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Posted: August 24th, 2023
Research on Diversification Strategies of Shipping Company Groups
The shipping industry is one of the most important sectors of the global economy, as it facilitates international trade and connects markets. However, the shipping industry also faces many challenges, such as fluctuations in demand and supply, environmental regulations, geopolitical risks, and technological disruptions. Therefore, shipping companies need to adopt effective strategies to cope with these uncertainties and enhance their competitiveness.
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One of the strategies that many shipping companies have adopted is diversification, which means expanding their business scope to different segments or markets within the shipping industry or beyond. Diversification can help shipping companies reduce their dependence on a single market or segment, increase their revenue streams, exploit synergies, and create value for their stakeholders. However, diversification also entails costs and risks, such as loss of focus, complexity, and integration difficulties. Therefore, shipping companies need to carefully evaluate the benefits and drawbacks of diversification and choose the optimal level and type of diversification that suits their goals and capabilities.
This blog post aims to provide an overview of the research on diversification strategies of shipping company groups, focusing on the following aspects:
- The drivers and motives of diversification in the shipping industry
- The types and levels of diversification in the shipping industry
- The performance implications of diversification in the shipping industry
- The challenges and best practices of diversification in the shipping industry
Drivers and Motives of Diversification in the Shipping Industry
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The decision to diversify or not depends on various factors, such as the characteristics of the firm, the industry, and the environment. According to the literature, some of the main drivers and motives of diversification in the shipping industry are:
- Market conditions: Shipping companies may diversify to exploit opportunities or avoid threats in different markets or segments. For example, shipping companies may enter new geographic markets to access new customers or sources of supply, or they may enter new service segments to offer more comprehensive solutions to their clients. Conversely, shipping companies may diversify to escape from declining or saturated markets or segments, or to hedge against cyclical or seasonal fluctuations in demand or supply.
- Resource-based view: Shipping companies may diversify to leverage their resources and capabilities in new domains or to acquire new resources and capabilities that can enhance their competitive advantage. For example, shipping companies may use their existing assets, such as vessels, terminals, or networks, to provide new services or products, or they may acquire new assets, such as technology, know-how, or brands, that can improve their efficiency or quality.
- Agency theory: Shipping companies may diversify to align the interests of managers and owners or to reduce agency costs. For example, managers may pursue diversification to increase their power, prestige, or compensation, or to reduce their risk exposure. Owners may encourage diversification to monitor managers' performance more effectively or to reduce information asymmetry.
- Institutional theory: Shipping companies may diversify to conform to institutional pressures or norms in their environment. For example, shipping companies may follow the actions of their peers or competitors in diversifying their business scope, or they may comply with the expectations of their regulators, customers, suppliers, or other stakeholders in adopting certain practices or standards.
Types and Levels of Diversification in the Shipping Industry
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The literature distinguishes between different types and levels of diversification based on the degree of relatedness between the original and the new business domains. The main types and levels of diversification in the shipping industry are:
- Horizontal diversification: This refers to expanding into new segments or markets within the same industry. For example, a container shipping company may enter into bulk shipping or tanker shipping segments.
- Vertical diversification: This refers to expanding into upstream or downstream activities along the value chain of the same industry. For example, a container shipping company may acquire a terminal operator or a freight forwarder.
- Diagonal diversification: This refers to expanding into related industries that share some commonalities with the original industry. For example, a container shipping company may enter into logistics services or maritime equipment manufacturing.
- Conglomerate diversification: This refers to expanding into unrelated industries that have no connection with the original industry. For example, a container shipping company may enter into real estate development or financial services.
The level of diversification can be measured by various indicators, such as the number of segments or markets that a company operates in,
the proportion of revenue that comes from different segments or markets,
or the degree of similarity between different segments or markets.
Performance Implications of Diversification in the Shipping Industry
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The impact of diversification on performance is a controversial issue in the literature,
as different studies have found different results depending on various factors,
such as the type and level of diversification,
the measurement of performance,
the time period,
and the context.
Some studies have found positive effects of diversification on performance,
suggesting that diversified shipping companies can benefit from economies of scale and scope,
risk reduction,
market power,
innovation,
and learning.
Some studies have found negative effects of diversification on performance,
suggesting that diversified shipping companies suffer from diseconomies of scale and scope,
loss of focus,
complexity,
and agency problems.
Some studies have found no significant effects of diversification on performance,
suggesting that the benefits and costs of diversification may cancel out each other,
or that the effects may depend on other factors,
such as the mode of diversification,
the timing of diversification,
or the strategic fit between different businesses.
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Challenges and Best Practices of Diversification in the Shipping Industry
Diversification is not a simple or straightforward strategy for shipping companies,
as it involves many challenges and risks that need to be addressed and managed.
Some of the main challenges and best practices of diversification in the shipping industry are:
- Choosing the right type and level of diversification: Shipping companies need to assess their internal and external environment and identify the optimal type and level of diversification that matches their goals and capabilities. They need to consider the attractiveness and compatibility of different segments or markets, the availability and cost of resources and capabilities, and the potential synergies and trade-offs between different businesses.
- Choosing the right mode of diversification: Shipping companies need to decide whether to diversify organically or inorganically, i.e., whether to develop new businesses internally or to acquire existing businesses externally. They need to weigh the advantages and disadvantages of different modes, such as speed, control, risk, cost, and integration.
- Managing the diversified portfolio: Shipping companies need to coordinate and integrate their diversified businesses effectively and efficiently. They need to balance the autonomy and interdependence of different businesses, allocate resources and incentives appropriately, foster communication and collaboration across businesses, and monitor and evaluate performance regularly.
- Adapting to changing conditions: Shipping companies need to be flexible and responsive to changing conditions in their diversified businesses. They need to anticipate and cope with environmental uncertainties, such as demand and supply fluctuations, regulatory changes, technological disruptions, or competitive moves. They also need to review and revise their diversification strategy periodically and make necessary adjustments or exits.
Conclusion
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Diversification is a common and important strategy for shipping companies in the dynamic and complex global economy. Diversification can help shipping companies enhance their competitiveness and create value for their stakeholders, but it also entails costs and risks that need to be carefully evaluated and managed. Therefore, shipping companies need to adopt a strategic approach to diversification that considers their goals, capabilities, opportunities, threats, and best practices.
References
- Chang, Y., & Park, H. (2019). The effect of business diversification on performance: Evidence from the global container shipping industry. Maritime Policy & Management, 46(7), 847-865.
- Chen, S., & Liu, Z. (2019). The impact of horizontal integration on firm performance in the container shipping industry write my thesis homework help. Transportation Research Part E: Logistics and Transportation Review, 130, 1-14.
- Lee, P., & Cullinane, K. (2019). The impact of horizontal integration on market power in the liner shipping industry. Transportation Research Part E: Logistics and Transportation Review, 127, 86-104.
- Notteboom, T., & Rodrigue, J. P. (2012). The corporate geography of global container terminal operators. Maritime Policy & Management, 39(3), 249-279.
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