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Strategy is important in shipping because it facilitates the identification of business opportunities, gives an objective view to solve business problems, pro vides a framework to improve internal and external collaboration, assists in control ling business activities, minimizes negative effects when threats arise, helps make better decisions, guides effective allocation of resources, provides methods to man age changes, and nurtures consistency in the management of the shipping business. Shipping firms have a hierarchy of interrelated strategies, each formulated at a different level, which can be classified as corporate strategy, business strategy, and functional strategy. Formulating and implementing shipping strategies involve answering many interrelated decisions: What to do? When to do it? How to do it? The development of shipping strategies involves the process of strategic analysis, formulating strategies, and implementation and control of strategies. To seek business opportunities, a shipping firm needs to answer the question of how to structure the organization to sustain growth. The structural options for shipping firms include organic growth, acquisitions, joint ventures, alliances, and networks. 1. Introduction Shipping is concerned with the delivery of goods and services required by ship pers. The opportunities and challenges faced by shipping companies are affected by the business environment in which they operate. As the business environment changes with technological, economic, and political developments, shipping lines face the challenges of developing strategies that give them an advantage in better serving their customers. For almost two decades, managers have been learning how firms should adapt to the changing business environment. Firms must be flexible and responsive to respond rapidly to competitive and market changes. They must benchmark continuously for best practices, and nurture a few core competencies to stay ahead of their competitors. There is a direct relationship among the market structure, conduct, and performance. The basic economic and political conditions of the container shipping industry affect its market structure. Market structure can be examined through a number of variables, such as number of sellers, product differentiation, cost structure, and entry barriers. The market structure of a container carrier affects its conduct in the container shipping market. Examples of the conduct of a firm include its pricing policy and capacity level. The performance of the container shipping firm depends on its conduct in making decisions such as pricing and capacity management. In summary, the economic conditions deter mine market structure, market structure determines conduct, and conduct determines performance. On the other hand, there can be feedback effects of performance on conduct and structure, as well as of conduct on structure. A summary of the structure-conduct-performance paradigm is shown in FIG. 1. As far as market structure is concerned, container shipping can be considered as an oligopoly market. The characteristics of the container shipping industry include (1) high fixed cost, (2) little difference in the services offered, (3) a high concentration rate, which means that a few operators account for the majority of the total shipping supply, and (4) high entry barrier. The increase in the carrying capacity of global container shipping carriers has accentuated the characteristic of concentrated operation in the industry. Concentration in recent years is a result of increased carrying capacity by the top container shipping operators. --------------
Economic conditions -- Market structure -- Conduct -- Performance -- Political Conditions -------------- The key changes that have taken place in the liner shipping industry over the past 20 years are related to increased horizontal and vertical integration. The former has been the result of mergers and acquisitions, as well as the ongoing evolution of strategic alliances among shipping lines. The latter has been achieved by shipping companies integrating with the corporations of which they are a part to provide a bundle of comprehensive services under one roof, including more value added services such as cargo consolidation, container terminal services, and intermodal and logistical services. Within the shipping industry, certain companies outperform others on a consistent basis in terms of cost and service advantages. They employ different strategies to improve performance on a variety of economic and operational performance measures in their efforts to outperform competitors. In the era of globalization and severe competition, strategic decisions are critic al to the growth or decline of a firm. The relationship between strategy and performance is of utmost importance in liner shipping. Shipping firms should apply the principles of strategic management in various aspects of their business because they: • help shipping firms identify and prioritize business opportunities; • give shipping firms an objective view to solve business problems; • provide shipping firms with a management framework to improve their internal and external collaborations; • assist carriers in controlling their business activities; • minimize the negative effects on shipping firms when threats arise; • help shipping firms make better decisions to support predefined organizational goals and objectives; • guide shipping firms in the effective allocation of resources to improve their overall efficiency and effectiveness; • provide shipping firms with methods and ways to manage changes in a dynamic business environment; • nurture shipping firms to be consistent in the management of their business. --------------
Hierarchy of strategies Hierarchy of strategies Corporate strategies Corporate strategies Business strategies Business strategies Functional strategies Functional strategies ------------- 2. Strategy for Shipping A strategy is a fundamental pattern of present and planned objectives, resource deployment, and interactions of an organization with its market, competitors, and other environmental factors. A well-developed shipping strategy should contain five key components: 1. Scope: Scope refers to the breadth of a firm's strategic domain - the type of industry (such as a third-party logistics provider, a liner shipping company, or a container terminal operator), and market segments (such as European, North American, or Asian markets) it competes in or plans to enter. 2. Goals and objectives: Strategies also state the desired levels of accomplishments, such as growth of volume over a specific time period. 3. Resource deployment: Resource deployment refers to the availability of re sources that a firm requires to achieve its goals and objectives. For example, liner shipping companies deploy ships to launch new container shipping services calling at ports in emerging countries. 4. Competitive advantage: An important part of a strategy is to specify how the firm will compete. For example, liner shipping companies may extend their services by providing integrated logistics services to their customers with a view to enhancing their competitiveness through maintaining a high level of services for years. 5. Synergy: Synergy can be defined as "the degree to which various resources' deployment complement and reinforce one another". The formation of alliances in the shipping industry is a typical example of the creation of synergy among the allied members. These five basic components are part of the shipping strategy. In general, ship ping companies deploy a hierarchy of interrelated strategies, each formulated at a different level. As shown in FIG. 2, strategies can be classified into three categories: corporate strategy, business strategy, and functional strategy. 2.1 Corporate Strategy Corporate strategy seeks to determine what businesses a firm should be in or wants to be in. As an illustration of this, Malaysia International Shipping Corp (MISC) proposed a corporate strategy of leaving the shipping industry in 2005. Lloyd's List reported on 11 January 2005 that MISC was looking for buyers so it could sell a stake in its container shipping arm after exiting dry bulk shipping, with Hong Kong's Orient Overseas Container Line (OOCL) as the front runner. MISC, which had been taking advantage of high market values to exit non-core businesses over the previous year, decided to sell a majority stake in its container shipping division. 2.2 Business Strategy Business strategy seeks to determine how the firm should compete. Park Jung won, President of Hanjin Shipping, demonstrated business strategy by saying that "We expect to achieve 6 trillion won in sales and more than 750 billion won in operating profits this year. This will accelerate the re structuring of the shipping industry. Hanjin has already started focusing on in vestment to develop information technology for shipping and e-business sectors, while positively seeking strategic cooperation with other carriers." 2.3 Functional Strategy Functional strategy seeks to determine how to support business strategy. The adoption of electronic commerce to streamline documentation processes is an example of functional strategy in the liner shipping business. Senator Lines, headquartered in Bremen, Germany, completed integration with INTTRA, pro viding another avenue for innovative e-commerce shipping solutions to their customers. Senator Lines' customers will have access to INTTRA's suite of e-tools, including tendering, sailing schedules, booking, shipping instructions, bills of lading, track and trace, and reporting. Senator Lines' customers will benefit from the e-tools, which further streamline their ocean shipping processes, saving them time and money and improving data accuracy in documentation. 3. Market Orientation in Shipping Shippers of today expect a higher level of service quality than ever before because they have more choices and possess better knowledge about service offerings. The challenge for shipping firms to stay competitive is to determine what their customers want and whether they are satisfied with the firms' services. Market orientation can be defined as the "organization-wide generation of market intelligence across departments, and organization-wide responsiveness to it". This marketing concept suggests that the long-term purpose of a firm is to satisfy customer needs for the purpose of maximizing corporate profits. In doing so, firms are required to take a proactive attitude in doing business and be responsive to customer needs and market changes. A firm must be market-oriented to gain long-term competitiveness, and the actions of market-oriented firms must be consistent with the marketing concept, i.e., placing customers at the very heart of business operations. A key advantage for a firm on becoming market-oriented is to get close to the market and understand how it is likely to change in the future. To obtain this knowledge, it requires acquisition of market intelligence about customers, competitors, and the market. Market-oriented firms need to view the information from a total business perspective, decide how to deliver superior customer values, and take actions to deliver value to customers. They should also be able to develop a customer focus, generate competitor intelligence, nurture cross-functional coordination, and understand the performance implications. 3.1 Customer Focus A market-oriented firm is good at understanding customers' preferences and requirements, and effectively deploying the required resources and skills to satisfy customers profitably. A customer focus orientation requires finding out what services customers value. Shippers' decisions to support a shipping line are based on the attributes and features of the shipping services they value. Shipping lines' sales representatives need to contact shippers and consignees directly to obtain information on what and how to provide better customer value. 3.2 Competitor Intelligence A market-oriented firm recognizes the importance of understanding its customers and competitors. It is essential for shipping lines to identify competitive threats and develop strategies to counter the threats. For example, the eastbound trans-Pacific volume continued to grow strongly in 2005 and shipping lines were expected to achieve freight rate increases of around USD 350 per 40-ft container, or around 70% of what they were seeking on all the routes from Asia to the USA. Under this market environment, shipping lines need to identify competitive threats and develop strategies as they lose shippers on this route compared with those routes moving goods from Asia to Europe. There could be some market downturn with so much new capacity scheduled for delivery, with the freight rate slipping by about USD 270 per 40 ft equivalent unit in 2006. 3.3 Cross-functional Coordination Market-oriented firms are effective in coordinating business functions to provide superior customer value. For example, CMA CGM, a French shipping line, launched its new environmental protection policy with support from both seagoing and sup porting functional members. CMA CGM's chairman, Jacques Saad, said: "When it comes to protecting the environment, especially the marine environment, I expect our performance in this area to be something we can all be proud of. This is why we have defined a very strict environmental strategy, which I am asking all staff members, both seagoing and sedentary, to support". 3.4 Performance Implications Market-oriented firms begin strategic analysis with a penetrating view of the market. As an illustration of this, Kuehne & Nagle has a clear strategy on expanding its integrated logistics and IT-based supply-chain management services with the aim of developing from a pure airfreight and sea freight forwarder into a global "one-stop shop" logistics provider. The company's turnover in 2004 rose 21.1% year-on-year to 11.56 billion Swiss francs (USD 9.97 billion). Earnings be fore interest, tax, and amortization increased 23.5% year-on-year to 390 million Swiss francs, and net earnings amounted to 241 million Swiss francs, up 23.1% over 2003. 4. Operational Effectiveness Versus Competitive Strategy One goal of shipping firms is to outperform their competitors. Both operational effectiveness and competitive strategy are essential to attain superior performance, but they usually work in different ways. Operational effectiveness means performing similar activities better than competitors. It refers to any practices that allow a shipping company to better utilize its resources, e.g., delivering services cost-effectively. The empty container management model illustrated in Section 11 is an example of firms achieving operational effectiveness through better management and utilization of critical resources. Differences in operational effectiveness can affect profitability because they directly influence relative cost positions. Through practicing total quality management and benchmarking, managers can improve the performance of activities to eliminate waste and achieve customer satisfaction. Constant improvement in operational effectiveness is necessary to achieve higher profitability. On the other hand, strategic positioning means performing activities different from those of one's rivals or performing similar activities in different ways. Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of customer value. Strategic positions can be attained from three distinct sources (Porter 1996), namely, variety-based positioning, needs-based positioning, and access-based positioning. 4.1 Variety-based Positioning Variety-based positioning is based on the choice of product or service variety rather than customer segments. Variety-based positioning makes economic sense when a company can best produce particular products or services using distinctive sets of activities. For instance, Lloyd's Register, a classification society, is a major organization involved in classification of ships, which sets standards of quality and reliability during their design, construction, and operation. Classification societies are organizations dedicated to delivering maritime services during the en tire life of vessels from design to building and operation. 4.2 Needs-based Positioning A second basis for positioning is that of serving most of or all the needs of a particular group of customers. Needs-based positioning arises when the same customer has different needs for different types of transactions. For example, manufacturers in the Pearl River Delta will ship cargoes to the USA, Europe, and other areas. Therefore, liner shipping companies have to offer a variety of liner shipping services to meet the various transport needs of the shippers in this ship ping market segment. 4.3 Access-based Positioning The third basis for positioning is that of segmenting customers who are accessible in different ways. Access can be a function of customer scale or of anything that requires different activities to reach customers in the best way. From the perspective of liner operators, shippers can be segmented into several clusters for developing shipping service strategies. In general, shippers can be segmented into three categories: international freight forwarders, global traders, and small domestic exporters. [A classification society is a non-government organization that certifies a ship's seaworthiness. Such an organization inspects design drawings and specifications before construction begins, supervises construction to ensure that standards are met, and performs periodic surveys to deter mine continued seaworthiness of the ship. ] 5. Development Process of Shipping Strategies Figure 3 shows the activities and decisions involved in the process of formulating and implementing shipping strategies. Formulating and implementing a ship ping strategy involves many interrelated decisions, such as what to do, when to do it, as well as how to do it. Objectives and strategies must be achievable with the shipping firm's available resources and capabilities, and must be consistent with the direction and allocation of resources inherent in the firm's corporate and business strategies. 5.1 Strategic Analysis A major factor affecting the success of shipping strategies is whether the strategic elements are consistent with the business environment. Therefore, the first step in formulating a shipping strategy is to monitor and analyze the opportunities and threats by examining the business environment. Shippers and consignees use the same container services but they are located in different countries. Therefore, managers in shipping firms must be aware of the global business environment to identify opportunities and threats to their business. ------------
Corporate objectives Business objectives External environment Market analysis Strategies formulation Implement and control Corporate objectives Business objectives External environment Market analysis Formulation of strategies Implementation and control ------------ 5.2. Formulation of Strategies Formulation of strategies should reflect market demand and the competitive situation within the shipping market. Different strategies are typically more appropriate for different market conditions. Formulating a successful shipping strategy re quires an understanding of the following issues: • the company's internal resources, capabilities, and strategies; • the environmental context, such as political, economic, and technological trends in the shipping industry; • the relative strengths and weakness of competitors; • the needs, wants, and characteristics of current and potential customers. 5.3. Implementation and Control Another determinant affecting the success of a shipping strategy is concerned with the organizational abilities to implement the strategy effectively. It depends on whether the strategy is consistent with the firm's resources, organizational structure, coordination efforts, and control system. For example, Hapag-Lloyd established a blueprint to acquire CP Ships by applying its own yield management systems in 2005. Hapag-Lloyd also looked for fleet saving, combining services where possible to reduce deployed capacity and operating costs. Synergies can be created by combining the two companies to form one of the world's top five container shipping lines. Control is probably the most important but most neglected area in the strategic management process. It requires the provision of an effective and efficient system to monitor progress within the budget constraints and to adjust the program when performance is not up to expectation. This evaluation and control process can also serve as a basis to conduct market opportunity analysis. -------------------
Organic growths Organic growths Networks Networks Alliances Alliances Joint ventures Acquisitions Acquisitions Structural options Structural options -------------------- 6. Structural Options for Shipping Companies Firms make their strategic choices after analyzing their external business environment, resources, capabilities, and competencies. To seek growth opportunities, a firm may consider diversification. Alternative growth opportunities can be identified and achieved in related business (e.g., Maersk Group operates APM container terminals). Growth opportunities can also be realized through vertical integration or development of the logistics service business (e.g., NYK Logistics and OOCL Logistics joined forces to become more fully integrated into the supply chain of their customers). Such diversification may be considered as strengths or weaknesses of shipping companies. An important question about growth opportunities is: how do shipping companies plan to grow? As illustrated in FIG. 4, the structural options include organic growth, acquisitions, joint ventures, alliances, and networks. 6.1 Organic Growth A company is considered to be growing organically when it is increasing the turn over of its existing business, but not by acquiring other companies. Organic growth offers the greatest control without meshing organizational cultures. It is an excellent alternative for firms like OOCL Logistics when the opportunity and resources exist. 6.2 Acquisitions Buying an existing firm can be one way to grow a business in a short time. An acquisition or merging may lead to market power and create economies of scale. For example, combining Hapag-Lloyd and CP Ships created one of the world's top five container lines and yielded a great synergistic ad vantage. The merging of Maersk Sealand and P&O Nedlloy in 2005, as well as that of CMA CGM and Delmas, has led to consolidation on an unprecedented scale in the liner shipping industry. Today, two or three players account for 40-50% of the capacity in the liner shipping market (Traffic World 2005). 6.3 Joint Ventures A joint venture has a greater alignment of incentives that motivates partners to adapt to a changing environment than is the case in a contractual agreement (Kogut 1988). As an illustration, CMA CGM formed a joint venture with Jardine Shipping in 2000 to create the CMA CGM shipping agency in Hong Kong at the time when it was developing its agency business.
6.4 Alliances The term "alliance", or "strategic alliance", can used to describe a wide range of organizational structures in which two or more shipping lines cooperate for mutual benefit and share common goals. Strategic alliance in the liner shipping industry is driven by the need to accomplish the organizational objective of achieving operational gains. COSCO, K Line, Yang Ming, and Hanjin Shipping focused on strengthening their strategic CKYH alliance and service offerings in 2006. The shipping lines intended to upgrade services by providing a total of 14 loops, with eight serving northern Europe. It added two new loops in the first quarter of 2006. In the trans-Pacific trade, CKYH provided 17 loops. In addition, CKYH intended to extend its cooperation scope by establishing joint feeder networks in 2006. Table 1 shows that most of the liner shipping service providers in trans-Pacific trade are operated in the form of shipping alliances with capacity sharing among the member lines. In the face of global competition and pressure for higher profitability, liner shipping companies form strategic alliances to deliver liner shipping services. The formation of strategic alliances is driven by the need to accomplish the following objectives: • Financial objectives: profit maximization, capital investment sharing, and financial risk reduction. • Economic objectives: cost reduction and economies of scale. • Strategic objectives: entry to new markets and expansion of geographical influence. • Marketing objectives: satisfying customer requirements, higher shipping frequency, and greater variety of routes and destinations. • Operational objectives: increase in frequency of services, vessel planning, and better coordination of global operations. 6.5 Networks A network can be considered as "a transformation process of independent actors and resources into a more closely knit configuration of a network". The transformation process of a liner shipping network can be classified into a creation process and an operations process. The former refers to the formation of relationships among actors to deliver liner shipping services, whereas the latter refers to continuous efforts to maintain and improve the relationships. A complementary resource is a key driver for shipping firms in the liner ship ping industry to cooperate. Through participation in a liner shipping network, actors in the shipping industry collaborate beyond firm boundaries to attain cost and service improvements. Network members enter a liner shipping network to access resources for organizational survival and performance improvement. Strategic interdependence, a situation in which one firm has resources or capabilities beneficial to but not possessed by the others, can be developed among actors within the liner shipping network. For instance, liner shipping companies enter into a network with railway operators to provide inland transport services to their customers so that a wider coverage of shipping services can be offered. The success factors of a liner shipping network include cooperation and trust among network members, as well as their ability to deploy resources to form and operate the network. As an illustration of this, the concentration process in the liner shipping industry and its increased capacity has led some actors, such as container terminal operators, being more cooperative. In 2003, the top ten liner shipping companies increased their carrying capacity by 13.0% to 3.8 million TEUs, which was 45.7% of the world total container carrying capacity (UNCTAD 2004). The largest liner shipping companies possess the power to manage shipping networks. Their global operations allow them more choices in calling at ports. On the other hand, if an actor in the liner shipping network, such as a container terminal operator, loses a global shipping line as one of its customers, it may lead to a substantial reduction in terminal throughputs. Liner shipping networks can be considered facilitators for service integration and deepening service conformity. From the perspective of liner shipping companies, there are many benefits from entering into a liner shipping network. These benefits include: • improved ability to provide better transport services and make them more at tractive to shippers; • expanded services to more markets in an inexpensive way; • efficient operations by increasing revenues and reducing costs in delivering the liner shipping services; • decreased exposure to financial risk for expanded services owing to reduction in capital investment; • increased market share by stimulating growth in acquiring new cargo • improved quality of their shipping services. top of page Home Related Articles |
