In 1907 – at a time when we as a nation weren’t that far removed from receiving mail via “Pony Express”– a visionary young fellow named James “Jim” Casey borrowed the princely sum of $100 and founded a small company called American Messenger Service in his hometown of Seattle, WA. More than a few years – and millions of package movements later – Casey’s company grew into the hugely successful United Parcel Service – forever changing the way packages were delivered with frequency, and setting a new standard by which Ben Franklin’s venerable U.S. Postal Service would struggle to meet.
“A hard part of management’s problem,” Casey posited sometimes later, during a speech to his employees, “is to know when to make changes and when to hold fast to what is good.”
Today those words bear a new ring of truth, and are a harbinger for some urgent decisions facing the shipper, which has seen its dominance disrupted by upstarts in a space that has grown enormously, but changed dramatically. UPS, it can be said, was the original disruptor in the package delivery space, pioneering management as a science with quantitative metrics and measures. Casey’s company was among the first to conduct time and motion studies, analyzing every movement on a driver’s route. UPS figured out how to minimize the number of steps taken to get the package out of the truck and to the delivery address; how each truck should back into the dock; whether the truck should idle or turn off its engine; and so on. Literally, every step of the process was scrutinized and improved. Though it has ridden the crest of the at-home internet package delivery wave, the company somehow has encountered margin erosion at the same time it finds it will have to invest billions in the business to remain competitive.
UPS, the original disruptor, is now experiencing the long-term impact of two other disruptors to its space. In 1971, Federal Express Company (now FedEx) entered the package delivery business. Day One was so bad, it almost didn’t have a Day Two. With three expensive airplanes idling on the tarmac in Memphis, TN, no packages arrived to be transported. But over time FedEx learned. Those planes were the beginning of a shipping Air Force deployed by FedEx in its pioneering role of taking express air delivery to the skies. It brought the concept of the disruptive value proposition of “absolutely, positively has to be there overnight,” with its Overnight Letter and other next-day options. Unlike UPS, FedEx had no legacy facilities or practices, and could invent the business as it saw fit. Fred Smith’s company became a global force, later expanding into direct competition with UPS with the advent of over-the-road package delivery, effectively creating a duopoly in this space. UPS responded with improvements to keep up, and consumers and businesses reaped the benefits of an overall better delivery network laden with more competitive options. But there was a difference – FedEx, being newer, had the benefit of newer practices and facilities. And FedEx, more or less over time, used continuous improvement to fortify its market dominance. All was fine in the short term until the third disruptor – Amazon – arrived. Historically, on UPS, the package got there quickly, but without a specifically promised date. FedEx introduced the concept of overnight, and then Amazon – a longtime consumer of both services – decided to introduce same-day delivery along with a host of innovations like Amazon Prime. Today, it is poised to create its own fulfillment network to make good on its promises, ordering its own wide-bodied cargo jets and even experimenting with drone deliveries as a means of pleasing a consumer that wants it “now.” Amazon, like FedEx before it, had no infrastructure and reinvented the business to dramatically improve service and lower cost. Their distribution centers are hyper-efficient and largely robotic. Their “last mile” costs are low because of a flexible network and an alliance with the Postal Service who already has the infrastructure. But UPS faces Jim Casey’s dilemma – they “held fast to what is good” for too long.
What can we learn from this “double disruptor” industry?
- “Continuously innovate or die.” This seems obvious: “Of course we will innovate,” you say. But when business is good, innovation seems like an optional upgrade, not a business-making proposition. During times of abundance, it’s easy to “hold fast,” put your head down, and become absorbed in what is a very hectic present. We as consultants have found with specific research that well-run companies don’t always think about the future, precisely because they spend all of their time being well-operated. Senior leadership at these enterprises live in the world of today’s operations and execute with precision. But they aren’t necessarily looking ahead.
- Strong businesses should bear in mind when considering disruption in the marketplace is to always be prepared for growth. Though it may seem obvious, it’s remarkable how many businesses aren’t pondering such sudden expansion. As an example, if I told most CEOs their business would experience growth at a rate of 15 percent annually for each of the next five years, I’m guessing they would be popping the champagne to celebrate.
Could you scale quickly to meet that demand, or are you only able to conduct your business in roughly the same way you do today? It’s like trying to pedal harder and harder on a single-gear bicycle – at some point, you’ll hit the limit to how fast you can go. Innovation, together with “scale,” adds another gear – now, with the same pedal effort, the bicycle (your company) can go faster, because you have figured out how to do things better and more efficiently. FedEx made investments in new “gears” at their sorting centers, adding new capital and, more importantly, conceiving new, more efficient ways of sorting and transferring; and developing new technology that creates greater connectedness to their customers. UPS, while certainly investing in its business, took longer to add gears to their bike. Now, the company has to add several gears at once, a yeoman’s task that will be difficult to fund and implement while fighting for market share against its double disruptors.
Are you committed to the innovation necessary to withstand disruption?
I don’t mean casually launching a new service or expanding into new geography from time to time. Innovation needs to be an “engine,” a process driven machine that gathers insights from the marketplace and competition and turns them into money-making ideas. It cannot be a discretionary item in the budget – when done without a focused effort, you are leaving your company open to an all-out assault by a more innovative, nimble, and efficient competitor.
Are you really committed to growth, meaning scale?
If the answer is yes, are you taking deliberate steps to add “gears” to your company, changing how you manufacture or serve your consumer as you grow, so that you get the benefits of scale, increased profitability, and higher quality? Be sure to get some help to think about “growth” and “scale” for your company. It’s an investment of time and money that will pay off.
Who do you want to be?
UPS, facing a big investment to catch up? FedEx, who has focused on this and is reaping the benefit because they have learned how to consistently add new gears over time? Or Amazon, today’s disruptor who is not only adding gears but redesigning the bicycle? It’s up to you.