Contents |Question No. | |Page | | | | | |1 |Critically assess the key drivers of the Shipping Industry. |1 | | | | | |2 |To what extent are firms in the Shipping Industry likely to achieve what Hitt et al. |6 | | |describes as above average returns? | | | | | | Introduction Shipping is the primary means of international transportation of any essential raw material or finished goods. There are three main segments consisting of bulk carrriers, specialised cargo shipping as well as container shipping.
This industry is fundamental to trade, globalisation and economic growth of a country. In this case, we will be looking at the key drivers of the Shipping Industry and what are the factors that will influence this industry. After that, we shall look at how shipping firms going to achieve an above average returns and lastly we will critically evaluate the prospect of this industry. (1) General Environment Analysis Key drivers are the key forces that will drive and shape changes of the industry in relation to the policy area or aspects of the future.
While some key drivers cannot be influenced by human means, it will be more important to prepare and respond to the forces. With this in mind, understanding of the external environment is essential, which is also critical to a firm’s survival and success. External environment is divided into three areas which are general, industry and competitor environments. I will be focusing on the general environment to assess the key drivers for this industry as the objective of this is to identify opportunities and threats.
Opportunity is a condition if exploited, will help a company to achieve strategic competitiveness while threat will hinder a company’s effort to achieve strategic competitiveness. General environment composed of six segments, they are demographic, economic, political/legal, sociocultural, technological and global. Based on the case study, I have identified the segments that create the opportunities and threats of the Shipping Industry in the table below: Segments of General Environment |Opportunity |Threats |Remarks | |Economic Segment | | |- Global economic growth | |v |- From 1980, economic growth in East Asia increased foreign direct investment that resulted in| | | | |greater dispersion of production across countries and regions, thus increased the demand for | | | | |shipping. (Source: Kulwant Singh et al. , 2010, Pg 110) | | | | | | | | | |- Asian economic crisis between 1997 to 1998 affected the shipping volume and rates to fall. | | | | |(Source: Kulwant Singh et al. 2010, Pg 111) | | | | | | | | | |- When fuel prices rose to about $750 per ton in mid 2008, it accounted as much as 60% of the | | | | |total cost of operating a mid-sized liner. (Source: Kulwant Singh et al. , 2010, Pg 116) | | | | | | |- Rises in fuel price | |v |- This will erode the profitability of the shipping firms due to high fixed capital cost. | | | | | | | | | | | | | | | |- High port cost and rising steel price | |v | | |Political/Legal Segment | | |- Strong support from government |v | |- Many governments supported the entry of more national shipping lines to support trade and | | | | |national development. (Source: Kulwant Singh et al. , 2010, Pg 109) | | | | | | | | | |- According to the case, in order to encourage competitive price setting, there are relatively| | | | |few regulatory or government constraints. | | | | | | | | |- Many governments provided subsidies and tax incentives to support their national lines which| | | | |allowed them to continue operating even in the face of poor profitability. (Source: Kulwant | | | | |Singh et al. , 2010, Pg 116) | |Sociocultural Segment | | |- Increased preference of shipping cargo on regular basis |v | |- This will reduce excess capacity and cost for docking. | | | | | |- Environmental and Security concerns | | | | | | |v |- Increasing security concerns led to introduction of costly security procedures and increased| | | | |insurance charges. | | | |- Environmental concerns will raise costs, but shipping lines are not able to pass the cost to| | | | |customers. (Source: Kulwant Singh et al. , 2010, Pg 116) | |Technological Segment | | |- Improvement in design and engine technologies |v | |- With the advancement of engine technologies, ships are 20% faster and more reliable. | | | | |Automation and IT also allowed smaller crews to operate larger ships. Source: Kulwant Singh | | | | |et al. , 2010, Pg 114) | | | | | | | | | |- With the better large ships operated by fewer crews, operating costs is lowered. Large ships| | | | |can move containers at lower rates which allow substantial economies of scale. |Global Segment | | |- Increased demand for shipment |v | |- Container shipment accelerated to 10% annual growth in the 1990s compare to 7% growth per | | | | |year in the 1960s. (Source: Kulwant Singh et al. , 2010, Pg 109) | Based on the above analysis, it shows great opportunity for the shipping industry. As it shows the increasing demand in the global segment accompanied with majority of customers requiring regular sailing schedules. With the substantial economies of scale, it allows the firms to order more larger ships, which will reduce the cost of shipping on transpacific routes provided it is fully utilized. Moreover, larger ships require lesser crews to operate, eventually reducing the fixed cost.
With the strong government support, it helps to give shipping industry a boost as government does not have much constraint on shipping firms for introducing new routes or sailing to ports of their choice. With the rising fuel price that pose as a threat to the shipping industry, shipping lines have to reduce the speed of their ships to improve fuel efficiency that in turns increases the cost of purchasing more ships to maintain their regular schedules. Even though with the higher fuel price, shipping industry remains an opportunity because it also increases the cost for shipping by air, customers will still prefer to ship their cargo by sea which is more economical.
Another main key driver for the growth of shipping industry is the economic growth of the country. It has been evidently shown that as economies grow, trade will grow as well, and makes the shipping industry profitable. According to the case, there is a pattern of rising trades and falling rates being repeated regularly in the industry. As this factor is uncontrollable, shipping firms can better prepared for the situation with prudence in their budget. With technology advancement, it increases the efficiency of the ships especially in loading and unloading of cargo. Furthermore, better technology reduces the fixed capital cost for shipping firms.
To conclude, the key drivers show that there are opportunities present in shipping industry to progress despite some of the threats being posed. (2) Above Average Returns According to Hitt et al. , Above average returns are returns in excess of what an investor expects to earn from other investments with a similar amount of risk (Hitt et al, 2009, Pg5). Firms need to understand on how to exploit a competitive advantage to earn above average returns, inability to earn at least average returns will results in failure. I will be analysing the industry environment to evaluate on how shipping firms will be able to achieve above average returns. Porter’s Five Forces Model Now we shall look at the industry environment which is part of the external environment.
Compared with the general environment which have been analysed earlier, industry environment has a more direct effect on the firm’s strategic competitiveness and above average returns (Hitt et al. , 2009, Pg48). I will be using Porter’s five forces model to analyse the intensity of the industry competition and its profit potential. Five forces model consists of a set of factors, they are threats of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of substitute products and rivalry among competing firms. Table below shows my analysis of the five forces that determine the attractiveness of shipping industry for firms to achieve superior returns in terms of ‘Low’, ‘Moderate’ and ‘High’ to represent the intensity for the factors. Porter’s Five Forces |High |Moderate |Low |Remarks | |Threat of New Entrants | | |(Entry Barriers) | | |- Capital Requirements |v | | |- A substantial amount of capital is required to enter shipping industry, with majority of the investment | | | | | |directed to the cost of ships. | |- Product Differentiation | |v | |- Services and technology of the ships can be easily imitated by competitors, however with superior services | | | | | |like providing customers with fixed schedules or lower freight rates can differentiate itself from the | | | | | |competitors. |- Switching Costs | | |v |- Switching cost is low due to the absence of any loyalty program for customers. With the competitive rates, | | | | | |customers are free to switch shipping firms without any binding contract. | |- Access to Distribution Channels | |v | |- With few regulatory from government for introducing new routes, there is not much entry barrier in access | | | | | |to distribution channels for firms.
However, government will still try to protect their national lines by | | | | | |providing subsidies and tax incentives that moderated the barrier for access to distribution channels. | | | | | |(Source: Kulwant Singh et al. , 2010, Pg 117) | |- Economies of Scale |v | | |- The potential economies of scale encouraged larger ships and shipping firms to low operating costs and | | | | | |move containers profitably at relatively low rates. Whereas smaller firms have a cost disadvantage. Source: | | | | | |Kulwant Singh et al. , 2010, Pg 116) | |- Government Policy | | |v |- Governments encourage more shipping lines to support trade and national development. | |Bargaining Power of Suppliers | | |v |- There are many shipbuilding firms from Japanese, Korean, Brazilian and Chinese. There is severe competition| | | | | |and overcapacity in the shipbuilding industry in 2008. These have led to the declining prices of ships. | | | | |(Source: Kulwant Singh et al. , 2010, Pg 114) | |Bargaining Power of Buyers |v | | |- Customers are knowledgeable about the shipping prices and highly price-sensitive. As all leading shipping | | | | | |firms offered the same services, customers exhibited little loyalty to shipping lines and shift their | | | | | |business based on prices and schedules. Source: Kulwant Singh et al. , 2010, Pg 118) | | | | | | | | | | | |- In 2005, Transpacific Stabilisation Agreement (TSA) members attempted to raise prices by 30% in view of | | | | | |rising port charges and fuel costs, the customers refused to pay higher rates. (Source: Kulwant Singh et al. | | | | | |2010, Pg 114) | |Threat of Substitute Products | | |v |- The threat of substitute products is low as the only substitute for cargo transportation is by air freight. | | | | | |With the rising of fuel price, shipping by sea is still considered the economical mode. However, some high | | | | | |value electronic items which are time-sensitive uses air freight. (Source: Kulwant Singh et al. 2010, Pg | | | | | |118) | |Intensity of Rivalry among Competitors | | |- Numerous or Equally Balanced | |v | |- Although many shipping firms entered the industry, it is moderately competitive with top 20 firms having | |Competitors | | | |the concentration level of 70% in 2008, which is lower than many other global industries. Source: Kulwant | | | | | |Singh et al. , 2010, Pg 114) | |- Industry Growth |v | | |- The demand for container shipping is increasing, 70% of the value of global seaborne cargo was shipped in | | | | | |containers. According to Clarkson Research Services, in 2008, international containerized trade growth | | | | | |reached around 1,400 million tons. (Source: Kulwant Singh et al. 2010, Pg 109) | |- Fixed Cost or Storage Cost | |v | |- Shipping firms tends to buy larger ships to reduce their operating cost by having fewer crews, the large | | | | | |ships creates excess capacity that cause the pricing competition among firms to prevent under-utilization. | |- Differentiation or Switching Costs | | |v |- The services provided in the shipping industry can be easily imitated by competitors and customers | | | | | |exhibited little loyalty to shipping lines due to low switching cost. |- Exit Barriers |v | | |- Shipping industry has high exit barriers due to its large operating capacity and high capital investment. | | | | | |Another reason is because of government restrictions as some of the shipping lines are national lines and | | | | | |they have been supported by government subsidies and tax incentives. | To summarise, based on the above analysis, it reflects a moderate entry barriers, low bargaining power of suppliers, high bargaining power of buyers, low threat of substitute products and moderate intensity of rivalry among competitors.
Although with these factors that portray a substantial level of competition, shipping firms are still operating in an attractive industry. As economies grow, trade will grow and majority of customers still prefer to ship their cargo by sea rather than the more expensive mode, by air. In order to achieve above average returns, firms should invest in having sophisticated IT systems to conduct complex yield management, capacity utilization and route planning. This can help the firms to differentiate themselves from the competitors as most firms are reluctant to invest heavily on IT systems. Firms that develop and sustain a differentiated product or services that cannot be easily imitated by competitors often earn higher returns (Hitt et al. , 2009, Pg54).
Firms can also invest in larger ships to enhance its reliability and efficiency for transporting of cargo. This can helps in concentrating on high volume routes and achieve high frequency sailing that give them an upper hand over those mid-sized carriers. Firms can come out with some loyalty programs just like in airline industry to bind them to the company. Firms should also focus on their capabilities to develop core competencies and create competitive advantage among the others to achieve above average returns. With the analysis of Porter’s Five Forces and combine with the earlier analysis of general environment, shipping firms can achieve strategic competitiveness and achieve above average returns in the shipping industry.