Research model development

Hair et al. (2010) states that a conceptual research model, even a simple one, should always be developed as a starting point for any empirical analysis. This model should, at least, specify the concepts under study and, in the case of a dependence relationship, specify the dependent and independent concepts.

The concepts of interest are the Ship Type Variety (STV) of a shipyard, and the Financial Performance (FP) of a shipyard. These concepts have been discussed in the theory review; however, we remind their basic definitions. STV can be defined as the variety of ship types produced by a shipyard on a given period. FP can be defined as the ability of a shipyard to generate profits on a given period.

To establish a model of the relationship of STV on FP of shipyards, we will build a model upon previous studies of the impact of product variety on firm performance. Product variety has been studied for its impact on manufacturing’s firm performance. According to the literature, the main beneficial effects of product variety consist of:

• Increased market shares because of an higher diversity of customer’s requirements that can be met (Kekre and Srinivasan, 1990);

• Increased revenues and profits, because customers are willing to pay more for variety (Child et al., 1991, Kekre and Srinivasan, 1990, Ulrich, 2006);

• Increased utilization of manufacturing capacities (Fisher et al., 1995);

• Higher resilience to demand downturns and market changes (Fisher et al., 1995).

50 On the other hand, the main negative effects of product variety on firm performance consist of:

• Increased demand uncertainty (Fisher et al., 1995, Randall and Ulrich, 2001);

• Higher cost of inventory, because of higher inventory levels and number of stock keeping units (Fisher and Ittner, 1999);

• Increased diversity in processes specifications, increased frequency of set-ups, need for more overhead working hours, etc. (Fisher et al., 1995, Anderson, 1995);

• Higher product design costs (Tang, 2006, Salvador et al., 2002);

• More complex quality assurance (Fisher et al., 1995, Anderson, 1995).

Based on this literature, we qualitatively assess the effect of ship type variety on the performance of shipbuilding firms and deduct the expected effect of STV on FP, in Table 12.

Table 12 Qualitative assessment of the impact of ship type variety on shipbuilding performance

Impact Impact on operations and design Impact on sales

+

• Lower underutilization of manufacturing assets and workforce during market downturns

• Increased market shares

• Lower sensitivity to macro-economic factors variations

• Adaptability to market downturns and demand declines

• Increase of the stability on long-term

-

• Reduced benefits from learning effect (Erichsen, 1994) and economies of scale

• Higher variety on intermediate level: more variety in parts

• Need for more complex or parallel supply processes and a larger supplier and sub-contractors base

• Need to adapt the yard’s layout

• Need for flexible capabilities

• Irregularity in the required size and skills of the workforce

• Increased inventory related costs

• Increased purchasing costs

• Increased complexity

• Harder to reuse design and engineering

• Standardization effort can be limited

• Higher selling prices which can moderate the competitive advantage

51 When considering objective 1, this assessment suggests that there is a dependence relationship between STV and FP. In this relationship, STV is the independent concept and FP the dependent concept. STV is expected to have multiple and contradicting effects, i.e. both positive and negative effects, on shipbuilder’s FP. A simple representation of this relationship is proposed in Figure 8. Because of the existence of contradicting effects, it is difficult to predict the exact nature of the relationship between STV and the overall FP. Furthermore, product diversification literature offers a variety of theoretical models and empirical findings which are not consistent with each other when it comes to the relationship between variety and overall FP (Benito-Osorio et al., 2012). Some authors bring out linear positive relationship, others linear negative relationship, or inverted U-shape relationships, or even no significant relationship. However, none of those studies is related to shipbuilding. Besides because of the inconsistency between those results there generalizability is limited (Benito-Osorio et al., 2012). Consequently, our first theoretical proposition can be expressed as:

Proposition 1: “The financial performance of shipyards is related to their ship type variety.”

Note that this proposition does not assume the nature of the relationship (e.g. linear or U-shaped) or its direction (i.e. positive or negative).

Figure 8 A model of the relationship between ship type variety and financial performance

On the other hand, there is a broader consensus on the idea that product variety allows to reduce risks related to the market uncertainty (Benito-Osorio et al., 2012, Tang, 2006, Pandya and Rao, 1998). The main idea is that if a company is present on several market segments, then it can always rely on several other products if the demand for one product drops. Moreover, in a context of unpredictable and changing demand, Fisher et

52 al. (1995) argue that product variety is rewarding for manufacturers. Indeed, manufacturers who can offer higher product variety have more flexible manufacturing capabilities and are able to rapidly adjust to customer requirements and market change. Considering objective 2, this leads to suppose that past ship type variety is beneficial for the shipbuilders which are facing a market downturn. This reasoning supports the formulation our second theoretical proposition:

Proposition 2: “After a market downturn, the financial performance of shipyards is positively related to their past ship type variety.”

These theoretical propositions are to be formulated in a way that they can be statistically testable. Therefore, once the conceptual model representing the relationship between the concepts is established, variables should be selected to represent the concepts (Hair et al., 2010).