The small package express delivery industry is a complex competitive environment. The “Porter’s five forces” combined give the competing companies the possibility to make profits with a low risk of entry and a weak bargaining power of suppliers. The intense rivalry between them and the strong bargaining power of buyers has a negative impact over the prices, which can lower the companies’ revenues. The most interesting thing about this case was the struggle of the global delivery company DHL, to enter the United States market.
It was interesting to see how a big company could spend an enormous amount of money to purchase all the equipment necessary for a distribution system, and yet not being able to succeed in gaining the market share. Risk of entry by potential competitors In the small package express delivery industry the barriers to entry are high which makes the risk of entry by potential competitors a weak force. The economies of scale in this industry are attained by only three companies, FedEx, UPS and DHL.
They developed complex air and ground delivery networks, which are expensive to establish for new entrants; this gives the leading firms an absolute cost advantage in the industry. DHL, a huge name in the European delivery market, is an example of failure in this aspect. After buying Airborne Express for $1 billion and spending $1. 5 billion upgrading it, DHL was forced to get out of the market because of the losses it encountered during 5 years of struggling. Following this event the, North American express delivery industry became dominated by FedEx and UPS.
One major element of the barriers to entry is the government regulations. Federal Express waited three years to get the right to fly planes from Memphis to Tokyo, and it got restricted to only 70 lbs per package. Tough government regulations make it difficult for new companies to enter the industry or in different markets, and it can increase the costs of operations as well. When the force of risk of entry of potential competitors is weak, the profitability of the companies that are already competing within the industry increase. Rivalry among established companies
The rivalry among established companies is very strong in the small package express industry. The industry is consolidated, dominated by three large companies, FedEx and UPS in the US and DHL in Europe, which are interdependent. Consolidated industry increase rivalry among established firms because one company’s competitive action, such as a change in price, directly affect the market share of its rivals. This can lead to price war, which means that one company follows suit when the other companies lowers the prices. In 1983, UPS offered next-day air service at half a price of its competitors.
In order to keep up, Federal Express followed and cut the prices to match UPS prices. This lead to a price war among competitors, which diminished profitability of the companies competing in this consolidated industry. Bargaining power of buyers The bargaining power of buyers in this industry is a strong force. When the buyers purchase in large quantities, they are able to bargain and reduce the prices. An example discussed in the case is Xerox, which negotiated a lower price for express delivery of its products because of the high volume of the orders and was able to get as much as 60% discounts.
The strong force of bargaining power of buyers in the small packages express delivery industry leads to lower prices and less profitability. Bargaining power of suppliers The bargaining power of suppliers in the small package express industry is weak. One example discussed in the case is the acquisition of the retail stores Mail Boxes Etc by UPS, which allowed UPS to have a direct contact with the consumers who needed its services. Another example is the Federal Express purchase of Flying Tigers, an international supplier with which Federal Express was working with at that time.
This allowed the package express company to reduce the cost of its operations and build a global air express network. By eliminating the direct suppliers with the vertically integrated strategy, the company gains more profits and control. This weak force in the bargaining power of suppliers allow for greater profits for the companies operating within the industry. Substitute products The threats of substitutes in the small package express delivery industry within US and global market is neutral.
The evolution of technology over the past few decades has produced several substitute products to small package delivery. The first substitute that was introduces was the fax machines, which made the transfer of documents easier and faster. The internet, a big substitute of the document delivery via email, but it also created online shopping which led to increased demand of the small package delivery industry. This gave the industry the opportunity to gain additional profits and replace the profits lost through the innovation of the fax and email.
Conclusions and recommendations In the small package delivery industry, the established companies will continue to play an important role within the industry and their profits will increase, because of the weak bargaining power of suppliers and the high barriers of entry by potential competitors. In a consolidated industry like the one presented in this case, the strong rivalry among established companies and the strong bargaining power of the buyers can lead to profitability losses.