Yellow Roadway, Having Made Several

Yellow Roadway, having made several recent major acquisitions, stands at a crossroads. With their most recent acquisition, USF, they have become the largest trucking company in their segment, and one of the top three in the U.S. They are unsure of their next move - to expand into the largest remaining segment (overnight and next day), or stay put and integrate the acquisitions of the past few years more thoroughly into their operation.

Yellow Roadway began its current acquisition phase in 2003 with the purchase of Roadway. Now, in 2005, they have followed up that transaction with the USF purchase, and have launched into the Chinese market by forming a joint venture with one of that country's most prominent conglomerates, Jin Jiang.

The shipping industry in the U.S. is worth $18.8 billion, with trucking accounting for $13 billion of that figure. YR's market share in its core LTL market ranges between 20-60%, depending on how the industry is defined. The definition is complicated by the fact that two of the largest carriers, FedEx and UPS, area combination of ground freight and air freight. Moreover, one can question whether the post office can be included in this industry. In 2004, Yellow recorded revenues of $6.8 billion, which equates to 52.2% of the trucking industry.

YR has expressed their core purpose as being to "make global commerce work by connecting people, places and information." They have expressed their objective as being "to provide seamless, end-to-end, global transportation solutions to our customers." (Harbin, 2005). The first is more a slogan than a concrete expression of purpose; the second is a broad-based objective from which any number of outcomes could conceivably flow. Now that they are faced with a number of potential directions in which to take the company, they must choose a more specific set of guidelines.

Corporate and Competitive Strategies

The business model that Yellow Roadways is currently pursuing is a mix of different business lines within the long-haul trucking industry, with several key facets. These are high service level; broad network; and wide product range. This is complicated by a vision of itself and a mission statement that do not offer any strong guidance in terms of underlying values or strategies.

YR operates a multitude of different companies, which gives them the ability to offer a high level of service. The vast networks that they have acquired gives them particular competitive advantage in the LTL market, where they have the scale to offer what is essentially a hub-and-spoke system (TMCA, 2008). This allows them to give their customers shorter delivery times than other LTL operators, most of whom do not have the scale to match YR's offering. This strategy is key to YR because they are a unionized shop, and therefore have trouble competing on the basis of price in an industry dominated by non-union companies.

The broad network that YR has acquired through its different purchases gives them competitive advantage, particularly when dealing with companies who do business in many countries. Because YR operates throughout the U.S., Canada, Puerto Rico and Mexico they are able to bring their service level to places other shipping companies simply cannot. They also have access now to the Chinese market.

With several subsidiaries, YR is able to offer their customers a wide range of products. They compete in the following segments of the industry: next day, overnight, LTL, TL, long-haul, regional. This makes them relatively close to being a one-stop transportation service provider, which is one of their stated goals.

Therefore, their strategy appears to be an amalgam of offering a wide range of products and offering superior service. Their recent acquisitions add to their ability to deliver of these core strategies since both of those tend to improvement in this industry with economies of scale. However, one of the major strategic issues facing the company is a lack of a clear, definitive sense of strategic direction.

SWOT Analysis

The strengths of Yellow Roadways are its economies of scale, its wide product range, its service level, and its financial stability. YR has become the number one player in its key market of LTL ground transportation. In doing this, they have achieved economies of scale that allow them certain competitive advantages. For example, they are able to offer a wide-ranging network of next day and short-haul services. Their size allows them to operate a hub-and-spoke system to consolidate their LTL freight at a central location and get it to the customers within a fairly narrow time frame. They are not as proficient at this as two of their strongest competitors, FedEx and UPS, but they are a major player in this market because they can do it well.

Also with their size, they are able to offer a wide product range. This means that they can meet a more diverse range of their customer's needs than can many of their competitors. Because YR operates in so many segments, they can arrange shipping at a wide variety of price points and destinations. This reduces the risk of customers using a competitor to meet some of their service needs, and increases the odds of successful cross-marketing.

They are also able to leverage their size to provide a broad geographic range. Most of their competitors are limited in range, but Yellow can cover the entirety of North America, including Mexico, and add Puerto Rico and China in as well. Their networks allow them to service all of these areas to a standard that most of their competitors will struggle to match.

The service level is another key strength of YR. Because they are a union shop, they are essentially unable to compete with the plethora of non-union trucking firms on the basis of price. Therefore, they have turned to service as their primary differentiating factor. This includes their geographic range, product range and wide network, but also includes elements of personal consultation and the ability to meet a large portion of any customer's shipping needs. The firm recognizes the importance of service as a key factor in their long-term stability and has made it a priority and a key selling feature.

Financial stability is another strength from which YR can draw. They have solid liquidity ratios despite the size of the recent acquisitions. However, those acquisitions have had a negative impact on the company's financials. For example, while they can in all likelihood bear more debt, the present debt-equity level is sufficiently high that they may wish to build up the equity stock again.

Weaknesses at Yellow include having to integrate the new companies into theirs; the high cost of their union labour and tight operating margins. The new companies are a source of weakness at present. Typically, an acquisition is a drag on performance for a parent company until the new company starts to generate revenues of its own and the parent company is able to leverage some synergies from owning the acquired company. In this case, YR has two new acquisitions and one new overseas joint venture. These operations are not yet integrated into YR but until they are, they risk being a drag on YR's earnings.

Another weakness is the high cost of labor. Formerly, the trucking business was the domain of unions. YR's drivers, for example, are represented by the Teamsters. However, the trucking industry has shifted over the past couple of decades to the point where paying union wages hampers competitiveness vis-a-vis the vast majority of the competition. Given that the industry has relatively low margins, but is subject to soaring fuel costs, it is reasonable that YR could be in a position to see its margins erode to the point where it fails to make a profit, while their non-unionized competitors are still going strong.

Those tight margins represent another key weakness at YR. Gross margins for YR relatively fantastic. However their operating margins are very slim. Though they improved in 2004 to 5.3%, the previous year's operating margin was just 3.5%. These margins are being challenged by rising fuel prices, which the company inevitably must pass on to the customer.

The rising fuel prices represent the greatest threat to YR. This is especially true because of the fairly tight operating margins. Increases in fuel costs cannot be absorbed; they must be passed directly on to the customer. This in turn increases customer expectations, in that if they are paying more they expect to get more. The result of this is a decline in customers. Corporate customers and business customers alike have alternatives at their disposal should the price of trucking become prohibitively expensive. For YR, being exclusively in the trucking business, that would spell disaster.

Another threat is that of overall economic downturn. Commerce collapsed, for example, after the 9/11 terrorist attacks. A company the size and scope of YR is an economic bellwether, meaning that their business is likely to track the market as a whole. Economic downturn cannot be prevented, but YR should take some solace in the fact that they are often the substitute that is turned to, from customers who would have otherwise used a courier company for their next day delivery.

Another threat is that of strike. A previous strike debilitated the company, and those costs could appear again should the Teamsters desire to make more money for their constituents. No matter how well mitigated, there is the risk of a strike shutting down operations at YR for a significant length of time.

The final threat is that of legislation. Due to high accident rates, drivers are now subject to increased regulation, which adds to the cost of doing business. This has included special hazmat training and various registrations.

Competition is a threat. Although the industry is very fragmented (ATRI, 2004), there are still several strong competitors, both in terms of companies that offer a total shipping package the way YR does, and in terms of small operators who can specialize in a certain type of product or a certain geography. These may be able to undercut YR or offer better service.

There are, however, some opportunities. YR is the largest company in the LTL market, which gives their operation a certain size and scope that few trucking companies have. This has allowed them to ponder the opportunity to expand into the overnight and next day markets. The companies in those markets use a similar hub-and-spoke system, albeit based around a combination of air and lorry transport. YR does not have the airline capacity as yet, but they have the ground network and can begin to challenge in this segment. One of the biggest appeals to this option is that this market is growing, whereas the LTL market so crucial to YR has flatlined.

Another key opportunity is to continue to expand in China. They have a partnership with one of that country's largest conglomerates. With the booming economy in China, there is significant room for growth. This is in contrast to the U.S. market, where many of YR's core markets have stagnated. With their foot in the door and a local partner to smooth out the logistical and political details, YR has the ability to place increased emphasis on this market, potentially achieving dominant status.

The third major opportunity for YR right now is to put increased focus on improvements in its operations. Though often not viewed as an opportunity, there are sometimes tremendous cost savings that can result from a stronger focus on internal matters. In the case of YR, they have a strong opportunity to do this because they are still in the process of integrating their two most recent purchases into the company's operations. There is some overlap with one of those purchases, but even when there isn't customer overlap, there are opportunities for cost-saving through operations consolidation and the development of key synergies.

Porter's Five Forces

The five external forces that act upon a firm are: the power of buyers, the power of suppliers, the intensity of rivalry, the barriers to entry and the threat of substitution (Porter, 1979).

These five forces are analyzed in independence and help give a sense of a company's overall position in the marketplace.

Rivalry in an industry is important because firms consistently strive for a competitive advantage over their rivals. The intensity level of this rivalry often determines the margins that a company faces, as well as direct competitive pressure in the marketplace.

The intensity of competition in the trucking industry is very high (ATRI, 2004). There are over five hundred thousand trucking companies operating in the United States, for 900,000 customers. This forces the thousands of smaller firms to compete aggressively for business. That in turn drives prices down, to the detriment of the entire industry. It has also in past driven safety standards down, and that also was to the detriment of the industry as the government has instituted a multitude of standards to improve the industry's safety record, at significant cost to firms like YR.

As well, the industry is characterized by slow growth. The LTL segment, which is YR's core business at present, has seen negligible growth over the past fifteen years, which means that the pie isn't getting any bigger. Firms already hungry for business become more hungry when the entire market is zero-sum game.

Other conditions exist which render the rivalry highly intense. For example, the "product" is highly perishable. A lorry's capacity is just that - once it is gone unused it remain so forever. When unused capacity represents revenue lost forever, firms tend to fight very competitively to fill that capacity. Another aspect is the low switching costs, a reality because of the proliferation of competition and the tradition in the industry of paying per job, rather than tying a customer to a transport company.

Additionally, the stakes are high for most of the companies in question. Many lorry-drivers are independent contractors, for which trucking is their only job. Given that the product is immediately perishable, they will inevitably be highly competitive in their quest for business.

The threat of substitutes is moderate. At present, the road-based transportation industry benefits from subsidized roadways and petrol. This keeps the cost down, but there are substitutes. Air shipping and ocean shipping are other common options, though each of these represents only a fraction of the overall shipping market. Additionally, trains are an option for some companies.

Another form of substitute is just not shipping.

This is an acute issue for overnight couriers, who are losing business directly to email, but there is a risk that firms faced with escalating fuel prices will find other ways in which to conduct business. This could result in purchasing more locally to avoid pricey long-distance shipping; or even vertically integrating. The latter seems an especially potent option for large companies that ship huge amounts to their retail outlets, but still compete on the basis of price (such as Costco or Wal-Mart).

Buyer power is low. This is especially true for a large company like YR. There are some 900,000 customers at YR alone, so the customer base for the trucking industry is incredibly fragmented the buyers are often without the ability to vertically integrate (though a handful are).

However, no buyer in particular can expect to have any significant influence over price or terms of delivery. Trucking firms may choose to compete on the basis of price, but a firm like YR will only miss customers on aggregate.

Supplier power is high. For lorries and other key equipment, suppliers have little power since YR is so large. They command the attention of those suppliers. However, they are ultimately at the mercy of two other key suppliers. YR has no control over fuel prices. They do, of course, have control over which company from which they choose to buy their diesel. In that regard, the supplier power for fuel is low. However, because the fuel companies typically operate as an oligopoly, leaving fuel prices out of the hands of even the most powerful consumers, they can be considered to be a powerful supplier, if only in aggregate. If YR's operations were consolidated they could exercise some control by buying their own fuel, essentially operating their own petrol station. However, their operations are sufficiently scattered that they are unlikely to be able to exercise this to any significant degree.

They also are at the mercy of the Teamsters. Having become a unionized environment, YR has essentially relinquished control of its workforce to the union. The union is powerful enough to set wages standards and working conditions.

Moreover, there is a shortage of drivers in the industry at present, and this shortage is anticipated to reach crisis proportions in the coming decades as a result of a rapidly aging workforce. The combination of the two makes the power of YR's two most important inputs very high.

The barriers to entry are low. This is evidenced by the hundreds of thousands of competitors in the marketplace today. While it is true that there are some governmental barriers, these can be easily overcome. Likewise, to enter the business requires an expensive capital asset in the lorry, but they are easy to obtain and credit is generally cheap.

That said, there are significant barriers to being on the same competitive plane as Yellow. YR has built itself over the course of several years and achieved a scale that no other player in the LTL market has. It would be extremely difficult for another player to achieve more than fraction of YR's scale.

Value Chain Analysis

The value chain is a sequence of activities that are common to a wide range of firms. The basic principle of the value chain is to offer to the customer a level of value that exceeds the cost of the activities (Porter, 1985). The basic value chain consists of the following: Inbound logistics, operations; outbound logistics, marketing & sales, and service. Because Yellow Roadways is a logistics firm, some of those functions become blurred. The value chain attempts to analyze each of these parts of a given business to determine what advantages the firm can gain in those particular processes. Value chains focus on cost advantage and differentiation.

Yellow's inbound logistics does not offer them cost advantage. They are hampered in their ability to deliver a cost advantage by their high cost of labour. At this stage of their operations, they are not differentiated either. They merely send a lorry to pick up the goods, and do so. This is no different than what any of their competitors would do.

The operations stage for YR's purposes can be the sorting and warehousing stage. At different facilities around the country they unload the incoming lorries and shift the freight around to the outgoing lorries. From this they derive both cost and differentiation advantages. These advantages are most obvious in the LTL business, where many competitors find themselves struggling to fill each lorry. The sorting and warehousing function allow YR to increase its efficiency by increasing the average fill of each lorry. That in turn allows them to offer a lower per pound cost, which at the very least can help offset their labour costs. This function also helps to differentiate YR from its competitors in that it allows them to deliver the freight more quickly, and to more places. That is a benefit that accrues from having economies of scale,.

As with the incoming stage the outgoing stage offers little in the way of cost savings or differentiation. They struggle to derive lower costs than their competitors at this stage, and ultimately to the customer one lorry delivering the freight is not inherently different than any other.

Marketing and sales is an area where YR can gain some manner of differentiation advantage. Their size affords them the opportunity to market on the basis of wide geographic scope. They have the ability to coordinate their marketing efforts at the corporate level as well, rather than at the individual company level. This is often considered by the marketplace to be a more attractive proposition. Moreover, it gives YR cross-marketing advantages for its different divisions that the bulk of its competitors will not be able to do.

As with marketing, service is an area where YR can develop a competitive advantage. Because they operate so many companies, they can consolidate the service functions of each of them to one central service area. This helps them in their cross-marketing, but also gives the customer a single point of contact for multiple business functions, rather than a different contact for each. In addition to the cost savings of having such a streamlined service function, this also adds an element of diversification that YR's competitors for the most part do not possess.

Recommendations

It is recommended that Yellow Roadways put future expansion plans on hold and focus on better integrating their new acquisitions. This allows them to develop synergies that will deliver the cost-savings and differentiation in marketing and service, as identified in the value chain analysis. Service has become one of the most vital drivers of the trucking industry with the advent of JIT inventory, technological developments and intense competition within the trucking industry (Engel, 1997).