Federal Express vs. United Parcel Service

Federal Express started with a strategy focusing on air-delivery and differentiated itself from other carriers through its hub and spoke distribution pattern which allowed it to provide faster service to more locations than its competitors. Later it expanded into other services acquiring more trucks and aircrafts with a growth strategy, continuing to differentiate itself with its superior quality and on-time delivery model. FedEx dominated the overnight delivery market until new entrants like UPS entered the market.

Throughout, FedEx maintained its Broad scope/Differentiation strategy, charging a premium price for its services as it expanded into global markets and made improvements in Information Technology to further increase quality and customer service. Thus, overall FedEx had a strategy to grow market share in a broad range of services and differentiate itself from competitors based on superior service and quality at a premium price in its mission to generate outstanding financial results.

UPS, on the other hand, started with a strategy focusing on express package delivery within the US and Western Europe at lower prices. The unionized structure of the company did not allow it to move into other markets (like overnight delivery) as fast as FedEx did. For the most part, UPS played catch up with FedEx whether it be globalization or expanding into newer territories, however, it remained cost-effective and a low-price provider of services.

Thus UPS changed its strategy from a focused low-cost service provider to a broad range of services at low cost in its mission to increase shareholder value in the long term. During the period 1984 – 1994, both FedEx as well as UPS expanded their services both domestically as well as internationally fueled by technical advancements and changes in the financial sector with deregulation. During the period 1991 – 1993, UPS' was financial results were much stronger than that of FedEx. In the domestic market, UPS' revenues were 3 times greater.

This is especially due to the fact that UPS provided the same quality and reliable service as FedEx did with its same day, next-day and two-day package delivery services at a much lower cost. Both firms lost money in the foreign markets, but during the period 1991-93, FedEx showed an improvement in curtailing its losses substantially. Both UPS and FedEx believed that they would grow in the foreign market in the coming years. FedEx's financial results are not in line with its mission statement due to setbacks in the early 1990's (1991 – 1993).

UPS' annual returns are much higher and their EVA (Economic profit based on value added to shareowners) is also much stronger (8. 9 in 1994 compared with 1. 2 for FedEx in the same year). Thus, UPS' financial earnings align well with its mission statement to increase shareholder value. However, past financial results are not indicators of future performance. Therefore, it is important to take a look at the strategic health of the firms as well. Strategically, in my opinion, UPS portrays a healthier picture than FedEx.

This is because UPS has adapted well to FedEx's differentiation strategy and at the same time offered lower prices to its customers. Since the differentiation in products has blurred over time with UPS and FedEx colliding head-on in its services, competitive pricing gains importance. Added to this is the fact that UPS has a more established trucking presence and expertise in that area than FedEx with a major market share domestically. Therefore, UPS comes out as a better performer, both strategically as well as financially.

The recent shift (at that time) was to serve corporate clients by providing them an integrated set of services providing total inventory control. Both UPS and FedEx are competing neck-to-neck in this market as well, UPS having bagged a 5 year contract with JC Penney for delivery services. In this market, the main differentiator that sets these giants apart would be cost. Who can provide these services at a lower cost? FedEx is regarded #1 in the express delivery business, but it also relies heavily on technology to stay as #1 despite pressures of rising costs.

In recent years, FedEx has been struggling to stay profitable in the domestic market and losing money in foreign markets, though it hopes to make the lion's share of its profit going forward internationally. However, the fact remains that these forces threaten FedEx to lower its costs to stay competitive. FedEx's strategy has never been to compete on price, whereas UPS as traditionally focused on lower cost operations thereby affording to set a lower price. In these circumstances, the forces seem to favor UPS more than FedEx.

EVA (Economic Value Added) indicates whether or not a company is producing positive results for its shareholders. It is not enough to just make a positive operating income/profit. The operating income should be greater than the opportunity cost of the capital, in other words, should be greater than the returns of investing the capital elsewhere. This in the true sense adds value to the shareholders. Thus EVA is an indicator of positive results for the shareholder, which goes a step beyond just having a positive operating income at the end of the year.

In order to get positive EVA a company has to increase its profitability to cover the capital charge. Thus, the company is required to look for ways to increase profitability by reducing cycle time, speeding up delivery, controlling expenses and increasing sales. On the other hand, reducing capital charge by lowering inventories and managing receivables can also help generate a positive EVA. Thus the quest for positive EVA infuses an efficient operating environment within the organization and thereby positively impacts the bottom line.