When Big Brown loses its raison d’être – UPS rethinks its strategy in reaction to isolationism

The recent increase in isolationism will reduce the global movements of goods – is this an existential threat to UPS? UPS is at a crossroads as it grapples with the impact of isolationism on international trade.

Building global networks

UPS first entered the International market in the mid-70s with operations in Canada and Germany. In 1988, UPS launched its own airline to facilitate the transportation of goods across international borders. By 1992, UPS was delivering to over 200 countries and territories and its services touched 4 billion of the 6 billion global population [1].

In response to customer supply chains going global and the rise of manufacturing in low cost countries, UPS built the capability to move international heavy freight through major acquisitions – Challenge Air Cargo in 2000 [2], Fritz companies in 2001 [3] and Menlo Worldwide Forwarding in 2004 [4]. UPS now serves over 220 countries and carries 2% of International GDP and 6% of US GDP in its network [1].

In 2016, 20% of UPS Revenue and 37% of UPS Profits came from International Operations clearly underlining the importance of international commerce to UPS [5].

Scenario planning – increased isolationism and decrease in international trade

The recent US election, where President Trump won on a platform of Nationalism and restricting international trade, the UK Brexit vote, and the rise of political parties espousing nationalism and isolationism in major EU countries, presents a clear threat to this successful strategy.

Fortunately, the UPS Strategy group has employed a very effective “Scenario Planning” process since the late 1990s. In its first scenario planning session in 1997, UPS managers explored the “Regressive World” scenario, one of four scenarios, focused on strong regional and national regulations. In a follow-on scenario planning exercise UPS management considered a “Bordered Disorder” world characterized by a highly regulated protectionist environment, an increase in security threats, and environmental and financial shocks [10,11]. Although both scenarios were discarded in favor of globalization, the potential action steps, if those scenarios were to prevail, should form the basis for future action.

What UPS is doing in response

In-country small package operations: UPS has developed comprehensive domestic transportation networks in major European countries through acquisitions like Lynx in UK [6], Stolica in Poland in 2005 [7]. In 2008, UPS assumed control of China and Korea domestic operations, and acquired Trans Courier Services SRL in Romania [8]. UPS also acquired Nightline logistics, immediately positioning UPS as one of the top local shippers in Ireland [9].

Build for heavy freight domestic capabilities: The 2006 acquisition of Overnite for Truck Load (TL) and Less-than-truck-load (LTL) movements has given UPS a strong domestic heavy freight capability to support domestic manufacturing. In 2015, UPS acquired Coyote Logistics, a TL brokerage service for US domestic heavy freight [12].  In 2017, UPS acquired Freightex to expand TL brokerage operations in UK and Europe [13].

Improve domestic cost structure:  UPS is ‘bending the cost curve’ by deploying On-Road Integrated Optimization and Navigation (ORION) to optimize the routes for UPS drivers saving 100 Million miles and 10 Million gallons of fuel annually. UPS is also automating its 30 largest hubs in a four-year program leading to productivity improvements targeting $300M to $400M in annual cost savings [10].

What else should UPS do?

In addition to the actions already taken, UPS management needs to accelerate development of short haul domestic capabilities

Aircraft acquisitions for short haul traffic: UPS is currently deploying 787 freighter aircraft for intercontinental freight movement. UPS needs to switch to smaller aircraft optimized for short haul flights – designed for intra-Asia, intra Europe and US domestic flights.

Build heavyweight ground transportation capabilities: UPS should consider acquisitions to build asset-based TL capabilities to support the movement of raw materials and parts for domestic manufacturing.

Provide same day and one-hour delivery services: Leveraging the growth of e-commerce, UPS should develop same day and rapid delivery services in conjunction with Amazon and other retailers building additional domestic revenue streams.

Lobbying efforts: UPS should focus its considerable resources and PAC to support free trade and globalization in the US Congress and in International countries.

Additional considerations

 There are a number of additional questions that need to be addressed.

    1. Is this isolationism trend here to stay or is it just a transient development?
    2. If globalization has led to lower consumer prices, what will be the impact of isolationism on costs, growth rates, and the probability of recessions?
    3. Will isolationism and nationalism lead to more frequent wars and political disruptions as compared to open societies based on global trade?

Word count: 772

References

[1] UPS Pressroom. (2017). UPS Timeline. [online] Available at: https://pressroom.ups.com/pressroom/ContentDetailsViewer.page?ConceptType=FactSheets&id=1426321596330-338 [Accessed 8 Nov. 2017].

[2] Blackmon, D. (1999). UPS Agrees to Buy Challenge Air,Continuing Latin American Push. [online] WSJ. Available at: https://www.wsj.com/articles/SB930523426689986069.

[3] ARMBRUSTER, W. (2001). UPS TO ACQUIRE FRITZ COS. FOR $450 MILLION. [online] Joc.com. Available at: https://www.joc.com/economy-

[4] Material Handling and Logistics (MHL News). (2004). UPS to acquire Menlo Worldwide Forwarding. [online] Available at: http://www.mhlnews.com/transportation-amp-distribution/ups-acquire-menlo-worldwide-forwarding-0.

[5] “UPS Quarterly historical income and operating data”, UPS Investor relations, 4th Quarter, 2016

[6] Davoudi, S. (2005). UPS to acquire Lynx Express for $96.5m. [online] Financial Times. Available at: https://www.ft.com/content/e817b04e-fd00-11d9-b224-00000e2511c8.

[7] UPI. (2005). UPS buys Stolica. [online] Available at: https://www.upi.com/UPS-buys-Stolica/15031107807383/.

[8] Ajot.com. (2008). UPS today announced it has agreed to acquire its authorized service contractor in Romania. [online] Available at: https://www.ajot.com/news/ups-today-announced-it-has-agreed-to-acquire-its-authorized-service-contrac.

[9] Muir, J. (2017). UPS to expand in Ireland with Nightline Logistics acquisition. [online] Air Cargo Week. Available at: http://www.aircargoweek.com/ups-expand-ireland-nightline-logistics-acquisition/.

[10] Interview with retired UPS President of Customer Solutions and participant in UPS Scenario Planning, (November 5, 2017)

[11] Garvin, David A., and Lynne Levesque. “Strategic Planning at United Parcel Service.” Harvard Business School Case 306-002, November 2005. (Revised June 2006.)

[12] Page, P. (2017). How Coyote Logistics Went From Startup to $1.8 Billion UPS Takeover Target in Under a Decade. [online] WSJ. Available at: https://www.wsj.com/articles/how-coyote-logistics-went-from-startup-to-1-8-billion-ups-takeover-target-in-under-a-decade-1438367463.

[13] Kelly, Y. (2017). UPS acquires U.K.-based Freightex. [online] AJC. Available at: http://www.ajc.com/business/ups-acquires-based-freightex/Oft35EShR7onAkSs3yNaVI/.

 

 

 

 

 

 

 

 

 

 

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15 thoughts on “When Big Brown loses its raison d’être – UPS rethinks its strategy in reaction to isolationism

  1. Interesting problem to explore for UPS! I personally think that UPS will be less affected than other companies from isolationism because UPS will not have to directly deal with import and export restrictions since these restrictions are often placed on value of goods rather than the 3rd parties that transport, especially since I view UPS as a consumer-focused business versus B2B (most B2B supplier to retailer packages are shipped through large truckloads domestically or by sea freight overseas and your chart of UPS revenue/profit split by type of transport supports that). Nevertheless, this is still a problem that the company must be aware of and act proactively.

  2. I agree with Viroopa that UPS may have some protections from isolationism that B2B businesses do not. In fact, if tariffs or other goods prevent international shipment of goods, that could be boon to UPS given its strong network in the U.S. since more individuals might be shipping goods internally rather than relying on external suppliers. However, there is an even more dramatic risk for U.S. companies if isolationism continues and a trade war results. Major U.S. businesses may be excluded from certain markets in retaliation for such a war.

    One additional question is: what policy levers UPS is exerting to try to fight isolationism through the U.S. Chamber of Commerce and Business Roundtable? It seems like pushing back against an isolationist an agenda in Washington might actually be one of the most powerful tools they have even as they move to protect their supply chain by building in-country capabilities.

  3. I really liked the research – I always thought that delivery services were expanding organically instead of through acquisitions. I agree with you that UPS must expand its domestic foot print, but I’m not sure that airplanes is the preferable way of doing so. I think the cost of operating an airplane is the same regardless of the size of the plane. I think the future is autonomous vehicles and specifically autonomous trucks as well as drones to ease delivery, which I think will the cheaper choice which will also enhance their last mile delivery capabilities to make it easier to fulfill some of the other points you made as same day delivery.

  4. Excellent article, as well as comments from the other students!

    I agree with you that isolationism is a big issue for UPS, and opposing what Viroopa and Katharine said, I feel UPS will suffer severe consequences. Although tariffs and trade regulations are on the goods (and not the transporter), the immediate consequence would be a great decrease in volumes traded globally, reducing UPS’s market.

    Your suggestion to focus both on lobbying and on short-distance transportation is quite reasonable. I would add that, in my opinion, most probably the isolationism trend is temporary, so I feel UPS should think of the next few years as a time with smaller operational complexity and use it to develop new capabilities for the long-term needs (such as smart language and currency tools, better long-range tracking systems, etc). Then, as soon as globalization starts booming again, UPS can act as the first mover and rapidly gain global market dominance.

  5. I join my colleagues in praise of the article – a good job. The ability of the Postal Authority to maintain good relations with the government and receive benefits is the main factor that has maintained the survival of the “national mail service” over the years, despite poor performance and low delivery times (not only in the US).

    If UPS will not be able to circumvent the problem described in the article, it is not certain that a national postal service will be required, especially in the long run. In fact, it is very possible that the new restrictions you have described will be the last difficulty to shatter the national authority and bring about a surge of private solutions that are already producing more efficient, faster, and more reliable ways to move items between remote destinations.

  6. In my opinion, isolationism is a transient trend that we don’t know until when it’s going to stay. The efficiency that globalization brings will be crucial for future markets, consumption and global warming countermeasures. However, the companies need to adapt to the current situation. My concern, as the author mentioned too, is the impact on costs and growth rate as companies will need to change their structure, strategy and processes every time the world trend changes. These modifications will carry large investments and a steep learning curve.

    Considering the nationalism trend, I will suggest UPS to analyze the option of using cheaper ways of transportation to keep cost below the competitors. I think that B2B business, even in a isolationism, will be prosperous as everyone will look for cheaper options to transport goods. Ex: Trains – entering the medium size/weight cargo business. Customers need speed service but if the cost is lower and they can wait a week, the option can be taken into consideration. Another point, as the author said, is the investment to be competitive at a country level which is considerable, so the company needs to establish priorities and country targets as it will be too hard to have a worldwide coverage (reducing scope).

  7. As UPS considers managing and thriving in a less connected world I wonder how they will be able to grow and expand their business. Their move to focus on local networks is a great opportunity to grow but ultimately local business especially in emerging markets requires extensive knowledge. European markets as Ravin mentions have been a great boon for UPS and they have successfully built local and domestic businesses there but can they translate this elsewhere? For example, DHL is significantly larger than UPS in the Middle East and Africa built on the fact that they entered the market 50 years ago, would UPS ever be able to break into these markets as successfully? If they do enter the domestic emerging markets what is the write method in terms of assets, should they outsource or own their own trucks and planes, how at risk are they to local government changes in policy particularly as it relates to imports and exports?

  8. Thanks for sharing this article! When I think of UPS, and when I compare it to postal services in developing economies, I see the company as trustworthy, reliable, and as a trusted partner not only between businesses and their end consumers, but also as an intermediary of B2B companies that cater to the SME space.
    In this age of isolationism, I believe that UPS can do a lot more to grow internationally, not only because of it’s image as a trusted partner, but also because it might require less investment in “long-haul” infrastructure, since distances in Asian (ex China) and Latin American countries are much shorter than in the US. Furthermore, UPS’ services could help boost growth in new geographies that have historically been isolated given their poor postal services and infrastructure.

  9. Interesting write-up on UPS, Ravin! I like the additional questions you posed at the end. Isolationism is here to stay in my opinion. Unfortunately, we see these movements taking place all over the geo-political landscape as you noted in your essay. Also, I think it’s clear that isolationism will increase costs for consumers. Take UPS for example; they are responding to the threat of isolationism by acquiring dozens of small carrier companies. These carriers are operating as individual business units within specific foreign countries. UPS may be able to seek efficiencies across their system to some extent with tools such as ORION, but operating dozens of unique small businesses is much more costly than operating an integrated global company with economies of scale benefits. Consumers should expect UPS to pass these increased costs along, ultimately increasing the cost of shipping.

  10. Very interesting essay! I agree with Student above, that UPS should be focusing on investing in the future of transportation/delivery/logistics, which will be centered around autonomous vehicles. Major players in the freight/logistics side have invested in partnerships with Volvo and Tesla who have been designing autonomous freight trucks. UPS would be smart to do the same, if they haven’t already, as a means to drive down future costs and protect future margins in light of these isolationist trends.

  11. Great write-up Ravin – to answer your first question, no, I do not think isolationism is here to stay. Isolationism in today’s world is largely a backlash from the recent effects of globalization. Different countries will always have different comparative advantages and if you (as an individual) are in the losing industry, then you will suffer when your industry is transposed to a different country.

    You raise an interesting question about the costs of isolationism – the immediate effects will be higher prices for consumers either in the form of tariffs or by forcing companies to use inefficient means to produce goods and provide services. It’s also very possible that the answer to your last question is yes – we may see more regional conflicts if economies become more isolated and less dependent upon each other. That said, I think the current isolationist trend will subside. Countries that stay linked to the global economy will reap the benefits (lower costs, more products, etc.) and make it more difficult for those that have embraced isolationism to stay on that track. If they do so, then it will be at their consumers/citizens economic detriment.

  12. Very interesting! I can certainly see why de-globalization would cause alarm bells to go off for a company which prides itself on bringing the world to your doorstep. I think the company’s move to acquire local intra-country shipping companies is a fantastic play, since it functions both as an effective means of expansion in any political climate, as well as a hedge against closed borders. Beyond planning for (and perhaps lobbying against) the isolationist movements worldwide, it would seem that UPS may also wish to devote some of its attention to the regional trading networks that may come to dominate even as the global trading community shrinks. For example, amid the Brexits and the NAFTA renegotiations, there is also the new (non-US-participating) Trans-Pacific Partnership, China’s potential Silk Road initiative, new agreements in south america, etc. UPS may wish to invest especially in regions where regional trade is likely to continue to grow, to position itself for a more fragmented global landscape.

  13. Great choice of company and very thorough analyses, Ravin. I enjoyed reading through the essay. I believe that UPS will be hampered significantly due to isolationism as there will be a significant drop in cross-border transport of goods and in fact it would be great to dig deeper into the trends of traffic in general and then juxtapose that with the traffic from primarily isolationist countries. This can potentially verify the hypotheses that its impact will be significant. Also, I believe that isolationism will most likely be transient. It is not viable for every country to try and improve trade deficit, become self-sustaining and make companies pay the price for that. I believe it was overall a zero-sum game when we look at all countries overall.

    In addition to your recommendations on making investments in short-haul domestic transport and in quick local delivery, I would proceed with caution. I think a knee-jerk capital intensive reaction may not be the best idea. Flexibly expanding operations in the domestic space might be better (perhaps through an acquisition, which they can eventually spin-off?). I recommend this inherently with the implicit assumption that isolationism is not here to stay.

  14. This topic article hits on a critical issue for the USA. Surely, fear and protectionism are used as rationale for isolationist movements, but as we have discussed in every class this semester, trust and knowing one’s partners facilitate win-win negotiations, strong relationships and general prosperity. We inherently need relationships with our fellow countries to make it impossible to view these partners as “one of them” instead of “one of us.”

  15. Interesting write up! I can imagine UPS developing a Hub and Spoke model here. If isolationism kills off the hub to hub communication, UPS will have a strong hub – spoke network to keep driving revenues.

    Definitely liberating markets and opening up trades make economies interdependent and hence brings people closer together. Market efficiencies are leveraged at international levels leading to international diplomacy. Hence deterring aggression and wars.

    In my view isolationism is a transient movement that will die off given that people will smarten up. They will realize that it is just a tool that certain people utilize to further their clout. Spurts of isolationism will come and go but the private sector with strong market forces will always keep it in check.

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