1

Introduction

What is the first thing that comes to your mind when you think of sending an important parcel or letter across to someone. Most likely it is FedEx. Once upon a time FedEx was almost synonymous with express package shipping. Today Federal Express maintains a big lead over competitors in express packages and letters sent within the US and from US to overseas destinations. FedEx has a 43% share in the US market and UPS , its closest competitor has a share of 27%. FedEx's initial delivery service began modestly with small packages and documents, but today the world is addicted to shipping all manner of goods around the globe swiftly and reliably. Even though Fedexs services initially were pretty much oriented towards shipping of important documents and parcels, these days people send just about anything through these express delivery service. The founder of FedEx, Fredrick Smith figured out two decades ago that this company was in the information business, so he stressed that knowledge about cargo's origin, present whereabouts, destination, estimated time of arrival, price and cost of shipment was as important as its safe delivery. In other words, information about the packages, is as important as the package itself. FedEx depends heavily on information technology to conduct its day to day business. Technology is something that competitors too can use to derive great benefits. But, Fedex, it is found is quite far ahead of its competitors in terms of application of information technology. It is definitely going to take a lot of time, effort and money for competitors to catch up with Fedex in this regard. Recently, FedEx was ranked 18 by the Fortune Magazine in a survey conducted to determine the top 100 companies to work for in the United States. The employee morale seems to be pretty high. This is exemplified by the way FedEx employees rose to the sudden increase in work pressure created by the recent UPS strike. Due to this strike by the UPS employees, the other shipping companies bore the brunt of handling excess shipments. Fedex was swamped with 800,000 extra packages a day and according to the press releases, the employees of Fedex voluntarily worked extra hours to clear the shipments. This kind of high enthusiasm among the employees is rarely seen in companies today. The employees are well appreciated for their efforts. Fedex gives away a lot of awards to the employees in recognition of their performance. This is probably one of the reasons for the high employee retention at Fedex. The growth in popularity of the Internet has introduced many new terms such as ecommerce and e-tailing. This has in turn created lots of opportunities for companies involved in the package delivery business. FedEx and its competitors are vying to gain as much advantage as possible out of these opportunities. Few of these companies, including FedEx, are going beyond the package delivery business and getting involved in becoming full service logistics providers that specialize in orchestrating the flow of goods and information between customers, retailers, and suppliers. Fedex, which started off as a simple package deliverer, is now getting itself involved in providing e-commerce solutions. In fact Fedexs presence is being felt throughout the supply chain. One of the best examples in support of this is the case of National Semiconductors (Natsemi).

Natsemi has manufacturing facilities in Singapore, to take care of its product demand in Asia. But, the company has essentially outsourced most of its warehousing and distribution to Fedex. Orders coming into Natsemi are processed in the mainframes at the companys headquarters in Santa Clara, CA. Once the orders are processed, the information is sent across to Fedex. From this point onwards, Fedex takes over and sees to it that the orders are delivered to the customer. FedEx is part of a bigger company called FDX, whose main objective is to provide the most innovative transportation and logistics solutions for customers. FDX family comprises of the following companies: FedEx, RPS Inc, Viking Freight Inc., Caliber Logistics Inc., Roberts Express Inc., and Caliber Technology Inc. Fedex is the FDXs flagship company, providing express, reliable , time-definite delivery of shipments throughout the world. It would be very interesting to analyze how FedEx goes about conducting this business. 1.1 Brief History Of FedEx

FedEx was founded by Fredrick Smith in 1973. Smith was also the companys first CEO, and he remained in that position until March 1998. Smith got this idea about improving the existing express delivery system while he was an undergraduate student at the Yale University, way back in 1966. In those days, mainframes were very popular and many mission critical applications resided in them. Whenever one of these huge mainframes broke down, computer parts had to be physically transported from one place to another and there was no reliable, fast and efficient express delivery system in place. There were other time sensitive shipments such as medicines that badly required an efficient express delivery system. Fred Smith recognized this and presented a paper describing the existing system and recommended improvements to it. Smith received a C grade for his efforts. Obviously, Smith was not discouraged by the letter grade as is evident from the current standing of Fedex. In 1971, Smith bought a company called Arkansas Aviation Company in Little Rock, Arkansas. While working in this company, Smith got a first hand experience in the package delivery business and was able to analyze the problems involved much better. This problem motivated him to do the necessary research for solving the inefficient distribution system. In 1973, Smith bought an abandoned military hangar in a corner of Memphis International Airport, and officially launched the operations of Federal Express from there. During those days, couriers used to deliver packages in family cars and pilots used to buy fuel for company jets with personal credit cards. In essence, the system was very crude. The company could afford to do so back then because there were not many customers and the business was small. As time passed, the business grew in size and the infrastructure had to be strengthened accordingly. Smith recognized pretty early that investment in information technology was essential. Smith's heavy investment in information technology, coupled with a lavish marketing effort quickly paid off. The company posted its first profit in 1975. In 1983, FedEx became the first company in American history to earn a revenue exceeding $ 1 billion in

a financial year, without any mergers or acquisitions. In the financial year 1997, FedEx had revenues of $11.5 billion, out of which more than a billion dollars were invested in information technology. Federal Express became a publicly held company on April 12, 1978, and has been listed on the New York Stock Exchange since December 1978. The stock price has had its ups and downs, but it has been steadily rising. The company has now expanded in the international marketplace and now serves more than 200 countries in Asia, Africa, Australia, Europe, North and South America. Throughout its existence, Federal Express has been the industry leader in introducing new services for customers. It was the first company dedicated to overnight package delivery, the first express company to introduce the Overnight Letter, first to offer 10:30 AM next day delivery and the first express company to offer time-definite service for freight. Federal Express was also the first in the industry to offer money back guarantee and free proof of performance. In keeping with the tradition of firsts, FedEx received the ISO9001 registration for all its worldwide operations in 1994, making it the first global transportation company to receive simultaneous system-wide certification. In 1994, Federal Express updated its corporate identity and formally adopted FedEx as its primary brand name. One of the main reasons for the change in name was that there was a general feeling that the word Federal indicated an association with the government. Also, with the new name, less paint would be required to put its name on the aircrafts and ground vehicles. The companys legal name remains Federal Express Corporation.

1.2

FedEx Facts and Numbers : : : : : : : : : : : : : : : : : : April 1973 Memphis, TN Hong Kong Brussels, Belgium Miami, Florida Theodore L. Weise $11.5 billion (FY 1997) More than 141,000 worldwide 211 325 610 Worldwide More than 40,500 worldwide Approximately 1,400 worldwide Approximately 34,000 More than 6,500 2,715,894 7.2 2.11

Began Operations Headquarters Worldwide Asian European Latin American Principal Officer Revenues Employees Countries Served Airports Served Aircraft Fleet Vehicle Fleet World Service Centers Drop Boxes Authorized Shipcenters Average Package Volume Average Pounds per Package Average Revenue per Pound

1.3

The Federal Express System: How it Works

Millions of packages travel through FedExs integrated global network every day. Let us take a look at the FedExs system from the moment a customer calls until the package reaches its final destination. COSMOS (Customer Operations Service Master Online System) is the nerve center of FedExs operations. COSMOS is a sophisticated package tracking system that can follow a shipment from pick-up through delivery. This big electronic brain monitors every phase of the delivery cycle. The employees of FedEx constantly feed COSMOS information through a number of other systems and devices. When a customer notifies a FedEx service agent details of their pick up request, COSMOS automatically notifies a dispatcher nearest the pickup location. The dispatcher then relays that pick up information to a small on board computer called the DADS (Digitally Assisted Dispatch System) in the couriers van. At the point of pick up, FedExs courier uses a hand held computer, called SuperTracker to scan the airbill on each package. This little computer records information about the package, determines the best way to route the package through the FedEx system and displays a specific routing code. When the courier returns to the van, the SuperTracker is plugged into a shoe attached to the dispatch computer. That shoe is SuperTrackers link to COSMOS. The package now starts its journey through the Federal Express system. Every time a package changes locations, the airbill is scanned and the information transmitted to COSMOS. Multi-Hub Sorting System: Until recently, FedEx used a hub and spokes system that was designed long back to handle all packages through the FedEx system. As the daily volume began increasing, FedEx discovered that it became even more efficient to sort packages globally. FedEx finally worked out a new multi-hub system which was much more efficient and flexible compared to the original single hub system. At the end of a couriers day, they return to the city station with a fully loaded van. The packages are consolidated into containers at the stations, loaded on FedEx aircraft and flown into one of five sorting facilities in the US system. FedEx has sorting facilities in Indianapolis, Memphis, Newark, Oakland, and Anchorage. In the destination cities, the Federal Express crews are waiting to sort packages again, this time from containers to courier vans. When the vans are loaded , the couriers are ready to deliver the packages to the customers.

1.4

The FedEx Technology at a Glance

Fueling the companys growth and success has been the development of strategic information systems that enable FedEx to provide superior service to its customers. Those efforts have also earned FedEx a solid reputation as the industrys technology leader. Today customers are able to complete entire shipping transactions from their desktop PCs, call for courier pick ups via modem, and track the status of their package through the Internet. Nightly, FedEx moves over 2.7 million shipments through its

integrated global network. Over 60 percent of the total volume is processed using an automated shipping system. SuperTracker : In the simplest terms, the SuperTracker is a barcode scanner. Barcodes are generated by customers using one of FedExs proprietary shipping softwares. The barcodes identify the shipment destination, the type of service delivery and the delivery commitment time. The information from each scan is transmitted to the companys mainframe system in Memphis. Real time information on the shipment is immediately available for the service agents or customers through a number of software applications such as PoweShip, FedexShip, Internet email or by accessing FedExs web site. ASTRA: Automated Sorting Tracking Routing Aid (ASTRA) is a barcode generator. The system uses specially designed bar code labels to provide accurate and reliable package delivery information. Each ASTRA label contains all the necessary information to precisely identify each package and its designated route from pick up to final delivery. DADS: Digitally Assisted Dispatch System (DADS) is a nationwide dispatch network that provides timely response to customers request for package pick up and delivery. After a package is scanned with the SuperTracker, the scanner is placed into a DADS transmitter, which uploads the necessary data into the companys centralized mainframe system in Memphis through an earth-orbiting communications satellite. COSMOS: Customer Operations Service Master Online System, as described earlier is a central component of FedExs strategic computer systems. It is a sophisticated electronic network that contains critical information on the location of each shipment in the FedEx system. COSMOS connects the physical handling of packages and related information to the major data systems at FedEx, and in turn, with customers and employees. ExpressClear: ExpressClear Custom Clearance from FedEx streamlines international shipping with an automated head start on regulatory clearance. Using state of the art technology, ExpressClear initiates and expedites regulatory clearance while cargo is enroute. This creates a competitive advantage for international shippers by facilitating delivery and reducing the number of potential delays in the clearance process. FedEx uses EDI (Electronic Data Interchange) to communicate with governmental agencies and other brokers about the shipments. FedEx also uses Imaging technology, which scans original documents into the FedEx computer system for transmission when additional shipment documentation is needed.

Automated Shipping Systems: These automated shipping systems generate more than 60% of FedExs daily package volumes.

1. PowerShip was first introduced in 1984. It is a DOS based system. It provided substantial efficiencies and benefits by enabling customers to reduce shipping paperwork, streamline billing and track their shipments in realtime. Typically, the PowerShip systems consists of a personal computer, software, and printer. Free of charge, FedEx provides the use of a total shipping system that includes PowerShip equipment, installation, training, and maintenance. Each system is menu driven and easy to operate. 2. Tracking Software: This program lets customers track the status of their shipments enroute and obtain a Proof of Delivery from their own personal computers. The software and modem connection to FedEx computers are free. The program is menu driven and compatible with IBM, Macintosh and Windows applications. 3. FedEx Ship: This was first released in early 1995 and was a modified version of the PowerShip. The system allows customers to quickly create entire shipping transactions from their desktop PCs. FedexShip allows customers to send shipping information to the recipient via an email template that indicates shipment date, type of service, method of payment and tracking number. The system is capable of tracking multiple packages simultaneously by tracking number, date, reference number and city. The necessary equipment and software to use FedExShip are provided free of cost by FedEx. 4. InterNet Ship: In 1996, FedEx announced InterNet Ship, the first automated shipping transaction system available on the internet. By entering a valid FedEx account number, customers complete entire shipping function directly from the web page. That includes preparing all paperwork online, printing a barcoded label for the package using any laser printer, scheduling a courier pickup and automatically uploading the billing information to FedEx. 5. Virtual Order: This is a software that links Internet order with FedEx delivery and online tracking. Specially designed for startups and small business communities.

Technological Improvements: FedEx customer service operations have greatly benefited from improvements in technology. A CTI screen pop was implemented that provides customer service representatives with information that connects incoming callers with customer account information. This now allows the service representatives to answer the phone in a much friendlier and more informed manner. FedEx also has a Proof Of Delivery imaging system. This system can now provide a letter on company letterhead that states the proof of delivery information to a customer. The system is probably one of the most complex and largest object databases in the world. The signatures are captured and archived in optical storage where they are instantly accessible. FedEx recently implemented another component of their Enterprise Image System architecture Domestic Customer Invoicing

System. The system is designed to scan, recognize, and store images of nearly one million airbills each day. Imaged air bill invoices are then accessible and viewable on client/server workstations. This new system improves the invoicing process by reducing keystrokes, eliminating paper handling, and increasing worker productivity. Fedex is also planning a major overhaul of its IT infrastructure under project GRID (Global Resource for Information Distribution). The objective of this project includes replacing 60,000 terminals and some PCs with 75,000 network computers. The NCs will be connected to to Windows NT servers. Citrix Systems WinFrame software and the Citrix ICA (Independent Computing Architecture protocol) will be used to present the Windows desktop environment on the NCs, which will also run native-mode Java. Fedex has traditionally used the two-tier client/server approach for a long time to develop applications. The three-tier network computing architecture will allow Fedex to build robust, scalable systems. The other obvious reasons for Fedex to move towards NCs include low cost of maintenance and low cost of ownership. Another objective is to retire Fedexs three Hitachi Skyline mainframes and four IBM mainframes by June, 2001, replacing them with Sun and HP Unix servers. Developments such as these reinforce the companys leadership position in information technology and add value to Fedexs transportation services.

Competitive Industry Analysis

Strategic importance of an information system has to be evaluated within the context of a competitive environment an organization is operating in. In our analysis of express package delivery industry, we will use Michael Porters industry an competitive analysis framework (Figure 1).

Potential new entrants

Bargaining power of suppliers

Industry competitors

Bargaining power of buyers

Threat of substitute services

Figure 1. Industry and Competitive Analysis Framework

We will first present our research on who we consider the primary competitors of Federal Express to be. We will continue to analyze the service FedEx provides and its bargaining power with customers (i.e.: price elasticity). Finally, we will outline technology vectors that are present and are likely to drive the industry into the future.

2.1

Primary Competitors

The freight and air transportation industry can be segmented in a variety of ways. In considering primary competitors to FedEx we have tried to select those companies the have similar service offerings. The only exception to this rule is Ryder, that offers ground transportation services. Since Ryder is trying to position itself as a provider of integrated logistics solutions, we included the company in the primary competitors list. Figure 2 provides approximate market share for express package delivery.

DHL Other Airborne Express UPS Federal Express 0% 10% 20% 30% 40% 50%

Source: Fortune Magazine

Figure 2. Market share in express package and letter delivery in the U.S.

The charts depicts only those companies that offer time-definite service, that is, they provide a guarantee that a delivery will be completed within a given number of days. US Postal Service does not offer such guarantee and thus is not included on the chart.

2.1.1 DHL Worldwide Express The company has been created in 1969 by Adrian Dalsey, Larry Hillblom and Robert Lynn (hence the name) on the west coast. Initially, it delivered shipping manifests from port to port by air to speed ocean cargo. In the next 10 years, it expanded into global markets in Asia, Australia, Europe, Middle-East, Latin-America. Currently, it operates in 227 countries and territories and reaches 635,000 cities. The company is privately held. Its major holders include Japan Airlines (25.001%) and Lufthansa Cargo AG (25.001%). Recently, German postal service Deutsche Post AG announced plans to acquire a 22.5% stake in the company. This gives DHL a solid international backing from major industry players. In 1997, DHL has spent $240 million in infrastructure and technology, and in Europe it plans to open at least 30 new service centers and acquire nine A-300 aircraft. 40,000 people. As a result of continued 16% growth, DHL has doubled in size in five years. From an Information Technology perspective, DHL faces major challenges in creating a infrastructure that will support its global operations. In 1993, DHL has initiated a $1.25 billion worldwide capital spending program, emphasizing computer technology.

The company operates a private, high-availability TCP/IP based network to link their IT centers as well as individual branches. The backbone system is a mainframe based database, that is linked to a distributed relational DBMS (Informix 7) that provides almost 100GB of real-time shipping data. DHL expects to loose 18% of its documents-transport business because of electronic communications, mostly over the Internet.

2.1.2 Airborne Express Airborne Express was founded in 1968 with headquarters in Seattle, WA. It originally offered freight services for the west coast region. In 1981, the company purchased Clinton County Air Force Base in Wilmington, OH, and became the first and only carrier to own and operate an airport. It also created the hub-and-spoke system for fast and express package delivery in the US. Airborne Express owns two other subsidiaries. ABX Air, Inc operates and maintains company-owned chartered aircraft and Airbornes package sorting facility in Wilmington, and Sky Courier offers fast delivery services to both US and international via next-flight-out air courier and expresss freight services. Services offered by Airborne ranged from US domestic same-day/next-flight-out, overngiht air express, next afternoon, and second day services, to international air express, Global Post, air freight, and ocean service. In FY1997, the company has a total revenue of $2.9 billion, and net earning of $120 million. It handled more than 302 million shipment, and enjoyed a yearly revenue growth of 17%. Airborne Express employed 21,970 workers, owns 14,140 delivery vehicles, 12,140 drop boxes, 303 shipping facilities, and with a monthly active customer base of 529,350. It operates out of 9 regional hubs in US, and owns 175 aircrafts, and one airport.

2.1.3 United Parcel Service United Parcel Service is a major competitor to Federal Express in the "delivery service" marketplaces. For example, in 1995 UPS had revenues of $ 21.05 billion and a net income of $ 1.04 billion. While their envelope market share was 12.8% compared to Federal Express' 59%. In the overnight delivery market UPS has 42.5% compared to Federal Express' 40%. As a trucking company, UPS ranks first in the US where Federal Express doesn't even compete. Both Federal Express and UPS have massive service areas, gross sales, employee base, delivery fleet, and aircraft fleet. In fact UPS's airlines is the 10th largest airline!

UPS uses a similar technology base to accomplish their basic services much as Federal Express does. They use technology to find efficiencies in the system and makes it more profitable in a similar fashion. As with Federal Express, they employ a hub and spoke system where packages are picked up locally, sorted at regional hubs, and then sent on their way. Both Federal Express and UPS use the same competitive paradigm in distribution systems they employ. UPS is also employing the technique of building infrastructure costs with their customers. UPS, better know for its trucking side of its business (where as FedEx is better know for its airplanes), has established bases of operations with their business customers that ship at very high volumes, integrated IS with high volume customers, and established IS links with other valued customers. This is the same IS strategy that Federal Express in employing.

2.1.4 United States Postal Service The USPS is an independent agency of the United States government, providing various services to the public. The USPS recognized that the expedited and package market is a very profitable one and that it continues to grow rapidly every year. In the express delivery category, USPS has two main services to offer Express Mail and Priority Mail. Express Mail is the faster of the two services. It is the only overnight service that delivers 365 days a year, including weekends and holidays. Express Mail is very convenient to use in that there are more than 40,000 post offices and 26,000 Express Mail boxes in which you can deposit your shipments. On demand pick up service is also available by calling a toll free 1-800 telephone number. When the speed of Express Mail is not needed, but preferential handling is desired, Priority Mail is a better option. Priority Mail offers fast delivery and is very economical. The USPS is planning to simplify its product line and improve its parcel services to steal market share from United Parcel Service and Federal Express. Under this plan, USPS is considering merging its Express Mail service under the Priority Mail umbrella, calling it something like Next Day Priority Mail Service. USPS would also offer a Two Day Priority Mail and perhaps a Same Day Priority Mail service. USPS is not a player in the Same Day Service market, but believes that its existing infrastructure can support it. Its plan is to enter the Same Day market by initially offering service between major markets and within some major markets, called intra-city delivery. It is important to note that USPS faces some challenges that other express delivery systems dont face. Federal Regulations set forth in the Postal Reorganization Act of 1970 prevent the organization from offering products and services with prices and characteristics that compare favorably with competitive offerings. These regulations constrain the Postal Services ability to respond to rapidly changing market conditions and to control costs. The USPS is not subsidized by the government, but the revenue generated by the Postal Service goes into the US Treasury, that help reducing our taxes.

2.1.5 Ryder System Ryder System is the worlds largest provider of logistics and transportation services. Annual revenues of 5.5 billion. Part of Down Jones Transporation Average. Ryders tree core competencies are: integrated logistics, truck leasing and rental, and public transportation services. Integrated logistics services provide companies with inbound transportation of raw materials to manufacturing facilities through the delivery of finished goods. These services are also offered in Canada, the United Kingdom, Germany, Poland, Mexico, Argentina, Brazil and The Netherlands. Ryder rents and leases trucks to over 13,000 customers and has over a hundred thousand vehicles on lease. Recognizing the value to customers in integrated logistics, the company has recently formed an alliance with IBM and Andersen Consulting to deliver integrated logistics services to customers. IBM and Andersen will develop information services to support these services.

2.1.6 Other Competitors Almost any major airline has cargo operations. These services are targeted at companies that need freight service for either large products or for products that need to be delivered in a short time. There is also a multitude of smaller shipping companies that typically are either regional or have a specific industry focus. These companies may only play a role of shipment coordinators, where they arrange shipment services with airlines or freight operators.

2.1.7 Potential for New Entrants The potential for new entrants in the industry is small. To pose a significant competitive threat to FedEx, requires an immense capital investment. On top of that, FedEx has a substantial customer base and brand equity that is very difficult to duplicate. Additionally, in order to provide efficient delivery service, sophisticated information systems need to be developed. These are not off-the-shelf systems and can be considered an advantage that FedEx has over any potential entrants.

2.2

Customers

Depending on the type of service, customers have different bargaining power. At the low end, letter and small package delivery, the customers do not have any or have low bargaining power. At higher volumes, and more specialized service (such as warehouse

management, catalog operations, etc) the customers are able to negotiate long term contracts with the company and offer lower than retail rates. We view customer bargaining power as low to moderate.

2.3

Threat of Substitute Services

Federal Express is clearly operating in a very competitive industry where customer does have a lot of choice. Express mail package delivery has a lot attributes of a commodity service: high volume; low differentiation; low margins (FedEx profit margins are about 3.2%). The threat of substitute services is therefore very high. It may be diminished by the temporary high market demand, but in the long run, the company should look for ways to provide improve customer value through product differentiation.

2.4

Other Considerations

All delivery services are labor intensive. Packages have to be unloaded from aircraft and sorted. Even if some of these operations are automated, human involvement is remains high. Federal Express employs almost 110 thousand people. High portion of its cost of operations (almost $11 billion) is therefore related to labor costs. UPS strike brings to focus problems that companies face when it comes to negotiating labor contracts. That also applies to pilots associations and unions. With FedEx pilots are more of an issue than for UPS, because the company has a very large and expanding aircraft fleet. On the other hand, employee loyalty at FedEx is reported by be very high. According to a recent Fortune Magazine article on FedEx some employees describe their blood as purple. This is a result of an extensive performance evaluation system setup for managers, who are not only evaluated by their superiors but also by workers they supervise.

2.5

Technology Vectors and Market Trends

As indicated earlier, express package delivery is becoming a commodity. There are two basic ways to grow revenues in this kind of business: improve efficiency (i.e.: reduce cost) or diversify business into high growth, high profit areas. While efficiency improvements are certainly a viable option, their potential for improving the bottom line is limited. Diversification, while certainly riskier, offers a much higher potential for growth.

According to industry analysts, the express delivery market will growth rapidly from $36 billion in 1996 to about $250 billion in 2016. During that period, express delivery services will substantially increase their share in the freight and delivery market (see Figure 3).

Less-ThanTruckload

Non-Express Delivery

Express Delivery

0%

10%

20% 1996

30%

40%

50% 2016

60%

70%

Figure 3. U.S. Domestic Shipping Market, 1996. (Source: Federal Express Corporation, 1997 Annual Report)

This trend can be explained by corporations struggle to reduce inventory and build justin-time inventory and delivery services, both for in-bound materials from suppliers and outbound products for customers. Supply chain integration offers to deliver substantial efficiency improvements but dramatically increases information requirements. Express shipping companies, including FedEx, find themselves in the information business: knowledge about cargo's origin, present whereabouts, destination, estimated time of arrival, price, and cost of shipment is as important as its safe delivery. FedEx is currently working on a project with KPMG and SAP as partners, to deliver a module that will integrate FedEx shipping software and warehouse management services with enterprise resource planning packages such as SAP R/3. The module will provide logistics and shipment functions with SAP's R/3 software system. Finally, electronic (not just Internet) commerce is gaining importance and acceptance. This is closely related to just-in-time inventory services but goes beyond that. Companies, such as National Semiconductor Corporations, are looking to outsource their warehouse operations and shipping of product to customers. Electronic commerce should

enable linking of computer systems between a manufacturer and a shipper to provide integrated delivery system.

The SWOT Analysis

We believe that doing a SWOT analysis will provide us with another view point on Federal Express' competitive and strategic technologic positions in their current market. And so below you shall find in each of the traditional four sections of a SWOT analysis, and what we think are the major points for Federal Express with respect to technology and information technology use in their business and industry.

3.1

Strengths

Having covered the story of Federal Express in previous sections, it should be apparent to you at this point that Federal Express is a very large company. This is one of its biggest strengths as it provides stability from local and regional market fluctuations, provides deep pockets, and has been in business for a long period of time. This long period of time has allowed Federal Express to establish a brand name, a complex and well supported infrastructure in their home markets, and a basis for expansion into other markets as well. If you look at UPS, they have developed similarly to Federal Express since they too had a long time to build their infrastructure. And since there is no switching cost to the typical individual user, Federal Express needs to protect itself from market fluctuations. Being one of the biggest players in the delivery marketplace means having a large service vehicle fleet. Both Federal Express and UPS have armies of delivery trucks and planes, and so they have made heavy investments in transportation technology. For example, Federal Express kept on top of this as they introduced the Overnight Letter in '81, they had already contracted 15 727s from Boeing. It is due to these necessary heavy investments in transportation technology that has allowed Federal Express to expand as quickly as it has. Fortunately for Federal Express, plane and vehicle technology has not drastically changed over time, it has been more incremental change than discontinuous change. This has played well for Federal Express as it means no need for replacement for large amounts of new transportation technology. For example, a discontinuous innovation would be the introduction of a supersonic transportation for the masses. This would create more market opportunities father away that Federal Express would be obligated to server. And so they would be forced to invest in the new technology as it is an extension of their core competencies. Another strength of Federal Express has been their continual investment in materials handling technology. Within their hub and spoke system lay a sorting system, and that relies on the effective combination of information systems and materials handling technologies. In each of the regional hubs they have a conveyer belt system with electronic eyes and diverting arms that steer the packages to the right destination vehicle. This investment in technology has been the means for Federal Express to keep costs

down (instead of employing thousands of employees to sort) while increasing volume dramatically. Again, the sorting technology for this system has not seen discontinuous innovation, and so Federal Express has enjoyed the use of it without serious reinvestment. Lastly, Federal Express has locked in the high volume customers with information technology infrastructure. Federal Express realizes that it isn't going to be the single one time user of their services that with profit them the most, it is the business segment of their markets. Therefore, they have taken strategic steps to retain their business in the long run. By far this is Federal Express' best strength, and most important one. If Federal Express didn't do this, the business would have surely degenerated into a commodity business, much like with residential customers today. With businesses, forming links and ties to the business allows them to establish switching costs, which effectively locks that customer in. Allow me to further divert your attention to this point. Federal Express know that creating switching costs are critical to keep their customers in the long run, so they have developed a full array of tactics to do so. Concentrating on the business customer, Federal Express has developed a suite of informational programs to use to interact with Federal Express' computers and shipping software. For example, the more common program is that which allows you to track packages at each stage of the delivery process. The goal is to establish that initial link with that customer with respect to their information technology infrastructure. This gets the customer more pliable for later investment with Federal Express in their IT, and so creating the tangible switching costs. If you go to Federal Express' homepage, and look at the levels of software integration, you can see that each one is geared to a different level of commitment (or integration) with Federal Express. If we look at Federal Express' operations in Hong Kong, they have an operation where they have taken on the warehousing function of a prominent semiconductor manufacturer. Federal Express has taken on the function of the warehousing as well as delivery, and I believe this is an example of the extent to which Federal Express is willing to take their integration. If you look around the market place, their competitors are doing this as well to some degree (i.e. UPS in trucking manufacturer's goods).

3.2

Weaknesses

We have touched on the idea that Federal Express in a poor position if the markets they compete in degenerate into service commodities. Strong price competition would mean little or no margin, and this would drive everyone out of the business. Federal Express is required to generate that premium over base cost as it must make the aforesaid investments in technology to keep up with demand, competition, and technological discontinuities. Simply put, Federal Express is susceptible to price competition with their strong competitors.

Another weakness with Federal Express is their high vulnerability to transportation cost fluctuations. If you see gas prices go up by thirty cents, you'll grumble and complain, and be able to afford it. If Federal Express sees this gas shortage, and must pay the price difference, multiplied by thousands of vehicles, how fast will they go out of business?

3.3

Opportunities

Federal Express has the ability to extend this "locking in" procedure with IT to individual customers (or what I called residential customers before). In a way they've already begun. By providing a higher level of service by allowing the customer to know that they know for no additional cost. This requires software for that individuals must install and use to interact with Federal Express' information systems. That is where the level of interaction is now, but if Federal Express wants to lock in these customers, and are half way there, all they need to do now is create something like a reward system for continual use. Since IS can easily keep track of this, it seems like such a little effort/cost for potentially large returns. More recently Federal Express has made bids and spent a lot of money to get into the Chinese delivery marketplace. This is evidence that Federal Express is expanding the pie as well as fighting for more of it. They are seeking other markets to expand into, and this is what they need to keep doing as the world becomes more integrated. This pays off in the end when they are more integrated around the globe than their competitors. It also pays off in that when they expand the pie, they get more of the expanded part; or in other words, they grow faster than their competitors. Lastly Federal Express is one of the market leaders in the delivery markets, and in being one, they can set standards for everyone. This would be applicable for the information systems that they are distributing for interaction with theirs. Comparatively UPS's information systems are unsophisticated, and so Federal Express has the opportunity to 'standardize' their IT processes to create switching costs for their competitors, and asserting their leadership position.

3.4

Threats

By far the biggest threat to Federal Express' document business is electronic commerce (the use of the Internet). Federal Express saw this years ago, and that is why they attempted "Zapmail." It was too soon for such a product, and so it was divested in '86. Today there is no way Federal Express can recover that market, the customers are talking to each other via computer, bypassing Federal Express entirely. Since this is cheaper than using Federal Express, the trend will continue as more companies get increasingly computer savvy. Federal Express will have to create more business elsewhere (i.e. foreign markets) to make up for lost revenue here.

Presently Federal Express employs a hub and spoke system that allows them to reap the benefits of the cheapest way to distribute products. Currently this is the best practice, or strategic paradigm. This is what Wal-Mart Figured out, and the airlines adopted. If another competitor comes out with another strategic paradigm that is cheaper, then Federal Express has really big problems since they've invested heavily in the one they're using now. Whether or not they are able to change when that day comes will determine whether or not they will remain in business (much like the other retailers when Wal-Mart rolled in). Strong competitors are likely to follow suit as Federal Express is one of the market leaders. Already UPS has a similar tracking system, although lacking, they already realize the utility of such a system, and are taking the cue from Federal Express. Obviously Federal Express needs to keep innovating and keep on top. Already UPS is employing swishing costs much like Federal Express has. With strong competitors in Federal Express' back yard, it is not easy to make early mover's strategic moves to leave the rest to follow. Federal Express has a high dependency on IT in general, and they employ a wide variety of system architectures. This means a lot of configuration and man hours involved with such systems. And with any complex systems, there is a buildup time. We could not find any evidence that Federal Express has addressed their year 2000 problem, and this could be a crippling problem in the near future. Federal Express has a high dependency on IS technology ('Strategic' on the IS Strategic Grid), and if the y2k problem kills their information systems, then their business will die too.

References:
1) 2) 3) 4) 5) 6) 7) 8) 9) 10) 11) 12) FedEx Information Packet Information Week, Oct 27, 1997 Fortune Magazine, Oct 27, 1997 Fortune Magazine, Nov 10, 1997 Fortune Magazine, Jan 12, 1998 FedEx web site (www.fedex.com) Airborne Express web site (www.airborne-express.com) United Parcel Service web site (www.ups.com) US Postal Service web site (www.usps.gov) Sun-Sentinel , January 7, 1998 Business Mailers Review, March 9, 1998. The USPS 5-Year Strategic Plan summary.