Competitive Strategy

​
Professor Jacob Leshno

Airborne Express Memo

​We pledge our Honor that we have not violated the Chicago Booth Honor Code in the creation of this
assignment.
 1. Porter’s 5 Forces Analysis

Competitive Rivalry
The structure of the domestic express mail market was an oligopoly with 3 major firms - Federal
Express, United Parcel Service and Airborne Express - controlling 85% of the market. There
were 6 second-tier players in the market - BAX Global, DHL Worldwide Express, Emery
Worldwide, Roadway Package System, TNT Express and US Postal Service - that made up the
remaining 15% of the market share. Among the big 3 firms, there was not much product
differentiation and the basic infrastructures and activities of all the companies were similar; they
were not only able to match each other’s prices, but also each other’s innovations. Thus, this
concentration of market share amongst a few players, the homogeneity of the products and
services they offered and their ability to quickly imitate one another meant that the competitive
rivalry within the industry was ​HIGH​.

Threat of New Entrants

Apart from the strong competitive rivalry among the 3 big firms in the industry and the oligopoly
market structure, there were numerous barriers to entry. There were high capital expenditures
involved in entering the market related to developing hub facilities and purchasing delivery
vehicles and cargo planes, and in the case of Airborne, even airports. The case mentions that
“A new UPS hub… was budgeted at $860 million… A new Boeing 767 cargo plane, for instance,
cost $90 million” (p. 3). On top of this physical distribution network, companies also had to
invest in information technology infrastructure to help trace packages and perform other
optimization functions. Among the 3 big players, Fedex controlled 45% of the market share,
owned 608 planes and delivered 2.8 million parcels per day, UPS controlled 25% of the market
share, owned 529 planes and delivered 12 million parcels per day and Airborne Express
controlled 16% of the market share, owned 175 planes and delivered 0.9 million parcels per
day. Because of product homogeneity, prices were relatively low as margins were low despite
high volumes of transactions. Thus, the industry reflected economies of scale. Due to a market
that was saturated by well-established brands, high capital requirements and economies of
scale, there were high barriers to entry and thus the threat of new entrants was ​LOW​.

Bargaining Power of Buyers

The customers had variety of service providers to choose from. They made their decision based
on price, reliability, brand name, tracking options and other factors. Although high-volume
business customers received discounts of up to 50%, the case states that “large customers
were not known for their fidelity” (p. 2). In an industry with service providers that were not that
different from one another, consumers had perfect information flow and were easily able to
compare the service providers based on their price points. Additionally, customers also faced
very low switching costs. Thus, the limited brand loyalty, price sensitivity and low switching
costs, the bargaining power of buyers in the industry was ​HIGH​.
Bargaining Power of Suppliers
Among the big 3 players, each company maintained a large fleet of vans and drivers and also
operated the cargo planes and hub facilities. In the case of Airborne Express, the company
even owned the airport that it operated out of and thus did not have to pay a facilitation fee.
Because of the high level of integration in the supply chain, the bargaining power of suppliers in
the industry was ​LOW​.

Threat of Substitutes
Various new technologies such as email and fax were becoming increasingly available. These
served as substitutes to express mail. Additionally, it was also important to note that although
express mail was a convenience, in most cases for household consumers, it was not a
necessity. There were also other alternatives such as RPS which were land based. However,
since Airborne Express focused more on business consumers, express mail was a necessity for
them. Oftentimes for business consumers, scanned copies or print outs of documents are not
sufficient and original copies are needed; eliminating the relevance of substitutes like fax in
those cases. Thus, the threat of substitutes, although present, was ​MODERATE​.

3. ​Now consider the situation of Airborne Express in 1997:

a. What activities does Airborne perform differently / more effectively than its
competitors?
Unlike its competitors, Airborne targeted business consumers that regularly shipped large
volumes of items urgently like Xerox. Instead of advertising publicly, they focused on larger
shipping companies. Airborne owned the airport that served as its major hub in Wilmington, OH.
Therefore, it did not have to pay landing fees, and it could use the airport specifically for its
needs. It also built warehouse space on this property, meaning that mail-order computer
retailers that stored goods in this warehouse could take orders from customers until 2am, and
have goods delivered via Airborne the same day, making its services much more efficient as
compared to FedEx and UPS whose warehousing options were not located at an airport site (p.
11). In addition, Airborne primarily utilized used aircrafts, and modified it for its own purposes,
which lowered costs. Airborne also ran its aircraft 80% full as opposed to the 65-70% full rate of
competitors, which made its operations more efficient (p.12). Also, Airborne couriers picked up
and delivered more parcels per stop than FedEx drivers, reducing labor costs by 20% for pickup
and 10% for delivery. Furthermore, in terms of pricing, Airborne also was known for its low
prices, which were lower than both FedEx and UPS in almost all cases (Exhibit 8). Lastly, unlike
UPS or FedEx, Airborne also invested significantly less assets in overseas expansion (6% of
total identifiable assets), preferring to focus on its domestic business.

b. How much does it cost FedEx to ship an overnight letter? How much does it cost
Airborne?
FedEx: $13.86 for morning, $12.04 for afternoon (Exhibit 8). Airborne: $10.95 for
morning and $9.25 for afternoon.
Supporting details: (p.12) “...a greater portion of Airborne’s volume consisted of afternoon and
second-day deliveries. As a result, Airborne could use trucks more often than its competitors for
the long-haul portion of a delivery.”

c. Are Airborne’s competitive advantages sustainable? Why or why not?

Airborne’s competitive advantages include its fleet and airport ownership and its proprietary
communication technology that increased delivery speed and reliability. In the case, it was
noted that “Airborne Express relied less on automation and more on humans than FedEx and
UPS” (p.11). With this in mind, regardless of the competitive advantages, it will be hard for
Airborne Express to keep up with such large players in the market like FedEx and UPS
(together they take up over 60% of the domestic express mail market while Airborne Express
holds a meager 16%, p.3) as they focus more heavily on technological advances. Leadership in
the company indicated they don’t plan on introducing new technology until after their
competitors test it. However, if future technology is effective enough to create a huge difference
in performance, Airborne Express may not be able to react fast enough to keep up, and
therefore might fall behind on innovation. In addition, pressure from facsimile and electronic mail
delivering small packages faster will also put more pressure on the company to innovate in the
future. One major competitive advantage referenced in the case was their ability to provide
customized shipping for major accounts. It was also noted that FedEx and UPS were soon able
to do the same thing for ​all ​of their customers. Their lack of willingness to expand internationally
and selectiveness of customer needs may also restrict their growth in the long-run as their
competitors are able to increase profits by expanding abroad and to a wider range of customers.
On the other hand, Airborne Express’ cost-saving measures like focusing on afternoon and
second-day deliveries and owning only a portion of its delivery vans could help sustain its
advantage in the market. Additionally, if its recent relationship with RPS is more wide scale than
on a “case by case basis,” there is a possibility of a strong partnership that would allow Airborne
to target both air and the land, thus creating a competitive advantage. However, based on the
context provided in the case, we think Airborne Express’s current competitive advantages may
be short-lived as UPS settles the issues with its worker strikes and FedEx adjusts their
increased prices to reflect market response.