Case HBS Airborne Express

HarvardBusinessSchool9-798-070Rev.May23,2007ProfessorJanW.Rivkinpreparedthiscaseasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©1998bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685orwriteHarvardBusinessSchoolPublishing,Boston,MA02163.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeans—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1AirborneExpressTheofficersofAirborneExpresscouldhardlybemorepleased.1Resultsforthethirdquarter,1997,werespectacular.Revenuesforthequarterwereupby29%overthepreviousyear,andyear-to-datenetearningshadincreasedbymorethan500%.Airborne’smanagementteamknewthatthegreatresultswere,inpart,fleeting.Asthethirdlargestplayerintheexpressmailindustry,AirbornehadgottenaboostfromtherecentstrikeatrivalUPS.Butthatseemedtoaccountforonlyasmallportionoftheearningsgain,perhapsone-fifth.RoyLiljebeck,thecompany’schieffinancialofficer,commented:WhiletheUPSstrikewastheheadlinenewsinthequarter,Companyoperationsoutsidethestrikewindowweresteady,trendinghigherthanperformanceinthesecondquarterof1997.Productivitygainsremainstrongandtheoveralloperatingcostpershipmentcontinuestoimprove.2Airbornehadbeenthefastestgrowingcompanyintheindustryforyears,butitsmarginshadbeenanemic.Now,effortstofattenthosemarginsfinallyseemedtobetakinghold.Ofcourse,itdidn’thurtthatFederalExpress,theindustryleader,hadraiseditsprices.Prospectsseemedmuchbrighterthantheyhadayearearlier.Atthattime,FederalExpressandUPSwereunleashingaflurryofnewservicesandpricingschemes.Oneindustryanalystinterpretedtheirmovesasaneffort“tosweepthecornersofthemarket….FedexandUPStowerover[Airborne].Theyhavesaturatedthecoremarketandarelookingformarginalrevenueopportunities.”Airbornecouldeasily“behammered...betweenthetwo900-poundgorillas.”3Onemovebythe“gorillas”requiredanimmediatedecision.Foryears,theindustryhadsetpriceswithoutregardtodistance.AnovernightlettersentfromBostontoNewYorkcarriedthesamepriceasonefromBostontoLosAngeles.In1996,UPSmovedtodistance-basedpricing;priceswereraisedonlong-distanceshipmentsandloweredonshortshipments.FederalExpressfollowedsuitinJuly,1997.NowcustomerswereaskingAirborne’ssalespeoplewhethertheytoowouldadjustpricestoreflectshippingdistance.TheExpressMailIndustryintheUnitedStatesBusinessesandindividualsspent$16-17billiononexpeditedshipmentswithintheUnitedStatesin1996.Theflagshipserviceoftheindustrypromisedovernightshippingwithnext-morning798-070AirborneExpress2delivery.Serviceshadproliferated,however,withsomecompaniesofferingnext-afternoondelivery(foraprice10-20%lowerthannext-morningservice),second-dayservice(40-50%less),third-daydelivery,andsame-dayorearly-next-morningdelivery(forseveraltimesmorethannext-morningservice).Physicaldeliveryofthepackagewasonlypartoftheserviceofferedtocustomers.Majordeliverycompaniesmadeitpossibleforcustomerstotrackshipmentsenroute.Theyprovidedconsolidatedinformationonshipmentstomajorcustomers.Manyofferedextensivecustomerserviceandguaranteesofon-timeservice.Forinternationalshipments,deliverycompaniesexpeditedcustomsclearance.Somecompaniesalsoofferedwarehousingservicesandlogisticsconsultingservices.Shipmentvolumeshadrisen15-20%peryearforthepastdecade,but,becausepriceshadfallen,totalrevenuesoftheindustryhadgrownbyonly10-15%eachyear.Industryobserversexpectedvolumestogrowatroughlya10%annualclipforthenextfivetotenyears.Customers.Virtuallyeverybusinessandmanyindividualsusedexpressdeliveryservicestoshiptheirmosturgentdocumentsandparcels.FederalExpressalonereportedthatithadtwomillion“currentcustomers”in1996.4Thehighest-volumecustomers,includingsomecatalogretailers,reliedonexpressservicesforthevastmajorityoftheirshipments.Inindustriessuchasfinancialservicesandconsulting,expressmailhadbecomethestandardmeansofdeliveringdocuments.Businessesvariedsignificantlyintermsofvolumeofshipmentsandthepredictabilityofvolume.Itemsshippedbyexpressmailusuallyhadahighratioofvaluetoweightandwereperishableinsomesenseoftheword.Businessdocuments,electroniccomponents,medicalsamples,andreplacementpartsweretypicalshipments.Shipmentswerediverse,however;onefirmreportedthatithadshippedrhinoceroses,artcollections,racecars,andfishingbait.5Theportionofgoodsconsideredperishableortime-sensitivehadincreasedovertime,ascompaniessoughttodriveinventoriesoutoftheirlogisticssystemsandcompeteonthebasisoftime-to-market.Ageneralaccelerationinthepaceofbusinessandshorterfashioncyclesinsomeindustriesalsotendedtobroadenthecustomerbaseandtoincreasetheexpressvolumeshippedbyeachcustomer.Anumberoffactorsinfluencedthedecisiontoshipanitembyexpressmailratherthannormaldelivery,buttheurgencyoftheshipmentandpriceplayeddominantroles.Amongbusinesscustomers,somehadstandardizedproceduresfordeterminingwhichitemswereshippedbyexpressmailwhileotherslefteachdecisioninthehandsofemployees.Havingchosentoshipanitembyexpressmail,thecusto