Analysis of Porter’s Five Forces for Shipping Industry

Porter’s five forces is a framework for industry analysis which determines the competitiveness and
attractiveness of a market at large. This model depicts that profitability or return should be constant towards
certain period of time, not in perpetual at all. The model can be utilized by business organizations to develop
their strategies to triumph over rivals. The primary focus of using this strategic tool is used to identify
whether new products, services or businesses have the potential to be profitable.

Threats of New Entry in the Shipping Industry:

The main issue involves in the shipping industry is the huge capital investments in acquiring and running
vessels and its operational risk factors and the container availability. Many shipping companies are well
established. “Maersk” is running their business operations in every part of the world. In certain regions it
may be the only player operating where their profit margins from those operations would be substantially
huge. But this target profit margin can be severely challenged, if APL or MSC introduce their service in
those regions. If there are any new potential shipping companies who would like to enter into this shipping
sector with huge capital backup, then other factors like licensing, government rules, regulations, policies
are all secondary.

Capital requirement is high.

Profit margin is high.
Switching cost is less.
Chance of expansion into new sector is less.
Existing regulations support the entry of new players high
Consumers can easily switch the brands due to weak or no brand loyalty Building a distribution network
Flexible retaliation factor
Established big players have Economies of scale
Merchandise differentiation
Government restriction is less.

Capital requirements of the shipping industry is very large, hence, the threat from the new entrants is less.
As the capital is very large the profit margin is also too high in the shipping industry. Because all exporters
and importers know the best mode of transporting their goods are the shipping line. Switching cost of the
customers is high because of the lack of experience of the new entrants. Most of the countries’ main
economy evolves around the shipping industry. So, the government will give full support to the new
entrants.

So overall threat for the new entry is high.

Threats of Substitution in the Shipping Industry:

Substitution threat arises when something is going wrong in an organization and competitors are waiting to
catch that opportunity for their business benefit which is the result of change in buyer behavior towards
competitor or against company. It may also occur due to change in quality of service, increase in freight
rates and increase in transit time. From view point of switching costs, buyers are not affected at all due to
higher number of available suppliers and freight forwarders available in the shipping market. While it may
affect the company to certain extent as they have to start new search of getting potential customers, establish
strong relationships, build rapport and educate them regarding company policies, rules, norms and systems.
Switching costs become even getting bigger at times of downturn due to decrease in supply of business
from customers. Cost factor is a pragmatic responsible factor for substitution while service specification
comes secondary.

In case due to the delay in service delivery and or provide, the service quality becomes not up to the mark
and at the same time the wagon rates per unit are also similar, then the customers would like to motivate
themselves to switch on to the new substitutes. If the oil price [crude oil/diesel oil] shoots up at the
international level then the company is forced to increase their delivery charges. Due to the increased rates
in shipping and delayed timing to reach the destination on time, customers will go for the substitutes like
airline, wagon or even trucks [for certain limited destinations]. If the airline or wagon [goods train] can
almost cost the same rates of the shipping companies but can reach on time then customers will think for
such substitutes as well.

Substitution threat would be termed as a major problem for a reputed company like “Maersk”. If any service
or the goods were not delivered in a specified manner then the client’s trust on company would eventually
go down. In this present competitive world people won’t compromise for anything. If they are not satisfied
by the service, they will jump to other substitutes who can give better rates and services.

Availability of the substitutes is high.

Price of substitutes is high.
Quality and performance of the substitutes is high.
Switching cost is high.
Cost factor is less.

More number of market players are available, but they all are dealing with different price tags, performance
measurements and quality standard would increase the attractiveness of the shipping sector. As the
switching cost is comparatively high, customer stick to their present seller will increase attractiveness. Cost
factor is less important because all players will play a role of defender in market will moderate the
attractiveness.

So overall threat of substitutes is high.

Bargaining Power of Supplier

Suppliers barely make any difference to companies involved in shipping line business, especially who are
leading players like “Maersk” in this business. While it may affect to certain extent to small players like
Five-star shipping company, Varun Shipping company etc. who are struggling to establish within the
industry. Many suppliers are such which are borne directly by customers but arranged by shipping lines
like pesticide, wooden pallets, container repairs and truck transportation due to corporate contract or link
ups of companies with service providers. While there are cases when these same services are borne by
shipping lines but then these charges are included in freight rate which would be higher if the suppliers
were not arranged by company.

Another supply which is related to loading of containers on third party vessels is very important here
because this is the only supply where shipping lines have to face the bargaining of suppliers. Not all
shipping lines own the vessel and therefore they hire the service of other companies, to load their containers
for different destinations. “Maersk” is the largest container operator in Kandla port. But its own vessels are
not operating from Kandla due to drift problem and therefore they hire the services of third-party feeder
vessels to load its containers till JNPT [Jawaharlal Nehru] port in Mumbai, from where “Maersk” mother
vessels are operating across continents. In this case “Maersk” may have to pay extra money if demanded
by ship operators. While this is not the case with MSC [Mediterranean Shipping Company] which has its
own small vessels operating from Kandla to different gulf locations. But if we move to location like JNPT
port in Mumbai, the situation is totally different. “Maersk” vessels are the biggest here operating among
other carriers and those small carriers are using slot on “Maersk” vessels for transporting their cargo. There
are other supplies like loading/ unloading of containers from vessel ie, movement of containers to CFS
(container freight station) and vessel towing which are provided by port authorized suppliers and
companies. Port authority charges fixed amount towards these handling from shipping lines and shipping
company charges the same from customers after adding their profit margin.

Number of the suppliers is high.

Price factor of the suppliers is high.
Profit of the supplier is less.
Switching cost of the supplier is high.
Operating cost is high.

So overall power of suppliers are low.

Bargaining Power of Buyer:

Price and quality of service are the two main core factors of Container line business. Price refers to freight
at which one container is set by company to move from one place to a different. Due to much competition
during this sector and limited number of operators, bargaining power of buyer has increased in reference to
freight price.

Quality of service refers to fast processing of documents, bill of lading and prompt loading and movement
of containers etc. In this techno-world, every company is trying to adapt new technology in their day to day
business and “Maersk” is so technologically advanced in this field, that all its data processing is being done
electronically by back office and clients are able to access all information relevant to shipment like shipping
bills, vessel certificates, freight invoices and bill of lading in encrypted format, once the payment is
completed by customer either electronically or at “Maersk” local office.

Companies like APL and MSC do have electronic processing systems but aren't fully fledged and as a result
much of the work remains being done manually. Other sections of buyers which can affect container line
business are freight forwarders or clearing agents, with rapid expansion of shipping industry and
import/export businesses. Many agents acting as freight forwarders have come up in market to share the
profit in sort of commission and these agents earn commission by way of collecting excess freight from
exporter than charged by shipping lines. It is relatively easy for shipping lines to entertain these agents, so
there's no difficulty of approaching different small exporters.

Numbers of the customers are high.

Switching cost is low.
Customer’s information and awareness is less.
Customer’s ability to demand is high.
Freight forwarders and clearing agents are high.

Number of customers are high in this field due to the export and import of goods from different parts of the
world. But the similar price and quality will lessen the attractiveness. Customer’s ability for demand during
purchasing will be high, because suppliers of Maersk are in threat of losing customer. Switching cost of
customers is low because of a greater number of suppliers. Due to easy availability of containers through
agents rather than searching by the shipping companies in several places the bargaining power of freight
forwarders and agents are going to be more.

So overall bargaining power of buyer is high.

Competitive Rivalry:

In consideration of the rivalry in shipping industry, it will be held valid due to enormous margins of
available profits combined with continuous growth. “Maersk” dominates the market due to its wide area
coverage, better connectivity with clientele, superb business practices, and efficient cost controlling
measures. But on other side, its strict and non-flexible policies and highly technological advancement at
very base levels which is not digested by people working in lower educated market. MSC has done well in
recent times in attracting business due to its competitive pricing model and better connectivity of services.
In contrast it has failed to control administrative, operational and higher output costs. Also, it has lagged
behind in attracting customers due to non-availability of killing marketing strategies.

Number of competitors is high.

Cost leadership is high.
Switching cost is low.
Industry growth is high.
Competitor’s move to new customer is low.

More number of competitors are high in the shipping industry, because of the thought that the profit margin
very high in the shipping industry. Cost leadership is high for the market leader like MAERSK, because
the new entrants and the minor players in this industry can’t sustain with very low cost of the market leader.
Industry growth is high, so the chance of exit from the industry is less. Competitor’s move to new customers
is very low because of the non-awareness of their profile. Switching cost is low, because of the less
familiarization of the new suppliers may lead to argument or disagreement.

So overall competitors of the industry are high.

Conclusion:

Government are somewhat liberal towards the licensing and development of shipping business by providing
different incentives and exemptions. So the threat of new entrance is high, but as the profit margin is high,
the attractiveness is also high. Many competitors are available in the market and they provide perfect
substitution in terms of services, freight rates etc, but the resources are also easily available. So the
attractiveness of this industry is also high. Suppliers are more in this field and the available facility is very
less. So the cost of operating this business is high, which makes shipping suppliers in weak and buyers are
in strong position. So the industry attractiveness is low in this case. The bargaining power of buyer is high
and potentiality of business is high then many buyers will be there in the market. This will increase the
attractiveness. Existing players are many, but constant technological advancement and updated services
and facilities will increase the attractiveness.

This force shapes the competition within any industry. Many new industries use these 5 forces model to
decide whether it is profitable to enter in a particular industry.

According below analysis and present market condition that the industry (Container Liner Shipping) is
unattractive for new entries.

References:

Maersk Porter Five Forces Analysis

https://www.case48.com/porter-analysis/13954-Maersk (Accessed: 5 February 2020)

Shipping Industry Analysis: A.P Mollar-Maersk

https://www.ukessays.com/essays/economics/shipping-industry-analysis-a-p-mollar-maersk-
economics-essay.php (Accessed: 5 February 2020)

Porter, M. E. (2008). “The five competitive forces that shape strategy”. Havard business review,
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Drund, T, (2006), Rethinking and reinventing Michael Porter’s five forces model, Strategic
Change, 15(5), 213-229