the necessity of reinvention

If it’s a truism that necessity is the mother of invention, then strategy, by a similar token, must be a parent of re-invention.  This is never more so than in today’s oil &  gas market. 

We live in an ever-changing world, and these are increasingly turbulent times.  To survive as the world changes, we must change too.  But how to manage these changes? We obviously need to a have a strategy.  But to paraphrase von Moltke ‘no plan of operations extends with any certainty beyond the first contact with the enemy[1]’.  Therefore, to allow for this, we need to create a sustainable competitive advantage that can adapt to the vagaries of the market and the reactions of our competitors.

The entertainment industry provides several successful examples of this ‘re-invention of the franchise’.  The American singer-songwriter Madonna has shown an uncanny knack for predicting trends and reacting to what the audience wants from a mainstream hit.  The Batman series of films has endeavoured to retain the audience’s attention by changes in tone to match the zeitgeist of the era: from the late Adam West’s ‘kapow!’ Batman to Christopher Nolan’s more existential Dark Knight.

But how is this re-invention relevant to the oil & gas industry?  As an example, let’s look at the shipbuilding industry.  Shipyards are relevant to the oil & gas industry as they are a critical part of most deep-water developments.  They provide the podium (be it FPSO or semi-submersible) on which to place the production facilities.

Some time ago Michael Porter[2], along with Dong Sung Cho, looked at shipbuilding as a model of changes in global industry leadership[3].  They chartered the change in leadership of the world shipbuilding industry from America to Britain, through Europe to the Far East.

American wooden ship builders were predominant in the pre-1830s, their competitiveness finally undermined by the civil war in 1861. Britain became dominant with its early adoption of iron and then steel, along with the steam and then diesel engines.  Britain’s motivation was powered by the need to protect the trade routes of a sprawling empire.  Post second world war and it was the turn of other European yards to take the place of the Britain’s, as both Britain’s empire and its merchant fleet went into decline.

Also from the end of WWII to the late 1950s, getting ready in the wings, were the Japanese yards.  They were busy rebuilding the domestic fleet which the war had reduced from over 6 million gt to less than 0.6 million gt [4].  With this, the Japanese yards gained experience and credibility as shipbuilders.  Shipbuilding booms were caused by the Korean War (1950 to 1953) and later, in 1956, by the Suez and attendant Energy Crises.  These helped propel the Japanese into the world market.

By the 1960s, Japan led the way.  State sponsorship of inefficient yards led to the overbuilding of the 1970s.  A truly free market would have led to the bankruptcy and disappearance of shipbuilding capacity, but the market was anything but free.  The lack of freedom resulted from Japanese financial incentives, matched by the protectionist policies of the Scandinavian countries.  Japan wished to maintain its strategic capability in the East, and in the North the protection of the yards was to ensure ongoing support for the offshore North Sea oil & gas boom[5].

This all led to the depressed market of the 1980s, which shifted the focus to price competition, rather than on quality of build.  This allowed developing countries with cheaper, though less experienced, workforces, such as Brazil and Korea, to enter the international market.  The catalyst for Brazil’s growth was the ascension of Petrobras and the Brazilian oil & gas industry.  It was also the cause for its demise [6].  Korea, however, with a low-cost workforce and armed with technology from the Britain’s Scott Lithgow and Govan yards, could compete and could beat Japan on cost and schedule.  Korea took over as the leading shipbuilding nation in 1999, remaining ahead of Japan for the next 17 years[7].

Already, in his 1986 publication, Porter could see China advancing as a shipbuilding nation and, sure enough, China overtook Korea in the first half of 2010[8].

Porter’s study shows how failure to adapt to a changing market led to the demise of previously dominant players.  But where did their strategies go wrong, why were the changes missed or, worse still, how were these changes helped to prosper?

Transfer of technology, allied with a strategy of modernisation and fuelled by new ways of looking at the problem, can be seen to be a prevalent key to the changes of leadership in the shipbuilding industry.

Britain’s embracing steel and adopting construction of motor ships is an obvious tale of the impact of technology change.  But Japan’s technical ascent also tells an interesting story, given that it starts in Britain, travels via the US, before concluding in the yards of Japan.

British yards had already discovered the benefits of division of labour and modular construction methods[9], but had been stymied by unions and a wish to retain outdated methodologies.  America had none of these problems.  As a response to the Battle of the Atlantic in the Second World War, Henry Kaiser, who owned the Oregon shipyards, took the all-welded, block construction methods and created the process, and the management techniques, which saw the revolutionary change in construction of the Liberty ships.  This allowed ships to be built faster than German U-Boats could sink them and in so doing helped break the German blockade of Britain.

At the conclusion of the Second World War, New York’s National Bulk Carriers (NBC) looked for facilities to build large iron ore carriers to service the Venezuela to the USA trade route.  NBC’s yard in Norfolk, Virginia, was too small, so a worldwide search ensued.  NBC settled on leasing the former Kure dockyard in Japan, and Elmer Hann, NBC’s head of engineering, went to supervise.  Hann was the ex-general superintendent for the Kaiser Shipbuilding Corporation, and therefore he took everything learned at Kaiser back to Japan.

By allowing the transfer of this knowledge, NBC set the way for Japan to rapidly progress their shipbuilding capability.   Reporting to Hann, as Chief Engineer, was Dr Hisahi Shinto.  In 1961, the Kure yard lease expired and it became part of Ishikawajima-Harima Heavy Industries (IHI).  Shinto remained with the yard.  By 1964, Japan was producing 40% of the world’s total shipbuilding tonnage.  When Shinto retired from his role as President of IHI in 1979, it was one of the leading shipyards in the world [10].  But by the late 1970s Japan’s predominance was on the wane.

In the late 1960s a Japanese delegation visited South Korea to examine the feasibility of constructing heavy industries in the region (the 1969 Akazawa Report)and concluded that it was a non-starter.  In response, the Koreans looked to the Britain for help in developing its industrial capability, in particular its shipbuilding industry.  Hyundai Heavy Industries (HHI) paid $1.7 million to A&P Appledore and Scott Lithgow, and in return got dockyard designs from Appledore, ship designs and operating instructions from Scott Lithgow, and expatriate European shipbuilders to work for HHI for the first 3 years of operation[11].  In effect, they bought the lessons learned from the design and construction of the Britain’s highly successful SD14 cargo ship[12].

Japan, however, did not take up the challenge of further modernisation.  Despite Japan’s adoption of the Kaizen management approach, and its philosophy of continual improvement (the development of which also dates to American post-war involvement as part of the Marshall Plan), the government rested on its laurels and focussed on internal issues.  There was a reduction in shipbuilding capacity in an attempt to limit competition between Japanese shipbuilders, and in so doing Japan gave away their lead to South Korea.

Other players, those that clung to their core shipbuilding activities and technologies, have now all but vanished.  Shipbuilding in the US is kept on life support by the Jones Act, giving them a protected market, whilst British large-scale shipbuilding occasionally twitches but is all but dead[13].  Even the Royal Fleet Auxiliary vessels are now being built in South Korea[14].  In Europe survival has relied on a move to a global segmentation strategy, where construction is focussed on more complex and complicated ship types.  Passenger vessels out of Italy is an ongoing example[15], LNG carrier construction was another until France and Finland lost their predominance to the Korean yards[16].

Part of this clinging to superseded ways of working, and missing the prevalent changes, was due to yards being blinded by their performance.  This mis-focus stopped them seeing the bigger picture.   Those that did see a broader future, rather than just relying on constant improvement of existing production, have survived and in many cases prospered.  Japanese shipbuilders have diversified into  becoming integrated heavy machinery corporations. For example,  Mitsubishi Heavy Industries, MHI, whose products now include aerospace components, air conditioners, aircraft, automotive components, forklift trucks, hydraulic equipment, machine tools, missiles, power generation equipment, and space launch vehicles as well as ships[17]).  In a similar manner, Hyundai Heavy Industries, although subject to major reorganisation in 2011 and 2017[18], has expanded its interests to include car manufacture, construction, retailing, finance and electronics.

A later work by Porter (his 1996 ‘What is Strategy’[19]) highlights this difference between Strategic Positioning and Operational Effectiveness.  According to Porter:

OPERATIONAL EFFECTIVENESS means performing activities better, i.e. faster, with fewer inputs and defects than rivals.

Benchmarking against rivals to measure effectiveness leads to competitive convergence.  As each player chases, another the more indistinguishable companies are from one another.

STRATEGIC POSITIONING attempts to achieve sustainable competitive advantage by preserving what is distinctive about a company.  It means performing different activities from rivals, or performing similar activities in different ways.

We can see where Operational Effectiveness has given sufficient edge to shipbuilding companies to gain an advantage (e.g. the US’s ‘Fabulous’ Kaiser yards with their Liberty ship construction methodology), but has failed to be sustainable.  Whereas the strategic decision to diversify, taken by the likes of MHI, in Japan, and HHI, in Korea, show how acceptance and strategic management of change, twinned with an appreciation of the bigger picture, can lead to growth not just survival.

But what of the Chinese, now one of, if not the, leading shipbuilding nation?  In a previous io Powerful Thinking article[20], we looked at the current shipbuilding market.   We commented on the strategic reorganisation of shipbuilding in China, with the consolidation of yards and the creation of China Shipbuilding Industry Corporation (CSIC).  In these changes, we can see the Chinese yards’ awareness of the need for strategic positioning.

In support of developing this strategy io has been in discussion with Chinese yards, and have successfully completed exploratory workshops.  We have been looking at both the oil & gas construction industry and its market holistically, and are now working with our Chinese colleagues to take the innovative construction methodologies they have created, in order to develop a broader, unique, and sustainable advantage.

To find out more, contact us at hello@iooilandgas.com.

[1] The full quote is “No plan of operations extends with any certainty beyond the first contact with the main hostile force” from Field Marshall Helmuth Karl Bernhard Graf von Moltke’s “On Strategy” of 1871. The precept is based on the belief that “The tactical result of an engagement forms the base for new strategic decisions because victory or defeat in a battle changes the situation to such a degree that no human acumen is able to see beyond the first battle”. Moltke’s observation is usually incorrectly attributed to Dwight D. Eisenhower

[2] Michael E. Porter is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at the Harvard Business School and he was one of the founders of the consulting firm The Monitor Group (now part of Deloitte).

[3] Porter, Michael E.  (1986), Competition in Global Industries, Chapter 17: Dong Sung Cho & Michael E. Porter Changing Global Industry Leadership: The Case of Shipbuilding, HBS Press.

[4] Vogel, E.F. (1984), Shipbuilding: High Priority Basic Industry, Harvard University Press

[5] See Stopford, M., (2008), Maritime Economics, Routledge, London

[6] See Phillips, D., (2017), In Lula’s Shadow, Brazil’s Shipbuilders Struggle to Right Themselves, New York Times

[7] Gourde, S (2017), Shipping Half Year Report – any Better This Year? Clarksons Research, London

[8]Staff Writer (2016), Chinese Shipbuilding, www.GlobalSecurity.org

[9] See Burton, A, (2013), The Rise and Fall of British Shipbuilding, The Histrory Press, UK

[10] Chirillo, L.D., Chirillo, R.D., (1986) The History of Modern Shipbuilding Methods: The U.S.-Japan Interchange, SNAME Journal of Ship Production

[11] Amsden, A., (1989), Asia’s Next Giant: South Korea and Late Industrialisation, New York: Oxford University Press

[12] See Lingwood, J. (2004), SD14 The Full Story, Ships in focus Publications, UK

[13] See Cheng, Y (2017), Shipbuilding Capacity Consolidation: China Presses On, Clarksons Research, London

[14] DSME was selected as the preferred bidder for the MARS tanker project in February 2012. The UK Ministry of Defence (MOD) awarded a £452m ($715.8m) contract to DSME in March 2012, to construct four MARS tankers for the RFA.  In April 2012, BMT Defence Services, a subsidiary of BMT Group, was selected to provide design services for the Tide Class tankers under a subcontract with DSME. (Source: naval-technology.com)

[15] See www.fincantieri.com

[16] See The McIlvaine Company (2017), LNG tanker Fleet, Appendix L, www.mcilvainecompany.com

[17] Source: Wikipedia

[18] Vishnoi, A., Park, K., (2017) Hyundai Heavy’s $11 Billion breakup Paves Way for More Deals, www.bloomberg.com

[19] Porter, Michael E., (1996) What is Strategy? Harvard Business Review

[20] io oil & gas consulting, (2017) shipyards and the rise of the phoenix, www.iooilandgas.com