Ups and FedEx Case Study Research Paper United Parcel Service and Federal Express Case Study FedEx AND UPSóTHE WAR CONTINUES As the competition between Federal Express (FedEx) and United Parcel Service (UPS) escalated over the years, consumers reaped the benefits of faster, cheaper services.
The fierce rivalry between these two companies seemed to change direction in the mid-1990s as opportunities to appear innovative became increasingly difficult to achieve. Both FedEx and UPS realized that significant changes in the way they approached their businesses were needed.
Ups and FedEx Case Study Research Paper
These changes came largely in the form of information technology, which became one of the differentiating factors between these two powerhouses. By enabling customers to control their access to information, FedEx and UPS created a new battleground, while continuing to compete on the ground, in the air, overseas, and through a number of expanded service offerings. Analysts fear that the market would become saturated seemed to become a reality in 1999, as FedEx’s profits plummeted while UPS saw its second most profitable year in company history. FedEx’s troubles, however, were somewhat short-lived, and in a surprising resurgence due mainly to growing ground operations, FedEx was seeing record earnings once again by 2002.1 Information Technology Mass customization and the World Wide Web In the mid-1990s, mass customization provided a competitive tool for FedEx and UPS, thereby giving customers the ability to tailor options to their specific needs. In 1995, FedEx and 1 FedEx Annual Report, 2002. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -2- UPS gave away PC software to their customers, which allowed them to make labels, schedule pickups, and track shipments.2 In 1995, Oz Nelson, former chairman of UPS, commented: Itís becoming popular now to talk about mass customization. I thought it was impossible . . . how can you pick up from 1.35 million customers a day and deliver 12 million packages a day and talk about any kind of customization? But I found out you can. One way is with technology.3 As Nelson suggested, technology became the key player in mass customization, but more specifically, information technology would play the defining role.
Ups and FedEx Case Study Research Paper
Frederick W. Smith, founder and CEO of FedEx, predicted the importance of the delivery of information as early as 1979 when he said, information about the package will soon be just as important as the delivery of the package.î4 By 2000, FedEx was spending $1.3 billion annually on information technology.5 UPS’s expenditures were also in the billion-dollar range. By the mid-1990s, FedEx and UPS found themselves in the midst of a virtual online war. FedEx beat UPS to online tracking in 1995, but UPS leap-frogged FedEx to the market in March 1996 when the company rolled out a Web site capable of handling package scheduling and pickup from beginning to end, with payment made off-line.6 FedEx retaliated by offering a Web site where customers could complete all shipping functions, including creating shipping labels, calculating costs, and scheduling pickups without using the telephone before UPS could offer the same functions on its own Web site.7 By early 1997, FedEx also introduced both FedEx internet Ship and Business Link software, increasing their presence on the World Wide Web. FedEx internet Ship processed transaction data over the Internet, thus eliminating all paperwork, and contacted the courier to pick up the shipment.8 The introduction of Business Link software marked FedEx’s entrance into the burgeoning field of e-commerce.9 UPS also harnessed the Web and became as pervasive on the Internet as its brown trucks were on the streets. In 1997, the company became more widely available to its customers through agreements with Info seek, Lycos, and Yahoo to locate package drop-off centers and download UPS OnLine Tracking software.10 UPS announced that they were working with companies like IBM, Pandesic, SAP, Icat, Harbinger, Lotus, and Microage to develop a series of 2 Marc Rice, ìCompetition Fierce in Complex Business of Delivering Package,î Marketing News (May 22, 1995): 5. 3 Rice, 5. 4 Steve Ulfelder, ì35 Years of IT Leadership: Signed, Sealed and Delivered,î Computerworld (September 30, 2002): 50. 5 Susan Avery, ìTransforming IT Sourcing Delivers Savings for FedEx,î Purchasing (January 13, 2000): 121. 6 Kim S. Nash, ìOvernight Services Duke It Out On-Line,î Computerworld (April 22, 1996): 1. 7 Kristin S. Krause, ìBattle for Cyber Space,î Traffic World (April 19, 1999): 56. 8 Pedro Pereira, ìFedEx Opens Doors to World,î Computer Reseller News (February 17, 1997): 248. 9 Douglas Blackmon, ìFedEx Plans to Establish a Marketplace in CyberspaceóShipper Aims to Deliver the Goods As It Moves Into Internet Commerce,î Wall Street Journal, 9 October 1996, B3. 10ìUPS Strikes Deals with Three Internet Companies,î Direct Marketing (April 1997): 8. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -3- application programming interfaces (APIs), which would connect the company to other companiesí e-commerce systems more efficiently.11 FedEx was determined not be left behind and began distributing its own APIs approximately one year later. By 1999, UPS was using APIs to provide UPS OnLine Tools, which allowed online merchants to put their features, including tracking and rating, directly on their Web sites.12 Tim Zach, director of electronic commerce for UPS, stated, ìwe want to empower the buyer and give them the capabilities they need for self-service.î13 Not surprisingly, one year later, FedEx incorporated its own APIs into a suite of products aimed at streamlining the process of connecting FedExís shipping, tracking, and rating information, as well as its e-mail notification capabilities, to online merchantsí Web sites.14 Amidst the explosion of e-commerce and the resulting scramble to gain a piece of the market, FedEx and UPS continued the race to link their tracking capabilities and online shipping tools all over the Web.
Ups and FedEx Case Study Research Paper
FedEx struck a deal with Netscape in 1999 to be its exclusive transportation provider15 and also launched FedEx MarketPlace, which provided customers with direct access to online merchants who used FedEx to deliver their products.16 In another effort to link online consumers to its services, FedEx began offering small- and medium-sized companies the ability to build an online store through FedEx in 2000.17 UPS, too, was busy linking its services to the World Wide Web. By 2001, UPSís tracking system was linked to over 60,000 Web sites, which allowed customers to locate packages without needing to access the UPS Web site.18 By 2002, UPS had built a world-class ecommerce infrastructure, enabling the company to ìupgrade their 60 customer service telephone centers so information could be scanned and ready for the 7000 customer service representatives whenever it was needed,î eliminating $450,000 in costs each day.19 Other technological advancements Both companies also turned their attention to improving technology used in their internal operations. In 1995, FedEx introduced a new Courier Route Planner (CRP), which improved 11Matthew Nelson, ìUPS to Deliver I-commerce Infrastructure,î InfoWorld (September 15, 1997): 1. 12Kathleen Hickey, ìUPS Debuts OnLine Tools,î Traffic World (April 12, 1999): 36. 13Hickey, ìUPS Debuts OnLine Tools.î 14Jennifer Baljko Shah, ìFedEx Readying Product Suite to Provide Package TrackingóService Claims Ship Manager Line Enhances SC Visibility,î EBN (September 11, 2000): 82. 15Krause, ìBattle for Cyber Space.î 16Linda Rosencrance, ìFedEx Creates Online Shopping Marketplace,î Computerworld (November 22, 1999):
- 17Rick Brooks, ìFedEx to Launch Service That Allows Small Companies to Build Online Stores,î Wall Street
Journal, 12 June 2000, A6. 18Rick Brooks, ìE-Commerce (A Special Report): Industry by IndustryóOvernight DeliveryóOutside the Box: The Giant Package-Delivery Firms Looked Like They Might Be a Dying Breed; Not Even Close,î Wall Street Journal, 12 February 2001, R20. 19Janet Perna, ìReinventing e-business,î Executive Excellence (January 2002): 17. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -4- employee productivity. The system used geographic information technology to calculate the most efficient delivery and pickup routes, helping ground workers decrease the number of miles covered per parcel delivered. UPS also increased employee productivity in 1996 with the wearable, ring-shaped bar code scanning system provided by Symbol Technologies. These scanners allowed workers to scan packages at a quicker rate and gave UPS the ability to offer its customers new services, such as the option to re-route packages that had already been sent.20 FedEx responded by improving its own bar code SuperTracker scanning system that enabled couriers to scan packages faster and begin delivery routes quicker. In 2001, FedEx continued to wring productivity improvements out of employees with the deployment of its worldwide Local Area Network (LAN)21 that utilized wireless technology on the hub ramp to make scanning easier and faster. Later that year, UPS not only announced plans to deploy its LAN network to date, but also revealed plans to establish a short-range wireless Bluetooth network that would replace the need for the sortersí wearable computers and eliminate the troublesome cords that often broke or interfered with the scanning process.22 UPS also introduced the fourth version of its Delivery Information Acquisition Device (DIAD IV), which incorporated ìnew radio technology, expanded memory, and a color screen,î ensuring that UPS drivers had access to the most current package information.23 Corporate Transformation UPS: initial public offering On November 10, 1999, UPS issued the largest ever initial public offering (IPO) in U.S. history to date when the company issued 109.4 million shares valued at $5.47 billion and watched the stock rise more than 40 percent in the first few hours of trading before settling down to a 35 percent gain.24 At the end of the first day of trading, its shares were selling for $67.25, up $17.25 from the offering price. On the same day, FedEx stock fell 75 cents to $43.25, and Airborne Freight managed to climb only 6.25 cents to $23.9375. Based on the New York Stock Exchangeís closing price, the market valuation of UPS stock was $80.9 billion, which was more than six times FedExís market capitalization of $12.9 billion.25 UPS planned to use the proceeds of its IPO to buy back internal shares, providing it with the opportunity to make acquisitions with stock as opposed to cash. 20Gary Forger, ìFirst Major Roll Out of Ring Scanners Delivers for UPS,î Modern Materials Handling (March 1997): S6. 21Bob Brewin, ìUPS to Deploy Bluetooth, Wireless LAN Network,î Computerworld (July 23, 2001): 8. 22Brewin, ìUPS to Deploy Bluetooth, Wireless LAN Network.î 23ìUPS Gears Up for Switch to Next-Generation Hand Helds,î Frontline Solutions (July 2003): 34. 24Rick Brooks and Douglas A. Blackmon, ìUPS Shares Post 35% Rise in Record IPO,î Wall Street Journal, 11 November 1999, A3. 25Brooks and Blackmon, ìUPS Shares Post 35% Rise in Record IPO.î For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -5- In early 2001, UPS used its stock for the first time to make an acquisition. In a deal valued at $431 million, the company agreed to acquire Fritz Companies, an air and ocean freight forwarding, customs brokerage, and warehousing operation.26 Fritz Companies was renamed UPS Freight Services. According to Satish Jindel, principal of Pittsburgh-based SJ Consulting: What UPS is saying with the acquisition is, ìYou already use us for your express and parcel needs, and we donít want you to go anywhere else for any transportation requirements.î They are like a grocery store that started off only selling produce but then added a meat counter, a drug store, a bank, a video rental counter, a dry cleaning service, and so on. These are all stops consumers, or in their case, shippers, have to make.27 In the same week, UPS also agreed to acquire First International Bancorp for $78.7 million in stock, which gave the company the ability to provide government-backed loans to small- and medium-sized businesses.28 UPS continued to make acquisitions that totaled 22 by March 2003. UPS: acquisition of Mail Boxes Etc. Working to improve services to small and home-based businesses, UPS made one of its more notable acquisitions in March of 2001.29 In an all-cash deal valued at $191 million, UPS acquired Mail Boxes Etc. (MBE)óthe largest shipping retail outlet in the countryóthat provided packing, shipping, and mail services. At the time, MBE was shipping more than 40- million packages a year, 43 percent of which were being shipped via UPS. After the deal closed, the stores continued to offer shipping services through other carriers such as the United States Postal Service (USPS) and FedEx. In 2003, FedEx announced plans to stop conducting business with the former Mail Boxes stores, which were now UPS Stores, claiming that they no longer represented a ìtrue multicarrier environment.î30 Besides the name change, UPS also offered price cuts of approximately 20 percent to its customers, hoping that the lower prices would attract more business. UPS, however, met resistance from some MBE franchisees that announced plans to bring a classaction suit against them charging that the move to eliminate the MBE brand would hurt franchisees.31 Specifically, ìMBE franchisees [were] worried about falling profits, loss of brand identity and loss of franchise territorial protection.î They also argued that the mandated lower 26ìUPS Agrees to Pay $431 Million in Stock For Freight Firm Fritz,î Wall Street Journal, 11 January 2001, 10. 27Kristin S Krause, ìUPS Buys Fritz for $450M,î Traffic World (January 15, 2001): 10. 28ìUnited Parcel Service Inc. to Acquire First Intíl Bancorp for 1.47 Times Revenue,î Weekly Corporate Growth Report (January 29, 2001): 11143. 29Ann Carrns, ìUPS Will Purchase Mail Boxes Etc. in Bid To Expand Services,î Wall Street Journal, 5 March 2001, B7. 30Jeff Bailey, ìEnterprise: Big Companies Hold Promise, Risk as AlliesóFor Mail Boxes Owners, Name Change by UPS Means No More FedEx,î Wall Street Journal, 8 April 2003, B2. 31ìMail Boxes Etc. Franchisees Want to Block UPS Plan,î Journal of Commerce (February 24, 2003): 1. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -6- UPS Store rate would not bring in enough new business to make up for the loss of both FedEx and USPS business. Andrew Palmer, a lawyer representing MBE, stated, ìThis conversion does nothing to help MBE franchisees and everything to increase UPS profits at the expense of MBE.î32 Despite this resistance, 90 percent of MBE franchisees (approximately 3,000 stores) agreed to make the name change, which proved to be successful because, in the words of reporter Connie Robins Gentry, ìAlthough the franchisees make less money per transaction with the lowered UPS rates, they more than make up the difference through increased shipping volumes.33 FedEx did not respond until early winter 2003 when it purchased Kinkoís for $2.5 billion, a purchase that gave FedEx greater reach into the retail marketplace. While many believe the price was steep, there was general agreement that the fit was good and positioned FedEx in Kinkoís growth in digital services and its place as an ìoffice away from homeî for the traveling executive. This combination of services made the two companies a one-stop office. In addition, the 1200 locations supplemented FedExís surface business by giving the company a much larger footprint. UPS: advertising campaign and equipment purchases In the spring of 2002, UPS spent approximately $46 million advertising its new tag line, ìWhat can Brown do for you?î34 UPS advertising spokesman, Steve Holmes, indicated that the new marketing blitz was a response to consumer perception that UPS was only a ground carrier for small packages.35 The new campaign focused on all of the services UPS could provide customers, including a wide range of logistical ones. UPS credited the new advertising campaign with helping them land some major accounts, which included ìa contract from Nikon outsourcing distribution of its entire digital camera business to UPS.î36 In a deal with Airbus Industrie back in 2001, UPS agreed to purchase 60 cargo-carrying A300-600 aircraft valued at $6 billionóthe largest order in UPS history.37 This purchase helped UPS continue to chip away at FedExís lead in the express air shipment business. UPS had already taken measures in 1997 to better compete with FedEx in air delivery with plans for an $860 million expansion of its primary hub in Louisville, Kentucky.38 After the IPO, UPS continued to pour money into the new hub, dubbed Hub 2000, which was finally completed in mid-2002. The expanded hub virtually doubled the UPS sorting capacity to 300,000 packages an hour. The near billion-dollar project was the largest capital expenditure UPS had made to date. 32ìMail Boxes Etc. Franchisees Want to Block UPS Plan.î 33Connie Robbins Gentry, ìBuilding on Brand Awareness,î Chain Store Age (July 2003): 36. 34John D Schulz, ìBig Brown Buffs its Image,î Traffic World (February 18, 2002): 31. 35Ed Lawler, ì19th Annual Sawyer Awards: Integrated Campaign Runner-Up: United Parcel Service of America,î B to B (December 9, 2002): 21. 36Dale Buss, ìUp with Brown,î Brandweek (January 27, 2003): 16. 37Rick Brooks and Jeff Cole, ìUPS to Buy 60 Cargo Jets From Airbus,î Wall Street Journal, 10 January 2001, A3. 38Douglas A. Blackmon, ìBusiness Brief: UPS to Expand Its Primary Hub As Battle With FedEx Heats Up,î Wall Street Journal, 22 December 1997, 1. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -7- FedEx loses battle After UPSís historic IPO, FedEx watched the companyís earnings soar as it spent lavishly on acquisitions, better aircraft, and sophisticated information technology. In 2000, UPS saw record second-quarter profits and growth across all segments. Revenue rose 11 percent, and profit grew to $695 million, up 18 percent from $588 million in the same period the year before, despite paying an unplanned $100 million for fuel.39 UPS also saw significant increases in domestic ground volume, domestic package revenue, overnight service revenue, and international revenue. Meanwhile, FedEx watched its own earnings plummet. It was already seeing a decline in demand and earnings before UPSís IPO, and in its fiscal second quarter ending November 30, 1999, earnings declined another six percent to $171 million from $183 million a year earlier.40 FedEx blamed its financial woes on increasing fuel costsóa bullet UPS managed to dodge. UPS bought more than half of its fuel in advance at a set price while FedEx routinely bought fuel on the spot market.41 This gamble cost FedEx an estimated $55 million more than it had in the same period the year before.42 FedEx still managed to see a nine percent increase in net income at the end of fiscal 2000, but by the end of fiscal 2001, FedExís net income was down 15 percent to approximately $584 million from $688 million the year before. According to reporter Charles Haddad, ìTo Wall Street, it looked as if FedEx was doomed to years of shrinking margins and lost business. Some analysts even went so far as to suggest that FedEx would disappear in a takeover.î43 Ö But not the war In an attempt to gain ground in UPS territory, in 1998, FedEx formed FDX Corp., a holding company, in order to acquire Caliber System, Inc., which operated a business-tobusiness ground delivery unit, RPS, Inc.44 RPS was the second largest, small-package ground service in the country. After acquiring Caliber, FDXís two primary subsidiaries were FedEx and RPS, which for two years operated under separate sales and marketing umbrellas. This changed in January 2000, when FedEx announced its new re-branding plan. FDX Corp. became FedEx Corp., RPS was renamed FedEx Ground, Roberts Express became FedEx Custom Critical, and FDX Logistics changed to FedEx Global Logistics. According to FedEx spokesperson, Shirlee Clark, the integration of sales and marketing was integral in satisfying customers. She said, ìWe are giving customers what they asked for: a single point of access. Itís been fragmented up to this point.î45 39Kristin S. Krause, ìUPS Looks Unstoppable,î Journal of Commerce (July 31, 2000): 31. 40William Armbruster, ìEarnings Decline on Increased Fuel Costs,î Journal of Commerce (December 17, 1999): 5. 41Kristin S. Krause, ìRevved Up,î Journal of Commerce (October 25, 1999): 44. 42Kristin S. Krause, ìFedEx Plans for 2000,î Journal of Commerce (January 3, 2000): 35. 43Charles Haddad, ìFedEx: Gaining on the Ground: Dismissed as an Also-Ran to UPS Not Long Ago, It Has Roared Back by Building a Bang-Up Ground Network,î Business Week (December 16, 2002): 126. 44Jacqueline Bueno, ìFedEx to Buy Caliber for $2.37 Billion,î Wall Street Journal. 7 October 1997. 1. 45Kristin Krause, ìUnleashing FedEx,î Journal of Commerce (January 24, 2000): 11. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -8- FedEx Ground would become a key player in FedExís resurgence after losing ground to UPS early in the new millennium. By 2001, FedEx had spent an estimated $4 billion building and revamping its ground system, and, by 2002, FedEx Ground was generating operating margins four times the operating margins of its air express unit.46 UPS still held nearly 80 percent of the ground market, but FedEx Ground was growing rapidly. In the three-month period ending August 31, 2002, its average daily package volume rose 11.8 percent while UPSís fell 2.1 percent.47 In 2002, FedEx announced plans for a $1.8 billion expansion and the addition of multiple hubs over a six-year period. The project was aimed at strengthening its overnight ground delivery service and boosting overall daily package volume to nearly double its current volume by 2009.48 In other words, FedEx was playing ìcatch upî in ground delivery just as UPS was trying to catch up in air delivery. As in the past, both companies were trying to leap frog each other and capture share from the part of the market where they were not traditionally strong. FedExís revamped ground system undoubtedly played a major role in its record earnings in fiscal 2002, which increased 22 percent from $584 million to $710 million.49 By 2003, FedEx Ground accounted for 15 percent of the FedEx revenue.50 In March of 2000, FedEx launched another service, FedEx Home Delivery, aimed directly at competing with UPSís residential service. FedEx planned to spend an estimated $150 million over a three-year period even though it expected to lose $15 million a year over that same period. It initially hired 500 contract drivers, opened 67 terminals, and was the first residential service to offer a money-back guarantee on all residential deliveries.51 At first, FedEx Home Delivery reached only 50 percent of the U.S. population, but, by the end of 2002, an additional 50 terminals were added to reach 98 percent of the population,52 and the service became profitable in 2003.53 UPS responded to this increase in competition by beginning to offer day-definite guarantees for its residential service in mid-2002, but did not wage a price war. Teamsters strike again Another contributing factor to the FedEx resurgence was UPSís labor problems. On August 4, 1997, the Teamsters Union, which represented approximately 185,000 UPS workers, went on strike for 15 days after UPS failed to meet the demand to turn thousands of part-time jobs into full-time jobs. Union workers returned to work on August 18 after UPS finally agreed to increase the number of full-time jobs and also to increase part-time wages.54 The strike, 46Haddad, 126. 47Haddad, 126. 48ìFedEx Ground Opens Expanded St. Louis Facility,î Journal of Commerce (10 April 2003): 1. 49FedEx Annual Report, 2002. 50Sonoko Setaishi, ìFedEx Profit Jumps 23% on Overseas Strength,î Wall Street Journal, 20 March 2003, A2. 51Kristin S. Krause, ìFedEx Heads Home,î Traffic World (20 March 2000): 44. 52Paul Miller, ìFedEx Home Delivery Challenges UPS,î Catalog Age (November 2002): 7. 53FedEx Annual Report, 2003. 54Jennie Walsh, ìUPS Concedes Defeat over Part-Time Policy,î People Management (28 August 1997): 17. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -9- however, cost UPS approximately $700 million in revenue and simultaneously put an estimated 9.5 million extra packages in the hands of FedEx during the two-week ordealó15 percent of which FedEx claimed to have retained.55 When the Teamsters Union threatened to strike again in 2002, customers began shifting their business to rival companies, including FedEx. This time, UPS customers had an increased incentive to switch to FedEx. UPSís rival ran a ground unit composed of nonunion drivers, which essentially eliminated the possibility of a strike that could have cost its customers millions. During the contract talks, UPSís labor-relations chief, Chris Maloney, admitted, ìthe closer we get to the expiration of the [Teamstersí] contract, the more customers are going to be concerned . . . and we donít know if weíll get those packages back.î56 Even though UPS ultimately avoided a strike by settling on a six-year contract that satisfied both UPS and Teamsters, many customers did, indeed, switch to FedEx without returning to UPS. FedEx and the deal with USPS In a public-private sector alliance, FedEx and USPS completed a $7 billion deal in August 2001.57 In the past, both UPS and FedEx considered USPS a rival and were determined to prevent the company from competing in the private sector. FedEx, however, struck a deal with USPS that it believed would be beneficial for its customers and the general public. Frederick W. Smith commented on the alliance: Whenever the public and private sectors work together, the real beneficiary is the American public. These two service agreements will create a winning business situation. The Postal Service will gain a single air transportation provider for most of its Express and Priority Mail, which cannot travel solely by surface. FedEx will gain an expanded retail network to grow our business.58 Under this partnership that consisted of two consecutive seven-year agreements, FedEx would cover air transportation for USPSís Priority and Express Mail. Under a separate arrangement, FedEx would be able to place approximately 10,000 drop boxes at USPS offices across the country, spending between $126 million and $232 million (depending on the number of boxes ultimately installed), which FedEx estimated would pull in an extra $900 million in revenue.59 FedEx began to see a significant impact on shipping volume and freight revenue after a full 12 months under the agreement. Freight revenue increased approximately 23 percent from 2002 to 2003. 55Tim Triplett, ìTeamsters Deliver Windfall to UPS Competitors, But Can They Retain It? ìMarketing News (24 November 1997): 2. 56Rick Brooks, ìUPS Customers Fearing Strike Contribute to Declining Volume,î Wall Street Journal, 11 July 2002, B2. 57Kristin S Krause, ìFedEx, USPS Strike Deal,î Traffic World (15 January 2001): 9. 58Krause, ìFedEx, USPS Strike Deal.î 59Krause, ìFedEx, USPS Strike Deal.î For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -10- The retail agreement between FedEx and USPS stated, ìTo avoid upsetting customers, USPS employees may allow customers to mistakenly hand FedEx Packages to them. However, USPS employees will not weigh or rate FedEx packages or respond to customer inquiries regarding FedEx service features.î60 Waging the service war On the same day in April 1995, FedEx and UPS announced that they would be providing a new 24-hour, same-day delivery service. Both companies charged $159 for the service, with varying delivery times depending on the region.61 One month later, UPS announced that it would be extending its same-day delivery service to packages with international destinations. In the same year, UPS also announced plans to speed up early morning delivery to 8 A.M. in selected cities.62 In response to the increased competition, FedEx launched FedEx First Overnight, which provided 8 A.M. service from anywhere in the United States to over 90 major markets.63 When FedEx and UPS exhausted ways to speed up delivery, they began offering guarantees aimed at undercutting the otherís service. In 1997, FedEx began offering guaranteed three-day delivery service, which UPS had offered since 1993. A year later, UPS undercut FedExís ìabsolutely, positivelyî guarantee by offering guaranteed delivery at no additional cost. FedEx tried to distinguish itself once again in 1998 by offering Sunday deliveryóa market that UPS always claimed was too small to be profitable. Logistics and supply chain management In 1995, UPS formed UPS Logistics Group, which provided global supply chain management solutions and consulting services designed to fit the individual needs of its customers. Under this group, UPS put its 1995 acquisition, SonicAir, to work. By 1997, customers could use SonicAirís team of consultants to manage their inventories. This team would ìwork with buyers and transportation managers to evaluate and reengineer a companyís distribution network to manage inventory at optimal levels.î64 UPS was also investing in better supply chain software. In 1999, it formed an alliance with supply chain software developer, Manhattan Associates, Inc. Its goal was not only to incorporate Manhattanís existing software into the UPS Logistics Groupís operations but also to jointly develop new applications geared toward specific industries.65 60http://contracts.corporate.findlaw.com/agreements/fedex/usps.sales.2001.01.10.html. 61Robert Frank, ìFederal Express, Battling Against UPS, Will Offer Same-Day Delivery Service,î Wall Street Journal, 12 April 1995, A2. 62ìUnited Parcel Service of America: Firm Will Speed Up Time of Early Morning Delivery,î Wall Street Journal, 14 June 1995, B10. 63ìFederal Express Co.: Service to Provide Delivery by 8 A.M. in Many Markets,î Wall Street Journal, 1 August 1995, B4. 64ìSonicAir Takes Stock of Your Inventory,î Purchasing (April 3, 1997): 51. 65ìUPS Forms Alliance with Manhattan Associates,î Logistics Management (August 1999): 111. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -11- Shortly after its IPO, UPS reached an agreement to acquire a leading French company, Finon Sofcom. This deal expanded ìthe European network for UPS Logistics Groupís emerging service parts logistics business, which included the storage, transport, and management of critical parts and components, including repair operations and quality inspection.î66 UPSís supply chain services received another boost with the acquisition of three more service parts logistics firms in 2000óMiami-based Comlasa, Australia-based Computer Logistics Solutions, and Atlanta-based Burnham Corp.67 According to Dan DiMaggio, these acquisitions were supposed to help UPS achieve its goal of reaching 88 percent of all domestic businesses within two hours and also improve its logistics services abroad.68 UPS was also receiving a boost to its logistics group from Ford, who was tapping into UPSís tracking technology to track more than four million of its cars and trucks annually.69 This alliance eventually led UPS to create two more units, UPS Autogistics, Inc., and UPS Automotive Services, to handle its burgeoning auto industry business.70 UPSís 2001 acquisition of Fritz, which provided importers and exporters with logistics management services, also strengthened its supply chain management capabilities.71 By the end of 2001, UPS had acquired eight logistics companies. With the sharp increase in the companyís logistics services came the creation of UPS Supply Chain Solutions in 2002, which streamlined access to UPS services. In the second quarter of 2003, this group led UPSís non-package sector revenue, which increased 16 percent to $731 million from the $630 million a year earlier.72 Meanwhile, FedEx attempted to propel itself into the top echelon of logistics firms with the acquisition of Caliber and its logistics unit in 1997. One year after acquiring Caliber, FedEx announced plans to incorporate Caliber Logistics under a new subsidiary, FDX Global Logistics.73 FedEx previously tried to form a logistics subsidiary with a focus on supply chain management and finally met success with its e-commerce and catalog unit. Caliber was eventually restructured and renamed FDX Supply Chain Services and it focused mainly on transportation management services, integrated services, and consulting.74 Before acquiring Caliber, FedEx experimented with such names as FedEx Logistics Services and Logistics, Electronic Commerce and Catalog Division, which was changed to FedEx Logistics after the acquisition. The final name change was to FedEx Global Logistics.75 Ultimately, FedEx could not withstand the restructuring, and the FedEx Logistics subsidiary was dropped. In 2001, 66ìUPS Logistics Acquires French Firm,î Journal of Commerce (14 December 1999): 16. 67Jennifer Baljko Shah, ìUPS Logistics Souping Up Its Operations to Speed DeliveryóUpgrading ServiceParts Business, Extending Reach Via Acquisitions,î EBN (26 June 2000): 56. 68Shah, ìUPS Logistics Souping Up Its Operations to Speed Delivery,î 56. 69Fara Warner and Rick Brooks, ìFord Is Hiring UPS to Track Vehicles As They Move from Factories to Dealers,î Wall Street Journal, 2 February 2000, A6. 70Ken Cottrill, ìUPS Creates Auto Units,î Journal of Commerce (27 March 2000): 20. 71ìUnited Parcel Service Inc. to Acquire Fritz Cos., Inc., for 0.27 Times Revenue,î Weekly Corporate Growth Report (22 January 2001): 11131. 72William Armbruster, ìUPS Profit up 13 Percent,î Journal of Commerce (22 July 2003): 1. 73Ann Saccomano, ìFDX Finds a Role Modelóand Its Caliber Logistics,î Traffic World (8 February 1999): 24. 74ìFDX Logistics Arm Changes Its Name,î Journal of Commerce (20 October 1999): 20. 75Kristin S. Krause, ìLogistics Shuffle,î Traffic World (29 January 2001): 22. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -12- FedEx spent approximately $22 million restructuring unprofitable segments of its logistics business. Supply Chain Services was eventually placed under the umbrella of FedEx Services, which was created in June of 2000 to manage its subsidiariesí advertising, marketing, sales, and information technology.76 It was ultimately incorporated into FedExís ground unit in 2003. International Expansion The race to expand overseas continued throughout the 1990s and into the new millennium. Despite losses in the 1980s and early 1990s for both companies, UPS was determined to see a profit from its European operations, and FedEx was intent on growing the profit it finally saw in 1994. UPS announced plans in 1995 to invest over $1 billion in Europe over the course of five years in an attempt to create a ìmirror imageî of its U.S. delivery system.77 The investment was geared toward ìfine-tuning the [European] network to provide the service that is requiredî and not toward making more acquisitions, according to Edwin H. Reitman, president of UPS Europe.78 In order to duplicate its U.S. system, the company invested $300 million in aircraft and another $300 million in aircraft support, $300 million on facilities, $16 million of which was contributed to a new ground-service hub in Brussels, and another $200 million on information technology.79 By 1996, UPS had standardized its services in each European country and managed to eliminate its unprofitable customers. It quickly reaped the benefits of these changes; its international losses were down to $67 million by the end of 1997, compared to losses of $201 million in 1996.80 UPS recorded its first full year of international profit in 1998. By 1999, the company was offering services in Europe that closely paralleled its U.S. services; it transported an estimated 700,000 packages a day; employed over 17,000 ground vehicles; and conducted 158 daily flights within Europe using its 45 aircraft.81 In 1999, UPS commanded approximately 14 percent of the air express market, compared to DHLís 40 percent, TNTís 16 percent, and FedExís four percent.82 FedEx also had plans to expand its European services. In 1996, it began a new secondday delivery service, FedEx International Priority, which delivered packages to over a dozen major European cities from the United States by 10:30 A.M. and planned to provide 8 A.M. delivery the following year.83 Also, despite major losses in its intra-European operations in the 76Krause, ìLogistics Shuffle.î 77Toby B. Gooley, ìUPS Has Big Plans for Growth in Europe, Asia,î Logistics Management (November 1996): 69A. 78Gooley, ìUPS Has Big Plans for Growth in Europe, Asia.î 79ìUPS invests in Europe,î Logisticstoday (September 1995): 18. 80Douglas A. Blackmon, ìUPS Posts 42% Jump in 4th-Period Net, Boosted by Quick Recovery from Strike,î Wall Street Journal, 3 March 1998, 1. 81Kristin S. Krause, ìTheyíre Back,î Traffic World (4 October 1999): 13. 82Krause, ìTheyíre Back.î 83ìFederal Express Gets Quicker to the Continent,î Purchasing (17 October 1996): 60. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -13- past, FedEx made a publicized re-entry into the business in 1999 with its expanded intraEuropean flight schedule and its new overnight delivery service, EuroOne, which served 38 major European cities. Alan B. Graf, chief financial officer of FedEx, was convinced that FedEx would not repeat its past mistakes. ìOur steps here are financially prudent, and the returns are going to be excellent. I am absolutely convinced that that will be the case,î he said.84 Graf was persuaded by FedExís new approach, which included no plans of reentering the ground market. The new strategy targeted ìonly the very high-yielding, ultra-time definite packages and [left] the deferred freight and packages for the plethora of current ground transport providers.î85 FedEx continued to strengthen its European operation in 1999 with the completion of a $200 million regional air hub at Roissy Charles de Gaulle Airport in Paris. The new hub helped bolster FedExís European services, including EuroOne, but mostly it supported FedExís transAtlantic services. The company also doubled its handling space and increased its sorting capacity by 70 percent at Frankfurt Airport, which supported its growing business in Eastern Europe.86 Both companies were expanding in Asia as well, and FedEx took an early lead. In 1995, FedEx became the only U.S. express carrier to fly directly to China when it purchased an air route from Evergreen International, Inc.87 In the same year, FedEx began full operations at its new cargo hub at Subic Bay in the Philippines that it hoped would speed up its delivery times and increase its freight capacity.88 UPSís plans for Asia included a new hub in Taipei. Both UPS and FedEx battled for the right to build a hub in Taipei in 1996, but UPS was awarded the deal in part because it planned to make the hub its primary Asian headquarters and also proposed an earlier date to begin operations.89 This hub, however, ultimately functioned only as an international gateway due to the unstable political situation between Taiwan and China.90 In another move designed to chip away at FedExís lead in Asia, UPS opened a branch at Subic Bay in 1999. UPS Managing Director Stuart Reichenbach stated, ìWe chose Subic because of its strategic location in the Asian region and the major role it plays in the growing economy of the country. Competition is healthy for businesses.î UPS also joined FedEx in China in 2000 when it requested and won the last route to China from the federal government.91 After UPS actually started making direct flights to China in April of 2001, it saw its revenue in 84Douglas A. Blackmon, ìFedEx Plans European Expansion,î Wall Street Journal, 23 September 1999, A3. 85Krause, ìTheyíre Back.î 86Leonard Hill, ìFedExing Europe (Again),î Air Transport World (April 2000): 87. 87Robert Frank, ìFederal Express Buys Route to China, Bolstering Its Recent Charge into Asia,î Wall Street Journal, 27 February 1995, B8C. 88Reginald Chua, ìFederal Express to Open Asian Hub at Subic Bay, Former U.S. Naval Base,î Wall Street Journal, 28 April 1995. 89Jonathan Moore, ìPackage Deal,î Worldbusiness (Jul/Aug 1996): 12. 90Kristin S. Krause, ìUPS to Fly from Philippines Hub,î Traffic World (16 April 2001): 31. 91Rick Brooks and Stephen Power, ìUPS Is Winner in Fierce Fight to Serve China,î Wall Street Journal, 22 November 2000, A3. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -14- that market double to about $200 million a year.92 By 2001, however, FedEx had the biggest aircourier network in Asia.93 In 2000, it began making nonstop flights between its hub in Paris and its hub in Subic Bay and also added ì10 Airbus A310 flights connecting Europe to the Middle East, India, and Thailand, with stops in Dubai, Mumbai, India and Bangkok, before arriving in Subic Bay.î94 UPS attempted to emulate FedExís operations at Subic Bay in 2001 with its plans to use the Clark International Airport in Pampanga, Philippines as an intra-Asian hub.95 Its plans for a new intra-Asia network would depend on its ability to fly from Hong Kong to the Philippines, and other points in Asia, which UPS was granted in 2003.96 Other Competitors In March 2003, DHL announced plans to acquire all of Airborne Expressís operations except for ABX Air in a deal worth $1.05 billion. Airborne reported $3.35 billion in revenue and had an 18 percent share of the overnight delivery market in 2002.97 DHL reported $5.8 billion in revenue and had a two percent share of domestic overnight shipments in the same year. The deal placed DHL third in the U.S. overnight market and offered FedEx and UPS some serious competition in the home delivery market. FedEx and UPS opposed the deal and requested that the Department of Transportation (DOT) examine DHLís ownership structure. Both companies petitioned DOT in 2001 to revoke DHL Airwaysí license, claiming that DHL violated a law that restricts foreign companies from owning more than 25 percent of a U.S. airline.98 DOT ruled in favor of DHL, but FedEx and UPS requested DOT re-examine DHLís ownership structure after announcing its deal with Airborne. During the re-examination, Dasburg investor group bought DHL Airways for $57 million and renamed it AStar Air Cargo, reinforcing that it was a corporate U.S. citizen. The decision to allow AStar to continue flying in the United States was pending at the time this case was written. Emery (formerly Emery Worldwide) had also undergone restructuring. Since December 2001, Emery conducted business under Menlo Worldwide, which was formed by its parent company, CNF.99 Emery Worldwide once served North Americaís heavy freight market, but voluntarily closed operations of its domestic air service during an FAA investigation of its safety procedures. Twenty contracted aircraft replaced its existing fleet, and the Emery name was 92ìBusiness BriefóUnited Parcel Service Inc.: Hub Opened in Philippines to Speed Deliveries in Asia,î Wall Street Journal (4 April 2002): C12. 93Jeff Cole and Rick Brooks, ìAirbus Industrie Is Close to Landing Order from FedEx for Big New Aircraft,î Wall Street Journal, 5 January 2001, A3. 94Kristin S. Krause, ìFaster FedEx,î Journal of Commerce (17 July 2000): 39. 95Kristin S. Krause, ìUPS to fly from Philippines hub,î Traffic World (16 April 2001): 31. 96David Bond, ìSomething for Everyone,î Aviation Week & Space Technology (21 July 2003): 37. 97ìDHL Buys Airborne Units,î Air Transport World (May 2003): 10. 98ìDHL/Airborne Deal Could Shake Up U.S. Express Market,î Logistics Management (April 2003): 15. 99William Armbruster, ìEmery Forwarding changing name,î Journal of Commerce (10 February 2003): 1. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019. UV2945 -15- expected to be phased out by January 1, 2004.100 John H. Williford, president and chief executive of Menlo Worldwide, stated: One of the primary reasons for the formation of Menlo Worldwide was to make it easy for our customers to identify and use the full range of supply chain services we provide. By uniting all of our services under a single brand identity, it will be easy for customers to benefit from the global solutions offered collectively and innovatively by Menlo Worldwide.101 Emery was operating at a major loss until uniting with Menlo. In the first nine months of 2001, Emery lost $423 million, but managed to reduce the loss to $17 million in the same period in 2002.102 In 2001, TNT began challenging FedEx and UPS in the North American express air market. It entered the market with the help of a newly created subsidiary, TNT International Express USA, based in Garden City, NY.103 Looking to the Future In November 2003, UPS planned to increase ground-delivery rates, which would take effect in early 2004. The planned rate change should have come as no surprise to consumers who had become accustomed to UPSís annual rate increasesówhich were generally matched by FedEx and DHL. The planned rate increase, however, was the smallest increase in seven years, and the planned increase for overnight rates was also less than expected. According to reporter Rick Brooks, ìThe size of the rate increases is smaller than some analysts expected and is a sign of the intensifying competition for shipments in the $47 billion a year U.S. package-delivery industry.î104 The numerous and often indistinguishable services offered by UPS, FedEx, and emerging competitors caused consumers to become progressively more price-conscious. With increased pressure from FedEx on the ground and DHL in the air, it appeared as though UPS could not afford to significantly raise rates and risk losing price-conscious consumers. As we look to 2004, it is unclear what new tricks both rivals will pull from their respective hats. It is clear that both will react to the increased competition as motivation to make services more efficient, to become more effective through the use of evolving technology, and to enter into unexplored territory in an attempt to stay one step ahead of their rivals. 100Armbruster, ìEmery Forwarding changing name.î 101Armbruster, ìEmery Forwarding changing name.î 102Kristin S. Krause, ìGetting It Right,î Traffic World (6 January 2003): 1. 103Etta Walsh, ìGoliath vs. Goliath,î Logistics Management (April 2001): 49. 104Rick Brooks, ìUPS Plans Small Rate Increases; Price Raises for Deliveries Are Slimmer Than Usual as Competition Heightens,î Wall Street Journal, 21 November 2003, A7. For the exclusive use of Y. Wen, 2019. This document is authorized for use only by Yuelin Wen in Competitive Strategy – Spring 2019 taught by GEORGE RUBSAM, Fashion Institute of Technology from Jan 2019 to Jun 2019