The trailer will give you a feeling for the tension and emotions (anxiety, fear) in a situation like this. Then, read the Ransom on the High Seas case in your textbook on page 392.
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- Why are there pirates in Somalia? What do they want? How do they operate?
Martin Anderson has though of four basic strategies to secure the release of Odyssey and its crew:
- Negotiate the release of the crew, ship, and cargo for the lowest possible ransom price;
- Negotiate supported by the threat of potential force;
- Use of force (consent to U.S. Navy SEAL attack);
- Attempt to lure and capture a representative from the pirates to use as leverage in negotiations.
- Are there other options that Andersen has not thought of? What option would you recommend that Andersen follow and why? What are the current and future benefits and costs of each of them? Under which conditions is one option better than the others?
- What kind of measures should companies develop to deal with the problems posed by organized crime? How should they ensure that these measures are implemented? What are the costs of doing so?
The trailer will give you a feeling for the tension and emotions (anxiety, fear) in a situation like this. Then, read the Ransom on the High Seas case in your textbook on page 392. http://www.youtube.
Ransom o n t he h igh s e as: t h e c ase o f piracy i n S omal ia 1 Michael Train and Jeanne McNett wrote this case under the supervision of Professor Alvaro-Cuervo-Cazurra solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected] . Copyright © 2011, Northeastern University, College of Business AdministrationVersion: 2012-11-26 Martin Andersen, chief operating officer (COO) of International Shipping Company (ISC), a European-owned and operated market leader in global transportation services, was looking forward to a relaxing evening. As a representative of a company that delivered cargo safely and securely to major ports, Andersen had just attended the United Nations International Maritime Organization (UNIMO) meeting in Kenya called to discuss the growing problem of piracy off the coast of Somalia. With the meeting concluded, he was going to meet colleagues from the meeting for dinner at the Tamarind Mombasa restaurant. Andersen was the first to arrive and was enjoying the view of Old Harbour when his telephone rang and he received some terrible news: one of ISC ’ s ships, MV Odyssey , had been hijacked. Background o n P iracy O ff t he C oast o f Somalia Instances of piracy off the coast of Somalia increased dramatically in the late 2000s (see Exhibits 1 and 2). More than 100 confirmed piracy attacks had been reported, and many suspected attacks remained unreported. In 2010 , Soma li pirates hijacked at least 25 ships, taking more than 650 hostages. By 2011, the cost of piracy was estimated to be between US$7 billion and US$12 billion a year, including costs for fuel and secur ity and about US$400 million in ransom payments in the period 2006-2011. 2310 Exhibit 1 Number of Reported Attacks by Pirates Worldwide. Sources: International Maritime Bureau (IMB) as reported by NATO (2009), www.nato-pa.int/Default.asp?SHORTCUT=1770 , accessed on September 4, 2011. International Chamber of Commerce ( ICC), www.icc-ccs.org/news/385-2009- worldwide-piracy-figures-surpass-400 , accessed September 4, 2011, http://news.blogs.cnn.com/2011/01/18/report-2010-was-worst-year-yet-for-piracy- on-high-seas/ , accessed September 5, 2011 E xhibit 2 Number of Attacks Off the Coast of Somalia. Source: International Maritime Bureau (IMB) as reported by NATO (2009), www.nato-pa.int/Default.asp?SHORTCUT=1770 , accessed September 4, 2011 One of the underlying causes of piracy in Somalia was political instability. Since the Somali Civil War began in 1991, the country lacked a stable government with effective authority. The following two decades were marred by a major rise in fighting between local groups. More than one million people — out of an original population of approximately 10 million — fl ed to neighboring countries such as Ethiopia. 3 The population of Somalia ’ s capital, Mogadishu, decreased by nearly two- thirds from 1990 to 2011. 4 In 2008, the United Nations (UN) estimated that nearly 3.2 million Somalis were dependent on food aid for survival. As a failed state, Somalia was one of the poorest and most violent countries in the world. The country was also plagued by famine and over 50 per cent of the population was affected by malnutrition. 5 The lack of stable government created an environme nt ripe for exploitation by many fundamen talist Islamic groups, such as al-Qaeda and Al Shabab, who successfully used fear tactics and violence to gain power. Because of the resulting political circumstances, the country became too dangerous for many foreign diplomats, charities, and journalists to enter. 6 Various global strategies to aid Somalia were put into action. The UN and the African Union deployed about 50,000 peacekeeping troops to help reduce violence. In 2006, the United States supported an invasion by Ethiopia in the hope that the311 Ethiopian troops would be able to suppress the fundamentalist factions and reinstate the fallen Somali government; however, this strategy backfired in a number of ways. After nearly two years, the presence of Ethiopian troops had proved to be completely ineffective at reducing the power of fundamentalist movements or reinstating Somalia ’ s offic ial government; in fact, some of the insurgent groups had grown both more radical and more influential. Some fundamen talist groups had also begun to receive support from nearby Eritrea, whose agenda was not to help Somalia but rather, to help defeat Ethiopia. 7 Out of these difficult and traumatic circumstances, piracy emerged as one of the only alternat ives to severe poverty for many unemployed youth in Somalia. Initially, the perpetrators mainly boarded the vessels of wealthy shipping companies for any money that was stored onboard; gradually, however, they began attacking ships in order to hold crew members for ransom. This highly profitable industry, along with local fundame ntalist factions, proved to be a very strong attraction for Somali citizens with very few options. Pirates often worked implicitly with fundamentalist Islamic groups to provide additional on-shore security and protection for a fee. 8 The merchant vessels that pirates typically targeted were large ships with small crews of only about 24 men. Their size and relatively slow transit speed made these boats easy targets for the small speedboats used by the pirates. Using these speedboats, pirates could approach a merchant vessel and launch hooks to climb aboard without being detected; once on board, they used small weapons, such as AK-47 assault rifles and rocket-propelled grenades, to capture the crew. Usually, the pirates then directed the captured ship to a locatio n near the coast from which they conducted negotiations for ransom. For many years, once a ship entered Somali territory foreign navies could not pursue it; 9 howeve r, in June 2008, the United Nations passed a resolution allowing foreign navies to enter Somali waters and use “ all necessary means ” to combat piracy. 10 The crew and cargo were rarely harmed in these situations because the pirates were primaril y interested in ransom money, which depended upon hostages ’ eventual safe release. Negotiations could take up to two months and payments tended to be between US$1 million and $3 million depending on the size of the crew and the value of the cargo. Sometimes pirates would hire a professional negotiator to obtain higher ransom prices. Once the money was received (either through informal channels, from another boat or by a drop from an airplane ) the pirates would usually go ashore, leaving the captured ship and crew unharmed. On some occasions, pirates launched their attacks from “ mother ships, ” enabling them to reach ships even at a substantial distance from the coast (see Exhibit 3 ). These mother ships were usually large fishing boats that had been captured and converted into mobile bases for attack ing ships. Many pirates employed fishermen or were former fishermen, so it was frequently difficult to distinguish between the two — especially from a distance. 11312 Exhibit 3 Piracy Threat Map. Source: CC-by-sa Arun Ganesh, National Institute of Design Bangalore. Used with permission Crews on merchant ships were typically unarmed since most countries did not allow vessels with armed crews to enter port. The main defenses against pirates were water cannons, increasing speed, and maneuvering the ship to prevent pirates from boarding the ship. As piracy became an increasingly common problem, some vessels were issued non-lethal sonic weapons that could cause permanent ear damage at 300 feet (about 91 meters) in order to discourage pirates from approaching. 12 Prevalent piracy in one of the busiest shipping lanes off the coast of Somalia had increased costs and shipping time for many shipping companies. Associated ransom costs led to higher insurance premiums. Additionally, to avoid attacks, some shipping companies decided to sail further away from shore than necessary, resulting in long er transportation times (up to four additio nal weeks of travel), increased costs and delays for customers. The increase in pirate attacks also led many shipping companies to employ private security firms to accompany their vessels and/or assist with on-ship defenses. Recent S omali H ijack ings More than $100 million in ransom costs was paid to pirates in 2008. 13 For example, a Spanish fishing boat, the Playa de Bakio, was ranso med for $1.2 million. Ransoms of $800,000 and $750,000 for smaller Ukrainian and German ships were paid in the summer of 2008. By 2010, the average ransom for a captured ship had increased to $5.4 million. The highest ransom on record was $9.5 million, paid for the release of the Korean crude oil tanker Samho Dream .14 One of the most publicized hijackings occurred in November 2008, when Somali pirates took control of the Sirius Star. Sirius Star belonged to Vela International Marine, a Dubai-based company and a subsidiary of the Saudi Arabian state-owned oil company Saudi Aramco. The ship was registered in and flying the flag of Liberia, and home-ported in Liberia ’ s capit al, Monrovia. On Nove mber 15, 2008, Somali pirates boarded the Sirius Star nearly 450 nautical miles (about 833 kilometers or 517 miles) off the coast of Somalia. This was both the largest ship pirates had ever hijacked as well as the farthest offshore that they had done so. At the time of the hijacking, the tanker contained more than $100 million in oil intended for transport to the United States. The pirates docked the ship at the Somali port of Harardhere,313 and the international crew of 25 was reported safe. 15 Five days later, on November 20, the pirates made a ransom demand of $25 million and imposed a deadline of 10 days, threatening “ disastrous ” action if Vela International Marine did not comply. On November 24, the pirates reduced their demands to $15 million after the company and Saudi Arabia, with the support of several other governments, refused to pay the ransom. Nearly two months passed before the ship and crew were finally released on January 9, 2009 — after a reported $3 million ransom was paid. 16 If the Sirius Star incident provided an example of significant success for Somali pirates, the incide nt involving Maersk Alabama demonstrated that failure was adamantly possible. Despite recommendations that all ships stay beyond 600 nautical miles (about 1,112 kilomet ers or 690 miles) off the coast of Somalia, Maersk Alabama was only 240 nautical miles (about 444 kilometers or 276 miles) offshore when it was boarded by pirates on April 7, 2009. While the pirates were boarding, most of the crew members locked themselves in the engine room and disabled the bridge controls so they could maintain control of the ship. After a brief skirmish in which the crew captured the leader of the pirates, the American tanker ’ s captain, Richard Phillips, surrendered himself in exchange for the safety of the rest of the crew. The pirates then forced Phillips into one of the cargo ship ’ s lifeboats and sailed out to sea with the intent of holding the captai n for ransom. 17 On April 9, the American destroyer USS Bainbridge arrived and escorted the cargo ship into harbor in Kenya. For the remainder of the day, a standoff ensued between the pirate-controlled lifeboat and Bainbridge . The following day, negotiations to free Phillips began while the pirates simultaneously developed plans to smuggle him onto Somali land to increase their leverage. On April 12, the captain of Bainbridge determined that Captain Phillips ’ lif e was in immediate danger and ordered a rescue operation. U.S. Navy SEAL snipers opened fired and killed the three pirates remaining on the lifeboat. A fourth pirate, who was on Bainbridge negotiating, was taken captive and brought to the United States to stand trial. 18 I SC’ s S ituation Andersen learned that ISC ’ s cargo ship MV Odyssey was carrying more than $50 million of machinery and was hijacked in the Indian Ocean, 550 nautical miles east of the coast of Somalia, by a group of 14 young men. Odyssey wa s being sailed towards the coast of Somalia and was presently 350 nautical miles from it. The ship ’ s crew consis ted of 20 men from 11 countries; the captain and the two officers of the ship were American. Because of the multinational makeup of the crew, ISC informed several national governments, including the United States, who promised to contribute any necessary resources and immediately rerouted one of its Navy ’ s ships towards Odyssey ’ s location. The pirates had not made their demands known so far. As COO respon sible for operations-level fleet safety, and due to his relative proximity to Somalia, Andersen was asked by the company ’ s CEO to take charge of the situation. This was the first hijacking that ISC had experienced, and as Andersen considered the issues, he remembered the discussion on initial responses at the UNIMO meeting: ISC had a policy of non-negotiation with pirates but until now, that policy had not been tested. Andersen had some time to think — at least until the pirates contacted ISC. The company ’ s CEO had instructed Andersen to do whatever he could to ensure the safe return of the crew, ship, and cargo. He also menti oned ready access to $3.5 million. However, Andersen knew that negotiation was expensive in terms of both money and time: the process usually lasted around two months and cost approximately $1 million in addition to ransom costs. 19 There would also be additional costs for security to protect Odyssey fro m other pirates during negotiations, as well as lost revenues due to the ship being out of service. Nevertheless, the safety of the crew was ISC ’ s314 main priority. Accordingly, one of Andersen ’ s first ideas was simply to negotiate for as small a ransom as possible in exchange for the safe return of the crew and ship. Andersen ’ s second option involved the U.S. Navy ship that was fast approaching Odyssey . While its main priority would be to rescue the American crew members, the highly-trained SEAL team onboard would likely be successful in attacking and recapturing the ship; however, the team estimated that there was a 60 per cent chance that one or more crew members would be harmed during this operation, while damage to the ship and cargo would be minimal. 20 The approach of the U.S. Navy ship also offered Andersen the ability to negotiate with the pirates while backed by a threat of substantial force. If, however, the pirates were to kill any of Odyssey ’ s American crew members during negotiations, the Navy would attack to prevent further harm to crew members, thereby potentially proving a liability for ISC ’ s employees and property. Odyssey co ntained enough supplies to sustain the captive crew for up to two months but Andersen worried that the longer ISC delayed decisive action, the greater the costs to the company would be. Furthermore, if the pirate s became impatient or desperate, they may take action against the crew, cargo and/or ship. Andersen knew that if the captured ship reached Somalia, it was possible that additional pirates would join the attack and the crew could be taken onshore, making the recovery of the ship by force nearly impossible without seriously endangering crew members. Another option that occurred to Andersen was the possibility of communicating a willingness to negotiate to the pirates and reques ting that a representative from the group join ISC. This represen tative could then be held captive in an effort to reduce the pirates ’ leverage, depending on the importance/rank of the captured representative to the group. Additional C onsider ations ISC ’ s finan ce department reported that the company would face potentially crippling losses if the entire $50 million cargo and the $25 million ship were lost. Furthermore, ISC did not carry insurance against piracy. The UNIMO meetings that Andersen attended had empha sized that payment of ransom encouraged further acts of piracy. They had debated U. S. Defense Secretary Robert Gates ’ opinio n that companies paying ransoms to Somali pirates hampered efforts to deal with the problem more effectively. Part of the problem is the number of companies — not countries, but companies — that are prepared to pay the ransoms as part of the price of doing business and clearly if they did not pay the ransoms then we would be in a stronger position … at least it would make it a lot more dangerous and a lot tougher for these pirates and then we could address some of the longer-term problems. 21 Any ransom payments made would increase ISC insurance premiums for future shipments. Premiums could rise as much as 20 per cent — and possibly higher should there be any problems with the crew, cargo, or ship. The death of any crew member would be a tragic loss and could cost ISC $500,000 to $1 millio n in payments to the deceased ’ s family. 22 Andersen sighed. “ It is one thing to talk about these issues in a meeting at a beautiful hotel in Mombasa, ” he thought, “ but it is a totally different thing to actually experience them. ” As he rushe d from the restaurant back to his hotel, Andersen wondered what approach he should take in dealing with this attack against one of ISC ’ s ships.315