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Global transportation and logistics industry
The Transportation & Logistics sector spans a wide range of service offerings such as by air, road, rail, sea - as well as related services such as warehousing, handling, and stevedoring. The extent of coverage includes value added services such as packaging, assembling, labelling etc. In addition to these, Transport & Logistic providers undertake the management role of planning, administering and coordinating.
Over the years, the sector has reshaped in manner where most players have a tendency to consolidate; resulting in larger, integrated groups operating in more than one of the Transport & Logistics sub-services/sectors. As a result, the limits between the sub-services/sectors become more and more indistinct.
The benefits of globalisation and business process outsourcing of logistics services generated double digit revenue growth in the industry in the early part of the 21st century. However the co-existence of other pressures, threats and limitations such as the economic downturn, and fuel price hike contribute to the dramatic changes faced by contenders in the sector.
With privatisation and liberalisation, more complexities were introduced to the sector. In addition, trade routes are changing and networks have become increasingly complex - as have the agreements between companies sharing resources.
There have been several regulatory requirements which have changed substantially in the recent years. Due to more IT enabled interconnectivity in companies, it operates across national. Hence, issues pertaining to customs, tax compliance, accounting and governance have increased. Companies looking to build a sustainable business need to continuously offer value additions to its stakeholders. Therefore with the changing business models in the industry, many companies are evolving from forwarding and warehouse managing businesses to highly industrialised, IT driven supply chain providers; adopting a holistic approach in their service.
Impact of the economic downturn
Over the past years, the Transport & Logistics industry has been profiting considerably from positive economic conditions and the demand for raw materials, capital and consumer products. Since 2008 though, the trade was suddenly faced with some of the most complex market conditions in history. A tightening global credit crisis and economic downturn that began in the U.S. quickly spread throughout the globe, impacting many organizations in nearly every aspect of the business. Changes in consumer buying patterns have led to less significant transport volumes, and shifts to less expensive delivery modes, with a sizeable impact on the express business. The volatile oil price coupled with a stronger focus on emission reduction has increased pressure on transportation companies, especially airlines, leading to a record in airline insolvencies. In addition, the economic recession places more fundamental challenges on the Transportation & Logistics industry: consumer patterns and a general curb of demand thereby causing a lower level of the flow of goods.
Opportunities in the emerging markets
For a country's economy, in addition to the tourism sector, even the transportation sector is often viewed as an important indicator of growth. With the rise in commercial trade activities, the location of manufacturing facilities and distribution centres can have a major impact on the growth of a country's transportation sector and transportation infrastructure. The relative location of these manufacturing facilities and distribution centres can dictate whether the country becomes a centre within a logistics network or a spoke in the wheel, serving in effect as a transit passage. Such matters are of particular importance to emerging economies where the transport and logistics infrastructure is making rapid development. Logistic providers are faced with clients who wish to source out of low-cost countries or access these new markets. They need to ensure that they can help their clients meet their objectives, understand the emerging markets environment, and expand their competencies and resources. These companies are at a crossroads in their development and have several strategic questions to consider. Should they expand or try new a niche? Should they move into an acquisition? Should they look at a stock-exchange float? Should they invest in IT/new technology? Should they look at optimising their cost base to counteract the trend towards smaller margins? How can they differentiate from competition by convincing customers that they add value to the business?
About FedEx Corporation
Federal Express is an express transportation company, founded by Frederick W. Smith in 1973. During his college years, his intuition that the U.S. was becoming a service-oriented economy and needed a reliable, overnight delivery service company designed for dedicated transportation of packages and documents was the cornerstone of the company's existence today. He started Federal Express with over $80 million, making it the largest company of its time ever funded by venture capital. He found investors willing to contribute $40 million, used $8 million in family money, and received the rest from bank financing.
Federal Express became successful due to the fact that they pioneered in advanced IT interventions ahead of its competition. They built a super-hub in Memphis, Tennessee, where all packages from the United States would be loaded and shipped out each night.
Today, Federal Express has over 143,000 workers worldwide, and delivers more than 3 million express packages to 211 countries daily. One major change has affected Federal Express. In January of 1998, Federal Express the company re-launched as FDX Corporation.
FDX Corporation now includes Federal Express, Roadway Packaging System (RPS), Viking Freight, Roberts Express, and Caliber Logistics. Even though FDX owns all these companies, Federal Express still remains independent. Federal Express' CEO is currently Theodore Weise.
FDX's strategy is to corroborate on selling and synergies for all FDX companies, but run operations separately and keep each company's strengths and markets separate. Therefore, some information will be about FDX, but most will be for Federal Express as its own company.
FDX Corporate Subsidiaries
All business units of FDX follow the corporate mission statement of the parent company. This synergy allows for growth. It also puts the entity in a position to acquire more companies whose operations are similar. Currently, these are the names and descriptions of the companies under FDX, other than Federal Express.
1. RPS: North America's second-largest provider of ground small-package delivery. It also services 28 European countries and Puerto Rico.
2. Viking Freight: The premier brand name in less-than-truckload freight movements throughout the western United States.
3. Roberts Express: Engineer and execute time-specific, door-to-door surface and air-charter delivery solutions that solve special-handling challenges for FDX customers within North America and Europe.
4. Caliber Logistics: Develops and implements customized logistics solutions that help FDX customers manage costs, improve customer service and focus on their core business activities.
In the Sales Breakdown for these FDX companies, Federal Express still accounts for 83 percent of total revenues. The next largest is RPS, bringing in 11 percent of FDX's total revenues.
FedEx Corporation's vision is a world where goods and information move quickly and seamlessly. A world where businesses source raw materials and parts globally, then move high-value goods quickly between continents and across time zones. A world where global information and transportation networks can shrink time and distance, creating competitive advantages for customers.
FedEx has experienced consistent growth in terms of net income in just about every year of its operation, which has meant three decades of growth. One of the company's greatest strengths is undoubtedly its business concept. No matter what the economy is doing, there will always be a need for package delivery of some sort by companies and individuals involved in nearly every industry. Even when times are tough and companies are seeking to save money, FedEx has less expensive delivery alternatives from which to choose.
Of course, being the originator of the express delivery concept is also a key strength. FedEx became a household name before any of its competitors ever arrived on the scene, and thus has become synonymous with the idea of express package delivery in the minds of many, if not most, consumers.
Visionary leadership (introduction to founder CEO)
Fred Smith recognized the need for a reliable, overnight delivery service. Smith presented the idea in a Yale term paper in the 1960s, and received a "C" grade for his efforts. Between 1969 and 1971 Smith, however, secured $90 million ($40 million from investors, $8 million from his family, and $42 million in bank financing) to launch Federal Express as the then largest startup funded by venture capital. Federal Express began offering overnight and second-day delivery to 22 American cities in 1973.
Today, The FedEx Express unit is one of the five subsidiary organizations that comprise Federal Express. The FedEx Express unit is the primary focus of this study.
FedEx Express is the global market leader in express transportation. The firm moves an average of three million packages daily.
FedEx Ground is a subsidiary of FedEx Express. FedEx Ground provides ground delivery of packages in North America.
FedEx Freight is a less-than-truckload carrier. FedEx Freight operates throughout the United States. FedEx Freight has two operating subsidiaries ù FedEx Freight East and FedEx Freight West.
Access is what makes all forms of interaction and exchange possible between people, businesses and nations. Increases in Access boost opportunities and empower people with the ability and confidence to improve their current conditions and future prospects.
The Mission Statement of FDX is "to produce superior financial returns for stockholders, by providing high value-added logistics, transportation and related information services through focused operating companies". This mission statement shows that FDX has a clear focus.
(1) The main focus is to bring returns to stockholders.
(2) They will emphasize adding value above and beyond just their service of transporting an object from one place to another.
(3) Their focus of operations will be logistics, transportation, and related information. This mission statement is focused enough to keep FDX from diversifying into for example, food products; yet vague enough to allow growth in all of those areas.
FDX and Federal Express, in particular hold a People-Service-Profit philosophy. The ‘People' goal is the continuous improvement of management's leadership. The ‘Service' standard is 100 percent customer satisfaction. The ‘Profit' goal is much like any other company's goal, and is essential to long-term viability. This philosophy governs how FDX runs its business, and defines strategies.
Customers Markets, Globalization and Services
The scope of the Federal Express operation covers business-to-business, business-to-individual and individual-to-individual accounts. Federal Express' markets include more than 200 countries where 90 percent of all the world's revenues originate. Federal Express provides both document and freight deliveries as well as supporting services. Stemming from the visionary leadership of the CEO, the company follows market reach & global footprint and a business strategy.
Federal Express' list of competitors include: United Parcel Service (UPS), Airborne Express, Emery Worldwide, BAX Global, DHL Worldwide, and United States Postal Service. Federal Express holds 46.5 percent, the largest portion, with UPS and Airborne Express as the largest competitors. As shown from the preceding information, Federal Express is clearly a large, strong, and growing express transportation company.
Environment screening & analysis
This section will show the services Federal Express provides; its strengths and weaknesses as an organization; the opportunities and threats, current problems and issues faced.
Federal Express provides delivery on documents and packages both domestically and internationally. Further, the company also provides supporting services.
In the United States, Internationally Supporting Services
Collect on Delivery
Dangerous Goods Service
U.S. Government Shippers
Alaska and Hawaii
Airport to Airport
International Government Guide
Company Strengths and Resource Capabilities:
Globalisation: Federal Express largely operates on a global scale. They operate in 211 countries. They provide services that appeal to most of the world. They have such a large market in which to operate which generates tremendous revenue for the business. Benefits of global economies of scale become available to players that operate in such a large playing field.
Innovation: Federal Express took the first-mover advantage by identifying airplanes and trucks as a source and resource to gain business advantage. This helped them to remain the industry leader since 1973.
Technology and Communication: Federal Express uses and continues to search for new technology. They allow spending of $1billion a year, 10% of total revenues on IT interventions such as integration. The company's commitment to introducing new customer centric service models through IT keeps customers from switching to other providers. Federal Express also has excellent communication with their customers. They use tracking devices on all shipments and customers can trace their shipment through many different avenues including a user-friendly Web site. Federal Express customers can feel assured that FedEx will always be on top of technology.
Strategic Vision: Company CEO Frederick Smith built an industry leader, and sustained the title since 1973. The strategic vision of the company is cascaded through top managers who are in charge of the strategic direction of the business.
First-Mover Advantage: The company has had first-mover advantage in several areas:
(1) Being a global express transportation & logistics company
(2) Advanced IT interventions that attributed to the continued success of the company
(3) Incorporating smaller business units with similar operations under its belt to synergize and control more of the market. Consolidating its resource capabilities at an optimized level has attributed greatly to its success.
Strong Brand Image: In 1990, Federal Express became the first organization awarded the Malcolm Baldrige National Quality Award in the service category. Further, in 1994, the company was the first in global express transportation to obtain simultaneous system-wide ISO 9001 certification in international quality standards. Federal Express has also developed its own quality system that matches their customer's standards.
Company Weaknesses and Resource Deficiencies:
Escalating prices: Federal Express' prices are priced above its competitors. This can be a weakness if their customers do not perceive a difference between Federal Express and its competitors' services.
Labour Disputes with Pilots: Federal Express pilots have formed the FedEx Pilots Association. This organization demanded changes in the pilots' salaries, retirement benefits, and suggested outsourcing some foreign flights instead of giving their own pilots the job. The pilots have a Web site where news is posted and any grievances are communicated. During the busy Christmas season in 1998, the pilots threatened to strike. Federal Express and the FedEx Pilots Association have developed a tentative agreement, which is published on the pilots' Web site. However, the pilots do not believe this agreement fully meets their expectations. The pilot dispute is definitely an internal weakness for Federal Express, considering they have 3,500 pilots employed with them. The business operations would suffer if there were strikes. When UPS employees went on strike in 1997, Federal Express took the extra 800,000 shipments a day. If Federal Express employees went on strike, their competitors could gain an immediate advantage.
The reason for running subsidiaries separately: FDX has deliberately chosen to keep its subsidiaries separate. According to FDX's 1998 Annual Report, CEO Frederick Smith states, "Simply layering the unique resource and operating requirements of a time-definite, global, express-delivery network onto a day-definite, ground small-package network would surely result in diminished service quality and increased costs. Under the FDX umbrella, we will leverage our shared strengths while operating each delivery network independently, with each focused on its respective markets." Frederick Smith is confident this will be a strength, instead of a weakness.
Expansion Globally: Federal Express can continue to expand its global footprint.
Expansion Internally: Federal Express can continue to acquire more similar smaller business which could offer Federal Express leverage to expand into new technologies or areas in their industry.
Run Subsidiaries Together: If FDX doesn't profit from running the subsidiaries separately, they can change to integrating their operations to achieve better synergies and economies of scale.
Contracts with Large Corporations: To stay the industry leader, Federal Express should form contracts with companies who will add cost-saving or value-adding benefits to their services.
Joint-Ventures: Federal Express can form joint ventures, such as already with Netscape and American Express, to enjoy the growth of integrating their customer bases.
Expansion of e-commerce: Federal Express already has a major presence of shipping online. They should keep finding Internet companies to contract delivery of their products. Since the growth of e-commerce is rapid now, Federal Express could enjoy both profits and brand name recognition from this kind of expansion.
Y2K Problem: If Federal Express' communication and tracking systems aren't actually Year 2000 ready, they will experience lost shipments, lost customers, and lost profits. This is a threat for every business, but a global company will be affected on a larger scale.
Community Responsibility in the U.S.: Federal Express might be subject to community disapproval in expansion within the United States. Right now, Federal Express has plans to build a second super-hub in Greensboro, NC. The airport is supportive, but the citizens of the community are not. Federal Express has to decide whether the community support or building the centre is more important.
Relations with Foreign Countries: Through Federal Express' expansions globally, they are subject to laws and regulations of all foreign countries. There could be major problems in this area, stunting growth and raising costs. Already, Great Britain will not let Federal Express fly their own planes for shipments. Federal Express must either load their cargo on to British planes, or use ground transportation. This is very inefficient for Federal Express; however, it keeps competition out for British Air Transportation companies. Everywhere Federal Express goes, they are at risk for regulations that hinder their operations or efficiency.
Economic and Political Conditions: Federal Express is subject to the entire world's economic and political condition in the areas of fuel prices and supply, customer purchase of their services, and relations with foreign countries. As a global company, they are subject to much more risk than domestic companies.
Current Problems and Issues
Federal Express has several current issues and problems. Decisions about these issues will affect Federal Express' profits and brand name in the future.
Federal Express Pilots' disputes with the company over their salary and compensation, retirement benefits, and Federal Express' outsourcing some foreign flights. Federal Express spends only 13.17 percent of total operating expenses on their labor expense. The industry average is 14.81 percent. However, Federal Express' main competitors spend 20 and 24 percent of total operating expenses on labor. This is why the pilots are voicing their disagreements, and demanding change.
Fuel Price Fluctuation: Federal Express raised their prices and developed contracts with oil suppliers to cover fluctuating fuel costs and volatility of supply.
Creation of super-hub in North Carolina: Federal Express does not have the community's support.
Alliance with Netscape: FDX created an alliance with Netscape in order to simplify the world of electronic commerce. FDX will offer delivery services on Netscape's Internet portal site. This will allow both companies to achieve mutual business targets that could not be achieved otherwise.
Alliance with American Express: Federal Express offers a 10 to 20 percent discount on many delivery services to customers using an American Express Small Business Corporate Card.
Federal Express offers many different services spanning the globe; this is why Federal Express has many strengths, and opportunities. However, Federal Express must also be concerned with their weaknesses and current problems.
Dominant Economic Characteristics
Federal Express is in the Air Freight or Air Cargo Transportation Industry. This industry had sales of $34.2 billion in 1998. This industry is in the early maturity life cycle because entry is difficult, yet current competitors are still growing. Companies can realize economies of scale in this industry in marketing and purchasing. Services in this industry are essentially identical, with the exception being the value-added services.
General Economic Conditions
The current global economic crisis can affect this industry by stunting foreign expansion and reduced utilization of express shipping services. The current crisis in Kosovo may affect business for these companies if any countries they do business in feel the United States is wrong and want to boycott American-originating products and services.
Porter's 5-Forces Model
Rivalry Among Competing Sellers:
This is a strong force in this industry because the competitors use price cuts to compete, there is a low cost and ease to switching brands, and the companies in this industry diversify and acquire other companies for strategic growth and synergy.
Competitive Force of Potential Entry:
This is a weak force in this industry. Each company currently in the industry has strong brand images, leaving a harder job for new companies. The capital expenditures to start an express transportation company are large, and the companies currently are achieving economies of scale by going global. Any smaller company will not be able to achieve these right away, not allowing them to compete on prices. Another factor threatening potential entrants is trade tariffs and international regulations. Most companies currently in the industry have already established relations with foreign countries. New companies will have to prove themselves to foreign companies, suppliers, and customers.
Competitive Pressures of Substitute Products:
This is a weak to moderate force in this industry. Businesses and individuals that wish to ship cargo and packages can do it with other modes of transportation such as trucks, trains and boats. However, the customers that use air freight transportation usually desire convenience, speed, and low cost. Traditional transportation modes do not offer all three of these. Businesses and Individuals who want to ship documents can use e-mail, the Internet, and Facsimiles. However, these can take some time to scan and load, and then it is uncertain that your document will get to its destination.
Power of Suppliers
This is a strong force if the suppliers serve industries other than Air Freight. If a supplier only has accounts, or the majority of their accounts with these companies, they will not be able to control prices and supplies. Suppliers that are involved in this industry are: vehicle manufacturers, airplane manufacturers, fuel suppliers, labor, airports, and shipping materials manufacturers.
Power of Buyers
This is a moderate force in this industry because competition keeps prices similar among the companies. The only difference is companies, such as Federal Express who have value-added services that allow a higher price. Also, the buyers of the services in this industry are reactionary. They do not know the technology before it happens. They become dependent on the technology, service and speed offered by the companies in this industry and will pay for it.
Industry Prospects and Overall Attractiveness
A trend among Air Freight shippers is to use the Internet for communication with customers and even obtaining shipping contracts with companies selling on the Internet. This alliance with the fastest-growing industry will bring exponential growth to the Air Freight industry, above and beyond what they would normally have realized without this. This industry should remain attractive, with concentration on competition for market share, service differentiation, and brand image. Current Advertising has been aimed at being better than the competitor for different reasons.
FDX has an impressive performance record for example in 1998 they had revenues of $15.9 billion. We can also look at their Net Income for 1998, as well as for the last five years. This information is shown in 4 on Page 3 of the Appendix. As you can see, sales have been growing steadily for the past five years. Looking at the net income, though, it isn't that impressive. It even declined in 1997, from the rising fuel costs during that year. However, in 1998 it grew from $200,000 to $500,000. That could be from reduction in operating costs, or from the acquisition of the subsidiaries which had lower operating costs compared to Federal Express.
The financial ratios for FDX compared to Airborne Express (ABF) are in Table 2 on Page 3 of the Appendix. Most of the ratios show Airborne Express in better financial condition than FDX. However, this can be explained through FDX's size as compared to Airborne Express. Airborne Express does not offer as many services or types of shipments as FDX, and it only has half the market share as FDX. Since UPS does not have air shipments, we could not benchmark FDX to them. Clearly though, FDX and Federal Express is the market leader in this industry, have outstanding sales, a healthy profit, and a safe amount of debt.
A 5-Year analysis of Federal Express' profitability and activity ratios is in s 5 and 6 on page 4 of the Appendix. These ratios over time show a steady increase, except for year 1997, where fuel costs hurt Federal Express deeply.TNT N.V. is an international express and mail delivery services company with headquarters in Hoofddorp, the Netherlands. In the Netherlands, TNT operates the national postal service under the name TNT Post. The group also offers postal services in eight other European countries, including the UK,...
Federal Express Five-Point Strategy
Federal Express has five strategies that govern business tactics. These are to improve service levels, lower unit costs, establish international leadership and sustain profitability, get closer to the customer, and maintain the People-Service-Profit Philosophy.
Major Strategic Issues
FDX is focused on three primary growth strategies. A collaborative sales process that leverages their shared customer relationships, aggressive global marketing of the broad FDX portfolio to targeted prospective customers, and a strategic application of information systems to reduce costs and improve customer access and connectivity.
Introduction to the business strategy
Expanding Access Through Our Networks
While the benefits and mechanisms of Access are too vast and complex to attribute to any one creator, FedEx is proud to have been the driving force behind many milestones and advances, beginning with overnight express delivery in 1973 from our hub in Memphis. At first connecting 25 U.S. cities — and today, 220 countries — express delivery was a historic breakthrough in Access, collapsing the time and distance between places and connecting people everywhere. Through our expanding networks, anyone shipping a package can now tap into unprecedented speed and worldwide reach.
Shaping the Way the World Connects
FedEx delivers systems and solutions, not just packages. In recent years, we've increased Access by moving information in the form of bits as close to its destination as possible before converting it into atoms. For example, when one customer planned to host a leadership seminar in New Delhi, FedEx Kinko's transferred tons of materials digitally to China, printed them in one day, and shipped them to India the next. With FedEx Office Print Online capability, any individual can do the same — printing documents remotely and having them delivered locally. It's one major new way FedEx is contributing to greater Access.
Today, thanks in part to the Access provided by the internet and FedEx, it's possible for a leading electronics company to synchronize its microchip factories in China to the pulse of global demand, flying the finished chips as needed to manufacturing lines in Shanghai, Seoul or Singapore. The chips are bound for laptops and phones that create personal connections in their own right, while the corresponding transformation of China into the world's factory is expected to lift half a billion people out of poverty by 2020. New FedEx hubs in Guangzhou and Hangzhou will increase the global Access of homegrown Chinese companies and contribute to greater quality of life, while helping companies outside this market to navigate and grow their business here.
Changing What's Possible
For 35 years, FedEx has been dedicated to changing what's possible and improving life for people everywhere by promoting greater Access. Every day around the world, we see first-hand how Access empowers people to improve their lives, their businesses and their communities. Because we see this power, we have a unique perspective on Access.
Infrastructure/supply chain & value chain
FedEx has done several things with its value chain to develop new business. First they have always recognized the need to have technology and IT work to communicate the logistics that they run. They have developed internet technologies that work simply and efficiently to enable customers and sellers to use FedEx as a go between. This has enabled many companies to integrate FedEx technology into their own web sites for customers to use. However, up until January 19, 2000 the organization of FedEx was very broad and tried to cater to too many customers without centrally organizing efficiently its information technology. After January 19, 2000 FedEx performed a reorganization within the company to develop and initiate new businesses.
ICT interface/integration and exploitation
The role information technology has played in FedEx's strategy is exciting. By using IT as a major part of its business, FedEx has reached an almost entirely new group of people. It has maintained its reputation and increased its business at the same time. IT has created a greater opportunity for customers in the global market. They can now request service, pay for that service, and track the package online. Customers no longer need to speak to FedEx. They are now free to order as they need, twenty-four hours per day, seven days per week. Because of this, FedEx's strategy has changed. It is now focused on the use of the Internet and other technological advances. Because this is such a critical aspect of the strategy, the implementation of the strategy had to be almost immediate. To compete with other major businesses in the industry, FedEx had to provide a service to customers that could be accessed using g technology. They also had to provide a package tracking service. As they developed this service, their reputation and business grew.
Background to merger and acquisition
Mergers and acquisitions(M&A) and corporate restructuring are a big part of the corporate finance world. Every day,Wall Street investment bankers arrange M&A transactions,which bring separate companies togetherto formlarger ones. When they're not creating big companies from smaller ones, corporate finance deals do the reverse and break up companies through spinoffs, carve-outsor tracking stocks.
The Main Idea
One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A.
This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.
Distinction between Mergers and Acquisitions
Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.
When one company takes over another and clearly established itself asthe new owner, the purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer'sstock continues to be traded.
In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a singlenew company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.
In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.
A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.
Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.
Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:
* Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.
* Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.
* Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company canmaintain or developa competitive edge.
* Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.
That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimesa mergerdoes just the opposite. In many cases, one and one add up to less than two.
Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal - will try tocreate animage of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price. We'll talk more about why M&A may fail in a later section of this tutorial.
Varieties of Mergers
From the perspective of business structures, thereis a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:
* Horizontal merger- Two companies that are in direct competition and sharethe same product lines and markets.
* Vertical merger- A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.
* Market-extension merger -Two companies that sell the same products in different markets.
* Product-extension merger - Two companies selling different but related products in the same market.
* Conglomeration- Two companies that have no common business areas.
There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:
o Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is madewith cash or through the issue of some kind of debt instrument; the sale is taxable.
Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and thepurchase price of the assets candepreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.
o Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.
As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock orconsolidation as a new company. Acquisitions are often congenial,and all parties feel satisfied with the deal. Other times, acquisitions are more hostile.
In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.
Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new publiccorporation with tradable shares.
Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends onwhether this synergy is achieved.
The Transport and Logistics (T&L) sector is characterised by a significant level of privatisation, finance-raising and merger and acquisition activity (M&A) . Transactions are often complex and impacted by the regulatory environment, competition issues, or need for contracted subsidies to support operations.
We have witnessed many privatisations of bus companies, ports and airports which have created successful private sector groups that have continued to grow via further acquisitions. In other segments there is ongoing global consolidation within and between operators from the courier, parcel, freight forwarding and contract logistics arenas. Postal organisations and railway companies that have historically been more nationally oriented, are now seeking opportunities to expand into cross-border markets driven by a more commercial focus and liberal regulatory regime.
Analyse benefits & limitations in industry
There seems to be rarely a day that goes by in the business world without some announcement or rumour of a prospective merger or acquisition. Invariably, the management of the firm doing the acquisition claims that the impact on the various stakeholders will be minimal. The trend to consolidation of the industry is still growing. Does the trend to acquisition in this industry mean we are getting less choice and worse value for money? Some think so. For the business doing the acquisition, the benefits may not always be what were expected.
Investors in a company thatareaiming to take over another one must determine whether the purchase will be beneficial to them. In order to do so, they must ask themselves how much the company being acquired is really worth.
Naturally, both sides of anM&A deal will have different ideas about the worth of a target company: its seller will tend to valuethe company at as high of a price as possible, while the buyer will try to get the lowest price that he can.
There are, however, many legitimate ways to value companies. The most common method is to look at comparable companies in an industry, but deal makers employ a variety of other methods and tools when assessing a target company. Here are just a few of them:
1. Comparative Ratios- The following are two examples of the many comparative metrics on which acquiring companiesmay base their offers:
o Price-EarningsRatio(P/E Ratio)- With the use of this ratio, an acquiring companymakes an offerthat isa multiple of the earnings of the target company. Looking at the P/E for all the stocks within the same industry group will give the acquiring companygood guidance for what the target's P/E multiple should be.
o Enterprise-Value-to-SalesRatio(EV/Sales)- With this ratio, the acquiring company makes an offer as a multiple of the revenues, again, while being aware of theprice-to-sales ratioof other companies in the industry.
* Replacement Cost- In a few cases, acquisitions are based on the cost of replacing the target company. For simplicity's sake, suppose the value of a company is simply the sum of all its equipment and staffing costs. The acquiring company can literally order the target to sell at that price, or it will create a competitor for the same cost. Naturally, it takes a long time to assemble good management, acquire property and get the right equipment. This method of establishing a price certainly wouldn't make much sense in a service industry where the key assets - people and ideas - are hard to value and develop.
* Discounted Cash Flow(DCF) -A key valuation tool in M&A, discounted cash flow analysis determines a company's current value according to its estimated future cash flows. Forecasted free cash flows (net income+ depreciation/amortization - capital expenditures - change in working capital) are discounted to a present value using the company's weighted average costs of capital(WACC). Admittedly, DCF is tricky to get right, but few tools can rival this valuation method.
Synergy: The Premium for Potential Success
For the most part, acquiring companiesnearly always pay a substantial premium on the stock market value of the companies they buy. The justification for doing so nearly always boils down to the notion of synergy; a merger benefits shareholders when a company's post-merger share price increases by the value of potential synergy.
Let's face it, it would be highly unlikely for rational owners to sell if they would benefit more by not selling. That means buyers will need to pay a premium if they hope to acquire the company, regardless of what pre-merger valuation tells them. For sellers, that premium represents their company's future prospects. For buyers, the premium represents part of the post-merger synergy they expect can be achieved. The following equation offers a good way to think about synergy and how to determinewhether a deal makes sense. The equation solves for the minimum required synergy:
In other words, the success of a merger is measured by whether the value of the buyer is enhanced by the action. However, the practical constraints of mergers, which we discuss in part five, often prevent the expected benefits from being fully achieved. Alas, the synergy promised by deal makers might just fall short.
What to Look For
It's hard for investors to know when a deal is worthwhile. The burden of proof should fall on the acquiring company. To find mergers that have a chance of success, investors should start by looking for some of these simple criteria:
* A reasonable purchase price - A premium of, say, 10% above the market price seems within the bounds of level-headedness. A premium of 50%, on the other hand, requires synergy of stellar proportions for the deal to make sense. Stay away from companies that participate in such contests.
* Cash transactions - Companies that pay in cash tend to be more careful when calculating bids and valuations come closer to target. When stock is used as the currency for acquisition, discipline can go by the wayside.
* Sensible appetite - An acquiring company should be targeting a company that is smaller and in businesses that the acquiring company knows intimately. Synergy is hard to create from companies in disparate business areas. Sadly, companies have a bad habit of biting off more than they can chew in mergers.
* Mergers are awfully hard to get right, so investors should look for acquiring companieswith a healthy grasp of reality.
The main issues that relate to this story involve consolidation of markets, reasons for mergers and acquisitions and the stakeholder model.
Consolidation of markets
Markets consist of a number of firms selling similar products. They are, of course, differentiated in many respects but essentially the same. The market for beer is divided into lager beers, bitter beers, mild beers and so on; it is, however, commonly described as the 'beer market'.
As the number of takeovers increases, the number of firms in the market gets smaller. Many of the brands might still survive but they are mostly owned by very large firms who are likely to have international interests. As the number of firms gets smaller in number, the market is said to become more consolidated. This has implications for the degree of competition in the market and the effect on consumers.
The reasons for mergers and acquisitions
There are a number of standard reasons given for acquisitions to take place. There are subtle differences in the reasons dependent on whether the acquisition is a merger or takeover but the main categories of reasons are the same. In exam or test questions, you have to strip out the relevant reasons from the ones that are not relevant in relation to the particular case study you are looking at.
In addition, you might be expected to make some evaluative comment about the different reasons - some are likely to be more important or more significant than others. The success of an acquisition in meeting these objectives might also be something that you will have to comment on. It is worth bearing these things in mind as you read through the reasons that follow.
Capacity refers to the amount of output that a firm is capable of producing given its existing assets. In theory, firms will have a maximum capacity that they can produce given their capital assets. Acquiring another business might enable it to be able to increase its capacity relatively quickly.
Economies of Scale
Economies of scale are the advantages of large scale production that result in lower cost per unit produced. Economies of scale do not refer to expanding output with existing resources; it is about changing the scale of production. A firm acquiring another increases its scale of operations; it has more labour, more plant and equipment - more of everything!
Economies of scale is not just about the firm expanding its existing capacity but about changing the whole scale of its operations - increasing all factors of production.
Acquisitions cost money - in some cases, millions of pounds, if not billions. It should be clear from this that an acquisition is not going to 'reduce costs' as is often stated by students. What it will hope is that the increase in output that results from the acquisition will be greater than the increase in costs as a result of it. If a firm doubles its costs as a result of financing an acquisition but output rises by 120%, then its average costs - the costs per unit - will fall.
This is what economies of scale is about. Firms gaining economies of scale from an acquisition will hope to use the benefits it gains from lower unit costs to either boost its profit margins or enable it to be able to compete with its rivals more effectively.
Plugging a gap in the market
A business may feel that its product portfolio is not sufficient to cater for different customer needs in its market. Acquiring another firm that is already in that market enables it to plug that gap. It may be the case that a firm has a seasonal sales trend. Buying a business that has its predominant sales in a different season of the year will also be an example of how the firm's product portfolio might be enhanced through a merger and acquisition. The example of Fuller's and Gales is an excellent example of this.
Acquiring a business which contributes to the product portfolio might be a reason for an acquisition.
Accessing supplies or distribution networks
Some firms develop their business in a particular sector of the production process - primary, secondary or tertiary. An acquisition in a different sector may reduce its reliance on suppliers or give it access to new markets. This can lead to a strengthening of the businesses position and give it a significant competitive advantage over its rivals. It can also mean that it is moving into an area of business in which it does not have expertise so care has to be taken to research the proposed acquisition target carefully.
A brewer acquiring a pub in which to sell its beers gives the brewer a mini-monopoly in that pub. This would be an example of vertical integration forwards. Such pubs are called 'tied houses' - they are tied to the brewer and must sell its beers.
Accessing technology or skills
A firm may be targeted for acquisition because it has specific skills within its staff or has a particular technology that would be useful to another business. Businesses that are relatively new and might have hit upon a new idea or who have developed specific skills in a certain area might be ripe targets for acquisition.
Businesses are always looking for ways to reduce their tax exposure. The tax laws in most countries are complex but essentially, there may be less tax to pay if a firm uses cash to acquire assets than if it has cash in hand. If, and this is often the case, a firm has large sums of money lying idle, using these sums to acquire another business that would not only enhance its operations but would also reduce its tax liability may be very tempting for the firm to look for a suitable target for acquisition.
The Stakeholder Model
A stakeholder is someone or some organisation/institution that has an interest in the success of a business. Notice the emphasis in this definition on the word 'success'. Some stakeholder models include competitors as a stakeholder. This definition would exclude competitors because they cannot be said to have an interest in the success of a business. That is not to suggest that other stakeholder models are incorrect - they are merely different to the one used in this article.
The key stakeholders in an acquisition are going to be:
* The local community
* The government/regulatory agencies
When an acquisition is announced, there is likely to be conflicts of interest between these different stakeholder groups. The interests of shareholders are likely to be very different to the interests of the firm's employees. One of the issues that a firm considering an acquisition has to ask itself is whether it can make the acquisition work with its existing business. Different cultures and working practices can cause a number of problems, which might stop the merger from delivering the benefits the firm might hope for. Finding ways of satisfying these competing stakeholder interests, therefore, might be crucial to the success of the merger.
Why They Can Fail
It's no secret that plenty of mergers don't work. Those who advocate mergers will argue that the merger will cut costs or boost revenues by more than enough to justify the price premium. It can sound so simple: just combine computer systems, merge a few departments, use sheer size to force down the price of supplies and the merged giant should be more profitable than its parts. In theory, 1+1 = 3 sounds great, but in practice, things can go awry.
Historical trends show that roughly two thirds of big mergers will disappoint on their own terms, which means they will lose value on the stock market. The motivations that drive mergers can be flawed and efficiencies from economies of scale may prove elusive. In many cases, the problems associated with trying to make merged companies work are all too concrete.
For starters, a booming stock market encourages mergers, which can spell trouble. Deals done with highly rated stock as currency are easy and cheap, but the strategic thinking behind them may be easy and cheap too. Also, mergers are often attempt to imitate: somebody else has done a big merger, which prompts other top executives to follow suit.
A merger may often have more to do with glory-seeking than business strategy. The executive ego, which is boosted by buying the competition, is a major force in M&A, especially when combined with the influences from the bankers, lawyers and other assorted advisers who can earn big fees from clients engaged in mergers. Most CEOs get to where they are because they want to be the biggest and the best, and many top executives get a big bonus for merger deals, no matter what happens to the share price later.
On the other side of the coin, mergers can be driven by generalized fear. Globalization, the arrival of new technological developments or a fast-changing economic landscape that makes the outlook uncertain are all factors that can create a strong incentive for defensive mergers. Sometimes the management team feels they have no choice and must acquire a rival before being acquired. The idea is that only big players will survive a more competitive world.
The Obstacles to Making it Work
Coping with a merger can make top managers spread their time too thinly and neglect their core business, spelling doom. Too often, potential difficulties seem trivial to managers caught up in the thrill of the big deal.
The chances for success are further hampered if the corporate cultures of the companies are very different. When a company is acquired, the decision is typically based on product or market synergies, but cultural differences are often ignored. It's a mistake to assume that personnel issues are easily overcome. For example, employees at a target company might be accustomed to easy access to top management, flexible work schedules or even a relaxed dress code. These aspects of a working environment may not seem significant, but if new management removes them, the result can be resentment and shrinking productivity.
More insight into the failure of mergers is found in the highly acclaimed study from McKinsey, a global consultancy. The study concludes that companies often focus too intently on cutting costs following mergers, while revenues, and ultimately, profits, suffer. Merging companies can focus on integration and cost-cutting so much that they neglect day-to-day business, thereby prompting nervous customers to flee. This loss of revenue momentum is one reason so many mergers fail to create value for shareholders.
But remember, not all mergers fail. Size and global reach can be advantageous, and strong managers can often squeeze greater efficiency out of badly run rivals. Nevertheless, the promises made by deal makers demand the careful scrutiny of investors. The success of mergers depends on how realistic the deal makers are and how well they can integrate two companies while maintaining day-to-day operations.
One size doesn't fit all. Many companies find that the best way toget aheadis toexpand ownership boundaries through mergers and acquisitions. For others, separating the public ownership of a subsidiary or business segment offers more advantages. At least in theory, mergers create synergies and economies of scale, expanding operations and cutting costs. Investors can take comfort in the idea that a merger will deliver enhanced market power.
By contrast, de-merged companies often enjoy improved operating performance thanks to redesigned management incentives. Additional capital can fund growth organically or through acquisition. Meanwhile, investors benefit from the improved information flow from de-merged companies.
M&A comes in all shapes and sizes, and investors need to consider the complex issues involved in M&A. The most beneficial form of equity structure involves a complete analysis of the costs and benefits associated with the deals.
Let's recap what we learned in this tutorial:
* A merger can happen when two companies decide to combine into one entity or when one company buys another. An acquisition always involves the purchase of one company by another.
* The functions of synergy allow for the enhanced cost efficiency of a new entity made from two smaller ones - synergy is the logic behind mergers and acquisitions.
* Acquiring companies use various methods to value their targets. Some of these methods are based on comparative ratios - such as the P/E and P/S ratios - replacement cost or discounted cash flow analysis.
* An M&A deal can be executed by means of a cash transaction, stock-for-stock transaction or a combination of both. A transaction struck with stock is not taxable.
* Break up or de-merger strategies can provide companies with opportunities to raise additional equity funds, unlock hidden shareholder value and sharpen management focus. De-mergers can occur by means of divestitures, carve-outs spinoffs or tracking stocks.
· Mergers can fail for many reasons including a lack of management foresight, the inability to overcome practical challenges and loss of revenue momentum from a neglect of day-to-day operations.
FedEx acquisition of Caliber Systems
Federal Express Corporation is founded in Little Rock, AR in 1971 by Frederick W. Smith
To change its historical image from an express delivery company to an e-business company, it acquired other companies such as Caliber Systems and RPS. The acquisition of Caliber provides customized, integrated logistics and warehousing solutions worldwide. RPS is North America's second-largest provider of business-to-business ground small-package delivery services. FedEx is growing RPS into a business-to-customer specialty service for the residential delivery business. In 2000, FedEx announced a major re-organization to allow five subsidiary companies to function independently but to compete collectively. In addition to streamlining many functions, the company announced that it would pool its sales, marketing and customer service functions. The interesting aspect of FedEx is that it has adopted new technologies to deliver business value but also has paid a great deal of attention to organizational and re-engineering/alignment issues.
FedEx Corporation was founded as FDX Corporation in January 1998 with the acquisition of Caliber System Inc. by Federal Express. With the purchase of Caliber, FedEx started offering other services besides express shipping. Caliber subsidiaries included RPS, a small-package ground service; Roberts Express, an expedited shipping provider; Viking Freight, a regional, less-than-truckload freight carrier serving the Western United States; Caribbean Transportation Services, a provider of airfreight forwarding between the United States and the Caribbean; and Caliber Logistics and Caliber Technology, providers of logistics and technology solutions. FDX Corporation was founded to oversee all of the operations of those companies and its original air division, Federal Express.
In January 2000, FDX Corporation changed its name to FedEx Corporation and rebranded all of its subsidiaries. Federal Express became FedEx Express, RPS became FedEx Ground
FedEx Ground is a shipping company headquartered in Moon Township, Pennsylvania, a suburb of Pittsburgh. Originally conceived as a lower cost competitor to UPS, Roadway Package System , was created to take advantage of new bar code, material handling and computer technologies...
, Roberts Express became FedEx Custom Critical, and Caliber Logistics and Caliber Technology were combined to make up FedEx Global Logistics. A new subsidiary called, FedEx Corporate Services was formed to centralize the sales, marketing, customer service for all of the subsidiaries. In February 2000, FedEx acquired Tower Group International, an international logistics company. FedEx also acquired WorldTariff, a customs duty and tax information company, TowerGroup and WorldTariff were rebranded to form FedEx Trade Networks.
FedEx Corp. acquired privately held Kinko's Inc. in February 2004 and rebranded it FedEx Kinko's. The acquisition was made to expand FedEx retail access to the general public. After the acquisition, all FedEx Kinko's locations exclusively offered only FedEx shipping. In June 2008, FedEx announced that they would be dropping the Kinko's name from their ship centers, with FedEx Kinko's changing to FedEx Office.
Branding and business structure
FedEx is organized into operating units, each of which has its own version of the wordmark, designed by Lindon Leader of Landor Associates, in 1994. The Fed is always purple
PurplePurple is a general term used in English for the range of shades of color occurring between red and blue. In additive light combinations it occurs by mixing the primary colors red and blue in varying proportions...
and the Ex is in a different color
ColorColor or colour is the visual perceptual property corresponding in humans to the categories called red, yellow, blue and others. Color derives from the spectrum of light interacting in the eye with the spectral sensitivities of the light receptors...
for each divisionand grey for the overall corporation use. The original "FedEx" logo had the Ex in orange
Orange (colour)The colour orange occurs between red and yellow in the visible spectrum at a wavelength of about 585-620 nm, and has a hue of 30° in HSV colour space. It is numerically halfway between red and yellow in a gamma-compressed RGB colour space The complementary colour of orange is azure, a slightly...
; it is now used as the FedEx Express wordmark. The FedEx wordmark is notable for containing a hidden right-pointing arrow in the negative space
Negative spaceNegative space, in art, is the space around and between the subject of an image. Negative space may be most evident when the space around a subject, and not the subject itself, forms an interesting or artistically relevant shape, and such space is occasionally used to artistic effect as the "real"... between the "E" and the "X".
FEDEX OPERATING COMPANIES SCAC CODES FOR FEDEX:
The Standard Carrier Alpha Code(SCAC) is a unique code used to identify transportation companies. It is typically two to four alphabetic letters long. It was developed by the National Motor Freight Traffic Association in the 1960s to help the transportation industry for computerizing data and records.
FDE - FedEx Express
FDEG - FedEx Ground - A package delivery company
FDCC - FedEx Custom Critical
FEXF - FedEx Freight
FXFE - FedEx LTL Freight East
FXFW - FedEx LTL Freight West (formerly VIKN - Viking)
FXNL - FedEx Freight National (formerly Watkins)
Some of FedEx's best-known ad campaigns:
* “Absolutely, Positively Overnight” - 1978 - 1983
* “It's not Just a Package, It's Your Business” - 1987 - 1988
* “Our Most Important Package is Yours” - 1991 - 1994
* “Absolutely, Positively Anytime” - 1995
* “The Way the World Works,” 1996 - 1998
* “Be Absolutely Sure,” 1998 - 2000
* “This is a Job for FedEx,” 2001 - 2002
* “Don't worry, there's a FedEx for that,” 2002 - 2003
* “Relax, it's FedEx,” 2004 - 2008
* "We Understand," 2009-present
* "We Live To Deliver" 2009-present
Internet marketing and e-tailing in 2000
IT Strategies -- How to Align IT with Business Needs
Once a company establishes a strategy then the systems are developed to realize the strategy through effective use of information technologies and other organizational procedures. For example, Dell established and implemented integrated systems with partners that produce a customized PC to minimize the time to start using the PC. Similarly, Amazon.com developed technologies such as OneClick and business partnerships with many bookstores so that the customers could quickly select and purchase books from a very large virtual bookstore.
The first and most important step after e-business strategy is to develop a design of e-business that aligns the company information systems and other systems with the strategy. The design must be developed to keep flexibility and change as a core requirement because everything is changing. Traditional business design approaches started with core competencies that drove the products/services which were delivered to the target customers. The new model starts with examining customer needs (e.g., the Dell idea of minimizing the time the customer has to wait before using the PC), developing products/services to satisfy these needs, and then relying on the competencies of service providers by outsourcing product development. Both models are shown in 1.
This does not mean that the traditional model does not work. In fact, both models work at different times. The trick is to know what model works when. The new model implies a great deal of flexibility because customer needs change very quickly. This model heavily relies on outsourcing because outsourcing gives flexibility (if your business needs change, you get new service providers). It also implies heavy reliance on information technology (IT) to quickly understand and respond to customer needs. Basically, information technology must be aligned with the business needs of an organization. For example, Michael Hammer [Hammer 1990] defines and promotes business process reengineering (BPR) as the use of the power of modern IT to radically redesign business processes in order to achieve dramatic improvements in performance. In essence, IT must enable the organization to survive and prosper in the competitive global economy. While there is a general agreement on the importance of aligning IT with business, the approaches and views differ widely. This short discussion is intended to establish an overall context within which the issues of e-business application engineering/reengineering can be presented.
Different views and models for aligning IT with business needs have been discussed widely in the management literature. While the models and approaches differ between IT management scholars, the basic principles of aligning business and IT are the same. Let us discuss a model presented by Henderson and Venkataram [Henderson, J. and Venkatraman, "Strategic Alignment: Leveraging Information Technology for Transforming Organizations", IBM Systems Journal, Vol. 32, No. 1, 1993, pp. 4-16]. ] to illustrate the key concepts. This model is accepted in the IT management research community and has been used by many researchers as a framework for further work. . In addition, this model has been adopted by IBM for management training and is used by the IBM Consulting Group. The basic Henderson-Venkataram model views business and IT in terms of strategy and infrastructure (see 2). The four closely interacting components of this model are: business strategy, IT strategy, business infrastructure, and IT infrastructure.
Henderson-Venkataram (H-V) propose that IT can be aligned with business by involving not less than three components of the alignment model. The effort can be initiated (driven) from any component and then involve the other two. For example, the following scenarios for aligning IT with business processes can be envisioned:
* Business strategy -> IT strategy -> IT infrastructure. In this case, the business strategy drives the IT strategy, which in turn influences the IT infrastructure. This common approach is depicted in 3a.
* Business strategy -> Business infrastructure -> IT infrastructure. In this case, the business strategy drives the business infrastructure, which in turn influences the IT infrastructure ( 3 b). This is the traditional BPR model.
* IT strategy -> Business strategy -> Business infrastructure. In some cases, the IT strategy drives the Business strategy, which in turn influences the Business infrastructure. This scenario, shown in 3 c, is used in cases where organizations initiate new businesses due to their expertise in IT (this is happening in the telecommunications industry where the Baby Bells are entering the Internet market to take advantage of their networking know-how).
* IT strategy -> IT infrastructure -> Business infrastructure. In this case, the IT strategy influences the IT infrastructure which in turn influences the business infrastructure 3 d).
Here are some general observations and guidelines to move forward:
* Real strategic and sizable business gains do not result from re-engineering only the applications but come from the combination of business re-engineering along with the supporting application re-engineering. See the sidebar " Case Study: e-Business Strategies at Federal Express”.
* IT should be used to enable business decisions and processes. Make sure that there are clear business drivers before you get carried away with the technology.
* Many new technologies that claim to eliminate existing N technologies themselves become N+1.
* The life cycle for the reason for undertaking an effort should be longer than the life cycle of the undertaking itself. In other words, if you undertake a two year reengineering effort to save hardware cost, but hardware costs change in 6 months, you may be looking at a very tough year and a half.
* Distribution is not always good. Replacing a mainframe with multiple PCs may be like replacing a horse with 100 chickens to pull a cart. You face similar coordination problems!
* There is a thin line between vision and hallucination. You should know when you cross it.
e-Business Strategies at Federal Express
Over the years, Federal Express Corporation (“FedEx”) has transformed itself from an express delivery company to a worldwide transportation, global logistic, and supply chain solutions company that relies heavily on e-Business. The Optically Recorded Information Online Network (ORION) project at Federal express is an early example of how FedEx utilized new information technologies while reengineering the business processes. As noted later, this trend has continued.
ORION was conceived in the mid 1990s in response to the inability of alternative methods (paper, microfilm, microfiche) to cope with the massive documentation needed for FedEx's more than 90,000 employees at that time. Instead of just an archiving system, ORION virtually eliminated all manual data and allowed secure and instant access to documents worldwide. This was accomplished through systematically combining technological innovation with organizational changes. In particular, the project was conducted as three stages of reengineering which systematically replaced the character -based system with GUI devices. In each stage, the customers, input devices, output devices, indexing schemes, and interconnecting networks were clearly specified. In addition, the workflow was reengineered in each stage and the organizational/staff issues were carefully taken into account. The key factors for the success of this project were:
Strong sponsorship from senior management
Information systems group served as enabler and facilitator instead of leader
Focus on integration with existing systems
Effective staging of technical and organizational changes
Constant review and analysis of evolving technologies
High initial investment on non-technical issues such as end-user training
The company has continued the same approach to adopt e-business in the late 1990s. In 1998, the company built a powerful technical architecture that had the ability to deliver information over the web to all employees, customers and sites in a global economy. It has also integrated its operation with suppliers such as Amazon.com for fast delivery. FedEx, for example, integrated its supply chain with Amazon.com to deliver 250,000 copies of the very popular book "Harry Potter and the Goblet of Fire" in one day!