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UPS, FedEx, DHL & TNT - Who Will Dominate the World Of Logistics
Introduction
As is well
known, although both DHL and TNT have a presence in the US market,
ground and air superiority are held by UPS and FedEx respectively.
Although both companies provide similar services, they have
diametrically opposed corporate philosophies.
All four companies
have been vying for global domination of the Logistics Market, but over
the last 10 years this struggle has intensified with a systematic
stream of acquisitions. Deutsche Post World Net (DPWN), DHL’s parent
company, has bought more than 50 companies, mostly in Europe. UPS ever
since it went Public has gone on a shopping spree to fill out its Air
Express capabilities, FedEx mirrored this move by acquiring ground
transportation brands. This break neck speed of expansion and
determination to service the entire supply chain along the most
important trade lanes shows no sign of abatement.
In this
highly competitive rush to dominate global logistics, the question
remains – which of these behemoths will succeed in their feverish
attempt to be the logistics supplier of choice for the global economy?
Can we look at them today and predict the future winners?
The History
FedEx’s
origin in the Air Express business, started in Memphis, TN, in 1973.
Today it is still adroitly run by its founder Fred Smith. Its approach
to the industry is marketing led, with heavy investment in market
research, top notch marketing staffs, and carefully crafted multimedia
marketing campaigns. Fred Smith is not afraid to make bold moves, such
as the acquisition of Flying Tigers in 1989, which gave him a clear
advantage in the Asian Air Express market before China became
fashionable, and the visionary introduction of bar-coding to shipment
tracking to name just two examples.
UPS started in ground
transportation, just over a century ago in Seattle. Its present day
gargantuan revenues and profits have taken it beyond critical mass, and
it stands today as probably one of the most efficient operational
company in the world. All of its acquisitions have to fit into its
operations-first corporate culture. It is known for patience in its
approach to the market, and even if it does not get it right as in the
case of its European incursions in the 1990s, it will try, and try
again until it does. It persevered for 7-8 years to turn a profit in
Canada, and 8-9 years in Germany, and another 6-7 years in the rest of
Europe.
DHL developed along a very different path. DHL was the
pioneer of the international Air Express business, and with a first-
to-market advantage it built a global network which to this day is
still unrivaled in its reach to the globe’s most inhospitable
locations. DHL grew in an age when station managers were still given a
check book and told to go and open up a new country from their hotel
bedrooms. What developed was a close-to-the-customer, decentralized
network that developed an absolute lock on their customers, to the
extent that its brand became a by-word for air express in Latin
America, Europe and Asia. In the early days of the air express industry
DHL was the uncontested world leader with dominant market shares, which
persist to this day in some regions of the world.
TNT, another
great brand in the industry, was started in Sydney after the 2nd world
war as Thomas National Transportation. As globalization picked up steam
across the Far East TNT also experienced explosive growth, often driven
by station managers and their corporate check books. When they came to
Europe though, the more mature market with long term established
players presented a more complicated operating environment.
Whatever
their historical development paths, we now see these four big companies
dominating the express logistics world, and seeking dominance in all
modes: air, sea & land. What they do not presently own they are in
the rapid process of acquiring.
Comparative Benefits of Centralization and decentralization
There
are some interesting commonalities between FedEx and UPS, and between
DHL & TNT that directly impacted on how these companies became
behemoths of the global logistics industry
UPS & FedEx,
vigorous market rivals also have some things in common. They are both
fanatical about tracking one another’s movements in the market. Their
investment in competitive market research is high, systematic and
constant. They are both centralized organizations with annual business
planning processes that are initiated, led and summarized by their
respective corporate headquarters in Atlanta and Memphis.
Their
dedication to their employees is rooted in the belief that customer
satisfaction in the service industry, begins with employee
satisfaction. Both invest heavily into its employees and actively
compete over the best annual MBA crop. FedEx has a unique 360 degree HR
management system that is not repeated in any of its competitors. Both
also believe in promoting from within. Most of UPS’s CEOs began their
careers as drivers or part-time workers. Both companies also have a
strong strategic planning culture, and view their businesses in terms
of decades. Sowing the seeds of long term investments, and then waiting
patiently for the results.
DHL and TNT started with a highly
decentralized model. DHL’s decentralized nature though ultimately put
it at a disadvantage against the centralized systems of UPS &
FedEx, who could spread their costs across their entire network, and
whose large corporate headquarters could access greater funds. The
decentralization that was so valuable to the quality of the localized
service, became an obstacle to a culture of long term strategic
planning. Its more centralized rivals began product and geographical
encircling moves that began to eat away at DHL’s market dominance. As
these encircling moves became more successful so DHL began to lose
market share, across its product offerings and geographies.
Decentralization hindered a corporate wide realization of the long term
significance of these encircling moves, and handicapped a sustained
corporate wide coordinated reaction to the advance of its competitors
in multiple market and product segments.

Eventually this made
DHL, the great pioneering brand of the industry, vulnerable to
ownership dilution, and finally acquisition by Deutsche Post World Net.
Ironically, Deutsche Post, a venerable and very profitable Government
Postal Service only started flexing its financial muscle when a
McKinsey alumni, (one of the premier strategy consulting houses in the
world), began to develop a global logistics capability ahead of
Germany’s forthcoming postal deregulation. Deutsche Post, with its deep
pockets has been re-vitalizing DHL ever since.
Corporate
cultures, created over the course of decades, die hard though, and DHL
today is now operating with its old genetic decentralized structure,
and a new highly centralized structure imposed from Bonn. In some ways
it is reminiscent of England in the 14th century, when the country was
run by an uneasy imbalance between the king who controlled the State,
and the Barons who controlled the regions.
The splicing of these
two conflicted cultures is made more complex by a process, driven by
Deutsche Post‘s desire to become a free-standing global logistics
powerhouse, large enough to rival UPS (100 years old) and FedEx (35
years old), in 15 years of systematic and serial acquisitions.
TNT
became vulnerable after making disastrous operational decisions in its
European markets, with heavy financial impacts, and was in its turn
acquired by the Dutch Post, (Holland not Germany). FedEx and UPS also
stumbled in their European incursions. UPS had the funds and the
fortitude, in the face of enormous internal shareholder pressures, to
struggle through years of losses in the hundreds of millions of
dollars. FedEx shut down the largest part of its European business, and
focused solely on intercontinental express service continuing to serve
the market through an alliance with TNT. While the downsizing for FedEx
was painful and required a $254 million restructuring charge, they did
carve out a solid niche with a truly unique product solution under the
slogan “FedEx is the fastest way to more of the USA”.
Impact of structural developmental models
By
observing the differences in the centralization / decentralization
variable we see how fundamental differences in corporate cultures
developed over decades, ultimately determine the future competitive and
market positioning of these four integrators.
All the
integrators have been driven by the long term global growth in trade
and economic productivity. FedEx and UPS though have also been able to
maintain their independence. TNT and DHL have both been acquired by
Government Postal bureaucracies. DHL had the luck to end up with the
more aggressive of the two, and is certainly keeping up with FedEx and
UPS in terms of acquisitions and global expansion.
FedEx and UPS
adopted a strongly centralized command and control structure from the
beginning. TNT and DHL both developed from decentralized and
entrepreneurial companies, with a less strategic but more tactical
personalized customer service.
The most significant
implication of these developmental paths is that FedEx’s and UPS’ high
degree of centralization from the early days enabled them to embrace a
discipline of strategic planning, which simplified the implementation
of long term plans over a period measured in decades. Although DHL and
TNT started with the decentralized model, they have been experiencing a
process of increasing centralization since their acquisitions by the
European postal authorities. This increasing centralization though is
coming up against the bulwark of a decentralized corporate culture
developed over the course of many years. The effect is to create
constant tensions between headquarters and the periphery.
UPS
and FedEx both have a strong domestic revenue base, which they have
used to subsidize their global expansions. Both have a patient long
term strategic approach to the market. Both are well funded and
determined to continue acquisitions to further strengthen and extend
their dominant domestic market shares across the globe.
What
are the implications of these different development paths to the long
term future of these four companies? More specifically how do these
differing corporate cultures and development paths impact the
companies’ value chains, and ultimately their relative competitive and
market positioning?
The Logistics Value Chain
The
primary activities in any companies’ Value Chain are in-bound
logistics, operations, out-bound logistics, marketing and sales, and
customer service. These are facilitated by the firm’s infrastructure,
HR management, Technology R&D investment, and procurement. All
these departments work together to produce the company’s profit.
In
the race for global domination, the components of this value chain have
to be optimized on a worldwide scale, at all levels of the corporation
– Global Headquarters, Regional Headquarters, and country level, as
well as within the critical product portfolios, regions, and countries
that the companies operate in.
Although you would expect these
logistics companies to have world class in-bound and out-outbound
logistics, this is not where they excel.
Comparing the Integrator’s Value Chains
DHL
has historically been known for its outstanding customer service at a
local level. UPS is known for its militaristic obsession with
operations. FedEx has world class marketing talent and because it is
still run by its founder, a nimble ability to quickly mobilize their
strategies. TNT was always known to have the most flexible service in
the business.
UPS and FedEx’s centralized structures have always
required, and facilitated billion dollar investments in IT. This became
an advantage that they used to undermine one of DHL’s greatest
strengths, localized customer service. With a globally connected IT
network, FedEx and UPS were able to leverage their IT advantage to
service their corporate accounts on a global basis, rather than on a
country by country basis.
FedEx has the best HR system in the
business. It also has had an active strategic procurement optimization
initiative that has been adopted by the rest of the industry, producing
savings in excess of millions of dollars, straight to the bottom line.
The
most important part of the value chain is found in the senior
management of these companies. UPS and FedEx have had stable, strong
teams running the critical components of the value chain and the
associated departments. Alan Graf has been the FedEx CFO since January
1998. Fred Smith has been the CEO of FedEx since he founded the company
35 years ago. Mike Glenn has been FedEx’s CMO for the last 8 years and
has been a senior sales and marketing executive with the company for
many more. UPS’ CEO started as an industrial engineering manager, and
worked his way up for 34 years to his present position. These teams
have overseen steady and profitable growth for both companies over the
period of the last 40 years.
TNT’s CEO in the USA has changed at
least twice in the last 10 years. DHL USA has had four different CEOs
within the last 4 years. It is a fair assumption that new CEOs bring in
their own new teams, which implies that the high CEO turnover ripples
through various levels of executives. Success in any company often has
an inverse relationship with the rate of internal turnover in the
firm’s primary activities. Managing change across large global
multi-layered and matrixed enterprises is complex. Implementation of
critical initiatives may take many years. Stability in policy is most
often associated with a stability in critical personnel. This Personnel
stability is an important predictor of the successful implementation of
these policies.
Lately theses companies have filled out their
supply chain capacities through acquisition. The critical management
function at the moment is efficiency in integration. As Dick Metzler is
fond of saying, “Integration is like watching porcupines mate. They
ultimately consummate the act, but it is pretty painful for both
parties”. This activity is also dependent on the quality of the
corporations’s management. Dick is presently the Chief Commercial
Officer for Greatwide Logistics, and was the former Executive Vice
President of Marketing with DHL Americas, former CEO of APL Logistics,
Senior Marketing executive at Federal Express, and the Head of Global
marketing for TNT. In his previous position Dick Metzler put DHL on the
awareness map in the USA.
Considering the waves of continuing
acquisitions whichever company can best integrate their different
acquisitions, will better serve their customers. Full integration of
acquisitions for these large companies can take anything from 3 – 7
years, another critical activity that is facilitated by a stable and
good team of managers.
Once these acquisitions have been
ingested and stabilized to extract the back office and market share
benefits that drove them in the first place, then the race will be to
optimize the best management teams within each corporate level, in the
critical markets around the globe. Since a company’s success is based
on its management’s capabilities to direct the organization in a
complex and dynamic market environment, whoever can develop and
stabilize the best management team first, wins the value chain game.
Such resources, just like the best in class companies that are
presently being acquired are not limitless, and the next race amongst
the integrators may well be for the best management talent, across the
globe.
This leads us to another critical value chain component
– HR. The often repeated but infrequently implemented adage is more
important in service industries. People are a company’s most important
asset. Investment in your people, their recruitment, training and
management is a critical support activity that is capable of being a
major contributor to the success of the company.
Another
differentiating discipline is long term strategic planning. Effectively
implementing change across large global multi-layered and matrixed
corporations can take many years. The appropriate long term direction
has to be set and implemented with the correct tracking metrics. In
many organizations this is usually developed and driven by the
strategic planning department.
Companies also have to deal with
market dynamics over which they have little control.In these days of
transportation companies becoming Public, there is a temptation to
manage the company not for the long term for the customers, who pay the
bills, but for the short term benefit of the investment community that
supply the companies with capital infusions, and the appropriate market
valuation.
Companies with long term strategic planning
departments are less likely to succumb to these distractions than
companies that are driven by tactical rather than strategic
imperatives. UPS, with its strong internal share ownership philosophy,
and FedEx with the passionate service attitude of its founder, have
always tried to resist such temptations.
In the integrator
market, the more successful companies embraced strategic planning
departments that were able to dictate and implement long term
strategies that overrode short term financial goals, company politics,
and investment community demands.
This should not be
counter-intuitive. The two companies that have embraced strategic
planning and centralization have gone from strength to strength. The
two companies that developed and persisted along the lines of
decentralized models have relinquished their independence to two
different Government Postal Organizations.
Conclusion
What
can we learn from the experience of these industry leaders? From the
developmental paths of the four big integrators we can differentiate
amongst those that adhered to centralized planning from the beginning
and those that started with a decentralized model. The early adopters
of the centralized model have maintained their independence, while the
two that started with the decentralized model have suffered
vulnerabilities that resulted in their takeover by Government Postal
Monopolies.
Centralization is not a benefit in and of itself, but it does enable the practice of strategic planning.
Strategic
Planning can be applied to both a centralized and a decentralized
model. But is easier to apply strategic planning to a centralized
model, and it’s more difficult to apply strategic planning to a
decentralized corporate culture.
Strategic Planning in its
turn enables a long term view, a vision for the overall business
whether it be in San Francisco or Timbuktu. It allows for
economies-of-scale on a worldwide basis, the benefits of which can be
applied to every component of the value chain. This is a clear
competitive advantage for any corporation that has it against any
corporation that does not.
Strategic Planning enables a long
term view of the business, which in turn protects the company from the
short term trends which have little significance over the long term
health of the business. This long term focus on the significant drivers
of the business allows the corporation to communicate the importance of
these drivers over the long term, to form a core message of shared
objectives and values which can be followed by the entire organization.
The entire organization can ‘sing from the same hymn sheet’, rather
than be subjected to the short term vagaries of constantly changing
market philosophies, short term investment community influences, short
term financial goals, company politics or executive demagoguery.
Strategic
Planning paves the way for stability in management across all critical
components of the value chain. Stability in management, specially
executive management, in turn allows for implementation of the long
term vision. A ‘virtuous cycle’ is created that compounds the
competitive advantages of the corporations that follow the management
model enabled by strategic planning. The corporations that do not
follow such a model are more likely to be subject to ‘vicious cycles’
that exacerbate their weaknesses across the value chain, creating
vulnerabilities that drive them to bankruptcy or involuntary takeovers.
In
a competitive environment Strategic planning, whether you are
decentralized or not, is a critical component of company growth and
survival in the long term. Companies without strategic planning may
survive for five, ten, or with luck even 15 years, but at the end of
that time the company will at best be a candidate for involuntary
acquisition by those competitors that did implement strategic planning,
or at worst looming bankruptcy.
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