FedEx does not have a competitive advantage in the shipping services industry because their return on investment is below the industry average. When the FedEx return on equity percentages are compared to the returns of their leading competitor, the United Parcel Service (UPS), the FedEx returns are half that of the shipping giant. The average return on investment for FedEx over the past four years is around 12% and the industry leaders four-year average is around 25%. The industry average is figured to be just above 20%. With such a low return on investments, FedEx does not appear to have a competitive advantage in the shipping services industry.
B. Distinctive Competencies FedEx does not so much possess distinctive competencies, as it has strong existing competencies. FedEx’s existing competencies include brand equity, strong infrastructure and a fierce commitment to innovation and technology. These competencies enabled FedEx to become the premier express delivery company in the world. Although FedEx still trails UPS and DHL in terms of competitive advantage, these competencies will enable FedEx to make inroads and eventually gain a competitive advantage in the shipping industry.
The FedEx brand name is synonymous with express package delivery. When a company or individual needs to send a package in a quick and timely manner, they say “FedEx it.” They don’t say UPS it. FedEx has positioned itself in the minds of its customers that they (FedEx) are the company you turn too when you need it there fast. A quote from allaboutbranding.com says it all, “FedEx is a great brand. Great brands provide a source of identification. These brands differentiate great brands and cement their leadership credentialsi assurance of quality”. This is a hard thing to imitate because you can say that you’ll get it there, but can you really? FedEx owns a large fleet of aircraft and has an enormous infrastructure to back it up, for anyone to viably compete with them would take lots of capital and a whole lot of advertising.
FedEx’s next existing competency is its infrastructure. FedEx has spent billions, over $1.5 billionii in 2003 alone in capital expenditures, to create a worldwide network of hubs, airplanes and trucks. This is something that would be hard to imitate because, again, of the huge amount of capital needed to compete directly with FedEx and the fact that FedEx could cut prices to harm new entrants into the market.
FedEx’s third existing competency is its dedication to innovation and embracing new technologies. This commitment to better serving their customers is what makes FedEx Express the number one express delivery company in the world with over a fifty percent market share in the express package delivery segment of the shipping industry. An example of how FedEx stays on top of new technologies was the fact that FedEx was the first company to embrace the world wide web and this attitude has made the FedEx website the number one website in the shipping industry with over one million hits a day and a network of over two million people connected through its website.
Another example of FedEx’s commitment to innovation and technology are its wireless solutions, the first in the industry, which enables its couriers to send customer package information via a magic wand over a network for faster shipping times; its website allows customers to track their packages from the moment it was sent to the moment it is delivered, another area in which FedEx was the first in; and finally, FedEx has partnered with the university of Memphis to open the FedEx technology institute which will give FedEx first crack at the newest technologies that will be developed in the future.iii This dedication to embracing the newest technologies to better serve their customers is not a new thing as Frederick Smith of FedEx said in 1979 “The information about a package is just as important as the package itself.”
FedEx’s vision, to be the world’s leader in the shipping industry, has motivated them to build on their existing competencies through a constant focus on customer satisfaction, which guides FedEx’s strategies. Before the 1980’s, UPS was the number one express delivery company. But by the early 1980’s the Motor Carrier Act and the Staggers Rail Act deregulated trucking and railroad industriesv paved the way for FedEx to compete with UPS on a more level playing field. FedEx’s commitment to quality, innovation and customer responsiveness caught UPS off guard. By the time UPS made the appropriate adjustments, FedEx had already seized a sizable chunk of their market share and now has the (greatest share of the overnight delivery market.vi
Strategies The current strategies that are pursued by FedEx do build on the distinctive competencies that they have cut out in the past three decades. FedEx continues to offer faster delivery times and expand their global network. On September 2nd, 2003 FedEx announced that they would be offering next day delivery to and from Taiwan.vii This further defines in the minds of its customers that FedEx as having faster delivery times, as this is the first firm in this industry to offer a direct flight from South China to the Continent of North America.
Another industry first is the entrance that FedEx has made in Iraq, becoming the first shipping firm to offer door-to-door pick-up and delivery service in that country. This will continue to build their distinctive competence of offering services where no one else does. By opening up a hub in Iraq, FedEx has established themselves as an industry innovator of moving into new markets, putting them one step ahead of the competition. When the competitors of FedEx decide to finally move into that market it will be difficult to make up the step that FedEx has already established.
Another aspect of the strategy that is pursued by FedEx is along the technology front. FedEx offers more automated and package tracking options, from the plain barcode to wireless, for their customers than any other firm in the industry. FedEx also continues to push their technology advances with the FedEx Technology Institute that is opening in the fall of 2003 at the University of Memphis.viii FedEx contributed over $5 million to the construction and establishment of the institute that will be a joint venture with the state and local governments. While FedEx is expanding and reaching into new markets, they do not seem to be building any new distinctive competencies and rather just relying on the ones they already posses.
FedEx’s distinctive competencies are based on their strong resources as well as their capabilities to operate in the shipping industry. To some of FedEx’s major resources, that distinguish their operations from their competitors, undeniably belongs to their aircraft fleet. We can observe the extent of this distinction by comparing FedEx to one of their major competitors, UPS. Fed Ex is a younger company (FedEx Express was founded in 1971ix) in comparison to UPS , which was founded in 1907.
Still FedEx Corp was able to establish an air fleet of 638 aircrafts.x Even when we add their 319-chartered aircrafts to UPS’s air fleet, UPS still falls way below FedEx in respect to this type of resource. It is not difficult to distinguish the barriers to imitate this kind of distinctive competence. For the most part, the biggest barrier to imitate FedEx’s air fleet is the high cost of acquiring more aircrafts.
Additional distinctive competencies that FedEx have, also arise from firm-specific tangible and intangible resources, namely, FedEx’s hubs and package handling systems; its package tracking and customer support function and its logistics support. Again, the main barrier to imitate these firm-specific resources is the high cost associated with acquiring them. FedEx’s package tracking ad customer support functions as well as their logistic support are examples of the firm’s distinctive competencies as well. The barriers to imitate FedEx’s package tracking and customer support functions are based on the fact that FedEx was the initiator in establishing the first tracking applications website and providing each customer with a unique barcode to individualize each shipment. That allowed FedEx to gain proficiency at these systems and knowledge about the functional operations.
Four Building Blocks When evaluating FedEx against the four generic building blocks of competitive advantage (efficiency, quality, innovation and customer responsiveness) it has been determined that FedEx does not have a competitive advantage. When considering efficiency, FedEx was the first in its industry to embrace wireless technology which enabled FedEx employees to access information from the company(s information systems network 24 hours a day as well as using wireless collection data via a barcode and a magic wand that employees use to scan packagesxi This investment in capital productivity enables FedEx employees to quickly enter packages into the company’s package tracking system, which reduces the possibility of error. However, they are still lackluster when compared to UPS ground delivery service. These investments that FedEx has made in efficiency may soon pay off.
In terms of quality, FedEx’s commitment to quality is very apparent. They invest heavily in new technologies that enable them to improve their service and make it more reliable and valuable in the eyes of their customers. They have improved quality by introducing innovative technologies such as package tracking on their website, address checker which is a (convenient tool that can help you reduce the costly mistakes, late deliveries and dissatisfied customers resulting from incorrect addressesxii This commitment to improving the quality of their service with add-ons creates a more valuable service in the eyes of its current and potential customers
As mentioned above, FedEx has a very vested interest in continually investing in new technologies that will aide in improving their service. They are set to open a FedEx technology institute in a joint partnership with the University of Memphis as stated earlier in the chapter. FedEx’s investment in future technologies will ensure that they will not be caught off guard when a new technology is used in their industry, in fact they will probably be the one using it, and using it first.
FedEx values its customers, and that is why FedEx is continually trying to identify and satisfy its customers needs through the use of new technologies which make it easier and easier for customers to use FedEx and adds value to the service they are using. This is making it easier for current and potential customers to see the difference between FedEx versus UPS. An example of this is that FedEx just extended it drop-off times by three hours to give its customers more time to make the deadline for next day express deliveryxiii. They have also recently partnered with the USPS to include in post offices a FedEx drop off boxxiv. These are both the results of customers wanting longer hours and more locations to drop off their packages. FedEx answered the call.
FedEx is strong in all four areas of the building blocks of competitive advantage, however they do not as of yet have a competitive advantage over their rival, UPS. This is not because UPS is better at the four building blocks but rather because FedEx has made so many capital investments over the years that their ROIC is not as good as UPS. But that same expenditure in invested capital will probably give FedEx a competitive advantage in the years to come once their investments start to pay off.
E. Strengths FedEx has many strengths. They are very innovative in coming up with new ways to add value to their customers experience with FedEx. They have always been wiling to embrace new technologies as well as create some of their own as shown in the example of FedEx using wireless technology to better track packages as well as launching its website with lets customers track their packages till it reaches its destination. They are responsive to their customers needs, as is evident in FedEx extending their drop-off times to better suite the needs of their customers. They also own a large fleet of aircraft and have an extensive hub and spoke network which extends to more than two hundred countries around the world.
F. Weaknesses FedEx’s weaknesses derive from their inability to differentiate themselves on a wide scale basis from UPS, this is hindering their ability to achieve a industry wide competitive advantage, although they do dominate the express delivery segment of the market. Another weakness is FedEx’s high cost, because of their constant expenditures in their infrastructure, they are unable to lower their prices and thus take away market share from UPS.
There are several strengths and weaknesses of the FedEx Corporation that are not captured in the four generic building blocks of efficiency, quality, innovation and customer responsiveness. There are other elements of the company that are not as easily measured such as the company image and customers perception of the product and FedEx.
Image The element of image is crucial to large companies like FedEx. When competing in an industry with such large and well-run players, image is a key differentiator when the purchase-decision arises. According to Forbes magazine (Jan 02), “Being most admired is all about delivering what you promise to multiple audience, and that’s something FedEx has down pat…FedEx has successfully transcended its image as simply an air express carrier for business to become a one-stop shop for any shipping need.” FedEx Corporation competitive market position is continually reinforced through a positive advertisement campaign and its continual effort to provide for customers needs.
A market leader must extend its hand beyond business improvement arenas and into the community. One way FedEx could achieve a competitive advantage is by appeasing these external elements. Earlier this year FedEx announced steps they are taking to reduce their energy consumption and carbon emission. FedEx collaborated with Environmental Defense, a nonprofit organization, to introduce a low-emission hybrid electric powered delivery vehicle that could become the standard medium duty delivery truck in FedEx’s fleet
FedEx’s strengths in logistics, operations, and technological innovation allow them to pursue a differentiation business level strategy. FedEx works to stand apart from its competitors by creating a level of service that is difficult for competitors to match. FedEx has clearly been identified as an innovator, but what they need to get across to their customers is that they provide a high level of quality service. FedEx charges higher prices for its services than many of its competitors in the industry. This is considered a premium that a customer pays for the quality of service FedEx provides. By differentiating their standard of quality from their competitors, FedEx lets their customers know that if they are willing to pay more, it will be worth it.
The purpose of differentiation is to establish a strong customer base which understands that FedEx does offer a superior service than its rivals. While all players in the industry are capable of making fast deliveries, FedEx is the most customer-friendly. Some of the special services FedEx offers are the most support, a money back guarantee, and the capability to pick up packages from the customers home. FedEx goes far out of its way to differentiate itself from its rivals.
Issues in Differentiation However, due to the nature of the industry and the awareness level of the customer, differentiating themselves is proving to be difficult. When it comes to shipping, customers are very price sensitive. They will usually just decide on the cheaper carrier, so there isn’t much brand loyalty at all. The typical customer doesn’t care how well FedEx can deliver around the world, or how innovative their logistics or technology is. They usually want their package delivered from point A to point B for as cheap as possible. For these customers, the lines of quality service are blurred by affordability. Therefore, FedEx needs to differentiate itself in as many ways as possible from its competitors, namely UPS. The less they resemble their rivals, the better their customers can perceive their level of quality, becoming more willing to pay the premiums.
Targeting Customer Needs FedEx understands that different customers have different needs. Therefore FedEx has divided itself into six different segments; FedEx Express, FedEx Ground, FedEx Freight, FedEx Custom Critical, FedEx Trade Networks, and FedEx Supply Chain Services. Each service is targeted toward a specific segment of the market, according to the specific needs of different customers.
By specifically targeting customers by their needs, FedEx hopes to serve the immediate and psychological need for those who need a guarantee on time and delivery. Customers may require different services at different times, falling into more than one category. A company may need a document express delivered overnight a few states away, and then need freight something the next day. FedEx understands that there are a variety of needs their customers could have, and have segmented the market accordingly. That way, no matter what the customer may need to do, FedEx will be able to serve them.
Market Segmentation FedEx has divided itself into different business units to better serve customer needs. Their goal is to operate independently of each other yet to compete collectively. This segmentation is also how it has differentiated itself from its competitors. By splitting up into different business units, each segment can better concentrate on its own market rather than concern itself with the whole market.
The largest segment, FedEx Express, is geared to satisfy time and day definite service for anyone needing speedy delivery of small packages (documents, legal papers, etc.), with a money back guarantee to ensure an on time delivery. The FedEx Ground service caters more to a business-to-business small and medium package delivery with less time and destination restraints. They also account for business to home delivery with FedEx Home Delivery. A third segment is the heavy package segment, FedEx Freight. This service allows customers to send packages of over 150 pounds, regional and interregional, within the continental US.
This caters to large shipments that have flexible time restraints. The remaining substantially smaller segments are the FedEx Custom Critical, which provide shipping of products requiring special care in handling or specially equipped vehicles, FedEx Trade Networks, which provide end-to-end support for international trade, and finally FedEx Supply Chain Services which synchronize the movement of goods for enhanced customer satisfaction. With all of this evident it can be said that FedEx segments its markets according to the needs of the customers and not by demographic regions.
FedEx Express and FedEx Ground do the majority of the company’s business, and are currently its most profitable aspects. FedEx Express and FedEx Ground account for over $14 billion in revenues. FedEx Express gives a good a picture of the company’s overall success because that is what FedEx prides itself on, and what they do best. FedEx is associated with express delivery because of their capability and promise to deliver.