Strategic Management - Essay Example

Table of Contents Executive Summary 2 0Introduction 3 1Introduction to the FedEx Corporation 3 2.0Strategic Analysis 4 2.1Industry Profile 4 2.2Organizational Purpose 5 2.3Internal and External Environment Analysis 7 2.4Competitive Advantage 11 3.0Strategy Development 12 3.1Existing Strategy 12 3.2Strategic Options 14 3.3Evaluation and Ranking of options 16 3.4Choice of Strategy 17 4.0Strategy Implementation 17 4.1 Implementation and Issues 17 4.2 Risk Management Strategies 18 5.0Conclusion 19 6.0 References 20 Executive Summary Strategic management has been the essence of new dynamic environment, where its scope of application is huge. The purpose of this report is to apply its concepts in context of a real life organization, where the strategies are formulated and implemented after a comprehensive strategic analysis. For this, FedEx Corporation is selected, which has a great name in USA especially and also working in more than two hundred countries. It is involved in the shipping business and a portfolio of segments, such as FedEx Express, Ground, Freight, and Services. The strategic analysis is performed with the help of SWOT analysis, PESTEL analysis, financial ratios analysis, and also with the porter’s five forces of Competitive Advantage. The industry of the company is Shipping Industry, where it has a number of competitors, but the major competitor is UPS. The FedEx has weak financial position with respect to the UPS, and also it has much threats from its competitors, due to higher bargaining power of the buyers. The analysis shows a number of opportunities in other world’s market. The major threats are from competitors due to its higher prices and higher fixed costs. But it has invested much in capital, which has become the source of competitive advantage. According to the Porter’s generic strategies, the existing strategy of the company is differentiation, and BCG Matrix suggests that the FedEx Express and Ground are the stars for the company, where the Express will soon be the cash cow. After analyzing the existing strategies, a number of strategic options are proposed, evaluated and ranked. Then a combination of three strategic options is recommended, i.e. cost reduction, market development and bundling pricing strategies. These are recommended to lower the costs, increase revenues, higher ROCE, and also to compete with the rivals by lowering the prices and enhancing market share. The strategy implementation issues and risks associated with these strategies are also identified, such as disapproval from top management, labor union pressures, and business disruption. The Gantt chart is presented with every activity defining and the risk management strategies in implementation are also suggested for FedEx. 1.0 Introduction With increasing competition and dynamic business environment, it has become quite challenging for the organizations to survive in this new environment. In such situation, the companies are using strategic management tools for analyzing their environment and competitive position in the market, so that they can develop and implement their business strategies to respond to the market and competitors effectively (Amason, 2011; Lynch, 2012). Business strategy provide answers to important questions regarding the organizational current business position and future direction. In order to formulate the business strategy, there needs a comprehensive analysis of the company’s industry, markets, goals, resources, competencies, systems and structures (Freeman, 2010; Wheelen, et al., 2010). The purpose of this report is to apply these concepts in context of a real life organization, where the strategies are formulated and implemented after a comprehensive strategic analysis. 1.1 Introduction to the FedEx Corporation FedEx Corporation was founded in 1971 by Frederick Smith, with the name of Federal Express, based in Little Rock, Arkansas. The company’s headquarters are in Memphis, Tenn. The founder’s business insights have been appreciated throughout the years, who always focused on providing better customer services than competitors. In the starting years, after facing a number of financing difficulties, the company kept on striving for its survival. In 1998, the company announced its initial public offerings and then in 2000, it became a corporation with the name of FedEx Corporation (FedEx Co., 2014). The company is involved in a portfolio business, where the company provides mix of services with the corporate name of FedEx, such as business services, e-commerce, and majorly the transportation services. 2.0 Strategic Analysis This section of the report deals with the company’s and its industry analysis, where the profile of the industry, sector, competitors, consumers, organizational purpose, internal and external environment, and its basis for competition are elaborated by using strategic management tools. 2.1 Industry Profile Before formulating an effective strategy, it is important to analyze the industry where the company is operating and also the competitive forces impacting on the company’s business (Porter, 1981; Lynch, 2012). The main industry where the FedEx is operating can be regarded as the shipping or transporting industry, which can be classified as the oligopolistic market with some major competitors. It is involved in the delivery or shipping services mainly, and other offerings of the company are logistics services and business support solutions. It has four major segments; FedEx freight, FedEx Ground, FedEx services, and FedEx Express. The company is working in more than 220 countries and majorly in USA and Europe. There are more than 300,000 employees working in 1,800 offices established (FedEx, 2014). The company’s major competitors at local market are United Parcel Service (UPS), and the United States Postal Service (USPS). At the global basis, there are a number of competitors established themselves on the global market, such as FCML Couriers, Royal Mail, Deutsche Post (DHL), and LDH Express. While among these, DHL is the major competitor in global market. The company is having the increasing trend in the revenues from 2009-2013, where the revenues have grown to 44,287 dollar millions. With respect to the return on equity and operating profits in 2013, there is seen a decrease in profits, as there has been impairments and retirements of some of the fleets of the company (FedEx Inc., 2013). Recently, it has gained 49% market share in the US market, where the major competitor has been the UPS in respect to the volume and revenues. At the global level the market share of the FedEx is 27%, while the major competitor at global level is DHL with 32% market share (IPC, 2011). The shipping industry has the main demand of quality service, where the customer ideal shipping service has features of on-time delivery, delivery at right places, responsive to customer issues, and majorly the classy tracking system for the order. The companies in this industry has the major challenge with regard to the information, as it is becoming the core business in this industry. The industry is very challenging and changing with the change in technology. As the ecommerce has revolutionized the ways, the companies are operating. So, it has become a major trend in this industry to place an order, keep on informing the customers about their order, and receipt information of order through internet. FedEx is known as first to incorporate the Internet Power in their business, where the company was the first one to launch its website in 1994. The company realized soon that its main business is related to information, as the customers not only want to get their delivery, but also to track their ordered delivery during the process of shipping (FedEx, 2014). 2.2 Organizational Purpose The organizational purpose defines the strategy statement of the company. The strategy statement involves the mission, vision, and values of the company, which are important to analyze in order to get knowledge about the company’s current strategies and objectives. These are also assessed to evaluate that either the company is performing in line with its mission or not (Bryant, 1997). Underneath, the mission, vision and values of FedEx Corporation are described. Mission statement: “FedEx Corporation will produce superior financial returns for its shareowners by providing high value-added logistics, transportation and related business services through focused operating companies. Customer requirements will be met in the highest quality manner appropriate to each market segment served. FedEx will strive to develop mutually rewarding relationships with its employees, partners and suppliers. Safety will be the first consideration in all operations. Corporate activities will be conducted to the highest ethical and professional standards”. (FedEx, 2014) Vision: The FedEx has envisioned itself for 2016, where the company will have 1 trillion dollars of estimated worldwide e-commerce sales in 2016, signifying the 1% of international GDP. And also it has estimated a 42% increase in US online expenditure in 2017 (FedEx Inc., 2013). Values: The FedEx Company value its employees and their opinions, where it manages a workforce diversity in order to foster innovation. For the service side, the company puts its customers at the highest priority. Major values of the FedEx Company are the innovation in technology and services, integrity in finances and operations, responsibility of the societies and environment, loyalty for customers, employees, and shareholders, and safety for the customers, employees and equipment (FedEx, 2014). Financial Comparison: The FedEx Company’s return on equity is 9.7% in 2013, while its major competitor UPS’s ROE is 68%, which shows that UPS is performing far better than the FedEx. The trend of ROE ratio for FedEx is quite varied, which shows inconsistency in returns. Total revenues of FedEx are 44 million dollars in 2013, while the UPS revenues are 55 million dollars. With respect to the balance sheet, UPS and the FedEx are close competitors, as both has similar level of assets. Especially, the goodwill of UPS and FedEx are quite similar, which shows that both are in fierce competition with each other. Overall, the UPS has good financial condition than FedEx (FedEx Inc., 2013; UPS Inc., 2013). 2.3 Internal and External Environment Analysis For the external and internal analysis of the company, the SWOT matrix can be used. The SWOT analysis provides answer to the question that either the company has such resources and capabilities (internal environment) which can be used to exploit the opportunities and avoid the threats (external environment) (Pahl & Richter, 2007). With the help of SWOT analysis, the company can formulate better strategy by taking the strengths, weaknesses, opportunities and threats into account (Manteghi & Zohrabi, 2011). But there are some drawbacks of the SWOT matrix, where it does not take all the macro factors and competitive environment into consideration and ignores many important business issues, such as inflation, governmental regulations and laws, and so on. Furthermore, it is oversimplified and is based on subjective analysis of the company (Helms & Nixon, 2010). In this report, some of the SWOT drawbacks are overcome with the help of PESTEL analysis (for external environment) and Porters’ Five Forces Model (for competitive environment). SWOT Analysis Strengths Unbeatable Image for on-time delivery Robust brand image Efficient infrastructure and assets like planes and aircrafts. Good management of Hubs locations and Routes planning Well-developed research and development side fostering innovation God ranking in industry with respect to the consistent operations over a number of years Widespread capital investment High focus on customer needs Pioneer in making websites and online tracking of orders Leader in local express market First mover advantage in express transportation company Weaknesses Greater pricing with respect to the competitors Weak position at global market Lagging behind competitors in terms of its ground delivery services Claims to be differentiated , but not to UPS, as UPS has a head to head competition with it Highly vulnerable to the economic situations and fuel rates Lower market share as compared to the competitor High expenses due to continuous investments in capital Increasing unionization (pilot unionization) Complex organizational structure Opportunities The recovering economy especially for Asian market Less governmental interference in expansion to more markets Sustained globalization in the international market can create availability of more deals with greater volumes Growth of e-commerce with the passage of time and online order placing websites can create demand for on-time, stress-free shipping, and expansion possibilities Taking more market share from competitors on Express Business Higher fixed costs for infrastructure for express delivery can maintain its leadership in express delivery business Threats Greater fixed costs of the maintenance of infrastructure for express delivery Capital investments are made by sales revenues, so high fixed costs can harm the profits Impossibility of becoming a market leader in shipping industry Lower return on invested capital is there due to the nature of shipping industry The e-business requires lower shipping prices and rates to attract the customers from competitors Competitive threats due to higher prices and lower revenues, where the major competitors are UPS and DHL, (threat of Price wars) Figure 1. SWOT Analysis. Source (Pahl & Richter, 2007): A number of factors ignored by the SWOT Matrix can be explained by use of PESTEL Analysis, which can provide a big picture of the company’s market (Hodgkinson, et al., 2006). PESTEL Analysis Political Opportunity: FedEx has permits to deliver its services to other markets than the USA only, where the expansion can be possible. Threat: The competitors of FedEx are mostly state owned and they have more access to resources, and lower cost and profit vulnerability with favorable business conditions than FedEx. Technological Opportunity: The development of IT infrastructure can provide better services and collaboration with the customers, where they can be satisfied by on-time delivery. And development in aircrafts provide opportunity to deliver efficiently and with minimum costs. Threat: higher costs involved in the acquisition and maintenance of IT infrastructures as well as the complexity involve in this, can harm company’s profits and image. Economic Opportunity: Better economic conditions than before and also the increasing GDP rates in USA can provide good opportunities. Also the increasing globalization and integrated markets are boosting the economic growth. Threat: The high volatility in the energy prices and hence the oil/fuel prices for FedEx can pose major threat, along with the increasing costs of carriage safety and insurance. Environmental Opportunity: The company is using recycled products and is involved in contributing to the environment can be a source of good will. Threat: With the increasing concerns of environment sustainability among communities and relevant authorities can demand more, which can pose threats of bad repute or otherwise higher costs to employ environment friendly technology. Socio-cultural Opportunity: There is a change in the consumers’ behaviors with higher usage of online shopping and internet related facilities, and also the increase in e-commerce can be the opportunity for FedEx. Threat: the consumers have so many options to fulfil their demands, and they have become less-tolerant to the bad services and their expectations for the services are much greater now. And also, the consumers demand for more customized services. Legal Opportunity: The reduction in the legal barriers can be a source of expansion for the company. Threat: The changes in the tax policies, environmental and safety regulations can pose a threat to the company’s operations. Figure 2. PESTEL Framework. Source: Author For the competitive analysis of the company, the five forces model given by Michael E. Porter is used. Porter (2008) has argued that these five forces are the sources of competitive advantage or disadvantage, and by analyzing these forces, one can develop strategies to be competitive. The managers can assess options to impact these forces in the best interest of the company (Porter, 2008). The model is criticized on the basis its key assumptions, and also the scope of application, where it assumes a static market structure so can be applied to simple markets (Karagiannopoulos, et al., 2005). Another criticism is that it was developed in early eighties, so cannot be applied in twenty first century (De Man, 1994). The shipping industry analysis shows that there is an intense competition between the UPS and FedEx, where there are other competitors as well. Following model presents the five forces.   SUPPLIER POWER (LOW)   THREAT TO ENTRY (LOW TO MODERATE) THREAT OF SUBSTITUTES (LOW)   BUYER POWER (HIGH) HIGH DEGREE OF RIVALRY Figure 3. Porter’s Five Forces Model. Source: (Porter, 2008) Threat to New Entry: The threat to new entry is low to moderate, due to some reasons, such as higher fixed costs related to global shipping network and infrastructure required to compete, and the strong brand names of already existing competitors; UPS and DHL. Rivalry Extent: Existing competitors are involved in the fierce competition for market share, which can be seen as the constant rivalry among UPS and FedEx. Rivals have to be focused on the continuous enhancement in quality of service, dropping prices, and innovative packages, as the switching costs are very low. Moreover, the higher fixed costs in up keeping technology can be the exit obstacle. Buyer Power: The bargaining power of buyers is high, as the switching cost is very low. The consumers can switch to other providing quality services, lower rates, and convenience. Suppliers Power: The supplier power is low, as the companies in shipping industry purchase in bulk and can switch to other suppliers with lower rates. Substitute Threats: the threats of substitutes to the transportation service is lower, as this service cannot be replaced easily. 2.4 Competitive Advantage FedEx is not the market leader, and has not much unique competencies. The company’s brand equity in terms of its Express Service is the source of competitive advantage, where customers use the word “FedEx it” in spite of “ship it”. The company’s large investments in capital and infrastructure building can be the source of competitive advantage in future, while it is providing quality service with the use of this technology that is hard to copy. The brand equity, superior quality, unique mix of packages and the infrastructure are the key success factors, on which basis the FedEx Company compete in the shipping industry. In addition to these, the company’s devotion to innovate and bringing new technological upgrades is another competency. Overall, the FedEx have competitive disadvantage over UPS in number of regards, such as lower return on equity, lower revenues, and has similar advantage on the basis of quality of services (El-Khamy & Golubov, 2005). 3.0 Strategy Development This section deals with the strategy formulation on the basis of industry and environmental analysis conducted in the previous section. 3.1 Existing Strategy After analyzing the FedEx internal and external environment, the existing strategy being pursued by FedEx can be identified. Following matrix are used to analyze the existing strategy. a) Porter’s Generic Strategies: There are four strategic options given by Michael E. Porter, based on the two dimensions, sources of competitive edge and competitive scope. Figure 4. Porter’s Generic Strategies. Source: (Dess & Davis, 1984) Low Cost Leadership: it is the strategy, where the source of competitive advantage is lowest cost but not the prices, which gives profit margin. The FedEx has high fixed costs due to its investment in capital, so this strategy is not the FedEx existing strategy. Cost Focus and Differentiation focus: where the company has lower cost operations in a niche segment or targeted market, or differentiation focus in its niche market. But the FedEx is not pursuing cost focus, as it does not have a niche market. Differentiation: In this strategy, the company is competing on the basis of differentiation from its rivals, either in terms of unique product/service, or unique brand image etc. This also includes extra costs and premium pricing due to differentiation. The above analysis suggests that FedEx is pursuing the differentiation strategy. The company has built unique brand image and heavily invested in infrastructure through capital expenditures, where it is incurring higher fixed costs. The prices of FedEx are higher than its competitors. The FedEx has fierce competition with the UPS, and the differentiation is used for head to head competition. b) BCG Matrix The BCG matrix can be used to assess the corporate level strategy, as FedEx is involved in the portfolio of business, which can be positioned in the BCG Matrix underneath. The analysis suggests that the company’s FedEx Express and Ground, can be regarded as stars, where there is high growth and high market share. The FedEx express is the market leader, while the FedEx ground is the second to market leader UPS. While the freight and services segments can be regarded as the question marks, which are generating a small portion of revenue. Figure 5. BCG Growth share Matrix. Source: (Nutton, 2007) The analysis suggests that the FedEx has been using the differentiation strategy to compete, but the competition with UPS is a fierce rivalry. The company’s strategic objectives are to increase its market share, expansion in new markets, reduce the costs and also prices with respect to the competitor, increase revenues and return on capital employed, and being the leader with respect to infrastructure. 3.2 Strategic Options In response to the strategic objectives of FedEx, there are following strategic options for the FedEx to be pursued to achieve these objectives. a) Cost Reduction Strategy: The very first option for the company is cost reduction strategy. The FedEx has been facing a decline in revenues and ROCE (9.7%) from previous years and also it is lagging behind from its competitors, so there is need to develop a strategy to increase this return by efficient use of capital employed. Another strategic issue is that the company has high fixed costs due to higher capital investments. There must be full capacity utilization with proper training of employees and the elimination of non-generating cost elements, so as to get most out of its capital employment (Holbeche, 2009). With decrease in cost, the revenues and EBIT can be increase, resulted in higher ROCE. b) Differentiation: Another strategy option is the differentiation, which is already being pursued by FedEx, but there is need to modify this strategy to compete with its competitor. As the differentiation is important for fierce competition. FedEx has to differentiate on the basis of its service level to compete with UPS. c) Competition pricing strategy: FedEx has higher prices in comparison with its competitors, so a pricing strategy needs to be modified, where the FedEx has to lower its prices to gain more market share. More market share can offset the loss incurred by reducing prices. It is also important in the industry where bargaining power of buyers is high. d) Bundle Pricing Strategy: In this strategy, FedEx can bundle up its different services with lower prices, where it can use to leverage the sales of FedEx ground segment by bundling its services with the FedEx Express services. This will provide two benefits; lower prices, and increasing sales and revenues (Olderog & Skiera, 2000 ). e) Market development strategy: where the FedEx needs to target new customer segments and new markets on region basis, such as Asian markets. It is a time to increase its market share in international market, where there are more opportunities rather than US. The company can enter into lower cost regions, where there is low cost labour and easy access to resources. f) Resource Based Strategy: the FedEx can have a long term success by using the resource based strategy, where the company has to keep on up grading its infrastructure to beat the competitors in long term. Due to head-to-head competition with the UPS, it is a good competitive strategy. g) Acquisition strategy: The acquisition strategy can be pursued to increase market share and customer base, which can be a competitive strategy in order to compete with UPS. 3.3 Evaluation and Ranking of options The above mentioned strategic options can be ranked as follows; the options are evaluated and ranked on the basis of their estimated costs, expected benefits, associated risks, and timing of investing and getting returns. These strategies are for business streams of FedEx. Strategic option Est. Cost (low / moderate / high) Expected benefits (low/ moderate/ high) Risk level (low/ moderate/ high) and Major risk Timing for investment and returns (short-term/ long-term) Ranking Cost Reduction moderate High (low cost, high revenue and higher ROCE) low, human resource risk Long 1 Differentiation high High (Competitive advantage) High, customer risk (new service may not be liked by customers) Long 4 Competitive Pricing moderate Moderate (Competitive advantage) high, loss of revenues short 7 Bundle Pricing low Moderate (Lower prices, competitive advantage) Low, non-performance risk short 5 Market Development high High (higher market share) Moderate, lower returns in new market long 2 Resource Based high High (Competitive advantage) moderate, technology risk long 3 Acquisition high High (higher market share) High, non-performing risk (resulting in divestment) long 6 For corporate level, the FedEx business segments can be analyzed by employing the BCG matrix (as shown in figure 5). The FedEx express will soon become the cash cow, which would need no investment and will be providing cash to invest in other business. The FedEx should invest more in FedEx ground, which is the star for US market especially. While the FedEx Freight is a question mark where the company should invest more, as there are good prospects for this segment also. Further, for the FedEx services, there is divestment option, but still it is providing a small portion of revenue, so it is not the time to divest. However, it will be divested in future. 3.4 Choice of Strategy For the next five years, the FedEx should pursue cost reduction strategy by using the full capacity of resources as well as by eliminating the cost elements which are giving no revenue. The company has been investing much in its capital, which should be now utilized. It should also pursue market development strategy to enter into more markets, which is important for increasing market share and hence to compete with its major competitor UPS. In combination with these, the company should also need to modify pricing strategy, where it should employ the bundle pricing strategy. It is important to lower the prices as compared to rivals, to increase revenues/ sales, and to gain more market share. By combining these strategies, FedEx can have much benefits for both short and long term. 4.0 Strategy Implementation 4.1 Implementation and Issues The major implementing issues in executing the suggested strategic initiatives can be the disapproval from top management and employees. Another issue which may arise is the pressure from labor unions, as the company may have to downsize the workforce to cut the costs. The routine business activity may be disrupted while implementing these, so to implement these initiatives, there is need of a proper team and employees’ commitment towards it. However, the implementation can be done by combating these issues, and following Gantt chart presents the major activities and their timing of implementation and also the milestones are set. Figure 6. Gantt chart Developed for the implementation of the strategies. 4.2 Risk Management Strategies There are three major risks associated with the strategic initiatives, human resource risk, risk of lower returns and non-performance. The human resource risk is associated with the cost reduction through downsizing, where the labor union can create an issue. This can be handled by proper negotiation with the employees and providing good compensation for these. The bundle pricing strategy should be employed with proper consideration of customer needs to lower the chance of non-performance, for example the combination of services should be complementary. The market development may pose the risk of lower returns in other markets, for that purpose, proper analysis needs to be performed before entering, where the low cost labor is available, such as Asian countries would be majorly focused. 5.0 Conclusion The report has presented the strategic management aspects with the context of the FedEx Corporation. In this report, after a little introduction to the company, the strategic analysis of the company is performed, where the industry profile of company, internal and external environmental analysis, and the sources of competitive edge of company are elaborated with the use of a number of strategic management tools. On the basis of this analysis, strategic initiatives are proposed, evaluated, ranked and selected in the third section. Fourthly, the implementation of these strategies with use of Gantt chart, their issues and risk management strategies are discussed. 6.0 References Amason, A., 2011. Strategic Management: From Theory to Practice. 1st ed. London: Routledge. Bryant, S., 1997. Strategic management: developing and realising a strategic vision. Public Management , 79(10), pp. 28-32. De Man, A., 1994. A Porter Exegesis. Scandinavian Journal of Management , 10(4), pp. 437-450. Dess, G. G. & Davis, P. S., 1984. Porters (1980) Generic Strategies as Determinants of Strategic Group Membership and Organizational Performance. The Academy of Management Journal, 27(3), pp. 467-488. El-Khamy, M. & Golubov, Y., 2005. FedEx in the Global Market, Online: McCafee. FedEx Co., 2014. History. [Online] Available at: http://about.van.fedex.com/history [Accessed 15 November 2014]. FedEx Inc., 2013. FedEx Annual Report 2013, Memphis: FedEx Incorporation. FedEx, 2014. About FedEx › FedEx Corporation. 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