Opportunities and value

“What is a ship?” asked Dr. Helmut Sohmen, Chairman of BW Group, in a speech from 1985 titled “What bankers always wanted to know about shipping but were too afraid to ask.”

Is your ship an asset or a liability? That might be determined by your strategic decision making, technical flexibility and operational efficiency.

Sohmen ended the humorous address by saying nothing he had said was terribly novel, but he made some remarks that are relevant to this issue of Generations:

–"In financial terms, a ship is an asset when it is trading and a liability when it is idle.” 
–“The financing of ships actually means not the financing of the hardware, but of the ship’s employment, both actual and potential.” 
– “The more dedicated a ship is to a particular trade, the greater the difficulties of adjustment in a market downturn or in a changed situation.”

These statements point to flexibility and operational efficiency over a vessel’s lifetime as the keys to profitability, our theme for this issue.

So it is logical to assume that shipping markets should have excess capacity most of the time, and that high freight rates are the exception rather than the rule. As maritime economist Dr. Martin Stopford told us during the interview featured on pages 6 to 11, market cycles are what help separate the successful shipowners from those who only pretend to be. The winners build both fleets and organizations that last, serving their customers in both good times and bad. They are simply better at managing their opportunities, beyond times where rates are good and everyone makes a profit. 

Profit is “sales revenue minus cost” if we stick to the accounting definition of profit in its simplest form. Economic profit, however, is defined differently. It reflects the total opportunity costs (both explicit and implicit) of a venture to an investor.

A shipowner who looks at his opportunity cost before defining profit would be concerned about alternative technologies with payback through reduced voyage costs. He would also think of possible lost revenue when compared with a competitor who made a smarter choice.

His accountant would be happy as long as the ship was not operating “in the red”, while the economist would advise him to look carefully at all the options before making a choice on how to make money. While still maintaining a profit margin, the marketing specialist takes a third approach: look for opportunities to increase the topline figures.

Harvard Business School professor Das Narayandas defines marketing as: “Create value and extract a fair part of it” in a book titled Business Market Management: Understanding, Creating, and Delivering Value, of which he is co-author.

One of the basic principles of marketing is expressed in the formula: 

Value = Perceived benefit / Price

This puts price where it belongs: second to benefit – in the eyes of the customer. Benefit could come from increased reliability or convenience, or it could be a new freight product. But where is the benefit? Is it in the technology, hardware component, ship design, engine control or fleet deployment software? Or is it in the performance of the overall logistics operation? That depends, of course, on the perspective of the decision-maker, since benefit is only of value when it is understood. “Perceived benefit” indicates that the value created depends heavily on how successful a business is in communicating the benefits of its products.

Opportunity cost

The new Oxford American Dictionary defines opportunity costs as "the loss of potential gain from other alternatives when the one alternative is chosen". So the economist asks: What else could I be doing with my money and assets?
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