5 Forces Case Report: The Air Express Industry Case Questions
Introduction
The air industry in the US dates back the early 1970s and its growth and development was gradual and based on numerous factors. In the initial period of operation, the industry particularly dealt with small packages and the entry into the industry was challenging due to the environment characterized by significant regulations. It is essential to understand the primary factors which led to its growth and development to its current status. First, the deregulation in the industry is attributed with significant changes, which allowed Federal Express, which was among the first companies to buy large jets with higher capacities. As a result, the industry experienced a boom characterized by increased shipping that was growing at an average rate of 31% annually in between 1981 and 1989. The increased level of business and profitability attracted new players such as the UPS and Airbone Express but the industry stabilized in the mid-1990s (Hill, Jones and Schilling 92). However, there is a need to analyze the strategic approaches adopted in the industry to identify its current status and position of different operators, which is the focus of this paper to identify new approaches and strategies that can be adopted in the industry.
The analysis of the air express industry using the Porters 5-forces helps many industry stakeholders such as investors, companies, and suppliers have a clear vision of the financial position of the industry together with all the favorable and unfavorable factors. Such information is useful as it leads to better investing decisions and other financial decisions such as buying and selling shares. The fundamental analysis of the industry starts with examining the financial gains of the sector, company's stock performance as well as the potential effects of external forces on the industry as well. Hill, Jones and Schilling (92) present that the Air industry in the US experienced significant growth in the 1990s, and it started to achieve stability. As a result it started expansionally strategies with three major players who included Federal Express, Airbone Express and the United States Postal Service competing vigourously.
The overview of the air express industry using the five forces evaluates some vertical and horizontal threats including the competition of the industry, a threat of substitutes, a threat of new entrants, bargaining power of suppliers and increased bargaining power of buyers. Investors can use such information to decide whether they want to invest in a certain industry or not.
Risk of Entry by Potential Competitors
The threat of new entrants into the air express industry is minimal and does not pose any substantial threat to the existing competitors. The high barriers to entry in the industry are said to be challenging and only a few investors would try to venture into the murky waters and majority investing in the existing businesses. Some of the barriers which discourage new entrants include massive operating costs, high initial capital to start and strict government regulations, which are numerous and complex to navigate. The only ventures that take place in the air express industry are buyouts and mergers between companies. The fact that the latest entrance into the industry is JetBlue, which entered in 1998, shows how hard it is to get into the industry.
Bargaining Power of Suppliers
The supply chain of the air express industry consists of many participants including manufacturers of aircraft, freight forwarders, lessors, travel agents and air navigation service providers. Further, there are other suppliers who include third party booking websites, maintenance, repair, catering and ground services. The bargaining power in this scenario is directly in the hands of the airlines because there are many suppliers in the industry while the parties to be supplied to are not many. The bargaining power of the airlines goes with the size of the respective companies, with the largest such as Delta having the strongest bargaining powers. The largest companies have the most powerful bargaining powers because they can offer the suppliers a larger sales volume which is hard to replace by using another company.
Bargaining Power of Buyers
In the air express industry, buyers have a lot of power and pressure over the companies since it costs almost nothing to switch from one airline to another. The issue has been made worse by third party booking websites and mobile apps, which allow the buyers the luxury of comparing the prices of different airlines in the industry and choose the best or the one they like. This case means that the companies will always try to price their services as lowest as possible to attract more customers and in the process lose a lot of revenue. In most cases, buyers do not make contact with the airlines as the third party booking websites enable them to do more from the comfort of their homes (Bowen and Leinbach 179). To survive in the industry, airlines come up with new methods of pricing and attracting more customers.
Substitute Products
Some of the substitute products which can threaten the air express industry include bus, trains or cars. However considering all the features of the industry, such substitutes cannot mount any substantial threat since they cannot offer what the airlines offer to consumers. For instance, a trip which takes 6 hours by flight can, in turn, take 24 - 36 hours by the mentioned substitutes considering all the logistics challenges of the processes.
Rivalry among Established Competitors
The air express industry is highly competitive, with much of the competition being driven by prices, capacity and geographic coverage of the operators. The only way for the companies operating in the air express industry to remain competitive is to have the maximum volume, sufficient scale and exercising fuel efficiency in its operations. The competitiveness of the industry can be attributed to some reasons included entry of low-cost carriers in the industry, strict regulations which have pushed operating costs up and the use of outdated business models.
The competitive nature of the industry mostly favors the established companies such as Federal Express, Delta, Airbone Express and JetBlue airlines. The major reason for the competitiveness of the air express industry is that the regulation of the industry is done from a supply side rather than a demand-side and thus small companies cannot survive the intense operating conditions. Hill, Jones and Schilling (94) argued that increased deregulation was among the primary reason behind the increased competition between the companies operating in the industry. For instance, after the relaxation of the regulations for the entry of new players in 1977 by the congress the overpricing tendencies by different players was significantly reduced.
The aspect of customer loyalty does not apply in the air express industry since most consumers choose the company depending on the price and how well the services are. As such, this means that if a consumer has been flying with Delta Airlines, and one day they offer bad services, such a customer can choose another company with a simple click of the mouse (Bowen and Leinbach 175). Every business in the industry seeks to offer competitive prices which attract customers and help the company cover costs and make profits. Low prices easily sway customers, and as soon as they notice a different company offering better prices, they easily leave the one they were using.
Attractiveness of the Industry
Potential Attractiveness to Incumbents
For the firms that are already operating in the United States with a measurable market share, they can be attracted by the low jet fuel prices, ability to access new markets and the aspect of globalization which means people and goods will be moving more often. The companies operating in the air express industry can be attracted by the fact that most companies nowadays sell their products online meaning that the business is still growing. Some of the e-commerce companies include Amazon, Alibaba, and eBay.
Potential New Entrants
As mentioned above, the air express industry does not offer anything attractive that can make new businesses enter into the industry. However, the growing number of companies doing business online and the aspect of globalization may be some of the factors which can attract such new entrants (Bowen and Leinbach 183). Many companies engaging in e-commerce means that more small packages will be sent making the industry require new companies.
Recommendations to Delta Airlines
As one of the business leaders in the air express industry, the company is currently doing well despite the many challenges that are faced in the industry. However, a few improvements in the business model of the company can go ahead to make it take a bigger market share and thus bring on more profits. For instance, the airline can counter the force of third party booking sites by ensuring that it offers cheap direct flights to the areas where the customers book most. The company can also go ahead and offer free miles to the most loyal customers, a promotion move, which can make other customers want to accumulate the required miles as well. The company can also offer a promotion to e-commerce businesses such as Alibaba, Amazon, and eBay by reducing the costs of delivering their packages around the world. Lastly, the best way for any business to attract and maintain customers is to make sure that it offers the best services at competitive prices as compared to its competitors in the industry.
Works Cited
Bowen, J., and Leinbach, T. (2004). Market Concentration in the Air Freight Forwarding Industry. Air travel journal, 95(2), 174-188. doi:10.1111/j.0040-747x.2004.t01-1-00299.x. Web.
Hill, Charles W. L, Gareth R. Jones and Melissa A. Schilling. Strategic Management: Theory & Cases: An Integrated Approach. Boston: Cengage Learning, 2014. Print .
