Why Does Shipping Industry End Up At the Wrong End of the Stick Every Time?

have thought about this simple question a lot. I joined shipping industry as a cadet in 1982 and spent the next 12 years in various roles. Even after leaving the industry, I have retained an affinity to it, and tried to apply what I learned outside the industry to problems in the industry.

In 1983, barely a year after joining the industry, I witnessed its biggest recession in history at that time. Since then, the pattern repeats itself every few years. There are a couple of really good years, and then back to normal. Worse still, every subsequent recession in the industry is deeper than the previous one - and gets to be known as the worst so far.

Just today I read another article on the woes of shipping industry. This one, by Andrew Craig-Bennett was a lot more insightful than the usual shallow thinking in shipping press in general.

Below I quote the brilliant writer:

Meanwhile, the next part of the cunning plan, seen by the staff of the big liner companies as ‘The Good Bit’, comes into play, as the surviving giant containerlines can at last do what their staff have wanted to do for decades, and put the bite on the forwarders, by jacking up their rates and shutting them out. But the problem with the cunning plan rears its ugly head. Owners of unwanted tramp boxboats can either scrap them, at tender ages, or do something else with them, just at the time when big forwarders, controlling worthwhile cargo volumes on certain routes, find themselves shut out. The solution is obvious and not even difficult to put into effect– Non-Vessel Operating Common Carriers become Vessel Operating Common Carriers, by chartering ships, cheap, from the desperate tramp owners. The NVOCCs know all about the liner business; all they need to do is to hire a few operations people, appoint agents, and buy bunkers.

Presto! A whole new generation of liner shipping companies, carrying negligible debt or overhead, springs up like the dragon’s teeth and starts to out-compete the ‘legacy’ big shipping lines.

Clearly deep strategic thinking is missing in the shipping milieu. Why is this the case?

Just as Peter Drucker can be credited with creating the brand ‘Management’, Michael Porter can be credited with creating the brand ‘Strategy’. Both these areas of human thought were largely unexplored in an explicit sense before these men started writing about them and popularised them.

Strategy as a field of exploration, started with simple postulation of generic competitive strategies of cost leaderships, Differentiation or niche strategies in 1985. Since that time the field has grown rapidly. Boston Consulting Group’s growth-share matrix, Scale-curve analysis, Booz Allen and Hamilton’s Product Life Cycle and McKinsey’s 7-S model firmly established these firms as the leaders of strategic thought in the commercial world. Over the last 40 years or so, both, the academia, as well as the commercial world has exercised a great deal of mental muscle to come up with better and better strategic models, solutions and methodologies. For some reason, though, Shipping industry has remained suspicious and aloof from all this development.

Strategy is a methodical approach to gaining and sustaining long term advantage. Very few, if any shipping companies do this. If I had to make a list of all the strategic missteps of the shipping industry – right from leaving the door open for 3PLs, to losing the network effect in the world’s first network business, to fragmentation of thinking – I would have to write a whole new book.

Shipping companies are quick to copy each other in a race to lowest costs, a race to the shipyards, or a race to the lay-up. As one investment banker remarked to me ‘perhaps with the exception of the airlines, no other industry spends such a lot of money with this little thought.’

At a very basic core every decision maker relies on his/her intuitive judgement to make a decision. This is perhaps the start of strategic thinking. In terms of advent of strategy, this, indeed, is the first step shown in the figure. At this stage decisions are made in the mind. The decision making process is largely opaque – all the factors, all the data, all the trade-offs reside in the decision maker’s mind. Many times the decision maker may not be even able to explain how he/she made that decision. They might just say – it is my gut feel. Lots of great decisions are made this way. But many of the greatest disasters are too – think about the Titanic.

Moving forward from intuitive decision making, the decision maker relies on the historic demand and supply data to make judgement on the future course of action. The assumption is that history will repeat itself. While it is useful to some extent, this approach is clearly akin to driving forward while looking in the rear view mirror. The dangers of such an approach are self-evident.

A step better is forecasting. Most shipping companies rely heavily on forecasting. There are as many forecasting algorithms as there are recognised statisticians. One thing they all have in common is this - most forecasts are mostly wrong. So why use forecasting at all. Because the associated statistics gives us enough data to do something better than forecasting – simulations. Shipping companies are starting to embrace simulations. Value-at-risk models (VAR models) are based on such simulations. In probabilistic terms it is outline the outcomes from a particular course of action. This is very powerful breakthrough. Even more powerful would be its application to real options analysis – situations that shipping companies face almost on a daily basis. However, that is an area which shipping companies have not yet explored.

Scenario analysis or War gaming is the next step in the evolution of strategic thought. This technique, introduced from military world to the business world by the likes of Shell, has been very powerfully utlised to stimulate holistic thinking. This technique is also the advent of strategic thought - all earlier techniques were primarily analytic techniques. As the name implies this technique incorporates the principal of looking ahead and reasoning backwards (all the way to conclusion.) However, this technique can quite often overwhelm the participants, especially when no consensus emerges.

The most sophisticated decision making methodology known at present – hypothesis driven approach is barely used by a few shipping companies. This technique is an art in itself, when properly deployed can produce fast, robust and actionable decisions. It involves starting with a brain-storming exercise to generate hypotheses about the current state of affairs (akin to a doctor creating hypotheses around what ails a patient). This is followed by data gathering and analysis – only to the extent it is necessary to confirm or disconfirm the hypothesis. Based on the results, future course of action is decided. This rigorous, scientific approach can be extremely powerful if the discipline of the methodology is adhered to. However, it is quite easy to slip into sloppy ticking the box approach of maintaining form over substance.

It is quite clear from the foregoing that shipping industry – though steward of huge amount of global capital – is particularly cavalier in its approach to strategy setting. And then they blame the banks, the government, the customers, the economy - everyone but themselves - for their woes.

I have yet to see a banker with a gun to the head of a shipping company's CEO forcing them to buy new ships.

The key question at this stage is why is this the case? Why does shipping company remain strategically backwards - despite being awarded with enormous amounts of global capital allocation.

Insular nature of the industry: For a long time our industry has believed that there is a certain black art to managing ships – something that mere land lubbers would never understand. This has led us to stay clear of most the fads and fashions of board rooms in other organisations, saving our industry a lot of money and frustration. But, at the same time this insularity has also meant that, barring technology, we are one of the last industries to apply innovative business practices originating elsewhere. While we might be wrapped up in our own greatness, the world is fast overtaking us. Evidence today is that the current boom is benefiting the shipping services companies – from logistics, 3PL, 4PL, shipping banks to ancillary industries a lot more than the shipping companies themselves.

Overwhelming cost focus: During each depression (the dreaded D word) our industry gets focuses –and rightly so – on cost cutting. Nothing unusual in that. However, we are slow to adjust to the boom era where different strategic focus is needed to capitalise on all the opportunities. We have conditioned ourselves to believe that after each short bout of sunshine there is going to be another long dark night, and we must save up for that. With sound strategy, this need not be the case for the business innovators in the industry.

Lulled by traditional economics: Ships being large floating units of capital are very easy to count and classify. Demand and supply are extremely easy to account for. This leads us believe it is equally easy to predict (which is true to some extent in case of supply – after all, order books of most shipyards are transparent to a large extent.) Most shipping companies appear content with trying to be tipsters in the game of managing supply to their advantage in face of an anticipated demand. Game of strategy is much more than that zero-sum game. As expounded in the brilliant book Co-Opetition by Adam M. Brandenburger, Barry J. Nalebuff it requires finesse to understand all the PARTS (Players, Added Value, Rules, Tactics, Scope) and swing these to our advantage.

Is it necessary to acquire a keener strategic focus? Absolutely. To escape the cycles of boom and bust, to thrive in adversity, and to be equal partners in the global commerce our industry innovators need to think and act at the same level as industry innovators in other global industries. Perhaps the current boom, cross-fertilisation of ideas with wall street and global approach to supply chain management would address some of this insularity. However, the first rule of strategy is to not leave outcomes to chance – to take control and create the desired outcomes. This is the key message of my book The 5-STAR Business Network, which this thinking led me to write.

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