United Parcel Service
Fed which is the largest foreign presence in China, with 11 weekly flights, serving 220 Chinese cities, so the company’s volumes in China had grown by more than 50% between 2003 and 2004. UPS which is the world’s largest package- delivery company and dominant parcel carrier in US, serving 200 cities in 2003. Fed had virtually invented customer logistical management, and was widely perceived as innovative. Historically, UPS had reputation for being big, bureaucratic and an industry follower. Two companies have their own market, an individual characteristics, and inconclusive.
Thus, not only based on the development and operation of the two companies, the analysis also relied on the special purpose financial ratios ( especially Economic Value Added (EVA), an effective measure and paid for firm within an industry) to find which company has more competitive advantage. Lecture: 1 . Fed corporation: Fed, formally known as Federal Express, started delivering packages and freight on April 17, 1973. The company was founded by Frederick W. Smith, a Yale University graduate. Federal Express offered overnight and second-day delivery to 25 cities in the United States.
The company started in Memphis, Tennessee, and it is still in that location today. Fed didn’t actually start showing a
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When UPS had a strike in 1997 850,000 packages a day came to Fed, thus another boost in revenues for the company. The name “Fed” didn’t come about until the year 2000. After that Fed has expanded into several other markets that mainly deal with logistics. They have formed somewhat of a partnership with the U. S. Postal service. Fed has made available air transportation for express postal shipments. In return, the U. S. Postal Service now allows Fed to place drop-off boxes in significant locations. Another noteworthy move by Fed occurred in 2004 when they purchased Kink’s in order to better serve small businesses. . United Parcel Service Inc. In 1907 there was a great need in America for private messenger and delivery services. To help meeting this need, an enterprising 19-year-old, James E. (“Jim”) Casey, borrowed $100 from a friend and established the American Messenger Company in Seattle, Washington. That initial name was well-suited to the business pursuits of the new company. In response to telephone calls received at their basement headquarters, messengers ran errands, delivered packages, and carried notes, baggage, and trays of food from restaurants. They made most deliveries on foot and used bicycles for longer trips.
Only a few automobiles were in existence at that time and department stores of the day still used horses and wagons for merchandise delivery. It would be six years before the United States Parcel Post system would be established transportation and logistics services. Every day, we manage the flow of goods, funds, and information in more than 200 countries and territories worldwide. The most recent public change came in 2003, when the company introduced a new brand mark, representing a new, evolved UPS, and showing the world that its capabilities extend beyond small package delivery.
The company went another step further, adopting the acronym UPS as its formal name, another indicator of its broad expanse of services. Ever true to its humble origins, the company maintains its reputation for integrity, reliability, employee ownership, and customer service. For UPS, the future promises even more accomplishments as the next chapter the company’s history written. Ill. THE BATTLE BETWEEN FED AND UPS 1 . Competition in the Express-Delivery Market FED RULES AIRS AND UPS RULES GROUND Overall, the two companies split the small segment of the Express-Delivery market.
There are ground market and air-express market. While UPS has dominated the ground area, the air-express has often been Feeder’s playground. B. Capital-investment expenditures The graph shows that from 1992 to 2003, cumulative capital Expenditures of Fed and UPS regularly rise. Although the Feeder’s ACE is more than UPS, during this period, the two companies matched each other’s investments in capital almost exactly. C. Price competition Tablet : Summary of Announced List-Rate Increase 1998 1999 2000 2001 2002 2003 2004 Average UPS ground 3. % 2. 5% 3. 1% 3. 5% 3. 9% 1. 9% U. S domestic air 3. 3% 3. 7% 3. 2% 2. 9% U. S export 0. 0% 2. 2% Fed Fed ground 2. 8% 3. 0% 1. 8% It can be seen from the table that price competition of two companies in ground is the same numbers. There are some small changes of figure in domestic air and price increase. D. Some significant dimensions Customer Two companies have the same targets: listening carefully to the customer’s needs, providing customized solutions rather than standardized products, and committing to service relationship.
Information technology Fed use COSMOS (Customer, Operations, Service, Master On-line System), which transmitted data from package movements, customer pickups, invoices, and deliveries to a central database. UPS relied on AIDS (Delivery Information Acquisition Devices), which were handheld unit that drivers used to scan package Barbados and record customer signatures. Service expansion Having the aim is pecking its service offerings as volume discounts and superb quality. Besides, Fed bought $200 million to buy vehicles to match UPS. UPS copied Feeder’s customer interfaces to catch up Feeder’s schedule.
Logistics service Fed combine with The London design-company Laura Ashley to store, track, and ship products quickly to individual stores worldwide. UPS combine with Dell Computer to manage its total inbound and outbound shipping. In short, Fed and UPS is the same target, development, operation and the cumulative capital- investment expenditures in the Express-Delivery Market. Moreover, Fed is the primary choice for air and international shipping while UPS donate the ground. So each firm has done everything they can to catch up with each other and the competition has been fierce. . International Package-Delivery Market In 1992, Fed relinquished its hub in Europe by selling its Brussels, Belgium, to DEL (one of International Package -Delivery company) that made Fed lost $1 billion in Europe. In 1995, UPS spent more than $1 billion to expand on Europe. At the same time, Fed expand its routes in Latin America, Caribbean, and Asia. So, in the early sass, both of them also spent similar expenditure in developing their strategy in different areas. In China, until 2005 Fed and UPS Just only focused on the import/ export package market.
If they want to have completely package operations in China, they must use local partners. As the graph shows, growth of two companies rises. Sometimes, they slightly decrease (UPS decrease in 1997, and Fed is lower in 1993 and 2002) but this is not insignificant. Fed and UPS developed equally, and their variance are small in International Package-Delivery Market. Besides, Fed entered the market earlier Han its competitors and generated revenues in the international market, but UPS acquired higher revenues than Fed at the end in 2003. 3. Performance Assessment a.
PEPS, Market Values, and Returns increased slightly from 1992 to 1998 and the stock price and annual return of UPS is higher than Fed (UPS: AAA shares; Fed: EBB shares). In 1999, they go up quickly. After that, from 2000 to 2001 , they slow down and finally, they Jump steadily. Overlook, two companies increased unstably, but their growths are similar to each other. Feeder’s stock price grow in 1999 because Fed expanded its network rapidly o a large number of cities in China and made Fed had 20% of the market, so the stock price rise and annual return also rise.
However, Fed reported a large financial loss of its international division. This was due to the unexpected high costs of its expanding network. It made stock price of Fed go down. And thank to having the largest foreign presence in China, Fed go up again. In 1999, UPS initiated a two- for-one stocks split, sold 109. 4 million newly created Class B shares which lead to raise 5. 226 billion. Clearly, stock price and annual return of UPS develop. No longer, UPS used the majority of the proceeds to repurchase 68 million shares of Class A, so stock price and annual return of UPS decreases.
Finally, UPS concentrated on its operations, especially UPS had more activities in China that made its rate of growths renew. According to the linear, we can see the growth of earning per share of UPS the same increase with Fed but Pep’s linear of Fed higher than UPS. B. Ratio Analysis: Activity Analysis According to the chart, Fed seems to be outperforming UP as it maintains its ratios and is trending towards slight improvement. UPS has been worsening in their ratios. UPS seems to be losing more and more control of its receivables as it grows.
Liquidity Analysis Fed again seems to be improving in the liquidity department but UPS is clearly superior. What this means for UPS is that to creditors and investors they are in a better position to satisfy their liabilities than Fed is. Leverage Analysis The chart shows the linear of debt/equity ratio of Fed fall down rapidly. That means Fed is not taking advantage of the increased profits that financial leverage may bring. UPS tend to remain debt/equity ratio so this rate increases slightly from 992 to 2003 because UPS want to develop in long term.
Profitability Analysis In terms of profitability Fed has consistently been worse than UPS. The net profit margins demonstrate that while Fed has 3. 69% of each dollar of sales left over Growth Table 2: AVERAGE OF GROWTH FROM 1992 TO 2003 Sales Book assets Net income Operating income 11 . 53% 9. 81% 35. 51% 13. 64% 7. 32% 8. 12% 18. 83% 12. 35% With the exception of net income, Fed has fairly consistently out stepped UPS in terms of growth of things such as sales and assets. UPS is still fairly high but Fed is outperforming them.
C. Economic Profit ( Economic Value Added(EVA)) Analysis NONFAT (Net Operating Profit After Tax) Look at the graph, the linear of two companies have the same rise, but UPS’ NONFAT is higher than Feeder’s NONFAT. Cost Of Capital (WAC: Weighted-Average Cost of Capital) Looking at the graph, we can see that linear of UPS’ WAC tend to reduce steadily. On the other hand, Fed linear increases marginally. A low WAC can show that the UPS created more value for the shareholders out of the projects it chooses to invest in.
Economic Value Added( EVA) EVA reflects the value created or destroyed each year by deducting a charge for UAPITA from the firm’s net operating profit after tax (NONFAT). EVA = Operating profits – Capital charge = NONFAT – (K X capital) For many years, managers and shareholders have believed that growth in annual earnings per share and increases in ROE were the best measures for maximizing shareholder wealth. However, there has been a growing awareness that these conventional accounting measures are not reliably linked to increasing the value of the company’s shares.
This occurs because earnings do not reflect changes in risk and inflation, nor do they take account of the cost of additional capital invested to insane growth. There are a number of other reasons why earnings fail to measure changes in the economic value of the business. These are: Alternative accounting methods may be employed. Dividend policy is not considered. The time value of money is ignored. One way of viewing the “shareholder value” approach is to value the business using Economic Value Added as a valuation methodology. EVA (economic Value Added) measures the extent by which the firm has increased shareholders wealth.
Strengths of using EVA to analyze how a company is being run is that EVA is an estimate off cuisines’ true economic profit. It includes the cost of all capital including the cost of equity capital (opportunity cost). The weakness of using EVA is that large companies can create more wealth than those small companies despite not using their assets as efficiently. Thereby the firm can accurately determine the real value is created for investors, shareholders in a certainly time. The EVA for two companies shows that there is no comparison, by this standard UPS is the clear victor.
Fed shows a negative $2,252 cumulative EVA for the period while UPS shows a positive $4,328. EVA values over time will increase company values, while negative EVA values might decrease company values. Market Value Added (MBA) The way in which shareholder wealth is increased is by maximizing the difference between an organization’s total market value and the amount of capital that investors have supplied to the organization. This difference is called market value added (MBA). It is calculated as the difference between the current market value of the company and its investment base.
MBA = Present value of all future EVA MBA = Market value of debt and equity – Capital The market value created could be compared with cumulative EVA. Whether a company has positive or negative MBA depends on the level of rate of return compared to the cost of capital. All this applies also to EVA. Thus positive EVA means also positive MBA and vice versa. In other words, maximizing the present value of EVA would amount to maximizing the market value of the firm. Total market value is the sum of the book value of debt and the market value of equity, while total capital supplied is the sum of the book values of debt and equity.
The book value of debt is seed in the calculation of total market value for four reasons: * The purpose of the analysis is to assess the addition to shareholders’ wealth. * Determining the market value of most corporate debt issues is difficult because they are not actively traded. *Debt market values are usually relatively close to book values. * The market value of managerial actions that influence shareholder wealth. Essentially, the assumption is made that the market value of debt equals its book value. As the chart shows, we can see both of linear of two companies go up, but Pup’s linear go up stronger than Feeder’s linear.