How Attractive Is the U.S Express Mail Industry?
Q.1 How attractive is the U.S express mail industry?
The conclusion arrived at after applying Porters Five Forces Model is that the U.S express mail industry as of 1997 is not attractive in terms of profitability for existing players and conduciveness for new entrants. Exhibit 1. shows clearly the factors affecting the 5 forces, some of which have been applied in the analysis:
1) Degree of Rivalry: Very High
This industry is concentrated with only 3 major players and six second-tier players– making it an oligopoly. There is intense competition in the industry as is evident by the price wars waged between 2 mammoths, UPS and FedEx that are almost equal in size and market share. The industry is characterized by slow revenue growth, high fixed costs and exit barriers (all of which force them to compete aggressively). This is due to heavy outlays in hubs, vans, aircrafts, technology and other capital extensive infrastructure. The rivals play catch up with each other in terms of technological innovation, pricing, service offerings and marketing making it difficult to differentiate from each other. For example, UPS had made a determined effort to match FedExs IT prowess, investing $3 billion in advanced technology between 1990 and 1995. Customers have no brand loyalty and very little switching costs. This high intensity of competitive rivalry has eroded the profit potential for the industry.
2) Threat of New Entrants (Entry Barriers): Low
The entry barriers for this industry are very high. Selection of a carrier by customers is affected by several factors like reliability, access to tracking, customer service, brand name, the convenience of drop-off and sheer habit. For that, new entrants will typically need high initial capital outlays for setting up extensive distribution networks and infrastructure. Also economies of scale will not be in favor of the new competitor either as the initial volume would be low. This would call for a longer breakeven period (gestation period) and the risk appetite associated with it. From the perspective of incumbents, entry barriers work well for its sustainability. However, the industry is very unattractive for potential entrants.
3)Supplier Power: High
The inputs to this industry are fuel, planes, vans, technology etc. Of them all, fuel is the most indispensable and limited input in this industry for which the firms cannot bargain. Fuel consumption is a major expense, averaging from 600 to 700 million dollars annually for all three firms. Technology and transport (planes, trucks) are other inputs; but the suppliers of them dont have much bargaining power as there are many alternatives available to the industry players and a reasonable price for their products can be obtained.