Harvard business school case Essay
Harvard business school case
1)Airborne’s performance from 1986-1997 can be described as dismal. Throughout the period the company managed to remain profitable every year, but they underperformed the McGahan averages. Airborne averaged 1.72% ROS (including 1997, which was an outlier for this set), 2.46% ROA, and 9.34% ROE. This was compared to the ROS, ROA, and ROE of 4.7%, 5.9%, and 12.6%, respectively. Airborne also had lower margins than its competitors, FedEx and UPS, so it can be inferred that Airborne’s performance is poor not just in general but also considering the industry. It should be noted that the industry leader, FedEx, could not consistently beat the averages either, so the industry is not earning large margins to begin with. However, UPS does consistently beat the averages, so Airborne should not be entirely excused due to its industry.
The strategy seems to be low-cost, broad based. Based on Exhibits 1 and 8, it is obvious that Airborne is charging lower prices than the competition. This is only half of the low-cost strategy. It would at first appear that Airborne is simply charging lower prices, but has not developed a lower cost structure because its margins are so low. However, there is evidence to support a lower cost structure as well. First of all, it would be quite difficult to have a similar cost structure and even turn a profit if one looks at the FedEx comparison in Exhibit 1. This is not the only evidence of a low cost strategy. At first glance, it appears that Airborne may not have a lower cost structure because of the size of their Depreciation cost versus revenue. Because Depreciation was the only cost that was present in the Financial Results Exhibits for all three companies, it has to serve as the number for comparison. Versus revenue size, Airborne actually was much higher than UPS, and barely lower than FedEx.
It is important to consider what the cost means though. Most likely, the depreciation costs are based on depreciation of the aircraft, the major asset purchases that these companies make. If the depreciation cost is divided by the number of planes in the fleet, then Airborne appears to be paying less per plane, this could be supported by the statement that they use planes from the 60s and 70s. It would seem that the cost structure is lower in this case. Also the case mentions that Airborne is able to fill its planes to a higher capacity, meaning less costs incurred per item because the flight cost is spread out over more revenue generating packages. Also, Airborne does not invest in the technology that the others do, such as tracking, that would add to costs and also be the mark of differentiation.
Airborne also uses the cheaper ground method over air to save money, another low cost method. Airborne does not engage in costly advertising campaigns. Airborne is definitely pursuing a low cost strategy, they just seem to be doing a poor job of it as far as earning similar margins. In terms of the broad versus narrow based, there may be an argument for Airborne positioning themselves for urban markets because the customers they serve tend to be in the major 50 areas of the US. The fact remains that Airborne does not specifically serve only these urban areas according to the case, so they would most likely serve any part of the country. They do seem to be focusing on domestic shipments because they do not operate their own aircraft on international shipments, but the still do have international shipments, lending more weight to the broad argument.
2)Substitution: this is a major threat. The specific service that Airborne provides is easy to find from competitors, not to mention that there is no proprietary characteristic of the Airborne service that would necessarily encourage a customer not to switch with the exception of price.
Imitation: The threat of imitation is not as high. If a competitor were to imitate, they would have to develop a separate cost structure, and the Airborne way does not really fit into their business models. If a startup were to attempt to imitate, then there would be many costs that would be quite prohibitive. It would be expensive to buy all the planes, at over $5m each, the airport, and spend the money on getting customers.
Hold Up: This threat appears to be quite low. The customers will most likely not ask for lower prices, and the company owns a lot of the planes and inputs. The only conceivable threat is from employees. Pilots typically have unions (the case does not mention a union of Airborne pilots), so they could use that union clout to ask for more money. The only clue to the likelihood of holdup was the employee description of “frugal” and “strait-laced”. These are not words that usually have positive connotations, so this could be a hint that employees are unhappy.
Slack: Slack is harder to gauge than the others, but it appears that the threat is low. It appears that company is cutting costs in all areas where they can. This bare bones setup would definitely not be indicative of a management that could produce slack. They could conceivably get slack because they do not work as hard via advertising and promotion, so potential customers do not know about their price advantages. The only really pertinent piece of information I found was that the capacity was listed at 80%. That leaves extra capacity that they could be using, indicating slack. This observation is offset by the fact that this capacity is still higher than the competitors. All in all, there is more evidence to support a low threat of slack.
3)I think that Airborne should adopt a distance based pricing structure. While it may present a threat to the cost edge that they currently have over competition, it also could lead to higher revenues. The company already has a cost advantage, so it should be able to still outprice the competition. The distance based pricing model could let the company gain some of the revenue that they are missing. If the company uses more trucks anyway, over a larger distance, the cost savings should add up, and Airborne will still earn a profit.
The only major threat that a pricing change presents is lost volume because of losing customers. However, customers are used to a distance based system, as it is the industry standard. Also, if they have the lower price compared to UPS and FedEx, the main selling point is still in place. I would not recommend this change only in the event that Airborne would cease to be the cost leader after adjustments, because that would destroy their edge and model. There is no evidence to indicate that this could be the case, so I stick by my recommendation.
4)The relationship with RPS looks like it can be quite valuable. I would have to say that I do recommend a change in terms of service offered, and that in turn could be a slight modification of strategy. I think that, with main competitors offering tracking and other information services, Airborne needs to offer some kind of tracking service as well. The tracking service might have moved from being a differentiated service that customers pay a premium for into an industry standard. Part of the low cost strategy is at least giving the consumer what would be considered a typical service. If differentiation increases the willingness to pay, I think that not offering a key service that the customer expects could substantially decrease willingness to pay. Airborne should forge a stronger alliance with RPS and take advantage of the opportunities.
If they can take market share away from UPS and offer a higher quality service, that should mean more revenues. Airborne is currently outpricing the competition substantially; in Exhibit 1 they have almost half the per package revenue of Federal Express, and in Exhibit 8 they charge almost 20% less per package. The extra service could justify a higher price but keep them in the low-cost position as there is plenty of room to raise prices. This should make a difference in terms of more revenue. I am unaware as to the elasticity of the price of shipping packages, but it would seem to me that, as long as they have the lowest price, the volume should not decline.
Another reason to join forces with RPS is the large amount of ground shipments. This is where they get the higher margins, and RPS can increase the volume. It would seem that a company should jump at the opportunity to increase the volume of higher margin activity. There is little discussion as to the costs associated with the relationship, but it seems to be implied that Airborne does make money from the activities conducted together. This would mean looking a lot more like UPS than FedEx, and UPS is the only one of the three companies with acceptable performance indicators. All in all, I recommend that Airborne stay with a low-cost strategy, but they should use the relationship with RPS to get some more customers and raise their poor margins. As it stands the company is not doing well, and this could be what they need to finally get the company to earning a decent profit.