1. How is the industry structured?
The industry is defined by NAICS as the logistics, transportation, and related business services. This is a very broad definition because it doesn’t define the main function of the business, which is express delivery and shipping that includes a wide range of services for both businesses and consumers. FedEx offers express delivery, ground, and freight shipping, in domestic and international markets.
The most important dominant economic traits of the express delivery and shipping industry are:
-Market Size and Growth
* The express delivery and shipping industry is $189B with a growth rate of 0.1% globally. Although there has been a -2% decline in the industry in the U.S., there is a tremendous amount of potential growth in the developing and international markets. The shipping services industry could be classified as being in the mature stage of the industry life cycle since the main focus is increasing market share and increasing cash flow. Future growth is dependent on the penetration and development of new markets.
-Degree of Product Differentiation
* Companies within the industry are differentiated by price, the markets they serve, reliability, and speed. Smaller firms who serve local segments are differentiated by the custom and personalized level of service. Larger firms who serve the global segment are differentiated by price, guaranteed delivery, and service. Price is a major factor for e-commerce businesses relying on the price of shipping and delivery times. Prices for shipping smaller individual packages are similar, but companies who ship in high volume get a break. Although there is some loyalty, price is a determining factor for businesses.
-Scope of competitive rivalry/number of rivals
* A few major players in the shipping industry dominate the world market. FedEx, UPS, DHL, and USPS hold 67% of the market share who ship worldwide and within the U.S. Larger firms have an advantage based on brand recognition and the wide range of services they offer. Penetrating into international markets with growing economies will create an opportunity for larger firms to grow.
-Number of buyers
* Demand for express deliveries is dependent upon the health of the global economy and the growth of e-commerce. As the economy grows, so does the demand for shipment of products to consumers and other businesses. As the economy slows down, so do the number of businesses using shipping and freight services to deliver products. During a recession, businesses shut down, and consumers stop spending buying products online, which directly effects the number of items being shipped.
-Economies of scale
* Larger firms tend to have more “hubs,” which are local sorting facilities for packages before reaching their final destinations, which creates efficiency in the delivery process, as well as reaching more locations that smaller companies cannot. Economies of scale also helps with various costs, such as fuel, which is a major cost in the shipping and freight industries.
2. What is competition like? What forces are at work?
According to Porter’s 5-forces model, express delivery and shipping industry is very competitive. The five forces are listed in order from strongest to weakest.
-Intensity of rivalry => Very Strong
Intensity of rivalry among current competitors is extremely high to increase market share. The large firms, such as FedEx and UPS, must consistently compete in price, service, reliability, and implement new technologies to improve the efficiency of shipment. Cost of fuel has risen 6.8% from 2011 which is the main operating expense in the industry and is difficult for firms to pass on the cost to the customers due to low switching costs. Margins remain low making it very competitive to maintain the volume of shipment and avoiding price wars.
-Bargaining Power of...