Exhibit: Five Forces Outline 1. Barriers to Entry—Medium to High for the following reasons: a) Economies of scale—the top three carriers (Federal Express, UPS, and Airborne Express) serve slightly more than 85% of the domestic express mail market. All three carriers deliver a high volume of packages, and thus, are able to spread fixed costs over more units. Also, each carrier has integrated technological systems that improved operational efficiency. In addition, intensive training programs of employees increase service and delivery efficiency. ) Extremely large capital requirements are necessary to enter the market. Hub facilities at airports (e. g. FedEx’s hub near Dallas cost $250 million); capital expenditures for air and ground fleets are large (e. g. New Boeing 767 cargo plane cost $90 million); large number of employees and high training costs. c) Supporting the physical distribution network of each company is an extensive infrastructure devoted to customer service and information management. The distribution networks for a company in the express mail industry require a heavily integrated and complex information system.
Sophisticated information systems plan optimal routes for packages, assist in billing, and permit the tracing of packages. In addition, a large number of service representatives are necessary to assist customers, schedule package pickups, track packages, and obtain rate information. d) If a company were to enter the market and attempt to directly compete with either FedEx or UPS (i. e. not differentiating significantly and not attempting to service a specific market segment), then the dominant carrier companies could: lower prices, increase quality of service, and increase variation of services. 2.
Threat of Substitutes—Low to Medium for the following reasons: a) Email (electronic mail) has a cost of 0 cents. Documents can be scanned into the computer and emailed directly to the receiver. A five-page domestic facsimile document cost approximately 50 cents. Both delivery systems travel significantly faster than express mail. However, such avenues of delivery limit the customer’s presentation options (cannot bind business reports / “deliverables”). Also, the customer cannot transport a non-paper package (e. g. a book, a desk) via this delivery system. b) Regular mail only cost 32 cents for letters.
The post office is also very convenient. However, in regards to packages, the post office is very poor in quality service and efficiency (cannot track packages efficiently and has an on-time delivery record much worse than commercial carriers) 3. Bargaining Power of Suppliers—Medium for the following reasons: a) Postal materials—numerous suppliers of necessary postal and packaging materials. Switching costs are not high. The postal materials suppliers have low bargaining power. b) Software programs combined with extensive customized programming updates / additions.
The software and software customization industries both have numerous suppliers. However, given the complexity and uniqueness of such an information network, there are probably only a limited number of software and customization companies that can provide a carrier with a high quality system that is capable of smoothly integrating all the operation and customer service divisions. Furthermore, the switching costs have the potential to be extremely high because such a transfer could disrupt communication between the divisions, leading to poor quality service.
In addition, the company would have to invest in training for all of its employees who use the software. Both the software companies and software customization firms have a medium to high bargaining power. c) Aircraft and aircraft part suppliers are few, Boeing, Airbus, and used airplanes. Switching costs are extremely high. Boeing and Airbus have a medium bargaining power. d) The airport hubs have a very high cost; however, there are numerous airports. Although, the switching costs would be incredibly expensive and could possibly disrupt operations. The airport hubs have a medium bargaining power level. ) Labor is a supplier that has demonstrated high bargaining power. The UPS strike “immediately cost UPS $700 million in lost revenue, and it tarnished the firm’s reputation for absolutely reliable delivery. ” 4. Bargaining Power of Customers—Medium to high for the following reasons: a) Among high volume business customers, rates and services were negotiable. Discounts from list prices of 50% were not uncommon. b) Brand loyalty is very low, particularly among high volume businesses. c) Buyer switching costs are extremely low, increasing bargaining power of customers. 5.
Rivalry Among Existing Competitors—High for the following reasons: a) Rivalry among the top two carriers is highly competitive. Major carriers (particularly, UPS and FedEx) competed on multiple fronts, matching each other’s prices, products, and customer support. In the early 1990s, UPS and FedEx matched not only each other’s prices, but also the other’s innovations and services; e. g. early-morning delivery, same-day service, and an ability to track packages by the Internet. b) Smaller players (DHL, TNT, BAX Global, RPS) targeted specific market segments, in turn, competition in those particular segments are not that intense.
However, as a result of the UPS strike and UPS’ lost volume, it would appear that the competitive landscape is shifting, and smaller carriers are deciding to compete in a greater variety of segments of the express mail market. The Postal Service planned a major advertising blitz to promote its express services, and is petitioning Congress for the right to grant volume discounts. UPS began to plan its strategy to recoup its lost volume. And, Airborne and RPS forged a relationship that would integrate each company’s strengths.
Write-Up: (1) Change of Five Forces Over Time; and (2) Main Strategic Issues The factors influencing the barriers to entry have significantly strengthened since FedEx’s incorporation. FedEx introduced overnight delivery to the express mail market. It was a leader in technological innovation, and was dedicated to continually improving the company’s service quality. FedEx raised industry standards. As a result, the capital requirements necessary to enter the market increased, the economies of scale of the major carriers increased, and access to distribution channels became more difficult to obtain.
The threat of substitutes grew over time. Prior to email and facsimile, regular mail was the only practical substitute for express mail. However, with the invention of the internet and the fax machine, these two viable substitutes for delivering letters and documents surfaced. Also, the bargaining power of labor increased over time. As industry practices shifted towards employing part-time workers rather than full-time employees, the gap between full-time and part-time wages widened. In UPS’ case, such a disparity in wages resulted in a national walkout.
The bargaining power of customers increased over time. FedEx expanded the variety and increased the quality of services. By expanding the variety, the value of UPS’ two-day delivery service was devalued. And, in turn, UPS and other carriers had to expand its services to compete with FedEx. However, as a result of vigorous competition, almost identical services, and low brand loyalty, the consumer became extremely price sensitive. The rivalry between UPS and FedEx has remained constant, yet intense, since FedEx’s entrance.
However, it would appear that competition within the industry has intensified as a result of the UPS labor strike (see exhibit 5b). The express mail industry is less attractive at the conclusion of the case for the big players (FedEx, UPS) than it was prior to the UPS labor strike, yet it still remains attractive. The UPS labor strike created an opportunity for several peripheral carriers to compete for market share. Therefore, one strategic issue facing the large carriers is determining the best course of action to successfully thwart the threat from an increase in competition.
This involves pricing, operation efficiency, and possibly expanding their own operations into smaller market segments (attacking the threat’s “bread and butter”). In addition, success in the international market is considered essential if consistent growth is to be maintained. DHL and TNT have extensive experience and solidified positions in the international market. Furthermore, both carriers have presence in the United States, and could potentially expand their domestic operations.
The second strategic issue is determining a course for international expansion, while also preparing for DHL and TNT’s probable response to such expansion. Even after the UPS labor strike, the express mail industry is still not attractive to smaller carriers (Airborne, RPS). As a result of the labor strike, smaller carriers were provided an opportunity to expand into larger market segments within the industry. For example, the partnership between RPS and Airborne directly targets a broad range of UPS customers, and the Post Office is petitioning Congress for the right to grant volume discounts.
In this case, the retaliation of the larger carriers is a main issue. For example, FedEx and UPS have both introduced distanced based pricing and Airborne must decide whether or not to adopt such a pricing scale. Finally, the smaller firms must access their international market strategy. In regards to DHL and TNT, how do they respond to FedEx and UPS increasing their expansion into the international market? In regards to Airborne, does it need to expand its operations, stay the course, or leave the international market all together as a result of the larger carriers’ expansion?
