Strategy Management – FedEx

“What is strategy?” Johnson and Scholes said: “Strategy is the direction and scope of an organization over the long-term: which achieves advantage for the organization through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations”.

How Strategy is Managed is why we study Strategic Management. In its broadest sense, strategic management is about taking “strategic decisions” In practice, a thorough strategic management process has three main components, shown in the figure below:

To assess FedEx case we use Strategic Analysis

This is all about the analyzing the strength of businesses’ position and understanding the important external factors that may influence that position. The process of Strategic Analysis can be assisted by a number of tools, including:

PESTEL Analysis – a technique for understanding the “environment” in which a business operates

Five Forces Analysis – a technique for identifying the forces which affect the level of competition in an industry

Value Chain Analysis – describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business.

PESTEL analysis is concerned with the environmental influences on a business. The acronym stands for the Political, Economic, Social and Technological issues that could affect the strategic development of a business.

Identifying PESTEL influences is a useful way of summarizing the external environment in which a business operates. However, it must be followed up by consideration of how a business should respond to these influences.

Apply to the case of FedEx, PETEL factors can be defined as the following:

Political/Legal factors

Government deregulation of the airline industry which permitted the landing of larger freight planes, thus reducing operating costs for FedEx.

Deregulation of the trucking industry, which allowed FedEx establish a regional trucking system to lower costs further on short-haul trips.

Trade deregulation in Asia Pacific, which opened new markets for FedEx. Expanding globally became a priority for FedEx.

Economy factors

“The growth of the express transportation and logistics industry was brought about by three main trends: the globalisaiton of business, advances in information technology (IT) and the application of new technology to generate process efficiencies, and the changing market demand for more value-added service”

Socioculture factors

“FedEx’s business expanded beyond national boundaries and extended their global reach to take advantage of new markets and cheaper resources, so the movement of goods created new demands for transportation and logistics industry. With this the competitiveness of transporation companies depended upon their global network of distribution centres and their ability to deliver to wherever their customers conducted business. Speed became of significance to achieve competitiveness , not only for the transportation companies but also for their customers. The ability to deliver goods quickly shortened the order-to-payment cycle, improved cash flow, and created customer satisfication.”

Technology factors

Technological breakthroughs and applications innovations promoted significant advances for customer ordering, package tracking and process monitoring. FedEx’s greatest strengths is its relentless pursuit of technological advancement. Well before it became a competitive imperative for companies to strive for technological improvements, FedEx redefined the shipping industry with its breakthrough innovations. From its introduction of the COSMOS system to the launch of its website, FedEx has sought to constantly stay ahead of its competitors by technological improvements that would create value for customers. In addition, its enviable record of technological integration has created an internal environment in which information is shared and readily available for decision makers.

Environmental factor

Rising inflation and global competition gave rise to greater pressures on businesses to minimize the costs of operation including implementation of just-in-time inventory management systems, etc. This also created demands for speed and accuracy in all aspects of business.

External Analysis: Porter’s Five Forces Analysis of Express Transportation and Logistics Industry

According to Porter (1979), competition in an industry depends on five forces that ultimately determine the profit potential of that industry. Apply to the case of FedEx, five forces can be defined as the following:

Competitive rivalry

Since multi-market competition exists, rivalry between competitors in the industry is extremely intense. Companies in the industry have started new businesses to increase the level of competition with one another (ex. FedEx Ground, UPS Overnight) and compete heavily for geographic markets. There is no clear dominant market share player in the industry; although FedEx leads with 35%, UPS holds 30%, TNT has 9%, and Airborne has 3%. Data could not be found for DHL and is not included in the market share percentages above, but they hold very strong positions in Europe and Asia. Though the industry currently has relatively high growth, much of the business is cyclical, which leads to intensified competition in economic downturns. High fixed costs also contribute to intense competition.

Threat of entry

The threat of new entrants into this industry is relatively low because of the scale required to make companies in the industry competitive. Capital demands to fund all of the assets required in the industry (air and ground fleets, warehouses, distribution centers, large labour force, etc.) are extraordinarily large, making competition from entrepreneurs or small companies very difficult at this level of market competitiveness. Economies of scale are necessary for the business to be profitable and because of the intensity of rivalry, customers would are difficult to attract. While the basic service of shipping goods would be relatively easy for new entrants to imitate, the competitors in the industry have created value and high switching costs for their customers through proprietary technologies such as online package tracking and integrated sales and shipping systems.

Supplier power

Suppliers’ power is fairly low for the industry, but differs between competitors. For delivery vehicles such as planes and trucks, suppliers have low bargaining power because of the intensity of rivalry in their respective industries. Competitors are also on the same footing with suppliers of fuel, as they are all subject to the same prices, although they may have hedged differently. Labour is a major factor of production in the industry and differences between companies regarding labour contracts subjects them to varying degrees of supplier power. UPS especially is impacted by labour issues as their high level of unionized workforce has halted operations in the past.

Buyer power

Customers in the industry initially have power, but once they commit to a carrier, their bargaining power decreases significantly. New customers can easily shop around for price or level of service in the beginning, but once they have chosen a carrier and use their value-creating services, they have very high switching costs. In addition, customers are likely to become loyal to a certain provider because of long-standing relationships or personal interaction with the company.

Treat of substitutes

The threat of substitutes is currently low for the industry, but major technological or security break-throughs could change that. Increased use of email probably decreased industry volume slightly over the past few years, but security issues with this form of communication will probably limit the transmission of sensitive information by email. Regular mail is the largest threat to the industry, as these providers likely have lower prices than the rest of the industry, but lack the level of service. Around the world, national postal systems have issues with speed, security, and reliability that reduce the threat that they pose to the industry.

For Downes (1997), three new forces are overwhelming these ‘traditional’ five. They are the forces of digitalisation, globalisation and deregulation.

One of the main drivers of globalisation is the proliferation of networking technology, itself driven by the convergence of telecommunications and computing. For FedEx, as of January 2000, it served 210 countries (making up more than 90 per cent of the world’s GDP), operated 34,000 drop off locations and managed 10 million square feet of warehouse space worldwide.

Value Chain

Value Chain Analysis describes the activities that take place in a business and relates them to an analysis of the competitive strength of the business. Influential work by Michael Porter suggested that the activities of a business could be grouped under two headings:

(1) Primary Activities – those that are directly concerned with creating and delivering a product (e.g. component assembly); and

(2) Support Activities, which whilst they are not directly involved in production, may increase effectiveness or efficiency (e.g. human resource management). It is rare for a business to undertake all primary and support activities.

FedEx’ value chain please refer to Appendix I to III

Other factors – First Mover

FedEx was the pioneer of the express transportation and logistics industry. She invented the air/ground express industry and overnight delivery market in 1973. Being as a first-mover, FedEx takes advantages and disadvantages. When to make a strategic move is often as crucial as what move to make. Timing is especially important when first-mover advantages or disadvantages exist. Being first to initiate a strategic move can have a high payoff when

1. pioneering helps build a firm’s image and reputation with buyers;

2. early commitments to new technologies, new-style components, distribution channels, and so on can produce an absolute cost advantage over rivals

3. fist-time customers remain strongly loyal to pioneering companies in making imitation extra hard or unlikely. The bigger the first-mover advantages, the more attractive that making the first move becomes. However, being a rapid follower or even a wait-and-see late-mover like UPS, DHL and TNT doesn’t always carry a significant or lasting competitive penalty. There are times when a first-mover’s skills, know-how, and actions are easily copied or even surpassed by late-movers, allowing them to catch or overtake the first-mover in a relatively short period. And there are times when there are actually advantages to being an adept follower rather than a first-mover. Late-mover advantages (or first-mover disadvantages) arise when

1. Pioneering leadership is more costly than imitating followership and only negligible experience curve benefits accrue to the leader – a condition that allows a follower to end up with lower costs than the first-mover. For example, FedEx initially developed COSMOS, Powership programme and ect. which cost it very much when IT was very high as early as 1979.

2. The products of an innovator are somewhat primitive and do not live up to buyer expectations, thus allowing a clever follower to win disenchanted buyers away from the leader with better performing products. For example, FedEx developed overnight express logistics pattern and business style which it followers like DHL, TNT can follow it.

3. Technology is advancing rapidly, giving fast followers the opening to leapfrog a first-mover’s products with more attractive and full-featured second- and third- generation products. For example, while FedEx had pioneered many logistics solutions that had helped it to achieve economies of scale faster than its competitors, the advantages were quickly eroding as newer technologies became even more power and less expensive.

Conclusion

In conclusion, FedEx’s success is because it can prioritize and monitor macro- environmental factors of PESTAL above. However, its market share was eroded by other competitors after: Externally, this is because of five force factors above. Internally, this is because of value chain (Appendix I &II) and competitive advantages. At the beginning, FedEx pioneered in webbed-based package-tracking system, took advantages of first-mover advantages and set up image and reputation with customers. However, such systems became the industry norm rather than a competitive advantage. The advantages were quickly eroding as newer technologies became even more powerful and less expensive.

Competitive advantage is achieved by performing activities in the value chain in such a way that they deliver extra value to customers. Re-organization lead FedEx cannot keep its competitive advantages. Since a series of consolidation and rename, FedEx was trying to promote five different subsidiary companies with completely unrelated names and business logos. Each subsidiary continued to operate independently, with separate accounting system and customer service staff. Then it’s net income was down by 6%. It should re-think its business strategy and formed a sixth subsidiary companies called FedEx Corporation Services Corp. However, it ignored customers’ need, for customers the benefits included easier means of doing business with one company, FedEx, not a group of six companies. It failed to take advantages of one of its greatest assets, the FedEx brand name. This gave its competitors, like UPS, the opportunity to erode its market share.

Total words: 2056

Appendix I

Primary Activities

Primary value chain activities include:

Primary Activity Description

Inbound logistics All those activities concerned with receiving and storing externally sourced materials. For FedEx, inbound logistics is talking about receiving goods from customers to distribution centres.

Operations The manufacture of products and services – the way in which resource inputs (e.g. materials) are converted to outputs (e.g. products) For FedEx, the whole operation is concerned with receiving goods from customers and send them destinations

Outbound logistics All those activities associated with getting finished goods and services to buyers. For FedEx, outbound logistics is concerned with sending goods from distribution centre to destinations after received goods.

Marketing and sales Essentially an information activity – informing buyers and consumers about products and services (benefits, use, price etc.) Remember FedEx’s television advertisement, how Jenny can become FedEx’s staff is a good example.

Service All those activities associated with maintaining product performance after the product has been sold. FedEx’s Global Display System provided package-tracking service for its customers to query and receive package status information for up to 25 shipments simultaneously.

Appendix II

Support Activities

Support activities include:

Secondary Activity Description

Procurement This concerns how resources are acquired for a business (e.g. sourcing and negotiating with materials suppliers) For FedEx, it acquired a fleet of 648 aircraft and more than 60,000 vehicles and built its logistics infrastructure.

Human Resource Management Those activities concerned with recruiting, developing, motivating and rewarding the workforce of a business. FedEx employed a staff of nearly 200,000 was the world’s largest overnight package carrier with about 30 per cent market share.

Technology Development Activities concerned with managing information processing and the development and protection of “knowledge” in a business. FedEx’s technology development was outstanding in its industry, for example, COSMOS, Powership programme, DADS…ect. “We are really becoming a technology company enabled by transporation.” (David Edmonds. VP. Worldwide Services Group, FedEx)

Infrastructure Concerned with a wide range of support systems and functions such as finance, planning, quality control and general senior management. FedEx had a fleet of 648 aircraft and more than 60,000 vehicles, with a staff of nearly 200,000 staff.

Appendix III

Porter’s Generic Value Chain

Inbound

Logistics → Operations → Outbound

Logistics → Marketing

&

Sales → Service → Profit Margin

↑ ↑ ↑ ↑ ↑

Firm Infrastructure

HR Management

Technology Development

Procurement

FedEx’s Value Chain

Outbound Losgistics Inbound Logistics

Operations

Reference

Page 193 Thompson / Strickland Strategic Management concepts and cases Thirteenth Edition

http://www.tutor2u.net/business/strategy/what_is_strategy.htm