Maersk Shipping Company Strategic Management Analysis

Strategic Management Analysis of Maersk Shipping Company

Maersk Shipping Company is a largest global shipping company operating more than 600 ships, recording more than 23,000 bookings daily and 2.2million containers. Maersk can boast of 14.5% of market shares globally because their vessels arrive at ports every 15 minutes. Established in 1904, Maersk operates in more than 130 countries with over 110,000 employees. The company market capitalization was $27.6 billion at the end of 2015 fiscal year. Maersk facilitates the transportation of 14% of global seaborne containers coupled with Damco and APM Terminals, the company offers infrastructure with global demand for energy and global trade. The company offers different services that include Reefer Cargo, Verified Gross Mass, Special cargo, Dry Cargo, and Routenet. However, Maersk derives 40% of their revenues from container business. Despite the superior market advantages that the company has enjoyed in the last few decades, the global economic recession has affected Maersk profitability. For example, the company has recorded a rise in the employee turnover rate and particularly, Maersk has experienced five notable talent challenges. Out of 400 employees trained in a given year, 20% of them remain with the company after 5 years. A recent business problem facing the shipping industry has also affected Maersk business advantages.

A report by Economist (2016) reveals that the shipping business is presently in crisis. The collapse of Hanjin Shipping has brought a storm of collapse in the shipping industry. After the bankruptcy of Hanjin Shipping, the company ships were stranded at sea. The company left 66 ships carrying goods worth $14.5 billion at sea, and harbors globally. Even the Tokyo refused to allow their ships to enter their ports because of a fear of unpaid services. With stocks out of reach, many British and American retailers voiced their concerned about the problems of the Christmas shopping.

Similarly, out of the 12 biggest shipping companies, 11 of them have announced huge losses in their past quarterly financial reporting and several shipping companies are on the edge of bankruptcy. In Japan, NYK Line, Kawasaki Kisen Kaisha, and Mitsui OSK Lines look vulnerable. Some investors are recommending that these companies should merge to avoid the same problems similar to the South Korean Line. Even, France's CMA CGM, which is the third largest carrier records a net loss in September 2016. The Economist (2016) affirms that, the Maersk Line, the industry leader is forecasted to be in red at the end of the 2016 fiscal year having recorded a loss of $107 million within six months between January and June. The cumulative loss can reach $10 billion in the industry at the end of 2016 fiscal year.

According to Niamie, & Germain, (2014), "the shipping business environment is getting more unstable, competition is increasing, profit margins are decreasing, expected service quality is increasing and demand is becoming more uncertain".(p 2). The powerful forces that have affected the industry is as follows: First, there is a crisis in the world trade since 2008 /2009 financial crisis forcing the multinational companies to cut costs by building factories in the local markets. For example, GE (General Electric) manufactures their engine parts at countries that need them rather than shipping the parts from North America. Moreover, there is a gradual decline in the shipping rates because of the competitions. Since 2011, the shipping rates have declined. Moreover, the costs of sending the containers rates from Shanghai to Europe now costs half of what it costs in 2014 affecting the revenue of the Maersk. While the focus of the CEO of Maersk is to ensure that the company revenue continues to grow, however, the goal remains uncertain amidst of the contemporary uncertain market environment. A serious problem that Maersk Oil may face is that their production may be reduced by 50% in 2018 because the license to operate in the Qatar's largest oil field will expire in July 2017.

The company Annual Report (2015) shows that Maersk is recording a decline in revenue in the last few years because a demand for containers' services has reduced by more than expected in Emerging markets and Europe. In the container transportation, a low demand for containers led to a sharp decline in the freight rate in 2015. Maersk, needs to redesign its strategic map to achieve competitive market advantages.

2) What were they trying to achieve in their strategy?

Maersk Line is attempting to create a winning business, creating value and profitable growth. Moreover, the company intend to improve their ROIC (Return on Invested Capital) focusing on the capital allocation, executing the portfolio optimization, and performance management. Maersk also aims to increase the value creation of the shareholders growing their dividends in nominal terms. The ambition of Maersk was to deliver to top annual returns and well as recording 10% in ROIC. The strategy to achieve this objective is to increase the company market position of Maersk Line to achieve the leading position in the line of business. The strategy is by recording 5% points above the competitors. The company was able to fund their cash flow by recording the average returns of between 8.5% and 12.0% in ROIC. Maersk ambitious strategy is also to increase the company size, financial flexibility, global reach, talented employees, innovative drive and commitment to sustainability and safety.

3) What was their strategy?

Over the years, Maersk is executing a strategy to achieve a premium conglomerate in the industry by investing in the non-core asset and capital assets. The company strategy is to build premium conglomerate through performance management and portfolio management, clear financial strategy and discipline capital allocation. Typically, the company uses the global network financial flexibility, and skilled people to assist countries and customers creating their wealth. The company strategy is also by implementing the capital prioritization. Similar to other companies, Maersk relies on IT to deliver strategically and business initiatives in customer services, product and operational efficiencies. The company uses the IT to initiate the global booking using the innovation to achieve the global networking systems. Since the demand for Maersk services outstrips the supply, the company IT is exceptionally under pressure. The major bad news is that Maersk is not managing their information systems up to the expectation. Between 2009 and 2010, it took Maersk an average of 150 days to get value for its development pipeline showing that it was costly to deliver effective IT systems.

Additionally, Maersk has integrated the maritime technology to achieve competitive market advantages. The company uses the innovation to identify and fund project not linked directly to the company business units. Maersk has finalized the application of the RCM (Remote Container Management) where more than 250,000 containers have been equipped with the GPS, terminals, and 3G SIM Card. The goal is to track the containers at any part of the world. The Maersk shipping company also invested in digital capabilities and data analytics to modernize and optimize the process as well as improving a large amount of data. The company also continues improving transparency and quality of operation data, improving fuel efficiency, operational efficiency and voyage planning. In 2015, the company upgraded to the latest energy efficiency fleet technologies. Jadranka, Dora, Zrinka, (2015) identify the costs control as one of the major strategies of the Maersk Shipping. Typically, the company uses the cost control to improve reliability and greater flexibility. After the acquisition of P &O Nedlloyd and Sea-Land Company in 2006 and 1999 respectively, Maersk has been able to cut costs leading to a rise in income by 600% between 1997 and 2007.

Despite the aforementioned strategy that Maersk employs in achieving the competitive market advantages, Maersk is still facing challenges in increasing revenue. The company financial reporting at the second quarter of 2016 reveals that Maersk total revenue decreases by $1.7 billion which is 16% decline compared to Q2 2015. The major reasons have been due to 24% decline in the container freight rates. The Group net profit was $118 Million in Q2 2015 making the company record a ROIC of 2% compared to 2015 ROIC of 10.1%. Globally, the Maersk has recorded a lower rate in the demand especially from North America, Asia, Europe and Africa. Moreover, the intense competition in the maritime industry made Maersk record a loss of $ billion at the end of 2009 fiscal year, which was the first time in the history of Maersk. Between 2008 and 2009, the volatility of the shipping industry became evident.

4) What strategy would you recommend (what they could have done instead)?

Maersk shipping needs to develop a strategy to remain a leader in the shipping industry. Jadranka, Dora, Zrinka, (2015)

Reference

Annual Report (2015). AP Moller-Maersk A/S Annual Report. Maersk Group.

Jadranka, B. Dora, N. Zrinka, S. (2015). Cost Control Policy in Maersk Line. Economic and Social Development: Book of Proceedings: 125-132.

Niamie, O. & Germain, O. (2014). Strategies in Shipping Industry. A Review of "Strategic Management" Papers in Academic Journals:1-30.

The Economist (2016). Profits Overboard. The Economist Newspaper Limited.