Maersk Line Case Study

Introduction

This paper presents a detailed analysis of the Maersk Line case study. Maersk Line is the world single largest shipping company. Despite its organic growth over the years, the company is grappling with several challenges, which include increasing competition and high fuel costs. In this regard, the analysis will focus on three areas. First, it will highlight the dilemmas facing the company.

Second, it will highlight the factors that have led to the success of the company’s business model. Finally, the strategic choices facing Maersk Line’s CEO will be analyzed. Based on the analysis, recommendations will be made regarding the strategy that should be adopted by the CEO.

Dilemmas Faced by Maersk Line

The CEO of Maersk Line is facing several dilemmas as he attempts to implement new strategies to improve the profitability of the company, as well as, to maintain its position as the industry leader. To begin with, the company is implementing a sustainable shipping strategy to overcome competition. The objective of this strategy is to reduce the environmental impacts of the company’s activities.

As a result, customers who are interested in reducing their ecological footprint will consider Maersk Line as the right transport partner. This will increase Maersk Line’s sales and customer loyalty. However, the dilemma in implementing this strategy arises from the costs associated with it. For instance, slow steaming helps the company to reduce fuel consumption.

However, it will reduce the competitiveness of the company during economic boom. In particular, slow steaming will prevent the company from responding to increased demand in the short-run. This is because Maersk Line will have to increase its fleet size, which is not possible in the short-run since orders for new ships take up to 4 years to be fulfilled.

Additionally, if other companies begin to ship at normal speed, Maersk Line will be less competitive because it will take longer than its competitors will deliver containers (Caputo, Fratocchi & Pelagagge 2005, pp. 876-899).

The company also focused on enhancing its reliability and simplifying the shipping process in order to differentiate itself from the competition. Enhancing reliability involved ensuring that all containers are delivered in time, whereas simplifying the shipping process involved using online systems to track the shipping process.

While these strategies have the potential of improving the competitiveness of the firm, their positive effects are likely to be short-term. This is because the company’s competitors are likely to follow suit and improve their reliability, as well as, to adopt online systems to improve their operations.

This is illustrated by the fact that the company’s competitors were able to imitate its strategies such as slow steaming and using low-sulphur fuel while approaching ports such as Hong Kong. In this regard, the dilemma in implementing the company’s differentiation strategies is the risk of imitation.

Finally, Maersk Line focused on purchasing new energy-efficient vessels, as well as, rehabilitating existing ones. The aim of this strategy is to enable the company to reduce its fuel costs and to achieve its objective of ensuring sustainable shipping. However, the dilemma in implementing this strategy arises from the initial costs of purchasing or rehabilitating existing vessels and the response of the competitors.

Purchasing new vessels requires a significant amount of financial capital. Thus, it is justifiable only if it leads to improvements in the company’s returns on assets (Katsioloudes 2006, p. 78).

However, this will not be the case if the competitors respond by expanding their fleet and the demand for shipping services fail to increase. In particular, the resulting increase in competition coupled with low demand will lead to underutilization of Maersk Line’s capacity, thereby reducing its profits and returns on assets.

Explanations for the Success of Maersk Line’s Business Model

The success of Maersk Line’s business model can be explained by several factors. First, the company succeeded because it had the largest shipping network in the industry. The large capacity contributed to the success of the business by enabling it to transport a large number of containers, thereby increasing its sales and profits.

Conceptually, having a large production capacity leads to a reduction in unit costs, which in turn improves profitability (Sadler 2003, p. 132). In this regard, having a large number of vessels enabled Maersk Line to reduce the overall cost of transporting containers. This is likely to have enabled the company to respond to the price wars in the industry by lowering its prices without compromising its profits.

Second, the company succeeded because of its ability to maintain the highest level of reliability of 80% against the industry level of 56%. Maintaining a high-reliability level was an important differentiating factor because it enhanced the company’s customer loyalty, thereby enabling it to defend its market share.

In particular, customers would continue to use Maersk Line’s services if they were not able to find a more reliable shipping company. Furthermore, high reliability reduced the operating costs of customers by eliminating the costs attributed to holding buffer stock.

Consequently, customers were likely to pay premium prices for Maersk’s services, especially, if the cost savings attributed to high reliability exceeded the additional cost of accessing the services at a premium price (Saxena 2009, p. 141).

Third, the success of the company can be attributed to effective management of its shipping capacity. Maersk Line used its own vessels, as well as, hired ships, which accounted for 53% of its shipping capacity. The advantage of this strategy is that it facilitates cost-effective response to demand swings (Koufopoulos, Lagoudis & Pastra 2005, pp. 151-176).

For instance, during low demand seasons, the company can terminate its contracts with owners of the chartered vessels, thereby reducing its operating costs. Conversely, it can increase its capacity in response to rising demand by acquiring more chartered vessels, which is less expensive than purchasing new ones. Additionally, Maersk Line allocated only 25% of its capacity to major clients who have a great bargaining power.

This cushioned the company’s profits from being affected negatively by the low prices demanded by the major customers. Moreover, allocating 50% of capacity to small customers with low bargaining power improved Maersk’s ability to negotiate for better prices for its services.

Fourth, the success of the company can be attributed to its membership in the A.P Moller-Maersk Group. The membership enabled the company to access funding for key investments such as purchasing new vessels.

In this context, the company had a competitive advantage over firms that were not able to access cheap funding to expand their operations (Sadler 2003, p. 165). Belonging to the group also improved Maersk Line’s bargaining power. For instance, as the largest purchaser of bunker fuel, the company had the opportunity to negotiate for low prices, thereby reducing its operating costs.

Finally, the company was successful because of its effective marketing strategy, which included offering additional value-added services such as door-to-delivery of cargo. Moreover, the firm offered excellent customer care services, which included timely notifications of delays and money-back guarantees.

The advantage of the additional value-added services is that they enhanced customers’ shipping experience, thereby increasing the potential of repeat business for Maersk Line (Zimmerman & Blythe 2013, p. 97).

Excellent customer care services, on the other hand, are likely to have improved the company’s customer satisfaction levels. For instance, compensating customers for delays in delivery eliminated the dissatisfaction, which could have arose due to the losses attributed to late deliveries.

Why the New Business Model should Work

According to Katsioloudes (2006, p. 211), the success of a business is determined by the extent to which it is able to respond to dynamics in its internal and external environment, as well as, the market needs. The external environment of Maersk Line is characterized with challenges such as high fuel prices, high competition, and a significant reduction in the price of shipping services.

Market surveys indicate that customers are interested in reliable, simple, and sustainable shipping services. Consequently, Maersk Line’s new business model should work by addressing the challenges in the external environment and providing solutions to customers’ needs.

The new business model is likely to address the market needs. This is because it focuses on enhancing sustainability by reducing the company’s ecological footprint, improving reliability through timely delivery of containers, and enhancing simplicity by digitizing the transfer of shipping documents.

Focusing on improving reliability, simplicity, and sustainability will also enable the company to address the challenges in the external environment such as high competition and fuel prices.

For instance, reliability will improve the company’s competitiveness by boosting its customer satisfaction rate, whereas using fuel-efficient vessels to reduce carbon emissions will also reduce expenditure on fuel.

Why the New Business Model should Facilitate Differentiation

The new business model should help Maersk Line to differentiate itself from the competition due to several reasons. First, differentiation will enable the company to engage in non-price competition (Saxena 2009, p. 170). Since prices have already been reduced severely, further reductions will negatively affect the firm’s profits rather than improving its competitiveness.

By contrast, differentiation will improve the company’s competitiveness by enabling it to highlight its new value proposition in the differentiated services (Saxena 2009, p. 171). Second, differentiation will enable Maersk Line to ensure brand loyalty through continuous improvement of service quality. This is because differentiation leads to value addition, which in turn creates the ‘no substitute’ perception among customers.

Since the container shipping industry is entering its maturity stage, brand loyalty will be central to the firm’s efforts to defend its market share (Tsekouras, Poulis & Poulis 2011, pp. 320-341). Finally, differentiation will enable the firm to serve niche markets. For instance, Maersk Line is likely to be the preferred shipping services provider among customers who are interested in sustainable transportation.

Strategic Choices Facing the CEO of Maersk Line

The CEO is faced with three strategic choices. The first choice is to focus on reducing the operating costs of the company (cost-leadership strategy). This will enable him to overcome competition by lowering the prices of the company’s services. In the long-run, the resulting increase in sales will offset the reduction in revenue occasioned by price reduction.

Thus, the company will make profits in the long-run. The second strategic choice is to focus on differentiating the company’s services. Differentiation will improve the company’s competitiveness by enhancing its brand loyalty and customer satisfaction.

Moreover, it will enable the company to serve a niche market and to charge premium prices, thereby increasing its profits (Zimmerman & Blythe 2013, p. 157). Finally, the CEO can implement a mixed strategy by focusing on both cost-leadership and differentiation.

The Strategy that should be Chosen

Maersk Line has the ability to pursue a cost-leadership strategy. This is because its membership in the A.P Moller-Maersk Group enables it to access funds for new investments. The company’s financial strength has enabled it to invest in a number of cost-saving measures. These include rehabilitating existing vessels, purchasing new cost-effective vessels, conducting research on alternative (cheap and clean) energy sources.

Nonetheless, the scope of price reduction is limited because they are already very low. Besides, further price reductions are not likely to boost financial performance because the expected increase in capacity in the industry will reduce the firm’s demand (Sadler 2003, p. 203). Thus, pursuing a pure cost-leadership strategy is likely to fail.

Similarly, Maersk Line has the ability to pursue a differentiation strategy due to its financial strength and expertise in developing innovative shipping solutions.

However, the main challenge in pursuing a pure differentiation strategy is that the company’s competitors have the capacity to imitate its differentiation strategies. In this regard, the positive effects of differentiation will be neutralized as other companies adopt similar strategies.

Therefore, Maersk Line should focus on a mixed strategy that involves cost reduction and differentiation of its services. According to Katsioloudes (2006, p. 261), a mixed strategy leads to failure. For instance, lowering prices may undermine the company’s ability to maintain high product quality. However, this perspective is not always true since customer needs are often multi-dimensional (Sadler 2003, p. 243).

For instance, customers in the shipping industry are interested in low cost services due to the tough economic times. Additionally, they are interested in high quality services, especially, reliability and sustainability in order to improve their competitiveness in their industries. In this regard, the best way to succeed is to focus on both cost reduction and differentiation.

Maersk Line has the ability to pursue a mixed strategy due to its access to financial capital, leading scientific research, and a good corporate reputation. These characteristics will enable it to offer cheap, but high quality services.

Conclusion

The aim of this paper was to analyze the case study of Maersk Line. The analysis indicates that the main dilemma facing the company’s CEO is how to implement the differentiation and cost reduction strategies (enhancing sustainability, reliability, and simplicity) without compromising the firm’s competitiveness and profitability.

The company succeeded in the past due to its dominant position, membership in the A.P Moller-Maersk Group, effective management of its capacity and effective marketing strategies. Given the challenges in the industry and market needs, the company should pursue a mixed strategy that focuses on cost reduction, as well as, differentiation of its products.

References

Caputo, A, Fratocchi, L & Pelagagge, P 2005, A Framework for analyzing Long Range Direct Shipping Logistics, Industrial Management and Data Systems, vol. 105 no. 7, pp. 876-899.

Katsioloudes, M 2006, Strategic Management, Butterworth-Heinneman, London.

Koufopoulos, D, Lagoudis, I & Pastra, A 2005, Planning Practices in the Greek Ocean Shipping Industry, European Business Review, vol. 17 no. 2, pp. 151-176.

Sadle, P 2003, Strategic Management, Kogan Page, London.

Saxena, R 2009, Marketing Management, McGraw-Hill, New York.

Tsekouras, G, Poulis, E & Poulis, K 2011, Innovation and Dynamic Capabilities in a Traditional Service Sector: Evidence from Shipping Companies, Baltic Journal of Management, vol. 6 no. 3, pp. 320-341.

Zimmerman, A & Blythe, J 2013, Business to Business Marketing: A Global Perspective, Routledge, New York.