Business perspectives on Finnish maritime industry EXTENDED SLIDE SET Antti Salovaara, Markku Tinnilä, Virpi Tuunainen (Aalto ECON) CONFIDENTIAL: for use only for IFCO and AaltoBraRus project partners is presentation can be downloaded from: bit.ly / SdSvDi
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Business perspectives on Finnish maritime industry EXTENDED SLIDE SET Antti Salovaara, Markku Tinnilä, Virpi Tuunainen (Aalto ECON) CONFIDENTIAL: for use.
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Business perspectives on Finnish maritime industryEXTENDED SLIDE SET
Antti Salovaara, Markku Tinnilä, Virpi Tuunainen (Aalto ECON)
CONFIDENTIAL: for use only for IFCO and AaltoBraRus project partners
This presentation can be downloaded from: bit.ly/SdSvDi
• Goal of the analysis:– Identify issues of strategic competitive power
COMPETITIVE POWER
(Based on Porter, complemented with general literature about alliances)
Forces driving the industry competition
Industry competitors
Rivalry among existing competitors
Bargaining power of buyers
Bargaining power of suppliers
Threat of substitute products or services
Threat of new entrants
Suppliers Buyers
Potential entrants
Substitutes Porter, 1980
Value chain
SupplierFocal
companyBuyer
Engine manufacturer
FPSO builder Contractor
Powerful positions in value chains
Top-of-chain positionsIndependence from
suppliers (e.g., many alternatives)
Strategic assets (e.g., capability to self-manufacture)
Cox, 2001
Competitors
Suppliers Buyers
Cox et al, 2001
When does company have power?
Independence of suppliers
Independence of suppliers
Independence of suppliers
Most of these are examples of strategic assets
Porter, 1980
Buyer has power when: Supplier has power when:
When the buyer buys large volumes relative to the seller’s sales. Because of the big influence on the seller’s revenue, the buyer is in a good position to negotiate for low prices.
When buyer purchases large volumes. The buyer will therefore pay a lot of attention on prices.
The products are standardized or undifferentiated. Alternative suppliers are then easy to find.
Switching to an alternative product can be done with low cost.
The buyer earns low profit. The buyer will then have a high incentive to lower its purchasing costs.
Buyer can present a threat of self-manufacturing. Partial self-manufacturing, in turn, gives detailed knowledge of true production costs, which gives an advantage in price negotiations.
The product is unimportant to the buyer’s products. If the product is not critical to buyer’s operation, it will not be willing to pay a high price.
The buyer has full information. If the buyer knows the demand, actual market prices, etc., it has a higher bargaining power.
When the industry has few suppliers but a large and fragmented base of buyers.
When the supplier’s product is important to buyer’s success.
When the market is not important to the supplier.
If there are not substituting products.
The supplier can credibly claim that it may start operating in the buyer’s business itself.
If the supplier product is differentiated or has high switching costs. The buyer will then be less willing to search for an alternative product.
Power can be gained with strategy
1. Identify the strategic groups in the market– Positioning the companies in the market along strategic
dimensions:
specialization, brand identification, push versus pull, (delivery) channel selection, product quality, technological leadership, vertical integration, cost position, service, price policy, leverage, relationship with parent company, relationship to home and host government,…
2. Find a strategic position in the supply chain to develop better bargaining power
Strategic groups: example from marine engines
High
Low-speed main engines
Auxiliary engines
Engine type
Wärtsilä
MAN Diesel
MitsubishiLow
Medium-speed main
engines
Hi speed manufacturers
MAN Diesel
HiMSEN
Com
petit
ion
base
d on
pric
e
Three generic competitive strategies
Industry-wide
Particular segment
only
DIFFERENTIATIONOVERALL COST
LEADERSHIP
FOCUS
Uniqueness perceived by the customer
Low cost position
Strategic advantage
Strategic target
Porter, 1980
Alliances
• Strategic group analysis can be complemented with literature on alliances
Three possible alliance formations for achieving a better competitive power in offshore projects (by Kimmo Juurmaa)
Alliances, projects and supply chains
IOC / NOC
Contractor
Alliances should implement sound strategy
Alliance
Weakness
Types of alliances
• Types of collaboration:– strategic (competitive advantage, e.g., entry in a new market
Market structure:Reduce potential for future competition
Raise entry barriers for competitorsAlter technology
basis
Timing:Accelerate entry
Resource use:Manufacturing costs
Marketing costs
Skills:Learn from partners
Enhance present skills
Criteria for alliances
• Creation of resources that are strategic:– valuable: improved cost efficiency– rare among a firm’s competitors– imperfectly imitable: cannot be copied– no equivalent substitutes: will not be
replaced with other solutions/resources
• Alliance should also:– Support companies’ strategy– Be convincing (resources and capabilities)– Improve the marketing mix (price, product,
promotion,place)
Barney (1991) Varadarajan (1995), Kotler (1983)
Arctic expertise & partners from Russia and Brazil that lower entry barriers
Larger project planning contracts through joint planning
Long-lasting alliances
Internally coherent, not a fragmented group of companies
Turn the alliance into a brand that can be used in selling projects
Examples in offshore context:
Risk of opportunistic behavior
• One partner’s actions may erode the alliance:
– Economic reasons (e.g., a new profitable deal with a third party)– When partner does not find the alliance important– When partner expects only short-term benefit from the alliance– When partner beliefs that an evitable future situation cancels
the alliance’s long-term benefits (e.g., Euro crisis, rise of Korean shipbuilding)
• Exigency mechanisms (last resort)– Counter threats and warnings of what may happen if a partnership is
breached– Cooptation: making the breacher a partner in the other company’s
board to improve communication and mutual understanding of the partners’ viewpoints
Das & Rahman (2002)
Long-term vs ad hoc alliances
Ad hoc:
+ Flexibility and opportunism- No joint marketing or brand- Unclear leadership- Probably not in line with
strategy- Transaction costs: on
every new project deal, partner agreements need to be re-negotiated
Long term:
+ Better in line with previous slide’s 4 criteria
+ Joint management, marketing and brand
+ Easier to leverage partners’ strategic complementarities
+ Partner commitment- No short-term opportunistic
benefit
Are the current Finnish alliance models ad hoc or long-term?
Implications for Finnish maritime cluster
• Starting points:– Oil companies (IOC, NOC) have high power in supply chain– Finnish companies will stay lower in the chain and mostly in construction &
equipment– By being small, Finnish companies cannot compete with cost
=> Differentiation and focus will be the best strategies• Alliances:
– The alliance should help in entry into Brazilian and Russion offshore market=> how about other possible benefits (see slide “Why alliances are formed”)?
– Alliance should move the companies to top-of-chain positions, decrease dependence from others, and provide strategic assets
• Analytical tools:– Literature cited in the previous slides provides many tools for analysing the
market situation
SERVICES
What are services
• Classic definition (aka IHIP):– Intangible: are not physical– Heterogeneous:
customizable– Inseparable from production
and consumption: are consumed immediately
– Perishable: cannot be stored for later use
• Examples in marine business– Maintenance, repair,
provision of spare parts– Design, consulting, project
management, training– Financing– Software– Expert analyses, e.g.
simulations
Lovelock & Gummesson (2004)
Why company should provide services?
• Close cooperation with customer => deeper insight into customer’s needs
• Decreases threat that customer changes its supplier• More continuous cash flow• Simplifies customer’s operations: lets the customer
externalize peripheral tasks (e.g., maintenance)
Factors of successful industrial services
• Customer needs & relationship– Stay close to and communicate with your
customers regularly, on many levels– Measure, report and follow up both
customer profitability and customer satisfaction
– Give key customers high visibility in your own organization
– Recruit people with a practical understanding of customer’s needs
• People and mindset– “You hire the attitude and you train the
skills”– Measure, report and follow up individual
performance systematically – both from company’s and customer’s point of view
– Use benchmarking to highlight best performances and practices
– Train your people and provide easy to use tools to secure quality and consistency of your service
• Profitability– Organize for arm’s length co-operation
between capital and IS business units– Apply clear and simple metrics and
objectives for both– Protect your profit base in capital
business– Highly efficient logistics is key for IS
profitability, “there is big money in parts and consumables!”
– Apply systematic benchmarking to keep focus on key issues and to highlight Capital–IS synergies
• Innovation– Develop new concepts centrally,
implement and improve locally– Use pilot units for testing new
concepts; budget and follow-up results– Spread innovations through
benchmarking BestServ (2003)
Issue: Third party threat
• A third party intervenes => the supplier loses touch with the customer– Supplier loses negotiation power and insight into customer’s needs
• Applies especially to selling equipment and solutions
Supplier
Supplier
Customer
Customer
Customer’scustomer
Customer’scustomer
Contractor
Grönroos (2007)
Fighting the 3rd party threat in offshore
• Reacting to increasing 3rd party power by:– Lowering prices =>
customer does not want to pay for 3rd party’s costs
– Adopt the service-oriented strategy + compete with the 3rd party
Oil company (international or
national)
SupplierConsulting & engineering
SupplierSupplier
Contractor
Adopting a service-oriented strategy
• Requires changes throughout the company– Otherwise tensions tend to develop between the manufacturing
unit and the rest of the company
• Creation of value to the customer with services needs a holistic approach– The product becomes only one of the value’s creators– The level of desired service provision should be stated on the
company’s strategy (see next slide)
Service provision levels
Spares and wares
Reactive services (on request)
Preventive mainte-nance services
Predictive availability services
Perfor-mance services
Life cost ensurance
Shared business outcome
Spare parts on customer’s request
Repair, technical help
Mainte-nance, upgrades
Guaranteed availability
Measurable improvement in customer’s processes
Leased equipment, promise of increased profit over the technology lifecycle, leaser takes part of risk
Shared operations with joint risk
What is the provision level in Finnish maritime companies?
Grönroos (2007), Malinen (2007), Airola et al. (2005)
?
Spare & ware
Reactive
Maintenance
Predictive
Performance
Life cost
Shared outcom
ePure service
Aker Arctic Technology Oy
Development, design, testing, marketing and selling of ice-going ships; Simulations and full-scale testing
Arctia Offshore Oy
Icebreaker renting, operations with icebreakers
Deltamarin Oy
Consulting, design and engineering for building and operating offshore and marine vessels
Elomatic Marine Engineering Oy
Design and engineering for shipbuilding and offshore projects
Halikko Works Oy
Tailor-made steel products: cones
Cold forming, welding, heat treatment
Ilmatieteen laitos
Forecasts, weather information
Kvaerner Finland Oy
concept screening and selection, concept definition and project execution strategy, EPC (engineering, procurement and construction)
Analysis: IFCO partners and their services(based on website data)
Spare & ware
Reactive
Maintenance
Predictive
Performance
Life cost
Shared outcom
ePure service
Napa Oy Ship design software and training
Nurmi Cylinders Oy
Cylinders Cylinder engineering
Pemamek Oy
spare parts, maintenance
production support
Studies and simulations
Rolls-Royce Oy Ab
maintenance
Guaranteed availability
training Ship design
Ruukki Engineering Oy
Parts Installation
? ? Consulting
Sweco Industry Oy
Planning, design, consulting, management
ABB Oy Azipod
Spare parts, installation and commissioning
Retrofit, refurbishment
Maintenance, repair, remote services
Field services
training
Cargotec Oyj
Maintenance, 24/h service
Guaranteed availability
?
Spare & ware
Reactive
Maintenance
Predictive
Performance
Life cost
Shared outcom
ePure service
Wärtsilä Finland Oy
Machines Installation
24/7 service
Training, energy saving
Marioff Corporation Oy
Fire safety systems
24/7 service, Upgrades
Steerprop Propulsors 24/7 service
Hollming Works Oy
Tailor-made machine parts
Installation
STX Finland Oy
Construction
Plastilon Oy
Plastic parts
Wellquip Oy ? ? ? ? ? ? ? ?
Implications from analysis
• Manufacturing companies:– Many companies have “product + some service” model
• Pure service firms:– A yellow box far in the right does not mean that services need
not be developed further
• Short-term and long-term challenges:– Develop more advanced services– How to package service into purchasable form?– How to organize service provison by alliance?
Strategic partnership with customer
Physical product
Spares and wares
Reactive services (on
request)
Preventive mainte-nance
Predictive availability
Perfor-mance
Life cost ensurance (leasing)
Shared business outcome
Spare parts on
customer’s request
Repair, technical
help
Mainte-nance,
upgrades
Guaranteed availability
Measurable improvement in customer’s
processes
Promise of increased profit over lifecycle,
leaser takes also risk
Shared operations
with joint risk
Aker Arctic
Arctia Offshore
Deltamarin
Elomatic
Ilmatieteen laitos
Kvaerner Finland
Napa
OTC
Sweco Industry
ABB AzipodCargotec
Halikko WorksHollming Works
Marioff CorporationNurmi Cylinders
Pemamek
PlastilonRolls-Royce
Ruukki EngineeringSteerprop
STX FinlandWellquip?
Wärtsilä Finland
Need for long-term commitment in alliance-based business
Low High
Pureservice
References
AIROLA, N., VALKONEN, J., LEINO, J., SALMINEN, V., and MALINEN, P. 2005. Teollisen palveluliiketoiminnan arviointi- ja laskentamalli (service chart calculation). Working papers, LCB projekti.
BARNEY, J. 1991. Firm resources and sustained competitive advantage. Journal of Management 17, 1, 99--120.
BESTSERV 2003. BestServ Feasibility Study Final Report. Teknologiateollisuus ry, Helsinki.
COX, A., SANDERSON, J., and WATSON, G. 2001. Supply chains and power regimes: toward an analytic framework for managing extended networks of buyer and supplier relationships. Journal of Supply Chain Management 37, 2, 28--35.
DAS, T. K. and RAHMAN, N. 2002. Opportunism dynamics in strategic alliances. In Cooperative Strategies and Alliances, F. J. CONTRACTOR and P. LORANGE, Eds. Elsevier, Amsterdam, NL, 89--118.
GRÖNROOS, C. 2007. Palveluyritykseksi muuntautumisen haasteet ja keinot. In Teollisuuden palveluksista palveluliiketoimintaan: Haasteena kannattava kasvu, C. GRÖNROOS, R. HYÖTYLÄINEN, T. APILO, H. KORHONEN, P. MALINEN, T. PIISPA, T. RYYNÄNEN, I. SALKARI, M. TINNILÄ, and P. HELLE, Eds. Teknologiateollisuus ry, Helsinki, 28--46.
KOTLER, P. 1983. Principles of Marketing. 2nd edition. Prentice-Hall, Englewood Cliffs, NJ.
LOVELOCK, C. and GUMMESSON, E. 2004. Whither services marketing? in search of a new paradigm and fresh perspectives. Journal of Service Research 7, 1, 20--41.
MALINEN, P. 2007. Arvon tuottaminen asiakkaalle. In Teollisuuden palveluksista palveluliiketoimintaan: Haasteena kannattava kasvu, Teknologiateollisuus ry, Helsinki, 86--98.
PORTER, M. E. 1980. Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press, New York, NY.
VARADARAJAN, P. R. and CUNNINGHAM, M. H. 1995. Strategic alliances: a synthesis of conceptual foundations. Journal of the Academy of Marketing Science 23, 4, 282--296.
BestServ Feasibility Study Final Report
Teollisuuden palveluksista
palveluliiketoimintaan - haasteena kannattava
kasvu
sdlogic.net/JM_Vargo_Lusch_2004.pdf
Service Management and Marketing: Customer
Management in Service Competition
On sale in printsdlogic.net/JM_Vargo_Lusch_2004.pdf