Airborne Express Essay

2153 words - 9 pages

Industry Analysis: In the early 1970’s, Federal Express (FedEx) pioneered the domestic
express mail industry, starting with defining the market and developing a comprehensive solution for overnight express delivery of small packages. Prior to FedEx, express deliveries flew primarily as freight in the holds of passenger airplanes managed by several airfreight forwarders. FedEx grew rapidly, reaching $1 billion revenue in 1983, and a revenue of $11.5 billion in 1997. During these years, the domestic express mail industry was mainly dominated by three firms FedEx, UPS, and Airborne Express, representing 45%, 25% and 16% share of domestic express mail industry respectively, the rest served ...view middle of the document...

However, customers were not loyal to a particular vendor as switching costs were low. The express mail services can be categorized as: overnight shipping with next-morning delivery, overnight shipping with next-afternoon delivery - 10-20% cheaper, second-day service 40-50% cheaper, and more expensive same day service. In addition to package delivery, firms offered shipment tracking, delivery guarantee, customs clearance and warehouse services. The domestic express mail market was extremely competitive with firms offering similar products at competitive prices. Competition also came from alternative products: Overnight letter delivery: $15, Ordinary mail: $0.32 (slower), Fax: $0.50 (faster), Email: $0 (faster).

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The competitor analysis of three first tier firms and six second tier firms is covered in Exhibit A. To better understand the express mail industry context in which the firm operates, we performed Porter’s five forces analysis as shown below.

SUPPLIER POWER Infrastructure high cost Plane – leased, used, new Labor union can squeeze margin Low differentiation of inputs High impact of inputs on cost High Switching costs for labor Buyers' incentives

BARRIERS TO ENTRY High Capital Cost- IT, Infrastructure Government Customs policy Economies of scale Brand identity Expected retaliation Price wars

DEGREE OF RIVALRY Exit barriers High capital cost - BT Exit Industry concentration- Few firms Fixed costs /Value added Expected industry growth 10% Low differentiation Low Switching costs Brand identity: Important

THREAT OF SUBSTITUTES Low Switching costs High Buyer inclination to substitute High Price Sensitivity Parcel price wars Email / Fax

BUYER POWER High Bargaining leverage Buyer volume discounts Low Switching Cost High Price sensitivity Low threat of backward integration Low product differentiation Substitutes available Buyers' incentives

Porter’s five forces analysis illustrates that the express airmail industry is extremely competitive, even with fewer number of firms due to high capital cost. The threat of substitutes, price wars, high capital cost and low customer loyalty make this industry less attractive for new entrants. The end customers have high buyer power and can take away a bigger share of the PIE with volume discounts and parcel pricing war. At the same time, the reliance on unionized labor results in higher supplier power and can squeeze firm’s profit margins.

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Firm Analysis: Airborne’s survival and rapid growth can be analyzed in detail by looking at firm’s market position and sources of competitive advantages.

MARKET POSITION • • Business to Business customers Large volume urgent items • • Low cost Known for low prices FIT SOURCES OF COMPETITIVE ADVANTAGE a) Operations • • • • • • • • Avoided residential and infrequent shippers Owned airport, leased warehouse, same day delivery for retailers, reduced property taxes Labor: half workforce unionized, low part-time wages $7/hr,...

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