The line shipping industry is an excellent illustration of a central concept in strategy, the value chain. The deal comes from a need for the sender to deliver goods to a recipient on the other side of the ocean. The shipper is generally a manufacturing company that makes goods of second and third transformation. These industrial goods are small and can be squeeze into a container. The contact point between the sender and the supply chain is the maritime agency. Here is an overview of the steps of the transaction :
- The shipping agency plan stages of the journey and coordinates the work of partners along the value chain. It ensures the administrative management of the case and monitors the security level and insurance.
- Shortly after their manufacture, the goods are packed in the factory of the manufacturer according to a rigorous plan. After inspection of the customs service, the seals are affixed to the container.
- A crane then load the container on a truck or a train. Goods complete the land portion of the journey to a seaport.
- The container is discharged into the protected era of the marine terminal waiting for the container ship.
- When the ship arrives in port, a company specialized in stevedoring load the container on the ship using a crane and other equipment following a plan that ensures the stability of the ship.
- The ship leaves port with its loading and complete the maritime portion of the journey.
- The ship reaches its destination. Another stevedoring company discharge the ship and put the container on the dock with a crane.
- The container travels again overland to reach the recipient.
- At destination, the container is cleared and delivered to the customer. The shipping agency ensures to complete the administrative management of the case.
The model of 5+1 forces, of Michael Porter, identifies groups of actors who have the greatest influence on the balance of power within an industry. Here is how these forces are represented in the simulation NaviSim :
The power of senders over competitors must be evaluated for each maritime route and for each product (standard or refrigerated). If there is excess capacity on a particular route, senders will be in a better position to negotiate lower prices or additional services. The same principle applies when there is imbalance between import and export on a maritime route; shippers have more power in the portion where the fill rate is the lowest. Given the above, it is imperative for shipowners to conduct a continuous watch on the market. This will allow to identify under-served market segments and those where the power relationship with customers is the best.
The intensity of competition
As naval technology is available to all competitors through the shipyards, the sea service tends to become uniform. Customers often perceive little difference in service quality, leading them to focus on price as the primary decision criterion. This encourages fierce competition between shipowners and causes a general decline in profitability of the industry. However, significant opportunities for differentiation exist especially within maritime agencies. For this it is necessary to adopt a downstream vertical integration strategy!
Large shipyards are experiencing huge problems of overcapacity since the Second World War and their bargaining power is therefore limited. The shipowner will always find somewhere that will accept to build a ship but prices may vary over time. In the secondary market (ship chartering), prices are essentially determined by offer and demand. They suffer high volatility.
All other suppliers are installed around ports to deliver their products or services. The line shipping industry has obviously no influence on the price of energy (fuel or diesel). Bargaining power is greater than those of specialized services. The most radical way to change the pricing structure of a port services is to leave the port for another one. It is also possible to vertically integrate the two main activities upstream and downstream : stevedoring and maritime agency services.
Human resources are a special case. In contrast to the bulk transport, container transport usually involves a skilled and well-paid workforce. However, as the ships fly foreign flags, this dimension is disregarded in NaviSim model because it is often left in subcontracting.
The substitution is widely discussed in Porter's model but does not threaten the marine sector. Exceptionally, when the products are lightweight and are worth a lot of money, it will be possible to transport goods into cargo planes. But in most cases, shippers have no alternative when the price of shipping becomes prohibitive, if not to withdraw from the market.
Threat of new entrants
NaviSim is limited to conventional techniques to close the door to competition, techniques that are well described in Porter's model: increasing the capacity on a route, using newer ships, investing in customer service, etc.
As NaviSim is intended as a pedagogical exercise, entering or leaving the industry are not allowed during the simulation. Although the industry is highly profitable, no new competitor may enter the indutry. Conversely, if the industry turns out a large deficit, the competitors will be backed up by banks and will continue the simulation until the end.