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FedEx has great success in US and Canada with the "hub and spoke" business operational model. Fedex was acknowledged in the industry to be a pioneer with the hub and spoke operation model. This model helped the company offer the next day delivery option to the customer. This offering was the unique selling preposition that the company gave to the customers.
Need to expand outside North America and the volume of logistic traffic between America and Europe were the two main reasons for FedEx management to decide for expansion in Europe. Company believed that Europe is also a western world and had similarities to American culture; it would be easier to expand their successful business model in the developed countries in Europe. In 1984, the company decided to expand in Europe with setting up the operations in Germany, France, Italy and United Kingdom. Company decided to implement the same operational model that it used in US in Europe. Company wanted to setup the European hub in Germany but decided to move to Brussels, Belgium due to the airport usage regulation in Germany. The company offered both domestic and international transportation services and expanded to other counties on the European mainland with its' main hub at Brussels. Other countries were served through the ground transportation that the company established within the hub and the offices in various cities. Continuing the efforts to expand further in1989 the company did expand to Belgium, Switzerland and Netherland.
One key requirement for the business operations was the usage of airport facilities at night and also permission to land and fly from the airport at night. This was required so that the late orders that were received by FedEx could still be delivered the next day. Usage of the air transport helped reduce the transportation time.
In the hub and spoke operations, there key efficiencies were achieved when the packets were to pass through the main hub because the usage of air transport reduced the transport time and helped the customer get value for the service the FedEx was offering. If the packages were to go domestically then the effectiveness of FedEx services wasn't really observed because the transport time was either same or more than what any other logistic provider.
Europe Expansion Execution
FedEx expansion plan faced many unexpected conditions and these conditions grew overtime forcing the company to withdraw part of the business from Europe. The only expected difficulty that the company knew was the regulations in different European countries for usage of airport at night. The company expected that overtime these regulations would be eased but in reality the company experienced that the European government took much longer to get these regulations altered. In the meanwhile while the company initially planned to have the European hub in Germany, the company decided to move the hub to Brussels due to support for airport authorities to use the Airport at night.
Handling an expected condition was much easier but in Europe, the unexpected conditions were much difficult to address. The problems were with the volume of the domestic packages and the daily operations.
Once the operations were established, the company observed that the domestic logistic traffic was much more than the cross border and international packages. In this kind of a business requirement the operational model that they had implemented wouldn't be effective because neither would it consistently meet the customer expectation of delivery times nor would it provide the profits on the investment that company had done in setting up the operational model. The company observed that the people mostly had businesses that were spread within the same country which lead to a lot of domestic transportation. In the domestic transport the next day delivery wasn't any attractive preposition for the customers. Local competitors were more skilled and efficient in delivering the packages and that too at a higher profit margin. FedEx realized that it failed to understand the market by not accounting for the business environment within the countries. The company's assumption that there would be significant package transport between the different countries in Europe was false.
The major operational setback that FedEx observed was the daily operational cost. The reason for high cost was the different cultural differences between the people in different European countries. FedEx business was sensitive towards the time because the transport time affected the delivery time and the commitment that the company had to its service. In reality the company observed that there was difference in attitude towards the time by French, German, Italian and British. Germans and French would work early hours of the day while Italian and French would be working at later half of the day. Germans gave preference to leisure more than work and were not available for a 40 hour work a week. Spanish too would like to work late in the day. This difference in the working hours across the country affected the transport time for the packages. In Germany and UK, the packages were available in the early hours of the day but there was shortage of workers in the evenings. In France and Italy, the company faced problem with workers availability in the early hours of the day so there was a delay in receiving the packets for delivery. These differences in attitude towards the time contributed to the delay in delivery times and the service quality that FedEx intended to achieve. The company not just faired bad in the customer service but there were added operational expenses due to the time delays for the flights and other transportation mediums that the company used in Europe. In order to use improve the service and have employees available early mornings and late evenings in France and Germany respectively , the company paid extra money to the employees resulting in higher operational cost.
Night operations at the hub and spoke centers for the European operations were important to have the centralized model operate effectively. While deciding on the operational model, the company never considered the cost of having people available to work at night. In European countries there isn't a culture to work at night. People mostly like to be with their families or friends to enjoy and relax. FedEx faced major challenge in attracting people to work at night. The company had to pay very high for getting people to work at night shift. This accounted for extremely high operational expense.
Over the years from 1985 to 1991 the company did try to expand in other European regions even though the operational problems mentioned in the above paragraphs existed. Expansion continued with the hope that with higher business volumes the expenses would reduce over period of time. On expansion to Eastern Europe ,the company did experience most operational losses because in Russia, the inventory used to clean the offices and transportation vehicles was used by the local employees of their personal usage due to higher cost of consumer goods. There were similar problem in the eastern European region which added to the operational cost.
Europe Expansion Results
FedEx continued to operate in Europe on the operational model it planned even though the problems grew over year. In the year 1991 the company decided to restructure its European operation under which it closed the domestic services. The company withdrew from 100 plus cities and restricted its operation in just 16 cities. The workforce of 9200 in Europe was reduced to 2600 on restructuring.
When the company decided to do the restructuring the CEO and Founder of FedEx, did state "The operations needed to support our intra-European service have been extremely costly, and we have not generated adequate revenues to cover our costs". The market analyst commented that the company was too early to enter the European market but some really mentioned that it was the operational model that failed in the multicultural environments in Europe. The total losses that FedEx experienced in the time period from 1985 to 1991 amounted to $1.2 billion. The management at FedEx and many other companies who planned their expansion in Europe learnt that cultural differences are the hidden factors that do impact the business.
What FedEx experienced in its early stage of European expansion is likely to be experienced by any organization which fails to weight the cultural impact of the location to the organization alignment. Executing a global strategy should have the cultural differences review on the organization strategy. It is critical to design the organizational alignment model so that the social, technological, economic and political environment of any place could be reviewed and analyzed.
As FedEx planned for expansion it should have thought through the complexities that are likely to grow. It is the coordination that grows exponentially on expansion. Coordination and communication on the different tasks and activities was an area of review. FedEx's hub and spoke model was really good and it is considered a pioneering solution in supply chain but this model needed some alignment in light of the environment that existed in Europe. The regulation on air traffic and cultural difference across the region were against the assumptions that were required for the model to be effective. FedEx realized from its European expansion that assessing the model for the assumptions and requirements is something that the management should do each time this model is adopted in a new business environment.
FedEx management executives might have not thought about the cultural impacts and the need for organization alignment earlier but their experience does make them aware that the organizations who wants to operate globally have not just language and time zones factors to account but it's the Cultural aspect of the place that would affect the people aspect of the organization alignment model along with the environment aspect.
Global Strategy is a way the organization would relate itself to the external environment. An effective strategy is needed to compete and succeed in the fast changing world of today. FedEx failed in its earlier attempt to establish in Europe but in 1996 it did enter the domestic services market again and this time it accounted for the cultural differences. In the second attempt ,FedEx succeeded in addressing the cultural differences and aligning the European organization of the company with the external environment using an effective strategy.