Value-Driven Business Development

By Erik Knop, a business development specialist and analyst within the international Industrial Bulk Shipping Industry.

Business Development is commonly thought of as a sales prospecting process, to go forth and win over new customers. It is a valid view of the term, but Business Development has the potential to be something more, not only “shaking the trees” for fruit to fall in your lap. In the current economic climate, organizations can gain in this area by exercising their collective creativity in developing their business.

Consider the word Development; fundamentally the goal should be to develop, or improve the Business. How you achieve this objective may take you down different paths, all equally valid and potentially successful. The term also implies that key strategic decisions on what business the company will undertake, has been made and it has selected its’ strategy to achieve a sustainable competitive advantage.

An expanded view of Business Development considers it an umbrella term for a range of tactical initiatives and roles, that aims to increase the value of the business, and which are consistent with the organization’s chosen strategy.

Business Development Objectives
If a successful Business Development effort has as its focus to increase the value of the business, then revenue growth without consideration for profitability could be a poor tactical choice. In contrast, non-sales projects such as cost savings and process improvement initiatives may have a significant positive impact on business value. It is also an area where the ingenuity of the organization can be engaged in unlocking business value, even in the face of poor market conditions.

In the context of Business Development efforts, assuming a constant level of capital employed – one option is to look at Operating Earnings and Risk Management; two areas with the potential to increase business value. The reason being, an increase in operating earnings for the same degree of total risk or a reduced degree of total risk for the same level of operating earnings should have a positive effect on company valuation.
The objective of Business Development would then be to optimize the business in the context of these two areas.

Business Development in Shipping
Business Development within the Shipping Industry depends in part on each company’s business model; a reflection of the entrepreneurial decisions and the degree of risk accepted by its key investors.
Whether the company choose to act as a tonnage provider, as an “asset-player”, or as a freight service provider, its Operating Earnings are derived from freight- and chartering revenues in one of the most competitive markets in the world. Most shipping companies act as price-takers except in conditions of extreme shortage of tonnage. The choice of business model will in turn have an effect on the volatility of operating earnings, as a long-term tonnage provider will experience relatively stable operating earnings in contrast to a company putting its ships in the spot market.

As anyone in the industry can attest to, Shipping has the potential to make or break fortunes within a short time. To some extent though, “Shipping is as risky as management make it” (Stopford 2009) and by its choice of business model and financing, investors have some discretion in the level and type of risk accepted.
While volatility is often used as a proxy for risk, it should be noted that risk management involves several metrics, including volatility.

The degree of total risk (Degree of Total Leverage - DTL) faced by the organization is a function of business risk (Degree of Operating Leverage - DOL) and financial risk (Degree of Financial Leverage - DFL):
- Business Risk Shipping is exposed to substantial market risk thanks to the volatility of freight markets. Other business risks include political risk (think of Somali pirates as one example), non-financial counter-party risk, technical and physical risk.
- Financial Risk A function of the financing of the company and the impact of fixed-cost financing, as a higher leverage ratio will increase the degree of financial risk. Other areas of concern include exposure to foreign exchange risk, interest rate risk and counter-party risk.

Corporate- vs. Commercial Business Development
Business Development picks up the baton from the Strategic Management Analysis, and in the implementation involves several functional areas such as Marketing, Operations, Finance and Corporate. However, we can in broad terms distinguish between Corporate- and Commercial Business Development:
- Corporate Main initiatives in this category will include corporate transactions, financial risk management, key asset acquisitions or disposals.
- Commercial Initiatives in this category will form integral parts of the Commercial Management and Operations Management. Within this category we find initiatives such as revenue growth, process improvement, operational risk management and cost cutting.

Corporate Business Development
Ships can be bought, sold and employed without a substantial organization to analyze the decision in great detail. At some companies, Corporate Business Development may be rolled up in the responsibilities of the key investors and top management. Most decisions are thus reflections of their views on the future, the credit-worthiness of the customers and their expectations for the assets’ future earnings potential and valuation.

For a freight service provider, Corporate Business Development will support Commercial Business Development through acquisitions of suitable assets or acquisitions of additional capabilities through corporate transactions.

Underlying all is financial risk management, a key responsibility of Corporate Business Development.

Commercial Business Development
Commercial Business Development can involve a range of initiatives within the Commercial, Operations and Ship Management departments. It is probably in this area where the organization has the best opportunity to add value.

For a tonnage provider, the Corporate / Commercial Business Development will overlap as the organization attempts to uncover investment opportunities that add value to the business. In this business model, the organization is providing the appropriate logistics asset and professional management of this asset to an operator with a defined need, but without the capability or interest to do so themselves. A good example would be an LNG-carrier on a 20-year time-charter to a gas exporter or a utility company. The organization is aligned towards establishing and maintaining positive relationships with its target market, and in meeting the customers’ requirements for specific projects. At the same time, it also needs a razor-sharp focus on operational risk management and cost control once the contract is agreed to.

The roles and objectives are similar for an asset-player, but in contrast its investment time horizon is less certain. The strategic decision – to purchase the vessel has already been taken, but not when to dispose of it. If the company is looking for maximum exposure to the freight market, or has a market bias towards increasing freight levels, it will be reluctant to tie up the ship under a long-term employment.

Commercial Business Development within a Freight Service Provider will be far more extensive and complex than in the case of a tonnage provider or asset-player. It will evaluate the entry and exit of trade lanes and business areas, and in this way closely engage with the Strategic Management Analysis. It will certainly also be focused on establishing and maintaining relationships with its target market, and meeting customers’ service expectations. At the same time, because the situation is more complex, there is also likely to be more opportunities to create value through innovative Commercial Business Development initiatives.

Generating Business Development Initiatives
Prior to identifying potential initiatives, a key first step is to prepare a base-case by analyzing the existing state of affairs. Preferred methodology will depend on each individual case, but likely consist of a combination of statistical- and financial analysis. Once a base-case has been established, the organization can turn to generating potential business development initiatives. Good ideas can come from anyone, so involve a variety of stakeholders in this process, and don’t rush to dismiss any suggestion at the outset.

Having developed your list of options, subject these to further evaluation and generate a short-list of initiatives. This process will (and should) require a certain amount of effort from all involved. In selecting initiatives set “SMART” objectives to help implementation and follow-up.

In broad strokes, the ideas are likely to fall into the following categories:
- Operating Earnings
o Growing gross margins
o Increase productivity
o Optimize trading patterns
- Risk Management
o Business Risk Management (market risk – revenues and costs, counter party risk, degree of fixed operating cost).
o Financial Risk Management (interest rate risk, foreign exchange exposure, degree of financial leverage)
Implementation
The hard part is still to come – implementation and follow-up. The optimum number of objectives to choose will depend on the resources of the organization and the scope of each initiative, better to succeed with too few than to be overly ambitious and in the end realize you did not have the required resources.

As the organization selects its key business development initiatives it is critical to build ownership and support behind their implementation. To some degree ownership should have been built through the joint process of generating, evaluating and selecting these initiatives, but support also has to come through top management exercising its leadership in the implementation and follow-up phase.

The follow-up and evaluation phase as the initiatives are implemented is perhaps even more important to preparing the initial base-case. Compare the actual results to the SMART objectives made ahead of the implementation and use the findings to improve for the next business development cycle.

While Business Development certainly should include initiatives to grow revenues and gain customers, it makes intuitive sense that the term should incorporate all initiatives with the potential to develop (or improve) the business.

The organization may focus on two key areas – Operating Earnings and Risk Management. All else being equal, an increase in operating earnings for the same degree of total risk, or a reduced degree of total risk for the same level of operating earnings, should have a positive effect on company valuation.

The objective of Business Development should therefore be to optimize the business in the context of these two areas. By exercising its collective ingenuity, the organization itself holds the potential to unlock business value through generating and implementing business development initiatives in a constant loop process.
- Erik Knoph
Works Cited
Porter, Michael E. Competitive Strategy. New York: Free Press, 1980.
Stopford, Martin. Maritime Economics. 3rd Edition. Oxon: Routledge, 2009

About Narwhal Shipping Advisors:
Narwhal Shipping Advisors offer business development services to the Shipping Industry, focusing on Shipping Companies and investors in Shipping-related assets.
Its underlying mission is to help investors optimize their investments within the Shipping Industry.
Its services include:
- Business Development
- Financial Analysis
- Business Improvement Analysis
- Market Research

About Mr. Knoph:
Erik Knoph is a business development specialist and analyst with more than 20 years experience within the international Industrial Bulk Shipping Industry. Originally from Bergen, Norway he graduated with a B.A. in Business Administration from The University of Washington, Seattle.
Prior to founding Narwhal Shipping Advisors, he was last Manager, Business Development for Gearbulk's Canadian office, focusing on business improvement projects, new business development and market research.

He joined Kristian Gerhard Jebsens Skipsrederi A/S in 1988 within the Gearbulk open-hatch pool based in Bergen, Norway and transferred shortly thereafter to Gearbulk's Canadian office in Vancouver, B.C. After progressively increasing responsibilities at trade desks running industrial parcel trades to Europe and Asia / South East Asia, he moved to Gearbulk's office in Jakarta, Indonesia in 1996. The turbulent period of 1996 - 1998 included the Asian Financial Crisis and subsequently the Jakarta Riots and the resignation by President Suharto, a period with many challenges but also opportunities. In 1999 he moved to Gearbulk's office in Melbourne, Australia, returning to Gearbulk's office in Vancouver, B.C. in 2001.

His past experience includes commercial management and chartering, new business development and market research, evaluation and due diligence of acquisition targets and restructuring of industrial shipping services.

He has direct commodity experience with the bulk transportation of paper products, pulp, solid wood products, steel, non-ferrous metals, dry cargo bulk commodities, project cargoes, wind energy cargoes and high-heat liquid carbon.

Mr. Knoph is particularly interested in commercial and strategic issues related to industrial bulk shipping, with an emphasis on business development and mergers and acquisitions. He also has interests in financial analysis, market research and business improvement projects. He can be reached at +1 (604) 987-6505, by e-mail at [email protected] or at www.narwhalshipping.com.