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How an Alliance of Regional Shippers Is Threatening UPS and FedEx

When properly networked, small players wield greater power.

(originally published by Booz & Company)

You probably know how to ship products to customers across the United States: the Postal Service if you are patient; FedEx, UPS, or DHL if you can pay and need speed. At least, that used to be the choice set—and it was a comfortable situation for FedEx and UPS. The dominance of these two firms produced revenues of well over US$100,000 per employee, along with solid and stable profitability. Indeed, even DHL, which is a shipping powerhouse in Europe, struggled against these two.

But are things about to change? It’s unlikely that any one company can challenge FedEx and UPS, but they may be under significant competitive pressure from a set of collaborating regional shipping firms. A recent article in the Wall Street Journal titled “A New Threat to UPS and FedEx” discusses this new competitive threat. The idea behind it is quite simple, and is a good illustration of why partnerships of firms—what we often call alliances—can be effective tools of competition.

There are many small regional shipping firms in the U.S., each with fleets of trucks, warehouses and packing facilities, and flexible delivery routes. They don’t have fleets of airplanes or national delivery coverage, and they are much smaller than FedEx and UPS. These three features look like drawbacks, and they are drawbacks if the shipping firms tried to compete against FedEx and UPS on their own. But they don’t.

The basic business for these shippers is regional traffic, which is why they have truck fleets and shipping systems adapted to quick shipping within a specific area. For local shipments they are very efficient because they don’t need to move goods from truck to plane to truck, as the national players do. And here’s the key: The local efficiency isn’t necessarily lost over greater distances if they can collaborate to move a package from one regional shipper to another. That is exactly what many regional shippers are doing: forming broad enough partnerships to compete with the geographic coverage of FedEx and UPS. The combination of wide coverage, the flexibility offered by truck-based operations—with less rigid pick-up times than shippers who deliver via planes—and lower costs is allowing regional alliances to undercut large shippers.

Here we are seeing the formation of a set of partnering firms that have become more robust competitors than single companies. That’s an important accomplishment and a good illustration of how strong alliances can be. But the story behind the success is a little more complicated. Shipping of goods by vehicle is a pretty old, even old-fashioned, business. It does not change quickly, and as a result the shippers have significant experience in their own operations, significant knowledge about the operations of others, and confidence that they don’t quickly have to rearrange their key systems. All this predictability allows alliances of many players to coordinate and gain cost and service improvements. And each participant has enough understanding of the benefits of their alliance that there are no unnecessary conflicts over how to share in them. The shippers form an integrated network—a network with many connections among the members—in an industry that is very well suited for such networks.

The opposite of integrated networks are hub-and-spoke networks in which a central firm has connections to many other firms that are not connected themselves. We can easily see why this would not work with shipping firms: Coordination requires many connections, not a few through a central point, and the small regional firms do not have a natural leader that would be able to organize the others into a hub-and-spoke model. In addition, the ability of a hub-and-spoke network to generate innovations would largely be wasted in such a stable industry. Different networks fit different industries and firms. Along with my coauthors, Tim Rowley and Andrew Shipilov, I delve much deeper into this topic in the book Network Advantage: How to Unlock Value from Your Alliances and Partnerships (Wiley, 2014).

Not all firms find the right answer, but a growing number of regional shipping firms seem to have done so.

Henrich Greve

Henrich Greve is a professor of entrepreneurship at INSEAD. His research and teaching focus is on when and how organizations change, and how organizations affect the world.

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