Strategic Management: New Market Entry of Havila Shipping in Brazil - Case Study Example

1. New market entry - Brazil Havila Shipping plans to expand its overseas operations and envisages starting offshore operations in Brazil. Brazil isan attractive offshore site but the mode of entry has to be evaluated based on Porter’s Diamond Model. This model is based on industrial organizational economics and resource based theory (O’Connell, Clancy & Egeraat, 1999). The four determinants of national competitive advantage operate interdependently rather than individually. These four determinants as explained by Abbott (2004) include the factor conditions, the demand conditions, the related and supporting industries and firm strategic, structure and rivalry. Further, Porter emphasizes that the government has to play a supporting role to make the business environment conducive. Factor conditions – Brazil is Latin America’s largest economy and several shipping companies like OSX have declared their IPOs. Brazil also has vast deep-water oil wealth (Reuters, 2010). In the new business environment following trade liberation companies have been trying to modernize their management. However, there is lack of investment and this has weakened the transportation infra-structure. Brazil relies heavily on highways for transportation. Brazil has a lengthy coastline and there is significant potential for growth in the maritime sector. The use of containers has been growing rapidly as the services were standardized and the chart below demonstrates the need for maritime transportation in Brazil. The trend is towards using larger vessels to reduce the transportation costs. The largest vessel to have come into Brazil had a capacity of 5,500 TEUs (Wilson, 2010). Ports at Brazil are now privatized and private companies can operate terminals. Privatization has attracted inward FDI in the sector and this has enhanced the infra-structure at the ports. The enhanced services include reduction of waiting time for dockage at ports, time spent loading and unloading, and introduction of technological and productive processes to reduce the costs of labour operation. Source: Wilson (2010). Demand conditions – Rising oil prices and a surge in the Chinese demand for commodities like iron ore and coal have caused an interest in investments in the shipping companies at a global level. Brazil based companies that win contracts for energy exploration are obliged to source about 70% of their equipments and sources domestically (Reuters, 2010). Between 2003 and 2005 the exports increased at a compounded rate of annual growth of 27.2% and imports at 23.5 percent (Wilson, 2010). This demonstrates the demand for Port and Logistics maritime industry. Currently, the Port and Logistics Maritime industry offers transportation of cargo, including loading and unloading of vessels, ship agency and vessel towing. The markets have become dynamic and the consumers demanding. There fore, it is essential that a variety of products and services are offered on the spot and can be customized. Because of an upsurge of the deep-water oil and gas offshore industry The bargaining power of the buyers is high and hence quality service has to be maintained. Relating and supporting industries – The growth of the related and supporting industries have led to the growth of the Brazilian maritime industry. The Petrobras’ monopoly has ended and the discovery of oil and natural gas in the country has contributed to the development of the Brazilian maritime industry (Espínola De Lemos, 2009). The use of containers has boosted the sector. It has simplified the transportation and handling of cargo with different models and sizes (Wilson, 2010). Container terminals have increased and so have the facilities available. Firm strategy, structure and rivalry – Political and economy decision sin the past 15 years has altered the commercial globalization of products and services in Brazil (Wilson, 2010). Trade liberalization and removal of barriers have enhanced the imports and exports. Exports have increased because of the devaluation of the Brazilian currency. The navigation activities are defined by the Federal Law and the navigation of maritime support, port support and cabotage navigation must be performed by Brazilian navigation companies ("BNC"). The vessels too have to carry the Brazilian flag and such a strategy ensures that the local market is preserved (Espínola De Lemos, 2009). Foreign vessels are allowed only when there are no local vessels with that capacity. Only BNC is authorized to transport oil and only BNC is authorized to make use of foreign vessels without prior approval. Chartered contracts have to be executed and the process will be intensified as pre-salt reserves have been discovered along the Brazilian coast. Analysis The market for maritime services globally gives a positive indication and Havila Shipping can take definite advantage of this oppurtunity of starting off shore operations in Brazil. Porter’s Diamond Model suggests that the Brazilian maritime sector is very lucrative and immense potential exists. Need for quality service exists and the sector has received a boost because of global trend in enhancing the maritime sector. However, the country despite trade liberalization still has a protectionist approach. Foreign vessels would only be allowed if the same capacity vessels are not available locally. Moreover, the vessels must carry the Brazilian flag. This however implies that no threat from new entrants exists. This suggests that Havila Shipping has to enter through joint venture. Joint ventures enable sharing of risks, assets and profits, and participation in ownership. The stakes can vary from 5 to 95% (Rajan & Pangarkar, 2000) and as far as Brazil is concerned, this would be the most profitable mode of entry. Being protectionist towards the Brazilian firms, the joint venture would receive support from the local government. Acquisition or wholly owned subsidiaries is not advisable because at every point foreign companies have to take permits. Besides, the stakes would be high even though it provides a high degree of control (Agarwal & Ramaswami, 1992). This mode of entry is based on the institutional theory in which the institutional environment in both the home and the host country has to be taken into account. There are five types of risks involved - product, government policy, macroeconomic, materials, and competition (Brouthers & Hennart, 2007) and in the case of Brazil the government policies leave no other option but to enter this market through joint venture. 2. Implementation of IT Bulk of the world trade is transported by ships and the pressure on the maritime industry has been mounting due to trade liberalization. Such pressures have forced the maritime companies to change their business strategies and improve operations including adoption of new technologies and management systems to ensure optimum commercial performance. Maritime communications have become critical to gaining competitive advantage by enhancing customer services and enhancing internal operations. So far communication networks onboard maritime vessels have been restrictive. Narrowband services have to be shared by the crew and the passengers which make it difficult to retain crew who spend longer stretches at sea. Limited connectivity also becomes a deterrent as it hampers exchange of critical information about cargo (iDirect, n.d.). The maritime industry is moving towards broadband and Havila Shipping should incorporate this into their system to enhance their services. iDirect technology provides the ability for ships to roam to roam across satellite beams. It is now possible to connect one satellite from another to obtain global coverage. It has become essential for cargo fleets and oil tankers to have an always-on satellite broadband connection which would provide information on location. Information technology and enhanced internet connectivity are breaking the barriers in the way information is used by the maritime sector but the major portion of the applications is still local. The Straits of Malacca and Singapore are well equipped with the latest technology but this is not the case with sea lanes at other places (MEH, n.d.). There are two other applications that can both enhance customer service as well as render the internal operations effective. The Marine Electronic Highway (MEH) is a regional network of marine information technologies linked through an internet portal. The adoption of digital technology in the maritime sector has enhanced navigation. Havila would benefit immensely as it is expanding in the Asia-Pacific region. With the use of transponders such as an automatic identification system (AIS) and onboard access to the internet, it is possible to exchange real-time information from other ships or the shores. It is also possible to collect information about other ship’s identity, type, position, course, speed and navigation status. It would also enable the sending and receiving of weather information which can ease ship movement in restricted or congested waterways. With enhanced AIS weather data could be analysed and information flow could be real time. The AIS technology also enables vessels to cope with the threat of maritime terrorism but this would have to be utilized by all ships passing through their waters, including the smaller ships (Beckman, 2010). Hence, private companies such as Havila would benefit by investing in such information technology systems. While technology is available and investments made, the utilization of information in the right manner is essential. If the information is inadequate or inaccurate, technology cannot compensate for it. The maritime companies can now enter e-commerce because of the advancement in information technology (IT). This information helps streamline the internal processes such as controlling costs, managing inventory, identifying new markets, and developing competitive advantage by the development of the personnel and the best utilization of the resources (APL, 1997). IT has enabled the shipping companies to receive freight bookings online and construct the rate quotes. They can even issue freight bills and respond to failures because of the readily available information. It is now possible to plan the route and track and manage equipment. A carrier deals with multiple providers and hence compatibility is an issue. Thus, to exchange large volumes of information, EDI was introduced. EDI enables processing the orders and tracing shipments. The customers know exactly at which point their shipments are and how long it would be before they receive it. They can also measure carrier performance and pay their freight bills. The shipping companies also acknowledge the reduction in paper-work related costs because of the application of EDI. They are also able to control inventory and gain greater efficiency. The costs of generating and exchanging information have been reduced to a large extent. The internet, as an open architecture is providing real-time information which helps in planning and budgeting. With continuous real-time access to cargo- and equipment-status information, the maritime companies can reduce the inefficiencies in the internal processes. They can match manufacturing to orders, they can change routing or delivery schedules at short notice, and they can even measure the effectiveness of their own internal systems. The shippers can receive customized management reports which are important tools to measure costs and manage performance. Shipments documents can be electronically transmitted and the process is error free as well as instantaneous. Business success in the shipping industry depends to a large extent on the extent to which one can remain connected to remote locations, to consumers and suppliers and to partners (Roumboutsos, Nikitakos, Gritzalis, 2005). Computer related crimes are very common in the maritime industry as the sector is vulnerable to security breaches due to vast number of remote sites. Interconnectivity in the maritime sector has distinct advantages. However, there are plenty of risks involved in having interconnectivity. In ship-to-shore system the authentication system should be strong. While sending information through a communication channel, the system can be under intruder control. The intruder’s activity can take different forms such as recording and strong information that can be retrieved later when necessary. Havila should have an efficient Information Technology platform so that the customers are benefited while the company benefits in terms of savings of both time and costs. It enables the company to extend customized service while measuring internal performance and areas where efficiency needs to be enhanced. Organizations such as SeaLink Information Technologies provide service to carriers and transportation service firms. Havila can outsource functions or keep the core functions in-house while implementing IT but the risks have to be managed before implementing IT into the system. The ultimate success of using technology would depend on how the information is analyzed and how the risks can be managed. References Abbott, P.Y. (2004). Software export strategies for developing countries: A Caribbean perspective. Retrieved online 16 May 2010 from http://www.ejisdc.org/ojs2/index.php/ejisdc/article/viewFile/119/119 Agarwal, S., & Ramaswami, S.N. (1992). Choice of foreign market entry mode: Impact of ownership, location and internalization factors, Iowa State University, Retrieved online 16 May 2010 from http://aib.msu.edu/awards/23_1_92_1.pdf APL. (1997). Intermodal Information Technology: A Transportation Assessment. Retrieved online 16 May 2010 from http://www.apl.com/news/documents/iitech.pdf Beckman, R. (2010). Maritime Security and Innovation. Retrieved online 16 May 2010 from http://www.innovationmagazine.com/innovation/volumes/v6n1/coverstory2.shtml Brouthers, K.D., & Hennart, J. (2007). Boundaries of the Firm: Insights From International Entry Mode Research. Journal of Management, 33, 395 Espínola De Lemos, L.A.M. (2009). Brazil: Maritime Issues In The E & P Industry. Retrieved online 16 May 2010 from http://www.mondaq.com/article.asp?articleid=73414 iDirect. (n.d.). A Sea of Change Transforms MAritime Communications. Retrieved online 16 May 2010 from http://www.idirect.net/~/media/Files/Maritime%20Campaign/Maritime%20ViaSatellite%20Supplement.ashx MEH. (n.d.). The Concept of Marine Electronic Highway. Retrieved online 16 May 2010 from http://www.meh-project.com/project-framework/copy_of_the-project O’Connell, L., Clancy, P., & Egeraat, C. (1999). Business research as an educational problem-solving heuristic - the case of Porters diamond. European Journal of Marketing. 33 (7/8), 736-745. Rajan, K.S., & Pangarkar, N. (2000). Mode of entry choice: an empirical study of Singapoream Multinationals. Asia Pacific Journal of Management, 17, 49-66 Reuters. (2010). Brazilian billionaires IPO is bet on oil growth. Retrieved online 16 May 2010 from http://www.reuters.com/article/idUSTRE62C03B20100313 Roumboutsos, A., Nikitakos, N., Gritzalis, S. (2005). Information technology network security risk assessment and management framework for shipping companies. MARIT. POL. MGMT, 32 (4), 421-432 Wilson, Sons. (2010). Brazilian Port and Maritime Logistics Industry. Retrieved online 16 May 2010 from http://www.mzweb.com.br/wilson/web/conteudo_en.asp?tipo=17845&idioma=1&conta=44 Appendix Key – findings 1. The business environment in Brazil is conducive for Havila. 2. Brazil still has a protectionist attitude and hence local companies are preferred. 3. Under the circumstances, Havila should enter the country under joint venture. 4. Incorporating IT can help Havila achieve competitive advantage. 5. Several companies are offering tailor-made solutions to enhance internal effectiveness. 6. Implementing IT has certain risks which need to be taken care of. 7. Havila can outsource certain functions and services while keeping the core functions in-house. Read More