This paper will analyze Federal Express’s value creation frontier, and determine which of the four building blocks of competitive advantage the company needs in order to continue their above average profitability. It will also explore the main aspect of product differentiations and capacity control of the company to maintain an edge on their rivals. Furthermore, for this assignment I will attempt examine the efficiency of FedEx’s current business model and recommend a new business level strategy that will give Federal Express a competitive advantage over it rivals. In addition, this paper will also examine the manner in which overall, global competition may influence my recommended business strategy and I will suggest a significant way that Federal Express can confront its global competition.
Federal Express began operating in 1973, under the leadership of Fred Smith Jr. Before Federal Express, a major portion for small packaging airfreight flew on commercial passenger flights. Fred Smith believed that these two services should be treated differently, because the commercial passenger and cargo shipper had different needs. The commercial passenger they wanted the convenience of daytime flights. As for the cargo shippers, they preferred night services, which would afford them late afternoon pickups and next day delivery (Hill,2013). Since small-package airfreight only went out based on the commercial flight scheduling, it was hard for cargo shippers to achieve next day delivery. To remedy the shipping issue cargo shippers had Smith aimed to build a system that could achieve next day delivery of small package airfreight (Hill,2013).
Today Federal Express has grown from a express delivery company to a global logistic and supply chain management company (Crane, et al., 2003). Over the years Federal Express was able to grow through acquistions and large investmenst in information technoloy. The company was also able to stand out from the rest best on their business model operate independently, compete collectively. Smith segmented his compnay into 6 different component – FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services, which allowed each component to focus on their own maket segment. By segmenting of each component it provided Federal express the oppurtunity to focus more on customer. Even though Federal Express 6 different components operated seperatley the competed together under FedEx Corporation. Federal Express’s Value Creation Frontier and Their Four Building Blocks of Competitive Advantage Federal Express profitability depends on three factors: The value a customer places on their services, the price Federal Express charges for their services, and the cost Federal Express has to incur to produce the services they provide (Hll & Jones, 2013).
The more favorable these factors are the more value is bestowed on Federal Express’s product. To accurately value, a company’s product management must distinguish the difference between utility and price (Hill & Jones, 2013). Utility is the customer’s satisfaction or happiness with using or owning a company’s product or services. Federal Express has stepped up to the plate by making shipping easier and convenient for their customer. Today we can find drop off boxes in front of office buildings and small neighborhood shipping stores. Having drop off boxes offers the customer anytime drop offs and no waiting time. Federal Express has also invested heavily in innovation to add to the customer’s experience (Crane, et al., 2003). The option of wireless technology and the ability to track deliveries and schedule picks on the company’s website provides the customer shipping right at their fingertips.
For their global customer Federal Express can offer shipping option to more than two hundred companies. The prices Federal Express set for their services are higher than many of their competitors. Federal Express pricing is considered a premium, which reflects the high quality level of service FedEx provides (Crane, et al., 2003). Based on FedEx stance, their premium pricing is worth it, but they fail to realize their very price sensitive customer who may go with a more cheaper option for certain services (UPS). In this case it make it difficult for Fedex to standout based on branding and the amenties they offer. They may have to think of a different way to differeinate themselves from the competitior. Since Federal Express’s growth and customer, satisfaction comes with a high price tag. Their return on invested capital (ROIC) is very low compared to its biggest competitor UPS. In 2011, FedEx ROIC was 7.41% and UPS was 19.39% (Hill, 2013).
Some say in time the money FedEx spent to build up their company, technology infrastructure, and customer satisfaction may soon pay off. The other positive side is that FedEx spending and acquisition expenses have made it hard for new companies to enter and compete in the packaging industry Along with value creation, a company must excel in the four building block of competitive advantage – efficiency, quality, innovation, and customer responsiveness. How well a company performs in these four areas will determine their profitability and competitive advantage over the competitor. These four generic building blocks are a product of a company’s distinctive competencies, which will allow a company to differentiate its product and lower its cost structure (Hill & Jones, 2013). In turn, sustain a competitive advantage and better profitability outcomes over their competitor.
When determining a company’s efficiency we can look at what it takes (inputs) to produce a product or services (outputs). According to Hill and Jones, the more efficient a company is the fewer inputs it required to produce a particular output. The most common way to measure a company’s efficiency is through employee productivity – the out pout produced per employee (Hill & Jones, 2013). When examining FedEx efficiency they were the first packaging company to invest in technology that enabled their employees to access company information wireless 24 hours a day. This wireless feature also allows the employee to collect packaging data, which allows employees to quickly enter packages into the company’s package tracking system, which reduces the possibility of error (Crane, et al., 2003).
As for FedEx service, they can be review by its features, performance, durability, reliability, style, and design (Hill & Jones, 2013). These features are used by customers to determine the quality level of the services that are offered by FedEx. Based on FedEx’s history, spending to build its infrastructure, and premium pricing FedEx is committed to providing a service of high quality standings. FedEx has also invested heavily in new technologies, which will improve their services, make it more reliable, and valuable to its customers (Amsler, Cullen, & Erdmenger, 2010). An example that show FedEx is all about quality is their technology efforts such as tracking deliveries on their website, and offering convenient shipping at the customer’s fingertips. As mentioned before FedEx is all about innovation.
They are into creating new services and processes to make shipping easy and convenient for their customers. One of their major investments is the joint venture with University of Memphis. University of Memphis and FedEx have joined and formed the FedEx Institute of Technology. This investment will ensure that FedEx will not be let in dark when it comes to new technology (Crane, et al., 2003). When it comes to customer satisfaction FedEx tries to identify their customer needs. FedEx heard the customers demanded for a more convenient way of shipping.
FedEx has extended drop off times by three hours, offer drop off boxes, and the ability for customer to schedule pickups on FedEx’s website. The only dissatisfaction is the premium pricing set on their services. FedEx fail to adhere to the demands of their cost sensitive customers. These are the customers who only care about inexpensive delivery services. This group of people may use FedEx as a last resort for their shipping needs.
The idea behind product differentiation is creating a product that satisfies the customers’ needs (Hill & Jones, 2013). In order for a company to obtain a competitive advantage they must offer a product that better satistfies the customer’s need than its rival. When a company creates a stratergy that involves innovation, execellence, quality, and customer responsiveness they are offering custumers differentiation product. When the a company’s stratergy is about finding ways to increase efficiency and reliablity to reduce cost they are offering the customer low priced product (Hill & Jones,2013). In the case of Federal Express their stratergy is not about offering a low priced product, but offering a product that is innovative, meets a high standard of execellence, high quality, and basing the product on the customer’s need.
Federal Express understood the importance of differentiation. Since their strategy is not based on offering a low costing product Federal Express had to focus on information technology. Today customers are interested in monitoring their shipments, estimating arrival times, price and cost of shipments. These elements are important to most businesses and consumers as well as the safety of their delivery (Crane, et al., 2003). To satisfy the needs of their customers and to stand out from their competitor FedEx has invested heavily in the technology infrastructure, which provides options for customers to track and validate shipments at their personal computer.
Federal Express works hard to create a high quality level of service that is difficult for their rival to match (Crane, et al., 2003). Over the years, FedEx has been known as an innovator in the shipping sector, and providing a high level of quality services. Due to FedEx’s higher prices the level of service they provide may become unnoticed. To differentiate their standard of quality from their competitor FedEx lets their customers know that if they are willing to pay more it will be worth it (Crane, et al., 2003).
With technology, forecasting, and planning strategies Federal Express is able to handle the fluctuating demand in shipping. With General Information Science (GIS) Federal Express is able to build routes for the driver, guide sorting activities of inbound freight, estimate and record delivery times. This information is stored on a cloud, which is use for future planning and test the durability of a route to accommodate package volume fluctuation (Conger, Dezemplen, Haas, & McLeod, 2010).
Efficiency of Federal Express’s Current Business Model
Federal Express’s current business model is to “operate independently, compete collectively.” Currently Federal Express is under the leadership of FedEx Corporation. FedEx Corporations provides strategic direction and financial reporting for the following operating companies that compete collectively, but operate separately worldwide: FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services (Amsler, Cullen, & Erdmenger, 2010). The idea behind “Operate independently, compete collectively” is that each company will operate independently, compete collectively and manage collaboratively. By operating independently, each of the organizational components (FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services) can focus solely on their market segment. Also by segmenting off each component by its own market segment has provided FedEx the competitive advantage in customer responsiveness and has limited wasted time and resources on problem that are not associated with each market (Amsler, Cullen, & Erdmenger, 2010).
The benefit of all the organizational component competing collectively is carrying and competing under a well know name – FedEx, which is one of the most recognized names in the industry (Smith, 2005). Even though “operate independently, compete collectively” has worked for Federal Express thus far, but keep in mind it only provided FedEx with a competitive edge in specific customer focus. To gain a stronger competitive advantage FedEx should add cost leadership to their business level strategy. Cost leadership is a business model strategy that works towards lowering a company’s cost structure so they can make and sell their products at a lower price than its competitors (Hill & Jones, 2013). This has been difficult for FedEx, because of their constant expenditures in their infrastructure (Amsler, Cullen, & Erdmenger, 2010).
Due to FedEx costly expenditures, they are unable to compete with their biggest rival, UPS in setting prices. Global Competition and the Impact on Suggested Business Strategy Based on the international shipping demand among integrated global corporations and manufactures it will be FedEx’s as well as its competitors best interest to enter into the global shipping industry. Global manufactures are interested in keeping their inventory at a minimum and have just in time delivery option. This way global manufactures can keep cost down, fine-tune their production, and meet delivery deadlines (Hill, 2013) . As for global corporation their shipping need are different. They are in need of fast and a safe way to ship document that are to confidential for internet transmisson or require a real signiture. These global coroporation are seeking for the same shipping services the receive in the U.S for their global operations (Hill, 2013).
According to Case 7: “The Evolution of the Small Package Express Delivery Industry, 1973 -2010” the trend for global shipping need is forcasted to grow approxiamently 18% annually from 1996 to 2016. This means there is a big demand for air cargo operators to build global shipping networks that will allow them to provide shipping services across the globe with in a 48 hour time frame. Through acquistion Federal Express was able to build a global shipping network to meet the demand among intergrated global corporations and manufactures. The acquisition expenses, international start cost, customs regulation cost , labor issue associated with global shipping, and the barries to attaining landing right in many markets prevented FedEx to include cost leadership in their global busines stratergy.
Eventhough FedEx does not have the competitive edge when it come to pricing they are t more visible in the global shipping industry than their competitors. They can offer services and shipping time frames their rivals can not offer. FedEx also has shipping hubs all over the world, which include 600 or so air crafts , which allows them to provide shipping option most of their comepitives can not offer. Based on history this was very difficult for other companies to establish this task. Since very few competitor have the same golobal infrastructure as FedEx global companies relay more FedEx for the international shipping needs (Crane, et al., 2003)
In conclusion, Federal Express’s competitive advantage is not based on cost, but on its technology infrastructure. Over the years, Federal Express has spent heavily on technology and in acquisitions in order to offer delivery options and services their competitor cannot. The spending was geared towards satisfying the needs of the customer, innovation, offering a quality product and excellence services. The only negative side on spending heavily is that the cost was passed on to the customer, but Federal express stance is that they offer premium services and products. Federal Express can offer their international customers shorter delivery time, because of the major acquisition transactions Federal Express was involved in over the years. As for their domestic business, it may be a little difficult to stand out from their competitor. Currently the competitor (UPS) can offer similar services and convenient shipping options at a lower cost.
Amsler, M., Cullen, J., & Erdmenger, J. C. (2010). Strategic Report for FedEx Corporation. Vector Strategy Group. Conger, R., Dezemplen, R., Haas, J., & McLeod, J. (2010). Using GIS Strategic Planning and Execution at FedEx Express. Crane, B., Landthorn, B., Miri, B., Relph, J., Sanchez, C., & Vernerova, A. (2003). FedEx Corpration: Strategic Management Project. Hill, C. L. (2013). Case 7: The Evolution of the Samll Package Express Delivery Industry, 1973-2010. In C. L. Hill, & G. R. Jones, Strategic Management: An
Integrated Approach (pp. C83-C96). Independence: Cengage. Hill, C. L., & Jones, G. R. (2013). Strategic Management: An Integrated Approach (10th ed.). Independence: Cengage. Smith, F. W. (2005). FedEx. Retrieved from FedEx corporation annual report: http://www.fedex.com/us/investorrelations/financialinfo/2005annualreport/online/msg_chair.html