Prepare to describe in class the competition in the overnight package delivery industry, and the strategies by which those two firms are meeting the competition. What are the enabling and inhibiting factors facing the two firms as they pursue their goals? Do you think that either firm can attain a sustainable competitive advantage in this business? FedEx and UPS are the market leaders in the package delivery industry which is a $45 billion US industry. The industry is channeled into both air and ground services of which $25 billion or 36% of the market is air express. Almost all of FedEx’s revenues are generated by air services while only 22% of UPS’s services are delivered by air. The air segment constitutes the market share from which both FedEx and UPS directly compete. There are three categories which determine the type of service to be used: weight, transit mode, and timeliness of delivery. Weight is divided into three sectors which comprise letters, packaging and freight. As customers demand smaller time intervals increasing premiums/revenues are collected. These include: regular delivery (4 or more days), three-day delivery, deferred delivery (2 days) and overnight. Several components are important to for each to remain competitive in the express air delivery service space. These include: Customer Focus, Price Competition, Operational Reengineering, Information Technology, Service Expansion and Logistical Services. From 1992-2003 each company matched capital investitures into these components. At the turn of the millennia, international trade had become increasingly more robust and by 2004 50% of all goods moved internationally were done by air. FedEx had maintained a hub in Europe since the early 1980s but sold it in 1992 after losing $1 billion. In 1995 they decided to concentrate on Latin America, the Caribbean and Asia instead. UPS entered the European market in 1988 and introduced a coding and tracking system to more effectively collect revenues. In 1995 they invested another $1 billion more in expansion in hopes that international services would account for 33% of revenues by 2000. Mean while, China had become the manufacturer to the world with their air cargo market growing at 30% per year. The US-China air service agreement allowed an additional 111 air cargo flights per week between the two countries. Both FedEx viewed this as a strategic opportunity to not only meet the needs of their growing global market but also to strengthen their commercial supply chains throughout the world. Porter’s 5 Forces
Here we are applying Porter’s 5 forces to air and ground services sectors only without ecommerce and supply chain management sectors. Rivalry Between Established Firms
Within the industry the competitive rivalry is very high and the industry as a whole is highly consolidated. Established companies like UPS and FedEx must continuously innovate and invest in new technologies aimed at increasing quality at lower prices. Fixed costs make exiting the space very high and customers have very low switching costs which increases the rivalry. Risk of New Entrants
Threat of new entrants is low due to high regulations, tariff and trade agreements, economies of scale, high capital expenditures required to enter and brand image of established players like TNT and DHL as well as UPS and FedEx. Further, the absolute cost advantage gained by volume makes it extremely difficult for new competitors in this space.
Power of Suppliers
While the bargaining power of suppliers of packing materials is extremely low due to UPS and FedEx’s large quantity demand. The power of market forces on suppliers of gasoline and JP4 is extremely high. So overall the buying power of suppliers is moderate. Threat of Substitutes
Threat of substitutes is very low. Although email and texts have created a medium for letters and documents, the freight industry has been commoditized as there are no substitutes especially in the...
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