Case 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc.

1. Case 4: The Battle for Value, 2004: FedEx Corp. vs. United Parcel Service, Inc. By: DJ Nails Chasiti Dixon

2. History Smith�s Yale UG term paper developed into a $3.6 million corporation. Investment startup was $4 million from Smith�s inheritance, raised $91 million in venture capital. 1973-389 employees, 186 packages, 25 U.S. cities 1983- $1 billion in revenues 1990- Malcolm Baldridge National Quality Award 2003 Assets $15.4 billion Revenues $22.5 billion Net Income $830 million Malcom Baldridge National Quality Award definition: proved itself an operational leader and first company to ever win in the service category. 50,000 ground trucks, 625 aircrafts, 216,200 employees, and shipping 5.4 million packages dailyMalcom Baldridge National Quality Award definition: proved itself an operational leader and first company to ever win in the service category. 50,000 ground trucks, 625 aircrafts, 216,200 employees, and shipping 5.4 million packages daily

3. History Founded in 1907 by Jim Casey and is the largest package-delivery company in the world. 1929-Air delivery service 1997-Aug.- 190,000 employees, Union strike�15 days. 1999-Nov.- IPO raised $5.2 billion 2003 Assets $28.9 billion Revenues $33.4 billion Profits $2.9 billion Jim Casey who was only 19 years old had a vision but first started out with a bicycle-messenger service that soon changed into what we now call UPS. Air delivery service method used commercial passenger planes to ship packages to the many associated countries. Image Revitalization: trying to change logo for first time since 1961. 2003-Image revitalization Entered overnight delivery market 200 countries/ territories 13 million packages 88,000 ground vehicles 583 aircrafts Jim Casey who was only 19 years old had a vision but first started out with a bicycle-messenger service that soon changed into what we now call UPS. Air delivery service method used commercial passenger planes to ship packages to the many associated countries. Image Revitalization: trying to change logo for first time since 1961. 2003-Image revitalization Entered overnight delivery market 200 countries/ territories 13 million packages 88,000 ground vehicles 583 aircrafts

4. Competitive Strategies FedEX: Inventor of the �HUB� system �absolutely positively overnight� ad campaign. Expanding services, acquiring more trucks and aircrafts. Raising capital �People-Service-Profit� philosophy JIT system Technological Innovations UPS: Hub system of how the cargos came in an out, with stops along the way. Over night letters were charged to customers half the price of FedEx�s fees JIT system does rapid and carefully monitored movement of packages, limited warehousing. Technological Innovations: Important advances in customer ordering, package tracking, and process monitoring UPS: Hub system of how the cargos came in an out, with stops along the way. Over night letters were charged to customers half the price of FedEx�s fees JIT system does rapid and carefully monitored movement of packages, limited warehousing. Technological Innovations: Important advances in customer ordering, package tracking, and process monitoring

5. Competitive Strategies UPS: Expanded package-delivery to every address in the U.S. Half-priced over-night letters Aggressive Acquisitions Large investment: Technology Aircrafts Facilities During post �World War II UPS Entered during strongest growth period of economic boom Aggressive Acquisitions: Miami based freight carrier operating in Latin America and a Franchise based chain of stores providing packing/shipping/mail services 4,300 domestic/international locations. Half priced in attempt to steal from FedEx Large Investments to reduce costs and maintain quality and support innovations. During post �World War II UPS Entered during strongest growth period of economic boom Aggressive Acquisitions: Miami based freight carrier operating in Latin America and a Franchise based chain of stores providing packing/shipping/mail services 4,300 domestic/international locations. Half priced in attempt to steal from FedEx Large Investments to reduce costs and maintain quality and support innovations.

6. Enabling/Inhibiting Factors

7. Competitive Sustainability Environmentally sound practices Customer focus orientation Product differentiation Reducing cost per unit Marketing strategies Customer focus orientation: listening to the customer needs and providing solutions, creating relationships Product differentiation: tried but to close when UPS is copy catting FedEx on the customer interfaces, and fedex tries to take UPS�s big clients away. Reducing cost per unit. With economies of scale--Maximizing their flights with full loads on each cargo plane, bigger cargo planes Market strategies: UPS revamping logo and expansion to peak more customer interest, moderate pricing on services domestic and international. FedEX with strong ad campaigns.Customer focus orientation: listening to the customer needs and providing solutions, creating relationships Product differentiation: tried but to close when UPS is copy catting FedEx on the customer interfaces, and fedex tries to take UPS�s big clients away. Reducing cost per unit. With economies of scale--Maximizing their flights with full loads on each cargo plane, bigger cargo planes Market strategies: UPS revamping logo and expansion to peak more customer interest, moderate pricing on services domestic and international. FedEX with strong ad campaigns.

8. FedEx Stock Price Largest foreign presence in China 11 weekly flights (2x as many as UPS) Serving 220 cities 50% volume growth between 2003-2004 Value of equity is Interpret ion of 14% increase means: possibly rapid economic growth of company Unsustainably-leading to high cost of capital Plus is a high rate of return FedEx�s stock price had rocketed at nearly 5x faster than UPS. UPS had 6 weekly flights, serving 200 cities, 60% traffic growth in 2001FedEx�s stock price had rocketed at nearly 5x faster than UPS. UPS had 6 weekly flights, serving 200 cities, 60% traffic growth in 2001

9. Growth in Sales FedEx 3.42% 8.60% 10.76% 9.39% 12.13% 37.79% 5.67% 8.84% 7.52% 4.98% 9.12% 10.75% UPS 7.65% 10.08% 7.51% 6.29% 0.40% 10.37% 9.13% 10.05% 2.94% 2.04% 7.08% 6.69% FedEx has the leading growth in sales over 10 years, during the 97-98 year FedEx took on a new project that skyrocketed their sales from a 12% to 37%, but something must have happened due to dropping drastically back down to 5% sales growth. UPS has had ups and downs with their growth sales, hit rock bottom in 96-97, then jumped back up and fell back down in 00-01, some competitive new projects taken on and dropped due to intense competition.FedEx 3.42% 8.60% 10.76% 9.39% 12.13% 37.79% 5.67% 8.84% 7.52% 4.98% 9.12% 10.75% UPS 7.65% 10.08% 7.51% 6.29% 0.40% 10.37% 9.13% 10.05% 2.94% 2.04% 7.08% 6.69% FedEx has the leading growth in sales over 10 years, during the 97-98 year FedEx took on a new project that skyrocketed their sales from a 12% to 37%, but something must have happened due to dropping drastically back down to 5% sales growth. UPS has had ups and downs with their growth sales, hit rock bottom in 96-97, then jumped back up and fell back down in 00-01, some competitive new projects taken on and dropped due to intense competition.

10. List-Rate Increases UPS Ground increased rates in 2003, implemented on 1/7/07 3.9, but went back down to 1.9% in 2004, implemented 1/6/08. UPS Domestic Air tried in 2002, implemented in 1/8/02 a 4.0% increase, but also ended up slowly decreasing down to 2.9 as shown in 2004, implemented 1/6/08. UPS Ground increased rates in 2003, implemented on 1/7/07 3.9, but went back down to 1.9% in 2004, implemented 1/6/08. UPS Domestic Air tried in 2002, implemented in 1/8/02 a 4.0% increase, but also ended up slowly decreasing down to 2.9 as shown in 2004, implemented 1/6/08.

11. Financial Ratios Asset Turnover: Asset turnover�measures�a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. also indicates pricing strategy: companies with low profit margins tend to have high�asset�turnover, while�those with high margins have low asset turnover. Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back�its short-term liabilities (debt�and�payables)�with its short-term�assets�(cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under�1 suggests that the company�would�be�unable to pay off�its obligations if they came due at that point.�While this�shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn�its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because�business operations differ in each industry, it�is always more useful�to�compare companies within the same industry.� Debt/Equity Ratio: A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.� The debt/equity ratio also depends on the industry�in which the company operates. For example, capital-intensive industries such as auto�manufacturing tend to have a debt/equity ratio above 2, while�personal�computer�companies have a debt/equity of under 0.5. Return on Assets: ROA�tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure,�it is best to compare it against�a�company's�previous ROA numbers or the ROA of a similar company.� The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea�of how effectively the company is converting the money�it has�to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million�and total�assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million,�it has�an ROA of 10%. Based on this example, the first company�is better at converting its investment into profit. When you really think about it,�management's most important job is to make wise choices�in allocating�its resources. Anybody can make a profit by throwing a ton of money at a problem, but�very few managers excel at making large profits with little investment. Return on Equity: Comparing profitability of the company to other companies in the same industry. The amount of net income�returned�as a percentage�of shareholders equity.�Return on equity�measures a�corporation's�profitability�by revealing how much�profit a company generates�with the money shareholders have invested.�� Net Income: Net income is calculated by starting with�a company's�total revenue. From this, the cost of sales, along with any�other expenses that the company incurred during the period, is removed to reach earnings before tax. Tax is deducted from this amount to reach the net income number. Net income, like other accounting measures, is susceptible to manipulation through such things as aggressive revenue recognition or by hiding expenses. When basing an�investment�decision�on net income numbers, it is important to review the quality of the numbers that were used to arrive at this value.� example, suppose that your gross income is $50,000 and you have $20,000 in deductions and credits. This leaves you with a taxable income of $30,000. Then, suppose that another $5,000 of income tax is subtracted; the remaining $25,000 will be your net income.Asset Turnover: Asset turnover�measures�a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better. also indicates pricing strategy: companies with low profit margins tend to have high�asset�turnover, while�those with high margins have low asset turnover. Current Ratio: The ratio is mainly used to give an idea of the company's ability to pay back�its short-term liabilities (debt�and�payables)�with its short-term�assets�(cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under�1 suggests that the company�would�be�unable to pay off�its obligations if they came due at that point.�While this�shows the company is not in good financial health, it does not necessarily mean that it will go bankrupt - as there are many ways to access financing - but it is definitely not a good sign. The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to turn�its product into cash. Companies that have trouble getting paid on their receivables or have long inventory turnover can run into liquidity problems because they are unable to alleviate their obligations. Because�business operations differ in each industry, it�is always more useful�to�compare companies within the same industry.� Debt/Equity Ratio: A high debt/equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense.� The debt/equity ratio also depends on the industry�in which the company operates. For example, capital-intensive industries such as auto�manufacturing tend to have a debt/equity ratio above 2, while�personal�computer�companies have a debt/equity of under 0.5. Return on Assets: ROA�tells you what earnings were generated from invested capital (assets). ROA for public companies can vary substantially and will be highly dependent on the industry. This is why when using ROA as a comparative measure,�it is best to compare it against�a�company's�previous ROA numbers or the ROA of a similar company.� The assets of the company are comprised of both debt and equity. Both of these types of financing are used to fund the operations of the company. The ROA figure gives investors an idea�of how effectively the company is converting the money�it has�to invest into net income. The higher the ROA number, the better, because the company is earning more money on less investment. For example, if one company has a net income of $1 million�and total�assets of $5 million, its ROA is 20%; however, if another company earns the same amount but has total assets of $10 million,�it has�an ROA of 10%. Based on this example, the first company�is better at converting its investment into profit. When you really think about it,�management's most important job is to make wise choices�in allocating�its resources. Anybody can make a profit by throwing a ton of money at a problem, but�very few managers excel at making large profits with little investment. Return on Equity: Comparing profitability of the company to other companies in the same industry. The amount of net income�returned�as a percentage�of shareholders equity.�Return on equity�measures a�corporation's�profitability�by revealing how much�profit a company generates�with the money shareholders have invested.�� Net Income: Net income is calculated by starting with�a company's�total revenue. From this, the cost of sales, along with any�other expenses that the company incurred during the period, is removed to reach earnings before tax. Tax is deducted from this amount to reach the net income number. Net income, like other accounting measures, is susceptible to manipulation through such things as aggressive revenue recognition or by hiding expenses. When basing an�investment�decision�on net income numbers, it is important to review the quality of the numbers that were used to arrive at this value.� example, suppose that your gross income is $50,000 and you have $20,000 in deductions and credits. This leaves you with a taxable income of $30,000. Then, suppose that another $5,000 of income tax is subtracted; the remaining $25,000 will be your net income.

12. Financial Ratios

13. Stock Market Comparisons Today�s stock prices are: FedEx: $75.22 increased $11.24 UPS: $66.21 decreased $8.34 Today�s stock prices are: FedEx: $75.22 increased $11.24 UPS: $66.21 decreased $8.34

14. Economic Value Added (EVA) Strengths Weaknesses Single statistic Recognizes the cost of capital Pinpoints how value is created Accrual distortions Poor indicator of future performance Explaining the s/w of EVA as a measure of performance Economic Value Added shows a reflection of the value created or destroyed each year by deducting the cost of capital (K) by the capital employed in the business or operation. NOPAT is net operating profit after taxes adjustment to net income. Strengths: 1. Because it is a residual performance metric, it conveniently summarizes into a single statistic the value created above and beyond all financial obligations 2. By applying a capital charge, it corrects the key deficiency of earnings and earnings per share (EPS): capital is not free and, if growth is purchased with capital, economic profit recognizes that the growth is not free and assigns a charge for the capital used to purchase the growth. 3. As an operational metric, it helps managers clarify how they create value. They do it either by investing additional capital that produces returns above WACC, by reducing capital employed in a business, by improving returns by growing revenues or reducing expenses or by reducing the cost of capital. Weaknesses: 1. From an accounting perspective, if EVA is not fully loaded (all cash adjustments are made), economic profit can be subject to accrual distortions. For example, because NOPAT is after depreciation and amortization, a company that does not reinvest capital to maintain its plant and equipment can improve its accrual bottom line simply by virtue of the declining D&A line. This sort of attempt at boosting economic profit is known as harvesting the assets. 2. It has the limitations of any single-period, historical metric: last year's economic profit will not necessarily give you an insight into future performance. This can be especially true if a company is in a turnaround situation or makes a large lump-sum investment, in which case, economic profit will immediately suffer (due to the higher invested capital base) but the expected future period payoff will not show up as a benefit in the calculation.  Explaining the s/w of EVA as a measure of performance Economic Value Added shows a reflection of the value created or destroyed each year by deducting the cost of capital (K) by the capital employed in the business or operation. NOPAT is net operating profit after taxes adjustment to net income. Strengths: 1. Because it is a residual performance metric, it conveniently summarizes into a single statistic the value created above and beyond all financial obligations 2. By applying a capital charge, it corrects the key deficiency of earnings and earnings per share (EPS): capital is not free and, if growth is purchased with capital, economic profit recognizes that the growth is not free and assigns a charge for the capital used to purchase the growth. 3. As an operational metric, it helps managers clarify how they create value. They do it either by investing additional capital that produces returns above WACC, by reducing capital employed in a business, by improving returns by growing revenues or reducing expenses or by reducing the cost of capital. Weaknesses: 1. From an accounting perspective, if EVA is not fully loaded (all cash adjustments are made), economic profit can be subject to accrual distortions. For example, because NOPAT is after depreciation and amortization, a company that does not reinvest capital to maintain its plant and equipment can improve its accrual bottom line simply by virtue of the declining D&A line. This sort of attempt at boosting economic profit is known as harvesting the assets. 2. It has the limitations of any single-period, historical metric: last year's economic profit will not necessarily give you an insight into future performance. This can be especially true if a company is in a turnaround situation or makes a large lump-sum investment, in which case, economic profit will immediately suffer (due to the higher invested capital base) but the expected future period payoff will not show up as a benefit in the calculation.

15. Economic Profit Analysis Return on Net Assets: The higher the return the better the profit performance for the company purpose of performing the calculation is to generate a longer-term perspective of the company�s ability to create value, extraordinary expenses may be added back into the net income figure. Formula: Net Income / (Fixed Assets + Net Working Capital) WACC: All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC equation�is the cost of each capital component�multiplied by its proportional weight and then summing:� A company�s assets are financed by either debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances. EVA: A measure of a company's�financial�performance�based on�the residual wealth calculated by�deducting�cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".) Formula: = Net Operating Profit After�Taxes�(NOPAT) - (Capital * Cost of Capital) MVA: The higher the MVA, the better.�A high MVA indicates the company has created substantial wealth for the shareholders. A negative MVA means that the value of management's�actions and investments�are less than the value of the capital contributed to the company by the capital market (or that�wealth�and value have been destroyed)� Formula: company�s mkt value � invested capital Return on Net Assets: The higher the return the better the profit performance for the company purpose of performing the calculation is to generate a longer-term perspective of the company�s ability to create value, extraordinary expenses may be added back into the net income figure. Formula: Net Income / (Fixed Assets + Net Working Capital) WACC: All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk. The WACC equation�is the cost of each capital component�multiplied by its proportional weight and then summing:� A company�s assets are financed by either debt or equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances. EVA: A measure of a company's�financial�performance�based on�the residual wealth calculated by�deducting�cost of capital from its operating profit (adjusted for taxes on a cash basis). (Also referred to as "economic profit".) Formula: = Net Operating Profit After�Taxes�(NOPAT) - (Capital * Cost of Capital) MVA: The higher the MVA, the better.�A high MVA indicates the company has created substantial wealth for the shareholders. A negative MVA means that the value of management's�actions and investments�are less than the value of the capital contributed to the company by the capital market (or that�wealth�and value have been destroyed)� Formula: company�s mkt value � invested capital

16. Geographic Segments FedEx entered the market earlier than its competitors and generated revenues in the international market. However, UPS acquired high revenues in the domestic and consolidated geographic segments. FedEX revenues in 1992 were 5,195 m and 2003, revenues increased to 17,277. UPS revenues in 1992 were 14722 and in 2003 generated 26968m. International revenues for Fed Ex started with 2355FedEx entered the market earlier than its competitors and generated revenues in the international market. However, UPS acquired high revenues in the domestic and consolidated geographic segments. FedEX revenues in 1992 were 5,195 m and 2003, revenues increased to 17,277. UPS revenues in 1992 were 14722 and in 2003 generated 26968m. International revenues for Fed Ex started with 2355

17. Company of Excellence An excellent organization must be proactive, fast-acting, innovative, customer oriented and produce high quality products. 1981- Industry leader in overnight shipping and coined the Hub distribution system In 1990, FedEx was awarded the Malcolm Baldridge National Quality Award Early 90�s- Only cargo transporter with own fleet of airplanes 2004- Quintupled the amount of cargo flights to the Asian-Pacific

18. Excellence in Business Excellence in business is not only successfully doing what you are doing but also being the best at it Continual improvement to current processes, systems and goals Excellent companies are proactive in nature rather than reactive For example, an excellent organization will continuously monitor what is new in the marketplace, determine what will be the next best thing and successfully execute the product plans. Nurturing environment that encourages any new ideas and high expectations for achieving excellence