Five Forces Analysis-US Express Mail Industry Essay
Five Forces Analysis-US Express Mail Industry
Question 1 asked to complete a five forces analysis of the US Express Mail Industry. A five forces analysis is done to rate the attractiveness of an industry. Threat of new entry is low because the barriers to entry are high. Newcomers to the industry would require an enormous amount of up front capital to set up the distribution networks and infrastructure, such as establishing hubs, and acquiring aircraft and a large amount of ground transportation vehicles (vans, trucks, ect). Economies of scale are significant and would deter new firms from entering because initial sales volumes would be low do to the fact that existing brands already have strong brand identification, and there are no cost advantages to entering, like government subsidiaries or favorable locations. There would also be aggressive reaction from the three main players (FedEx, UPS, Airborne) since the level of rivalry is already so high.
Buyer power (customers consisting of businesses and the general public) is high mainly because the large volume of customers have no brand loyalty in the express mail industry. Customers base their selection of a carrier on reliability, price, and convenience and there is not much product differentiation in any of those areas between carriers so customers can bounce around between carriers, essentially playing the competitors against each other, forcing prices down and demanding higher quality and services. Supplier power is high overall. The main inputs, or supplies, for the express mail industry are fuel, airports, aircraft, ground transportation, and the employees. The employees are unionized and have the power to demand higher wages and benefits, they may not always get that, but then there is the potential for strikes, like with UPS, which costs UPS $700 million in revenues and hurt their reputation. Fuel is another supplier power that is high. Fuel is a key component and there is limited bargaining when it comes to negotiating fuel prices.
Another key product is the airports, there are only a few in each major city, and the carriers have to go where they have to go, hitting those hubs in major cities, thus causing there to be little bargaining power with airports. The airports and the aircraft suppliers aren’t only relying on the express mail industry, so that also gives those suppliers more power to charge what they want (landing fees, cost of planes). Ground transportation vehicles is the only input that would allow for more bargaining power since there are numerous alternatives available, there is more room for the industry players to negotiate price. The availability of substitutes is medium mainly because there aren’t a large number of substitutes out there for express mail outside of the industry. Most next day deliveries are business documents, parcels, letters, ect, not typically cargo. So substitutes could include email and faxes, both are faster and cheaper than express mailing. Depending on the nature of the business, video conferencing or the old fashion telephone could be used.
If the parcel is going somewhere local maybe could use bike messengers, or just hand deliver. There are also the second tier players, like RPS, DHL and TNT, while they are still in the delivery industry; they tend to specialize in areas other than express mail. With RPS, it is second day service at 40-50% less, and a business that does a large amount of overseas or international express shipments may want to substitute with DHL or TNT, who specialize and differentiate themselves in the international market. The Intensity of rivalry is high. The domestic express mail industry only consists of three major firms, UPS, FedEx, and Airborne, and six second tier firms, such as DHL, RPS, and the U.S. Postal Service so there isn’t a high level of concentration. The big three make up 85% of the U.S. express mail market. There is intense competition, when one company lowers prices, so does another, leading to price wars. When one company improves it technology or offers more service, so do the others, leading to difficulty in differentiating products.
Fixed costs are high (planes, hubs, transportation) and when fixed costs are high it causes companies to want to reduce prices in order to sell more and generate more revenue, but the revenues have not kept up with falling prices and has caused the industry growth to be slow so the companies are all fighting for market share. The exit barriers are also high, financially and non-financially. Financially because of the enormous amount of capital that has been invested (fleets of planes and/or trucks, set up of the distribution networks and infrastructures), and non-financially, mainly due to social costs. People conduct business everyday and rely on urgent delivery of time sensitive information (documents, contracts, and perishables like medical samples) and not having the services of the express mail industry to deliver those time sensitive parcels could cripple the economy, for example when UPS when on strike for 16 days, there was a “noticeable disruption” to the economy as a whole.
So in conclusion, based upon this analysis, the US Express Mail Industry in terms of profitability is very unattractive and would be considered unattractive by any firms considering entering as well.