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UPS SWOT Analysis | Available Competitive Strategies | Analysis of Calue Chain for UPS

Introduction

Strategic decision-making should be based on the result of analysis of many factors, such as industry analysis, consideration of strengths, weaknesses, opportunities and threats of the company, analysis of existing competitive advantages and comparison of strategies available in current situation. Strategic decisions determine market success of failure of the company, and involve analysis of the company’s value chain, customers and potential markets (Stevens & Loudon, 2005). Porter 5 forces analysis of the industry should also be included in the background for strategic decisions. The purpose of this paper is to consider competitive advantages and develop a competitive strategy for United Parcel Service, Inc. The paper contains overview of UPS operations, SWOT analysis, consideration of industry forces and available competitive strategies, analysis of value chain for UPS products and a proper directional strategy for the company is recommended on the basis of all above-mentioned factors.
Impression of UPS operations

United Parcel Service, Inc. (UPS) was founded in 1907, and from a small messenger service has evolved into a large multinational company providing ocean and air freight, shipping and group delivery services worldwide, supply chain optimization and contract logistics services (UPS official website, 2011). UPS provided both B2B and B2C services, and is extremely successful in reacting to the changes of external environment. In fact, UPS can be considered the barometer of US and world economy, since its revenues largely depend on consumer activity and business activity (UPS official website, 2011).

The company has timely developed a powerful IT infrastructure, and has gained a significant competitive advantage through creation of online services, freight tracking and supply chain optimization. It has also created an open API system, thus enabling business customers to include UPS logistics operations and costs into their cost optimization procedures and ERP systems.

The company has passed several stages in its development: it transformed from messenger service to package delivery (since 1918), then to international air transport company (since 1975) and has grown into a powerful logistics company and a driver a global commerce since 1990s (UPS official website, 2011). They have changed their mission and vision from the delivery service (led by the slogan “what can brown do for you?”) to the global vision of a logistic leader, whose mission is focused around customers, people and shareowners. Corporate mission of UPS currently is formulated as: “Serve the ongoing package distribution needs of our customers worldwide and provide other services that enhance customer relationships and complement our position as the foremost provider of package distribution services, offering high quality and excellent value in every service” (UPS official website, 2011).

The company has traditional hierarchical structure, with vertical subordination and centralization, with most decisions made at the top level, and low autonomy provided for regional departments. The culture of the company is characterized by the focus on excellence and reliability, people relations are also important: loyalty of employees and low turnover show the value of UPS as an employer. In addition to delivery and freight services, UPS provides fund transfer services, such as insurance, working capital, payment services and commercial financing (United Parcel Service Financial Position, 2011). The mix of the services allows business customers to build optimal value chains.

Currently the company operates in more than 220 countries, with over than 150,000 locations worldwide, and continues to add capacity in Europe and Asia due to acquisitions of local transportation and delivery firms. From financial point of view, UPS is highly leverages and is currently investing into its working capital and fixed assets; during a 5-year period UPS increased its dividends by 20%, and working capital increased in average by 20% annually (United Parcel Service Financial Position, 2011). UPS is doing better than its direct competitor, FedEx; shares of UPS slightly increase in value, while the prices for FedEx shares are falling. Its operating margin and profit margin is approximately twice larger than FedEx, the same can be stated for quick ratio (United Parcel Service Financial Position, 2011). Current ratios in the industry are compatible. In general, it is possible to state that UPS’s operations are very successful, and it is growing into a powerful logistics company.

UPS SWOT analysis

Strengths:

  • Strong brand
  • Wide distribution network
  • Diversified products (Stevens & Loudon, 2005)
  • Impressive IT infrastructure
  • Possibility to build value chains through integrating finance and transportation

Weaknesses:

  • Large infrastructure makes logistics very complicated
  • Possible work stoppages due to unionization of labor
  • Perception of UPS as B2C company mostly (not B2B) (Stevens & Loudon, 2005)
  • High leveraging (might be dangerous in case of financial losses)
  • Quality of service sometimes suffers (recent customer reviews)
  • Competitive advantages can easily be “copied” by other industry players (e.g. FedEx)

Opportunities:

  • Further expansion into e-commerce
  • Expansion into developing markets
  • Strategic alliances within the industry
  • Acquisitions of transportation companies
  • Developing air freight services

Threats:

  • Growing costs of fuel
  • Tight competition within the industry
  • Economic recession might significantly affect revenues (Stevens & Loudon, 2005)
  • International trade and delivery regulations can affect logistics
  • Local companies (especially those with governmental support) have a cost advantage

Competitive advantage and competitive strategy

Competition is the key to the company’s success. According to Porter (1998), the term “competitive strategy” denotes the search for optimal competitive position within the industry, aimed to establish a sustainable position with regard to the forces affecting competition in the industry. Prior to choosing the strategy, the top management of the firm should analyze the attractiveness of the industry (commonly, using Porter’s 5 forces framework) and determine the relative competitive position of the firm within the industry (Chang, 2010).

The company can develop and sustain competitive advantage within the industry. Competitive advantage means the company’s advantage over competitors based on the ability to deliver greater value or lower cost to the customers. The choice of competitive strategy itself can vary between cost leadership, differentiation and focus, basing on such variables as the company’s resources and capabilities (Porter, 1998). Choice of the strategy, according to Porter, can be done using the following structure (Table 1):
Target scope Advantage

Low cost Product uniqueness
Broad (industry wide) Cost leadership Differentiation
Narrow (market segment) Focus (low cost) Focus (differentiation)

Table 1. Choice of competitive strategy (Porter, 1998)

In addition to competitive strategy, the company should also make decisions regarding its corporate strategy, which might include decisions on the direction of the strategy, portfolio analysis and corporate parenting decisions (Chang, 2010). In the next sections competitive advantages, value chains and possible competitive and corporate strategies of UPS are considered.

Competitive advantage and competitive strategy of UPS

In order to analyze competitive advantages and to determine competitive strategy for UPS, it is necessary to perform a competitive analysis of the delivery and freight services industry sector (both US and worldwide). In general, Porter’s 5 forces framework for competitive analysis is shown on Fig. 1.
Figure 1. Model of 5 forces (Porter, 1998)
The model of competitive forces considers 5 key determinants of the industry: rivals, power of customers and suppliers, threats of potential entrants and the availability of substitutes. The competition in the delivery and freight services industry is very tight, and there are three key competitors of UPS in this sphere: FedEx (public company) and two private companies largely supported by governments: USPS (United States Postal Service) and DHL (service by Deutche Post AG). Threat of new entrants is quite low because in order to compete with industry leaders, significant investments and a wide network of locations are required. Moreover, existing brands have won the loyalty of customers, which makes entering this industry even a more difficult task (Chang, 2010).

Existing substitutes are varied, but they do not cover the total scope of operations within the industry. For air freight, there are virtually no substitutes in terms of cost and speed (Chang, 2010). For local delivery services, smaller delivery companies, personal deliveries and internal corporate delivery systems are common substitutes. For documents and information, electronic means of sending information are dominating (Chang, 2010).

The power of suppliers is between moderate and high: workforce is strongly unionized, costs of fuel are growing, and governmental regulations as well as trade limitations might affect revenues in the industry. At the same time, major competitors have own transportation base and resources, thus reducing the impact of suppliers. The power of customers is moderate, since the costs of switching are low, but the success of the major industry players is in the scope of operations, and individual customers might not significantly impact the revenues in this sphere. However, large business customers and contracts might significantly change competitive balance.

Overall, the industry is rather attractive since the emerging markets and globalization are offering many new opportunities for global costing and cooperation (Chang, 2010). At the same time, the cooperation within the industry is rather high. UPS is losing cost leadership to its competitors, since the costs of FedEx and USPS delivery for non-urgent packages are lower (Chang, 2010). At the same time, UPS managed to develop new services, such as easy tracking of packages, e-commerce opportunities, value chain building and logistics services. The competitive advantage of UPS currently is the combination of movement of goods, information and funds resulting in value-added solutions.

According to Table 1, UPS is operating at industry wide level and has the advantage of product uniqueness. Thus, the competitive strategy of UPS should be centered around further differentiation and deepening its competitive advantage in such a way that competitors would not be able to “copy” the major solutions (Chang, 2010).

Value chain for UPS products

UPS offers a number of business solutions, such as shipment delivery, returns, contract logistics, international trade solutions, technology solutions, industry-focused solutions, financials, return solutions etc (UPS Shipping, 2011). Overall, value chain for UPS products can be illustrated in the following way (Fig. 2):

Fig. 2. UPS value chain (Chang, 2010)
Let us consider value chain for such UPS product as shipping. At the inbound logistics stage, such activities as scheduling, route selection and adjusting price and time add value to this product; at the stage of operations, such issues as e-tracking, vehicle maintenance, enhanced routing and cost-effective fuel spending participate in adding value (UPS Shipping, 2011). At the stage of outbound logistics, scheduling, customer service and availability of multiple locations participate in value chain. For marketing and sales, strong brand image, corporate services and phone notifications are the factors driving customer value. Finally, at the service stage, such options as investigations for lost or damaged packages, easy tracking of lost parcels and handling of complaints increase potential value of the product. In general, UPS has optimized most of the element of its value chain and due to diversification can provide effective delivery services for corporate and individual customers.

Directional strategies

In addition to the choice of competitive strategy, corporate strategies are also important. In general, there are three components of corporate strategy: directional, portfolio and parenting component (Stevens & Loudon, 2005). With regard to parenting, UPS has a strong vertical chain (Chang, 2010) where business units are empowered to make tactical decisions, but do not participate in strategic decision-making. This strategy is effective provided that analytical data at UPS is timely collected and responded to (which is evidently taking place, since the company quickly adapts to the environment).

Regarding the portfolio choices, UPS has adopted a differentiated approach, and it is optimally aligned with its competitive advantages. Finally, with regard to direction, UPS can choose between growth, stability and retrenchment approaches. Since the dynamics of the company is positive and its financial position is strengthening, the best solution is to choose a growth-oriented strategy.

Growth strategies include concentration (vertical or horizontal) and diversification (concentric and conglomerate) (Stevens & Loudon, 2005). Mechanisms for growth strategies are mergers, acquisitions or strategic alliances, in addition to internal growth strategy (Stevens & Loudon, 2005). In my opinion, UPS should consider the possibility of concentric diversification, based on building expanded synergies with major competitors. It is possible to recommend a strategic alliance with FedEx. The reasons for this are tight competition in the industry, comparable prices and the presence of government-supported players. Also, one of key advantages in the delivery industry is the diversity of locations and availability of transportation means. Both companies offer similar services, and the IT advantages offered by UPS can be easily adopted by FedEx. Although FedEx is smaller in scope, it is perceived as a B2B company, and its quality of service is considered to be better. Uniting both networks, the companies might get a significant competitive advantage against DHL and USPS, and enhance cross-selling.

Conclusion

Competitive analysis of delivery and freight services industry has shown that there are several key players operating in an attractive but at the same a very competitive environment. They are UPS, FedEx, USPS and DHL. Currently UPS is slightly losing in terms of costs and quality of service, but the company managed to create a new competitive advantage through creating value-added services of tracking, financial delivery, e-commerce and logistics services. Thus, UPS managed to combine delivery of funds, goods and information altogether, and its open API is stimulating business agents to integrate their value chains with UPS system.

Basing on the five forces analysis of the industry, UPS is recommended to choose a differentiation strategy and should further develop its strategic advantage by offering new services and creating synergies between its business units. In addition to this, it is recommended to choose the corporate strategy of UPS as concentric diversification, forming a strategic alliance with FedEx, which would allow both companies to have an advantage over the government-supported companies.

 

References

Chang, C.M. (2010). Service Systems Management and Engineering: Creating Strategic Differentiation and Operational Excellence. John Wiley and Sons.
Stevens, R.E. & Loudon, D. (2005). Marketing planning guide. Routledge.
Porter, M.E. (1998). Competitive advantage: creating and sustaining superior performance. Simon and Schuster.
UPS Financial Position. (2011). Available from http://finance.yahoo.com/q?s=UPS&ql=1
UPS Official website. (2011). Available from http://www.ups.com.
UPS Shipping . (2011). Available from http://www.theupsstore.com/products/pages/shi.aspx