Strategic Management in FedEx in response to Competition
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Published: Mon, 5 Dec 2016
History of air carriers as given by Coyle et al attributes the use of airplanes for mail transport as the starting point of the airline industry (Coyle et al, 2006:158). From mail transport air transportation moved to passenger, transport where the industry has all through established its dominance especially when it comes to transporting passengers over long distances in very short periods of time. The services offered by for-hire carriers can be classified into all-cargo, air taxi, commuter, charter and international services (Coyle et al, 2006:159). All-cargo carriers such as FedEx and UPS airlines are primarily concerned with the transportation of cargo. Federal Express Corporation, which is a cargo airline, is based at Memphis in the United States of America.
Federal Express Corporation also known as FedEx is the largest airline globally with regard to freight tons but in terms of fleet size, it is the world’s second largest airline (Zhang, 2006:98). The corporation provides direction and financial reporting for a number of companies, which collectively compete under the Federal Express name globally. The companies include FedEx Ground, FedEx Express, FedEx Office, FedEx Freight, FedEx Services, FedEx Trade Networks and FedEx Custom Critical (FedEx.com, 2010:110). Before the Federal Express became Federal Express Corporation it was known as FedEx but it adopted the current name under which it currently operate in 1998 when it acquired Caliber System Inc. Federal Express Corporation built on its strength of express delivery service and formed more diversified company which incorporated different but related businesses (Denton, 1992:86). Federal Express Corporation is the leading firm in the transportation industry globally. The company has managed to attain its current position by incorporating what it takes to be a major player in the global market (Gp-Training, n.d.). FedEx Corporation has built superior virtual, physical and people network to shape network economy in the global scale.
The following discussion will seek to conduct a strategic management analysis of FedEx based on two models; Porter’s five forces model and the SWOT analysis. The two models have been selected based on the reason that they provide a step-by-step analysis of an organization. They are objective and can enable a planner or strategic manager to make accurate predictions of a business or project. Further, they greatly assist in prior determinations before capital investments are made, for instance, they greatly assist in determining whether the goals and objectives of a particular business are attainable.
SWOT Analysis and five forces model of Federal Express Corporation
SWOT analysis refers to an evaluation technique deployed in determining the strengths, weaknesses, opportunities and techniques in a business venture.
On the other hand, Michael Porter established a structure that models a business as being influenced by five main forces. This model is very important and can be used by industries to understand their operations better. According to Overbeck (2009:126) porter’s five forces, which is a model for industry analysis, include rivalry, threats of substitutes, Buyer power, Supplier power and Barriers to entry or threat of entry (McGrew & Wilson, 1982:75). In addition, FedEx SWOT analysis presents various opportunities as well as strengths of the company, which have made it become one of the market leaders globally. However, the company also has a number of threats and
weakness that should be addressed to be able to become even more prosperous in future.
Source: Hill, C. and Jones G. (2009:67). Strategic management theory. New York: Cengage Learning.
Porter’s Five Forces model
According to Hill and Jones (2009:42), competition between rival firms according to traditional economic model drives profit to ultimately zero. However, competition is not perfect and businesses are not basic passive price takers but they strive for competitive advantage over rival firms. Application of rivalry, which is Michael porter’s first force to the Federal express, is evident. For instance, the corporation was faced with threatening rivalry challenge before it occupied the current position in the industry. For instance, the entry of competitors in their market. UPS in particular, posed a major threat. The company was ready to spend enormous sums of money in market penetration. For example, it invested in a thirty million dollar ad for purposes of competing with FedEx. Another challenge facing FedEx is the progressive developments in technology which act as substitutes to transnight mail delivery, for example, fax and emails. The entry of UPS into the market posed a severe threat to FedEx, serious enough to cause Pauline and Farhoomand (2000:88), to report that the transportation volume of FedEx was going down.
FedEx Corporation responded to the threat of rivalry that threatened its progress and in January 2000, it resorted to reorganize the company into groups operation by doing business with the whole FedEx family. According to Hill and Jones (2009:42) it is important to reconsider strategy in order to compete effectively in the market. The theory of Porter’s five forces model state that such action should only be taken after understanding the structures of the industry (Goodwin, 2001:178). The resolution was that the five subsidiary companies and FedEx corporation was to compete collectively but to function independently, a strategy that boosted their pursuit for an advantage in the industry. This is in accordance with the strategic management theory and the model of Porter’s five forces, which further advocates the scrutiny of competitive forces in the market before identifying threats and opportunities as well as coming with a suitable strategy (Hill & Jones, 2009:201).
Another strategy that FedEx Corporation used was improving product differentiation by embracing innovation and offering high quality products and services to customers. According to (Goodwin, 2000:67), FedEx Corporation pooled its marketing, sales and customer service function that enable customers to access services of the group at a single point. The reorganization cost FedEx Corporation 100 million USD in a span of three years, but the end justified the means. These measures retained FedEx in the market, but did not frustrate UPS which in a number of years has managed to scoop its fair share of the market. Today, FedEx has grown into a multi- billion corporation owning various companies namely the FedEx corporation, FedEx Ground, FedEx Express , FedEx Freight, FedEx custom critical, FedEx Trade Networks and FedEx Kinko’s .
On the other hand, UPS has grown to the largest package delivery company on the globe owning companies like; UPS Mail Innovations, UPS Air Cargo, UPS Capital Corporation, UPS Consulting, UPS Aviation Technologies, UPS Mail Boxes Among Others.
Threat of Substitutes
A substitute product in Porter’s model is a product in other industries which could be deployed as an alternative to another product from a different industry. The threat of substitutes according to the five forces theory therefore exists when the demand of a product is affected by change in price of a substitute product (Overbeck, 2009:56). The same way the price elasticity of a product is affected by same substitute products hence when more substitutes become available, it influence demand, which becomes more elastic because customers have more alternatives. Competition can be endangered by threat of substitutes when they come from outside industry. Strategic management theory and five forces theory according to Hill and Jones (2009:53) assert that existence of very close substitutes poses a strong threat in the market and leads to reduced profitability. To deal with such a challenge the two theories support the idea of diversifying a company’s products and service as FedEx did (Hill & Jones, 2009:53-54).
FedEx embraced technology and innovation, which enhanced reliability and speed of deliveries in the firm. The company adopted next day delivery services, which completely revolutionized the industry. This made it preferable to many customers because it became reliable and convenient. Perishable commodities could reach their intended destination with appropriate time, which consequently reduced competition among its rivals. According to Overbeck (2009:45), FedEx Corporation Company under the leadership of Smith pioneered a number of technological breakthrough that propelled the firm above all others. For instance, over 100000 PCs loaded with Federal Express software made to log and link customers into tracking and ordering systems were introduced in FedEx. Federal Express also, became the first to issue their drivers with handle scanners, a device that alerted customers when packages were either delivered or picked up. According to Pauline and Farhoomand (2000:113), Federal Express Corporation was the first to launch a website with tracking and tracing capabilities. Such strategies helped the company to grow without feeling the pinch of the threat of substitutes.
This is the impact that customers (buyers) have on a producing industry. According to Overbeck (2009:89), there are factors that determine the buyer power. Federal Express Corporation has been shaped by the buyer power especially corporate buyers who have enormous bargaining power resulting from the large amounts of purchases they make. Buyer power is also influenced by the switching costs. It is a fact that buyer’s power greatly influences FedEx. For example, it gained a huge share of the catalogue business because it was able to offer buyers lower prices as compared to UPS. The company has always tried to expand with the demand of its customers (Overbeck, 2009:89).
FedEx Company has used information technology that has been quite significant in the globalization of trade, effective and efficient sharing of information within and outside the company, improved customer service and reduced costs of services offered by the company. As a result, the buyer power is skewed towards Federal Express Corporation because it provides the services that the buyer demands. According to five forces theory and strategic management theory, buyer power is a very significant consideration in designing business strategy (Hill & Jones, 2009:50-52).
On the other hand, buyer power also constrains FedEx in some ways. The delivery has nominal switching costs such that when a customer is not satisfied, they can easily switch to the competitor’s services. For instance, when UPS made its entry into the market, offering its services at half the price offered by FedEx, many of its customers disregarded the switching costs and moved to UPS.
Supplier power illustrates the ease with which suppliers can determine prices. Supplier power id determined by the number of suppliers available in an industry, the distinctiveness of their services or products their influence over a company. The more supplier options open to a company, the less the likelihood of high supplier power.
According to Hill and Jones (2009:52), a powerful supply has the ability to influence the producing industry. According to five forces theory and strategic management theory, suppliers can easily determine the future and progress of a firm and so can the third parties (Hill & Jones, 2009:53). While other rival companies in the industry were sub-contracting their shipment to third parties and buying space on commercial airlines, Federal Express Corporation tried to acquire its own transportation fleet and in the tenth year, it became the first company in the United States to achieve 1 billion USD revenue mark in ten years without corporate mergers and acquisitions. According to Farhoomand and Pauline (2000), Federal Express Corporation does not have external factors that influence its internal decision and operation and has been able to advance greatly in the industry this is because Federal Express Corporation has limited influence of buyer power.
Barriers to Entry/ Threat of Entry
Hill and Jones (2009:43) argue that industries possess some characteristics, which protect the lofty levels of profit of firms in the market, which prevent additional firms from entering the market. It is this inhibition of additional rivals in the market, which is termed as barriers to entry. According to Strategic management and five forces theories, barriers to entry reduce rate of entry of new businesses, which therefore maintains the high level of profit for those firms that are already in the industry (Hill & Jones, 2009:87). The sources of such barriers include government created barriers, Asset specificity, patents and proprietary knowledge and organizational economies of scale. Federal Express is already in the industry and dominating the industry already (Farhoomand & Pauline, 2000:79). Therefore, it is not faced with any barrier to entry into the industry.
FedEx and the other delivery companies already in the market like UPS are the cause of the barriers. They have large brand name as well as established relations with foreign countries. Smaller companies will have an almost impossible task of penetrating the market because of the large capital requirements. With little capital, it will be impossible to offer competitive prices. Further, reaching the standards set by the market giants is an uphill task.
Federal Express SWOT Analysis
FedEx SWOT analysis presents how the company has been able to use information technology in defining its strategies (Quality-Assurance-Solution, n.d.). Information technology apart from improving the performance has made it possible for the company reaches new associates or groups of people. SWOT analysis of FedEx Company involves analyzing strength, weaknesses, opportunities as well as the threats of the company in accordance with the SWOT analysis theory (Burger, 2008:12)
Strengths of FedEx
SWOT analysis theory according to Burger (2008:13) is very instrumental in helping companies identify internal and external attributes and factor, which affect the companies’ resource capability. According to the theory, internal attributes are strengths and weaknesses while external attributes are opportunities and threats (Burger, 2008:13). FedEx strengths in the transport industry include ;
Efficient service delivery to customers. The company gives the needs of customer’s first priority. This has instilled customers with confidence in the company, thereby making it quite preferable among many people in the global market.
In addition, Grignard (1994) argues that the strength of the company is the ability to offer express mail services, which ensures that mails are delivered overnight. This has made the company to outdo many major players in the industry such as United States Postal Service in terms of service delivery as well as customer service. According SWOT analysis theory such strength is very crucial in making FedEx realize its objectives (Burger, 2008:13). FedEx Company also has a very strong brand name, which gives it its place in the global market.
FedEx is known for its innovativeness. It has proved time and over that it is capable of initiating great ideas that totally change the market. For example, the purchase of their own airplanes and ships instead of hiring. This boosts a customer’s confidence in the company as they are guaranteed that third parties are not a party to the delivery of their parcels.
Further, FedEx is known as a market leader. It’s known for its use of advanced technology and effective communications systems in all its operations. It’s a recognized worldwide transportation company and it’s also known for its ability to take in smaller companies to expand its needs.
Above all, its greatest strength is its brand name and the goodwill or reputation attached to it.
SWOT theory according to Burger (2008:12) states that weaknesses are some of the internal conditions, which prevent companies from achieving their objectives. For instance, the dispute between the company and its pilots is an internal crack which could damage its reputation
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