Corporate Strategy of Fedex Corporation

Corporate Strategy of Fedex Corporation Executive Summary This analysis of the corporate strategy of FedEx Corporation relates to three specific issues in the corporate strategy case. The first issue is a critical analysis of the global express transportation and logistics industry. The second issue discusses about the mergers and acquisitions in transportation and logistics industry. The final issue is a critical review of the performance of FedEx in the events leading to the January 2000 reorganisation. In the first section, the global express transportation and logistics industry is an attractive sector based on the fundamentals of the sector given in the five forces analysis using Porters framework. There are large barriers to entry, there are minimal substitutes that exist, industry is relatively disciplined, and the power of buyers and suppliers are mixed. FedEx is well placed in the sector given its core competencies and dynamic capabilities relating to its management and the functional areas of marketing, human resources and information technology and systems. In the second section, gives a brief knowledge about the benefits and limitations of merger and acquisition strategies in this industry. This also describes how effective was the 1998 Caliber System acquisition and where did it led the company do in its further years. In the final section, it is noted that FedEx performed poorly within its sector and given its capabilities, the firm was expected to have been more proactive in moving past its poor performance. Nevertheless, the firm had to wait until after several quarters of poor performance and only after the competitors have taken advantage of the development in the Internet market did FedEx make changes to its business. Post the changes, FedEx did well in utilising its core competencies that were identified in the first section, and leveraging these competencies to its advantage. CHAPTER-1: Analysis Of Global Express Transportation And Logistics Industry Introduction To Transportation And Logistics Industry. Global Transportation Logistics Industry comprises a wide range of service providers, covering all modes of transport air, road, rail, sea as well as related services such as warehousing, handling, stevedoring, and finally value added services like packaging, labelling, assembling etc. In addition to these physical services, TL involves all sorts of planning, organising and managing services in the area of transportation and logistics. Over the past years, we have seen a trend to diversification (growth strategies mergers acquisitions), which results in larger integrated groups operating in more than one of the TL sub-sectors. As a result, it becomes very unclear to understand the limits between the different TL sub-sectors. (http://www.pwc.com/gx/en/transportation-logistics/index.jhtml) About FedEx FedEx corporation offers transportation, e-commerce and business services through its network of subsidiaries, divided into four business segments. The FedEx express segment includes Federal Express Corp., a leading global express transportation company offering time-certain delivery within one or three business days; and FedEx Trade Networks Inc., a provider of customer brokerage, global cargo distribution and Global Trade Data and Global Trade Tools software products. The FedEx ground segment includes FedEx Ground Package System Inc., which provides small package ground delivery to nearly 100% ofU.S.residences. The FedEx Freight segment includes FedEx Freight Corp., a US provider of next day, second day and interregional less than truckload (LTL) freight services; FedEx Custom Critical Inc., the worlds largest provider of expedited time critical shipments; and Caribbean Transportation Services Inc., a provider of airfreight forwarding services between the US and Puerto Rico. The last segment is FedEx Kinkos, consisting of FedEx Kinkos Office and printing services Inc., which provides copying and printing services, signs and graphics, videoconferencing, high speed wireless and wired Internet access and computer usage, as well as retail access to all FedEx ground and global express shipping services. (Jack W. Plunkett 2007) Porters Value Chain Analysis This section assesses the global express transportation and logistics industry through the value chain analysis of Porter. The review is done across the primary and support activities for the value chain with the details presented in the following table: Primary Activities Comments Inbound logistics Increased presence in various markets to expand footprint and capture market share by players (Lai et al, 2008) Operations Increased cost in operations due to rising fuel prices; margins of industry players hit (Wadewitz, Johnson Weinz, 2008) Outbound logistics Important activity as link to customers Distribution centres being set up by the largest players in the sector in new markets such as China (Lai et al, 2008) Marketing and sales Increased importance in current market with pressure on margins though players have generally kept pricing discipline Service Service to customer could potentially change with new pressures and competitive dynamics; current focus on service but business models on customer service delivery could change (Greene Longson, 2008). Support Activities Comments Firm infrastructure Entrepreneurial culture typically Management of firms could be forced into action with potential consolidation in the sector driven by pressures in decreased business and margins; could lead to synergies and value (Fitchie, 2008) HR management Human resources continues to play an important role as talent influences the activities across the value chain Technology development Technological capabilities continue to be critical factoring the sector and a requirement to be a player (Greene Doshi, 2007) Procurement Important lever for sector given large capital outlay required for building or replacing fleet Some are pursuing this activity despite sector pressure as business has decreased; FedEx recently reported to have bought some aircraft from Rolls-Royce (Armitage, Fornaro Crispin, 2008) www.umbrellacloud.com/business-model/value-chain We note from the analysis above and the supporting arguments in articles, the key factors impacting the value chain are the following: Integration of the firms activities across primary and support activities Though each of the activities above have their influence on the sector and its development, the important underlying factor is the integration of the primary and support activities in order to drive the efficiency of the firms in the sector, and ensure the delivery of the customer service required by clients. Use of technology to drive integration and also efficiencies across the value chain Aside from the integration of the activities, a key driving force as well is the use of technology to both drives the integration and also pushes the efficiencies across the value chain as this impacts the pricing of services and delivery of customer requirements. Strong management to drive actions and initiatives across the chain Finally, strong management is needed in order to identify the opportunities and be able to push for the implementation of these initiatives, particularly in technology and in integration. The current industry pressures from higher fuel prices are changing the dynamics of the sector. Supply Chain Management Supply Chain analysis involves working across multiple enterprises or companies (Inter-enterprise) to shorten the supply chain time in the delivery of goods and services to the consumer or customer. Demand uncertainty in supply chains can be addresses by faster response times. A basic product supply chain can afford longer lead times and batch manufacturing of large lot sizes to meet the demand. A supply chain that produces fashion or mass customization products must respond quickly and be more agile. Most supply chains are moving in the direction to support a more rapid changing of demand by the consumer or customer. Good transportation and logistics companies also natures in reducing total costs through supply chain management excellence. Supply chain management means managing the business process from the initial supplier to the ultimate customer focusing on speed and flexibility, resulting in the lowest total cost and highest customer satisfaction-from suppliers supplier to customers customer-with supply decisions based on total life cycle costs. In this Context, FedEx identifies five principal attributes of supply chain management: Strategy Creating an effective supply chain management organization and supporting fact-based strategies and plans. Resources Developing and deploying human resources and information systems necessary to maximize performance. Nothing happens without top-notch, highly-skilled professionals using effective technical tools. Processes Creating strategic plans based upon total cost management and in sourcing/outsourcing analysis and applying a systematic approach to better utilizing the supply base. Optimization Aligning the supply base with our supply chain goals and continually seeking to improve the supply chain methods and composition. Globalization Viewing supply opportunities on a global basis. (www.fedex.com) FedEx Core Competencies And Dynamic Capabilities The analysis above of the global express transportation and logistics industry provides an indication of the requirements needed in order to be successful in the sector. This sub-section presents the core competencies and dynamic capabilities of FedEx and will present the link with the sectors requirements for success. The core competencies and dynamic capabilities of FedEx are the following: 2. Human resources: empowering employees One of the core competencies of FedEx is the empowerment of employees which has led to entrepreneurial behaviour among the employees (Schindehutte, Morris Kocak, 2008). This empowerment is the reason that FedEx is able to adapt quickly to market changes and keep abreast of the development in the global express transportation and logistics sector and ahead of competition. 3. Marketing: delivering customer value FedEx is known for their innovativeness in delivering value to their customers. It is partly the point above on employee empowerment which drives this. However, it is also largely the strength of their marketing organisation in being able to identify the value that customers require and their ability to deliver this through convenience and minimised relational costs (Smith Colgate, 2007). 4. Information systems and technology: providing accurate 24/7 information FedEx has invested significantly in its information and technology systems in order to provide customers with information to track the services being provided by FedEx. The firm realised early on in their business history, and well ahead of the other firms in their sector, the importance of information (e.g. package tracking, drop-off location finder) and the power this brings to meeting customers needs (Bhattacharya, 2006). 5. Management: continuing learning and application to operation This core competence of FedEx is driven by their CEO and Founder Fred Smith who stated that the success of FedEx is based on â€Å"continual learning and education and the discipline to apply those lessons to your operation† (Sarros, Cooper Santora, 2007). FedExs actions have been based on a continual understanding of their market situation and the implementation of initiatives to meet the requirements of the evolving sector such as technological demands and customer service level requirements. Strategic Vision And Infrastructure Within FedEx Corporation (a) FedEx Strategic Vision And Visionary Leadership. Frederick W Smith, the Chairman, President, and CEO of FedEx Corporation was presented the â€Å"Peter F. Drucker Strategic Leadership Award† for the year 1997. The award, established in 1995, was in recognition of an individuals innovative and result-oriented leadership. With the help of his team he executed a vision with consistency and focus. Analysts credit Smiths leadership as the reason for the transformation of FedEx, from a once loss making company, to a global logistics industry leader with revenues of â€Å"$22.5 billion.† Under his leadership, FedEx management has developed rigorous processes with extremely low defect rates; employees are empowered through information, technology and thorough training. Information technology has transformed the company into a cyberspace leader as well as a logistics trailblazer. Smith was one of the few business leaders who first anticipated the application of Internet in business operations, resulting into the launch of the website www.fedex.com in 1994, enabling customers to do business online. FedEx had been established as a technologically driven company. Smith stipulated three goals, which he believed would form the critical success factors of FedExs business in future speed, reliability and customer service. In order to achieve these goals, Smith invested heavily on IT. Smith strongly believed that for an express industry, it was necessary to use IT to provide customers with real-time information about the movement of their documents/packages. Visionary Leadership FedEx Supply Chain Services will be an acknowledged world leader in global integrated logistics management, supply chain solutions and time-definite delivery. Our motivated associates will forge mutually profitable partnerships with our customers using world-class technology and business practices. Smith also believed that in a service oriented organization like FedEx, it was very important to have highly committed employees, failing which; it was not possible to deliver the kind of service that the customers expected. FedExs employees were made to believe that they were not merely performing their duties but were solving the transportation problems of the customers. It is clear from these analyses that FedEx Corporation had been very competent in technology and human resources which resulted in its great success. FedExs corporate strategic vision is based on three principles; operating independently: by focusing on independent networks to meet distinct customer needs; compete collectively: by standing as one brand worldwide and speaking with one voice Manage collaboratively: by working together to sustain loyal relationships with their workforce, investors, and customers. http://www.icmrindia.org/casestudies/catalogue/Leadership%20and%20Entrepreneurship/LDEN023.htm (b) FedEx Transportation And Logistics Infrastructure FedEx Corporation (â€Å"FedEx†) provides a broad portfolio of transportation, e-commerce and business services through companies competing collectively, operating independently and managed collaboratively, under the respected FedEx brand. These operating companies are primarily represented by Federal Express Corporation (â€Å"FedEx Express†), the worlds largest express transportation company; FedEx Ground Package System, Inc. (â€Å"FedEx Ground†), a leading provider of small-package ground delivery services and FedEx Freight Corporation, a leading U.S. provider of less-than-truckload (â€Å"LTL†) freight services (FedEx Annual report 2007). Overall, FedEx hasover 280,000 employees worldwide,operates approximately 50,000 drop off locations and managed over 10 million square feet of warehouse space worldwide. They have 670 aircrafts, and 75,000 vehicles and trailers, handling around 6.5million daily shipments to more than 220 countries and territories. (Jack W. Plunkett 2007). FedEx Corporation introduced express delivery to the world in 1973, and remains the worlds largest express transportation company and it is the worlds largest overnight package carrier with about 30 percent market share. Taking into considerations the key elements from the above analysis and FedExs core competencies it can be figured out that FedEx primary activities are Marketing and Sales, checking orders, financial analysis and receiving payment, packaging, shipping products, logistics, handling and storing of products to be shipped, handling orders, delivery of the products, and finally Service to ensure customer satisfaction. But, the key elements which support these activities are: Procurement (purchasing, trucks, planes, gas and other assets). Research and Development (RD) activity which include technology development, investments in systems innovation, and information technology (IT) development. Human Resource Management that includes hiring, training, developing and compensating employees from the truck drivers to the top management. Firm infrastructure which includes general management, planning, accounting, legal support, government regulations, and other general requirement to support the value chain. (c) FedEx Virtual Information Infrastructure Information Technology is the backbone of the FedEx Corporation which is immensely responsible for its success and its competitive advantage over its rivals. FedExs consistent effort in the development of information technology and system innovations has always been its prime concern which created the direct interconnection between its customers and services. FedExs Virtual Information System emerged as a revolution in this context which closed the gaps between the consumer and seller. In 1979, a centralised computer system Customer, Operation, Master Online System kept track of all packages handled by the company. This computer system relayed data on package movement, pickup, invoicing and delivery to a central database. In 1984, FedEx started to launch a series of technological systems. The Power-Ship program, aimed at improving efficiency and control, which provided the most active customers (around 850,000) with the proprietary online services. But, the most significant development in this field came between the years 1994-99 which started giving the shape to the virtual information infrastructure. They were first to offer online package status tracking through FedEx website so that customers can actually conduct business via internet. In 1995, a Windows-based shipping and tracking software allowed around 650,000 users to process and manage their shipment from their desktops. FedEx Virtual-Order Software in 1996 linked internet ordering with the delivery and o nline tracking. In 1997, FedEx introduced e- Business tools for easier connection with shipping tracking applications. FedEx decided to overhaul its internal I.T. infrastructure under the Project GRID (Global Resources for Information Distribution). The project involved replacing 60,000 terminals and some PCs with over 75,000 network systems. Also, in 1999 FedEx signed an agreement with Netscape to adopt Netscape software as the primary technology for accessing its corporate intranet sites. FedExs intranet included more than 60 Websites, created for its end users and some cases by its end users. At this point of time FedEx was the largest online client server network in the world that operated in real time. The benefits of these services were not limited to FedExs customers. Its online services, which in 1999 handled 60 million transactions per day, saved FedEx cost of 200,000 customer service employees. In turn, the Company reported spending 10 percent of its 17 billion U.S. dollar s annual revenue on I.T. in 1999. Information had allowed FedEx to lower its costs such that the cost to customers of using FedEx in 1999 was lower than it was 25 years ago. FedEx Virtual Order Process http://www.ite.poly.edu/people/brao/fedex_case.htm CHAPTER-2: Mergers Acquisitions In Transportation And Logistics Industry. Benefits And Limitations Of Merger And Acquisition Strategy. Merger and Acquisition is basically a mechanism by which an organization grows. It is a kind of external growth strategy which involves using the businesss money to invest in other businesses, whereas the internal growth occurs by investing profits in the same business. A merger occurs when two separate companies agree, usually by mutual consent, to come together. On the other hand, acquisition is a takeover which involves purchasing a shareholding of over 50%, and then this company can control and impose its will upon this. Merger and acquisition are growth strategies are beneficial for transportation and logistics industry, as in all the other industries if two companies decide to join hands after a detailed research and surveys. (book†¦Ã¢â‚¬ ¦book†¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦Ã¢â‚¬ ¦.book) Benefits Of Merger And Acquisition: Mergers and acquisitions usually succeed in building cost efficiency through the implementation of economies of scale. Basically, a new economically stable firm emerges, through the union of two parent firms with an increased scale of operations. As a result, there are chances that the cost per unit will come down with rise in output production. In context of TL industry the company will get a bigger infrastructure and they may get easy access to the areas which were to difficult to reach. This in turn will increase their logistics offerings and their efficiency with reduced cost, which was not possible if they would have thought of increasing the branches on their own. This process also often leads to an increased value generation for the company. It is expected that the shareholder value of the newly established firm would be greater than the sum of the shareholder values of the parent companies which is applicable in TL industry as well. One of the benefits of mergers and acquisitions is increase in market share. When a financially stable company acquires a contrastingly distressed one, the newly found organization experiences a substantial increase in market share. The new firm is usually more cost-efficient and competitive when compared to its financially weak parent organization. Limitations Of Merger And Acquisition: I. If due to mergers and acquisitions, a company has considerably a big market share then there could be less competition complacency amongst firmscan lead to lower quality of services and less investment in new products and services. II. Due to merger or acquisition, if a company expands too much then it could also lead to diseconomy of scale. In this condition, it will lead the firm to produce products and services at increased per unit costs. III. Mergers and acquisitions can lead to loss of jobs. IV. Mergers could be a factor of de-motivation for staff, for example, managers would prefer to work for big company where they get higher salaries and more prestige. V. There could be failure to secure good will of a wide range of stakeholder groups in both companies. VI. Potential conflict between individual and corporate objectives is not given sufficient recognition and isnt managed. VII. Reputation can also be damaged during the merger process. Acquisition Of Caliber Systems In 1998 By FedEx Corporation In the year 1998, FedEx took a big leap in context to its diversification by acquiring Caliber System Inc. As a result of this, five subsidiary companies were formed: Federal Express, RPS, Roberts Express, Viking Freight and FDX Logistics. Apart from Federal Express, all the other four were the part of Caliber System and all were managed independently. The logistics operations of both FedEx and Caliber were different as differed in customer bases and service offerings. Caliber was expertise in providing an elaborate logistics operation focusing mainly on high priced goods industries such as moving raw materials, managing work-in-progress, manufacturing of cars and fork-lift trucks etc. Federal Logistics and Electronic Commerce (FLEC) before the acquisition was not able to provide complete supply chain solution because they just focused on finished goods and reverse logistics. But, the acquisition led FLEC to put there hands into areas like warehousing and transportation apart from th e basic logistics functions. Later, Caliber became apart of FDX Logistics and FLEC continued as a division under Federal Express. The burden which this acquisition brought along with it to the company was that, the company has to loose its image of just being an express delivery company. The challenge was that all the critics including the customer related the FedEx brand just with transportation. One solution to this challenge was the renaming of the company. In this context, the acquisition gave the name to the holding company as ‘FDX Corporation but they did very less to promote the name. Therefore, the transportation subsidiary FedEx Express still lived on as a brand image and the corporate name was still under cover. Unlike other companies such as UPS which ran only under one name for all its services, FedEx was trying to promote all its subsidiary companies with completely unrelated names under FDX logo. The key agenda here was that, the two separate logistics businesses within the group with separate sales and customer service staff created confusion within customers and resources were duplicated. The big thing was despite having such confusion the branches continued to operate and offer solutions at all level of supply chain. In this scenario, the autonomy of all subsidiary companies where maintained but the challenge was to bring the companies closer to create the synergy. These companies were operating with separate accounting systems and customer service staff, so they made a vision to â€Å"progress individually but compete collectively.† Therefore, we can figure out that this acquisition was not a complete success as all the subsidiary companies sustained but the ultimate goal for the corporation was to provide customers with a single point of access to the whole Group. In later years, this became the main reason for the companys structural transformation through advancement in information technology within the company. CHAPTER-3: Events Leading Up To January 2000 Reorganization This section provides an analysis of the events leading to the January 200 reorganisation of FedEx. The first sub-section reviews the performance of FedEx and the developments in the Internet market while the second sub-section touches on the impact of the major strategic initiatives undertaken. The final sub-section provides a quick summary of the analysis. FedEx Performance And Internet Market Developments The January 2000 reorganisation was largely driven by the poor performance of FedEx in the preceding periods. While performance remained strong and positive up to 1999 with record earnings, this proved to be the start of a downtrend in performance. The next several quarters saw FedExs performance experience considerable in income and profit. This was partly influenced by the rising fuel prices but the failure of the company to react and still be reasonably profitable in a backdrop of rising fuel prices led management to believe that change was needed. The performance of FedEx was sub-par and deserved poor reviews. The lower financial performance aside, FedExs performance was inadequate for the following reasons: Un-reactive and inflexible It took several quarters of poor performance for FedEx management to take action. FedEx could have been more aggressive in its actions and realised immediately after the first quarter of poor profit performance that the industry was changing and that FedEx needed to make a move. At the very least, FedEx could have made moves that would have impacted other players as well and severely harm the poorer capitalised firms (e.g. start a price war) Did not utilise advantages in sector Partly related to the first point, FedEx did not push to make any impact on the sector. FedEx could have utilised its network, for example, and worked with its suppliers and even buyers to ensure that the firm still maintained good profitability in the period of high fuel prices. In addition to the poor performance of FedEx in the preceding several quarters, the development of the Internet market and the actions of competitors forced FedEx to review its business strategy and determine the steps necessary in order to bring the firm back to profitability and successful operations. In this respect, the actions of FedEx were unacceptable as well for a couple of reasons: Failure to realise technological changes For a firm that was known to be reliant on technology as well as at the forefront of technological advancements, the actions of FedEx were unacceptable as they showed poor pro-activity and understanding of the changes happening in the sector. Reactionary moves to technological innovation Not only did FedEx not realise technological changes that would impact the sector, FedEx had to wait for other firms to take the first move in tapping the new technology. This thus made the situation worse as it placed FedEx in a position that was far behind other competitors in terms of the use and development of technology. Motivation for Strategic Initiatives FedEx had three strategic initiatives following the reorganisation in January 2000. For these actions, FedEx could be lauded as these addressed the concerns that FedEx faced following the several period of poor performance and the developments in the Internet market. The strategic initiatives and the rationale for pursuing each are as follow: A new branding strategy that involved changing the Companys name to FedEx Corporation, and extending the ‘FedEx brand to four of its five subsidiary companies This is an excellent move for a couple of reasons: (1) integrates the firm and leverages the successes of the various divisions, (2) taps the brand that clients are familiar with. This would allow FedEx to leverage its advantages in the sector as seen in the five forces analysis. Although relatively belatedly, FedEx did realise the importance of integrating their businesses and maximising their position in the sector. The need for one point of access to sales, customer services, and billing and automation systems This again touches on the integration point although at a different aspect. With an integrated business across its key activities, FedEx could provide clients with easy access and reliable services, factors that are important for the FedEx clients. Also, this action gives FedEx the technological push that it needed in order to bring its technology up to par with competitors, and position the firm for possible advancements at a later time. FedEx Home Delivery, a new, economical residential delivery service- This last action by FedEx touched on several important factors related to the success of firms in the global express transportation and logistics industry: (1) innovation in products and services, (2) leverage of strengths of related businesses, and (3) exp