCE兲0733-9364共2009兲135:4共288兲
CE Database subject headings: Construction industry; Statistics; Decision making; Competition.

Introduction industry following the same or similar strategy along a set of

All companies should have a clear strategic perspective to achieve
competitive advantage. The selected strategies should be in accor-
dance with objectives, competencies, and competitive rules pre-
vailing in the market. The need for a strategic perspective for
construction companies has long been stressed by many research-
ers 共Betts and Ofori 1992; Chinowsky and Meredith 2000; Dik-
men and Birgonul 2003; Warszawski 1996兲. It is clear that a
number of companies that compete in the same industry may have
similar resources/competencies and develop similar strategic per-
spectives. The question is whether these companies show similar
performance or not. In the forthcoming parts of this paper, the
theoretical background of strategic group analysis will be dis-
cussed as well as its performance implications.
Strategic Groups
The strategic group concept was first introduced by Hunt 共1972兲
for explaining the performance difference between firms that fol-
low different strategies. The popularity of the term increased after
its usage by Porter 共1979兲 and Caves and Porter 共1977兲. Accord-
ing to Porter 共1980兲, a strategic group is a group of firms in an
1
Associate Professor, Dept. of Civil Engineering, Middle East
Technical Univ., 06531 Ankara, Turkey 共corresponding author兲. E-mail:
idikmen@metu.edu.tr
2
Professor, Dept. of Civil Engineering, Middle East Technical Univ.,
06531 Ankara, Turkey. E-mail: birgonul@metu.edu.tr
3
Research Assistant, Dept. of Civil Engineering, Middle East Techni-
cal Univ., 06531 Ankara, Turkey. E-mail: budayan@metu.edu.tr
Note. Discussion open until September 1, 2009. Separate discussions
must be submitted for individual papers. The manuscript for this paper
was submitted for review and possible publication on January 22, 2007;
approved on September 26, 2008. This paper is part of the Journal of
Construction Engineering and Management, Vol. 135, No. 4, April 1,
2009. ©ASCE, ISSN 0733-9364/2009/4-288–297/$25.00.
strategic dimensions. Dimensions include strategic decision vari-
ables that best distinguish the business strategies and competitive
positions of firms within an industry such as scope and mode of
competition. According to Porter, strategic groups are persistent
structural features of industries that are bounded by mobility bar-
riers. Mascarenhas 共1989兲 also highlights the importance of mo-
bility barriers and argues that strategic groups may exist only if
significant mobility barriers exist between groups. Leask 共2004兲
defines strategic groups as stable intraindustry structures sepa-
rated by mobility barriers in pursuit of different strategies that
may be expected to yield significant performance differences.
Drawing from economic and cognitive theories, researchers argue
that there may be differences between the performances of firms
that belong to different strategic groups. The traditional view of
strategic groups draws from industrial organization economics
and proposes that firms within strategic groups collude to isolate
themselves from firms outside their group 共Caves and Porter
1977兲. Due to this collusive action, a favorable competitive envi-
ronment exists in a strategic group leading to a similar perfor-
mance level between its members. Hatten and Hatten 共1987兲
argue that strategic groups are more than an analytical conve-
nience only if true group-level effects exist. Dranove et al. 共1998兲
state that true effects 共strategic group level兲 and spurious effects
共industry level兲 should be distinguished. They argue that “a stra-
tegic group exists if the performance of a firm in the group is a
function of group characteristics.” Without strategic interactions
among group members, there can be no direct effect of group
membership on performance. McNamara et al. 共2003兲 argue that
rivalry rather than collusion may also exist within strategic
groups.
Strategic group analysis is a subset of industry analysis that
looks specifically at different groups of rival firms clustered
around a similar competitive approach or strategic position
共Fleisher and Bensoussan 2000兲. Porter 共1980兲 defines strategic
group analysis as the first step in structural analysis of industries
to understand the strategies of all significant competitors. It is
used to determine the different strategic positions that rival firms

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J. Constr. Eng. Manage., 2009, 135(4): 288-297

 occupy, intensity of competitive rivalry within and between in-
dustry groups, the profit potential of the various strategic groups
in an industry, and implications for the competitive position of the
firm under analysis. However, members of a strategic group,
while pursuing similar strategies, are not necessarily in competi-
tion with one another. Due to differences in locations, submarkets,
etc., companies in the same strategic group may not be direct
competitors.
In this paper, the fundamentals of strategic group analysis are
discussed by using the Turkish construction industry as a case
study.
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Strategic Groups and Performance
Investigation of the link between strategic groups and perfor-
mance has been a very popular research theme. However, whether
there exists a direct relationship between the strategic group
membership and performance is still questionable. There are vari-
ous empirical studies carried out in different sectors to investigate
this issue. For example, Frazier and Howell 共1983兲 found no sta-
tistically significant difference between the performances of firms
that belong to different strategic groups in the medical supply and
equipment industry. Cool and Schendel 共1987兲 found significant
performance differences according to market share not profitabil-
ity and risk-adjusted performance in the United States pharma-
ceuticals industry. In some of the studies such as Amel and
Rhoades 共1988兲, Lewis and Thomas 共1990兲, and Wiggins and
Ruefli 共1995兲, no clear relationship was established. In contrast,
Porter 共1979兲 defined the strategic groups according to the “size”
of the companies and determined two groups named “leaders”
and “followers.” He argued that the leaders gain more profit than
the followers. Dess and Davis 共1984兲 found significant perfor-
mance differences in the paint and allied product sectors by using
Porter’s 共1980兲 generic strategies 共differentiation, cost leadership,
and focus兲 as the strategic dimensions. Further, the study of Reger
and Huff 共1993兲 on the banking industry demonstrated that sig-
nificant differences exist between strategic groups when the per-
formance is measured in terms of return on assets. Examples of
studies that show some performance differences between the stra-
tegic groups are those by Mascarenhas and Aaker 共1989兲, Fiegen-
baum and Thomas 共1990兲, and McGee and Thomas 共1986兲. Kale
and Arditi 共2003兲 empirically proved that differentiation strategy
is positively related to performance in the United States construc-
tion industry.
The inconsistency of the results may be attributed to different
factors. Strategic group analysis requires choosing or developing
a conceptual framework in which the strategic dimensions are
defined. Yet, there is no consensus on these dimensions. Caves
and Porter 共1977兲 suggested that due to differences in risk posture
or random differences in skills and quality of assets, firms tend to
utilize different strategies, and this creates mobility barriers lead-
ing to different strategic groups. In other words “strategic
choices” are the reasons why different strategic groups exist. Con-
sequently, Porter 共1980兲 defined two strategic dimensions that
may be used for strategic grouping: mode and scope of competi-
tion. Mode of competition refers to a firm’s decisions on how to
achieve competitive advantage, whereas scope of competition re-
fers to a firm’s decisions on the breadth of its operations. Thus,
according to Porter 共1980兲, the performance differences between
firms can be explained by different competitive positions resulting
from different strategic choices. Since late 1980s, there has been a
surge of interest in the role of resources and capabilities of a firm
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J. Constr. Eng. Manage., 2009, 135(4): 288-297
as the basis for strategy and primary determinants of profitability,
which is considered under “the resource-based view.” Rather than
the “generic” sources of competitive advantage, resource-based
view concentrates upon the resources and capabilities that under-
lie these advantages. Accordingly, resources and capabilities are
proposed to be considered during strategic grouping. McGee and
Thomas 共1986兲 also argue that mobility barriers 共which may be
due to the resources and capabilities as well兲 provide a much
firmer basis for identifying groups rather than strategies which
tend to be loosely defined. Cool and Schendel 共1987兲 contend that
firm-level characteristics and market factors should be considered
as well as mobility barriers. In their work, strategic resources are
considered as well as scope for strategic grouping. Industry spe-
cific variables are also proposed to be used as strategic dimen-
sions. For example, Hodgkinson 共1997兲 defines the historical
evolution of the industry among the other variables which are:
differentiating resources and capabilities, unique goals, different
chronological points of entry, segmentation, and risk profiles. Rel-
evant strategic dimensions may also change with respect to the
characteristics of each industry. As the strategic dimensions are
industry specific, a direct comparison of results from different
industries may not be possible. Similarly, as different perfor-
mance indicators 共financial indicators such as return on equity,
growth, market share, or subjective reporting of overall perfor-
mance兲 are used, research results about impact of strategic group-
ing on performance may not be directly comparable.
Also, there is no universally accepted technique for carrying
out strategic group analysis. The most common method for iden-
tifying strategic group structures is through cluster analysis.
Major challenges of cluster analysis are: choosing the clustering
variables, algorithms, number of clusters, and validating clusters.
Cluster analysis is criticized as it relies heavily on researcher
judgment and it does not offer a test statistic that supports results
共Ketchen and Shook 1996兲. Using perceptions of industry profes-
sionals to identify the structure of the industry and competitive
positions of firms is an alternative way. The study of strategic
groups from a cognitive perspective has gained prominence dur-
ing the past years 共Hodgkinson 1997兲. According to this cognitive
view, the cognitive classification schemes developed in the mind
of the decision makers to simplify the market may be used for
strategic grouping 共Tang and Thomas 1992兲. The concept of “cog-
nitive groups” first appeared in Porac et al.’s 共1989兲 article about
strategic groups in the Scottish knitwear industry. Construction of
a set of cognitive strategic groups based on expert judgment
eliminates some of the criticisms about reliability of cluster analy-
sis. Osborne et al. 共2001兲 argue that cognitive and performance-
based groups may finally emerge.
Strategic group analysis has its benefits and shortcomings. A
key question is whether strategic group analysis provides any
information that cannot be gained from the study of industries and
individual firms. In order to answer this question, more research
is needed to investigate the behavior of strategic groups and pos-
sible group-level impacts on performance. Strategic group analy-
sis is known to be more a descriptive rather than a predictive tool.
It is unlikely to offer much insight into why some firms in an
industry perform better than others 共Grant 1995兲. However, it can
increase understanding about the structure of the industry, strate-
gic perspectives, and dynamics of the competitive environment.
There are a limited number of studies within construction
management literature about strategic grouping and its perfor-
mance implications. Kale and Arditi 共2002兲 argue that research on
competitive positioning in the construction industry appears to be
unbalanced in favor of anecdotal or descriptive approaches. Only
 a few construction management researchers 共such as Jennings and
Betts 1996兲 have conducted empirical research studies in this area
and explored performance implications 共Akintoye and Skitmore
1991; El-Mashaleh et al. 2006; Hampson and Tatum 1997兲. In
their study, Kale and Arditi 共2002兲 used one of the most influen-
tial generic typologies, Porter’s 共1980兲 generic competitive posi-
tioning typology, to classify United States construction firms.
Modes of competition were identified as quality, product and ser-
vice innovations, time, and cost. A construction company may
select one mode or place varying degrees of emphasis on all of
the modes 共which is called as a hybrid mode兲. Scope of compe-
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tition is defined as either narrow or broad market approach. A
questionnaire was prepared in which all items were measured on
a 1–5 Likert scale. Performance was measured by using a subjec-
tive reporting approach. K-means cluster analysis was used to
classify firms according to the identified dimensions 共mode and
scope兲. As a result, based on the responses from 107 firms, four
clusters were identified. Statistically significant performance dif-
ferences were found between the clusters. The writers claimed
that differences in construction companies’ performances can be
partly explained by their choices of mode and scope of competi-
tion. It was found that construction companies that outperform
their rivals adopt a hybrid mode, rather than a single mode of
competition. However no statistically significant finding was
found on impact of scope on performance.
Claver et al. 共2003兲 studied the linkage of strategic groups and
performance by examining the business strategies of Spanish con-
tractors. Using the data regarding 88 housing contractors and de-
fining variables that are based on Porter’s generic strategies, the
writers identified four strategic groups. However, the empirical
findings demonstrate that no significant differences exist between
the performances of firms that belong to different groups.
Objectives of Research
The objectives of the research are twofold:
1. To carry out strategic group analysis for the Turkish con-
struction industry and identify possible clusters having dif-
ferent strategic positions; and
2. To test whether performance differences exist between the
firms in different strategic groups.
In order to eliminate some of the shortcomings of strategic
group analysis, the following strategies are utilized:
1. A conceptual framework, which is thought to be a relevant
model for the construction industry, is defined. It is based on
the work of Price and Newson 共2003兲 and the strategic vari-
ables are determined by referring to the previous work of
Dikmen and Birgonul 共2003兲 on strategic perspective of the
Turkish contractors; and
2. Strategic group analysis is conducted using cluster analysis.
In order to eliminate some of the problems of using cluster
analysis, alternative statistical clustering techniques are used
and the results are compared to find the best technique to
minimize the risk of dependency of results on the selected
technique.
Determining Conceptual Framework for Strategic
Grouping
Thomas and Venkatraman 共1988兲 mentioned that there is an ab-
sence of a generally accepted scheme for defining strategic di-
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J. Constr. Eng. Manage., 2009, 135(4): 288-297
mensions to be used for strategic group analysis. They identified
two types of studies that attempted to define strategic dimensions:
those that viewed strategy in narrow terms 共a single dimension
such as size, location, etc.兲 and those that viewed strategy in
relatively broader terms 共a complex array of scope and resource
deployment decisions兲. They argued that development of strategic
groups using narrow conceptualization of strategy is unlikely to
capture the complexity of the strategy construct and they sug-
gested utilization of multidimensional constructs. A broader range
of variables has the potential to increase the probability of incor-
porating relevant group-defining attributes into the analysis. There
are various researchers that used a broad perspective for defining
strategic variables 共Cool and Schendel 1987; Dess and Davis
1984; Fiegenbaum and Thomas 1990兲. However, defining a high
number of variables from a broad perspective is not without criti-
cisms. Barney and Hoskisson 共1990兲 pointed out the potential for
introducing noise into the data analysis process as all variables
are usually given equal weight in generating clusters. Thus, if
irrelevant factors are included in the analysis, the resulting clus-
ters may not reflect the actual group structure. They suggested
that some theoretical framework should be used for choosing stra-
tegic variables and judging the quality of results. However, this
theory has yet to be developed.
Thomas and Venkatraman 共1988兲 suggested utilization of the
following strategies for the selection of a relevant conceptual
framework:
1. It should match the key basis of competition in the market
place; and
2. It should bear a strong relationship to some of the common
theoretical discussions on strategy types so that a cumulative
perspective can be developed.
Thus, in this research, the findings of previous research studies
about the competitive environment within the Turkish construc-
tion industry are used to identify the strategic dimensions for
grouping. Moreover, the most common framework used in strate-
gic grouping research, which is Porter’s generic typology, is uti-
lized to identify the variables about the strategic position. Details
regarding the selection of the conceptual model and variables are
given in the next section.
Selection of Variables
Price and Newson 共2003兲 mentioned three dimensions of strategy
that can be recognized in every real-life strategic problem situa-
tion:
1. Strategy content: product of strategy process;
2. Strategy process: manner in which strategies come about;
and
3. Strategy context: organizational and environmental circum-
stances under which strategy process and content are
determined.
Strategy Content
The scope and mode of competition are the products of a strategy
formulation process. An organization distinguishes itself by dif-
ferentiating its offerings in some way. Basically there are two
generic strategies: price differentiation 共cost leadership as defined
by Porter兲 and quality differentiation. Companies that utilize price
differentiation strategy charge a lower price for their service/
product and this approach seems to be the only way to survive in
a market like the construction industry, where the lowest cost
 bidder is usually awarded the contract. Betts and Ofori 共1992兲
argue that despite the competitive bidding system, price differen-
tiation is not the only strategic approach in the construction busi-
ness due to increasing concern for quality and value for money.
Although some argue that there are limited ways to differentiate
services in the construction sector, there are several authors that
suggest that construction business offers considerable scope for
differentiation 共Hasegawa 1988; Tatum 1987兲. Kale and Arditi
共2002兲 argue that contractors may compete on the basis of con-
tracting service quality as well as product or process innovations.
In this research, sources of competitive advantage are grouped
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into two categories: price and nonprice factors. If a contractor is
competing on the basis of price, the primary objective is to mini-
mize costs. In the other category, which is quality differentiation,
a contractor tries to maximize client satisfaction through high
quality products and services, innovations, support services, etc.
In this category, company resources are organized in such a way
that the client objectives are identified and met successfully.
Quality differentiation strategy does not mean that cost issues are
not considered; however, reducing cost is not the primary objec-
tive.
Companies should make strategic choices about the markets
they serve and types of projects they undertake. Thus, the bound-
aries of an organization should be determined. Companies may
have a diversification strategy or a focus strategy which deter-
mines their competitive scope. In this research, two dimensions
are identified to group the companies with respect to their com-
petitive scope: market-level and project-level diversification.
Market-level diversification is about whether the company oper-
ates in the construction market only or sectors related and unre-
lated to construction. Also, the amount of work in the domestic
market and international markets are considered under the head-
ing of market-level strategy. Project-level diversification has two
dimensions: type of project and type of client. The variety of
projects undertaken by the construction company is questioned as
well as the variety of clients served.
Strategy Process
During the strategic group analysis, “realized strategies” of firms
are evaluated to identify possible similarities or differences be-
tween firms operating in the same market. A realized strategy has
two components: deliberate strategy 共plans realized兲 and emer-
gent strategy 共patterns developed in the absence of intentions兲
共Mintzberg 1987兲. Junnonen 共1998兲 also stressed that realized
strategy is composed of both intended and emergent actions
which are sometimes formed, not only formulated. Thus, he ar-
gued that the success of strategy process depends on both formal-
ization of procedures and the existence of the right climate for
strategy formation. Dikmen and Birgonul 共2004兲 identified the
following two mechanisms used during the strategy development
process:
1. Formulation of strategies: a strategic planning system is re-
quired for formulation of strategies and realization of in-
tended strategies. The effectiveness of this mechanism
depends on the existence of a system/structure that supports
strategy formulation; and
2. Emergence/formation of strategies: strategies, other than in-
tended ones, may emerge within the organization. Success of
these strategies depends on the existence of the right climate
and organizational culture that permits idea generation. The
effectiveness of this mechanism is mainly about the power
culture and management style of the organization rather than
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J. Constr. Eng. Manage., 2009, 135(4): 288-297
the existence of systems or structures. An appropriate envi-
ronment within the organization which fosters imagination
and creative thinking is vital for the emergence of successful
strategies.
Based on the findings of a questionnaire answered by 60 re-
spondents, Dikmen and Birgonul 共2004兲 found statistically sig-
nificant differences between the competitiveness of Turkish
companies that are grouped under different categories with re-
spect to their strategic decision-making characteristics. In the cur-
rent research, two strategic variables are defined: systematic
strategic planning and centralization of decision making. It is as-
sumed that companies may be categorized considering whether
they carry out systematic strategic planning and whether a col-
laborative environment exists within the company or not.
Strategy Context
The resource-based view asserts the critical role of resources and
capabilities of a firm as the basis for strategic choices and primary
determinants of profitability. Under the title of strategy context,
tangible 共such as financial resources兲 and intangible resources
共such as experience and relations兲 of companies are considered as
well as the capabilities 共such as managerial and technical capa-
bilities兲. Dikmen and Birgonul’s 共2003兲 work on the strategic per-
spective of Turkish contractors is referred to for identification of
major strengths and weaknesses. According to the results of the
study mentioned, client relations and financial resources are the
major determinants of competitive advantage in the Turkish con-
struction industry.
Finally, based on strategy context, content, and process, 13
variables are defined. These variables and how they are measured
are depicted in Table 1.
Research Methodology
The target population is selected as the members of the Turkish
Contractors Association 共TCA兲 which is an independent and non-
profit professional organization that represents the leading con-
struction companies in Turkey. The business volume of its
members encompasses nearly 70% of all domestic and 90% of all
international contracting work done so far by the Turkish con-
struction companies. From the beginning of the 1970s up to the
present, member companies of TCA have completed over 3,000
projects in 63 countries and their business volume abroad has
reached approximately $65 billion United States. Thus, the stra-
tegic group analysis carried out in this research covers only the
medium-big size contracting firms in Turkey. Small and local
firms are excluded from the analysis.
A questionnaire form was designed and submitted to 136
members of TCA. In the questionnaire, each representative of the
company was requested to give relevant information about the 13
strategic variables. The yearly turnover 共average of the last
3 years兲 and age of the company were also questioned. A subjec-
tive reporting approach was used for performance assessment
rather than collecting financial data. Dess and Robinson 共1984兲
argued that subjective performance measures are most appropriate
in examining relative performance within an industry. Each re-
spondent evaluated his/her company’s performance considering
the previous 3 year period in terms of profitability, workload, and
other company objectives. The total number of returned question-
naires is 84 and the return rate is 0.62.
“Size” as defined in this study refers to the average turnover
 Table 1. Variables Used during Strategic Group Analysis
Variable
Differentiation strategy
Diversification strategy
Internationalization
Type of projects 共project type that has the highest percentage
in total number of projects兲
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Type of client 共client type that has the highest percentage in
total number of projects兲
Strategic planning
Strategic decision-making
Relations with clients
Human resources
Managerial capability
Technical capability
Financial resources
Experience
value recorded for the last 3 years. Thus, a high correlation is
expected to exist between the performance rating and size, since
one of the components of performance rating is “workload.” Cor-
relations between the strategic variables, size, and age should be
calculated and if age and/or size are found to be strongly corre-
lated with other variables, the list of variables to be used during
clustering should be revised.
Cluster Analysis
Statistical cluster analysis is used for strategic group analysis of
the Turkish construction industry. The aim of cluster analysis, as
defined by Bacher 共2002兲, is finding K clusters so that the objects
of one cluster are similar to each other, whereas objects of differ-
ent clusters are dissimilar. Cluster analysis simply finds the pos-
sible groups without explaining why they exist. Cluster analysis
can be used for finding a true typology, model fitting, prediction
based on groups, hypothesis testing, data exploration, hypothesis
generation, and data reduction 共Everitt 1974兲.
Before the application of cluster analysis, the scale and vari-
ance of the variables and multilinearity among the variables
should be checked. In this research, as no significant differences
were found between the mean values and standard deviations,
standardization was not applied to the current data set. Also, the
data set was checked for multilinearity, as high correlations be-
tween variables can cause flawed results by overweighting one or
more underlying constructs. In this research, Pearson correlations
between the variables were calculated and it was proved that no
multilinearity effect exists in the current data set. Also, size and
age were not strongly correlated with other variables. The corre-
lation matrix is presented in Table 2.
The tool used for cluster analysis is SPSS 13.0, which offers
three methods for clustering: Hierarchical cluster, K-means clus-
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J. Constr. Eng. Manage., 2009, 135(4): 288-297
Measure Type
Category 1: price differentiation Nominal
Category 2: quality differentiation
Category 1: only construction/construction-related sectors Nominal
Category 2: diversified in sectors unrelated to construction
Internationalization ratio 共ratio of international workload to Numeric
total workload兲
Category 1: infrastructure Nominal
Category 2: housing+ building
Category 3: industrial
Category 4: others
Category 1: government Nominal
Category 2: private sector
Category 1: systematic and regular strategic planning Nominal
Category 2: no systematic approach for strategic planning
Category 1: democratic and collaborative environment Nominal
Category 2: autocratic approach
Subjective rating using 1–5 scale Ordinal
Subjective rating using 1–5 scale Ordinal
Subjective rating using 1–5 scale Ordinal
Subjective rating using 1–5 scale Ordinal
Subjective rating using 1–5 scale Ordinal
Subjective rating using 1-5 scale Ordinal
ter and two-step cluster analysis. All of these methods have ad-
vantages and disadvantages over each other. For example, the
K-means clustering method requires that the number of clusters
are known at the start of the application, whereas in the hierar-
chical clustering method, the number of clusters are determined
after the analysis. On the other hand, in the hierarchical cluster
analysis, there is only one pass through the data. Thus, the wrong
partition of data may persist throughout the analysis and lead to
wrong results. K-means cluster analysis can fix an early poor
partition problem at later stages of the process by passing over the
data more than once. The most important advantage of the two-
step cluster method is its ability to determine the number of the
clusters automatically. Also, a large quantity of data can be ana-
lyzed efficiently. However, accurate results can be reached only if
all variables are independent, continuous variables have normal
distributions and categorical variables have multinomial distribu-
tions. In real life, these conditions are rarely provided 共Norusis
2004兲. In this study, as it is impossible to determine the most
appropriate clustering technique at the beginning, all three meth-
ods are used and results are compared to select the best one.
There are various algorithms used during hierarchical cluster
analysis. In the first step, all algorithms of the hierarchical cluster
analysis were used in order to make an initial guess about the
number of clusters. The results were presented by a dendrogram
and an inverse scree tree was drawn by using an agglomeration
schedule. Analysis was carried out by using the Manhattan 共city
block兲 distance, as it is the most suitable parameter when the data
have nominal and ordinal variables 共Bacher 2002兲. Finally, the
alternative number of clusters was determined as two or three. In
the next step, two-step cluster analysis was conducted where the
number of clusters was determined automatically by using
Schwarz’s Bayesian criterion 共BIC兲 and Akaike’s information
criterion 共AIC兲. The procedure was carried out using these two
criteria separately and finally, the number of clusters was deter-
 Table 2. Correlation Matrix
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
1. Age 1.00 — — — — — — — — — — — — — — —
2. Size 0.44b 1.00 — — — — — — — — — — — — — —
3. Type of client 0.08 0.32a 1.00 — — — — — — — — — — — — —
4. Internationalization 0.19 0.08 −0.17 1.00 — — — — — — — — — — — —
5. Types of projects 0.17 −0.10 −0.45b 0.16 1.00 — — — — — — — — — — —
6. Strategic planning 0.31a 0.16 0.06 0.17 −0.06 1.00 — — — — — — — — — —
7. Strategic decision making 0.26 0.16 0.07 −0.11 0.05 0.29a 1.00 — — — — — — — — —
8. Relations with clients 0.26 0.18 0.02 0.11 −0.07 0.55b 0.42b 1.00 — — — — — — — —
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9. Human resources 0.30a 0.29a −0.02 0.20 −0.03 0.46b 0.38b 0.64b 1.00 — — — — — — —
10. Managerial capability 0.27 0.17 −0.05 0.24 0.03 0.55b 0.31a 0.53b 0.58b 1.00 — — — — — —
11. Technical capability 0.27 0.37b 0.02 0.07 −0.01 0.46b 0.46b 0.56b 0.65b 0.64b 1.00 — — — — —
12. Financial resources 0.22 0.15 0.09 −0.02 −0.05 0.48b 0.44b 0.60b 0.61b 0.54b 0.61b 1.00 — — — —
13. Experience 0.29a 0.30a 0.03 0.12 −0.03 0.59b 0.52b 0.61b 0.65b 0.55b 0.64b 0.50b 1.00 — — —
14. Differentiation strategy 0.18 0.02 0.05 0.18 −0.08 0.45b 0.42b 0.62b 0.52b 0.47b 0.50b 0.48b 0.44b 1.00 — —
15. Diversification strategy 0.40b 0.18 −0.03 −0.10 0.16 0.04 0.11 0.02 0.13 0.27 0.26 0.15 0.18 −0.01 1.00 —
16. Performance 0.30a 0.27 0.01 0.16 −0.00 0.62b 0.48b 0.75b 0.75b 0.65b 0.76b 0.75b 0.74b 0.65b 0.18 1.00
a
Correlation is significant at the 0.01 level 共two-tailed兲.
b
Correlation is significant at the 0.001 level 共two-tailed兲.

mined as three. Finally, by referring to the findings of previous
methods, K-means cluster analysis was carried out for two and
three clusters. The distance between the centers of the clusters
was determined to be 3.843 for the two-clusters solution. For the
three-clusters solution, the distances were found to be 2.147,
5.491, and 3.475 between the first and second, first and third and
the second and third clusters, respectively. The number of clusters
was chosen as three, a since three-cluster solution may provide
some significant information that could be lost in the two-cluster
solution.
After deciding on the number of clusters, some tests must be
carried out to check stability, relative size of the clusters, and
external validity. The Rand index, which measures the proportion
of consistent allocations, should be calculated in order to check
stability. If the Rand index is equal to one, it means a perfect fit.
Values over 0.7 are considered as sufficient for the stability of the
cluster analysis 共Bacher 2002兲. Table 3 gives the Rand indices for
different methods. All of the Rand indices of Ward’s method,
complete linkage, and two-step cluster analysis were found to be
higher than 0.7. The stability of the analysis was also checked by
drawing some random samples from the population and testing
whether small modifications in the data set change the outputs of
the method or not. Nine firms 共around 10% of the population兲
were randomly drawn from the data set and the Rand indices were
calculated for each method. The Rand indices of two-step cluster
analysis with Schwarz’s Bayesian criterion, average linkage,
K-means, and Ward’s methods were the highest among all. The
number of members in each cluster was also checked for each
method. The methods which provide clusters that have only one
or two members should not be used 共Bacher 2002兲. In this data
set, the average linkage method yielded a cluster with two mem-
bers, the single linkage method resulted in two clusters with one
member, the centroid linkage method lead to one cluster with two
members, and the solution of the median linkage method sug-
gested one cluster with one member and one cluster with two
members. These methods were excluded and the external validity
test was performed for the remaining methods. For the external
validity, the performance rating was used as the external variable
and analysis of variance 共ANOVA兲 analysis whose results are
shown in Table 4 was performed for each method.
According to ANOVA results, it can be concluded that perfor-
mance differences exist between clusters in all of the methods. By

Table 3. Rand Indices of Methods

Hierarchical cluster analysis
Two-step
cluster Average Average K-means
analysis linkage linkage cluster analysis
with 共between 共within Single Complete Centroid Median Ward with
Cluster analysis methods BIC groups兲 groups兲 linkage linkage linkage linkage linkage three clusters
Two-step cluster analysis with BIC — — — — — — — — —
Average linkage 共between groups兲 0.413 — — — — — — — —
Average linkage 共within groups兲 0.730 0.466 — — — — — — —
Single linkage 0.302 0.697 0.369 — — — — — —
Complete linkage 0.791 0.404 0.796 0.503 — — — — —
Centroid linkage 0.645 0.678 0.525 0.717 0.649 — — — —
Median linkage 0.432 0.629 0.440 0.929 0.700 0.684 — — —
Ward linkage 0.848 0.441 0.727 0.514 0.712 0.720 0.542 — —
K-means cluster analysis with three clusters 0.800 0.274 0.810 0.324 0.567 0.777 0.394 0.810 —
Note: BIC= Schwarz⬘s Bayesian criterion.

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J. Constr. Eng. Manage., 2009, 135(4): 288-297

 Table 4. ANOVA Results of “Overall Performance” Using Different Clustering Methods
Sum of squares
Cluster analysis methods Between groups Within groups Total F Sig.
Two-step cluster analysis method 66.518 30.292 96.810 88.934 0.000
K-means cluster analysis method 70.374 26.435 96.810 107.817 0.000
Hierarchical cluster analysis method Complete linkage method 63.148 33.661 96.810 75.978 0.000
Ward method 68.001 28.808 96.810 96.600 0.000

comparing the F values, it can be noted that the clusters obtained When compared to the other clusters, the ratings regarding the
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by using the K-means method are the most dissimilar clusters. In
addition to this, the K-means method shows the highest stability
for the data set. Therefore, the clusters found by this method can
be used for strategic grouping. Table 5 shows the clusters sug-
gested by this method. ANOVA results are depicted in Table 6.
Discussion of Research Findings
ANOVA results depicted in Table 6 demonstrate the variables that
significantly contribute to the formation of the clusters. The top
three factors that show the highest contribution to the separation
of the clusters are: experience, relations with clients, and human
resources. About the strategy process, both types of strategic plan-
ning and decision-making processes significantly contribute to the
differences in clusters. Similarly, differentiation and diversifica-
tion strategies have significant contributions. The contributions of
factors such as internationalization ratio, type of projects, and
clients are found to be insignificant 共if 5% significance level is
considered兲. One can argue that strategy context is the major de-
terminant of performance differences in different strategic groups.
In light of the statistical findings, the following three strategic
groups are found to exist within the Turkish construction industry.
Strategic Group 1. The number of firms in this group is 34.
This group comprises the biggest firms 共average turnover is
around $108 million $/year兲. The majority of the firms in this
group have a systematic strategic planning process and strategies
are formulated in a democratic decision-making environment.
level of experience and client relations are significantly higher.
The values of other variables regarding the strategy context,
which are financial resources, technical capability, human re-
sources, and managerial capability, are also very high 共in the
range of 4–5兲. All of the firms in this group utilize a nonprice
strategy, meaning that they differentiate themselves from others in
terms of quality, innovation, etc. Similarly, the majority of the
firms are diversified into sectors unrelated to construction. The
average performance rating is the highest among the three groups.
This may result from the exceptional level of resources and capa-
bilities which give them the opportunity to differentiate their ser-
vices from others. Also, unrelated diversification may result in
financial synergy leading to the highest financial resources score
among the three groups.
Strategic Group 2. This group comprises 36 companies with
an average yearly turnover value of $47.17 million United States
$/year. This value is lower than the average of Strategic Group 1.
All of the strategy context variables have values within the range
of 3–4, showing that their competitiveness is lower in all dimen-
sions when compared with the firms that belong to Strategic
Group 1. Also, the percentage of firms having systematic strategic
planning and democratic decision-making process is significantly
lower. This also holds true for the strategy content. It may be
argued that although the majority of the firms in this group have
nonprice differentiation strategy, the level of resources and com-
petencies that backup this strategy is not as high as in Strategic
Group 1. Also, it is evident that the majority of the firms in this
group utilize focus strategy rather than diversification. The per-

Table 5. Means of Variables in Each Cluster

Mean SD
Variables Cluster 1 Cluster 2 Cluster 3
Size 共million $/year兲 108.000 共109.493) 47.170 共79.576) 26.100 共35.562)
Age 29.850 共14.076) 26.190 共11.496) 18.860 共9.371)
Type of projects 1.680 共0.727兲 1.500 共0.737) 1.640 共0.745)
Type of client 0.686 共0.323兲 0.720 共0.311) 0.696 共0.395)
Internationalization ratio 0.260 共0.263) 0.151 共0.261) 0.187 共0.314)
Strategic planning 0.910 共0.288兲 0.690 共0.467兲 0.070 共0.267兲
Strategic decision making 0.970 共0.171兲 0.690 共0.467兲 0.290 共0.469)
Relations with clients 4.180 共0.626) 3.560 共0.695兲 1.710 共0.825兲
Human resources 4.290 共0.524兲 3.440 共0.652) 2.210 共0.975)
Managerial capability 4.090 共0.621) 3.030 共0.810) 2.070 共0.730)
Technical capability 4.620 共0.493) 3.830 共0.609) 2.640 共1.008)
Financial resources 4.410 共0.557) 3.470 共0.810) 2.500 共0.855)
Experience 4.380 共0.739) 3.610 共0.599) 1.860 共0.663)
Differentiation strategy 1.000 共0.000) 0.780 共0.422) 0.290 共0.469)
Diversification strategy 0.710 共0.462) 0.440 共0.504) 0.430 共0.514)
Overall performance 4.240 共0.496) 3.440 共0.652) 1.570 共0.514)

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J. Constr. Eng. Manage., 2009, 135(4): 288-297

 Table 6. ANOVA Analysis of K-Means Cluster Analysis mation about movements between groups is needed to assess
Mean square them. Dynamic strategic group analysis should be carried out and
mobility 共or immobility兲 of firms between the groups should be
Variables Cluster Error F Sig.
observed in order to comment on the mobility barriers within an
Type of projects 0.291 0.539 0.541 0.585 industry. Consequently, ANOVA findings do not provide enough
Type of client 0.011 0.109 0.098 0.907 information about mobility barriers in the Turkish construction
Internationalization ratio 0.106 0.073 1.451 0.240 industry and further analysis is needed to reveal the strategic vari-
Strategic planning 3.509 0.140 25.149 0.000 ables that act as mobility barriers.
Strategic decision-making 2.386 0.142 16.853 0.000
Relations with clients 30.156 0.478 63.139 0.000
Human resources 22.056 0.448 49.209 0.000 Conclusions
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Managerial capability 22.462 0.526 42.673 0.000

Technical capability 19.783 0.423 46.794 0.000
Financial resources 19.622 0.527 37.216 0.000
Experience 31.630 0.448 70.581 0.000
Differentiation strategy 2.532 0.112 22.587 0.000
Diversification strategy 0.717 0.239 2.996 0.056
formance of firms in this group is moderate and significantly
lower than the average performance in Strategic Group 1.
Strategic Group 3. In this group, there are 14 companies that
have the lowest average performance rating among the groups.
This group comprises comparatively small firms the majority of
which utilize a price differentiation and focus strategy. The basic
difference from the other groups is that the majority of firms in
this group do not have a systematic and democratic strategy pro-
cess. Also, they have weaknesses 共scores lower than 3兲 in terms of
all sources of competitive advantage. They are especially weak in
terms of client relations and experience.
Finally, it can be concluded that the type of projects conducted
by a construction company, type of clients served, and the level of
internationalization can hardly explain the differences, between
the performances of firms. Strategy development process and stra-
tegic choice may significantly contribute to performance differ-
ences, but strategic groups are mainly determined by the level of
resources and competencies 共strategy context兲.
The observed relationship between group membership and
firm performance can be taken as evidence of the existence of
mobility barriers and the variables that significantly contribute to
the performance differences can be considered as mobility barri-
ers 共McGee and Thomas 1986兲. Caves and Porter 共1977兲 mention
that the distance between groups may be used as a proxy for the
height of the mobility barriers separating them. As the F value
found as a result of ANOVA shows the distance between indi-
vidual distributions, indicates of how well a variable discrimi-
nates between clusters, and the variable that has got the highest F
value creates the major difference between the clusters, the vari-
able共s兲 that contribute to the performance difference between the
three strategic groups can be candidates for mobility barriers.
“Experience” can be a strong candidate for a mobility barrier
between the strategic groups within the Turkish construction in-
dustry. McGee and Thomas 共1986兲 identified the strategic deci-
sions that cannot be imitated by firms outside the group without
substantial costs, significant elapsed time, or uncertainty about the
outcome of those decisions as possible sources of mobility barri-
ers. “Experience” is an asset which can hardly be imitated by the
others and it can only be achieved after an elapsed time and
completing enough projects. However, Sudharshan et al. 共1991兲
state that no single period analysis can identify the variables that
act as mobility barriers or infer heights of such barriers as infor-
In this research, using a conceptual framework that has three
components, namely, strategy context, content and process, and
conducting a statistical cluster analysis, three strategic groups are
identified for the Turkish construction industry. There are signifi-
cant differences between the performances of firms in different
groups. Major contributors to these differences are identified as
experience and client relations. All strategy context as well as
strategy process variables are found to affect the level of perfor-
mance significantly. All of the companies in the high performance
group are found to utilize a nonprice differentiation strategy. The
resources and capabilities of those firms as well as their strategy
development process support the nonprice differentiation strategy
showing that strategic integration can bring success.
Diversification into other sectors also contributes to the perfor-
mance difference between the firms in different groups. The ma-
jority of the firms that belong to the strategic group that have the
highest performance level are diversified into sectors other than
construction. However, the amount of work in the domestic and
international markets does not create a major performance differ-
ence between the firms categorized under different strategic
groups. Moreover, the contribution of the scope of work in terms
of projects and clients is not statistically significant.
Research findings may be used to propose certain strategies for
the Turkish contractors. It is clear that in order to promote to a
group that has a higher performance, companies should aim to
increase their resources and capabilities 共in the order of most
important to least important: client relations, human resources,
technical capability, managerial capability, and financial re-
sources兲. Experience is found to create a major difference be-
tween the clusters. Partnering with experienced firms may be an
effective strategy to compensate for a firm’s weakness on this
issue. Also, having a systematic and democratic strategy formu-
lation process is found to make a significant contribution to the
separation of clusters, and thus performance levels.
Barney and Hoskisson 共1990兲 state that “to be right in the
strategic grouping research is to find that combination of data and
clustering algorithm that yields groups that are intuitively appeal-
ing to an author’s intimate knowledge of an industry and that
generate significant differences between performance of firms in
different groups.” Although, the validity of the variables used for
clustering and reliability of the clustering method can be ques-
tioned, based on the writers’ intimate knowledge as well as statis-
tical evidence, it is believed that strategic groups found as a result
of this study reflect the realities of the Turkish construction indus-
try. However, there are certain shortcomings of this research.
First, it cannot be argued that strategic group membership is the
primary determinant of firm performance. There may be signifi-
cant differences within a group due to firm level advantages such
as the existence of unique resources. Strategic group heterogene-
ity, as discussed by McNamara et al. 共2003兲, is ignored in strate-
gic group analysis. Although some generalizations are made about

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J. Constr. Eng. Manage., 2009, 135(4): 288-297

 strategic groups, it may not hold true for every firm in the same
group. Second, the relation between strategic group membership
and performance is studied at a single point in time. It is hard to
make predictions about performance of groups in the future as
strategic groups are dynamic. Also, group performance may
change as a result of a change in the competitive environment.
Third shortcoming is neglecting the role of macroenvironment in
strategic group analysis. Researchers that support environmental
determinism describe environment as the primary mechanism for
explaining the performance of an organization. In strategic group
analysis, it is hypothesized that environmental forces have the
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same impact on all firms and its implications are reflected in the
performance ratings in the same manner. Also, the research has
some limitations due the measurement method used. Single items
are used to measure variables rather than constructs composed of
a series of questions. Moreover, performance rating is subjective
and reflects the personal judgment of only one respondent.
If a rational theoretical framework is used together with an
appropriate clustering method, strategic group analysis may pro-
vide significant information for analyzing intraindustry heteroge-
neity. In order to increase the reliability of results, the cognitive
approach can be used together with statistical tools and their re-
sults may be compared. Another topic for further study can be
conducting strategic group analysis over time and monitoring per-
formance implications with changing strategic positions and com-
petitive rules. Dynamic strategic group analysis can be carried out
so that one can question the relevance of strategic group structure,
identify causes of performance differences between groups over
time, and finally determine whether mobility barriers exist or not.
Finally, this study statistically proves that different strategic
groups may exist within the construction industry and strategic
group membership may be a determinant of performance. How-
ever, results are country specific and cannot be generalized. Com-
parative studies can be conducted by using the strategic
dimensions and analysis method proposed in this paper.
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