Case Analysis of Federal Express

Case Analysis: Federal Express

Introduction

Federal Express is an express transportation company, founded in 1973 by Frederick W. Smith. During his college years, he recognized that the United States was becoming a service-oriented economy and needed a reliable, overnight delivery service company designed to solely transport packages and documents. He wrote a Yale term paper on this idea, and received a ‘C’. His professor thought it would never work. Fortunately for Frederick Smith, he didn’t take it to heart and ended up building that company he dreamed of.

He found investors willing to contribute $40 million, used $8 million in family money, and received bank financing. He started Federal Express with over $80 million, making it the largest company of its time ever funded by venture capital.

Background:

Federal Express became successful so quickly because all their competition became weaker at the same time. They built a super-hub in Memphis, Tennessee, where all packages from the United States would be loaded on the correct transport and shipped out each night.

Today, Federal Express has over 143,000 workers worldwide, and delivers more than 3 million express packages to 200 countries daily. One major change has affected Federal Express. In January of 1998, Federal Express changed to FDX Corporation.

FDX Corporation now includes Federal Express, Roadway Packaging System (RPS), Viking Freight, Roberts Express, and Caliber Logistics. Even though FDX owns all these companies, Federal Express still remains independent. FDX’s strategy is to corroborate on selling and synergies for all FDX companies, but run operations separately and keep each company’s strengths and markets separate. Therefore, some information will be about FDX, but most will be for Federal Express as its own company. For example, Frederick Smith, the founder of Federal Express, is now the Chief Executive Officer of FDX. Federal Express’ CEO is currently Theodore Weise.

Mission Statement

The Mission Statement of FDX is “to produce superior financial returns for stockholders, by providing high value-added logistics, transportation and related information services through focused operating companies”. This mission statement shows that FDX has a clear focus. (1) The main focus is to bring returns to stockholders. (2) They will emphasize adding value above and beyond just their service of transporting an object from one place to another. (3) Their focus of operations will be logistics, transportation, and related information. This mission statement is focused enough to keep FDX from diversifying into for example, food products; yet vague enough to allow growth in all of those areas.

Philosophy:

FDX and Federal Express, in particular hold a People-Service-Profit philosophy. The ‘People’ goal is the continuous improvement of management’s leadership. The ‘Service’ standard is 100 percent customer satisfaction. The ‘Profit’ goal is much like any other company’s goal, and is essential to long-term viability. This philosophy governs how FDX runs its business, and defines strategies.

Federal Express Five-Point Strategy

Federal Express has five strategies that govern business tactics. These are to improve service levels, lower unit costs, establish international leadership and sustain profitability, get closer to the customer, and maintain the People-Service-Profit Philosophy.

Major Strategic Issues

FDX is focused on three primary growth strategies. A collaborative sales process that leverages their shared customer relationships, aggressive global marketing of the broad FDX portfolio to targeted prospective customers, and a strategic application of information systems to reduce costs and improve customer access and connectivity.

FDX Corporate Subsidiaries

All subsidiaries of FDX follow the focus of their mission statement: logistics, transportation, and related information. Since their mission statement allows for growth, they also have room to acquire more companies whose operations are similar. Currently, these are the names and descriptions of the companies under FDX, other than Federal Express.

RPS: North America’s second-largest provider of ground small-package delivery. It also services 28 European countries and Puerto Rico.

Viking Freight: The premier brand name in less-than-truckload freight movements throughout the western United States.

Roberts Express: Engineer and execute time-specific, door-to-door surface and air-charter delivery solutions that solve special-handling challenges for FDX customers within North America and Europe.

Caliber Logistics: Develops and implements customized logistics solutions that help FDX customers manage costs, improve customer service and focus on their core business activities.

The Sales Breakdown for these FDX companies in 1998 is shown in Figure 1 on Page 1 of the Appendix. As you can see, Federal Express still accounts for 83 percent of total revenues. The next largest is RPS, bringing in 11 percent of FDX’s total revenues.

Federal Express Sales & Sales Growth

Federal Express is a very large company, and their sales are shown in Figure 2 on Page 1 of the Appendix. Federal Express had revenues of $13.3 billion in 1998, grown 15 percent from 1997. Federal Express has also had steady growth for the past five years, signifying a very strong company.

Customers, Markets, and Services

Federal Express serves business-to-business, business-to-individual and individual-to-individual accounts. Federal Express’ markets include over 200 countries where 90 percent of all the world’s revenues originate. Federal Express provides both document and freight deliveries as well as supporting services.

Competitors

Federal Express’ competitors include: United Parcel Service, Airborne Express, Emery Worldwide, DHL Worldwide, BAX Global, and United States Postal Service. The market share each of these companies hold is shown in Figure 3 on Page 2 of the Appendix. Federal Express holds 46.5 percent, the largest portion, with UPS and Airborne Express as the largest competitors. As shown from the preceding information, Federal Express is clearly a large, strong, and growing express transportation company.

Company Analysis

This section will show the services Federal Express provides, their strengths and weaknesses as a company, opportunities and threats, and current problems and issues.

Services

Federal Express provides delivery on documents and packages both domestically and internationally, as well as supporting services.

In the United States Internationally Supporting Services

Priority Overnight

Priority

interNet Ship

Standard Overnight

Economy

Collect on Delivery

Same Day

Next Flight

Location Service

First Overnight

First

Dangerous Goods Service

Express Freight

Priority Freight

Worldwide Logistics

Weekend Shipping

Economy Freight

U.S. Government Shippers

Alaska and Hawaii

Airport to Airport

International Government Guide

S.W.O.T. Analysis

Company Strengths and Resource Capabilities:

Globalism: Federal Express operates on a global scale. They operate in 211 countries. They provide services that appeal to most of the world. They have such a large market in which to operate, and thus realize tremendous revenues. They can also achieve global economies of scale.

Innovation: Federal Express took airplanes and trucks and used them differently than any other company before them. This is innovation. They have first-mover advantage in name recognition because of this innovation. This has helped them to remain the industry leader since 1973.

Technology and Communication: Federal Express uses and continues to search for new technology. They allow spending of $1billion a year, 10% of total revenues, for information technology. That commitment keeps customers from switching to other providers. Federal Express also has excellent communication with their customers. They use tracking devices on all shipments, and customers can find out where their shipment is through many different avenues including a user-friendly Web site. Federal Express customers are assured that FedEx will always be on top of technology.

Strategic Vision: Federal Express’ will always have competent top managers in charge of strategic direction. Frederick Smith built an industry leader, and kept it in that position since 1973.

First-Mover Advantage: Federal Express has had first-mover advantage in several areas. (1) Being a global express transportation company. (2) Advanced technology and communication throughout the company’s operations. (3) Incorporating smaller companies with similar operations under its belt to synergize and control more of the market.

Industry Leader: Federal Express has been the industry leader since 1973.

Strong Brand Image: In 1990, Federal Express became the first company awarded the Malcolm Baldrige National Quality Award in the service category. In 1994, Federal Express became the first global express transportation company to obtain simultaneous system-wide ISO 9001 certification in international quality standards. Federal Express has also developed their own quality system that matches their customer’s standards.

Company Weaknesses and Resource Deficiencies:

Rising Prices: Federal Express’ prices are above their competitors’. This can be a weakness if their customers do not perceive a difference between Federal Express and its competitors’ services.

Labor Disputes with Pilots: Federal Express pilots have formed the Fedex Pilots Association. This organization demanded changes in the pilots’ salaries, retirement benefits, and the fact that Federal Express outsources some foreign flights instead of giving their own pilots the job. The pilots have a Web site where news is posted and feelings are discussed. During the busy Christmas season in 1998, the pilots threatened to strike. Federal Express and the Fedex Pilots Association have developed a tentative agreement, which is published on the pilots’ Web site. However, the pilots do not believe this agreement fully meets their expectations. This dispute is definitely an internal weakness for Federal Express, considering they have 3,500 pilots employed with them. Their operations would suffer if there were strikes. When UPS employees went on strike in 1997, Federal Express took the extra 800,000 shipments a day. If Federal Express employees went on strike, their competitors could gain an advantage.

Running Subsidiaries Separately: FDX has deliberately chosen to keep their companies separate. In FDX’s 1998 Annual Report, CEO Frederick Smith states, “Simply layering the unique resource and operating requirements of a time-definite, global, express-delivery network onto a day-definite, ground small-package network would surely result in diminished service quality and increased costs. Under the FDX umbrella, we will leverage our shared strengths while operating each delivery network independently, with each focused on its respective markets.” Frederick Smith is confident this will be a strength, instead of a weakness. Time will tell.

Company Opportunities:

Expansion Globally: Federal Express can continue to expand globally, including the other companies under FDX.

Expansion Internally: Federal Express can continue to acquire more companies, and expand into new technologies or areas in their industry.

Run Subsidiaries Together: If FDX doesn’t profit from running the subsidiaries separately, they can change to integrating their operations to achieve better synergies and economies of scale.

Contracts with Large Corporations: To stay the industry leader, Federal Express should form contracts with companies who will add cost-saving or value-adding benefits to their services.

Joint-Ventures: Federal Express can form joint ventures, such as already with Netscape and American Express, to enjoy the growth of integrating their customer bases.

Expansion of e-commerce: Federal Express already has a major presence of shipping online. They should keep finding Internet companies to contract delivery of their products. Since the growth of e-commerce is rapid now, Federal Express could enjoy both profits and brand name recognition from this kind of expansion.

Company Threats:

Y2K Problem: If Federal Express’ communication and tracking systems aren’t actually Year 2000 ready, they will experience lost shipments, lost customers, and lost profits. This is a threat for every business, but a global company will be affected on a larger scale.

Community Responsibility in the U.S.: Federal Express might be subject to community disapproval in expansion within the United States. Right now, Federal Express has plans to build a second super-hub in Greensboro, NC. The airport is supportive, but the citizens of the community are not. Federal Express has to decide whether the community support or building the center is more important.

Relations with Foreign Countries: Through Federal Express’ expansions globally, they are subject to laws and regulations of all foreign countries. There could be major problems in this area, stunting growth and raising costs. Already, Great Britain will not let Federal Express fly their own planes for shipments. Federal Express must either load their cargo on to British planes, or use ground transportation. This is very inefficient for Federal Express; however, it keeps competition out for British Air Transportation companies. Everywhere Federal Express goes, they are at risk for regulations that hinder their operations or efficiency.

Economic and Political Conditions: Federal Express is subject to the entire world’s economic and political condition in the areas of fuel prices and supply, customer purchase of their services, and relations with foreign countries. As a global company, they are subject to much more risk than domestic companies.

Current Problems and Issues

Federal Express has several current issues and problems. Decisions about these issues will affect Federal Express’ profits and brand name in the future.

Federal Express Pilots’ disputes with the company over their salary and compensation, retirement benefits, and Federal Express’ outsourcing some foreign flights. Table 1 on Page 2 of the Appendix shows why the pilots are upset about their salaries. Federal Express spends only 13.17 percent of total operating expenses on their labor expense. The industry average is 14.81 percent. However, Federal Express’ main competitors spend 20 and 24 percent of total operating expenses on labor. This is why the pilots are voicing their disagreements, and demanding change.

Fuel Price Fluctuation: Federal Express raised their prices and developed contracts with oil suppliers to cover fluctuating fuel costs and volatility of supply.

Creation of super-hub in North Carolina: Federal Express does not have the community’s support.

Alliance with Netscape: FDX created an alliance with Netscape in order to simplify the world of electronic commerce. FDX will offer delivery services on Netscape’s Internet portal site. This will allow both companies to achieve mutual business targets that could not be achieved otherwise.

Alliance with American Express: Federal Express offers a 10 to 20 percent discount on many delivery services to customers using an American Express Small Business Corporate Card.

Federal Express offers many different services spanning the globe; this is why Federal Express has many strengths, and opportunities. However, Federal Express must also be concerned with their weaknesses and current problems.

Industry Analysis

Dominant Economic Characteristics

Federal Express is in the Air Freight or Air Cargo Transportation Industry. This industry had sales of $34.2 billion in 1998. This industry is in the early maturity life cycle because entry is difficult, yet current competitors are still growing. Companies can realize economies of scale in this industry in marketing and purchasing. Services in this industry are essentially identical, with the exception being the value-added services.

General Economic Conditions

The current global economic crisis can affect this industry by stunting foreign expansion and reduced utilization of express shipping services. The current crisis in Kosovo may affect business for these companies if any countries they do business in feel the United States is wrong and want to boycott American-originating products and services.

Porter’s 5-Forces Model

Rivalry Among Competing Sellers:

This is a strong force in this industry because the competitors use price cuts to compete, there is a low cost and ease to switching brands, and the companies in this industry diversify and acquire other companies for strategic growth and synergy.

Competitive Force of Potential Entry:

This is a weak force in this industry. Each company currently in the industry has strong brand images, leaving a harder job for new companies. The capital expenditures to start an express transportation company are large, and the companies currently are achieving economies of scale by going global. Any smaller company will not be able to achieve these right away, not allowing them to compete on prices. Another factor threatening potential entrants is trade tariffs and international regulations. Most companies currently in the industry have already established relations with foreign countries. New companies will have to prove themselves to foreign companies, suppliers, and customers.

Competitive Pressures of Substitute Products:

This is a weak to moderate force in this industry. Businesses and individuals that wish to ship cargo and packages can do it with other modes of transportation such as trucks, trains and boats. However, the customers that use air freight transportation usually desire convenience, speed, and low cost. Traditional transportation modes do not offer all three of these. Businesses and Individuals who want to ship documents can use e-mail, the Internet, and Facsimiles. However, these can take some time to scan and load, and then it is uncertain that your document will get to its destination.

Power of Suppliers

This is a strong force if the suppliers serve industries other than Air Freight. If a supplier only has accounts, or the majority of their accounts with these companies, they will not be able to control prices and supplies. Suppliers that are involved in this industry are: vehicle manufacturers, airplane manufacturers, fuel suppliers, labor, airports, and shipping materials manufacturers.

Power of Buyers

This is a moderate force in this industry because competition keeps prices similar among the companies. The only difference is companies, such as Federal

Express who have value-added services that allow a higher price. Also, the buyers of the services in this industry are reactionary. They do not know the technology before it happens. They become dependent on the technology, service and speed offered by the companies in this industry and will pay for it.

Industry Prospects and Overall Attractiveness

A trend among Air Freight shippers is to use the Internet for communication with customers and even obtaining shipping contracts with companies selling on the Internet. This alliance with the fastest-growing industry will bring exponential growth to the Air Freight industry, above and beyond what they would normally have realized without this. This industry should remain attractive, with concentration on competition for market share, service differentiation, and brand image. Current Advertising has been aimed at being better than the competitor for different reasons.

Performance Analysis

FDX has an impressive performance record for example in 1998 they had revenues of $15.9 billion. We can also look at their Net Income for 1998, as well as for the last five years. This information is shown in Figure 4 on Page 3 of the Appendix. As you can see, sales have been growing steadily for the past five years. Looking at the net income, though, it isn’t that impressive. It even declined in 1997, from the rising fuel costs during that year. However, in 1998 it grew from $200,000 to $500,000. That could be from reduction in operating costs, or from the acquisition of the subsidiaries which had lower operating costs compared to Federal Express.

The financial ratios for FDX compared to Airborne Express (ABF) are in Table 2 on Page 3 of the Appendix. Most of the ratios show Airborne Express in better financial condition than FDX. However, this can be explained through FDX’s size as compared to Airborne Express. Airborne Express does not offer as many services or types of shipments as FDX, and it only has half the market share as FDX. Since UPS does not have air shipments, we could not benchmark FDX to them. Clearly though, FDX and Federal Express is the market leader in this industry, have outstanding sales, a healthy profit, and a safe amount of debt.

A 5-Year analysis of Federal Express’ profitability and activity ratios is in Figures 5 and 6 on page 4 of the Appendix. These ratios over time show a steady increase, except for year 1997, where fuel costs hurt Federal Express deeply.

Recommendations

Based on the company history, company analysis, industry analysis and performance analysis, we have the following recommendations for Federal Express.

Ensure that the employees, especially pilots, are well compensated. Since Federal Express is a service company, employees are critical to its success. Place pilots’ salaries at or above the industry average. They need to maintain a strong presence on the Internet, in case of a shakedown, and find ways to make their e-commerce user-friendly and profitable. They need to keep prices within 10 % of their competitors prices, or make sure that their customers view their service as worth the price.

Stock and Investment Evaluation

FDX stock is doing very well right now. As you can see, the stock price is high, 107 1/8. Also, the P/E ratio of 27, shows buyers are paying 27 times what the earnings are on the stock. A P/E ratio this high, over the standard 20 limit reflects that FDX is becoming an Internet stock. Investors are willing to pay more for the stock relative to its original industry competitors because of future expectations.

Three graphs showing FDX’s stock prices at 1-Year, 6-Months, and 5-Years ago are found in Figures 7, 8 and 9 on Pages 5 and 6 of the Appendix. Figure 8 shows that FDX is currently well above the S&P 500, showing great expectations for the company.

Additionally, prospects are looking good for FDX stocks and FDX as a company by several sources including an analyst at Morgan Keegan & Co., Gruntal & Co., and Value Line.

In Conclusion, we would recommend FDX as a good stock to invest in due to consistent growth in revenue, and their newfound presence on the Internet.