75
76 Another important distinction between the two models is the fact that Torm is in control of all aspects of its operations, this was further enhanced by the company’s recent decision to get involved with scrubber production and installation. Whereas Norden emphasis outsourcing
activities and is thus more reliant on strong relationships with its counterparties to ensure favorable terms of contracts. For Norden’s chartered fleet, such terms may involve a higher degree of
optionality related to the duration of the contracts and the opportunity to purchase the vessels.
However, as recognized by Kachaner and Whybrew (2014), these charter contracts may also be subject to conflict of interest as all parties have divergent intentions. For Torm’s asset heavy
business model, which is not as concentrated around short-term chartering contracts, the company is less likely to encounter such conflicts of interest in its day-to-day operations. Although, Torm also enters vessel contracts, these occur more seldom and are commonly related to the sale and purchase of its tankers, thereby more capital intense and costlier to exit.
Further, both companies’ business models operate within the product tanker segment, but they are present in different vessel classes. Torm directs attention to all vessel classes in line with its “one-stop shop” which enables the company to be more versatile for its customers. On the the other hand, Norden mainly specializes in operating Handysize and MR tankers as these vessels are flexible and have similar characteristics related to cargo, size, routes, etc. Thus, they are also easier to draw synergies from when operated in the pool structure, as opposed to including LR1 and LR2 which have different features (Lorange & Fjeldstad, 2012). In times with oversupply of tankers, Norden’s approach may be less exposed than Torm’s approach, due to MR and Handysize’ wider range of application areas compared to the largest vessel segments. Conversely, Torm can exploit higher earnings from LR1 and LR2 tankers when there is a strong demand for vessels, especially because they can be converted to trade in the crude market.
Based on the assessment of the business models of Torm and Norden, it is evident that the companies apply very different approaches to create value, although they operate in the same market. For each company the customer is considered an essential stakeholder and they have developed distinct business models to suit customer needs. Even though the companies target customer with similar features, they have differing perceptions of what their customers value. On one hand, Torm believes that its customers prefer to buy services from a company that both owns
77 and operates vessels because this will facilitate accountability and transparency for the customers (Torm, 2020). Therefore, Torm pursues an integrated model to maintain control of all stages in their operations. On the other hand, Norden’s impression is that customers are indifferent regarding who owns the ships, as long as the operator provides high quality in their services (Dampskibsselskabet Norden A/S, 2020). Drawing on this, it is noticeable that each company’s understanding of
customer preferences have influenced their choice of business model.
6.1.2 Value capture
In terms of revenue model, the two companies also differ. Norden earns the bulk of their revenues through Norient pool, as well as revenue from long-term leasing activities. Conversely, Torm primarily generates income from operating their vessels in the spot-market, in addition to chartering out vessels if profits are deemed favourable. The company’s focus on exploitation of the spot-market may prove beneficial during times with high rates, whereas Norden may not be able to take advantage of such rates to the same extent as Torm. Furthermore, Torm has the potential to earn additional revenue from its scrubber venture, though it will depend on shipping companies’
compliance solution with IMO 2020. Evidently, one similarity identified between the two revenue models, is the fact that both companies earn proceeds from sale and purchase of ships, although these transactions may occur more frequently for Torm than for Norden due to its asset heavy business model.
With regards to cost structure, both Norden and Torm recognize bunkers as their largest cost and they have chosen to install scrubbers on approximately half of their owned vessels. Torm is therefore less affected by the spread between HSFO and the compliant fuels due to its balanced approach. Norden on the other hand, may be more exposed to increases in this spread contingent on the characteristics of the vessels the company charters in. When it comes to capital expenditures however, these are significantly lower for Norden, resulting from the company’s asset light model.
Despite Torm’s higher capital expenditures, the company has the opportunity to negotiate
favourable loan terms with its creditors due to the large ownership of vessels. This is particularly advantageous in tough markets. For Norden, this may be more difficult as the firm has less
collateral, thus lower ability to take advantage of asset play in negotiating with creditors (Stopford, 2009). Additionally, the company has a more sophisticated model which may hamper banks’
understanding of how Norden generates income.
78 6.1.3 Sub-conclusion
Sub-question 2: Why did Torm decide on an asset heavy business model, whereas Norden on an asset light business model?
Torm’s decision to apply an asset heavy business model is grounded in its perceived advantage of having a “one-stop shop”. The company believes that this model simplifies the customer experience significantly, enabling Torm to become the preferred option across the product tanker market.
Moreover, the asset heavy model creates synergies between revenues and expenses through close coordination between divisions within the company. Another reason for Torm’s choice of business model, relates to the benefits of being an integrated owner and operator. Torm is determined that ownership, along with operation of vessels, will contribute to higher revenues because the company does not have to pay charter hire as sole operators must. Additionally, the asset heavy model
enables Torm to generate revenue from timely purchase and sale of vessels. Norden, on the other hand chose an asset light business model because the firm wanted to reduce exposure to the volatile shipping market by chartering in vessels. In particular, the short-term leasing of vessels allows Norden to decrease and increase the fleet to adhere to market conditions. Further, the company’s aim to reduce ownership was reasoned in exploiting synergies and reducing risks in terms of shared costs through employing vessels in the Norient pool.