Lecture 3: Airborne Express Flashcards
What are the different types of advantages sought and what are the scopes?
Types
- Differentiation
- Low-cost
Scope
- Focused
- Broad
Companies can focus in terms of:
- Product/service
- Customers
- Geography
Companies can ‘focus’ with the aim of:
- Low cost
2. Differentiation
How can we assess how significant economies of scale are (i.e. in terms of unit cost difference between larger and smaller players)?
- Estimate the total capital requirement (which we assume is essentially ‘fixed’)
- Convert this capital amount to an annual cost
- Divide this annual cost by the annual volume of (a) larger and (b) smaller competitors
What’s the strategic significance of having a unit cost advantage?
Higher, sustained profit margins
What does increasing fixed costs imply for industry?
Implies increasing economies of scale, which means it’s harder and harder for small companies to survive
What’s airborne’s strategy?
- Targeted a segment of the express mail industry that was over-served by the current, broad-line players (FedEx and UPS)
- Segment that required lower level of service in exchange for lower price
2. Great care to select customers whose demand pattern fitted with low cost delivery
- Tailored their fulfilment system to provide lower level of service in very economic way
– Reduced (per unit) SC
– Reduced the need for FC investments
– Reduced CV
How is Airborne doing in terms of value capture?
- Relative bargaining power
a) Large customers likely to be quite powerful, especially with low loyalty and low switching costs - Intensity of rivalry
- quite high, high fixed cost industry
Would FedEx want to attack Airborne’s segment?
FedEx has clear incentives to attach Airborne’s segment:
- Market growth is slowing
- Marginal costs are low in this industry, so attractive to get extra volume
Can FedEx match Airborne’s strategy (scope and activities)?
Probably serving many customers from ‘Airborne’s segment’ already ….. just
with a higher performance service
Probably NOT worth trying to precisely match Airborne’s ‘lower spec’ activities
- Too many different services can confuse customers and staff (plus brand conflict)
- Unattractive operationally to some of Airborne’s choices (e.g. local outsourcing, lower level of automation) not least because of making operations more complex
– But little to stop FedEx being much more aggressive on price towards Airborne’s segment:
1. Especially if they allocate costs correctly between the various segments they serve 2. And given that they may well actually have a scale-related advantage in some cost components e.g. local pick-up and drop
Should Airborne pursue ‘tailored services’?
- This appears to be seeking to serve ‘under-served customer’
– Very different from its current approach of serving ‘over-served customers - Ask:
– What would (higher) unit cost be?
– How much higher would CV be?
– Is it likely that higher CV will more than compensate for higher unit cost?
What else can Airborne do?
- Acquire or merge with RPS to capture economies of scope?
- Continue to reduce unit cost as much as possible
- etc
What is one way that smaller competitors prosper and survive?
One way for smaller competitors to survive/prosper is to focus on a specific customer segment
Airborne is an example of a focused low cost strategy
How can you design a focus strategy? What are the key factors?
- Identify a segment which is either over or under-served by the broad line competitor
- Devise a scope (and thereby a value proposition) which more closely fits what that segment is willing to pay for
- Tailor a set of (distinctive) activities to fulfill this value proposition
How can a focus strategy work well?
- VALUE CREATION: The segment must offer us the possibility of a decent gap
between Customer Value and Unit Supplier Costs - VALUE CAPTURE: Find positioning that avoids powerful suppliers/customers and avoids high rivalry
- SUSTAINABILITY (IMITATION): It must be either hard or unattractive for the broad line competitors to address the segment
