ECN 5210 Peter Liedman

Pre-Class prep Airborne Express Questions

Cost Structure and Firm Strategy

Question 1

The market for parcels in the US can best be described using the perfect competition

market structure. There are dominant players in the market, such as UPS and FedEx, but other

smaller companies provide severe competition.

Question 2

a. Cost Structures: The cost structure in a firm is best understood from fixed and variable

costs incurred (Gunarathne & Samudrage,2018). FedEx and UPS have increased in size,

which in theory is supposed to lead to a lesser price per unit. However, the opposite is

right as the companies still have had to deal with more management complications that

have increased the cost structure again. The rivalry hasn’t helped in this regard either, as

both companies have sought to win it by expanding further.

b. Switching costs: The rivalry has affected switching costs. With each company striving to

outdo the other, services have been made more personal to suit the consumer’s individual

needs. The high level of personalization means that consumers incur a higher cost to

move.

c. Learning effect: The competitive pressure between the two companies has contributed to

a high level of learning. Both companies are currently offering high-quality services with

more favorable pricing.

ECN 5210 Peter Liedman
ECN 5210 Peter Liedman

Question 3

a. Airborne’s cost structure is different from FedEx and UPS mainly because it is lower.

Airborne may struggle to keep its customers happy with a lower cost structure in the long

term as the company grows in size. The figure below shows the contrast in the cost

structures of the three companies:

Figure 1: Comparison of FedEx, UPS and Airborne cost structures

b. Airborne Express goes after price-sensitive consumers. The company tries to keep its cost

structure low, which then contributes to a lower price.

c. As mentioned in b above, the company’s main target is price-sensitive consumers. By

setting a low price, most consumers are easily attracted.

ECN 5210 Peter Liedman

Question 4

As Airborne increases in size, the cost of management will increase. This will make it

untenable for the company to continue offering services at a low price. Any future effort to

increase the price to factor in the added costs may result in a backlash from consumers.

Question 5

Technological developments marked the 1990s in the US. The packaging industry,

therefore, faced a severe threat of being obsolete (Montreuil et al., 2018). The other danger is the

increase in competition that came about due to a robust economic environment.

Question 6

To survive, Airborne should consider operating on a lean structure. This would include

opting against moves that complicate the firm’s management further. Purchasing RPS would

only increase Airborne’s cost structure, and there it is a decision I would not make.
ECN 5210 Peter Liedman

References

Gunarathne, N., & Samudrage, D. (2018). Analysis of the cost structure: perspectives from the

manufacturing companies in Sri Lanka. Asia-Pacific Management Accounting

Journal, 13(3), 197-223.

Montreuil, B., Buckley, S., Faugere, L., Khir, R., & Derhami, S. (2018). Urban parcel logistics

hub and network design: The impact of modularity and hyperconnectivity.