Cf Motorfreight In 1992 Essay

2132 words - 9 pages

1.HOW ATTRACTIVE IS THE LTL TRUCKING BUSINESS IN THE 1990S? WHAT IS THE LONG TERM PROFIT POTENTIAL?
U.S. LTL Market Overview 1991
The LTL market, with a total turnover of $16 billion, amounted to approximately 10% of the gross revenues in the U.S. trucking industry in 1991. The three big firms Yellow, Roadway and CMF had the largest shares in the LTL market which was broken down into the long-haul and regional segment. After liberalizing entry into the industry by the Motor Carrier Act of 1980 the continuously growing market had been flooded by new entrants, fighting existing carriers market shares1. Market definition: Less-than-truckload (LTL) freight are shipments represented by a single ...view middle of the document...

The low product differentiation (see Rivalry) and insignificant switching costs makes it easy for customers to select carriers on the basis of price. Another aspect increasing bargaining power of buyers is their knowledge about services and prices, due to the information spread through the internet and large scale advertising of suppliers. The risk of backward integration is rather low in the LTL industry, even though it is an easy business to enter. However, profit margins are very low which makes it more convenient for shippers to use existing carriers. To secure market share it is essential for carriers to tighten relations with shippers and to secure contracts with major companies, especially now since the traditionally popular one-year contracts are being replaced with 3-year contracts.3
1 David B. Yoffie, "CF MotorFreight in 1992," Harvard Business School Publishing (May 18, 2009): 3 2 David B. Yoffie, "CF MotorFreight in 1992," Harvard Business School Publishing (May 18, 2009): 6 3 David B. Yoffie, "CF MotorFreight in 1992," Harvard Business School Publishing (May 18, 2009): 6

Power of Suppliers is high and is likely to stay high as labor unions remain strong.
Within the LTL industry, where labor is the largest cost with over 60% of total operating expenses, labor unions are an important source of supplier power. The high percentage of unionized employees are reducing profitability for carriers as they demand a 20% to 40% premium over nonunion employees4 . Power of equipment suppliers is also high, since there are no significant economies of scale in purchasing5. However, the strength of the supplier power depends on the replacement cycles of each carrier ranging from two to eight years6. Actions to remain profitable within the LTL industry are either to independently negotiate separate union labor agreements or to use a non-unionized labor force. Maintenance of equipment can reduce replacement cycles and decrease equipment expenses which are the second largest LTL carriers’ operating expenses at the time.7
Power of Substitutes is high and will increase as substitutes are developed further.
Substitutes for LTL carriers, such as truckload freight and premium freight carriers and intermodal transports, have a lot of power since they are more cost efficient due to the use of non-unionized labor and different cost structures.8 Less stops and freight handling combined with size restrictions makes the operational processes more time efficient and increases the power of substitutes. Automated conveyor systems and innovative billing and service systems makes substitutes appealing to customers.9 Not differing much from the LTL product, the customer is likely to switch to these close substitutes when their price-performance characteristics match or outdo the LTL product. Increasing branding, tightening customer relations and finding niche markets and innovative services will help to differentiate LTL carriers from their substitutes....

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