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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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Presentation on theme: "Business perspectives on Finnish maritime industry EXTENDED SLIDE SET Antti Salovaara, Markku Tinnilä, Virpi Tuunainen (Aalto ECON) CONFIDENTIAL: for use."— Presentation transcript:

1 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 This presentation can be downloaded from:

2 Starting points of the analysis Finnish maritime cluster: –wants to enter the offshore markets in Brazil and Russia –has competence in e.g.: Technologies (azipod, cranes, fire protection, engines,…) Planning Software Arctic conditions –is considering forming alliances Goal of the analysis: –Identify issues of strategic competitive power

3 COMPETITIVE POWER (Based on Porter, complemented with general literature about alliances)

4 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 SuppliersBuyers Potential entrants Substitutes Porter, 1980

5 Value chain Supplier Focal company Buyer Engine manufacturer FPSO builderContractor

6 Powerful positions in value chains Top-of-chain positions Independence from suppliers (e.g., many alternatives) Strategic assets (e.g., capability to self-manufacture) Cox, 2001 Competitors SuppliersBuyers Cox et al, 2001

7 When does company have power? 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 sellers sales. Because of the big influence on the sellers 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 buyers products. If the product is not critical to buyers 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 suppliers product is important to buyers 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 buyers 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.

8 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

9 Strategic groups: example from marine engines High Low-speed main engines Auxiliary engines Engine type Wärtsilä MAN Diesel Mitsubishi Low Medium- speed main engines Hi speed manufacturers MAN Diesel HiMSEN Competition based on price

10 Three generic competitive strategies Industry- wide Particular segment only DIFFERENTIATION OVERALL COST LEADERSHIP FOCUS Uniqueness perceived by the customer Low cost position Strategic advantage Strategic target Porter, 1980

11 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)

12 Alliances, projects and supply chains IOC / NOC Contractor Alliances should implement sound strategy Alliance Weakness

13 Types of alliances Types of collaboration: –strategic (competitive advantage, e.g., entry in a new market domain) –operational (streamlining operations) Varadarajan & Cunningham, 1995 Distinct corporate entities (equity joint ventures) Interorganizational entities

14 Why alliances are formed Varadarajan & Cunningham (1995) Market entry and position: Access to new markets (Brazil, Russia) Circumvent barriers (NOC politics) Defend/enhance market position Product: Gaps in product line Differentiation Adding value to product Market structure: Reduce potential for future competition Raise entry barriers for competitors Alter technology basis Timing: Accelerate entry Resource use: Manufacturing costs Marketing costs Skills: Learn from partners Enhance present skills

15 Criteria for alliances Creation of resources that are strategic: –valuable: improved cost efficiency –rare among a firms 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:

16 Risk of opportunistic behavior One partners 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 alliances long-term benefits (e.g., Euro crisis, rise of Korean shipbuilding) –Feeling of imbalance in partnership Das & Rahman (2002)

17 Avoiding opportunistic behavior Preventive mechanisms –Contracts –Resource commitment, e.g., joint investments Operational mechanisms –Shared decision-making –Monitoring 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 companys board to improve communication and mutual understanding of the partners viewpoints Das & Rahman (2002)

18 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 slides 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?

19 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


21 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)

22 Why company should provide services? Close cooperation with customer => deeper insight into customers needs Decreases threat that customer changes its supplier More continuous cash flow Simplifies customers operations: lets the customer externalize peripheral tasks (e.g., maintenance)

23 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 customers needs People and mindset –You hire the attitude and you train the skills –Measure, report and follow up individual performance systematically – both from companys and customers 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 arms 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)

24 Issue: Third party threat A third party intervenes => the supplier loses touch with the customer –Supplier loses negotiation power and insight into customers needs Applies especially to selling equipment and solutions Supplier Customer Customers customer Customers customer Contractor Grönroos (2007)

25 Fighting the 3 rd party threat in offshore Reacting to increasing 3 rd party power by: –Lowering prices => customer does not want to pay for 3 rd partys costs –Adopt the service- oriented strategy + compete with the 3 rd party Oil company (international or national) Supplier Consulting & engineering Supplier Contractor

26 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 values creators –The level of desired service provision should be stated on the companys strategy (see next slide)

27 Service provision levels Spares and wares Reactive services (on request) Preventiv e mainte- nance services Predictive availability services Perfor- mance services Life cost ensuranc e Shared business outcome Spare parts on customers request Repair, technical help Mainte- nance, upgrades Guarantee d availability Measurable improveme nt in customers 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) ?

28 Spare & ware Reactiv e Mainten ance Predicti ve Perfor mance Life cost Shared outcom e Pure 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 Engineerin g Oy Design and engineering for shipbuilding and offshore projects Halikko Works Oy Tailor-made steel products: cones Cold forming, welding, heat treatment Ilmatietee n 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)

29 Spare & ware Reactiv e Mainten ance Predicti ve Perfor mance Life cost Shared outcom e Pure service Napa OyShip design software and training Nurmi Cylinders Oy CylindersCylinder engineering Pemamek Oy spare parts,maintenanc e production support Studies and simulations Rolls- Royce Oy Ab maintenanc e Guarantee d availability trainingShip design Ruukki Engineerin g Oy PartsInstallatio n ??Consulting Sweco Industry Oy Planning, design, consulting, management ABB Oy Azipod Spare parts, installation and commissioni ng Retrofit, refurbish ment Maintenanc e, repair, remote services Field services training Cargotec Oyj Maintenanc e, 24/h service Guarantee d availability ?

30 Spare & ware Reactiv e Mainten ance Predicti ve Perfor mance Life cost Shared outcom e Pure service Wärtsilä Finland Oy MachinesInstallatio n 24/7 service Training, energy saving Marioff Corporatio n Oy Fire safety systems 24/7 service, Upgrades SteerpropPropulsors 24/7 service Hollming Works Oy Tailor-made machine parts Installatio n STX Finland Oy Constructi on Plastilon Oy Plastic parts Wellquip Oy ????????

31 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?

32 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 customers request Repair, technical help Mainte- nance, upgrades Guaranteed availability Measurable improvement in customers 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 Azipod Cargotec Halikko Works Hollming Works Marioff Corporation Nurmi Cylinders Pemamek Plastilon Rolls-Royce Ruukki Engineering Steerprop STX Finland Wellquip? Wärtsilä Finland Need for long-term commitment in alliance-based business Low High Pure service

33 References AIROLA, N., VALKONEN, J., LEINO, J., SALMINEN, V., and MALINEN, P Teollisen palveluliiketoiminnan arviointi- ja laskentamalli (service chart calculation). Working papers, LCB projekti. BARNEY, J Firm resources and sustained competitive advantage. Journal of Management 17, 1, BESTSERV BestServ Feasibility Study Final Report. Teknologiateollisuus ry, Helsinki. COX, A., SANDERSON, J., and WATSON, G 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, DAS, T. K. and RAHMAN, N Opportunism dynamics in strategic alliances. In Cooperative Strategies and Alliances, F. J. CONTRACTOR and P. LORANGE, Eds. Elsevier, Amsterdam, NL, GRÖNROOS, C 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, KOTLER, P Principles of Marketing. 2 nd edition. Prentice-Hall, Englewood Cliffs, NJ. LOVELOCK, C. and GUMMESSON, E Whither services marketing? in search of a new paradigm and fresh perspectives. Journal of Service Research 7, 1, MALINEN, P Arvon tuottaminen asiakkaalle. In Teollisuuden palveluksista palveluliiketoimintaan: Haasteena kannattava kasvu, Teknologiateollisuus ry, Helsinki, PORTER, M. E Competitive Strategy: Techniques for Analyzing Industries and Competitors. The Free Press, New York, NY. VARADARAJAN, P. R. and CUNNINGHAM, M. H Strategic alliances: a synthesis of conceptual foundations. Journal of the Academy of Marketing Science 23, 4,

34 BestServ Feasibility Study Final Report Teollisuuden palveluksista palveluliiketoimintaan - haasteena kannattava kasvu Lusch_2004.pdf Service Management and Marketing: Customer Management in Service Competition On sale in Lusch_2004.pdf On sale digitally: al.html More reading about services

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