EDITORIAL Competitive Advantage in Liner Shipping: A Review and Research Agenda PHOTIS M PANAYIDES 1 & KEVIN CULLINANE 1 1 Department of Shipping & Transport Logistics, the Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong. E-mail: [email protected]Liner shipping is a rather unique and idiosyncratic sector of the shipping industry. As such, it has attracted much attention from both researchers and policy makers. The purpose of this special issue of the International Journal of Maritime Economics is to investigate current thought in liner shipping economics and strategy. The papers included address what are and have been the major concerns of practitioners and academics, viz. market structure and regulation as well as vessel deployment and integration strategies. In an effort to induce research in another important direction, the aim of this paper is to address the issue of competitive advantage by considering the main themes that appear in the literature, viz. vertical integration and logistics strategy, strategic alliances, mergers and acquisitions, cost reduction, networks, economies of scale, regulation, pricing and shipper relationships. In so doing, this Editorial emphasises the importance of the firm as the unit of analysis and concludes by drawing attention to the need for the empirical investigation of the strategy – performance relationship. International Journal of Maritime Economics (2002) 4, 189-209. doi:10.1057/palgrave.ijme.9100045 Keywords: Liner shipping; competitive advantage. International Journal of Maritime Economics, 2002, 4, (189-209) # 2002 Palgrave. All rights reserved. 1388-1973/02 $15 www.palgrave-journals.com/ijme
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EDITORIAL
Competitive Advantage in Liner Shipping: A
Review and Research Agenda
P H O T I S M P A N A Y I D E S 1 & K E V I N C U L L I N A N E 1
1 D e p a r t m e n t o f S h i p p i n g & T r a n s p o r t L o g i s t i c s , t h e H o n g K o n gP o l y t e c h n i c U n i v e r s i t y , H u n g H o m , K o w l o o n , H o n g K o n g .E - m a i l : s t l p p @ p o l y u . e d u . h k
Liner shipping is a rather unique and idiosyncratic sector of the shipping
industry. As such, it has attracted much attention from both researchers and
policy makers. The purpose of this special issue of the International Journal of
Maritime Economics is to investigate current thought in liner shipping
economics and strategy. The papers included address what are and have been
the major concerns of practitioners and academics, viz. market structure and
regulation as well as vessel deployment and integration strategies. In an effort
to induce research in another important direction, the aim of this paper is to
address the issue of competitive advantage by considering the main themes that
appear in the literature, viz. vertical integration and logistics strategy, strategic
alliances, mergers and acquisitions, cost reduction, networks, economies of
scale, regulation, pricing and shipper relationships. In so doing, this Editorial
emphasises the importance of the firm as the unit of analysis and concludes by
drawing attention to the need for the empirical investigation of the strategy ±
performance relationship.
International Journal of Maritime Economics (2002) 4, 189-209.
doi:10.1057/palgrave.ijme.9100045
Keywords: Liner shipping; competitive advantage.
International Journal of Maritime Economics, 2002, 4, (189-209)# 2002 Palgrave. All rights reserved. 1388-1973/02 $15
www.palgrave-journals.com/ijme
INTRODUCTION
What determines competitive advantage in liner shipping? What are the inherent
and acquired advantages of an individual liner shipping company that enable it to
outperform competitors? What strategies lead to success in acquiring or utilising
such advantages? Are such advantages asset- or technology-based or, alterna-
tively, do they accrue primarily from a firm's ability to manage effectively? How
do liner shipping companies create or benefit from such advantages ± is it through
any or all of cost reduction, innovation in services, economies of scale, asset
complementarity through joining a strategic alliance, rising barriers to market
entry, government regulation or the absence or inappropriateness thereof?
Although these questions are fundamental to the economic well-being of liner
shipping companies and to research in liner shipping economics and strategy, no
clear answer can be given. What is clear, however, is that certain liner shipping
companies (not necessarily of the same size nor resource base) outperform others
on a consistent basis to achieve competitiveness, relative financial prosperity and
growth. In so doing, these comparatively successful liner companies may well
have decided to pursue different strategies and put in place a variety of economic
and operational measures in their efforts to differentiate themselves from, and
outperform, competitors.
The purpose of this special issue of the journal is to provide an insight into
contemporary issues in liner shipping economics and strategy. An implicit theme
that seemed to run through all the submissions received in response to the `call for
papers' and one that is obviously directly relevant to liner shipping in practice is
that of competitive advantage. In setting the scene for the contents of this special
issue, therefore, the aim of this paper is to survey contemporary trends in liner
shipping economics and strategy in order to identify the factors that may help lead
to, or predict the existence of, competitive advantage for players within the
industry. In so doing, reference will be made to the theoretical concepts that may
actually explain or underpin competitive advantage, as well as to the practical and
research implications that the analysis reveals. The spur for such an analysis is the
ever-changing nature of the dynamic liner shipping industry; a feature that is self-
evident in the papers presented within this special issue and in the exemplars that
are explicitly referred to within this paper.
THEORIES OF COMPETITIVE ADVANTAGE
A review of the strategic management literature reveals a number of theoretical
concepts that may be applied to liner shipping in an effort to understand and
explain competitive advantage within the industry.
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Porter's competitive strategy framework
Porter (1980) developed a typology of three generic strategies for creating a
defensible position and outperforming competitors in a given industry. The first,
overall cost leadership, emphasises low cost relative to competitors. The second
strategy, differentiation, requires that the firm create something that is unique in
the industry, thus permitting the firm to command higher than average prices. The
third is a focus strategy, in which a firm concentrates on a particular group of
customers, geographic markets, or product line segments. These three generic
strategies represent three broad types of strategic groups and thus the choice of
strategy `can be viewed as the choice of which strategic group to compete in'
(Porter, 1980, p. 149). Firms oriented towards specific strategies should outper-
form other firms in the industry.
In Porter's framework, firm performance is a function of industry and firm
effects (ie market positioning) (Grant, 1991; Porter, 1991). Industry structure and
firm activities are interrelated and affect each other. In addition, industry structure
affects the sustainability of firm performance, whereas positioning reflects the
firm's ability to establish competitive advantage over its rivals. Having gained
such an attractive position, a firm can exercise market power (Teece, 1984) and
thus gain `monopoly-type' rents. These rents stem from the firm's ability to defend
itself against competitive forces (`defensive' effects), or to influence them in its
favour (`offensive' effects) (Porter, 1980, 1985 and 1991).
In addition, Porter views firms as capable of classification into homo-
geneous segments that adopt similar strategies but which are different from
those of other homogeneous firm groupings. This view is comparable to that of
the strategic orientation framework due to Miles and Snow (1978). They
considered that organisations enact their environments and become dominated
by the adaptive decision patterns they employ. They operationalised their theory
by classifying firms by `adaptive decision patterns' into four archetypes ranging
from the `prospector', through `analysers' and `defenders' to the least adaptive
category the `reactors'. `Prospectors' continuously seek to locate and exploit new
product and market opportunities while `defenders' attempt to seal off a portion
of the total market to create a stable set of products and customers. `Analysers'
occupy an intermediate position between the two extremes by combining the
strengths of both the `prospector' and the `defender' so as to cautiously follow
`prospectors' into new product-market domains while at the same time
protecting a stable set of products and customers. A fourth type, the `reactor'
does not have a consistent response to the entrepreneurial problem. As Lu and
Marlow (1999) and Hawkins and Gray (1999) found in the contexts of
Taiwanese and Asia-Pacific shipowners respectively, there is evidence to suggest
that liner shipping firms may also be classified into homogeneous groups in
accordance with their strategic orientation.
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The resource-based theory
Porter's contentions of positioning only explain part of the differences in
performance within an industry. According to the resource-based view (see
Conner, 1991; Grant, 1991; Mahoney and Pandian, 1992), a superior performer
possesses not only an attractive position, but also unique and hard to imitate
resources (Dierickx and Cool, 1989; Wernerfelt, 1984).
The resource-based view of the firm focuses on the relationships between the
internal characteristics of a firm and its performance. Proponents of this view
propose two alternative assumptions. First, that firms may be heterogeneous in
relation to the resources and capabilities on which they base their strategies.
Secondly, that these resources and capabilities may not be perfectly mobile across
firms, resulting in heterogeneity among industry participants. The resource-based
view has re-established the importance of the individual firm, as opposed to the
industry (or particular strategic groups), as the critical unit of analysis.
Strategy selection is based on careful evaluation of available resources
(strengths and weaknesses). Over time, firms continue to follow particular
strategies because of both the opportunities imposed by the market environment
and the constraints that result from their own accumulated asset base,
organisational structure, ownership and other specific factors (Barney, 1991;
McGee and Thomas, 1986). Current or future strategic decisions are constrained
by past resource deployments and result in the further reinforcement of the
company's prevailing strategic profile. Competitive strategy thus becomes the art
of nurturing, accumulating and deploying rent-yielding resources, rather than a
focus solely on erecting entry barriers or deceiving one's product-market
competitors (Foss, 1996).
The main difference between Porter's contention and the resource-based view
is that Porter views strategy as being primarily industry driven, whereas the
resource-based perspective posits that the essence of strategy is, or should be,
defined by the firm's unique resources and capabilities.
VERTICAL INTEGRATION AND LOGISTICS STRATEGY
A major contemporary trend in liner shipping strategy is vertical integration and
diversification into inland transport, terminal operation and logistics. In this
special issue, Trevor Heaver considers such developments in detail by addressing
the evolving roles of shipping lines within the context of international logistics.
The operational integration of sea and inland transport was initiated by the
need for greater efficiency and effectiveness and became feasible as the result of
containerisation and other technological developments linked to intermodal
capability. Hence, economies of scale in containership operations, the rationalisa-
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International Journal of Maritime Economics
tion of mainline ports of call, the resulting need to access an ever larger cargo base
(or hinterland) and the increased capability of inland transport systems to carry
large volumes of cargo over a long distance (and within a sufficiently short time
frame) have been instrumental in this. Archambault (1989) notes that because of
the inherent intermodal character of container operations, the structural
interdependence between the two transportation activities (ie sea and land) is
inevitable and the synchronisation of mainline containership schedules with those
of interlining modes has come to be an efficient way to create further economies
of scale.
In recent years there has been ample evidence to suggest a significant interest
of ocean carriers in inland transportation and the provision of a total door-to-door
logistics package to their clients. The reasons for such an interest vary and may
include, among others, trends in rationalisation and liberalisation taking place in
liner shipping, intense competition for market share, depressed freight rates and
additional customer requirements. Frankel (1999, p. 10) states, for instance: `The
time when shippers used an array of freight forwarders, truckers, clearance agents,
shipping companies, railway services, etc and various financial, freight insurance
and other institutions are gone. Today major customers demand and get one-
window integrated just-in-time and efficient all-inclusive door-to-door service at a
predetermined price. This is what the market demands now.' Semejin and Vellenga
(1995) succinctly document the benefits that may accrue to ocean carriers
adopting such a strategic move.
The advent of supply chain management has also contributed to the changing
nature of the way transportation organisations conduct their business. Carriers
have been transformed from product dispensers and distributors to become a
critical element in supply chain service performance, hence expanding the scope
of their operations. Contemporary carriers need to play a crucial role in supply
chain integration and the dissemination of information (Wagner and Frankel,
2000). Carriers themselves, industry observers and researchers are paying more
attention, therefore, to the value and position of carriers within established
networks (Coyne and Dye, 1998).
The potential advantages of a vertically integrated intermodal transport
structure have been recognised since the early 1980s and are embodied within
the considerable investments, primarily by ocean carriers, that have made in the
different modes and service capabilities along a supply chain. Potential benefits
to carriers include increased business and market share; survival in the
competitive international environment (Archambault, 1989); the facilitation of
management and co-ordination (Hayuth, 1987); economies of scale and scope
that can lead to lower cost structures and higher profits (Mahoney, 1985);
shared creativity along all stages of the logistical process (Bowersox, 1988;
Gardner and Cooper, 1988); capitalising on the relative advantages of the
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various transport modes (Hayuth, 1987); and greater routeing flexibility
(Mahoney, 1985). In addition, benefits have also been identified for shippers.
Such benefits include improvement in service quality; ease in transacting
business dealings; simplified claims settlement, filing, tracing of shipment and
paperwork needed for shipment; and increased control over shipment (see
Semejin and Vellenga, 1995; Vellenga et al., 1999).
The benefits have also been recognised by many mega-carriers, where
integration of shipping and logistics businesses has resulted in the provision of a
door-to-door service through carrier-owned or -directed connecting modes and in-
house logistics functions and services. Heaver reviews such developments and
considers the organisational strategies of lines in relation to terminal manage-
ment, intermodal services and logistics services. A more detailed consideration of
the economics of vertical integration and control is provided by Panayides (2001a
and 2002).
Heaver notes that `. . . lines are likely to differ in the way they interpret
market developments and in their assessment of the best strategies to capitalise
on the opportunities.' Evidence of this is given by the different strategies of liner
companies in providing logistics and value-added services. It is evident that
companies do not follow the same strategies in entering the logistics markets or
providing value added services, yet performance and competitiveness may not
be solely determined by, or dependent upon, the adoption of such strategies.
Beyond recognition of the status quo in strategic orientation, the challenge is, of
course, for scientific research to determine in what way and why companies
differ and what strategies are adopted in order to capitalise on available market
opportunities. In addition, how does a particular strategy relate to the
performance of the company? Past research has not addressed this issue and
empirical investigation is much needed. In addition, any conceptual work that
will have the potential to drive empirical assessment should be firmly grounded
in established theoretical principles of both economics and strategic manage-
ment.
The anecdotal evidence suggests that liner shipping companies may be
classified in accordance with the Miles and Snow typology, as not all companies
exhibit the same strategic orientation and the latter may resemble a particular
Miles and Snow category. An empirical classification will assist in explaining why
certain companies are able to outperform others, since the Miles and Snow
typology is related to performance (Zahra and Pearce, 1990).
For instance, the strategic orientation of CP Ships closely resembles the
characteristics of the `prospector' type of company, as it is seemingly
continuously seeking new growth opportunities, as evidenced through a coherent
strategy of acquisitions and new market development. CP Ships showed
improved financial results in 2000 and 2001, which can be taken as an indicator
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of performance. The basic premise of the typology is that the `defender',
`analyser' and `prospector' strategies, if properly implemented, can lead to
effective performance. Each type emphasises different functions to produce a set
of sustainable, distinctive competencies. The `reactors', on the other hand, lack a
coherent strategy and, therefore, the other three types of company will inevitably
outperform them.
Heaver provides an excellent analysis of the strategies of liner shipping
companies vis-aÁ -vis their expanding role in the global market by way of
investment in inland/intermodal transport and logistics. He states, however, that
`the success of a line. . .is not dependent on its ability to offer logistics services',
something which points to the presence of a differential strategy as a pre-cursor to
success. To empirically assess this contention, Porter's framework, as well as the
resource-based view, is immensely relevant.
The major characteristic of the liner shipping industry has been the intense
competition, which has been attributed to politically and technologically induced
excess capacity coupled with low marginal costs (Agman, 1976; Marx, 1953) and
the part this plays in influencing conditions of entry (Davies, 1986). Strategic
investment in ports and terminals, as well as in logistics management, affects the
conditions of entry and contributes to growth, competitiveness and profitability.
The ability of a firm to offer logistics services by embarking on a vertical
integration strategy through investment in either ports or terminals and diverse
inland transport may serve as a barrier to entry for new firms and create a position
of defensible competitive advantage. A firm will be able to offer total logistics
services as demanded by customers, with its service automatically differentiated
from that of competitors.
Empirical work is required, however, to identify if vertical integration into
inland transport and expansion into logistics is profitable in liner shipping. What
is the relationship between such a strategy and any ultimate measure of
performance, and to what extent will this be translated into sustainable
competitive advantage? In this case, the theoretical contentions of the resource-
based view of competitive advantage may also offer a platform to drive further
research in the area.
STRATEGIC ALLIANCES, MERGERS AND ACQUISITIONS (M&A)
The formation and membership of strategic alliances has been a prominent
feature in the liner shipping industry in the 1990s. This has prompted the scientific
examination of the strategic alliance concept (eg Evangelista and Morvillo, 1999
and 2000; Midoro and Pitto, 2000; Panayides and Song, 2001; Song and
Panayides, 2002; Ryoo and Thanopoulou, 1999).
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The objectives of modern liner shipping companies include risk and investment
sharing, the reaping of economies of scale, cost-control and a capability to
increase service frequencies. Against a background of the globalisation of world
markets and poor profitability and financial performance, these objectives have
prompted the formation of strategic alliances. It can be claimed that the formation
of, or even defection from, strategic alliances as well as the implementation of
other strategies (such as M&A) are all driven by the need to accomplish corporate
objectives. Hence, various writers (eg Fossey, 1994; Gardiner, 1997; Midoro and
Pitto, 2000) have credited the formation of global strategic alliances in shipping to
achieving various objectives which may be classified as follows:
. Financial objectives: profit maximisation, increase in shareholder wealth,
capital investment sharing and financial risk reduction;. Economic objectives: cost reduction, economies of scale;. Strategic objectives: entry in new markets, wider geographical scope, increase