Essay on Shipping Business
Today, shipping business keeps progressing and evolving fast under the impact of the progress of new technologies and trade. The shipping industry faces the stiffening competition as one of the main driving forces that stimulates companies to expand their business and focus on the integration, either vertical or horizontal. The main point of the integration is the enhancement of the efficiency of the organizational performance and improvement of the competitive position. These goals may be achieved through the higher efficiency of the organizational performance, which is achieved through the better allocation of resources, diversification of services and their higher quality or introduction of innovations that can put a shipping company into an advantageous position in the highly competitive business environment. Therefore, the integration, either horizontal or vertical becomes one of the main issues concerning the further business development of companies operating in the shipping industry. In such a situation, the question that begs is whether vertical or horizontal integration is more preferable and better for companies operating in the shipping industry. In fact, there can hardly be the universal answer since each company should take into consideration its own goals, resources, marketing strategies and other issues, but the vertical integration seems to be more prospective in light of the current economic development of the world and shipping industry in particular. In actuality, the shipping industry faces the urgent need to enhance the vertical integration to meet the current marketing demand and customer needs and expectations and to enhance the position of companies operating in the industry in their competitive struggle.
Background of shipping business
The globalization of the world economy and trade are the major trends in the development of the modern economy. Globalization contributes to the acceleration of international trade that leads to the growing demand on shipping services because the growing trade requires more shipping since goods, materials and supplies have to be delivered in time and to the target destination worldwide. Shipping services are essential for business, consumers, non-profit organizations and government agencies. Virtually all of them need shipping services.
The consistent extension of the shipping distance leads to the change in the shipping industry and services offered by shipping companies. In this regard, the importance of the introduction of technological innovations, to track the shipping, for example, emerges because customers want to be certain in the in time delivery of their items. To meet those wants and needs, shipping companies tend to the closer cooperation with companies operating in other industries to increase the effectiveness of their performance.
Vertical integration
Vertical integration is the process in which several steps in the production and/or distribution of a product or service are controlled by a single company or entity, in order to increase that company’s or entity’s power in the marketplace (Khor, 2011). In fact, the vertical integration implies the expansion of the market operations and presence of the company in different industries. In case of the vertical integration, the company tends to acquire or merge with suppliers, for example, or develop new business entities to enter new segments or new markets.
Researchers (Peters, 2012) distinguish different types of vertical integration. The backward integration is the example where in the company tries to own an input product company. Like a car company owning a company which makes tires (Gomory, 2012). In such a way, the company shifts down in the production and business line to expand its market and business operations. The forward integration is the vertical integration, where the business tries to control the post production areas, namely the distribution network. Like a mobile company opening its own Mobile retail chain (Barry, 2004). Finally, the balanced integration is a mix of the above two. A balanced strategy tends to take advantages of both the worlds (Barry, 2004). The balanced integration allows the extensive expansion of the company to the extent that the company tends to create the full business cycle. For example, a shipping company can build the full business cycle from supply of materials and resources required for shipping to the provision of means of transport and selling and probably production of goods, which the company ships to customers.
The vertical integration helps companies to hold a stronger competitive position, if the interaction with companies operating in other industries is needed. This strategy is particularly effective when the competition in the industry is tight and companies face difficulties with their horizontal extension. At the same time, the extensive vertical integration may raise a risk of monopolization of the market, but such risk is lower compared to the horizontal integration, because vertically integrated companies operate in diverse industries.
Horizontal integration
Horizontal integration (also known as lateral integration) simply means a strategy to increase the market share by taking over a similar company (Mohrman, 2012). This take over / merger / buyout can be done in the same geography or probably in other countries to increase the company’s reach (Mohrman, 2012). The immediate advantage of implementing them is to: have economies of scale; expand knowledge and capabilities; increase market (and profits); own the whole life cycle so that you can change it the way required; reduce competition (by merging with them rather than competing); provide better services (Mohrman, 2012).
The horizontal integration contributes to the increasing market share of the company and helps to take a stronger position in the market. The market expansion occurs through the integration, which involves the acquisition and merger of companies and units within the same industry and market. For example, in case of the shipping industry, an air transportation company acquires or mergers with other air transportation companies to enter new, international markets and expand its market share globally.
The horizontal integration in the shipping industry
The horizontal integration in the shipping industry may involve the integration of the transportation units, such as units providing automobile transportation services, train transportation services, sea transportation and air transportation. Such integration is extensive and consistent but, still the market expansion occurs within the shipping industry solely and the company does not shift toward new markets as is the case of the vertical integration. Instead, the company focuses on the most prospective segments or markets, if the company expands its business internationally, for example.
Essay on Shipping Business part 2
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