Not Mission Impossible

Geopolitical uncertainty, international health incidents like Covid -19, and stricter sustainability legislation increase the uncertainty under which firms make investment decisions. Decisions made today determine which actions are possible in the future under increasingly volatile market conditions. 

When less is known about the future, flexibility in exploiting changing market conditions is key. Several examples of the value of flexibility are found in maritime industries. These examples show the value of market switching as external conditions change, and factors that may assist and impede such switching.

Examples of market switching 

In the summer of 2020, the actor and producer Tom Cruise shot several scenes for the new “Mission: Impossible 7 motion picture in the western coast of Norway. More than four hundred people were involved in the filming, and to accommodate the crew the expedition cruise ship MS Fridtjof Nansen from Hurtigruten (the Norwegian Coastal Express) was rented.

Due to Covid-19, there was a lack of tourists, and the company was happy to relocate the ship to provide hotel facilities to the production team and the ship was docked in the small village of Hellesylt. The Norwegian Seafarers Union protested what they regarded to be “social dumping” because the ship was registered in the international ship’s registry using low-cost foreign employees, whereas ships operating domestically by law should be registered in the Norwegian ship registry to secure national wage levels and working conditions.

In 2012, the operator Viking River Cruises introduced a new class of cruise vessels, The Longship class. The innovative design allows for switching between international river systems, while still maintaining economies of scale and high accommodation quality. The novel naval architecture, representing proactive investments in flexibility, creates value by facilitating frequent relocations when market conditions change. 

Similarly, the Norwegian shipowner Klaveness has invested in combination carriers that allows switching between floating and dry products.

Finally, FSRUs (Floating Storage and Regasification Units) are alternatives to stationary pipelines and onshore facilities. They typically stay at a specific location for a shorter time than their technical lifetime and are characterized by high proactive investments during design and construction, moderate entry costs, and insignificant exit costs. They value was especially pronounced in 2022 when Germany needed to compensate for the disruption in gas from Russia, and as sabotage to the Nord Stream 1 and 2 pipelines undermined reliability of gas import by pipelines.  

The value of future flexibility

These examples illustrate proactive investments, i.e., extra costs taken at the time of investments to allow for more flexibility in the future. Extra costs do not necessarily have to be physical; they can also relate to investments in human capital. 

Market switching has a cost, but proactive investments reduce this cost, allowing capitalization on volatile and short-term market opportunities. Our research shows that proactive investments make these strategies more viable

These examples show us the value of building in future flexibility at the time of the investment decision. Achieving this value also depends on actively monitoring market conditions and acting on opportunities, as well as understanding the unique entry barriers between markets.