SIM 336 Strategic Management

on, e-commerce and business services. We offer integrated business applications through operating companies competing collectively and managed collaboratively, under the respected FedEx brand. Background FDX is the world’s largest express transportation company. Revenues in fiscal 1999 were $14 billion and the first quarter of fiscal 2000 was $3.6 billion. There are more than 148,000 employees’ worldwide, serving 210 countries and 366 airports worldwide, with 643 aircraft. The ground vehicle fleet numbers 43,500 worldwide. The distance driven totals approximately 2.7 million miles in the US alone, there are 34,000 drop boxes, 2400 FedEx shipping sites and 7600 authorized shipping centers. The average package volume amounts to approximately 3.1 million packages daily, weighing in at 25.6 million pounds annually. Average daily freight volume is about 7 million pounds per day. This level of business generates more than 500,000 daily calls and 63 million daily electronic transmissions according to Cornell Equity Research, December 5, 1999 by Iwanowycz, Kaylo, Lee, Sekine, & Wells. Introduction According to case study about FedEx by Ali F. Farhoomand and Pauline Ng (2002) suggest that since its inception in 1973, Federal Express Corporation (‘FedEx’) had transformed itself from an express delivery company to a global logistics and supply chain management company. Over the years, the Company had invested heavily in IT systems, and with the launch of the Internet in 1994, the potential for further integration of systems to provide services throughout its customers' supply-chains became enormous. With all the investment in the systems infrastructure over the years and the US$88 million acquisition of Caliber Systems, Inc., in 1998, the Company had built a powerful technical architecture that had the potential to pioneer in Internet commerce. And according to David Edmonds, VP, Worldwide Service Group, FedEx suggest that “We are really becoming a technology company enables by transportation”. And according to www.csustan.edu/manage/ Federal Express has five strategies that govern business tactics. These are to improve service levels, lower unit costs, establish international leadership and sustain profitability, get closer to the customer, and maintain the People-Service-Profit Philosophy. Question 1a l Porter Five Forces According to suggest that Porter's five forces is a framework for the industry analysis and business strategy development developed by Michael E. Porter of Harvard Business School in 1979. It draws upon Industrial Organization (IO) economics to derive five forces that determine the competitive intensity and therefore attractiveness of a market. Porter referred to these forces as the micro environment, to contrast it with the more general term macro environment. They consist of those forces close to a company that affect its ability to serve its customers and make a profit. A change in any of the forces normally, requires a business unit to re-assess the marketplace given the overall change in industry information. The overall industry attractiveness does not imply that every firm in the industry will return the same profitability. Firms are able to apply their core competencies, business model or network to achieve a profit above the industry average. Five forces analysis looks at five key areas namely the threat of entry, the power of buyers, the power of suppliers, the threat of substitutes, and competitive rivalry (see appendix 1) follow the link www.marketingteacher.com The threat of entry Economies of scale e.g. the benefits associated with bulk purchasing. The high or low cost of entry e.g. how much wills it cost for the latest technology? Ease of access to distribution channels e.g. Do our competitors have the distribution channels sewn up? Cost advantages not related to the size of the company e.g. personal contacts or knowledge that larger companies do not own or learning curve effects. Will competitors retaliate? Government action e.g. will new laws be introduced that will weaken our competitive position? How important is differentiation? E.g. The Champagne brand cannot be copied. This desensitizes the influence of the environment. The power of buyers This is high where there a few, large players in a market e.g. the large grocery chains. If there are a large number of undifferentiated, small suppliers e.g. small farming businesses supplying the large grocery chains. The cost of switching between suppliers is low e.g. from one fleet supplier of trucks to another. The power of suppliers The power of suppliers tends to be a reversal of the power of buyers. Where the switching costs are high e.g. switching from one software supplier to another. Power is high where the brand is powerful e.g. Cadillac, Pizza Hut, Microsoft. There is a possibility of the supplier integrating forward e.g. Brewers buying bars. Customers are fragmented (not in clusters) so that they have little bargaining power e.g. Gas/Petrol stations in remote places. The threat of substitutes Where there is product-for-product substitution e.g. email for fax where there is substitution of need e.g. better toothpaste reduces the need for dentists. Where there is generic substitution (competing for the currency in your pocket) e.g. Video suppliers compete with travel companies. We could always do without e.g. cigarettes. Competitive Rivalry This is most likely to be high where entry is likely; there is the threat of substitute products, and suppliers and buyers in the market attempt to control. This is why it is always seen in the center of the diagram.  l Porter Five Force – FedEx Corporation Threat of new Entrants: The threat of new entrants is low in the parcel industry. It is low because it is very expensive to get involved in the industry. Starts up costs are high. It is expensive to have the services that are equal to that of FedEx and the other competitors. (2010, March 21) Bargaining Power of Suppliers: The bargaining power of suppliers is high. It is high because when looking at the items that the parcel industry use such as, planes, computers, and vehicles. If FedEx is not on good relations with these people, the costs can increase drastically. If a supplier only has accounts or the majority of their accounts with these companies, they will not be able to control prices and supplies. Suppliers that are involved in this industry are: vehicle manufacturers, airplane manufacturers, fuel suppliers, labor, airports, and shipping materials manufacturers. Bargaining Power of Buyers: This is a moderate force in this industry because competition keeps prices similar among the companies. The only difference is companies, such as Federal Express who have value-added services that allow a higher price. Also, the buyers of the services in this industry are reactionary. They do not know the technology before it happens. They become dependent on the technology, service and speed offered by the companies in this industry and will pay for it. They have the ability to switch their user to one of the other members of the industry at any time. It is the job of FedEx to make sure that the customer is always happy. It comes as no extra cost to the buyer to switch their parcel delivery company. The only lose that is really suffered comes at the expense of the company for losing a client follow the link www.csustan.edu/ Product Substitutes: It is very easy to substitute a delivery service. There are not many out there but the ones that are well established in the eyes of the customer and the industry. It would not be a complex task to switch one company for another (2006). Since this is the case, FedEx has to maintain good customer relations with their clients. Intensity of Rivalry: The parcel industry is an intense industry. There are five main players in the industry competing for market share. The features that they are competing on are the speed of delivery, the efficiency of the delivery, and prices. If you can create a successful mix of the three of those factors, you will hold the greatest market share. (2007) This is a strong force in this industry because the competitors use price cuts to compete, there is a low cost and ease to switching brands, and the companies in this industry diversify and acquire other companies for strategic growth and synergy. l Porter Value Chain According to en.wikipedia.org/wiki/Value_chain suggest that the value chain, also known as value chain analysis, is a concept from business management that was first described and popularized by Michael Porter in his 1985 best-seller, Competitive Advantage: Creating and Sustaining Superior Performance. Follow the link www.learnmarketing.net suggest that Michael Porter in 1985 introduced in his book ‘The Competitive Advantage’ the concept of the Value Chain. He suggested that activities within the organization add value to the service and products that the organization produces, and all these activities should be run at optimum level if the organization is to gain any real competitive advantage. If they are run efficiently the value obtained should exceed the costs of running them i.e. customers should return to the organization and transact freely and willingly. Michael Porter suggested that the organization is split into ‘primary activities’ and ‘support activities’. (See appendix 2) Primary activities Inbound logistics: Refers to goods being obtained from the organizations suppliers ready to be used for producing the end product. Operations: The raw materials and goods obtained are manufactured into the final product. Value is added to the product at this stage as it moves through the production line. Outbound logistics: Once the products have been manufactured they are ready to be distributed to distribution centre, wholesalers, retailers or customers. Marketing and Sales: Marketing must make sure that the product is targeted towards the correct customer group. The marketing mix is used to establish an effective strategy; any competitive advantage is clearly communicated to the target group by the use of the promotional mix. Services: After the product/service has been sold what support services does the organization have to offer. This may come in the form of after sales training, guarantees and warranties. With the above activities, any or a combination of them, maybe essential for the firm to develop the competitive advantage which Porter talks about in his book. Support Activities The support activities assist the primary activities in helping the organization achieve its competitive advantage. They include: Procurement: This department must source raw materials for the organization and obtain the best price for doing so. For the price they must obtain the best possible quality Technology development: The use of technology to obtain a competitive advantage within the organization. This is very important in today’s technological driven environment. Technology can be used in production to reduce cost thus add value, or in research and development to develop new products, or via the use of the internet so customers have access to online facilities. Human resource management: The organization will have to recruit, train and develop the correct people for the organization if they are to succeed in their objectives. Staff will have to be motivated and paid the ‘market rate’ if they are to stay with the organization and add value to it over their duration of employment. Within the service sector e.g. airlines it is the ‘staff’ who may offer the competitive advantage that is needed within the field. Firm infrastructure: Every organization needs to ensure that their finances, legal structure and management structure works efficiently and helps drive the organization forward. l Porter Value Chain – FedEx Corporation Primary activities: Ÿ Inbound logistics-handing and storing of products to be shipped Ÿ Operations-shipping products, logistics, value chain analysis, financial analysis, handing orders, checking orders. Ÿ Outbound logistics-delivery of the product, receiving payment Ÿ Marketing and Sales- develop a positive imagine of the company making people feel comfortable and satisfied with the product. Ÿ Service- Concentrates on customer satisfaction, doing anything that satisfies the customers. Support Activities: Ÿ Procurement- purchasing, trucks, planes, gas and other assets Ÿ Technology development- investments in systems innovation, research and development and information technology Ÿ HR management-hiring, training, developing and compensating employees from truck drivers to top-level management Ÿ Firm infrastructure-General management, planning, accounting, legal support, government regulations, required to support the value chain. Global distribution involves managing not only the movement of goods, but also the flow of information and finance that moves with the goods. A FedEx supply chain solution is a streamlined organization and that one core competency leads to another it is a continuous flow. (2009, July 6) l SWOT analysis of FedEx According to case study about FedEx Corporation by Ali F and Pauline Ng (2002), and following the link www.csustan.edu Company Strengths and Resource Capabilities: Globalize: Federal Express operates on a global scale. They operate in 211 countries. They provide services that appeal to most of the world. They have such a large market in which to operate, and thus realize tremendous revenues. They can also achieve global economies of scale. Innovation: Federal Express took airplanes and trucks and used them differently than any other company before them. This is innovation. They have first-mover advantage in name recognition because of this innovation. This has helped them to remain the industry leader since 1973. Technology and Communication: Federal Express uses and continues to search for new technology. They allow spending of $1billion a year, 10% of total revenues, for information technology. That commitment keeps customers from switching to other providers. Federal Express also has excellent communication with their customers. They use tracking devices on all shipments, and customers can find out where their shipment is through many different avenues including a user-friendly Web site. Federal Express customers are assured that FedEx will always be on top of technology. Strategic Vision: Federal Express’ will always have competent top managers in charge of strategic direction. Frederick Smith built an industry leader, and kept it in that position since 1973. Industry Leader: Federal Express has been the industry leader since 1973. Strong Brand Image: In 1990, Federal Express became the first company awarded the Malcolm Baldrige National Quality Award in the service category. In 1994, Federal Express became the first global express transportation company to obtain simultaneous system-wide ISO 9001 certification in international quality standards. Federal Express has also developed their own quality system that matches their customer’s standards. Company Weaknesses and Resource Deficiencies: Rising Prices: Federal Express’ prices are above their competitors’. This can be a weakness if their customers do not perceive a difference between Federal Express and its competitors’ services. Running Subsidiaries Separately: FDX has deliberately chosen to keep their companies separate. In FDX’s 1998 Annual Report, CEO Frederick Smith states, "Simply layering the unique resource and operating requirements of a time-definite, global, express-delivery network onto a day-definite, ground small-package network would surely result in diminished service quality and increased costs. Under the FDX umbrella, we will leverage our shared strengths while operating each delivery network independently, with each focused on its respective markets." Frederick Smith is confident this will be strength, instead of a weakness. Time will tell. Company Opportunities: Expansion Globally: Federal Express can continue to expand globally, including the other companies under FDX. Expansion Internally: Federal Express can continue to acquire more companies, and expand into new technologies or areas in their industry. Run Subsidiaries Together: If FDX doesn’t profit from running the subsidiaries separately, they can change to integrating their operations to achieve better synergies and economies of scale. Contracts with Large Corporations: To stay the industry leader, Federal Express should form contracts with companies who will add cost-saving or value-adding benefits to their services. Joint-Ventures: Federal Express can form joint ventures, such as already with Netscape and American Express, to enjoy the growth of integrating their customer bases. Expansion of e-commerce: Federal Express already has a major presence of shipping online. They should keep finding Internet companies to contract delivery of their products. Since the growth of e-commerce is rapid now, Federal Express could enjoy both profits and brand name recognition from this kind of expansion. Company Threats: Relations with Foreign Countries: Through Federal Express’ expansions globally, they are subject to laws and regulations of all foreign countries. There could be major problems in this area, stunting growth and raising costs. Already, Great Britain will not let Federal Express fly their planes for shipments. Federal Express must either load their cargo on to British planes, or use ground transportation. This is very inefficient for Federal Express; however, it keeps competition out for British Air Transportation companies. Everywhere Federal Express goes, they are at risk for regulations that hinder their operations or efficiency. Economic and Political Conditions: Federal Express is subject to the entire world’s economic and political condition in the areas of fuel prices and supply, customer purchase of their services, and relations with foreign countries. As a global company, they are subject to much more risk than domestic companies Question 1b l Core competencies The definition of core competencies following the website searchcio-midmarket.techtarget.com “A core competency is fundamental knowledge, ability, or expertise in a specific subject area or skill set”. And from other website tutor2u.net/business they suggest that “Core competencies are those capabilities that are critical to a business achieving competitive advantage. The starting point for analyzing core competencies is recognizing that competition between businesses is as much a race for competence mastery as it is for market position and market power.” Beside that C.K.Prahalad noted that “A core competency is an area of specialized expertise that is the result of harmonizing complex streams of technology and work activity." Core competencies are the most significant value creating skills within your corporation and key areas of expertise which are distinctive to your company and critical to the company's long term growth- give by the website www.1000ventures.com/business_guide According to Prahalad and Hamel (1990) “Core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies.” From their points of view the core competencies are the collective knowledge and skills that distinguish an organization from the competition, which should also be difficult for the competition to imitate.   In effect, core competencies provide the basis for developing new products and services, and they are a primary factor in determining an organization’s long-term competitiveness. Moreover, a true core competence, and could provide a competitive advantage l Core competencies FedEx Corporation – According to Blackmon, Douglas, Ante Up! Big Gambles in the New Economy: Overnight Everything Changed for FedEx. The Wall Street Journal. (November 4, 1999). FedEx's delivery volume within the U.S. accounts for about two-thirds of the companies’ revenue, and has slowed in the past year.  Frederick Smith, CEO of FedEx believes the company can remake itself by slowing some things down.  It has invested $500 million in the past two years to double capacity at its RPS unit, a business-to-business delivery network acquired in 1997.  RPS transports packages more slowly, more cheaply and with much higher profit margins.  Federal Express has realized that the need for speed and reliability have slowed down.  They are willing to make changes in their own company and market new ideas.  They have a strong brand logo and loyalty that will assist them in their new projects. Beside that from other website they noted about core competencies of FedEx, www.chrmglobal.com “Core competency” was added to management literature by Mc.C.K.Prahalad and Mr.Gary Hamel both Harvard professors. They said that every organization has got a core competence up on which its products and services are built. They introduced that what is called as a “VGD Test” to identify whether a given competency is a C2. V- Does this competency Produce Significant value to customers? G- Does this competency act as a Gateway for survival and future of the organization? D- Does this competency differentiate the organization from its competitors? A competency must satisfy all the 3 conditions, to be designated as C2. Core competency of FedEx is “Delivery”. FedEx is long known for its outstanding delivery and goods tracking mechanisms. FedEx delivery agents carry palmtops to update goods delivery status back to their main frames from their field. It enables FedEx customers to track their good from source to destination and on time delivery. In the article “Product or Proficiency: What are a Utility’s Unique Skill of Leonard M. Fuld and Diane Borska, (July 1, 1997), they recommend that FedEx truly has a competency in customer service, because it scores relatively high in both the cost-reduction and value criteria for determining a core competency . For FedEx, customer service has a high value rating because it contributes performance, quality or strategic value to the core product: getting a package to a customer in a timely manner. While the value of the activity is important, its impact on the product's cost is also a significant determinate of a core competency. Once again as shown by its high cost-reduction score, FedEx's customer service is viewed as significantly lowering the cost of delivering the package. If a package is delivered properly it will not only keep the customer happy, but also will keep the costs down by not having to redeliver the package. The cost criterion can determine which company has the stronger competency in billing and collection. l Capabilities FedEx Corporation of According to suggest that “A capability is WHAT a company or organization needs to be able to do to execute its’ strategy”. Additionally, www.1000ventures.com has definition about capabilities “Capability represents the identity of your firm as perceived by both your employees and your customers. It is your ability to perform better than competitors using a distinctive and difficult to replicate set of business attributes. Capability is a capacity for a set of resources to interactively perform a stretch task.” FedEx have successful in sourcing, which plans and manages inbound transportation for more than 1, 5000 product suppliers into 26 General motors power train facilities. This capability puts FedEx at the leading edge of the $225 billion logistics-outsourcing industry. (Thomas H, Marius L, Seven V, 2006) With all the investment in the systems infrastructure over the years and the US$88 million acquisition of Caliber Systems, Inc., in 1998, the Company had built a powerful technical architecture that had the potential to pioneer in Internet commerce. (Farhoomand and Pauline, 2000) Advances in IT promoted the globalization of commerce. The ability to share information between operations/departments within a company and between organizations to generate operation efficiencies, reduce costs and improve customer services was a major breakthrough for the express transportation industry. However, of even greater significance was the way in which new technology redefined logistics. (Farhoomand and Pauline, 2000) By 1998, FedEx was a US$10 billion company spending US$1 billion annually on IT developments plus millions more on capital expenditure. It had an IT workforce of 5,000 people. (Farhoomand and Pauline, 2000) As of January 2000, FedEx served 210 countries making up more than 90 per cent of the world's GDP), operated 34,000 drop-off locations and managed over 10 million square feet of warehouse space worldwide. It had a fleet of 648 aircraft and more than 60,000 vehicles, with a staff of nearly 200,000. It was the world's largest overnight package carrier, with about 30 per cent market share. Question 1c l International trade Countries maintain trade relations with each other. The exchange of goods and services between countries is known as international trade. A country requires a market for its goods. Markets are available locally as well as internationally. According to the website they suggest that “International trade is the exchange of goods and services between countries. This type of trade gives rise to a world economy, in which prices, or supply and demand, affect and are affected by global events.” International trade is a relatively conservative approach that can be used by firms to generate markets (by exporting) or to obtain supplies at a low cost (by importing) (Madura, 2009) When an exchange of goods or services takes place across national boundaries, it us called international trade (Carl A. Nelson, 2000, p.3). Exports are the goods and service sold by individuals or nations. Imports are the goods and services purchased. National economies need international markets to produce and sell things. Most international trade is not in the goods we buy in the shops. It consists of things needs\ed to make these goods, ranging from the microprocessors and software in electronic equipment to the cereals in food. (Patrick Love, Ralph G, Lattimore, 2009, p3) International trade influences a whole range of activities including jobs, consumption and the fight against poverty. It also affects the environment and relations among countries. In turn, trade is shaped by a host of influence ranging from natural resource to fashion. (Patrick Love, Ralph G, Lattimore, 2009, p8). The theory of international trade divides traditionally into two disciplines distinguished by their theoretical frameworks of analysis: the pure theory and monetary theory (Jagdish N. Bhagwati, Arvind Panagariya, T.N. Srinivasan, 1998, p3) International trade is beneficial to world economy. It adds to the money coffers of the world at large. Every country can benefit monetarily if it is able to dispose off its surplus goods after meeting the requirements of the local people. Amitabh Shukla, (2009) l Advantage of international trade to FedEx Corporation Amitabh Shukla (2009, August 27) in World Economy suggests that international trade have some benefit, there are: Monetary gains to the respective country indulging in trade. More variety of goods available for consumers. Better quality of goods. Competition both at the international level as well as local level. Closer ties between nations. More exchange of technical know-how. Local producers will try to improve the quality of their products. Increase in employment locally. Lower costs through economies of scale: Free trade gives firms access to a larger world markets and allows them to realize economies of scale more fully. Increase sales and profit: +From 1993 to 1996 sales of FedEx grew from $7.8 billion to $10.3 billion (Lester, D., 2004, p.113). Sales grew from $13.25 billion in 1997 to $19.629 billion in 2001 (Lester, D., 2004, p.114) +“In the year ending 31 May, 1999, the Company had out-performed analyst expectations, posting record earnings of 73 per cent, an increase of 28 per cent over the previous year (Gelsi, 1999). Net income had risen 30 per cent to US$221 million.” (Farhoomand and Pauline, 2000, p. 657) Gain your global market share: “FedEx was the world’s largest overnight package carrier, with about 30 per cent market share.” (Farhoomand and Pauline, 2000, p. 649) Enhanced flow of ideas: The transfer of technological advances around the world is often thought to be linked to the trading of the goods that embody those advances (Mankiw, 2009) Reduced labor cost by outsourcing: FedEx can outsource its IT workforces to India to develop the FedEx integrated logistics solution or other solutions. That enables FedEx to reduce labor cost. Extend sales potential of existing products: FedEx’ products Enhance potential for expansion of the business: + “As of January 2000, FedEx served 210 countries (making up more than 90 percent of the world’s GDP), operated 34,000 drop off locations and managed over 10 million square feet of warehouse space worldwide. It had a fleet of 648 aircraft and more than 60,000 vehicles, with a staff of nearly 200,000.” (Farhoomand and Pauline, 2000, p. 649) Enhance the domestic competitiveness: + International trade can help FedEx enhance its reputation in the market. That enables FedEx to increase the customer trust about the company. Hence enhance the domestic competitiveness. l Disadvantage of international trade to FedEx Corporation Amitabh Shukla (2009, August 27) in World Economy suggests that international trade have some disadvantage, there are: Local production may suffer Local industries may._.