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

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

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

domain)– operational (streamlining operations)

Varadarajan & Cunningham, 1995

Distinct corporate entities (equity joint ventures)

Interorganizational entities

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

DifferentiationAdding value to

product

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)

– Feeling of imbalance in partnership

Das & Rahman (2002)

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)

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

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