Knight Transportation Company: Porter’s Five Forces Analysis

Knight Transportation Inc., KNX formerly KNGT, is a general freight trucking company within the trucking industry that was founded in 1989.  The company has been praised as a major growth success story since its founding (Funding Universe, nd).  According to Debter (2017), Knight and Swift, another large transport company, announced their merger which resulted in Knight-Swift Transport Inc., making the giant transport company the largest in the USA with a 28,000-person workforce that services the U.S., Mexico and Canada.  The company is headquartered out of Phoenix AZ.  The company’s 10k filing with the SEC indicates their yearly revenue is approximately $5.0 billion.  Knight-Swift clearly identifies potential threats to their multi-billion-dollar company in the annual report stating concerns such as the risks of doing business in Mexico, the risk of mergers/acquisitions, ability to stay profitable and relevant, etc.  Stinson (2019) points out that the latest quarter filings for Knight-Swift were down in the third quarter of 2019 by 29.5% due to the freight industry slowdown after an all-time high in 2018.  To better understand what forces are impacting Knight’s business and the transportation industry, Porter’s five forces will be examined within the context of Knight.

Threat of Entry is particularly high within the industry itself.  According to the U.S. Census Bureau (2019), the majority of transportation companies are small and/or self-individuals.  Lockridge also notes that new technology has made it easier for startup logistic companies to enter and become more competitive in the industry. This allows for simple processes such as ELogs, scheduling and route optimization to be automated making it the easier to run a small logistics business.  Particularly focusing on Knights exposure to threats of new entrants, they are significantly exposed to small entrants and the ease at which small businesses can enter the industry.  When looking at threats of entry that are the size and caliber of Knight, the threat of entry becomes a bit lower.  Due to the large financial backing that would be needed, and the vast number of employees, the potential for entrants the same size becomes lower.  Highlighting this point, Costello points out that in 2019 there was a shortage of roughly 60,000 drivers in the industry with 160,000 shortage projected for 2028 (2019).

The Power of Suppliers is moderate to low in the trucking industry as there are many options for Knight to purchase products such as forklifts, trailers, trucks, etc.  The one supply that the company’s annual report revealed was an area of concern was the price of fuel from their suppliers.  To limit the supplier’s power of fuel, Knight enters in contracts with multiple suppliers at fixed rates or within a band to cushion for any price increases that are unforeseen (Knight-Swift Holdings Inc, 2019).  The annual report continues to express minor concerns that they are subject to suppliers, who are experiencing costs increases, passing along those cost increases.  This is especially true for products that are made specifically for Knight as they are specialized and there would be switching costs if Knight had to transition suppliers.  However, items such as tractors, trailers, mechanical components can be purchased from a different supplier with very little to no switching costs.

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The Power of Buyers is moderate to high. Knight-Swift Holdings Inc. points out that Wal-Mart is the largest customer but only consists of about 14% of their revenue.  There is no other single customer at Knight that represents over 10% of revenue, meaning they have a vast customer base that they service (2019).  The 2018 annual report also indicated that the top 25 customers represented roughly 50% of the revenue giving more evidence that they have a wider customer base.  Porter alludes that buyers have power if the costs of switching is relatively low. He also points out that if buyers believe they can get the service anywhere or find an equivalent that they will play vendors against each other, thus giving buyers even more power (2008).  Other than logistic nightmares, the cost to switch transport companies is not all that impactful on buyers but overall in Knight’s profile, their differentiated customer base has allowed them to leverage the power of buyers, so the power of buyers is moderate for them. 

The Threat of Substitutes is low for Knight.  Due to the need for manufacturers and retailers to meet the needs of their customers, transportation via tractor trailer is really the only option for products to get to their location.  Kasi (2017) points out that there is a large growing pool in the transport industry that provide a different rage of services and prices, but a complete substitute does not exist leaving transport companies the only option for manufacturers to move their product.  Rail does offer a more ecofriendly substitute to the trucking industry however the infrastructure to support rail is slowly crumbling.  Rail also has limitations when it comes to the ever-growing popularity of just-in-time logistics needs because it is limited to areas that rail travels through as well as the need for storage of perishable products is longer via rail (Rocky Mountain Institute, 2009).

Rivalry Among Existing Competitors is high for Knight.  According the U.S. Census Bureau (2019), there are over 600,000 trucking companies in the U.S, with many of those companies having small headcounts or self-employed businesses.  Though there are primarily small competitors, there are also large competitors, roughly 100, that are established in the market with revenues over $50 million (JOC Staff, 2019).  Stinson (2019) highlights that Knight’s income was down roughly 30%, in the 3rd quarter of 2019, due to the over crowdedness of trucking capacity in the transport industry.  Though the shortage of truck drivers that Costello (2019) points out is real, the amount of small businesses and established large business continues to drive competition in the industry.  This competition leads to a battle of prices, quality, services and just-in-time logistics needs in order to secure customers (Kasi, 2017).  Another factor that Kasi (2017) points out that keep rivalry high is the low barriers to entry in the industry.

Many of these five forces have a couple of commonalities between them, technology.  As the wave of new technologies start to confront the industry, one major technology change is presenting an ethical dilemma, driverless trucks.  Lasater, points out that the programming of such an automated truck runs the risk of valuing particular individuals lives over that of others in determining the outcome of an accident.  Does the truck strike the family of four walking across the street or is it programed to swerve into oncoming traffic?  If there is a truck driver sleeping in the cab and an accident is imminent, how should the programing prioritize the safety of the sleeping driver verse that of other motor vehicles on the road (2017)? This artificial intelligence in the trucking industry presents a host of questions and concerns that are going to have to be faced by legislators and the court of public opinion.  

In conclusion, the trucking/transportation industry is an ever-changing industry.  The rapid globalization and barriers to trade have had significant impacts on the trucking industry.  Technology improvements, such as GPS, communications, artificial intelligence, etc., have allowed the trucking industry to expand its outreach (Kasi, 2017).  The review of Porter’s Five Forces and applying them directly to Knight shows where potential lapses and strengths in their strategy lie.  The analyses indicate that the threats of new entrants are high, competition is high, and power of buyers is high, leading participants in the market to a strategy of competing for prices, quality and service.  With the power of buyers and threat of substitutes being low, it is an attractive quality of the trucking industry.  It is imperative that Knight or any firm in the industry understand how these forces are impacting their strategy and framework of their company.  As Porter (2008) alludes, there are many contributors to profitability in the short fun.  However, in the long run, industry structure and how these five forces interact with the industry are a key determinant of profitability and sustainability in the industry.

References

• Costello, B. (2019). Truck Driver Shortage Analysis 2019 (pp. 1–17). Arlington, VA: American Trucking Association.
• Funding Universe. (n.d.). Retrieved February 8, 2020, from http://www.fundinguniverse.com/company-histories/knight-transportation-inc-history/
• Gensler, L. (2017, April 10). Knight, Swift Transportation Merge to Create $5 Billion Trucking Giant. Retrieved February 8, 2020, from https://www.forbes.com/sites/laurengensler/2017/04/10/knight-transportation-swift-transportation-trucking-merger/#6c5e68f73b04
• JOC Staff. (2019, August 13). Top 50 trucking company rankings 2018. Retrieved February 8, 2020, from https://www.joc.com/trucking-logistics/top-50-trucking-company-rankings-2018_20190813.html
• Kasi, A. (2017, July 6). Porter's Five Forces Model of Logistics Industry. Retrieved February 5, 2020, from https://www.porteranalysis.com/porters-five-forces-model-of-logistics-industry/
• Knight-Swift Holdings Inc. (2019). 2018 Annual Report. Retrieved from https://investor.knight-swift.com/sec-filings
• Lasater, L. (2019, November 4). The Ethical Dilemma of Driverless Trucks. Retrieved February 9, 2020, from https://redarrowlogistics.com/trucking/the-ethical-dilemma-of-driverless-trucks/

• Lockridge, D. (2019, July 15). How Logistics Technology is Helping Small Carriers and Brokers Compete. Retrieved February 8, 2020, from https://www.truckinginfo.com/336163/how-logistics-technology-is-helping-small-carriers-and-brokers-compete
• Porter, M. E. (2008). The Five Competitive Forces That Shape Strategy. Harvard Business Review, 86(1), 78–93. Retrieved from http://search.ebscohost.com.mylibrary.wilmu.edu/login.aspx?direct=true&db=bsu&AN=28000138&site=ehost-live
• Rocky Mountain Institute. (2018, October 11). Rail Versus Trucking: Who's the Greenest Freight Carrier? Retrieved February 9, 2020, from https://www.treehugger.com/cars/rail-versus-trucking-whos-the-greenest-freight-carrier.html
• Stinson, J. (2019, October 23). Knight-Swift's Q3 Net Income Down 29.5% to $74.6 Million. Retrieved February 4, 2020, from https://www.ttnews.com/articles/knight-swifts-q3-net-income-down-295-746-million
• U.S. Census Bureau. (2019, June 6). America Keeps on Truckin'. Retrieved February 8, 2020, from https://www.census.gov/library/stories/2019/06/america-keeps-on-trucking.html