Federal Express’s value creation frontier Essay
Federal Express’s value creation frontier
1. 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 to maintain above-average profitability. Provide a rationale to support the response. According to study of Hill and Jones (2013), value creation frontier refers to the maximum amount of value that the products of different companies within an industry can provide to customers at any one time using the different business models. To reach the value creation frontier, the company must pursue one or more of the four building blocks of competitive advantage, which are innovation, quality, customer responsiveness and efficiency. The concept provide four basic ways to lower cost and achieve differentiation. Federal Express or FedEx Company provides customers and businesses worldwide with a broad portfolio of transportation, e-commerce and business services. Fedex has its headquartered in Memphis, Tennessee, FedEx Corporation is the parent company that provides strategic and logistical support for a variety of operating divisions, currently known as FedEx Express, FedEx Ground, FedEx Freight, and FedEx Services.
These various entities compete collectively and are managed cooperatively under the FedEx brand name but operate relatively independently from one another. The company is currently the global leader in the express delivery market and offers delivery to and from individuals and businesses in over 220 countries. (Amsler, Cullen, & Erdmenger, 2010) The organization’s core businesses have focused on quality, and customer responsiveness. FedEx’s great attribution is reliable services, which shows its high quality of services. In early years of business, FedEx created a system that could achieve next-day delivery of small-package airfreight (less than 70 lbs.). This system guaranteed that a package, which picked up from a customer in New York at 5 p.m. would reach its final destination in Los Angeles (or any other major city) by noon on the following day. This system was a great achievement and created more value to the organization. After 1973, FedEx quickly built up its volume. By 1976, it had an average daily volume of 19,000 packages, a fleet of 32 aircraft, 500 delivery vans and 2,000 employees, and it had initiated service in 75 cities.
After 3 years of posing losses, the company turned in a profit of $3.7 million on revenues of $75 million (Charles W. L. & Gareth R., 2013). In term of customer responsiveness, FedEx have devoted more attention to compete on the basis of information technology. The ability to track a package as it moves through an operator’s delivery network has always been an important aspect of competition in an industry where reliability is highly valued. The internet-based technology allows FedEx to provide its customers service online though its website. Therefore, customers can ask for pick-up request, service and price information inquiring, package status and proof of delivery inquiring, and general inquires and advice. In additional, the company also provide toll free customer service hotline and 24 hours customer service from Monday to Saturday. This is the strategy that the organization tries to influence its customers and also create long-term relationships and customers’ loyalty.
By keep developing its quality and customer responsiveness, which are two of four building block of competitive advantage, FedEx reaches to the value creation frontier as quality as excellence. Customers can rely on its on-time delivery service, which create competitive advantage to the company. 2. Determine the main aspect of product differentiation and capacity control that Federal Express could use in order to maintain an edge over its rivals. According to study of Hill and Jones (2013), a differentiation business model allows a company to create a unique product- one that customers perceive as different or distinct in some important way. A differentiator gains a competitive advantage because it has the ability to satisfy customer’s needs in a way that its competitors cannot, which, in turn, allow it to charge a premium price for its product. FedEx created overnight delivery service and second-day delivery service in order to satisfy customers’ need in a way that its competitors cannot. Both services guaranteed delivery time to every customer, they willing to pay the premium price.
In this case, customers self-select the option based on their preferences, depending on the relative values of prices or their situational needs. If there is an urgent package, the customer can select overnight service. However, a second-day delivery is a cheaper choice for customers if they do not need to send the package right away. However, these services are still not much different from its rival such as UPS or DHL. FedEx has to add capacity control strategy, which allows it to maintain its revenue. When supply on the market is over demand, it creates excess capacity, which reduce price of product in the industry. According to study of Hill and Jones (2013), Capacity control is non-price competition helps mature industries avoid the cutthroat price cutting that reduces company and industry level of profitability. Excess capacity may causes by a shortfall in demand, as when economic recession lowers the demand for air delivery service. Another factor that cause excess capacity is technology development. Excess capacity occurs because the new technology can produce more than the old one, which creates substitute products.
During 1987 – 1996, FedEx experienced a slowdown in the growth rate of the air express business due to increasing geographic saturation and inroads made by electronic transmission (primarily fax machines) stimulated further price discounting in 1987 and early-1988. Moreover, FedEx also had similar products to its competitors such as UPS or Airborne Express. FedEx realized if it is always plagued by price-cutting and price wars, it would be unable to recoup the investments in their generic strategies. As a result, the organization decided to try to preempt its rivals and size the initiative. In order to preempt the market, FedEx introduced many kind of new products and activities. First, FedEx offered new discounts to high volume customers in domestic markets. Second, the organization introduced second-day delivery service which is lower price service than next day delivery. Third, it offered logistic services to respond customer needs of just-in-time trend.
Fourth, it improved information system to be more reliable; customers can check their package status online. Last but not least, globalization reduces the risk to FedEx and provides good opportunity in new markets, which fewer competitors. FedEx was first in the race to build a global air express network. During 1984 and 1989, the organization purchased 17 other companies worldwide in an attempt to build its global distribution capabilities, culminating in $880 million purchase of Flying Tiger.
The acquisition gave FedEx service to 103 countries a combined fleet of 328 aircraft, and revenue of $5.2 billion in fiscal year 1989. In my opinion, going aboard reduces a lot of pressure in domestic completion and also provides opportunity and reduce risk to FedEx. FedEx found new markets, which they had less completion, this allow FedEx to earn benefit of advantages from experiences and technologies. Moreover, going aboard helps the company diversifies its risk of economy. FedEx can choose to invest in a high grow economic country and slow invest in slow grow counties. As a result, the company can enjoy the sustainable growth and long term success.
3. Assess the efficiency of Federal Express’s current business model, and recommend one (1) new business-level strategy that gives the company a competitive advantage over its rivals. Provide a rationale for the recommendation. The current business model of Federal Express is a differentiation strategy. The company was the pioneer who provided overnight air delivery service in the industry. FedEx also pioneered the use of standard packaging with upper weight limit of 70 lbs. and a maximum length plus girth of 108 inches. This standard helped FedEx to gain further efficiencies from mechanized sorting at its Memphis hub. As a result, FedEx is able to add premium to its price and customers is willing to pay for it because no competitors can math this efficiency.
A business level strategy that I would like to recommend to FedEx is cost leadership strategy, which will help the firm increases its profitability. According to the textbook, cost-leadership business model chooses strategies that do everything possible to lower its cost structure so that the company can make and sell goods or services at a lower cost than its competitors. The just-in-time (JIT) policy, for instance, is very strict on the delivery dates, prefixing a time interval for the deliveries can add a significant level of flexibility to the overall production, transportation and storage decisions (Akbalik & Penz, 2011).
By using this policy, FedEx does not need to spend million dollars to store a lot of equipment and do not need big storages to carry them. This help the company save a lot of money. This strategy also can apply to FedEx store. The company is already well-known, it does not need attractive store like others, so they can save millions of dollar son store design. Consequently, the company can reach the goal of this strategy, which will reduce the operating costs and materials-management functions. This will create more competitive advantage to FedEx over other competitors.
4. Examine the manner in which overall global competition may impact the new business strategy that you recommended in Question 3. Next, suggest one (1) significant way that Federal Express may confront its global competition.