November 2012 | Finance
On the surface, they look pretty similar: United Parcel Service (UPS) and FedEx are U.S.-based package delivery companies that together provide for about half of all American shipping services. But digging a little deeper reveals pronounced differences. Founded in 1907 as a messenger company, UPS is, according to Wharton adjunct finance professor John Percival, “conservative and quiet. Its nickname is Big Brown — the color of its trucks and uniforms — and CEO Scott Davis is as reserved as his company’s image.”
FedEx has been around since 1971, when it started the overnight express shipping business. The company’s purple and orange logo is as flashy as Big Brown is staid. FedEx founder and CEO Fred Smith follows suit, with a reputation for his brash, risk-taking style.
After an in-depth exploration of the companies through the lens of financial management, Percival uses UPS and FedEx throughout Integrating Finance and Strategy for Value Creation, drawing distinctions that help executive participants see clearly the value of remarkable execution and continuously keeping an eye on the financial consequences of every strategic decision. “UPS, and UPS-like companies, are quiet. They don’t seek publicity. They focus on execution, and they’re willing to copy others’ ideas because they know their superior execution will set them apart. Analysts and investors love these companies [Percival cites Emerson Electric as another example] because their dividends are relatively high — UPS is four times that of FedEx right now — and they have a solid track record in terms of earnings, cash flow, dividend yield, and strategically sound growth efforts.”
The question that runs through the program, then is, “Are you a FedEx or UPS?” Percival, who also teaches in The CFO: Becoming a Strategic Partner, explores the company’s strategic decisions and the ensuing financial consequences. “One of the most pressing concerns for those in the program is profitable growth, so that is an important focus of the program. The first scenario is the classic growth issue: you’ve got a mature company that is having a difficult time finding the right growth opportunities. We teach the financial perspective that gets to the best combination of margin and growth.
“The other scenario involves companies experiencing rapid growth. They are having a hard time managing growth, because it takes resources to continue. Is it a good idea to borrow to finance that growth? What are the long-term implications of the debt?
“Because it’s so difficult to be good at the kind of development and execution that support organic growth, the temptation is to use acquisition to grow. But it’s not as good as organic growth, and should be a supplement, not a substitute, for it.” Percival stresses that any growth strategy must have a complementary financial strategy. “You need to get the money right. What are your dividend and share repurchase policies? You must complement operating strategy with finance.”
Participants in Integrating Finance and Strategy for Value Creation, which is offered twice a year, broaden their skills and gain a deeper understanding of the financial consequences of their decisions. Percival notes, “As we analyze the universal processes that differ between a FedEx and a UPS, we teach the tools that would have been useful to bring about different outcomes. The cases are representative, and we move beyond them to discuss the issues. We also have a couple of sessions that are more technique-oriented, giving participants tools for valuation and real options.”
While there are often no simple solutions, Percival stresses that executives should be able to evaluate decisions using a financial framework. “Strategy formulation alone isn’t enough. You need a financial strategy to go with it. Often that means asking the hard questions no one else wants to ask. Does it make sense to take on debt, acquire a rival company, or move into a new business? What seems to make sense from a strategy perspective might be a disaster financially. Someone needs to be weighing the financial consequences of every decision.”
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