Business perspectives on Finnish maritime industry

1. Business perspectives on Finnish maritime industry EXTENDED SLIDE SETAntti Salovaara, MarkkuTinnilä, VirpiTuunainen(Aalto ECON) CONFIDENTIAL: for use only for IFCO and AaltoBraRus project partners This presentation can be downloaded from: bit.ly/SdSvDi

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. (Based on Porter, complemented with general literature about alliances) Competitive power

4. Forces driving the industry competition Potential entrants Threat of new entrants Industry competitors Bargaining power of suppliers Bargaining power of buyers Suppliers Buyers Rivalry among existing competitors Threat of substitute products or services Substitutes Porter, 1980

5. Value chain Supplier Focal company Buyer Engine manufacturer FPSO builder Contractor

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

7. When does company have power? Most of these are examples of strategic assets Independence of suppliers Independence of suppliers Independence of suppliers Porter, 1980

8. Power can be gained with strategy • 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,… • Find a strategic position in the supply chain to develop better bargaining power

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

10. Three generic competitive strategies Strategic advantage Low cost position Uniqueness perceived by the customer Industry-wide Strategic target Particular segment only 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 KimmoJuurmaa)

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

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

14. Why alliances are formed Market structure: Reduce potential for future competition Raise entry barriers for competitors Alter technology basis 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 Skills: Learn from partners Enhance present skills Resource use: Manufacturing costs Marketing costs Timing: Accelerate entry Varadarajan & Cunningham (1995)

15. Criteria for alliances Examples in offshore context: • Creation of resources that are strategic: • valuable: improved cost efficiency • rareamong 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) Larger project planning contracts through joint planning Arctic expertise & partners from Russia and Brazil that lower entry barriers Long-lasting alliances Internally coherent, not a fragmented group of companies Turn the alliance into a brand that can be used in selling projects Barney (1991) Varadarajan (1995),Kotler(1983)

16. 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) • 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 company’s board to improve communication and mutual understanding of the partners’ viewpoints Das & Rahman(2002)

18. Long-term vs ad hoc alliances Ad hoc: 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 • 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  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

20. Services

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 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)

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 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)

24. 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 Customer Customer’s customer Supplier Contractor Customer Customer’s customer Grönroos (2007)

25. Fighting the 3rd party threat in offshore Oil company (international or national) • 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 Contractor Supplier Supplier Supplier Consulting & engineering

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 value’s creators • The level of desired service provision should be stated on the company’s strategy (see next slide)

27. Service provision levels ? What is the provision level in Finnish maritime companies? Grönroos(2007), Malinen (2007), Airola et al. (2005)

28. Analysis: IFCO partners and their services (based on website data)

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 High Low Need for long-term commitment in alliance-based business Pureservice Aker Arctic Arctia Offshore Deltamarin Elomatic Ilmatieteenlaitos Kvaerner Finland Napa OTC SwecoIndustry

33. References AIROLA, N., VALKONEN, J., LEINO, J., SALMINEN, V., and MALINEN, P. 2005. Teollisenpalveluliiketoiminnanarviointi- jalaskentamalli (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. Teknologiateollisuusry, 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. Palveluyritykseksimuuntautumisenhaasteetjakeinot. In Teollisuudenpalveluksistapalveluliiketoimintaan: Haasteenakannattavakasvu, C. GRÖNROOS, R. HYÖTYLÄINEN, T. APILO, H. KORHONEN, P. MALINEN, T. PIISPA, T. RYYNÄNEN, I. SALKARI, M. TINNILÄ, and P. HELLE, Eds. Teknologiateollisuusry, 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. Arvontuottaminenasiakkaalle. In Teollisuudenpalveluksistapalveluliiketoimintaan: Haasteenakannattavakasvu, Teknologiateollisuusry, 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.

34. More reading about services BestServ Feasibility Study Final Report Teollisuudenpalveluksistapalveluliiketoimintaan - haasteenakannattavakasvu sdlogic.net/JM_Vargo_Lusch_2004.pdf Service Management and Marketing: Customer Management in Service Competition www.bestserv.fi/material.html On sale digitally: www.ellibs.com/fi/book/978-952-238-024-1 sdlogic.net/JM_Vargo_Lusch_2004.pdf On sale in print