30-A Silver Competitor Follows the Wrong Strategy

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.

Posted 6/23/08

Update:

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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