Fedexs structural transformation through online markets

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There are various theories on the subject which enrich our modern day's understanding of the subject and make us appreciate how and why organizations strategize their decisions. How does Coca Cola know that its strength lie in adding various lines of beverages such as energy drinks, sports drinks, health drinks when others are just making aerated drinks? Or how does Estee Lauder through its various marketing brands cater to different segments - the original Estee Lauder for older women, Clinique for middle aged women, M.A.C. for youthful hipsters, Aveda to aromatherapy enthusiasts and Origins for eco conscious consumers.

Michael Porter's acclaimed Five Forces of Competitive Position model explains a simple perspective for evaluating and analyzing the competitive strength and position of a corporation or business organization.

Let us understand each force and its implication for the Strategic Planners in the Case of FedEx

Industry Competitors - This refers to the existing players in an industry unless and until there is a first mover advantage. But sooner or later, other firms enter and pose a direct threat to one's profits.

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In case of FedEx, UPS was a competitor though till 1982 UPS was not directly competing in the overnight delivery segment. And so the rule of the game have to be maneuvered keeping in mind what other firms are doing in the industry.

Potential Entrants - The threat of a new firm entering into the industry is more when it's easier relatively for an organisation to enter the industry in other words, entry barriers are low. An organisation planning to enter the industry will contemplate various decisions such as the loyalty of customers to existing products, how soon the economies of scale can be achieved, do they have access to suppliers, and would they face government legislation, discouraging them or promote them in any manner to enter the industry.

FedEx had a lot of first mover advantages. It was the first company to give the drivers hand held scanners for sending alerts to customers for each pick up and delivery. In 1194, it became the first big transport company to launch a website that included tracking and tracing capabilities, but by 2000 when DHL, TNT and UPS were fierce competitors., these advantages were lost as customers took all these facilities as granted and did not see any incremental value. Thus as more firms enter the market, the dynamics change and this calls for a continuous innovation stream and realignment of corporate strategy which has become the hallmark of FedEx over the years. By integrating its services and managing the supply-chain of its customers, it generated customer loyalty and increased the customer switching costs. Thus FedEx managed to effectively introduce the barriers to entry for competitors.

Threats of substitute products or services - The availability of products & services outside the common product boundaries raises the likelihood of customers to switch to alternatives. Are there alternative products that clients can buy over your product that provides the same benefits at a lesser price?

In the case of FedEx, this threat was low at the time it entered the market. There was no other way to make time sensitive documents reach overnight in a reliable fashion.

Bargaining power of buyers - The bargaining power of clients is also expressed as the market of outputs: the ability of customers to put the firm under pressure, which also governs the customer's sensitivity to price changes.

Strategic Planners at FedEx realized this from the beginning. The underlying philosophy at FedEx was that whenever businesses grow, there is always move of physical goods. This shows that the management team at FedEx took cognizance of customer sensitivity and their power. It always laid emphasis on speed and reliance in moving time sensitive documents.

Bargaining power of suppliers - Suppliers are critical for the success of a firm. Raw materials are required to complete the finished product of the organisation. Suppliers have immense power. This power comes from:

If they are the main supplier or one of the rare suppliers who supply that particular raw material.

If it is relatively costlier for the company to move from one supplier to another (known also as switching cost)

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If there are no other substitutes for their product.

FedEx made judicious decisions in selecting their technology partners. Whether it was tying up with COSMOS or making a deal with Netscape in 1999, it leveraged its IT partners to the fullest.

Value chain analysis described by Porter refers to the activities within and around a company, and links them to an analysis of the competitive strength of an organization. It thus assesses which value each particular activity brings to the organizations products or services. Porter says that the capability to perform particular activities and to manage the linkages between these activities is a source of competitive advantage. 

Porter differentiates between primary activities and support activities. Primary activities are directly linked with the creation or delivery of a product or service. They can be grouped into five main areas: inbound logistics, operations, outbound logistics, marketing and sales, and service. Each of these primary activities is linked to support activities which help to improve their effectiveness or efficiency. There are four main areas of support activities: procurement, technology development (including R&D), human resource management, and infrastructure (systems for planning, finance, quality, information management etc.). 

The basic model of Porters Value Chain is presented here-

The term ‚Margin' denotes that companies realize a profit margin that depends on their ability to manage the connections between all activities in the value chain.

In the case of FedEx

Strategic Planners at FedEx have been able to leverage both its primary and secondary activities and ensured that they reap high margins. Its focus on Technology Development proved that even a secondary activity can become critical in defining success. FedEx's success lay in its pro-activeness. It realized that mere express delivery will not take it far; in order to revolutionize the globe, it will have to focus on total logistics and supply chain solution.

Core Competencies and capabilities at FedEx

A core competency is a unique factor that a business considers as being central to the way it, or its employees, works. It fulfills three key criteria:

It provides consumer benefits

It is not easy for competitors to imitate

It can be leveraged widely to many products and markets.

When we analyze the case, it becomes evident that FedEx had various core competencies.

First, it is the underlining philosophy and the vision of the management at FedEx. Innovation and Pro-activeness is a culture in itself; either the organization has it or it does not. When others in the industry were competing on prices, FedEx was thinking how to integrate seamlessly with its customers and provide value. It was thinking of emerging into a global logistics and supply chain company while others in the industry were complacent being express delivery firms. In 1974, FedEx opened a small warehouse for Parts Bank and thus embarked on the journey of logistic management.

Fred Smith, Chairman of FedEx Corporation was a visionary; he realized that over night delivery of time sensitive documents was a brilliant business idea. He mastered that speed and reliance were crucial in this business for clients.

In the nascent years when other players were buying space on commercial airlines, FedEx acquired its own transportation fleet. Such a vision was instrumental in saving huge costs to the company in the latter years.

Secondly, the use of breakthrough technology and internet acted as another core competence. In 1980s, FedEx became the first company to give its drivers hand held scanners that were used to send alerts to customers every time a packet was picked up or delivered. It became the first big transport company to have a website with tracking and tracing facilities in 1994.

It had started putting customers' catalogues on the website. Thus FedEx had started redefining sources and procurement strategies for its clients who were very happy with these value added services, they had in a way outsourced their entire supply chain management to FedEx.

Thirdly, leveraging relationships as a strategy acted as yet another major competency for FedEx. It started using COSMOS tracking network in 1979 and provided tracing and tracking services with the advent of internet. In 1999, it made a deal with Netscape to offer a suite of delivery services at its netcenter portal. This meant automatic integration of Netscape & FedEx by means of which FedEx gained an added access to 13 million members who were there on the portal. As we see FedEx leveraged both, backward integration with its IT & Technology partners on one hand and forward integration with many of its clients like Dell & Cisco on the other.

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Thus as of January 2000, FedEx became the world's largest overnight package carrier with about 30 percent market share.

Main Advantages disadvantages of international trade to FEDEX Corporation

FedEx gained tremendously from International trade. Its tie up with Dell, Cisco, NatSemi and Netscape vouch for the fact that such backward and forward integrations would not have been possible if it had not ventured out of its home market.

The management also exploited the use of internet and e-commerce to the best of its advantage. It started tying up with companies worldwide and managed its customers' customers effectively. FedEx was able to service as an extended, fully outsourced logistics & supply chain division of global companies.

It introduced various e-Business Tools for faster connections with FedEx shipping and tracking applications. As early as in 1974, it started logistics operations with Parts Bank and built up a small warehouse at Memphis. Thus when others were just competing on prices and speed, FedEx was already way ahead with its first value added service way beyond transportation.

However when one goes international, there are disadvantages as well. FedEx increased its scope of work and base, spreading it self too thin. Multiple brands worldwide became difficult to manage. Costs started multiplying as each sub business had its own accounting, sales and marketing costs. While the likes of UPS had the advantage of promoting just one brand - UPS - to sell the company and its many service offerings, FedEx was trying to promote five different sub-companies with completely unrelated names business logos under the FDX banner with separate sales and customer service teams.

However a re-alignment & re-branding strategy was timely planned and international trade's advantages far out weighed its disadvantages and costs.

Section II - Classical & Evolutionary School of Thought & the case of FedEx

Strategy Theory is such a vast, multi-dimensional and multi-disciplinary academic field with competing schools of thought with each one taking a different view as to what strategy is aiming to achieve that it becomes almost impossible to compare any two schools. Let us look at some of the schools of thought in the domain of strategy and see the relevance of the same in the case of FedEx.

The classical view of strategy is based on the military parlance, in which the world is a fixed hierarchy with a solitary general who makes decisions. The concept has a long history in the military and if we see etymologically, strategy literally means - 'what the generals do'. However problem exists when some theorists take this too literally and try to replicate this in the business domain as it is.

The military model is supported by an intellectual inheritance from economics. Many economists placed this singular figure right at the heart of their ideation of strategy as an elaborate 'game' of move and counter-move, bluff and counter-bluff, between competing yet interdependent businesses. This view of individuals in association with Smith's view that 'each individual is continual exerting himself to find out the most profitable employment of whatever capital he can command', creates a stereotype of the manager who is focused on maximizing return on investment. Classical strategy places great confidence in the readiness and capacity of managers to adopt profit maximizing strategies through rational long-term planning.

Such cases are a rarity as businesses do not comprise of 'ideal economic man'. managers not only fail to set output at the theoretically profit-maximizing level where marginal costs exactly equal marginal revenue, but most managers have no clue what their marginal costs and marginal revenue curves are!

Economists adjusted to this business 'stupidity' by letting 'the markets' do the 'thinking'. With this view of the world, 'markets' not managers choose the prevailing strategies within a particular environment. For those strategists who adhere to the evolutionary view of competition, survivors may appear to be those who have adapted themselves to the environment. Competition is the most effective form of 'weeding out inefficiency' or lack of adaptation, thus easy entry into markets is the way to ensure healthy industries.

Application of the Schools in the case of FedEx

In the case of FedEx, we see an amalgamation of both the schools happening. When the firm has a first mover advantage, at times it is possible to relate its thinking, and actions with the Classical School Of Thought. From 1973 onwards, Fred Smith, Chairman of the group steered the company through breakthrough technical advances and innovative practices. It is similar to the Classical Ideology of maximizing profits and shaping the industry, so to speak.

It was Fred's vision that enabled the organization to transform itself from an express delivery company to a global logistics & supply chain company. He took the right decisions at the right time most of which were instrumental in making it the market leader at that time and even some thirty years later! Noteworthy are the following actions -

As early as 1974, FedEx realized the importance of value added services and the transformation into a logistics company. It tied up with Parts Bank and built up a small warehouse at Memphis to provide storage facility.

Smith insisted of acquiring his own transportation fleet while others were booking space on public carriers.

FedEx was the first company to introduce hand held scanners for drivers; this facilitated sending alerts to clients for pick up and delivery.

In 1994, it was the first transport company to have a website with tracking and tracing facilities.

In 1999, FedEx tied up with Netscape and thus gained access to millions of customers who were already on Netscape portal.

It tied up with Dell, Cisco & NatSemi and almost acted as their logistics and supply chain management.

The above are some of the examples to prove that from 1973 to 1999, there were a number of incidents which make us feel that management at FedEx acted in a Classical fashion and tried to maximize its profits and returns on investments as much as possible.

However when we look at the Re-branding strategy that was undertaken by the management in January 2000, it shows us the application of Evolutionary School of Thought & strategy. Towards 2000, UPS, TNT and DHL were strongly competing with FedEx. FedEx had five subsidiary companies each with separate sales, marketing and customer service staff. Each unit had its own accounting practices. They were targeting different segments and were working independently. But this strategy resulted in a lot of duplicity of resources and wastage of time & efforts. The subsidiaries were not even to leverage any synergies, not even the legacy of the FedEx brand.

This is when the management at FedEx looked around and learnt from market and the competition. It undertook a major re-branding and re-alignment of resource strategy. All subsidiaries had FedEx branding thus denoting that it came from the same brand. They leveraged the consolidated pool of sales, marketing, accounting and customer service operations. It became a one-stop-shop for all sized of customers, whether it was business-to-business, home delivery, ground or heavy steel plates.

Typically this is true in any industry and a new firm that enters the market at an early stage. The firm can operate in a classical manner, calling the shots. This is possible because of several reasons - low threat of competitors, virtually no substitutes, low bargaining power of customers and high switching costs. This is typical in the case of FedEx as well. But the dynamics change, when other firms enter and the market becomes mature. In that scenario, it is not the firm but the market that decides.

This scene can be seen in other industries as well. When Coca cola started operations, it was the king in the aerated segment, charging a price that it deemed fit and the customers were more than willing to pay the same, but years later when competition got ripe, such advantages disappear. There is a tendency to compete on prices, value added services because of which the market decides the viable price. To Coca Cola, the threat was not only from Pepsi and other soft drink beverages but even from other health drinks and water! This is when the entire product mix was realigned and Coca Cola introduced sports drinks, health drinks, tea & coffee.

Hence it is not a question of preference. It is which school is applicable as pet the time and maturity level of the industry. More often than not, we see that most of the times in a mature set up it is the evolutionary school of thought which is more relevant as market forces determine the pace and the direction in which change is required. Businesses which realize this well in time and pick up timely cues and act upon them thrive, while others wither with time.

Section III - Processual School of Thought, Stacey's Four Loops and Strategy Implications

A processual view of an organization suggests that organizations are a 'cocktail' of individuals, each of who brings their own personalities, personal agendas and cognitive biases to the organization. Thus, strategy is a continuing process of adjustment & evolvement because rational economic man is only a state of utopia and people are only 'boundedly rational'.

Most Processual scholars argue that because of these constraints, strategy is nothing else but the continuous adjusting of routines to awkward messages and cues from the environment which gradually force themselves on the manager's attention. Strategy is not only planned and executed action, but it is also a means to make meaning of the chaos of the world.

Stacey's Integrated Model of Decision making and Control

s

The Stacey's Matrix is a critical tool that helps one navigates when faced with complexity in the field of strategy. This tool helps in adopting the right management action & defines the strategy that one should focus at when faced in a complex environment with varying degree of certainty and agreement amongst the group in the organization.

Let us understand the axis first -

1. Closeness to Certainty: Concerns or decisions are close to certainty when cause and effect linkages can be evaluated. This is mostly the case when a very similar issue or decision has been made in the past sometime. One can then assess and relate from past experience to predict the outcome of an action with a good degree of certainty.

2. Far from Certainty: The opposite of the above, is the extreme end of the certainty continuum. They are decisions that are far from certainty. These scenarios are often unique or at least new to the decision makers. The cause and effect connections are not clear. Extrapolating from past experience is surely not a good method to predict outcomes in the far from certainty range.

3. Agreement: The vertical axis measures the degree of agreement about an issue or decision within the group, team or organization. As you would expect, the management or leadership function varies depending on the level of agreement surrounding an issue.

Four Loops:

Rational Loop - Rational Decision Making is possible when there is closeness to certainty and closeness to agreement. In such cases, the group has a consensus on views, options and decisions; also high certainty permits references from the past. There is less risk involved so it is fairly easy to take a rational decision.

As per the Processual School of Thought, such cases are a rarity in real time. Even if there is absolute clarity or certainty about an issue, to find absolute agreement in team is seldom possible. This is because each individual comes with his own objectives and interests.

Political Loop - Overt & Covert - Some themes have a great chance of certainty about how outcomes are created but high levels of disagreement about which outcomes are desirable. Neither plans nor shared objectives are likely to work in this context. Instead, politics become more important. Coalition building, negotiation, and compromise are used to create the organization's agenda and direction.

Some issues have a high level of agreement but not much certainty as to the cause and effect linkages to create the desired outcomes. In these cases, monitoring against a preset plan will not work. A strong sense of shared mission or vision may substitute for a plan in these cases. Comparisons are made not against plans but against the mission and vision for the organization. In this region, the goal is to head towards an agreed upon future state even though the specific paths cannot be predetermined.

Culture & Cognition - As per the Cultural School of Thought, strategy formation is a collective process of social interaction, based on the beliefs and understandings shared by the team members of an organization. Stacey defines culture as a set of assumptions people simply accept without question as they interact with each other. Thus strategy is based on perceptions and is deliberate if not fully conscious.

This goes well with Processual School as well, because it assumes that people come with different perceptions and learn through a tacit process of acculturation.

To conclude the above discussion, we can contemplate that strategies are often 'evolving', their coherence accruing through action and perceived in retrospect, while successive small steps finally merge into a pattern.