Airborne Express Analysis

Airborne Express Analysis

1. Discuss the dynamics of the express mail industry and address the following: Why are there benefits of being big in this business? How would you characterize the competition between FedEx and UPS?

        The dynamics of the express mail industry make it an overall unattractive industry. There is high buyer power, rivalry, supplier power, and threat of substitutes.  Only the threat of new entrants is low, which is due to high entry barriers. Buyers can choose between a total of nine firms in the express mail industry with little to no switching costs.  Additionally, there is minimal loyalty to these individual companies. The rivalry among the firms is very high, yielding the terminology ‘parcel wars’ because of the ferocity.  Supplier power is high as well, as evidenced by the disruption in supply chain suffered by UPS which caused $700 million in lost revenue.  While express service mail is a convenience, it is by no means a necessity. Firms have the option to use alternative methods of delivery, such as facsimile, standard mailing options, or email. Working in the industry’s favor is the low threat of new entrants, due largely in part to the high capital requirements to be a player.

        In the express mail industry, the ‘bigger is better’ idiom holds true as economies of scale prove the most successful. The profit margin for a firm to ship an express mail item is only 45 cents per overnight letter. To be an industry leader and achieve a positive operating revenue, thousands of these letters must be shipped daily. Additionally, to be competitive in this industry one must provide differentiated services, whether that be customer service, early delivery timeframes, or reliability of carrier, all on a large scale. The capital requirements to maintain this position of differentiation are high, which include the costs of an airline and trucking fleet. When the low profit margin and high cost of differentiation are combined, the key to success is large scale operations.

        The fiercest competition for business was within the express mail industry itself, with the rivalry centering primarily on UPS and FedEx.  Because the firms’ structures and strategies varied only slightly, UPS and FedEx were aggressive competitors over the express mail turf. The two were consistently embattled over how they could ‘one up’ the other, resulting in the two eventually almost matching each other in services. This competition, while described as ‘bloody’ by some observers, did drive the industry forward at a rapid pace, introducing services like early morning delivery and online tracking. However, the competition between the two distracted ‘gorillas’ allowed a third player to rise in the industry and upset the market share, Airborne Express.

2. Discuss Airborne's position in the industry and address the following: How has Airborne survived and recently prospered in its industry?

        Airborne Express sought to create a new position in the competitive landscape, one not occupied by FedEx and UPS. Airborne pursued an approach catered specifically to one clientele, rather than to the masses, explaining, “Since we can’t be all things to all people, we pick our customer deliberately.” These customers were the business consumer that regularly shipped a large volume of urgent items. An example of this type of customer is Xerox, who sent repair parts across the country. In pursuing this customer base, Airborne purposefully passed over the residential customer.