Propeller Club, Geneva June 23, 2005

To order Mr Loranges book: http://books.elsevier.com/elsevier/?isbn=0080446116

Strategic Challenges in the Shipping Industry

Dr. Peter Lorange, President, IMD The Nestl Professor

Copyright 2005 by IMD International, Lausanne, Switzerland Not be used or reproduced without permission

Let me touch upon Four aspects of Successful Shipping Strategies:

Commodity Strategies Niche Strategies Overall Portfolio Strategies The People and the Culture

Dr. Peter Lorange, President

2 PL-Strategic Challenges in the Shipping Industry

First, a need to develop a Successful Commodity Strategy! We know that Successful Commodity Shipping Strategies must build on:

Chartering: understand the markets: Timing

In / out Long / short Turning points

Purchase + sale of ships many of the same issues Cost Focus: Operations, crewing, the value chain and technology
Squeeze the costs out

Take advantage of the macro-environment

Exceptional economic growth Be sensitive to political risk A dilemma (?): Operations and/or asset play

Dr. Peter Lorange, President

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3) Long term CoA

2) Medium term CoA

4) Spot trade

1) Spot trade Shipping Market Cycle

5) Reduce Spot Exposure

Dr. Peter Lorange, President

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Future Expectations Cumulative Distribution of Spot Rates

Market < X (minus) 100% 5% Market < X (plus) 95%

50%

0%

X (minus)

X (plus)

Dr. Peter Lorange, President

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A Strategy Model, applied to Commodity Business

Leverage Transform

New
Protect and Extend = Commodity Understand the market - Timing decisions in/out; long/short - turning points Do good better; Improve market position Improve market position Managerially: Build

Shipping Markets

Established

- Strengthen existing competencies - Take out the last costs

In Place
Source: Chakravarthy and Lorange

Must Build

Distinctive Competences

Dr. Peter Lorange, President

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We Also Know that There Are Niches:

Key Elements of Niche Strategies in Shipping
For Niche Markets: See opportunities before they are obvious to everyone else Customer relationships closeness understanding continuity trust Key to have: Unique know-hows that the customer can appreciate! Technological IT Commercial A good Niche Strategy does it build on already established strengths?

Dr. Peter Lorange, President

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All Shipping Niche Business Platforms Will Become More Mature Over Time
Ships / shipbuilding capacity easy to copy ! The speed of new-buildings! Technological advances have led to even more capacity! Implication: You must order new ships that are: Cheap (in dollar!) Lowest ordering cost! Good delivery Know-hows must constantly be updated/developed in persons heads systems IT; logistical support This is Less easy to copy ! Huge investments in specialized fleet and infrastructure: Least easy to copy Ex.: Heeremas crane ships

Dr. Peter Lorange, President

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A Model for Niche-based Strategic Development in Shipping Firms

Leverage Niche Transform Far Out Niche

New

Markets
Protect & Extend Commodity Niche Build

Established

In Place Need to add Distinctive Competences

Dr. Peter Lorange, President

9 PL-Strategic Challenges in the Shipping Industry

Example: Klaveness
Leverage (Maritime Logistics) Beijing Transform

New

Markets
Protect & Extend (Maritime Services) - Pool based - Derivatives; hedging Build (Maritime Logistics) - IT

Established

In Place Need to add Distinctive Competences

Dr. Peter Lorange, President

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Example: I.M. Skaugen

Leverage Transform

Norgas China

New

River transport, Lightering Gas. Lightening

Markets
Protect & Extend Norgas pool (with AP Mller) Build

Established

Aframax tankers

Lightering Support (with Teekay)

In Place Need to add Distinctive Competences

Dr. Peter Lorange, President

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Examples of Least Easy to Copy Niche Strategies

From Freestanding Ships to Integrated Value Chain
Ex: Maersk SeaLand
Global Sales Force Terminals IT Trucks and huge ships, with top schedules and speed and leads in the industry consolidation of players merged with Sea-Land, Safmarine, and now P&O/Nedloyd (?)

Extreme Capital Intensity

Ex: Heerema
Dockwise heavy lift ships 3 super-mega-crane ships out of 5 in the world 1 super large oil pipe layer out of 2 in the world

Dr. Peter Lorange, President

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Third, The Portfolio Strategy Issue

Number of business platforms and relative sizes Interrelationship among the platforms: Risks
Cash flows stability Political stability Market cycle stability Complement steel (ships) with paper Shipping stocks hedge IMAREX freights hedge

Dr. Peter Lorange, President

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Two Overriding Portfolio Strategy Questions

For each shipping niche, business platform what is the degree of maturity ? What is the number of business platforms, and interrelationship among these ?

Dr. Peter Lorange, President

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Are these some common Key Risk Issues Today for many/all business platforms/segments? CHINA
Infrastructure - congestion Harbours Roads Steel manufacturing can it drive the growth? Steel imports Ore imports Energy consumption can it be sustained? Oil imports Environmental limitations? Consumer durables exports Container ship market Terrorism? Political stability

Dr. Peter Lorange, President

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Steel Intensity Rises as Countries Get Richer

Steel Consumption Per Capita, kgs 900 800 700 600 500 400 300 200 100 0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 GDP Per Capita, $000 China Europe, Japan, U.S. South Korea, Taiwan

Expected Chinese Consumption (UBS Warburg) Average Consumption for Developed Countries

Dr. Peter Lorange, President

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Portfolio Strategy Model

Worldwide Markets Protected Niche

Stable

Political Stability

Exposed

Exposed Niche

Unstable Unstable Stable Stability of Cash Flows

Dr. Peter Lorange, President

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Corporate Portfolio (Subjective Plots)

Stable (Low)
Worldwide Markets Protected Niche

Norden

Farstad

Political Stability (Risk)

Klaveness Exposed

Hoegh

Exposed Niche

Skaugen

Unstable (High) Unstable Stable (High) (Low) Stability of Cash Flows (Volatility)

Dr. Peter Lorange, President

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In the end its all about People and Culture! General Organizational Design Requirements to Shipping Organizations

Have the necessary know-how base Dynamism; an ability to change incl. internationally Focused; simple Keep it all at low costs From hierarchy to networks meeting place; nonpolitical

Dr. Peter Lorange, President

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Key Organizational Culture Issue in Shipping Firms

Allow people to see business opportunities Meeting places between problems and solutions Experimentation More systematic learning Juxtapose traditional vs. radical

Dr. Peter Lorange, President

20 PL-Strategic Challenges in the Shipping Industry

A Map of Key Actors in Successful Shipping Firms

A. Internal entrepreneurs: Bottom-up
see business opportunities Find key know-hows within firm and at the outside ! Lead inspirationally

B. The owner / CEO: Top-down

walk-the-talk; involvement Strategic budget for speedy business development Pump resources into non-commoditization !

C. Process: Top-down and Bottom-up

Interactive Iterative

Dr. Peter Lorange, President

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It is not the strongest of the species that survive, nor the most intelligent, but the most responsive to change
Darwin

Dr. Peter Lorange, President

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