Fitting DHL-Express into DHL’s Big Picture

DHL-ExpressBy Carlos Ceron, Isaac Chiu, Eric Craig, Tiina Kandzia, David Kuo, Tatiana Sunshine and David Yom

The perfect storm of economic downturn, high fuel prices and reduced demand worldwide put a serious hurt on DHL Express. In 2008, it pulled out of the US domestic market and in 2010, it sold its money-losing UK express parcel division. However, it appears that 2009-2010 has seen a fair degree of recovery for DHL Express and the industry as a whole. In the midst of this, Frank Appel, CEO of Deutsche Post DHL began the initiative of Strategy 2015 whose goal is to create synergy among the three divisions of DP-DHL into “One DHL.” It is quite the rosy picture, but integrating each division’s respective strategy and culture will be easier said than done.

Frank Appel’s plan is to leverage the different business divisions of the company. He envisions the different divisions operating hand-in-hand, generating business for each other. According to a recent IBIS report DHL-Express contributes 21.7% of DHL-DP total revenue. If Mr. Appel’s plan works, eventually, this calculation will be blurred.

According to the DHL-Express company website, their main objective is to increase profitability and generate further organic growth, despite the economic downturn. The goals they list are: maintaining the leading position in the international express market, concentrating on the international express business in the USA, increasing presence in growth markets, and managing global network costs.

According to the parent company website, DHL-DP “Strategy 2015” is being implemented across all DHL-DP subsidiaries to defend its market position in Germany, with a goal to raise profitability. They plan to generate annual organic growth of 1-2% above market average across the group. This applies to DHL-Express directly as it is the international shipping arm of the group and has a large amount of revenue in the country.

As part of the Strategy 2015, DHL-DP pledged to reduce carbon emissions. True to their word, in 2010 DHL-DP has committed to a purchase of 1800 new Volvo truck, mostly for use by DHL-Express. These vehicles promise reduced CO2 emissions and a 30% reduction in fuel consumption. In the Asia Pacific Region, they have taken measures such as replacing certain vehicles with motorbikes, using trucks vs. airplanes when appropriate and closely monitored energy expenditures in the effort to reduce consumption as well as CO2 emissions. They also maintain a very modern air fleet, using the latest models from Boeing. This green initiative is to be maintained across all divisions with the goal towards environmental responsibility and the benefit of reduced expenditures due to increased efficiency.

Cost reduction is crucial as DHL as been suffering declining cash flows.  The total net cash from operating activities went from a surplus of EU5.15B in 2007 to a deficit of EU584M in 2009

To resolve the cash problem, a major short-term focus has been instituting a program called Indirect Functions Excellence initiative (IndEx) to generate savings of EU1.0B in non-operating cost at the end of this year. This initiative is a comprehensive capital-markets roadmap to value program that aims to increase profitability and sustainably generate more cash from the business. As of Q2 this year, IndEx has realized EU552M in savings. Admin costs, travel, marketing and IT costs have been reduced. IT centers have been consolidated and European telecommunications have been outsourced to Telefonica.

In order to cut losses, DHL-Express has also been shedding some weight in the previous two years. The most widely publicized event was when it pulled out of the U.S. domestic market. In January 2010, in a controversial move, it sold off its UK domestic parcel division to Home Delivery Network (HDN). This division had been acquired (then known as Securicor) when then CEO Klaus Zumwinkel was on a spending spree that made DHL-DP the world’s largest logistic’s firm.

The pull-out in the US domestic market and the sell-off have led to question the motive for these actions. Some analysts believe that DHL has adopted a cut and run strategy vs attempting a turnaround when faced with difficult challenges. When considering the synergy between divisions, we question whether interdivisional synergy could have been better off had these measures not been taken.

The idea of synergy is easily talked about, but can be difficult to practice. A good example of synergy among DHL-DP divisions is being implemented in Germany. Several years ago, the German mail division set up parcel stations where its German customers could drop off and pick up packages in a 24/7 setting for their convenience. It allows customers the flexibility of not having to be home to receive packages. This service has now become widely used by DHL-Express when there is no day-definite or time-definite delivery necessary, such as an Amazon purchase.

The parcel station is one example of the benefits of synergy, but the question of integrating cultures is the bigger challenge. We find that the employees of their respective divisions identify, first and foremost with their group. A DHL-Express worker will emphasize they work for “DHL-Express” vs. just “DHL”, Supply Chain workers and HR workers the same.

First and foremost, it is this cultural divide between the different divisions that will pose the biggest challenge to integration to the “One DHL” structure. In speaking to a DHL employee, we discovered that there is internal competition between the divisions, particularly now that there is an allocation of budgets from the top down. Individual departments find themselves trying to prove who has contributed the most to profits. Additionally, any consolidation will inevitably lead to downsizing, further exacerbating the situation.

However, the alternative situation where each division remains independent would certainly be less than ideal, as DHL-DP would function more as a holding company. It would then run the risk to be open to a takeover, as it would make it easy break-up the company by division. Of course, the fact that there would be no possibility of leveraging synergies would also be to the detriment of DP-DHL and its shareholders.

A definite advantage that DHL will have in implementing Strategy 2015 is its embracing of IT. IT is having increasingly important effects on the way multi-business companies implement their strategies. Not only is it helping improve the efficiency with which the multidivisional structure operates, it also allows for the better control of complex value chain activities. The growth of outsourcing has also been promoted by IT and some companies have developed network structures to coordinate their global value chain activities. Proper IT management will be the key to ensuring that the plan is followed.

A final question of implementing the “One DHL” strategy is how it can affect the consumer. With consolidation of tasks we feel there is a huge risk that consumers, particularly business customers, may not be given the same attention as before. Thus far, we have not uncovered any evidence of this, but the possibility still exists.

Overall, DHL-DP will be walking a fine line while implementing Strategy 2015. The possibilities for synergy are endless and infrastructure can be adapted without great difficulty. However, the greatest risk will be the people. How DHL can prepare its employees to adopt the change will be the deciding factor in their success.

This report was a group project for the Global Strategy class of Thunderbird School of Global Management Professor Nathan Washburn, Ph.D.