Port Management and Logistics

Topic 6: Establishing a port’s competitive edge

Learning Outcome: Discuss the benefits of establishing a port’s competitive edge.

Basic Concepts:

Ports are a nation’s links to prosperity. Since a chain is only as strong as its weakest
link, a port’s constitutional weakness within a supply chain will eventually affect a
country’s economic sovereignty.

In the twenty-first century’s rapidly growing and ever-evolving global trade and
transport,it seems difficult to clearly define the difference between a port’s absolute
advantage, as opposed to a comparative advantage or a niche.

Absolute Advantage is based on higher workforce productivity. It enables a

nation or a port to offer a specific commodity or service at a cheaper price on
the basis of increased labor efficiency. In port management, it suggests that the
port can either:
a. utilize the same amount of labor compared to other ports, and
deliver a greater output, or
b. employ a lower amount of workers and be equally productive to other ports
that offer similar services though they employ more workers

Comparative Advantage focuses on lower opportunity cost. It establishes

the capabilities of growth and profitability from industrial and commercial
specialization. Opportunity cost is the value of a choice—in terms of service
or production—that must be relinquished so as to engage in a priority production
that will potentially bring more profit. Corporate strategies and the
decision-making process of port managers are based on measuring the opportunity
costs of two or more options and comparing the benefits of each option
at a micro and macro level.

Market Niche, finally, is a specialized market segment; a unique service or

commodity that is offered to a market that has an unmet demand. Although a niche
strategy is a widely recognized way of maximizing profits, there is no long-term
guarantee of market share retention or sustainable success.

Competitive Advantage resembles the benefits of a comparative advantage and

a market niche. It positions a company as an industry’s leader, in terms of either
lower cost or product differentiation advantages. Michael Porter has recognized
two principal kinds of competitive advantage:
(a) cost advantage, where the company is in a position to offer the same
products or services as its competitors, yet at a decreased cost, and
(b) differentiation advantage, when the company creates superior advantages
or value within their products or services that surpass those of their
competitors.

A nation’s economic and business objectives can be reshaped when it learns to

develop, identify, and evaluate the comparative and absolute advantages or niche
markets connected to its ports and supply chains. Once a port’s advantages are
recognized, it may prompt other regional ports to diversify and therefore grow in size
and influence, as opposed to consuming their resources in regional competition.

A port may seek for an absolute advantage through higher productivity, may gain a
comparative advantage through pursuing lower opportunity costs, or enter a niche
market through service differentiation. This means that a port can still be better, be the
best, and be different, on the basis of its geography, socioeconomic and legal factors,
demography, markets, and all of its factors of production.

The ports’ matrix reflecting potential niche markets and advantage areas could be
based on the following criteria:

a. Geographic profile: infrastructure and interconnectivity profile, for example,

island-nations, coastal areas, and landlocked areas
b. Regulatory framework: safety, security, environmental laws, and so on, strict or
lenient
c. Legal and governance framework: tax reform/incentives, government subsidies,
liability, social responsibilities
d. Demographic profile: gender; age, ethnicity, education, employment status,
income range, and socioeconomic structure of population
e. Financial and economic framework: banking and financing systems; trade,
manufacturing, transport incentives; balance of trade; currency strength;
marketbased economies versus command-based economies; national debt;
consumer spending; inflation
f. Factors of production—cost-based profile: land, labor, technology and
entrepreneurship.
g. Factors of production—innovation profile: technology, entrepreneurship, labor
(e.g., innovation vs. brain drain)
h. Commodities profile: raw materials, energy, value-added goods, commodities
and factors of production
When economic theories are extended to fit the principles of port management, it
becomes evident that a port can achieve advantage, specialization, or niche through
four principal paths:

1. Delivering services that are difficult to supply.

- As an example, Port of Anchorage is Alaska’s lifeline, handling over 90%
of then state’s cargoes. The significance of Alaska’s ports is increasingly
highlighted as a result of Alaska’s vast oil, gas, and shale gas resources.
Ongoing scientific researches and plans by national and local authorities,
USCG, the US Army Corps of Engineers, and so on, aim at the extraction
and transportation with the Port of Anchorage as a focal logistics point.

The recent economic and energy developments require that Alaska plays
a leading role as a national and global energy exporter in the decades to
come. The constraints the energy industry and the port face include
weather and geographic restrictions, inadequate infrastructure, difficulties
in securing the high levels of investment required through public or the
private sector, and developing innovative engineering and architecture
designs that would fit the Arctic, sub-Arctic, and Alaskan inland waterway
particularities.

Hence, Alaska’s comparative advantage (or niche) will be achieved under

the condition that a highly strategic and innovative energy and transport
plan will be developed to encompass port functions, inland waterways,
and global networks.

2. Innovation
An innovation pertains to novel ideas that offer increased value and usage to a
company’s, or nation’s factors of production, that is, labor, technology,
processes, services, and products. For a method to be considered as innovative,
it should offer a novel perspective of service or product that exceeds a simple
“improvement.”

3. Cost minimization
A port’s costs consist of direct and indirect costs.
  Direct costs are allocated forfinancing the input of a specific task, product
or service, salaries for technical work, port labor, research and
development, and transportation expenses directly allocated for existing
business.
 Indirect costs include the overhead (administrative and facilities) costs,
administrative salaries, maintenance, procurement and spare part
purchases, and traveling for marketing and future business.
Cost minimization in a capital intensive industry such as the maritime
industry should by no means be achieved at the expense of quality, reliability,
and productivity.
 Capital cost. A port’s capital costs are typically estimated by the
investment price, that is, cost of assets such as buildings, storage
facilities, equipment, and so on.
 Energy consumption. The energy consumption factor is a critical
expenditure for ports and terminals, as the cargo handling equipment,
infrastructure, and superstructure are heavily dependent on energy costs
and fuel efficiency. Costs also depend on other parameters such as
maintenance costs, life expectancy for the equipment, and so on.
 Technological performance. A port planning strategy is heavily dependent
on technology and machinery; hence, technological performance,
availability, and dependability warrant a port executive’s serious
consideration.
 Labor performance. Although shipping is a global industry, costs typically
vary at the regional, national, and local levels, based on factors such as
national balance of trade, currency strength, inflation, cost of labor and
unemployment, national debt and taxation, consumer spending, and so
on.

4. Through efficient allocation of resources

Finally, a port can achieve advantage, specialization, or niche through optimum
allocation of resources, which implies that diversification is promoted in order to
eliminate internal competition.

Sustainability is a corporate juggle of staying power and prosperity and has reasonably
become one of the most euphonious words in the port managers’ ears, as what it really
implies is “sustainable growth.” It is one of the stronger indicators of economic, quality,
and innovative influence, and because of this reason, it is found in most of the ports’
web sites, port plans, and annual reports.
Economic growth is perceived as a nation’s or industry’s capacity increase over time
and the ability to accelerate the output. The measurement of economic growth is either
in nominal terms, where inflation is included, or in real terms, which provides for inflation
adjustments.

Economic stimulus on the other hand pertains to a nation’s or the port’s capacity to
trigger financial growth.

While governments achieve growth by increasing government subsidies and

implementing currency, financial, or fiscal policy reforms, ports and entrepreneurs
monitor and evaluate growth in two distinguished categories:
1. organic or physical growth
2. strategic or long-term planning growth.

Organic or physical growth reflects a port’s tangible and short-term growth. This is a
tactical growth type that in military terms resembles a battle (as opposed to a port’s
strategy, which is the war itself). It is more easily recognizable by the industry and the
majority of the media and the communities, because of its tangible, short-term, and
nonconfidential nature: it is practically easier to measure a port’s expansion in terms of
assets, cash flow, investments, and current business compared to a strategic alliance of
the next category, whose long-term benefits and initial confidential process cannot be
easily assessed.

Strategic, long-term planning serves as a ship’s rudder: focusing on the port’s long-
term vision helps the organization materialize its short-term plans. In military terms,
strategic growth depicts the war itself. It is established in confidentiality and entails long-
term plans, and its benefits, such as its revenue, may be spread over numerous
activities and time span, making it hard for the outsiders to measure and evaluate them.
Risk analysis is a technique used to identify and assess factors that may jeopardize
the success of a project or achieving a goal.

This technique also helps to define preventive measures to reduce the probability of
these factors from occurring and identify countermeasures to successfully deal with
these constraints when they develop to avert possible negative effects on the
competitiveness of the company.

Risk analysis is rather difficult to measure, owing to the practical inability to measure
the possible likelihood and impact of a complex risk. Elements such as time, resources,
and human error make the risk management process rather complicated. In
mathematical terms, risk magnitude equals the probability of incidence multiplied by the
event’s overall impact:

Risk analysis consists of three major components, that is,

1. Risk management,
2. Risk assessment, and
3. Risk communication.

 three principal elements of hazard: (i) probability, (ii) consequences, and

(iii) impacts.

Risk management measures, monitors, and controls the larger decision process: it
brings together risk assessment methodologies with resolutions on how to tackle the
risk.

Risk assessment is a methodical practice for identifying and assessing potential risks
and measuring the impact or hindrance in achieving the port authorities’ objectives,
favorably or adversely.

Risk communication is a process of communicating potential losses and how they

might be prevented. This can include warnings, disclosures, and two-way
communication aimed at managing risk.

Typically, the maritime industry distinguishes risk into four major categories:
1. Strategic, pertaining to the port’s values and long-term goals, which include
company’s reputation, innovation, differentiation, and internal and external
competition, as well as the entrepreneurial aspects of negotiations, new business
and old business retention, ability to meet contractual deadlines and obligations,
customer loyalty, business cancellation, and so on.
2. physical and regulatory compliance risk, focusing on occupational health, safety,
security, social responsibilities, and environmental risk. This risk segment
encompasses the physical threat of natural disasters and environmental
hazards, as well as the regulatory compliance, emergency planning, contingency
planning, and response.
3. Operational, focusing strictly on the port’s operational efficiency, technical, and
maintenance reliability risk, as well as encompassing the efficiency of the entire
multimodal transportation and the supply chain, such as hazards related to
infrastructure accessibility and connectivity, time management, traffic control,
bottlenecks, warehousing and storage availability, logistics integration, and so
on.
4. Financial, which entails capital investment, banking and mortgage, currency,
inflation, assets’ sale and purchase, budget allocation and control, the economic
 aspects of the factors of production, cash flow, liquidity, taxation, and
so on.

The Risk Assessment Methodologies

The ability to grasp the extent and dimensions of risk is always dependent on internal
and external factors affecting the port, the economy, and the market’s volatility, which
typically are unforeseen. Nevertheless, risk assessment offers sufficient feedback to the
port management in order to pinpoint the elementary risks, prioritize the risk
management resolutions, and formulate the port’s strategy.

The methodologies to assess risk are categorized in three broad segments:

1. Qualitative risk assessment, which is based on statistical facts and figures. Risk
is hereby classified as high, low, or medium. The limited sources of data
gathered generate a rather biased or insufficient numeric and empirical basis.

2. Semiquantitative risk assessment, where a mathematical risk appraisal is

calculated by using a combination of qualitative and quantitative data.

3. Quantitative risk assessment, which needs calculations of two risk elements:

 the magnitude of the potential loss, and
 the probability that the loss will occur.
This assessment type offers numerical risk expressions and warnings of
 the potential risk hazards and uncertainties.

The element of risk is present in every business transaction. In fact, the maritime
industry is considered as a high-risk, capital-intensive industry, together with all global
trade and transport companies. Although port authorities are risk prone by nature, to
some extent, they are capable of minimizing the repercussions, because of government
support, that is, subsidies, and state, or regional backing, that is, European Union
Funding.

The private sector, on the other hand, may be more exposed to risk. In particular,
shipping companies that have penetrated multiple markets may be exposed to risk to a
higher extent.

Successful companies in the early twentieth century had a life span of approximately
60 years, whereas this figure decreased to 25 years in the last decades of the twentieth
century, 15 years in the first decade of the twenty-first century, and only 7 years in the
second decade of our century.

A company’s longevity is the strongest possible marketing tool, as it verifies the

company’s successful strategies in risk assessment, forecasting, investment strategies,
cash flow, alliances, and so on.

References:

1. Port Management and Operations by Maria G. Burns

2. https://en.wikipedia.org/wiki/Risk_analysis_(business)
3. https://simplicable.com/new/risk-communication