Case Study:UPS vs. Federal Express

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Abstract: This paper is a case study of the two giant delivery companies. It follows the format of a standard written case analysis, beginning with an Executive Summary and following that with a Situation Analysis, Financial Analysis, SWOT Analysis, Strategic Alternatives and Recommendations. (16 pages; 5 sources; MLA citation style.

Case Study: UPS vs. Federal Express

I Introduction

Both United Parcel Service (UPS) and Federal Express (FedEx) are successful package delivery companies. Over the years, they have “see-sawed” back and forth, with first UPS and then FedEx holding the top spot. This paper examines the rivalry between the two, their strategies and policies, and other aspects of their operations. It follows the format of a case study.

II Executive Summary

This report analyzes the on-going competition between UPS and FedEx. The situation analysis explains the “see saw” battle going on between the two, with first one, then the other, more profitable and popular.
The financial analysis reveals that both companies are stable and profitable, though at the present time, surprisingly enough, UPS is out-earning its rival.
The SWOT shows that both companies have strong corporate cultures, which have proven to be both strengths and weaknesses. UPS’s rigid structure kept if from developing its IT capabilities until recently, yet allowed it to survive the challenge mounted by FedEx. FedEx, on the other hand, charged ahead with a “can do” entrepreneurial spirit, but entered into several business ventures that ultimately failed. They might have done better to be as cautious as their rival.
Both companies are threatened not only by one another but by the possibility of new competitors entering the package delivery arena, which is extremely competitive. They also face threats from such widely divergent factors as the uncertainty of fuel prices caused by the American invasion of Iraq, and their enormous fixed costs. But opportunity certainly exists, particularly in new markets, and in that situation, specifically in China.
The strategic alternatives section touches on the problems that FedEx has created for itself by scheduling its flights to the second, literally. A one-minute delay at an airport will throw the entire schedule haywire, which is unacceptable.
UPS is also “clock watching” but in a different way: it focuses on telling its employees such things as which foot to use to get into the truck, and how to fill out forms while walking back to the vehicle. Its old-fashioned commitment to the sort of time-and-motion analysis that was pioneered in the 1920’s has put it into conflict with its own employees, who, not surprisingly, resent this kind of regimentation.
Finally, recommendations include that FedEx relax its scheduling, and that UPS recommit itself to bettering internal relations.

III Situation Analysis

The case study provides a great deal of information and will allow us to analyze the situation with regard to the two companies. Although UPS is the older of the two by far, FedEx “came from behind” and bumped UPS to second place; “by 1986, Federal Express held a 37 percent market share in the air express industry, well ahead of UPS’s 15 percent share…” (Case study).
However, UPS staged a comeback in the late 1990’s, modernizing its tracking equipment, offering a varied pricing structure and modernizing its tracking equipment, something the company had steadfastly refused to do earlier. Now, although FedEx remains the leader in terms of number of packages carried, as well as revenue, UPS has a much higher rate of return on sales; nearly double that of FedEx.
Today the rivalry between the two companies is intense, and it appears that UPS is rapidly overtaking FedEx and could return to the top spot
IV Financial Analysis
Both companies are profitable, viable organizations. In this section, we’ll look at the latest annual reports to get a sense of the two organizations in comparison to each other.
Federal Express reports that for the fiscal year ended May 31, 2004, they “reported record revenue of $24.7 billion,” 10% higher than the previous year. “Net income grew to $838 million, and diluted earnings per share rose to $2.76.” They reduced capital spending, and were able to raise their quarterly dividend by two cents per share. (Smith, PG).
The 2003 annual report is the most recent I could find for UPS. They report revenue in 2003 of $33,485 million, which, if I’m correct in my multiplication, means that they earned $33.485 billion, substantially ahead of FedEx. UPS too posted a gain from the previous year; the $33,485 million is 7.1% higher than the 2002 figure of $31,272 million. Dilute earnings per share were $2.44, up 30 cents from 2002; and they were looking forward to 2004, which they predicted to be a year of substantial growth. (Eskew, p. 4).
Perhaps the real story is that both these companies are still in business. We would expect that one would have driven the other out of business by now. But instead they both continue to thrive.

V SWOT Analysis

A SWOT analysis is subjective, since it is based on the researcher’s interpretation of the facts he/she finds. There is no one correct way to do a SWOT; however, strengths and weaknesses are usually considered internal to the organization while opportunities and threats come from outside.
Strengths: Both companies are strong performers, though both have had problems. Some of UPS’s strengths include its long history and instant name recognition; its record of timely delivery (which is better than FedEx); and its strict corporate culture. This last is unusual, so it might require some explanation.
“Corporate culture” is the ambiance a company creates within itself. It deals with such things as a dress code, attitude, grooming, tardiness, absence and so on; it’s the “code” that tells employees what’s expected of them. The components of the culture are almost never written down, but an employee soon gets to know what’s acceptable and what’s not by the way people react to his choice of clothing, for instance. A reasonably intuitive person will soon realize that if he wants to fit in, he has to do what everyone else is doing, whether that means wearing suits, working late, cutting lunch hours short, or keeping his hair trimmed.
UPS is odd in actually having spelled out the regulations it wants its employees to follow. There are very specific grooming standards, almost military in their precision. There are regulations about uniforms; about the number of packages to be loaded in an hour; about the number to be unloaded in an hour; about the way drivers are supposed to get into their trucks; about how and when to fill out the invoice (on the way to the van to save time); the list seems endless. UPS is also very egalitarian, meaning that everyone is equal. Executives are not hugely compensated, everyone eats in the same cafeteria, there are no reserved parking spaces, etc. This almost Communistic approach to business gives the company a rigid spine, and although it caused massive complaints that culminated in a disastrous strike, it also gave UPS the strength to meet the challenge presented by FedEx. Even more importantly, it gave the company a solid foundation and a base that kept it grounded and operating as it made changes, expanded, embraced technology, and generally reinvented itself. Without this framework, it might have gone under completely. So although the “time-and-motion study” approach to business is restrictive and even perhaps unpleasant at times, it has served UPS well and has to be considered one of their greatest strengths.
FedEx too enjoys instantaneous name recognition, a strength that cannot be overstated. It also captured a huge market share by using airplanes, rather than trucks, to deliver packages; it also was one of the first companies to recognize the savings that could be realized if companies used “just-in-time” delivery instead of keeping large inventories on hand. Once FedEx demonstrated its ability to get parts to companies as they were needed, rather than those organizations having to stockpile inventory in case of delivery problems, they began to grow exponentially. From this beginning they were able to move into international delivery fairly quickly, and became one of the fastest growing companies in history.
FedEx is also seen, generally, as trendier than stodgy old UPS, and its use of an efficient and accurate tracking system (something UPS has not done until recently) enables it to provide remarkable customer service to its users, who can find out where their package is instantly.
Its corporate culture is much more relaxed than UPS’s, and it makes use of independent contractors, rather than employees, to make most of the deliveries. This means that it attracts energetic, entrepreneurial types who are comfortable with setting their own hours and schedules. (Hiring contractors also saves the company a lot of money since it doesn’t have to provide benefits to these people.) But the self-employed bring with them a spirit of independence and energy that has helped give the company an appealing image of efficiency and élan.
Another of its strengths is its rapid delivery, and its guaranteed over-night, two-day and other services. Customers like knowing that when they need to have something delivered quickly, FedEx has a mechanism in place that accomplishes that. Their varied pricing, according to distance and time of delivery, has proven to be one of their strongest points.
In short, then, UPS has been a very traditional business while FedEx has been an innovative one, and both strategies have worked well, because the corporate cultures of the two companies accommodate them.
Weaknesses: Oddly, UPS’s rigid framework is also a weakness (as often happens, many factors can be both). In this case, while the harsh regulations gave the company a strong foundation, it also led to trouble with the labor unions, resulting in the 1976 strike in which 17,000 employees walked off their East coast jobs. The union struck again in 1997, over working conditions and pay for part-time employees. The company’s problematic relationship with its workers is one of its weakest points.
It is also (or was) slow to adapt to change. Because it refused to use technology to track packages and respond to consumer needs, it fell prey to Federal Express’s more advanced systems. It also fell behind because it continued to deliver mostly by ground when FedEx took to the air. Again, the rigidity of its corporate structure, which seems to embody a sort of “it’s always been done that way and therefore it’s right” philosophy, has not served it well in a world and society that is changing daily.
FedEx’s greatest weaknesses would appear to arise from the fact that it has such an entrepreneurial spirit. First, it seems to launch itself into new markets without doing enough research about them or without adequate forecasting. Examples of this lack of forward thinking include their Zapmail effort, a fax document service. Two years after its introduction, home and office fax machines made Zapmail not only simply unprofitable, but obsolete, and they abandoned it completely.
They also made the same sort of error with regard to expanding their service inside Europe. In 1989, they bought Flying Tiger Airlines for an estimated $900 million, solely to service the European market. They were unable to compete successfully with the intra-European carriers, and again were forced to abandon the project.
Finally, they “missed the boat” in the area of ground deliveries for goods ordered online:
“In 1998, 1999, and 2000, UPS delivered 55 percent of the packages ordered over the Internet and shipped to American homes. Fed Ex delivered 10 percent of the items ordered online, and the U.S. Postal Service 30 percent. One reason why FedEx lagged far behind UPS and the Postal Service was Federal's underdeveloped system of ground transportation. Although residential service accounted for just 20 percent of all UPS's deliveries in 2000 … home deliveries were projected to increase rapidly over the next five years…” (Case study).

UPS saw what this would mean; FedEx did not. Again, it appears their lack of forward thinking hurt them significantly in this area of operations.
Opportunities: The opportunity for both companies lies in the fact that the marketplace is global. Organizations all over the world need to be able to ship their goods quickly and reliably, and both companies are now proven international carriers.
The biggest opportunity probably lies in the Chinese market. China is still a virtually untapped market, one which offers great possibilities for anyone who can enter it successfully. Both companies now have a presence there, but UPS has more flights to China than any of its competitors; in addition, it is much more successful because of its decision to hire local managers rather than sending Americans overseas. (Case study).
Unless FedEx does the same thing and does it quickly, UPS could dominate this huge, newly emerging market.
Threats: The companies are direct threats to each other, of course, and their rivalry is so intense it seems there is almost a “war” between them. However, the real threats to both lie in situations outside of their control.
Because they are in the transport business, they both have enormous fixed costs that they cannot avoid, specifically the purchase of new equipment and the fuel to run it.
Airplanes are hugely expensive, costing many millions of dollars each to buy and to maintain, but they must be kept in good repair; any mistakes here and the results can be deadly to the crews and devastating to the company’s reputation, as well as causing havoc for those whose products are lost in the accident. Maintaining the fleet is a high priority and an expensive one, but the threat of disaster is ever-present in flying operations.
Even more important, since it is much more likely to occur, is the uncertainty of fuel prices. The American invasion of Iraq has destabilized the entire Middle East, and the end result of this misadventure is still not known. It is very possible that fuel prices will fluctuate wildly as the political climate in the region changes, and there is no way to prepare for such uncertainties other than to be aware that change is likely to occur quickly and without warning. The impact of the war can be seen in the example of Southwest Airlines: “… at the commencement of Desert Storm, Southwest’s fuel bill went up $15 million per month.” (“Survival of an Airline,” PG). UPS and FedEx have to fuel both trucks and airplanes, which makes the issue of fuel prices extremely important, and the uncertainty of the situation is a threat to both.
Finally, the package delivery industry as we know it today is not a “mature” market segment. That is, it has not been in existence in its present form (international flights, sophisticated tracking, just-in-time delivery, etc.) for very long. When an industry is immature and growing, there is always a threat that a new company will start up and become a competitor. The “barriers to entry” for a company that wants to duplicate the FedEx/UPS model are very high, and it appears unlikely that a rival will suddenly come onto the scene that can directly challenge them. However, it is conceivable that a new company could start small, undercutting prices and concentrating in one area, and grow to challenge the two leaders.

VI Strategic Alternatives

In the context of what we’ve learned of these companies, are there any reasonable strategic alternatives for them to consider? Presumably both want to continue growing and increasing their market share; how would they do that? Perhaps we can come at reasonable recommendations here by asking what they do wrong. If they can fix that, the rest should follow.
The obvious answer is that people ship packages and expect them to be delivered safely and on time. Both companies now have sophisticated tracking systems in place so they know where any given parcel is at any given moment; they both have developed their networks of trucks and planes, but they both fall short of the goal of on-time delivery. As much as 9% of UPS’s packages, and up to 15% of FedEx’s deliveries, are late. (Case study.)
The answer, based on a careful reading of the description given of their operations, appears to lie in a modification of the intensely tight scheduling. FedEx, for instance, times its operations to the minute, and any “hiccup” in the system can delay deliveries for hours: “A one minute delay in Memphis can make as many as 20,000 packages miss Federal's 10:30 A.M. guaranteed delivery…” (Case study.) This extraordinarily close timing requires an army of workers (3,000 or more) to unload packages and reload them between midnight and 3 a.m. Obviously, if anything goes wrong, the shipments will be late.
UPS doesn’t time things this closely; the problem that seems to need their attention is (was, will be) the tightness of the schedules they impose with regard to how employees do their jobs. There is surely no need to explain to a driver how to get into his truck! UPS exercises a near-strangulation hold on its employees, which can (and has) resulted in two devastating strikes, low morale and complaints about the company. Their comeback indicates that UPS is doing things correctly with regard to managing the business, but not doing so well managing employees.

VII Recommendations

With regard to FedEx, it seems obvious that with a 15% late delivery rate, they need to rethink their concept. Although Smith’s idea of using airports at night is a good one, the idea of having a horde of workers frantically busy for three hours and underutilized much of the rest of the time makes little sense. It’s a poor use of resources, both human and machine.
FedEx might consider expanding the time frame during which they unload and transship goods, building in a “safety margin” so that a 60-second delay at one point during the night doesn’t mean a wide-scale tardiness in deliveries the following day.
UPS has problems in the other direction. Its business operation appears to be back on track, but it needs to rethink the way it handles its employees. A less restrictive corporate culture, one which allows employees some discretion in how they perform their tasks, would result in higher morale, more effective service, and improve overall productivity.

VIII Conclusion

Both companies are doing well, but it appears that UPS may finally emerge the overall “winner” in the contest. As one article puts it, it’s the tortoise and the hare all over again: “No one is counting the wily Smith out of the game altogether. But in the long run, his fleet of red-and-blue planes may prove no match for the countless ranks of UPS's slow-moving brown trucks or its bulging war chest. Like the tortoise in the old fable, UPS is progressing slowly but surely.” (“UPS vs. FedEx: Ground Wars,” PG).

IX References

Case Study – UPS vs. FedEx. (Client provided.)

Eskew, Mike. “UPS Annual Report 2003.” UPS [Web site].
5 Mar 2004. Accessed: 15 Feb 2005. http://www.shareholder.com/ups/downloads/2003_Annual_Report.pdf

Smith, Frederick W. “2004 Annual Report.” FedEx [Web site]. 22 Jun 2004. Accessed: 15 Feb 2005.
http://www.fedex.com/us/investorrelations/downloads/annualreport/2004annualreport.pdf?link=4

“Survival of an Airline.” Swatakeoff.com [Web page]. Southwest.com [Web site]. 1 Apr 2004. Accessed: 12 Feb 2005. http://www.southwest.com/swatakeoff/survival.html

“UPS vs. FedEx: Ground Wars.” Business Week online [Web site]. 1 May 2001. Accessed: 15 Feb 2005. http://www.businessweek.com/magazine/content/01_21/b3733084.htm

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