Business strategy and IT strategy of COSCO As the president of COSCO once said, “container shipping industry is traditionally low-margin, highly competitive and risky market. ” Actually, this is the case. At the dawn of COSCO, with only a small fleet, it is destined that the only way to survive is to grow as large as possible to avoid being acquired by its peers. And now we have to admit that COSCO basically did a really good job when it comes to its way of growing.
This is resulted from its state-owned business background, the external economic environment and the business strategies it employed. The first two factors allows COSCO to gain more competitive advantages domestically by acquiring some privileges before China’s joining WTO, such as financial support from the government and entry to some industries which were not accessible by the foreign capitals. All these help COSCO to grow rapidly under the shelter of the government. But basically, COSCO’s success lies more in its business strategy, especially after China’s entering WTO.
Without those privileges, COSCO had to compete based on its own competency. Actually, we tried to find out the stages according to the times dimension and finally we get the point of year 2002 when COSCO established COSCO LOGISTICS, which indicated a critical change in COSCO’s business strategy. At the meantime, the top management also gave out the vision stating that “COSCO hoped to be known as a shipping-based logistics company by 2010”. COSCO managed to transfer its original image of a shipping enterprise to a brand new one as a global logistics company.
This strategic-level change established the basis for COSCO’s near future engagement in the global competition with major shipping enterprises like Maersk-Sealand. Actually, this is the mega-trend for almost all the major shipping companies throughout the world. Focusing on shipping business only will absolutely lead to the limited growth-rate of an enterprise, just because the profit for the shipping industry is rather low and dramatically fluctuated under the pressure of oil price, severe competition and changeable global economic environment.
The joint force of these factors finally made some companies struggled to find another way to gain steadier and greater profit. And naturally, they figured out the method of vertical integration. That is, in addition to shipping business, investing in logistics and gain more sections of the whole value chain. Instead of rely on the logistics agent to feed them, they established their own logistics companies to take the place of these agent. Compared with shipping business, logistics itself is of higher added value, which is desired by the shipping enterprises.
As for COSCO, vertical integration is also a good method to employ when facing the global competition. Stage1: DIVERSIFICATION This stage refers to the time before the establishment of COSCO LOGISTICS 2002. Like other shipping enterprises, COSCO used to play a role of shipper in the whole value chain of this container shipping industry, which means COSCO mainly focused on its port to port transport and paid no attention to set up its own logistics systems. This is actually the early days for COSCO.
But actually, in running the business, COSCO found that it was quite difficult to gain enough cash flow to guarantee the investment in various kinds of projects, which was natural for this industry. And the solution worked out by COSCO was diversification. And COSCO really did a very good job. Figure talks. By 1993, COSCO’s inland business, such as construction, finance, etc, composed of 24% of the total income of the group. And the figure rose to 39% in 1994.
By the year of 1996, the total revenue made from these businesses has exceeded 40% of the total. From these figures, we could reach the conclusion that COSCO’s inland business created a both solid and supportive basis for its main business. This actually established basis for the competitive advantages to COSCO. Besides the low margin, container shipping was also a highly-competitive market, in which all the companies involved, no matter big or small, spared no effort to enlarge the market share.
In the late 1990s, there was a wave of business merger. Well-known were the merger of Denmark-based Maersk Line and US-based Sea-Land’s container business into Maersk-Sealand in 1999 in the wake of the mergers of P&O with Nedlloyd in 1996 and NOL with APL in 1997. In this way, independent shippers such as COSCO confronted big threats. At that time, the goal for COSCO was to become one of world’s best ocean shippers. As has been mentioned, COSCO achieved this through its diversification strategy, which was to diversify its composition of assets.
So far, in four decades of development and reforms, COSCO had formed its shipping business as the main structure and some inland business matching the pattern of diversification. IT strategy at this stage: Attempt in applying IT to reduce cost First step in EDI (electronic data interchange) COSCO Group was mainly engaged in ocean shipping. In dealing with the departments including banking, customs, ports, terminals, commodity inspection etc, the transmission of information played an important role. Paper-based interchange of data would make the job unexpectedly heavy.
Therefore, in the early 1980s, COSCO started the EDI research, which had been commonly used in China as a standard. After several years’ attempt, COSCO set up its EDI center and EDI global network, which covered the network of its shipping agents, realized the EDI messaged exchanges with port terminals and customs, as well as connected its Chinese and foreign offices. Independent computing centers Early in 1988, Guangzhou Ocean Shipping (General Cargo) put forward the idea of adopting new financial software and soon became the general system for all the five subsidiaries.
But there was a lack in information transmission between different companies as well as the connection between financial system and other functional systems. However, with the decade’s development of scale, real asset, new business etc, a large number of new subsidiaries were established, which used their own preferable financial software. Hence, the disunity of format and statistical method made the headquarters an information “solitary island”. Stage2: VERTICAL INTEGRATION and FOCUS
This refers to the time after the establishment of COSCO LOGISTICS 2002. According to COSCO’s slogan, “to establish a shipping-based logistics company by 2010”, the key words lie in “shipping-based” and “logistics company”, which has been discussed at the beginning of this section. We sensed that COSCO could achieve its business advantage in the following ways.
- Strengthening the shipping business
- Modernizing the logistics capacity
- Optimizing the inland businesses
- Improving the network