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Partial conclusion

In document Finance and Strategic Management (Sider 44-47)

5 S HIPPING I NDUSTRY A NALYSIS

5.3.6 Partial conclusion

The attractiveness of the industry is currently low. This is mainly driven by a high degree of bargaining power of buyers and a high competitiveness, as it is difficult for the shipping companies to diversify themselves from competitors.

Analysts are speculating that a permanent industry consolidation is required to re-establish an attractive industry. Currently many mid- and small size shipping firms are struggling to meet debt obligations, which can create opportunities for the bigger players to acquire cheap assets.

5.4 GENERIC STRATEGY

To assess the competitive advantages of ML, Porter points to two central questions: To estimate the attractiveness of the industry in terms of profitability and consider the firm’s position within the industry.

From Porter’s perspective profitability is determined by a combination of the industry and the firm’s position

Troels Hedegaard & Morten N. Nielsen herein. The above analysis focused on the industry, while the following section serves to understand the position of Maersk and their strategy within the industry (Porter, 1980).

The generic strategy framework separates the strategy into two distinctive areas: scope and competitive advantage. Larger players competing on a broad level are dominating the industry, while multiple small-to-midsize shipping lines have entered strategic alliances in order to compete on a global scale. ML has historically been able to compete on a broad industry wide level with its strong global network. The industry analysis illustrated a clear tendency that liner companies are mainly focused on running a cost efficient organization where ML is no exception. Combined, it entails that the firm is pursuing a cost leadership strategy, to which Farheed Mehmud, head of legal services at ML commented (Rind, 2015 March 18):

“Cost leadership is the name of the game for shipping lines to thrive”

ML is fighting to remain profitable and to be the most cost-efficient company. During the financial crisis the firm fired more than 7.000 employees and in late 2015 it yet again announced the plan to let 4.000 employees go (Ship & Bunker, 2015 November 4). ML has further adjusted its fleet by 30%, which is significantly more than the average of 4.5% for the industry. Moreover, the company recently decided to focus its investments on smaller and more flexible vessels, compared to the triple-E. This must be seen as a dramatic change, as Nils Smedegaard in 2014 categorically denied that the company would place orders for vessels of smaller size than triple-E. However, the continuing struggle to stay profitable in the shipping business has forced ML to look for new ways to increase flexibility and profit margins. The new orders will lower the cost efficiency of the fleet, but allows for a better utilization of the vessels, as the smaller models can be redeployed to other routes (Interview: Martin Herrstedt).

It is clear that ML is following a cost leadership strategy where it through efficient cost management is trying to distance its key competitors and generate sustainable profits. The following section will deep-dive into where the cost advantage is generated.

5.5 VALUE CHAIN ANALYSIS

In the following, a Value Chain Analysis of MOG is conducted. This framework, which was first introduced by Michael Porter in his 1985 book ‘Competitive Advantage’, is utilized in order to clarify how the company produces value. By looking at the different ‘systems’ in the value chain and how it creates value, rather than specific departments or cost types, it is possible to identify the key strengths and weaknesses of the entire process, thereby creating a foundation from which informed strategic decisions can be made. The framework suggested by Porter has been tested throughout the years, but can be criticized for being to generic, as it was

Troels Hedegaard & Morten N. Nielsen developed for manufacturing and retail purposes. Therefore, the original value chain will be adjusted to the flows identified across the container shipping and oil industries.

Ross Robinson (2005) later promoted the framework in the shipping industry. He stated that it is crucial to understand the structure of the supply chain and how the firm operates to comprehend the success of a shipping liner. Shipping companies are a third party provider and are thereby part of larger logistics value chain, which for the Maersk Group is illustrated below:

Figure 18 - Global Trade Supply Chain

Source: (Maersk, Transport & Trade)

The manufacturer works together with a freight forwarder who, on demand, arranges the transport of goods on behalf of the manufacturer. A trucking company will pick up the goods in a container and transport it to the nearest harbor where it is loaded onto a container ship. After successfully arriving at the new location the container is unloaded and transported to an import distribution center from where the container is opened and the products are transported to its final destination, which is most often the sales location (World Shipping Council, 2016). Throughout the process, Maersk is involved in the majority of the stages, as DAMCO is handling the logistics, while ATM Terminals is loading and unloading the containers from ML’s vessels.

Being a third party provider, the value derived for ML is therefore based on the customer's’ acceptance of the product and service provided (Robinson, 2005). The focus in this analysis will therefore be on how ML is able to deliver superior products to its customers at a low cost, which enables profit to be made. The shipping industry supply chain can be viewed in three main flows: upstream, midstream and downstream.

Martin Herrstedt elaborated that container liners operate within three main stages in the value chain: pre-sea, transportation and post-sea. The three identified stages can be observed to cover the upstream, midstream and downstream activities and will therefore serve as the primary activities in the value chain framework.

Subsequently, the primary activities will be combined with Porter’s traditional supporting activities of firm infrastructure, human resource management, technology and procurement (Porter, 1985)

Troels Hedegaard & Morten N. Nielsen

In document Finance and Strategic Management (Sider 44-47)