2011

Airborne Express
EMI and the CT scanner

Juan Perez Strategic Management

Juan Perez Strategic Management |Airborne Case 1 Strategic Management 6/7/2011

First Case Analysis: Airborne Express

Analysis of the Express Mail Industry: In order to have a clear understanding of Airbornes position and to make recommendations about future moves, it is critical to examine the industry environmentcompetitors, customers, and suppliersand examine the firm internally. To do so, the Porters five forces framework and a resource & capability analysis will be utilized. Threat of Substitutes: In todays aggressive environment, product substitutes are regarded as one of the most threatening forces in competition. In the case of Airborne, it wasnt the exception. There were other two main players (Federal Express and United Parcel Service) offering similar a similar service express mailing. The availability of substitutes made the demand for this industry elastic. The case also states that large customers werent known for their loyalty for a single carrier, once the contract was up, they look for the best bidder. Threat of Entry: The existent barriers of entry made hard for companies to enter the express mail industry. The costs of becoming established in this industry were so large that discourage potential entrants. For instance, a company entering this industry would have to incur large upfront costs to operate, such as constructing a hub and several spokes, and purchasing a fleet of airplanes. In addition, a potential entrant must spend large amounts on technology (tracking and global positioning systems, information management software, etc) in order to be competitive in this industry. Another barrier of entry in this industry is the economies scale possessed by the main players. For example, due to their size (United Parcel Service with an aircraft fleet of 529, Federal Express 608 and Airborne 175), they are in better position to

Strategic Management |Airborne Case

negotiate favorable contracts with suppliers. (For example, obtaining volume discounts for fuel used in airplanes and trucks). As widely known the airline industry is heavily regulates, this creates an effective barrier of entry for firms planning to enter the express mail industry. Long waits for approvals, tedious procedures and inspections discourage many potential entrants. Furthermore, as a consequence of the 2001 events of terrorism, governmental bodies increased the security and regulation of airfreight carriers, thus hindering the profitability and attractiveness of this industry. The final barrier of entry is retaliation from established firms. Potential entrants may fear that their entrance would trigger an aggressive response from United Parcel Service or Federal Express such as price cutting, increase advertising, sales promotion or litigation. A good example of aggressive retaliation, that happened in a similar industry during the late nineties, was the aggressive behavior adopted by American Airlines when several low cost carriers attempted to enter one of Americans hubDallas FortWorth. American matched their prices, increased supply and drove them out of business. Federal Express and United Parcel Service are in the position of taking similar actions if any new entrant threatens to disperse their market share. Industry Rivalry: The express mail industry is highly concentrated. The two main players have over 70% of the industrys market share. The third playerAirborneheld 16%, and the other players were focused on international delivery rather than domestic express mailing. The remaining of market share was held by The United States Postal Service; however, it was prohibited by law from offering volume discount to large customers, could not track packages efficiently, and had an on-time record much worse than commercial carriers. Considering the elastic demand, rivalry was intense. The two main players constantly look for best practices to maintain their competitive edges. For instance, Federal Express devoted much of its resources to raise its quality standards both in operations and customer service. United Parcel Service Strategic Management |Airborne Case 3

followed by investing largely in technology. This allowed them to maintain at the competitive level of its archrival. There wasnt a lot of diversity of competitors in this industry. Firms offered basically the same service: transport a good from Point A to Point B overnight. Although, they competed in different dimensions (For example, friendly websites that permitted customers to track their packages, extensive customer service, and 100% satisfaction guarantees), Price was the main mean of competition. Price competition allowed Airborne to survive and recently prosper in its industry. Airbornes cost structure was significantly more flexible than Federal Express and United Parcel Services. The

following aspects highlight the advantages that Airborne had in respect to costs: (1)relying on part-time labor (paying roughly $7 per hour), (2)not unionized personnel at Airbornes hub, (3)buying used aircraft, (4)adopting a follower strategy in terms of technology, (5)not having to pay landing fees, and (6)reduced property taxes. This lighter cost structure passed on the form of reduced prices for consumers, exhibit 8 clearly shows that Airborne offered substantial lower prices in almost all categories. In addition, recent changes in the industry benefited small players in the express mail industry. After the United Parcel Services strike, costumersespecially those who were shaken by the strikerealized the riskiness of relying in a solely firm for carrier service. This shift in the industry gives the opportunity to small players, such as Airborne, to capture additional market share. However, the fact that The Postal Service has recently showed an admirable servicemostly during United Parcels Strikewill increase the industrys competitiveness. Bargaining Power of Suppliers: Labor unions are important sources of supplier power. In the case of the express mail industry, the labor is highly unionized, which generates a decrease in profitability. Many of the raw materialssuch as fuel and componentssuch as airplanes and trucksare provided by large companies, air carriers do not have much power over them, however, they can negotiate volume discounts or exclusivity contracts.

Strategic Management |Airborne Case

Resource & Capability Analysis: After analyzing the industry environment, it is necessary to assess the internal resources and capabilities, and consequently, match these two and arrive to sound strategic decisions. Resources within Airborne, such as having its own airport (Tangible Resources), having a culture of functionality and frugality (Human Resources) that encouraged to managers to do their own clerical tasks and thus saving in office staff, and the mix of organizational capabilities led to Airbornes unique competitive advantage: its flexible cost structure. Airbornes flexible cost structure is rare; other players are plagued with bureaucratic procedures and unionized labor, landing fees, and large investments in technology. It is also relevant, as stated previously, the express mail industry has an elastic demand, which implies that prices are important for customer when choosing between carriers. This competitive advantage is very hard to imitate, especially for the two large players. They are too large to emulate a cost structure similar to Airbornes. In respect to durability, there is no clear evidence guaranteeing that this competitive advantage will remain sustainable. For instance, a steep increase in fuel prices can hurt significantly Airbornes cost structure, however, Federal Express or United Parcel Service can use their size to mitigate such increases. Now that we have analyzed the industry and internal environments of Airborne we can answer the question: What must Robert Brazier, Airbornes President and COO, do to strengthen the company's position? In respect to the relationship with Roadway Package Information, Airborne should strengthen the links with this firm. RFP can provide Airborne with the Information Technology and tracking capabilities they lack of. However, Airborne needs to be careful because this partnership can be perceived as a threat for Federal Express or United Parcel Service and trigger an aggressive response. Considering the fast paced Strategic Management |Airborne Case 5

and highly competitive environmentrecently the Postal Service also starting to compete strongly in express mailand Federal Expresss and United Parcel Services race for bests practices, it is not tactically sound for Airborne to compete solely in the base of low prices. Seniors executives should reconsider the alternative of international routes.

Strategic Management |Airborne Case