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Kandidatuppsats juni 2005

Freight forwarding firms (3F), stuck in the middle or outpacing the competition?

Handledare Johan Alvehus

Författare (group 4) Robert Olofsson Thomas Stålbrand Honghong Wang

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Abstrakt Sammanfattning: Uppsatsen belyser strategier och strategiska förändringar inom den

svenska speditionsbranschen och analyserar faktorer som påverkar krafterna inom

branschen. Tre företag av varierande storlek valdes ut för multipla fallstudier,

grunddragen är att både kostnadsledarskap och differentiering är viktiga strategier för

företag att kunna konkurrera på marknaden. Emellertid, företag som passerar

konkurrenterna fullföljer inte endast genom att anamma någon av de båda strategierna, de

behöver förmågan att kunna lägga till en (kostnadsledarskap) till den andra

(differentiering) i samband med omgivningens förändringar över tiden.

Titel: ”Freight forwarding firms (3F), stuck in the middle or outpacing the competition?”

Seminariedatum: 3 juni 2005

Ämne/kurs: FEK 582 Kandidatuppsats, 10 poäng

Författare: Robert Olofsson, Thomas Stålbrand och Honghong Wang

Handledare: Johan Alvehus

Fem nyckelord: strategy, strategic change, freight forwarding firms, one-stop-shop,

Porter’s five forces.

Syfte: undersöka hur strategier fungerar och förändras inom den svenska

speditionsbranschen

Metod: kvalitativ studie baserad på multipla fallstudier

Teoretiska perspektiv: Porters generiska strategier och konkurrenskraft modell

Empiri: strukturerade intervjuer

Slutsatser: en mogen bransch som var mer komplex och konkurrensutsatt än författarna

hade förväntat sig

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Abstract Summary: This paper discusses the strategy and strategic change in the Swedish freight

forwarding business and analysis factors that influence the forces of the business. Three

companies of various sizes are chosen to be investigated as a case study, outline that cost

leadership and differentiation are both important strategies for companies to compete in

the market. However, companies outpacing competition do not only pursue either of the

two strategies, they need the ability to add one (cost leadership) to the other

(differentiation) in relationship to environmental change over time.

Title:”Freight forwarding firms (3F), stuck in the middle or outpacing the competition?”

Seminar date: 3 of June 2005

Course: Bachelor thesis in business administration, 10 Swedish Credits (15 ECTS)

Authors: Robert Olofsson, Thomas Stålbrand, Honghong Wang

Advisor: Johan Alvehus

Key words: strategy, strategic change, freight forwarding firms, one-stop-shop, Porter’s

five forces

Purpose: to investigate how strategies work and change in the Swedish freight

forwarding business

Methodology: qualitative study based on multiple cases studies

Theoretical perspectives: Porter’s generic strategies and five forces competition

framework

Empirical foundation: structured interviews

Conclusion: a mature business that showed more complexity and competition than

expected

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Index of contents 1 Introduction 1.1 Study background 1.2 Problem statement 1.3 Purpose 2 Method 2.1 Case-studies 3 Theoretic framework 3.1 Logistic Management, Third Party Logistic (TPL) Providers and

Range of Freight Forwarding Services 3.1.1 Logistic Management 3.1.2 TPL providers 3.1.3 Range of Freight Forwarding Services 3.1.4 Just In Time Management 3.2 Concepts, theories, model and matrix concerning strategy 3.2.1 Concepts 3.2.2 Porter’s Generic Strategies 3.2.3 A combination of Generic Strategies - stuck in the Middle? 3.2.4 A One-Stop Shop Strategy 3.2.5. Outpacing strategy 3.2.6 Porter’s Five Force of Competition framework 4 Business history and background of the studied companies 4.1 Business history 4.2 The background of Schenker and Schenker AB ColdSped

International 4.3 The background of Shuttle Service International AB (S.S.I.) 4.4 The background of TransFargo 5 Analysis 5.1 Buyer’s Power 5.1.1 Increasing sophisticated demand from customers 5.1.2 Why 3Fs adopt “one-stop-shop” strategy to manage customer relationship? 5.1.3 How ColdSped reacts and copes with costumers’ demand? 5.1.4 The buyers and their bargaining power on S.S.I 5.2 Supplier’s Power 5.3 Threat of New Entrants 5.4. Threat of Substitutes 5.4.1 Substitutes 5.4.2 E-commerce

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5.4.3 Demand of major shifts to environmental friendly transport modes 5.4.4 Transport Carriers bypass forwarders 5.5 Rivalry among Competitors 5.6 Threats against the forwarding business 5.7 Summary of analysis 6 Discussion and conclusions 6.1 Our study limitation and opportunities for future studies 7 Index of sources 7.1 Published sources 7.2 Company internal sources 7.3 Oral sources 7.4 Electronic sources 8 Appendix 8.1 The interview questions

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1 Introduction 1.1 Study background Today’s freight forwarding industry is developing as a result of greater international

competition changes on the market place. According to Freight Forwarding Market 2004,

there are a number of global trends affecting the freight forwarding industry, including

globalization of the supply chain, low inventory, and quick response requirements etc.

The content of logistics services is increasing, new types of services are added and

developed and the services are getting more complex (e.g. offering statistic reports,

manufacturing activities). The European freight forwarding market has been transformed

by a large volume of acquisitions; many forwarders are merging with large logistics

companies to become a part of “one-stop-shop” specialist companies. This has increased

the consolidation of what was a highly fragmented industry (Freight Forwarding Market

2004).

The environmental changes outline great opportunities as well as challenges for 3F. In

Sweden, the freight forwarding market is for the moment dominated by three integrated

giants: DHL, Schenker and DFDS, as well as many other small, middle sized players (e.g.

Shuttle Service International AB and TransFargo in Malmö). The total freight providers

are handling many different types of goods and coping with many different customers on

European and global markets. The main problem for the 3F is the struggle against low

profitability. The average industry profitability was 2 % in 2004, representing one of the

lowest among other industries. Many companies are practically living on the edge of

destruction, fighting for survival.

Due to the supply chain integration and outsourcing of logistics, service has become an

important way for companies to develop competitive advantages. The traditional concept

of distribution can no longer satisfy global logistics challenges. As the environment

grows more intense, the major challenges therefore require forwarders to improve their

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abilities to solve problems for their customers. It also requires them to develop

competitive strategies to be able to provide a broader range of value-added services,

which are faster, smarter and more efficient than what the competitors can offer. The

focal point in our thesis is therefore emphasized by how 3F adjusts its marketing strategy

for this new competitive situation.

1.2 Problem statement Porter (1980, 1985) argues that superior performance can be achieved in a competitive

industry through the pursuit of a generic strategy, which he defines as the development of

an overall cost leadership, differentiation, or focus approach to industry competition. If a

firm does not pursue one of these strategy types, it will be “stuck in the middle” and will

experience lower performance when compared to firms that pursue a pure generic

strategy (Porter, 1980).

Whether cost leadership and differentiation are compatible or not has been a point of

controversy. Some contend that firms can follow both cost leadership and differentiation

strategies simultaneously (Murray, 1988; Hill, 1988, Cronshaw et al., 1994 Hill 1988).

The argument is that investment to increase differentiation and increase brand loyalty and

expand sales, in turn reduces the long run average cost. Grant argues that in practice, few

firms are faced with such stark alternatives. “In most industries, market leadership is held

by a firm that maximizes customer appeal by reconciling effective differentiation with

low cost.” (Grant, 2005 P 243)

Xavier Gilbert et al assert that success results are not only from the single–minded pursuit

of either strategy, but from the ability to add one to the other at certain stages in the

evolution of the market. Competitive advantage can only be sustained by means of an

outpacing strategy. When service characteristics become commonly accepted, a standard

emerges, this is then followed by intense competition driven by low-cost strategy. When

price competition increases to the extent that companies have difficulties to sustain

existing levels of profitability, successful companies then switch back to value creation

process by means of differentiation.

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Cost leadership is a primary basis to achieve superior performance, it is impossible solely

to pursue differentiation strategy to achieve competitive position in today’s forwarding

business. However, firms which faithfully pursue single cost leadership strategy suffer

under-average profitability, resulting in being acquired by others, downsizing or

bankruptcy. Firms with above-average profitability, have many competitive methods and

strategies at a same time. That means there is a clear contradiction between Porters theory,

and Gilbert’s hypothesis.

1.3 Purpose This thesis aims at studying how strategies work and change in the freight forwarding

business in Sweden. We chose three Swedish freight forwarding companies of various

sizes (small, medium and large) as a multiple-case study, to explore the competitive

methods and strategies that are currently applied in the three companies, and which

factors influence the strategies of the business. Porter’s five force of competition

framework will be used to accomplish our task.

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2 Method

The business-field is a relatively grateful area to conduct research in, since it’s plentiful

with existing theories and framework. Our research takes off from already developed

theories and hypotheses. We believe that’s a strong benefit, because we want to use our

own knowledge as much as possible. One of the authors has worked for quite some years

in different 3F, and therefore one of our largest obstacles to overcome will be the obvious

fact that we are not completely objective towards our research. Everybody has different

beliefs and values that they bring along into a research. But we also have practical

involvement in our field of study, as well as clear connections with the people

interviewed. This clearly interferes with the positivistic ideal of a researcher who is

objective. The hermeneutic way of research is much more appropriate in our opinion,

since the foundation is the researchers own understanding of the subject. We have chosen

this way of doing our research because we want to benefit the most from our education.

By choosing the hermeneutic research tradition our thoughts and experiences will be a

resource in our effort to interpret the research. And the field of logistics gives an extra

edge, since two of the writers have previous experience from the business. We are fully

aware that our background makes it more difficult to remain objective. But by

highlighting our obvious prejudices, we hope to increase the quality of our research

(Larsson 1994).

Our goal isn’t to produce new theories, or to develop already existing ones, but rather to

gain important insights and knowledge. We find our validity the practical-hermeneutic

interest (Larsson 1994). The purpose is to improve communication through

interpretations. The interpretations provide validity through quality, and the ability to

create platforms in order to ease further understanding (Larsson 1992). It’s not likely that

the conclusions we draw from our research in the freight forwarding business will be

applicable in any other field, maybe it won’t even be relevant to 3F outside of Sweden.

It’s rather hard to label how we relate our theory with the reality. We want to have the

freedom of the inductive way of conductive research, but we also want to have the

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stability of a good theory behind us. Our main theory, the five forces, will hopefully be a

very useful tool in understanding the logistics market. Therefore, you could say that we

work according to the deductive way of research. But we don’t aim at testing the theory,

or make hypothesis. We also don’t have a theory that handles strategy-making in general.

We believe that there is way to combine the two methods, especially in the fields of

economics (Patel & Davidsson 1994 p 22). Why have we then chosen to base our

research upon theories instead of new groundbreaking hypotheses? The main reason is

that the theories are fully developed and very applicable. This, and the fact that it’s much

easier to find suitable theories may seem like taking a shortcut, but we want to have the

security of good stable theories. Another reason not to be working so much with

hypotheses is the fact that there isn’t that much research done in the freight forwarding

business. It’s very often conducted on distribution as a whole, but not with the focus on

3F.

2.1 Case-studies

We had the choice between conducting one in-depth case-study, or several case-studies.

Both ways has its benefits alongside with disadvantages. The most common form of case

research is the single-case research (Yin 2003 p 45). A case-study aims at the whole

perspective, trying to gather as much relevant information as possible (Patel & Davidsson

1994 p 44). We have chosen to conduct our research by doing a case-study research

(Eisenhardt 1989). It can also be described as a multiple-case study (Yin 2003 p 46). A

multiple-case study doesn’t differ that much from the classic way of conducting a case

study, a single case study that is. The evidence from multiple cases is often more

compelling, and the study is therefore regarded as more robust (Herriot & Firestone

1983). At the same time, unusual and rare findings will most likely come from single-

case studies.

The fact that we have chosen three different companies makes it clear that we won’t be

able to go as deep as we would if we would be doing a case-study on a single company.

Our aim is to get one company in every scope included in the research, that is a small

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company, a medium-sized, and a very big company. Every case should serve a specific

purpose within the overall scope of inquiry (Yin 2003 p 47). The reason for doing this is

obviously to try to make some kind of generalisation in its most basic way. That is also

the strength of case-studies. But we are fully aware of the great danger of drawing any

conclusions on the business as a whole, after studying only three companies. The reason

for not choosing more companies is of course the lack of resource. As one of the most

valuable resources, time is not our friend, and we wouldn’t have had the time necessary

to research more companies. On the other hand, we believe that the essence of our

research, understanding strategic change in the freight forwarding business, would have

been improved greatly with more companies to investigate. There is an obvious trade-off

between quality and resources. Having said this, we would like to point to the fact our

eventual findings will probably be useful on our three companies only. Larsson argues

that whether a qualitative analysis is successful or not, often depends on that the results

are used by people. The best results provide a version of the reality, that the reader is

convinced by. This is important to have in mind when arguing against generalisation. The

knowledge is provided when the reader has the results of the case-study in mind, when

thinking about other cases.

Larsson points to the fact that there’s a conflict between validity and ethics. The ethics

come into play when we consider the possible damage our research can conduct. We

have given serious consideration to the possibility that our research may damage our

respondents or their companies. Still, we have chosen to publish our respondents’ names

in full. The reason for doing this is that although the business is very competitive, there’s

also cooperation and openness. It’s fairly common that people switch between different

companies in the business, creating a feeling of “everybody knows everybody”. We have

tried to use this fact as an advantage in our research. Another important thing to think

about when conducting studies is the possibility of bias (Yin 2003 p 61). We are aware of

this risk, and will be open and sensitive to any uncomfortable and contra dictionary

findings.

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We have mainly been focusing our research on the acquisition of primary information.

This has been done by doing interviews with representatives from our three companies.

They have also in some cases provided us with additional information such as brochures

and financial numbers. The secondary information consists of mostly of homepages, but

also strategy-books. We have tried to minimize the use of these sources,

All of our interviews were very similar. They all took place early mornings at the

respondents companies. First of all we were given an informal tour around the company,

and then the interviews began. All of our respondents were asked in what language they

preferred to be interviewed in. They all had no problem with being interviewed in a

foreign language, English in this case. The interviews were conducted in a semi-

standardized way (Lundahl & Skärvad 1992 p 92). We asked the same questions to all of

our companies, and if anything was unclear, we asked them to develop further. Our

respondents were all very open, and we felt that the interviews went really smooth. After

the interviews, which took approximately 2 hours, we would discuss the interviews. We

did this in order to find out if there was anything we had been missing, and to get a

general opinion about the interview.

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3 Theoretic Framework This chapter will be divided into two parts to represent a literature review. The first part

is about concepts of Logistic Management (LM), third party logistic (TPL) providers and

range of freight forwarding services. The second part is about relevant concepts, theories,

conceptual models and matrix concerning strategy. Together they will form the base for

understanding how 3F has come to develop different strategies regarding environmental

change.

3.1 Logistic Management, Third Party Logistic (TPL) Providers and Range of Freight Forwarding Services 3.1.1 Logistic Management Logistics is understood as the link between the market place, where goods and services

are offered, and the operating activity of the business (Christopher, 1992). Through the

effective management of the major actors supply network, customer companies can gain

a competitive advantage. Freight forwarders may provide advantages to their customers

by transporting their materials faster and at lower costs than other competitors.

The definition of Logistics Management that we use here is the latest one that the Council

of Supply Chain Management Professionals (CSCMP) states on its website in 2005

(http://www.cscmp.org/Website/AboutCSCMP/Definitions/):

“Logistics is that part of the supply chain process that plans, implements,

and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers’ requirement.”

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3.1.2 TPL providers In simple words, a 3F is a shipbroker who fulfils requirements of shippers. In logistic

management research, 3F are seen as third party logistic (TLP) providers. The first party

is the shipper itself performing the logistic activities. The second party is outsourcing to

another party in the supply-chain. The third party is when logistic activities are

outsourced to a middleman not taking title to the products (Monica Alfredsson et al).

Virum, (1993) defined:

“A TPL provider is an external provider that by agreement performs customer specific logistic services based on long term goals with mutual benefit and trust. It assumes free flow of logistic information. The activities performed include at least management and execution of transportation and warehousing.”

Shapiro and Heskett (1985) defined the role of TPL provider: "an agent middleman in the

logistics channel who enters into a temporary or longer term relationship with some other

entity in the logistics channel". Most logistic services are purchased on a contract basis.

These contracts are managed between the seller and TPL provider or buyer and TPL

provider controlling their behavior and obligations in the market. La Londe and Cooper

(1989) define contract logistics as "a process whereby the shipper and the third-

party/third-parties enter into an agreement for specific services at specific costs over

some identifiable time horizon".

3.1.3 Range of Freight Forwarding Services

Freight forwarding services offered by the industry vary according to the sophistication

of the freight forwarder. The larger and more comprehensive freight forwarders offer a

full range of transportation and logistics services including warehousing, consolidation,

air express, trucking, distribution and customs clearance, tracking and monitoring of

freight being transported, and applying electronics data interchange (EDI) technology to

facilitate just-in-time based supply chain management. In general, the smaller freight

forwarders provide more basic and economical services. Related services involved in the

import/export process, such as the preparation of shipping documents, custom clearance

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and logistics, may be undertaken by the import and export traders or their agents. The

smaller firms do provide more flexibility and a more personalized service. In addition

they have lower overheads as they "piggyback" on the fixed capacities of the larger

companies, and can therefore often provide lower rates (source: www.tdctrade.com).

3.1.4 Just In Time Management The principal of JIT management means that all materials and products become available

at the very moment when they are needed in the production process, not sooner not later,

but exactly on time and in exactly the right quantity. The major objective underlying this

approach is to continuously tackle and solve manufacturing bottleneck within, and

interface problems between, consecutive steps in the manufacturing process (Van Weele

A.J, Purchasing and Supply Chain Management. Analysis, Planning and Practice, 2002)

3.2 Concepts, theories, model and matrix concerning strategy 3.2.1 Concepts

Strategy is the direction and scope of an organization over the long term, which achieves

advantage in a changing environment through its configuration of resources, with the aim

of fulfilling stakeholder expectations. (Gerry Johnsson Exploring Corporate Strategy 7th,

2004, P 11)

There are many definitions on strategy according to different strategic scholars. Steiner

thus points out in his notes that there is very little agreement as to the meaning of strategy

in the business world. Some of the definitions in use to which Steiner (George Steiner:

Strategic Planning 1979) pointed include the following:

• Strategy is that which top management does that is of great importance to the

organization.

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• Strategy refers to basic directional decisions, that is, to purposes and missions.

• Strategy consists of the important actions necessary to realize these directions.

• Strategy answers the question: What should the organization be doing?

• Strategy answers the question: What are the ends we seek and how should we

achieve them?

Strategy formulation and implementation involve finding a match between what a firm

can do and inducing others to do for the company. In market oriented organizations,

strategy sets the ground rules for the organization, giving managers a framework within

which they can manage their businesses as they see fit.

The role of strategy is crucial, “A firm’s strategy is the most important determinant of its

performance, industry context is important to performance, but not as important as firms

strategy” (McGahan and Porter 1997). No matter how hard people work, the company

will not succeed, if it has chosen the wrong strategy.

3.2.2 Porter’s Generic Strategies These are several fundamental bases on which firms may achieve an advantageous

position. Cost and differentiation advantage are known as positional advantage since they

describe the firm's position in the industry as a leader in either cost or differentiation.

Michael Porter (1985 P 11) identified two basic types of competitive advantage:

A low-price strategy seeks to achieve a lower price than competitors whilst trying to

maintain similar perceived product or service benefits to those offered by competitors.

A differentiation strategy seeks to provide product or service benefits that are different

from those of competitors and that are widely valued by buyers.

A firm can position itself by leveraging its strengths. Michael Porter has argued that a

firm's strengths ultimately fall into one of the two headings: cost advantage and

differentiation. By applying these strengths in either a broad or narrow scope, three

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generic strategies result: cost leadership, differentiation and focus. They are called

generic strategies because they are not firm or industry dependent.

3.2.3 A combination of Generic Strategies - stuck in the middle? Michael Porter believes that these generic strategies are not necessarily compatible with

one another. If a firm attempts to achieve an advantage on all fronts, this attempt may

result in achieving no advantage at all. “Being all things to all people is a recipe for

strategic mediocrity and below-average performance; because it often means that a firm

has no competitive advantage at all” (Porter 1985 P 12). Michael Porter argued that to be

successful in the long run, a firm must select only one of these three generic strategies.

Otherwise, with more than one single generic strategy the firm will be "stuck in the

middle" and will not achieve a competitive advantage.

3.2.4 A One-Stop Shop Strategy Since we believe that many firms are applying a one stop shop strategy as a solution for

cost efficiency, there is a necessity to address it here. A one-stop shop is a structural

solution where a physical presence is created through which all clients enquiries are

channeled. The function of the one-stop shop is to put together a complete package of

services by co-coordinating the various services. (Gerry Johnsson 2004, P 485)

3.2.5 Outpacing Strategy Outpacing strategy is defined as the explicitly developed capacity, depending on the

competitive situation, to switch strategic emphasis between perceived product value and

process cost reduction, in order to outdistance the competition. (Gilbert Xavier and Paul

Strebel 1987)

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3.2.6 Porter’s Five Force of Competition framework According to Michael Porter (Competitive Strategy: Techniques for Analyzing Industries

and Competitors, 1998), the essence of formulating competitive strategy is relating a

company to its environment. The state of competition in an industry depends on five

basic competitive forces. (See the diagram below). Customers, suppliers, substitutes, and

potential entrants are all "competitors" to firms in the industry; all five competitive forces

jointly determine the intensity of industry competition and profitability. From the strategy

formulation point of view, the ability to distinguish the strongest force or forces of

competition is crucial. Therefore, the key to developing successful strategies is to delve

below the surface and analyze the sources of each force. The goal of competitive strategy

for a business unit in an industry is to find a position in the industry where the company

can best defend itself against these competitive forces or can influence them in its favor.

Porter’s five forces structural analysis model applies equally to product and service

businesses, and it also applies to diagnosing industry competition in any country or in an

international market.

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Suppliers

Potential entrants

Industry competitors Rivalry among existing firms

Substitute

Buyers

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4 Business history and background of the

studied companies

4.1 Business history The purpose of this thesis is not to describe the history of transportation, rather to analyse

what factors influence the strategies of the business, this is also an important part of

realizing the ongoing globalisation. But to be able to do this, there is a need to describe,

in short terms the background of the forwarding business.

The history of transportation is ancient; the need for transports has always existed, even

before the invention of the wheel. The forwarding business has a much shorter history; it

follows the history of the industrial revolution when a great demand arose for transports

and the coordination of them.

Today’s society depends heavily on the transportation of goods, as many companies

globalise their business to be able to compete, the demand for efficient transports and the

coordination of them steadily grows. The European Union (EU) is an example where the

trade barriers between the different members has disappeared, which has led to the

possibility of moving goods quickly from one country to another without custom-

clearance procedures, which earlier slowed down the transport process. There is no need

to move the production closer to the clients as it is possible to reach most parts of Europe

within 48 hours.

The importance of logistics as a strategy has grown in pace with the globalisation of

many companies. The need of greater efficiency has developed the just-in-time concept

as well as supply chain management. Just-in-time has been developed to decrease the

stock of goods for industrial companies, trucks on the road are used as “storage” and the

goods are brought from the suppliers directly into the production. This way the

companies save money from not having to invest in warehouses. There is no need

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anymore to build large stocks of finished products as the goods are sold before they are

produced; therefore the planning of production and transportation has become crucial.

The goods are already sold, they must only be coordinated with the clients’ production-

schedule when they should be delivered into the production-line.

The difficult task a forwarding company has to face, is the struggle to be independent

from hauliers and at the same time find the best solution for a transport-mission and give

the client the service level that he ask for, at the lowest possible price.

CLECAT, the European Association for Forwarding, Transport, Logistic and Customs

Services was founded in 1958 and are situated in Brussels. The organisation represents 24

countries and their national forwarding organisations; it means that they defend the

interests of more than 19.000 companies with more than 1.000.000 employees in Europe.

CLECAT explains the work of a freight forwarder as follows:

“What is a freight forwarder? A freight forwarder is the real master of the supply and value chain. He crafts logistic solutions that satisfy both production and consumption, both supply and demand and makes sure their expectations are satisfied, ensures that goods move from the point of origin to reach their final destination at the right place, at the right time and in good shape. For this purpose, freight forwarders utilise the entire and complex logistic infrastructure with a totally unprejudiced and cost-efficient approach. Freight forwarders do not privilege any means of transport or transport infrastructure as such, although some may own a great many equipment and infrastructure. Customs agents are on the other hand the real experts of international trade and its subtleties, ensuring that our borders do not allow for fraud and infringement, in close contact with the competent Authority.”

4.2 The background of Schenker and Schenker AB ColdSped International ColdSped International is a part of the Schenker group which means that they are sharing

the common goals and strategies. Their organization differs however, since they work in

different segments.

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Schenker was founded by Gottfried Schenker in Vienna, Austria. When the company was

founded, in 1872, trucks did not exist which meant that the focus of transportation-means

was based on railway- and sea-freight. After the WW1 trucks were more frequent as

means of transportation, and Schenker focused on express deliveries and regional freight

forwarding.

In 1922 Schenker made their first airfreight shipment which means that the company now

uses all the modern means of transportation as railway, sea-freight, trucks and air. The

change from an Austrian to a German company took place in 1931 when Schenker was

bought by the German Railways, Deutsche Bundesbahn. During the coming years the

company grew and established subsidiaries around the world. In 1991 Schenker was

bought from Deutsche Bundesbahn by Stinnes AG, another German forwarding agent.

Schenker kept on growing in 1997 when the company bought all shares in the Swedish

forwarding-agent Bilspedition Transport Logistik (BTL). This deal meant that Schenker

was the leading European transportation and logistics provider at the time.

Deutsche Bahn showed their interest in Schenker again in 2002, a majority of the shares

were bought in Stinnes AG which meant that Deutsche Bahn was the owner of the

company once again. Since this deal was closed, Schenker has continued its growth

trough acquisitions of other business-related companies. Schenker today employs 38 000

persons at 1100 subsidiaries around the world, the company turnover is 6, 9 billion Euro.

Schenker AB ColdSped stands on three different operational legs; domestic transports,

international transports and logistics/storage. The domestic department has 800 trucks

trafficking Sweden and the logistics department have 10 cold stores from Malmö in the

south to Luleå in the north. These ten cold stores can warehouse a total 100.000 pallets of

frozen and child goods.

Schenker AB ColdSped International in Malmö are specialised in transporting frozen and

chilled goods, mostly food, in Europe. The international department has focused its

operations to the one and only office in Malmö, where the employees mostly are engaged

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in traffic planning and invoicing their customers. The administration, as paying invoices

and personal questions, are handled at the head-office in Göteborg.

ColdSped do not own any trucks themselves, they are owned by sub-contractors that are

engaged in transporting goods only for ColdSped. The international department has

subsidiaries in Denmark (Thermo Scandia), Finland (ColdSped) and in Norway

(Linjegods). The rest of Europe is covered trough a close cooperation between ColdSped

and different partners like TFE, Transthermos and a numerous other partners.

4.3 The background of Shuttle Service International AB (S.S.I.) Shuttle Service International AB (S.S.I.) was founded in 1997 by the present C.E.O.,

Mikael Nilsson. He owns 60 % of the shares in the company, the rest are owned by a

German forwarding-company called Hammer GmbH & Co Kg in Aachen. S.S.I. works in

a long-term partnership with Hammer, which handles the distribution of goods to

consignees all over Europe through their network.

The numbers of employees are at this point 65 in total, eleven of them work at the head-

office in Malmö, one is working at the subsidiary S.S.L, one is working at the regional

office in Tidaholm with domestic transports and the rest are truck-drivers.

S.S.I. has since the start specialised its business into security-transports of high-value

goods for the telecommunications company Ericsson. The revenue of the company has

decreased from 150 million SEK in the year 2000 to 110 million SEK in the year 2004. In

the year 2000 the telecommunications-company Ericsson had financial problems and

decided to close plants in Sweden and move the production to Asia. Since Ericsson was

the largest client at that time, the problems affected S.S.I hard and lead to a drop of 65 %

in the company’s transport-volume. It resulted in Mikael Nilsson having to fire 45 drivers

and one person in the office. Mikael Nilsson also decided to sell 40 % of the company to

Hammer so that he would not stand alone if the problems continued.

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The truck-fleet of S.S.I. consists of 5 domestic trucks, 15 trailer trucks and 55 trailers, the

rest of the trucks that are in traffic are hired from sub-contractors. S.S.I. uses a high

degree of IT both in the office and in the trucks, to monitor shipments, trucks and to

simplify the communication between the truck-planning department and the drivers. In

1997 the business focus was on security-transports which then accounted for 90 % of the

revenues, new services has since then been added: domestic transports, transportation of

frozen and chilled goods and door-to-door express-transports all over Europe. In the last

segment the company claims they are market-leaders in Europe.

A further product-diversification is the founding of S.S.L (Shuttle Service Local). The

activities are focused on transporting express- and airfreight-goods on the road. S.S.I.

owns 70 % of the shares, the rest are owned by Olof Nilsson, the manager of S.S.L. The

company works in a domestic transport-network which covers the south of Sweden and

its inner-cities with own small-size trucks, the rest of Sweden is covered with the trucks

of S.S.I. and trough a cooperation with other transport-companies with similar businesses.

According to Mikael Nilsson the company does not have a management control system,

he sees himself as a kind of team captain who has a back-up function. He also points to

the fact that there is no need for a management control system as there are only eleven

people working in the office. If the business keeps on growing, then he will hire some

kind of manager to run and lead the daily operations.

4.4 The background of TransFargo The company was founded in 1978 by Hans-Gunnar Andersson, he is both the owner and

the C.E.O. of TransFargo. Transfargo has offices and warehouses in Malmö, Göteborg

and Stockholm, the head-office is situated in Malmö, and the total number of employees

at the three activities is 115.

The revenue for the year 2003 was 307 million SEK, which was earned through four

related businesses; road-transports, air-cargo, sea-freight and third part logistics.

TransFargo cooperates in two different transport-systems, the first is called “SystemPlus”

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which is a European land-based express-product with deliveries in whole Europe within

72 hours. The second cooperation is called “Nordic Chain” and is a strategic alliance in

transports and logistics between TransFargo and four other forwarding-companies: EHJ

Transport & Spedition A/S in Denmark, Nortrail – Norsk Trailer Express A/S in Norway,

Varova Oy in Finland and IK Speditor Group in Estonia.

The homepage of TransFargo is characterised by high emphasise on quality, and the

company has been certified according to ISO 9001:2000 and ISO 14001 environmental

certification. The whole company is working according to the TQM-concept (Total

Quality Management), the purpose is security and efficiency in performance.

Environmental-friendly transport-solutions are a part of the business-idea, which states

that the company should be able to offer services that promote a sustainable development.

TransFargo tries to transport most of its transport-volumes with combined transports as

they are more environmental friendly and cost-efficient.

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5 Analysis

In this section we use Porter's Five Forces as a tool to identify key competitive forces at

work in the freight forwarding industry. We want to examine how each of the companies

react and cope with the changes from the driving forces. According to Porter, customers,

suppliers, substitutes and potential entrants are all "competitors" to firms in the industry;

all five competitive forces jointly determine the intensity of industry competition and

profitability. The under-performed logistics services may be explained by these

framework conditions. It is important to realize that if a company does not understand the

framework conditions, how to develop its strategy to beat these “competitors”, it can not

gain a good performance.

5.1 Buyer’s Power

5.1.1 Increasing sophisticated demand from customers

The pace of change in the global market place has never been more rapid than today. If

manufacturing or retailing companies do not think globally, they will not survive. The

demand from customers is a consequence of the supply chain globalization.

Modern logistics buyers consider buying a service that helps their company to compete.

Thus, they have higher expectations to logistic service providers than traditional ones

who simply regard this work as moving goods. Customers today increasingly require

logistics providers to be able to manage the full supply-chain with added value features,

demanding a higher level of customized performance from their service. Forwarders are

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increasingly being asked by customers to take joint efforts in the creation of value and the

reduction of total cost along the supplier chain.

The greatest bargaining power in the forwarding-business is according to Hans-Gunnar

Andersson at TransFargo the clients. They set the terms, as there are so many companies

in the business that can offer similar services, this leads to the clients setting the demands

and the price-level. By offering a high level of service, TransFargo works hard on turning

their relationships with the clients into long-lasting or long-term cooperation’s. Hans-

Gunnar Andersson gives us two examples of clients, Gambro and TetraPak, which have

been in cooperation with TransFargo for more than 20 years, almost since the founding of

the company.

A very important factor is the close personal relationship with the clients. The 3F are very

eager to make sure that their clients get the best possible service, enabling them to make

stronger connections with the 3F. It can be everything from going out playing golf, or the

fact that the client lives a couple of houses away, it all adds up to the fact that managing

the clients are just as important as in any other service business.

5.1.2 Why do 3Fs adopt the one-stop-shop strategy to manage customer relationship? When companies outsource their logistics function, they do not only look for logistics

providers who are able to manage complex logistics systems, they are also seeking one-

stop-shop alternatives where they are able to access a large number of different functional

support services from a single supplier (Berglund, 2000, P 77). Skjoett-Larsen (2000)

mentions three reasons for this trend towards a reduction in the service provider base.

1. Many companies have changed production strategy from in-house production of

nearly all components to out-sourcing a range of production processes that are not

part of the company's core competencies.

2. Searching, selecting and evaluation of suppliers on an ongoing basis may lead to

large transaction costs.

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3. The pace of technological development is so rapid that it is more important to

choose suppliers who are at the leading edge of new technology than suppliers

who are competitive in price.

The one-stop-shop strategy may eliminate a lot of wastes for customers, e.g. storage and

inspection, bureaucratic delays etc, and boost a better transmission of information and

greater coordination between the two parties. As a result, more companies are turning to

3F to help them manage supply-chain processes and ensure operational success.

The one-stop-shop strategy also means that the reciprocal dependency between buyer

and provider is increasing, because the area of interaction is growing. The relationship

between the buyer and the service provider comes to be more stable and more binding for

each party. This greater reciprocal involvement raises the switching costs of the

relationships.

Under this situation, higher profit can still be achieved if the customer value is increased

or the cost of the service is lowered. ColdSped is looking for more value-added services

to compensate for reduced margins and to solidify their market position.

5.1.3 How do ColdSped react and copes with costumer demand?

ColdSped is one of Europe’s leading providers of taking care of temperature controlled

transports, distribution and storage. ColdSped use their sophisticated knowledge of

temperature controlled transportation and their existing systems, to increase their

customers’ efficiency. Fragile goods such as groceries and plants need to reach their

destination in the same undamaged state in which the journey began. They are quickly

transported with equipment specially designed for this purpose. Goods also can be stored

safely in ColdSped´s storage system. The main strategy of ColdSped is to find clients

appreciating quality, which are interested in long-term relationships. They also establish a

client database; evaluating annually interactive performance with the clients. The purpose

is to give the customers a feeling of reliability and trust.

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Since ColdSped is a special unite of Schenker Group, it has the benefit of a large network

of customers. This network gives ColdSped greater opportunities to widen its business. It

has grown through client-based development. The size of Schenker means that they have

a large supplier and partner network which actually influence both the expectation of the

customers and makes it difficult to develop a role that bypasses them. ColdSped has

positioned itself as a premium provider of transport and logistic services, which has

resulted in the attraction of a customer segment that seek, and are willing, to accept a

slightly higher cost for better service. An essential successful factor for ColdSped is the

ability to establish and maintain long-term relationships with a number of companies,

which is needed to offer a qualitative service at the market.

The supply-chain management of ColdSped is concerned with achieving a more cost-

effective satisfaction of end customer requirements through buyer-supplier process

integration. This integration is typically achieved through a greater transparency of

customer requirement through the sharing of information.

Marketing is a matter of getting, maintaining and growing customers. The effectiveness

of a marketing strategy relates to the extent to which services meet the demand of the

logistics buyers. Customer satisfaction with a purchase depends on the service

performance relative to the customer’s expectations. If performance exceeds expectations,

the buyer is highly satisfied, thus, the company has to deliver services to match these

high expectations. Leaders in ColdSped say that they are listening and acting in response

to their clients. Their main objective is to find the most competitive transport solutions

for their clients. Therefore, ColdSped had established a program to track their customer's

expectations and customer satisfaction. The purpose is to make the customer as satisfied

as possible, while still making a profit.

5.1.4 The buyers and their bargaining power on S.S.I

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Although S.S.I. maintains a long-lasting relationship with their clients, the greatest

bargaining-power is the clients as they set the conditions for the whole business.

According to Mikael Nilsson, he accounts to his clients each year at price-negotiations

which costs have gone up, and why he has to raise the prices. The clients are probably

well informed regarding their suppliers and their costs, it improves their bargaining-

power.

Although the costs for sending a whole truck can seem high, the transport-cost of each

item on the truck is low. It could indicate the buyers being insensitive about the prices,

but it has probably more to do with the low differentiation of the transport as a product.

The low product differentiation is probably the reason why clients let the price determine

the supplier.

As well as long-term relationships with a few big clients can be an advantage, it can also

be a disadvantage. The greatest threats and opportunities are to have a few large clients.

If the clients eventually decide to change supplier, most of the revenues will be lost

which can lead to a disaster for a small company. Although there are big advantages in

having large loyal clients as they provide a large amount of work all year around, it

means a secure amount of incomes. It is crucial for S.S.I to keep on listening to the

demands and needs of the clients, since the focus must not be lost.

As the forwarding-business is all about keeping a high service-level towards the clients

and the main-purpose of a forwarding-agent is to be a problem-solver, a strict leadership

may not work that well, as it will reduce the ability of the employees to find the right

solution to a problem. Team-work is also crucial, as it is necessary to be able to work

tightly with the colleges to find a solution to a problem. The managers’ most important

task is to motivate their employees.

The risk of buyers integrating vertically is low; it would probably be more expensive

producing the services themselves. It would require too much effort from a producing

company to perform better and more cost-efficient than having a forwarding company

producing the services.

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5.2 Supplier’s Power Most forwarding-companies own the loading-equipment, trailers and swap-bodies, but

they do not own the trucks, they are often owned by sub-contractors/suppliers.

S.S.I. is different in that aspect, as they own 20 trucks, but since they own 55 trailers they

need suppliers to pull 35 of them.

As a middleman, ColdSped has no trucks; instead they have 800 trucks owned by sub-

contractors, who are considered as ColdSped suppliers. ColdSped has established good

long term collaborative relationships with its carriers. These carriers should adapt to

ColdSped’s business needs and requirements, for example, changing color and

advertisement on trucks, when necessary.

These suppliers probably don’t have great bargaining power as they don’t have the

network and connections that the forwarding companies have. It means that the suppliers

can not take over one or more clients as they do not have the resources to be able to

maintain a high service level. Also, the barrier to enter is low for a haulier which means

that the forwarding companies have great bargaining power against its suppliers, they can

shift supplier in a very short time-span. The reason for the low entrance barrier is the low

requirements. In order to start a trailer-hauling company all you need is a truck and a

traffic permit, used or new trucks are not rare and a traffic-permit is obtained after a short

course.

There are many international and national companies specializing in trailer trucking, the

trucking-companies are working in a segment where they supply services to the

forwarding-agents. One of the largest in Europe is a Dutch company called Heisterkamp;

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they own more than 700 trailer-trucks and have subsidiaries in Germany, Belgium and

Sweden. What probably contribute to their ability not to compete with their clients has to

do with their reputation on the market. If Heisterkamp would decide to build their own

forwarding-organization they will probably loose all of their clients, as they turn into a

threat.

5.3 Threat of New Entrants EU policies that are able to influence framework conditions, like economic growth,

employment levels and environmental requirements etc. can all indirectly have an impact

on the logistic performance of individual firms. One of the driving forces behind changes

in logistic structure and strategy within Europe, is the removal of trade and transport

barriers between EU countries (Skjoett-Larsen, 2000, p 2). The deregulation of the

European transport market, the privatization of transport chains, the relaxation of

international trade barriers have all encouraged new entrants. Eastern European logistics

providers and USA based logistics providers are competing in the European market in

land, air and sea, leading to greater price and service competition among companies.

Internet development will encourage a lot of new entries into the freight forwarding

business. Through web-based connectivity, companies can gain access to information

regardless of where it is entered. “Web services”, enable firms to quickly integrate the

supply-chain information into their own POS, payment, and operations system. Internet-

based inventory and shipment management systems will play an increasingly important

role in this business.

Since freight forwarding business has the character of service, it means that there is no

natural dominate player in the market. Entry into fright forwarding service needs

relatively little capital. Freight Forwarding service is not difficult to perform and easy to

copy. The global outsourcing has been increasing during the last years, which appears

very attractive to many, even to non–traditional players (e.g. Anderson Consulting).

These factors lead to more actors entering this market. An interesting observation has

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been made by Berglund, he describes the different entering times when providers started

with logistic services as "waves". The first wave was the 1980´s when the traditional

transport firms developed into TPL; the second waves from early the 1990´s when firms

such as TNT, DHL, Federal Express (FedEx) etc. entered. The players entering during

the third wave have been consultancy firms, financial firms and IT management firms.

Examples of these non-traditional entrant competitors are, Anderson Consulting, GE

Capital, EDS and IBM etc. (Berglund, 1997, P 129).

The capital requirements to enter the forwarding-business are low, not much is required

to build a new company. The most important asset is connections; most people in the

business build up their own net of contacts during their career. Connections with

transport-, forwarding and shipping companies are crucial as these contacts would be a

part of a new network. The connections can also be regarded as channels of distribution,

without these there is no possibility to enter the business. Besides connections, a phone, a

fax and a computer are also required to be able to communicate with different contacts.

There are no governmental or legal barriers to enter the business which simplifies

entering the business further.

As the forwarding business is mature there are many established companies which will

not allow a new company to enter without competition. According to the theories and the

economies of scale there are two problems when entering, either to enter in a small or

large scale. Probably the best solution for a new company would be to enter in a small

scale, since there have been attempts to enter the market in large scale with low prices as

the only mean of competition, this has not worked. By entering in a small scale the

competitors will not notice if one or two clients disappear from them, but if more clients

disappear there will probably be counter measures against the new entrant.

There might be great barriers for another company to be able to compete with S.S.I. in

their segment, as one of the strengths of S.S.I. is customer-loyalty. The main-strategy of

the company is to find clients appreciating quality and who are interested in long-term

relationships. A reason for choosing this strategy is that customers focusing primarily on

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the price are not likely to stay in the long run. At S.S.I that strategy has worked, the

company has not lost any clients since the founding in 1997. Although the client-

relationships are built on long-term cooperation, S.S.I, like their competitors, has to offer

competitive prices to stay in business.

5.4. Threat of Substitutes 5.4.1 Substitutes The substitutes or alternatives for the clients are three; airfreight, railway-transport or

sea-freight. Both Schenker and TransFargo can offer these services as alternatives to their

road-transports.

S.S.I. differ from their competitors as they only offer road-transports, although none of

these substitutes are really competitive as they are either too slow or too expensive to be

able to be an alternative for the clients having S.S.I as their supplier.

Airfreight is more suited for smaller packages as the price-level is much higher than the

one for road-transports. S.S.I. mostly load larger shipments, from one to maximum 33

pallets in a truck, it would be incredibly expensive to ship the same goods with airfreight.

The other both alternatives, railway- and sea-freight, are to slow and insecure for goods

that is supposed to be monitored all the time and were the transport-time is calculated in

hours not in days which is the case with railway- and sea-freight.

5.4.2 E-commerce As books and other items may be bought on a website, logistic services can be bought on

a website as well. E-commerce development could be a treat in the near future. An on-

line system is quicker and cheaper way of information flow compared with fax, telephone

and ordinary mail. The e-commerce competitors maybe do not have warehouse and

trucks, but they can run subcontract to carriers. “E-business has generated a new set of

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potential logistics clients, who do not have an existing logistics solution or any particular

logistics knowledge”. (Berglund, 1997, P 161)

5.4.3 Demand of major shifts to environmental friendly transport modes Road transportation has contributed to the increasing congestion and pollution problems,

especially along major trunk roads and in urban areas. Much of this growth stems from

international road haulage. The need for major shifts from road to more environmentally

friendly transport modes has become highly demanded. One of the pronounced objectives

in EU transport policy is to increase the share of rail in European freight transport,

considering the rapidly growing imbalance between modes of transport in the EU and

especially the pollution problems.

Nowadays, customers heavily consider the environmental performance of companies, to

the point that their buying decision is influenced by that performance. Such activities set

the requirements for 3F to make efforts themselves to reduce the impact of their services

to the environment, in order to stay competitive for the ship. There will be major shifts

from road to more environmentally friendly transport modes in the near future.

5.4.4 Transport Carriers bypass forwarders Due to decreasing margins and a harder competitive environment in the freight

forwarding industry, many transport carriers are attempting to bypass the forwarder and

go directly to the shipper. “By eliminating the forwarders, the carrier reaps the profits that

would accrue to the forwarder, thereby increasing the carrier's financial performance and

casting a cloud over the forwarder's future” (Coyle, 1998, P 269).

5.5 Rivalry among Competitors The acquisitions and mergers have been numerous the last ten years (DHL, Schenker and

DFDS) and will probably not yet cease. The main difference between the different

companies in the business is the company-size. The size of a company decides the range

of products, often smaller companies are specialised in a segment. In opposite, large

36

companies often offer different products such as warehousing, international and domestic

road-transports, airfreight, sea-freight and railway-transports. In spite of a wide range of

services the larger companies are often inflexible in solving problems which requires

special attention. This fact has opened up the business for smaller companies as S.S.I.

The profitability for 2004 was less than 1 % for S.S.I, which might indicate a business

with a strong competition among the different companies. Those figures of profit are

normal in the business, according to Transportindustriförbundet, the business-

organisation; the average profit percentage was 2 % in 2004. Transportindustriförbundet

have more than 130 companies as members, these companies are involved in different

logistics-solving businesses. The large number of companies in the business indicates a

high degree of concentration in the business.

The last ten years the business has been focused on cost-efficiency. One way to decrease

the costs is employing foreign truck-drivers, as Swedish truck-drivers are considered

being too expensive. According to Mikael Nilsson the cost for a Swedish driver is 4-5

SEK/km, while a German driver costs 2,60-2,70 SEK/km, a Polish driver 1,80 SEK/km

and a Moldavian driver 0,7 SEK/km. Although Swedish truck-drivers are considered

service-minded and efficient, more companies might have to hire foreign drivers to be

able to be competitive.

The most important success factor in the business is the ability to be a problem-solver,

and being able to listen to clients and their demands. Different concepts have been

developed to satisfy the demands and needs of the clients, an example of this is the “just-

in-time concept”, which has been created to lower the clients cost for keeping stocks. The

latest concept that has been developed is “one-stop-shop” which means that the client

avoids having to have contact with different persons for each transport-destination;

instead one person from a forwarding-company is placed at the client’s site to take care

of all logistic questions and solutions. This is a way for the producing companies to out-

source an activity that can be handled more efficient by a sub-contractor.

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The strategies of S.S.I and other companies in the business are constantly changing to

keep up the pace of the competitors. In other words, the strategies are adapting to the

actual business-situation. One important factor regarding competition is business

diversification. For S.S.I and the forwarding business as whole, it is important to offer

different kind of transport related services.

The main competitors of S.S.I are other small- and medium-sized forwarding- and

transport-companies, e.g. Nils Hanssons Åkeri, Börje Jönssons Åkeri and Soonius. All

three of these companies offer related services and products. Lars Persson agrees with his

C.E.O. about their main-competitors, but would also want to add DHL, DFDS and

Schenker as main-competitors as these companies are differentiating their offering of

products all the time. Today they might not compete in the same segment, but maybe in

the future. There is a need in guarding their moves and activities on the market, to be able

to defend the positions of S.S.I.

The main-competitors of TransFargo in the business are DHL, DFDS, Schenker and

Dachser, as they all are larger and financially stronger than TransFargo. The aspect of the

larger size means that they gain big-scale advantages which leads to lower costs.

TransFargo has in a very efficient way countered this threat by working in a net-work

with more than 40.000 employees and revenue of more than 6,9 billion Euros which

points to the fact that net-working and long-term partnership can be as successful as a

company built through acquisitions and mergers.

The key issue for a firm is evaluating the seriousness of a potential challenge. The extent

to which a competitor threatens a company’s market position depends on the competitor’s

capabilities. In Swedish market for freight forwarding, there are important competitors

such as DHL (20-30 %), Exel Logistics (10-20 %) and below 10% Panalpina, Schenker

and Kühne & Nagle. There’s an obvious existence of strong competitors, which are all

able to offer a wide range of services in different sectors, including express services.

(source: International Federation of Freight Forwarders Association, FIATA:

www.fiata.com).

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The major strategy for Schenker to beat other competitors is by means of acquisitions and

mergers. ColdSped leaders emphasize that the company size is very important to their

business. Through mergers, the company’s reputation and influences have increased

among their customers, which in turn increase the confidence at ColdSped to outpace

their competitors. ColdSped benchmarks competitors’ strengths to improve its

weaknesses. Thanks to the Schenker group network, ColdSped has gained advanced IT-

support for processing invoices, customers’ database and orders. ColdSped’s distribution

channels and service sophistication have also been more enlarging and improving than

ever before. Schenker’s globalised network is considered as one of the backbones for

ColdSped´s freight forwarding business in Europe.

5.6 Threats against the forwarding business The environmental issues are probably the greatest threats against the forwarding

business. Most European governments are in one way or another trying to decrease the

road-transports of today, and move them over to railway- or sea-transports.

Taxes are one way to decrease the road-transports. Five European countries, Sweden,

Denmark, Holland, Belgium and Luxembourg have been members of the Eurovignette

system since the start 2000 (Transport iDag/iTrafik). The idea of the system is that the

hauliers should invest in cleaner or low-emission trucks, as the price tariffs are based on

how much the truck pollutes the environment. The principal is rather simple; a clean

truck equals a lower tax (750 Euro per year). The forwarding-companies has an

advantage with this system; there is no limitation on how many kilometres a truck can go

when the fee is paid. This is obviously a great disadvantage for the governments as they

try to decrease the amount of road-transports.

Some countries have released their own solutions to the problem. Switzerland and

Austria were the first countries to introduce taxes based on how many kilometres a truck

travel on the public roads in their country.

39

The next country to follow the development was Germany, as a former Eurovignette

member the country decided to leave the cooperation and develop their own system,

called “LKW-Maut”. The system was not working properly until the first of January 2005

when it was introduced, but it should have been introduced already on 31 of August 2003.

The taxes are either paid cash at toll-booths situated at the autobahn or through a billing-

system. To be able to pay via a bill the truck has to be equipped with an OBU (On Board

Unite) that keeps track of how many kilometres that have been driven on the autobahn.

The OBU is connected with a GPS-sender that sends the information via satellite to the

company administrating the system, Toll Collects.

Other countries will soon follow this development, the Czech Republic and Slovakia will

introduce their systems on the first of January 2006. Great Britain will wait until the first

of January 2008, and will probably be followed by Sweden the same year, although

sceptics think that 2010 is a more reasonable date of introduction in Sweden. Holland has

also shown interest in introducing a system of their own but they are awaiting the

development. According to an article on the Internet, the different future systems will

probably adapt to each other so it would not be necessary to have different OBU’s for

each country, only the computer-programs will be different (source: Transport

iDag/iTrafik).

The development of punishing the transport-business through taxes has to do with the

development of means to govern an efficient decrease in outlets from the transport-sector.

The European parliament has developed a program, called Marco Polo II, the goal of this

program is to promote environmental-friendly transport-solutions and decrease the load

on the European roads.

A second argument, besides the environmental, for introducing different taxes on road-

transports is studies made by, for example, the German road-department. According to

Bundesministerium für Verkehr, Bau- und Wohnungswesen a 40 ton truck and trailer

wear 60.000 times more on a road than a normal car. With the increasing internalisation

and globalisation the amount of transports increases rapidly. According to a study made

by BMT Solution, called Capacity 2015, the best solution limiting the increase in road-

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transports is introducing a kilometre based tax. The purpose is to let them who wears the

most on the roads pay the costs, that means that the transport- and forwarding-companies

are going to have to pay initially, but in the end it will be the end-consumer of a product

who has to pay. This argument speaks for putting more goods on the railway but not all

kind goods is suited for this mean of transportation; some examples are food, express-

deliveries, security-transports, flowers and plants. The main reason for not transporting

food, flowers and plants on railway or as combined transport is that most of these

transports are temperatured. The cooling-machinery on the trailers require attention from

the drivers, they have to check the temperature so that it does not change, and most

important that the cooling-machinery does not stop, as it can have disastrous effect on the

goods as it will be destroyed. Another type of goods not suited for railway- or combined-

transports are express-transports, the railway-transport takes to long time which

eliminates the meaning of express-delivery. Security-transport are not suited either as the

goods have to be monitored by someone all the time, S.S.I for example, uses a system

with two drivers in the truck when transporting high-value goods as it eliminates the need

for stops on the way. This however doesn’t eliminate the risk of robbery or hi-jacking the

truck which, sadly, is a reality in today’s forwarding-business.

Today, most transport-buyers are conscious about the environmental problems that the

road-transports cause, and the big problem of trucks crowding the roads of Europe. Most

transport-buying companies have probably adopted some kind of environmental program

to improve their consciousness, but as long as the forwarding-companies work on

decreasing their costs no one will notice the increase in costs.

There are alternatives to transporting goods in railway-wagons, today systems for

shipping trailers and trucks by rail-road exist, and are used by most forwarding-

companies, and this mean of transportation is called Hucke-Pack or combined transport.

Most of today’s trailers are built and prepared to be shipped by railroad. A truck loads the

trailer and when it is filled up, the trailer is left at a combi-terminal where it is loaded on

a railway-wagon and shipped to the nearest destination with a terminal, where the trailer

can be unloaded. The trailer is then picked-up by a truck that brings it to the consignee.

Another version of the Hucke-pack trailer are swap-bodies, they consists of two, 7 meter

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long, container-like bodies which are sent by rail on longer distances (over 300

kilometres), like Hucke-pack trailers, and by truck when the distance is shorter. The way

of sending the “loading-space” by rail saves money for the forwarding-companies by not

having to have a driver following the whole distance. These means of transportation are

regarded as more environmental-friendly road-transports.

An alternative for sending the load-carrier with railway is to send the whole carriage;

truck, trailer and driver with the railway, this concept is called “Rollende Landstrasse”

(rolling road). The network is well developed in Europe but three countries have worked

harder to develop their systems; Austria, Germany and Switzerland (source: Greenpeace,

Austria and Ferry World). The main reason for these countries to develop their “Rollende

Landstrasse” is that all three of them have a large transit-traffic. In Germany all trucks

passing to and from Scandinavia use the German roads. In Austria and Switzerland a

large number of trucks pass through on their way to or from Italy. This system has a big

advantage in transports of greater distances. Since the working hours of a truck-driver are

limited by law, the driver can go to sleep in a sleeping compartment after having loaded

his carriage on the railway-wagon. That means that when he wakes up he have had his

sleep and the truck has arrived in another country much closer to the final destination.

There is only one problem with this system, the week-days when the export and import is

most frequent, is also when the capacity is not enough which means that many trucks

have to stay on the European roads anyway.

Not only governments put pressure on the forwarding-companies, more and more large

transport-buyers demand having more environmental means of transportation. One

example is IKEA, which has a large program to decrease their influence on the

environment. One of their goals is to change from road- to railway-transports, for the

present they transport 10 % of their goods by rail. In 2002 IKEA founded their own rail

company, IKEA Freight, which was taken over by an external operator in 2004. IKEA

Freight has replaced 300 road vehicles each week from Duisburg to Älmhult with rail

(source: www.ikea.com). Although rail-transports are seen as more environmental-

friendly IKEA has different criteria’s that the rail-suppliers has to fulfil if they wish to

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remain suppliers. IKEA is probably not alone in their work and other companies will

probably follow this development in the near future.

All of our studied companies have some kind of environmental program where they state

their goals. Both Schenker and Transfargo are certified according to the ISO 14001

environmental policy, S.S.I. has an environmental-policy that they have adopted. Most

forwarding companies state on their homepages that they have some kind of

environmental program to be able to decrease their influence on the environment. The

conclusion is that most forwarding-companies are aware that governments and the

environmental-movement follow their work.

It can also be concluded that diesel and petrol are fuels that will not last forever, which

means that the whole business has to look at options. Another conclusion is that the

governments in Europe will not accept a large increase in road-transports every year.

International trade and globalisation is very important but there must be alternative means

of transportation, and that is why most governments punish the road-transports with

different taxes. The purpose is to increase the prices so that transport-buyers think twice

before they choose a truck as their mean of transportation. The concepts of TQM and

“just-in-time” transports allows the goods to be transported by railway, it has to do with

the planning of the logistics. This means that the transport-customers and buyers have to

accept taking a greater responsibility for their own operations.

It can be established through our interviews and other information gathered that there will

always be a need for transports, in one way or the other. This speaks for the future of the

forwarding-business and their constant work of adapting their strategies to the changing

surroundings and the environment.

5.7 Summary of analysis By analyzing the sources of five forces, we can see that the three companies are working

in a tough situation. The buyer’s power is strong, since customers have increasingly

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sophisticated demands; they have quite a lot alternative suppliers available in the market.

Their switching costs to alternative suppliers are not high; therefore buyers have the

power to put pressure on prices. The three companies must listen and react to the

customers’ needs; their success is connected with achieving cost efficiency with the

customer satisfaction through forwarding process integration. The supplier’s power is not

strong; however, the companies need a lot of help from the suppliers’ in order to achieve

good performances. (e.g. service quality and swiftness). The threat of new entry is quite

high, because entering into to freight forwarding industry is not too expensive. The

technologic requirements are low, new competitors can enter the market easily if they see

that they can make good profits. Even though they do not have any forwarding

experience, they can still enter and drive the prices down. Competitive rivalry is high,

because apart from the multinational giants, there are many small and medium sized

players who together intensify the competition, resulting in lower profitability. Finally,

there exist some threats of substitutions as we mentioned in the analysis.

Therefore, we can conclude that the freight forwarding industry is a customer driven

industry, subject to external impacts. Companies that meet the needs of their customers

better than competitors grow faster and are more profitable than others. The framework

conditions are dynamic, firms need to continuously outdate and develop strategies to

keep up with the changes by means of adaptation to new environmental demands and

through innovation. ColdSped has achieved great competitive advantages in the market

through mergers and acquisitions, proving that 1+1 =3.Transfargo has joined the Nordic

Supply Chain, which has lead to an increase in the company’s efficiency and

effectiveness through networking. S.S.I is a productive player, who is focusing on its

niche market.

3F can use Porter’s five forces framework when thinking about what strategic changes

can be done in order to increase its own power with respect to each force. Company

leaders may know how to cope with these changes from experiences. However, we

believe that if they know the underlying engines of the changes, then they can make

decisions to prevent undesirable things happening to their companies.

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6 Discussion and conclusion

By observing the intensity of the driving forces, we found that freight forwarding

industry has a very tough competitive environment. That is why the average industry

profitability is very low (2% in 2004). A firm must develop their ability to adapt to the

forces of change. If the firm has low level of adaptive ability, then it will be left behind

by its competitors. Freight forwarding service is also a customer driven industry, leaving

the customer as a dominating power in the market. Nowadays, price is still a major

determinant of choice of customers. Companies are searching for ways to make them

appealing to customers in order to catch buyers. Differentiation is also important, if one

company can differentiate by adapting to specific customer needs, or can offer services

that other company can not do, then the company has a competitive advantage over the

other competitors. One problem is that service differentiation is very easy to be copied by

competitors.

When competitors cannot differentiate their services, usually, the only way to compete

for market share is through the price war. A low price strategy is dependent on low cost

but it is difficult to sustain a competitive position. Therefore, it is important for

companies to develop strategies to be able to differentiate themselves from competitors.

The three companies do have some different strategies; however these differences are not

dramatic. Almost all the interviewees expressed the view that they have changed their

strategies in order to adapt to competitive situations. For example, they are developing

strategies focusing on issues which are important to the customers. They are paying

increasing attention to decrease the cost to the customers, while not at the expense of

quality of the service (e.g. service reliability, fast response, availability etc).

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None of the three companies follows a single-minded cost leadership or differentiation

strategy. They are working on finding new more flexible, efficient solutions to perform

their services. Companies outpacing competition do not only pursue either of the two

strategies, they need the ability to add one (cost leadership) to the other (differentiation)

in relationship to environmental changing over time. For example, when the market price

was almost reaching to the bottom, ColdSped quickly initiated a shift toward service

differentiation, by offering wider range services, unifying operations for end –customers,

equipping trucks and trailers with three temperature control zones in one truck etc. All

these solutions helped ColdSped to create a new position in the market. Our findings

support the notion of Gilbert Xavier et al. “A successful strategy should be flexible

enough to exploit market change by making timely shifts back and forth” (Gilbert Xavier

and Paul Strebel 1987).

Porter's generic strategy gives us a basic view that firms can achieve competitive

positions by choices of cost leadership, differentiation or focus strategy. Gilbert Xavier et

al propose that in order to outperform competitors, firms need the ability to add one (cost

leadership) to the other (differentiation) in relationship to environmental changing over

time. This indicates that it is necessary to include this capability into the strategic change,

i.e. a firm that has the capability to make strategic shift timely will perform better.

Two companies under study have created networks, through mergers and acquisition (e.g.

ColdSped) or through alliance and partnership (e.g. TransFargo). Leaders of these two

companies confirmed that they felt that their competitive positions had strengthened

because of the network. Networking can increase the scale of their services, allowing

them to receive support from partners, and make it possible to react quickly to business

changes at a low cost. Companies taking a network approach have the advantage and the

opportunities for growth, especially for small and medium sized forwarders with limited

budgets and staffs.

3F must strategize to determine how they want to position their logistics services through

choices of low cost or differentiation. Porter’s fiver forces framework is a useful tool that

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helps company’s top management to build a credible vision of the future. By identifying

the strength and direction of each force, companies make strategic change in order to

move the balance of power into their own favor.

The one-stop-shop strategy reduces the numbers of suppliers and increases coordination

between buyers and forwarders. It creates a win-win situation for the two parties. The

One-stop-shop strategy may be seen as a threat for smaller companies, because of their

lack of capability to provide a wide and complete range of service. However, small firms

can use their flexibility to seek different business opportunities and snitch markets.

When just-in-time was introduced, it could at that time be seen as a competitive

advantage that few companies could fulfill. Now it has become a competitive parity, it

means that if you do not supply just-in-time, you will be left behind your competitors. A

company adopting the one-stop-shop strategy might be having a competitive advantage

for the time being. But there is there is a possibility that the one-stop-shop strategy will

become a competitive parity in the future, just as just-in-time.

Our lesson learned is that although the freight forwarding business is not a gold-mine,

there still are a lot of opportunities for companies to make profit with the right strategies.

We think that environmental issues are very important. 3F need to respond quickly to

adapting environmental friendly vehicles and alternative fuels for freight movement.

6.1 Our study limitation and opportunities for future study Our study was based by interviews of the managers. To get a better view of the freight

forwarding market, we feel that it would have been appropriate to interview coworkers,

clients, and so on. A survey of what activities the logistic customers are demanding

should also been done. However, we did not have enough time to do that. Opportunities

for future studies may focus on more quantitative methods, such as: measure the

relationship between economic performance and marketing strategy in service industry.

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Or, a discussion on the one-stop-shop strategy, how long will it be a competitive

advantage?

7 Index of sources

7.1 Published sources

Alfredsson, Monica & Herttz, Susanne (2002) “Strategic development of TPL Providers”

Andersson, D (1987) “Third Party Logistics - Outsourcing Logistics in Partnership” Department of Management and Economics, Linköping University, Linköping

Bagchi, P.K. & Virum H (1993) “Third Party Logistics Development in Europe In Logistics and Transportation”

Berglund, M (1997) “Third-Party Logistic Providers -Towards a Conceptual Strategic Model” Department of Management and Economics, Linköping University, Linköping.

Coyle et al (1996) “Transportation” South-Western College Publishing Grant, Robert M (2001) “Contemporary strategy analysis” Eisenhardt, Kathleen M (1989) “Building theories from case study research” Academy

of Management Review Heracleous, Loizos (2003) “Strategy and Organization: Realizing Strategic

Management” Herriot, R. E. & Firestone, W. A. (1983) “Multisite qualitative policy research:

Optimizing description and generalizability” Johnsson, Gerry & Scholes, Kevan (2004) “Exploring Corporate Strategy: Text and

Cases” Larsson, Staffan (1994) “Om kvalitetskriterier i kvalitativa studier” Lemoine, Olga W & Skjoett-Larsen, Tage (2004) “Reconfiguration of supply chains and

implications for transport – A Danish study”. International Journal of Physical Distribution & Logistiks Management, No 10, 2004

Lundahl, Ulf & Skärvad, Per-Hugo (1992) “Utredningsmetodik för samhällsvetare och ekonomer”

Patel, Runa & Davidsson, Bo (1994) “Forskningsmetodikens grunder – Att planera, genomföra och rapportera en undersökning”

Porter, Michael E (1980) “Competitive Advantage: Creating and Sustaining Superior Performance”

Porter, Michael E (1985) “Competitive Strategy: Techniques for Analyzing Industries and Competitors”

Skjött-Larsen T (2000) “European Logistics beyond 2000” International Journal of

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Physical Distribution & Logistics Management, Vol. 30, Issue 5. Steiner, George (1979) “Strategic Planning”

Van Weele, A.J (2002) “Purchasing and Supply Chain Management. Analysis, Planning

and Practice” Yin, Robert K. (2003) “Case study research” Xavier, Gilbert & Strebel, Paul (1987) “Strategies to outpace the competitive

competition”

7.2 Company internal sources

INSIDE – outside (issues 1-4 from 2004 and issue 1 from 2005) Magazines from Schenker AB.

Zusammen wachsen – die neue Stinnes AG/Growing Together – The New Stinnes AG (November 2003). Pamphlet from Deutsche Bahn

Think Globally, Act Locally (2004). Annual report from Deutsche Post

7.3 Oral sources Andersson, Hans-Gunnar, Managing Director, TransFargo, personal interview 13 of May

2005. Andersson, Lars H, manager, Schenker ColdSped International AB, personal

interview 28 of April 2005 Lundkvist, Thomas, forwarding manager, Schenker ColdSped International AB, personal

interview 28 of April 2005 Nilsson, Mikael, C.E.O., Shuttle Service International AB (S.S.I), personal interview 20

of April 2005 Persson, Lars H, traffic planner and manager of IT-development, Shuttle Service

International AB (S.S.I), personal interview 19 of May 2005.

7.4 Electronic sources Bundesministerium für Verkehr, Bau- und Wohnungswesen, Http://www.bmvbw.de/Verkehr/Strasse-,1436/LKW-Maut.htm, 5 of May 2005. CLECAT, European association for forwarding, transport, logistic and customs services, Http://www.clecat.org/docs/aboutus.htm, 5 of May 2005. CSCMP, Council of Supply Chain Management Professionals, Http://www.cscmp.org/Website/AboutCSCMP/Definitions/Definitions.asp, 29 of May

2005. Ferry World, Http://www.lkw-faehrverbindungen.de/rollende_landstrasse.html, 5 of May 2005. Greenpeace Austria, Http://www.greenpeace.at/1652.98.html, 5 of May 2005.

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Heisterkamp, Http://www.heisterkamp.nl/page.php?lang=eng&dbname=about, 5 of June 2005. Hong Kong Trade Development Council, Http://www.tdctrade.com, 29 of May 2005. IKEA, Http://www.ikea.com/ms/sv_SE/about_ikea/social_environmental/environment.html, 5 of

May 2005. Http://www.ikea-group.ikea.com/corporate/PDF/Brochure.pdf, 5 of May 2005. Http://www.ikea-group.ikea.com/corporate/PDF/IKEA%20Report2003.pdf, 5 of May

2005. International Federation of Freight Forwarders Association (FIATA), Http://www.fiata.com, 5 of May 2005. Regeringskansliet, Http://www.regeringen.se/sb/d/3484/a/43338, 5 of May 2005. Http://www.regeringen.se/sb/d/4264/a/28582;jsessionid=a0V86rqPfWWf#28582, 5 of

May 2005. Statistiska Centralbyrån/Statistics Sweden, Http://www.scb.se/templates/print____26617.asp, 8 of April 2005. Http://www.scb.se/templates/print____34649.asp, 8 of April 2005. Http://www.scb.se/templates/print____34643.asp, 8 of April 2005. TH Transport & Hantering, Http://www.th-online.se/nyheter/vis/vis_artikel.html?ramme=1&artid=78325, 18 of May

2005. Http://www.th-online.se/nyheter/vis/vis_artikel.html?ramme=1&artid=76876, 18 of May

2005. Http://www.th-online.se/nyheter/vis/vis_artikel.html?ramme=1&artid=62347, 18 of May

2005. Tidningen TrafikMagasinet, Http://www.trafikmaganiset.nu/, 18 of Mai 2005. Transport iDag/iTrafik, Http://www3.mentoronline.se/transportlasso/reportage/eu.pdf-, 5 of May 2005. Transportindustriförbundet, Http://www.swedfreight.se/sidor/svl/artiklar/302/art4_302.html, 8 of April 2005. Http://www.swedfreight.se/sidor/svl/artiklar/202/a6_202.html, 8 of April 2005. Http://www.swedfreight.se/sidor/svl/artiklar/404/sid12_202.html, 8 of April 2005. Http://www.swedfreight.se/sidor/svl/artiklar/104/sid10_104.html, 8 of April 2005. Http://www.swedfreight.se/sidor/svl/artiklar/105/sid10_105.html, 8 of April 2005. Http://www.swedfreight.se/sidor/svl/artiklar/105/sid11_105.html, 8 of April 2005. Http://www.swedfreight.se/sidor/svl/artiklar/105/sid12_105.html, 8 of April 2005. VINNOVA, Http://www.vinnova.se/Main.aspx?ID=aa5da0b1-9fcd-4138-a6d5-521c568a1cb3, 15 of

May 2005. http://www.vinnova.se/Main.aspx?ID=42ab4920-fd9b-49dd-a7ad-b16d5490c495, 15 of

May 2005.

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8 Appendix

8.1 The interview questions

1. What is the initiate motive for the founding of your company? 2. Describe the freight forwarding market out of your perspective? 3. What is your main strategy in the market? 4. Who are your main competitors in Sweden? 5. Which are the key success factors of your company? 6. What key success factors are necessary in the forwarding market, according to

your opinion? 7. Has there been a change in the strategic focus of your company? And what factor

triggered this change? 8. What is the greatest bargaining force in your company? 9. How do you maintain a long-lasting business relationship with your customers? 10. Which are the clients’ priorities, or criteria, when purchasing freight transport

service from your company? 11. Which strategy, do you think, can make your company grow and become stronger

in the business? 12. What in your opinion is a necessary size of your company to be able to compete? 13. What is your opinion about business diversification? 14. What kind of management control system do you use? 15. What is your opinion about leadership (Leadership in your company and

leadership in the forwarding business)? 16. What is your competitive advantage? 17. What is your corporate internal weakness? 18. What is the strategy of your recruitment? 19. How have the decrease in revenues affected your company? 20. What is your opinion about the strategies of acquisitions, mergers, long-term

partnership and net-working? 21. What is your perspective about the opportunities and threats of the forwarding

business, now and in the future?