30-A Silver Competitor Follows the Wrong Strategy

Companies who are not ranked in the top two positions in their industries can prosper providing they follow a highly disciplined strategy. Here is one of those smaller companies. At first, it made several strategic mistakes and sought to leave the market in disappointment. After some time, it reentered the market where it followed a better strategy. Fortunately, the industry was relatively comfortable as it reentered. The industry is just as comfortable today, but there are clear warning signs for the market leaders just over the horizon.

Posted 6/23/08

Deutsche Post AG is surrendering in the battle for the ground shipments in the U.S. market for express delivery. Over the last few years, Deutsche Post has purchased both DHL and Airborne in order to compete in the U.S. market. These two competitors were numbers 4 and 3 respectively in the industry. Deutsche Post plans to transfer DHL’s North American Air parcel deliveries to UPS and reduce its U.S. capacity for ground shipments by a third in order to cut losses.

Deutsche Post planned to become one of the top two leaders in the industry, taking market share from UPS and FedEx. This strategy rarely works for a Silver competitor. Deutsche Post’s strategy racked up huge losses, so it has now surrendered.

We define a Silver competitor as a company ranked number three or lower in an industry. There are many examples of successful Silver competitors (see “Rare Mettle: Gold and Silver Strategies to Success in Hostile Markets” in the StrategyStreet/Tools/Perspectives section). These successful competitors follow very carefully planned strategies to avoid the industry’s leading companies, where the industry leading companies are performing well. Two important tenets of a successful Silver strategy: First, seek the Large, second tier, customers in the marketplace and also woo service-oriented Medium sized customers, and avoid threatening the leading competitors in the marketplace by going after the first tier, Very Large, customers. Second, beat the standards of service for the customers in the marketplace.

DHL violated both of these two tenets. It sought out the largest customers in the marketplace in order to win significant market share. This strategy failed when neither UPS nor FedEx “failed” these Very Large customers in order to open these relationships to DHL’s offerings. DHL also failed on its service levels. Deutsche Post combined DHL and Airborne hubs in one location in 2005. This combination proved rocky for customers. Deliveries were delayed and many customers abandoned DHL. DHL lost 10% of its total revenues as these customers left it because of its “failure”. These customers belong to someone else now and DHL will have to wait for that someone else to fail before they are likely to have a shot at gaining that business back.

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Update 2022:

In a slower growing market, Failure moves more market share than success. A supplier fails its customer, who then leaves for another supplier. Market share changes hands. Statista 2021 data shows that the top three express delivery companies, FedEx, UPS and USPS each had customer service ratings in the mid-70s. These ratings have fallen off a bit over the last five years. They indicate a market with limited rates of “failure” among competitors.  Furthermore, the differences in failure rates among competitors is marginal.  Since all competitors have similar failure rates, market share would tend to shift very slowly.

The DHL company ended domestic pickup and delivery service in the United States in 2009.  In 2018, DHL launched a new same day and next day delivery service for online retailers in major cities in the US, reentering the US market, but serving only Very Large customers.  Industry analysts report that FedEx courier services are cheaper for domestic US shipments while DHL is cheaper for international shipments.  DHL has a large and successful international business.  The company is the market leader for parcel services in Europe.  It remains a subsidiary of Deutsche Post.

Here is a brief description of both Gold and Silver types of competitors. Gold competitors are the largest, most successful companies in their industries, such as Federal Express, Owens/Corning Fiberglas, and Paccar. While most industries have only one Gold, a few (such as meatpacking with ConAgra and IBP, and trucking with Yellow Freight and Roadway) have two. Gold firms hold the highest or second highest market shares and often have a powerful brand-name franchise. They grow faster than their industries and have above-average returns on investment.

Silver competitors are smaller and face longer odds of survival than Golds. While they too, have above average sales growth and ROI, their names are less well-known, except within their industries, and they are third or lower in market share. Examples of Silver companies are Airborne Express, Tamko (residential roofing), and Freightliner (truck manufacturing).

Gold and Silver competitors are neither numerous nor certain to exist in every industry. A typical hostile market might have one Gold company, with a market share of 20%-40%, and one Silver, with a market share less than half that of the Gold. The rest of the market belongs to several companies of varying size that have slow growth, low returns, or both. Some industries lack a Gold or a Silver competitor, and some have neither. For example, the farm equipment industry during the 1980’s had a Gold company (John Deere), but no Silver company. The lodging industry had a Silver (Marriott), but no gold. The domestic integrated steel industry had neither a Gold nor a Silver. A Gold or a Silver will exist only where a management follows a very disciplined strategy in its market.

For more on these types of competitors and how they succeed go HERE

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Update 10/25

The US ground shipment market has undergone a great deal of change since 2015. Throughout most of this time, the market has been relatively easy on competitors, certainly not a hostile market. However, market shares have undergone tremendous changes as Amazon entered the market as a competitor, rather than a customer. The entry of Amazon was a significant warning. The fact that some retailers are building their own in-house logistics is another significant warning for the industry. There are other warnings as well.

Market shares have shifted dramatically since 2015. UPS and FedEx, both then and now, maintain their industry leadership. Once, these two companies had market shares in the mid-to high 30s. However, both firms lost 6 to 8 percentage points of their market shares after 2018. In that year, Amazon expanded its Amazon Logistics arm to enter the ground shipping market as a competitor. Over the next 10 years, Amazon gained 18 or 19 share points in the market. The industry leaders’ market shares remain in the high 20s in 2025.

As you might expect, UPS and FedEx dominate the Very Large and Large customer market. Amazon specializes in serving its e-commerce vendors and customers, mostly Small and Medium customers. It offers relatively little service outside its own economic circle. Amazon is now the third ranked competitor in the market. The third ranked competitor in 2015 was the USPS. This firm lost about 1/3 of its market share, primarily to Amazon. DHL has maintained its 3% market share throughout this period. It is one of the “other” competitors who specialize in particular services or regions and have yet to create a major challenge the top leaders. Notably, this group, including XPO, has gained a bit of market share over the last 10 years. This latter development is another warning to the industry, especially on its pricing.

Each player in the industry offers its own style of uniqueness for its customers. These leading company sources of uniqueness are usually Function or Reliability benefits. UPS is particularly known for handling medium and heavy ground packages for larger companies. It also offers several benefits including end-to-end supply chain management and logistics services, building on its expertise derived from its base business. FedEx stresses speed of delivery, whether by air or by ground, offered to carefully selected industries where it has built technology advantages. Both these two leaders are competitive with one another in on-time deliveries and pricing for Very Large and Large companies. Amazon uses its unique position with its vendors and customers to offer extraordinary delivery times and low costs for staying within the family. DHL has relatively little of the US ground shipping market but it does excel in international logistics and in cross-border shipments especially between US and Europe. Its limited scale often results in its relying on the USPS for the last mile delivery.

Pricing is comfortable in the industry and has been for some time. However there are some clouds on the horizon. UPS and FedEx, who are the industry price setters, have raised prices about 6% in the last year and are able to charge premiums, especially to Medium and Small customers, while still offering discounts to larger customers. The problem with being the industry price setter is that you are always setting a price to discourage someone you do not see. The key strategic objective of price is to discourage someone from competing with you. That someone may be a new entrant (consider retailers building their own logistics) or a competitor expanding (consider the “other” smaller competitors). While the industry leaders enjoy this pricing environment, they must pay attention to threats on the horizon. Amazon was a big warning. However, it had a unique position with its own customers. Amazon could be seen as an exception. Those retailers building in-house logistics capabilities are more of a problem. While the ground shipping leaders clearly would have economies of scale advantages if they chose to use them, these retailers are looking to expand underneath the current price umbrella set by the leaders. That is dangerous. Also concerning is the market share gains, though small in total, of these smaller “other” market participants. If these unfavorable trends continue, the industry may lose some or all of its current pricing power.

Returns for the industry leaders are high, especially for UPS. Both the leaders suffered from cost increases as Amazon withdrew business from them beginning in 2018. This is an example of economies of scale operating in reverse. Over the last 3 to 4 years both the leaders have restructured their cost systems and invested heavily in technology to reduce their costs. Both the leaders provide attractive returns on equity. The returns on UPS are especially impressive. If these two industry leaders can blunt the menacing entrants of their own retail customers and the further expansion of some of their smaller competitors, these returns should continue. That is, unless Amazon decides to offer its logistics services outside its own family environment.

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