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FedEx Corporation

Strategic Audit
May 14, 2004
MGMT 449

Prepared by:

Clement Chen
Lisa Duong
Hideo Yang
Marny Susanty
Mario Vellandi
Andrea Betro
Forward:
This company for this case analysis was chosen by me, Mario Vellandi. I found FedEx
interesting because they are one of the top four logistics companies in the world with
2002 group revenues of $24.2 billion. Since I was studying the transport industry, I
found them to be an excellent company to analyze while in Strategic Management.

Research Process
To prepare for this case, I had performed primarily all the research for this case. This
process involved first going to the firm’s SEC filings on its website, then downloading
the .rtf version of its 2003 10-K, and the following 10-Qs and pre-announcements. After
having read and highlighted some 65 pages and notating applicable data for each section
of the strategic audit, I copied the data into individual Word documents titled after each
respective category. I also utilized company info from the investors section of its site.

Next I used the standard and news search functions of Google, among other sites, by
combing the term fedex with a combination of various business terms such as
competition, weaknesses, swot analysis, and commercials. I had also used combinations
with competitors’ names and specific business functions. Next, I had used the advanced
features to limit my searches in two ways: by data type, and by domain extension. I
found relevant existing secondary research on FedEx by searching for PowerPoint
presentations, Adobe PDFs, and by Word documents. By limiting searches to
educational institutions (.edu), I was able to find some quality data sources.

After having ciphered through my various news articles, I made a news document and
added relevant other data to the various Word documents previously created.

Distribution
I then sent out the various documents to my team members and told them to email me
with questions. I expected them to read the material and give 100% of what they could.

My Sections
I solely wrote the material for the following sections: Abstract, Corporate Governance,
Operations & Logistics, Information Systems, Human Resources, R&D, and
Implementation.
I contributed material and helped revise the data for the Task Environment

Summary
I found the information available quite extensive after having learned of the wide
product-mix that FedEx has. What I have discovered is that the intelligence gathering
process does not end until the final analysis and conclusions are drawn and presented.
New and interesting data is always available and can significantly change your perception
in the swot analysis. But being able to effectively filter all the info sources one obtains to
only those that lie in primary scope of the research, may be the greatest skill of all.

Mario Vellandi
Abstract
FedEx was incorporated in 1997 to serve as the holding company parent of FedEx Express and each of
their other operating companies listed, along with their functions, as follows:

• FedEx Express – Largest U.S. company offering time-certain delivery of envelopes, packages,
multi-piece shipments and freight up to 150lbs., within one to three business days and serving 214
countries including every U.S. address.
• FedEx Ground - FedEx Ground is North America's second largest provider of business and
residential money-back-guaranteed small-package ground delivery service, behind UPS. FedEx
Ground provides low-cost residential delivery to nearly 100% of U.S. residences through its FedEx
Home Delivery service.
• FedEx Freight – One of the top 5 carriers providing next-day and second-day regional LTL (less-
than-truckload) heavyweight consolidated freight services, over 150 lbs in both the United States
and international markets.
• FedEx Custom Critical - Offers non-stop, time-specific, door-to-door delivery of time-critical and
special-handling shipments within the United States, Canada and Europe.
• FedEx Trade Networks – Provides international trade services including customs brokerage, trade
advisory services, information technology, e-clearance and air and ocean freight forwarding.
• FedEx Services - Comprises the consolidated sales, marketing and technology support for FedEx
Express and FedEx Ground and offers extensive supply chain management solutions through its
FedEx Supply Chain Services, Inc. subsidiary.
• FedEx Kinko’s – Provides personal and business publishing/copying solutions as well as being a
FedEx shipping center, through a network of more than 1,200 digitally connected locations in 10
countries.

FedEx has accumulated its portfolio of companies through some important acquisitions. In 1984, it
acquired Gelco International allowed it to expand operations into Europe and the Far East. 1988, it
acquired Tiger International which gave FedEx a huge international freight network by adding valuable
routes, landing slots, and expertise in Europe and Asia. This acquisition took some adjusting to, as heavy
freight operations were more capital intensive and cyclical than small package distribution. Additionally,
Tiger’s employees were all union. After accumulating $2.1 billion in debt and much work, the merger was
a success. Ten years later during a UPS strike, FedEx acquired Caliber Systems which (through its large
subsidiaries) gave it its Ground, Freight (West), Custom Critical, Trade Networks, and lastly its Supply
Chain Services companies. In 2001, it acquired American Freightways to complete the eastern US half of
its Freight Company. In 2004, it acquired Kinko’s.

FedEx’s primary competitive advantage has been its IT infrastructure, client-provided software, and
website. With this infrastructure serving as the umbrella between the different companies’ operations,
combined with the company philosophy of “operating independently, competing collectively”, there exists
a very large synergistic force that is driving the company forward.

In this strategic audit, we aim to inform educators and analysts of the various important factors in the
company’s internal and external environments that affect what strategies the firm should pursue. After
having considered all the circumstances and factors affecting the company, we recommend that FedEx
pursue a growth strategy.

By acquiring small to medium sized regional firms in the industries each subsidiary operates in, FedEx can
increase its service coverage and market share over time and be better equipped to face challenges from
UPS and DHL. Additionally, we find increased importance in developing strategic alliances with various
firms in geographic regions where mutual relationships and long-term new market growth is feasible.
I. Current Situation
A. Performance
ƒ As a result of a strengthening worldwide economy, their outlook anticipates revenue growth
in all reportable segments for the remainder of 2004.
ƒ Management teams continue to examine additional cost reduction opportunities as they focus
on optimizing their networks, improving their service offerings, enhancing the customer
experience and positioning FedEx to increase cash flow and financial returns by improving
their operating margin.
ƒ For 2005, there are only modest expectations of an increase in pension cost, as 2004 actual
asset returns have substantially improved the funded status of the pension plans in spite of a
continued decline in the discount rate.
ƒ Voluntary early retirement incentives with enhanced pension and postretirement healthcare
benefits were offered to certain groups of employees at FedEx Express who were age 50 or
older.
ƒ Approximately 3,600 employees accepted offers under these programs during the first half.
The response to these voluntary programs substantially exceeded their expectations.
ƒ The ultimate costs and savings from their business realignment initiatives will depend, among
other things, on the number, timing, mix and relocation costs of replacement personnel
required.

For the third quarter, the FedEx Ground segment reported:

• Revenue of $960 million, up 8% from last year's $886 million


• Operating income of $112 million, up 3% from $109 million a year ago
• Operating margin was 11.6%, down from 12.3% the previous year

For the third quarter, the FedEx Freight segment reported:

• Revenue of $630 million, up 11% from last year's $568 million


• Operating income of $37 million, up 32% from $28 million a year ago
• Operating margin was 5.9%, up from 4.9% the previous year

ƒ FedEx Express total revenues increased in both the third quarter and nine months of 2004,
principally due to higher IP (International Priority) revenues in Asia, Europe and the U.S
ƒ IP revenues increased significantly on volume growth (10% for the third quarter and 5% for
the nine months) and higher yield (10% for both periods).
ƒ Fed Ex Ground revenues increased in the third quarter and nine months of 2004 due to higher
volumes and yield improvement, led by continued popularity of their home delivery service
ƒ Operating income increased in the third quarter and nine months of 2004 due to volume
growth, yield improvements and increased productivity.
ƒ The increase in FedEx Freight Segment revenues during the third quarter of 2004 was due to
year-over-year increases in LTL yield and LTL average daily shipments
ƒ Contributing to the increase in LTL yield during the third quarter and nine months of 2004
were a 5.9% general rate increase on June 30, 2003, favorable contract renewals and growth
in their interregional freight service.

B. Strategic Posture
Mission
FedEx Corporation will produce superior financial returns for its shareowners by providing high
value-added logistics, transportation and related information services through focused operating
companies. Customer service requirements will be met in the highest quality manner appropriate
to each market segment served. FedEx Corporation will strive to develop mutually rewarding
relationships with its employees, partners and suppliers. Safety will be the first consideration in all
operations. Corporate activities will be conducted to the highest ethical and professional standards.
Objectives
ƒ To protect and respect the environment through outstanding environmental performance and
efficiency in the conduct of its operations.
ƒ To adapt to changing customer needs to ensure customer satisfaction.
ƒ To improve on the ability to compete collectively.
ƒ To differentiate the company from competitors.
ƒ Improve FedEx’s competitive position.
ƒ To dynamically align resources to critical priorities while improving cycle time and return on
investment.

Strategies
ƒ Implement new technological innovations to differentiate FedEx.
ƒ Integrate with other companies when there is a common synergy that helps save costs and
provide new business opportunities.
ƒ Cut costs to gain a competitive advantage over competitors
ƒ Instead of assigning employees to specific business units, reassign teams from one project to
another to effectively distribute people with critical talent.
ƒ Built a variety of systems to provide a variety of choices to customers.

Policies
ƒ Treat all customers equally with a consistent service quality to ensure 100% customer
satisfaction.
ƒ Maintain an environment where employees feel safe enough to take the risk and become
innovative in pursing quality, service and customer satisfaction

II. Corporate Governance


A. Board of Directors
Membership and participation in corporate governance in addition to guidelines on operations
policies are outlined in a formal policy entitled “Corporate Governance Guidelines”. This outline
is quite extensive and covers the important points as follows:
1. Board Members are to promote the best interests of the company, and have two basic
legal obligations to the Company and its stockholders: a) exercising due diligence in
making decisions and in oversight of company management; b) duty of loyalty to the
company in regards to making decisions based on the best interests of the firm and
its stockholders, excluding any personal interests.
2. Potential conflicts of interest must be reported immediately.
3. The Board Chairman and CEO is under one office.
4. A proposal at the Sept. 2004 annual meeting will address requiring each director to
be elected annually.
5. Board Directors must meet 10 minimum qualifications that cover level of expertise,
open-mindedness, commitment to the firm, and corporate fit among others.
6. The Board members must meet the independence requirements of the NYSE, which
covers seven essential criteria regarding business/personal relationships.
7. Board Members may hold office only if they are age 71 or under.
8. There are no term limits.
9. The Board encourages senior management to make presentations by managers who
can “provide additional insight into items being considered or who have potential for
greater responsibility.”
10. Stockholders and other parties may make direct communication to any board
member via mail.
11. Board members who are company employees receive no additional compensation.
12. FedEx will not offer any loans or extend credit to Board Members.
13. Board members and senior management must own significant shares of stock, and
furthermore a 3 year plan that outlines ownership minimums to be met by that future
date, have been developed.
14. Company announcements and interaction with outsiders is limited to the Board
Chairman and CEO, Frederick Smith, unless given approval by the aforementioned.

The Board of Directors has four committees with the following descriptions:
ƒ Audit Committee – Oversight of FedEx's independent auditors and the integrity of FedEx's
financials.
ƒ Compensation Committee - Performance evaluation and sets directors’ compensation in
addition to overseeing FedEx's employee-benefit plans administration.
ƒ Information Technology Oversight Committee – Oversight of major IT related projects.
ƒ Nominating & Governance Committee - Identifying potential new directors and oversight of
FedEx's corporate governance practices.

The Board Members, their occupation, committee memberships are as follows:


1) James L. Barksdale - Chairman and President, Barksdale Management Corporation.
Compensation and IT oversight committees.
2) August A. Busch IV – President, Anheuser-Busch, Inc. Compensation committee.
3) John A. Edwardson - Chairman and CEO, CDW Corporation. Audit committee chairman.
4) Judith L. Estrin - President and CEO, Packet Design Management Company, LLC. IT
committee chairwoman.
5) J. Kenneth Glass - Chairman, President and CEO First Horizon National Corporation. Audit
committee.
6) Philip Greer - Managing Director, Greer Family Consulting & Investments, LLC.
Compensation committee chairman.
7) J.R. Hyde, III – Chairman, Pittco Management, LLC. IT committee.
8) Shirley A. Jackson – President, Rensselaer Polytechnic Institute. IT and
Nominating/Governance committee.
9) George J. Mitchell – Chairman, Verner, Liipfert, Bernhard, McPherson and Hand.
Compensation and Nominating/Governance committee.
10) Frederick W. Smith - Chairman, President and CEO FedEx Corporation. No committee
membership.
11) Joshua I. Smith - Chairman and Managing Partner, Coaching Group, LLC. Audit committee.
12) Paul S. Walsh - Group CEO, Diageo plc. Compensation committee.
13) Peter S. Willmott - Chairman and CEO, Willmott Services, Inc. Audit Committee member;
Chairman of Nominating/Governance committee.

From the outline of FedEx’s corporate governance policies, we can see that the firm is very
concerned about maintaining an image to its shareholders and others that signifies commitment,
independence, and no conflicts of interest. Seeing that only one board member is internal is an
interesting point. All the other members comes from a variety of backgrounds and each can make
substantial contributions to the firm in terms of knowledge and experience. To ensure that all
members are informed of the firm’s operations, meetings with senior management are frequent.

B. Top Management
Officers and Positions are as follows:
1) Frederick W. Smith - Chairman, President, CEO, FedEx Corp.
2) T. Michael Glenn - Executive V.P., Market Development & Corporate Communications,
FedEx Corp.; President, CEO, FedEx Services.
3) Alan B. Graf, Jr. - Executive V.P., CFO, FedEx Corp.
4) Robert B. Carter - Executive V.P., CIO, FedEx Corp; Executive Vice President, CIO, FedEx
Services.
5) Kenneth R. Masterson - Executive V.P., General Counsel, Secretary, FedEx Corp.
6) David J. Bronczek - President, CEO, FedEx Express.
7) David F. Rebholz - Executive V.P., Operations & Systems Support, FedEx Express.
8) Michael L. Ducker - Executive V.P., International, Express Freight Services, FedEx Express.
9) Rajesh Subramaniam - President, International, Canadian Region, FedEx Express.
10) Robert W. Elliott - President, Europe, Middle East & Africa region (EMEA), FedEx Express.
11) Juan N. Cento - President, Latin America-Caribbean region (LAC), FedEx Express.
12) Daniel J. Sullivan - President, CEO, FedEx Ground.
13) Rodger G. Marticke - Executive V.P., COO, FedEx Ground.
14) Brad B. Johnson - Executive V.P., FedEx Ground.
15) Douglas G. Duncan - President, CEO, FedEx Freight.
16) Patrick L. Reed - President, CEO, FedEx Freight East.
17) Keith E. Lovetro - President, CEO, FedEx Freight West.
18) Rick Faieta - President, CEO, Caribbean Transportation Services, FedEx Freight.
19) Gary Kusin - President, CEO, FedEx Kinko’s.
20) John G.(Jack) Pickard - President, CEO, FedEx Custom Critical.
21) G. Edmond Clark - President, CEO, FedEx Trade Networks.
22) Gerald P. Leary - Executive V.P., FedEx Trade Networks; President, CEO, FedEx Trade
Networks Transport & Brokerage
23) Douglas E. Witt - President, CEO, FedEx Supply Chain Services.

According to the Executive Biographies found on the company website, all the various officers
have extensive knowledge, skills, and experience in their related fields. Regarding international
experience, the bios show experience for the officers of FedEx Express: International. Of the two
companies FedEx Corp. acquired for its FedEx Freight company, only Douglas Duncan (CEO
formerly of Viking Freight) are part of management. Gary Kusin of FedEx Kinko’s was recruited
from the acquisition, although his particular title at the previous firm is unknown. For all the
various offices, it is assumed internal hires were made unless otherwise noted on the company
website or 10-K.

Top Management has a systematic approach to strategic management though its structure and as
outlined in the company’s “Corporate Governance Guidelines”. We can see that the extensive
number of officers, resembling the various company units, provide quite a bit of operational
feedback to the Board of Directors in addition to encouraging lower-level managers to provide
information to top management.

As outlined in the “Corporate Governance Guidelines”, ethical decision making is an important


element of the commitment made to management participation. Considering the breadth of
operations FedEx Corp. has and the number of officers (23), we believe that top management is
sufficiently skilled to cope with and properly address likely future challenges at any of the
operating units.

There is however some negative critique of FedEx’s management, according to a Dec. 2003
analyst report from Nicolas Owens from Morningstar.com. He mentioned his concern over Fred
Smith’s and J.R. Hyde’s spending hundreds of millions of the company’s money to secure naming
rights to the stadiums of the Washington Redskins and the Memphis Grizzlies (both directors are
minority owners of the teams). Additionally, Owens mentions (contrary to the company’s
projected impression), that individual investors aren’t given much input. Also, “FedEx’s
supermajority provision, staggered board elections, and its charter’s lack of a shareholder special
meeting provision preclude any meaningful change spearheaded by shareholders.”

III. External Environment: Opportunities and Threats (EFAS Exhibit 1)

A. Societal Environment
Economic
Opportunities
• Globalization—as a trend, the world's economy has become more fully integrated, and
barriers and borders to trade continue to decrease.
• Steady growth in U.S. gross domestic product—U.S. GDP related to international trade has
increased substantially over the past 30 years and continues to grow.
• Continuing recovery in the U.S. economy
o The U.S economy grew at an annual rate of 4.2% during the first quarter, and first-
quarter earnings are roughly 23% higher than they were a year ago.
o Partially due to Bush’s tax cuts that are fueling the current recovery, economic
growth is starting to look healthy again, and inflation is starting to come back.
o Consumer spending rises by 0.4% in March; that followed another 0.4% increase in
February.
o Americans' incomes also rose solidly in March, increasing by 0.4 percent; that came
on top of a 0.5 percent gain in February—the increase is encouraging since income
growth is a main factor in people's willingness to spend in the future.
o U.S. employment jumped in April with a 288,000 rise in non-farm payrolls. It
provides evidence of a labor market recovery; the national unemployment rate fell to
5.6% in April from 5.7% in March 2004. Many Americans consider the job market
the most important indicator of the economy’s health. Although the reaction is less
enthusiastic on Wall Street, these factors are indicating that more Americans are
finding work and making major purchases.
• Continued recovery in Asia’s economy—it may have a favorable impact on the growth of the
transportation industry with the acceleration of domestic as well as foreign trade.
• China’s growing economy.
o While china’s GDP represented only a percent of world GDP last year, it accounted
for fully 13% of the world’s growth.
o The Chinese have become major buyers around the world of everything, and China’s
importance in world industrial output is even greater, especially the manufacturing
sector. China consumes between 20 and 40% of many major raw materials.
o Although some contend that there are sings of cooling in China’s economy, an
economy with 1.3 billion people double in size every 10 years is likely soon or later
to have a tremendous impact on the rest of the world’s economies and certainly on
the transportation industry in which FedEx operates.
o China’s economic growth reached 9.7% in the first quarter; within a decade it
promises to be the world’s second economy after the U.S.

Threats
• Unpredictable energy prices—a substantial reduction of oil supplies from oil-producing
regions or refining capacity and other events as well causing a substantial reduction in the
supply of aviation fuel. It could have an adverse effect on FedEx operations.
• The rising costs in transportation security and insurance, especially in international freight due
to the continuing threats from terrorism.

Technological
Opportunities
• Improved information technology—enabling FedEx to integrate subsidiaries and business
functions altogether, assisting its single-point-of-access concept.
• Improvement in wireless technology—FedEx is looking into wireless technology to cut costs
and improve customer service.
o In Asia, it's experimenting with a digital/ink pen called Anoto Chatpen. The cigar-
sized device, made by Ericsson, uses Bluetooth wireless technology to transport
written information, such as a signature or an address, into a database.
• The Internet—FedEx.com gets about 4.5 million unique visitors a month, which is saving the
company $25 million each month by eliminating human involvement in processing package-
tracking requests.
• Improvements in aircrafts—the high capacity, cost-efficiency aircrafts make it ideally for
FedEx as an air cargo carrier to operate globally.

Threats
• High implementation, maintenance and failure cost associated with the adoption of
sophisticated information technologies.
• Due to the complexity of today’s businesses, benefit derived from highly integrated
information system may not be quantifiable for evaluation purposes.
• Failure in large-scale information technology systems could damage a company’s image and
credibility—for FedEx, it can also create a logistic nightmare.
• Growing concern over hacking and protection of customer information.
• Rate of Internet penetration—to better serve household and small business customers outside
the U.S., the timing and market readiness for its single-point-of-access concept, or
information-intensive services, need to be assessed from country to country.

Political-Legal
Opportunities
• FedEx Express currently holds certificates of authority to serve more foreign countries than
any other U.S. all-cargo air carriers—FedEx has an opportunity to offer single-carrier service
to many points not served by its principal competitors.

Threats
• Many of FedEx Express' competitors in the international market are government-owned,
government-controlled, or government-subsidized carriers.
o It entails that they may have greater resources, lower cost, less profit sensitivity, and
more favorable operating conditions than FedEx does.
• Under the Federal Aviation Act of 1958.
o Both the U.S. Department of Transportation (or DOT) and the Federal Aviation
Administration (or FAA) exercise regulatory authority over FedEx Express and may,
from time to time, affect the ability of FedEx Express to operate its aircraft in the
most efficient manner.
• The Aviation and Transportation Security Act.
o Signed by President Bush on November 19, 2001, it may in the future adopt security-
related regulations, including new requirements for cargo security, which could
impact FedEx’s air operations or otherwise increase its costs.
• In addition to the Federal Aviation Act of 1958 that regulates aircraft noise, certain airport
operators have local noise regulations, which limit aircraft operations by type of aircraft and
time of day.
o These regulations have had a restrictive effect on FedEx Express' aircraft operations
in some domestic areas.
o FedEx Express' international operations are also subject to noise regulations in
certain countries

Sociocultural
Opportunities
• Growing Internet users and e-commerce.
o E-commerce is a major catalyst of the economy and remains a vital growth engine
for businesses today.
• Change in consumer behavior.
o Consumer purchases over the Internet continue to grow.
o The survey involving interviews with 42,238 people in 37 countries worldwide
revealed that almost a quarter of internet users have shopped online and 15% plan to
do so during the next six months. This represents an opportunity for FedEx as a
provider of small-package delivery service.
• People are increasingly using the Internet as a time-saving resource.
o People engage in numerous activities online, such as e-mail, planning trips, online
banking and online research for their future purchases, all of which are easily
completed online. With its sophisticated online services, FedEx can satisfy the
consumer requirement of convenience.
• Change in sales channel combinations used by retailers.
o According to one study, 37% of US retailers are selling through a combination of the
Internet, in stores, and catalogs, up from 26% doing the same in 2003. This
represents a growing demand for the business-to-customer package delivery service.
o According to recent projections, online retail sales would reach $88.1 billion, and
total business-to-business e-commerce revenues will reach $1.3 trillion by calendar
year 2005.
• Business customers increasingly seek for a single solution that can meet all of their global
transportation needs, and more businesses are outsourcing their non-core operations.
o FedEx, as a result, provides its customers access to an integrated set of business
solutions and offers a number of initiatives to enhance customer experience.
• The rise of environmentalism.
o Today, companies are increasingly expected to take greater responsibility for
environmental consequences. To respond, FedEx uses environmental-friendly
recycled and recyclable packaging and has attempted to reduce harmful emissions
into the environment through the usage of hybrid vehicles.
o Such FedEx’s posture toward environmentalism gives consumers an impression that
FedEx does make contribution to environmental protection and safeness.

Threats
• Customers have become less tolerant of service failures and likely to expect better services
that are more than the average.
• Consumers today demand more for personalized services.
o It can be a difficult task for FedEx and other businesses to satisfy all customer needs
and still be profitable.

B. Task Environment
Threat of New Entrants
Opportunities
• There is a high barrier for new entrants to overcome because it is very expensive and time-
consuming to start up a major shipping company. Acquiring a large fleet of aircraft and/or trucks
along with quickly creating a large efficient distribution network are the primary operational
hurdles that deter potentials entrants, in addition to the massive marketing costs needed to
establish a presence (within an already very competitive industry). Lastly, the fact that FedEx
exploits new technology as soon as it becomes available makes the barrier even harder to
overcome since regularly updated technology is harder to imitate.

Conclusion: We do not believe new entrants pose a threat to the firm.

Bargaining Power of Buyers


Opportunities
• The enhanced infrastructure FedEx has through alliances with such companies as La Poste may
cause customers to perceive FedEx as a better company to do business with due to expanded
service coverage and reliability.

Threats
• Since shipping is a ubiquitous service and while FedEx is not the only carrier in the various
market segments it operates in, these conditions allow customers a variety of choices. With
internet access, buyers can easily and quickly compare prices and services of other carriers to
FedEx’s.
• Due to the extremely competitive industry nature of its Freight and Trade Networks subsidiaries,
time-volume contracts with large customers are the norm. Large buyers can easily negotiate rates
and can play competitors against each other to obtain lower prices. In the Freight (LTL) segment
there is an additional negotiated discount rate that may constitute up to 60% off the initial gross
charges before various possible surcharges (fuel, overweight, and hazardous materials among
others).

Conclusion: Although alliances may help FedEx expand its services, the primary product
(shipping) is standardized and alternative suppliers are plentiful. Buyers are thus able to retain a
large degree of bargaining power.

Threats of Substitute Product or Services


Threats
• Although FedEx has differentiated itself with the reliability of its services coupled with powerful,
user friendly IT services for tracking and account oversight, it still may not be enough. Fax
machines, electronic communications such as EDI, and other technologies offer an alternative for
delivering bills, statements, shared business data and personal messages.

Conclusion: Substitute Products for business and personal data exchange pose a threat to FedEx.

Bargaining Power of Suppliers


Opportunities
• FedEx has ensured that they have the best suppliers with a scorecard system where FedEx scores
its suppliers to measure its their performances while the supplier in return gets to give FedEx
feedback on how FedEx can improve. Because the system helps both sides, it may strengthen the
customer-supplier relationship.

Threats
• FedEx’s tracking and ERP systems are very crucial to their business operations, thus consultants
and contract programmers contributing to it are very important to the company. Although certain
long-term IT projects can be outsourced abroad to save money, FedEx cannot bargain with
suppliers for remedying crucial business functions that need immediate attention.
• Outsourcing activities such as aircraft/truck maintenance and acquiring or leasing the services of
regional carriers where FedEx needs to expand operations, provide these suppliers a great amount
of bargaining power.

Conclusion: Although FedEx makes a great effort to maintain mutually beneficial supplier
relationships, it cannot effectively control the prices it pays for professional IT services, and many
other operational functions.

Rivalry Among Competing Firms


Opportunities
• FedEx and the US Postal Service had signed a 6 year agreement where FedEx would deliver
USPS priority, express, and first-class mail through its air network, in exchange for the right to
place FedEx drop boxes in US post offices. Since the deal landed in 2001, the parties have agreed
at times to increase the volume shipped/drop boxes placed. We believe there is a substantial
opportunity for both parties to continue expanding their partnership.
• In the LTL industry in 2004, Yellow Freight had acquired Roadway Express. These two
companies had largely dominated this market segment, were archrivals, and had differing cultures
and service levels. According to many trucking executives, there is a large anticipation of a
customer spillover because many clients have unfavorable views of either Yellow or Roadway and
will see the merger negatively.
• Additional strategic alliances and acquisitions in Europe, South America, and Asia pose
significant opportunities.

Threats
• In the US market for Express and Ground shipping, UPS has about 55% of the market share,
USPS has about 15% and FedEx has about 22%. Even though USPS has a smaller market share
they still have the best delivery network of mailboxes.
• Possible strategic alliances and acquisitions by UPS and DHL in geographic markets where FedEx
is present, pose a significant threat. A good example of this is in China where Sinotrans, the
nation’s most prominent domestic airfreight carrier has started partnerships with UPS and DHL.
• With DHL’s acquisition of Airborne Express finalized earlier this year, the combined company
will make it a formidable competitor of UPS, FedEx Express and Home Delivery, and the U.S.
Postal Service. The threat is that some analysts are predicting DHL/Airborne’s market share will
jump from 1.5% to 6% in the next five years.

Conclusion: Although the shipping industry is quite competitive, there are various opportunities
and threats in the form of strategic alliances and acquisitions that pertain to its domestic and
international express segments.

Relative power of Union, Government, Special Interest Groups


Opportunities
• FedEx does make an effort to protect the environment. They reduce harmful emissions into the
environment through the usage of hybrid vehicles and its usage of recycled and recyclable
packaging. Because of these efforts, environmentalist groups probably will not pose a threat to
FedEx and may even support FedEx’s operations. So the relative power of special interest group
of environmentalist is an opportunity.
• The U.S. may allow trade restrictions on certain countries to be lifted increasing trade/transport
options in addition to certain foreign governments deregulating their domestic transport markets.
• Since UPS has a union that covers all employees except independent auditors, a potential UPS
strike will give FedEx Ground a considerable opportunity to attract new customers and steal
market share from UPS.

Threats
• FedEx’s pilots belong to the Airline Pilots Association (union), and had threatened to strike four
years ago. The FedEx ALPA agreement can be amended as of May 31, 2004 and negotiations are
well underway. If the quality of life issues surrounding flight schedules aren’t well addressed, a
strike is very possible.
• The government was the one that allowed competition against USPS. However, they are also the
ones that gave USPS the advantage of competing directly with private companies without having
to pay state or federal tax. The government is also the ones that control regulatory actions
affecting aviation rights and labor rules, both of which greatly affect FedEx. FedEx also has to
abide by government regulation of foreign country in which they do business in. The enactment
of new government regulations are unpredictable and may have a negative or positive effect on
FedEx. Thus this is a threat to FedEx.

Conclusion: While the ALPA may call a strike against FedEx and the U.S. government may
impose additional security related regulations, we find these factors may be only partially offset by
long-term trends in decreased governmental trade regulations.

IV. Internal Environment (IFAS See Exhibit 2)


A. Corporate Environment
ƒ FedEx operates its company divisionally while giving them the ability to compete
collectively.
ƒ FedEx corporate environment possessed the characteristics of an organic organization whose
environment constantly changes and uncertainty usually dictates a much higher level of
fluidity and flexibility.
ƒ The decision-making responsibilities are kept as close to the affected point as possible.
ƒ Employees are capable of responding to the constantly changing environment that is
characterized by a decentralized authority structure.
B. Corporate Culture
Strengths
ƒ Belief that success hinges on the first “P” of the People-Service-Profit philosophy; if
employees are taken care of, they will reciprocate with the impeccable service the customer
demands.
ƒ Good reputation as an employer; made Fortune’s list of Best Companies to Work for, a list
dominated by smaller companies.

Weaknesses
ƒ Collective bargaining agreement with Air Line Pilots Association signed May 1999 expires
May 2004.
ƒ Past attempts by labor organizations to attempt groups of employees; although none have
been successful.

C. Corporate Resources
1. Marketing
Strengths
• High brand awareness—with the image of high-quality service, reliability and speed.
• Turning to relationship marketing.
o FedEx works closely with its customers and emphasizes maintaining long-term customer
relationships.
o For example, in June 2003, FedEx teamed up with Amazon.com to deliver the highly
anticipated fifth Harry Potter book on the first day that the book became available to the
public.
• Green marketing—showing its concern for environmental problems.
o Through an alliance with General Motors, FedEx delivers packages in a fuel cell vehicle,
the HydroGen3, the first commercial vehicle that runs on hydrogen and only emits water,
and FedEx uses recycled and recyclable packaging.
o These represent huge implications for both FedEx and its customers.
• ISO 9001 certification.
o A high level of service quality for its global express and ground operations is evidenced
by ISO 9001 certification, which is currently the most rigorous international standard for
Quality Management and Assurance.
• Emphasis on e-commerce and information technology.
o Approximately 70% of FedEx shipments are automated.
o FedEx.com—which gets about 4.5 million unique visitors a month, saving the company
$25 million each month; it costs 4 cents to track a package online, compared with $2.14
when customer service gets involved.
o MyFedEx.com—a customer portal that goes beyond simple tracking and tracing
capabilities to offer personalized services for registered users.
o Freight.FedEx.com—a fully integrated Website, which combines the resources of its
operating company Web sites to create a one-stop LTL information source, including a
bill of lading generator and e-mail delivery notification, make freight shipping easier and
bring customers closer to their own account information.
• Synergies from multiple operating units—which are created by seamless information
integration.
• Flexibility to meet specific customers’ requirements.
o Each subsidiary generally serves a separate and distinct sector of the market and free to
focus exclusively on the market sectors in which it has the most expertise.
o The decision-making responsibilities are kept as close to the affected point as possible.
• The full portfolio of offerings to meet various customer needs—FedEx’s service portfolio
includes: express, ground, freight, logistics, supply chain, customs brokerage, trade
facilitation and electronic commerce solutions.
o FedEx Express
ƒ Delivering packages, documents and freight to 214 countries.
ƒ Overnight service virtually extends to the entire United States population.
ƒ Offers the most comprehensive international freight service in the industry.
ƒ Backed by a money-back guarantee, real-time tracking and advanced customs
clearance.
ƒ Alliances with certain retailers for drop-off sites—providing customers the
opportunity to drop off packages at locations in office buildings, shopping centers,
corporate or industrial parks and outside U.S. Post Offices.
ƒ Agreements with the U.S. Postal Service that run through August 2008.
• (1) FedEx Express provides air capacity for transportation of Priority Mail,
Express Mail and First Class Mail for the U.S. Postal Service.
• (2) FedEx Express has the option to place a self-service drop box in every U.S.
Post Office location.
o FedEx Ground: FedEx Home Delivery
ƒ Offering unique, convenient, customized service, most of which are not offered by
competitors, including extended evening delivery, Saturday delivery, and premium
services, such as day-specific, signature and appointment delivery.
ƒ Provides ground service to 100% of the United States population.
ƒ Overnight service to approximately 92% of the United States population.
ƒ Also provided to 100% of the Canadian population through a subsidiary.
o FedEx Freight
ƒ Has a fully integrated Website, Freight.FedEx.com, which combines the resources of
its operating company Websites to create a one-stop LTL information source—
including a bill of lading generator and e-mail delivery notification, make freight
shipping easier and bring customers closer to their own account information.
o FedEx Trade Networks
ƒ A leading provider of international trade services, offering services for international
businesses.
o FedEx Services
ƒ To enhance its single-point-of-access strategy.
ƒ Much of marketing activities for FedEx Express and FedEx Ground are combined
under FedEx Services to more effectively sell the entire portfolio of express, ground
and e-commerce services.
ƒ Sells and markets the full portfolio of services offered by subsidiaries and provides
customer-facing solutions that meet customer needs.
ƒ FedEx Supply Chain Services (subsidiary)
• Offers an extensive range of supply chain management services, including
transportation management, fulfillment and fleet services.
• Its management programs use advanced electronic data interchanges to speed
communications between customers and their suppliers, resulting in more cost-
effective solutions and enhanced levels of customer service.

Weaknesses
• FedEx Express lags behind its competitor DHL in foreign markets.
• UPS is the largest provider of business and residential ground delivery services in North
America, while FedEx Ground is the second.
• Service benefits not easily communicated; complexity of its offering mix may confuse
customers.
• Little differentiation in service width and depth against competitive offerings.
• Similar price structures to the competitors’; giving no intensive for customers who seek low-
cost shipment.
• Low share of voice in advertising.
o Analysis of January 2000 to December 2001 media coverage revealed ineffective or
negative reporting of the FedEx advertising messages, underscoring the need for more
aggressive, targeted media relations.
o The implication is that, despite its high brand awareness, FedEx is recommended to
devise effective brand promotions perhaps through corporate sponsorships and special
events in addition to traditional print and broadcast advertising.
o FedEx is currently the official sponsor of the National Football League for worldwide
delivery service; this type of promotions will further enhance the image of FedEx brand.

2. Finance
Strengths
ƒ They have been able to manage their cost structure for capital expenditures and operating
expenses and match them, especially those relating to aircraft, vehicle and sort capacity, to
shifting customer volume levels.
ƒ The EPS estimates for FY04 and FY05 have been raised from $3.39 to $3.45 and from $4.00
to $4.28, respectively. The P/E estimates for FY04 and FY05 are 21.4x and 17.3x,
respectively.
ƒ Over the past several years they have experienced significant year-over-year increases in
pension cost.
ƒ Their ability to effectively operate, integrate and leverage the Kinko’s business.
ƒ Approximately $65 million of savings were realized in the third quarter ($90 million in the
nine months), reflected primarily in lower ongoing salaries and benefits costs.
ƒ FedEx Ground, Freight, and Express segments all experienced increases in revenues,
operating incomes, and operating margins.
ƒ Top-line growth is expected by some analysts at 8% over the next five years. Additionally, its
moderate pricing power and its service mix development should allow operating margins to
increase from 6.5% to 7.9% in the same period.
ƒ Operating leases of its aircraft allow FedEx to retain more cash.

Weaknesses
ƒ In January 2004, they implemented average list price increases of 1.9% at FedEx Ground and
2.5% at FedEx Express.
ƒ $14 million in business realignment costs were incurred during the third quarter of 2004
($429 million in the nine months).
ƒ The FedEx Ground segment-operating margin was negatively affected by an operating loss at
FedEx Supply Chain Services.
ƒ FedEx continues to greatly rely on operating leases to acquire use of its
airplanes, which in turn makes for a “higher leverage and lower returns on invested capital
than the balance sheet implies…net debt/total capital remains close to 70%” (Owens). If one
was to count the leased aircraft as invested capital, this would result in 5 year average of
return on capital of 7%, compared to the same period’s 8.7% cost of capital.

2003 MVA Rankings


Tier 1: 45 largest market-cap companies with sales of more than $7 billion
3-yr 3-yr
Compa chang chang Compa Valu
ny MVA e in e in ROA ny PRVit Perfor atio
2002 1999 name 2002 MVA EVA EVA C Type Rank mance Risk n
United
Parcel
Service 13.1
17 36 Inc 57,036 -6,923 875 -250 0% "Y" 43 70 1 88
Fedex 5.10
101 353 Corp 8,558 4,811 -596 -182 % "-X" 48 47 28 45
source: eva.com

MVA measures how much value the company has created for its shareholders in excess over the
used amount of Capital, while excluding some accounting distortions. High MVAs indicate high
investor expectations for the company to generate considerable amounts of EVA. EVA is “an
estimate of true economic profit, profit that accrues to the company’s shareholders after all operating
costs (including taxes) and financing expenses” are covered. (eva.com). A positive EVA indicates
actual profit, while a negative EVA spells “economic loss and value-destruction”. ROAC is Return
on Average Capital “indicates productivity in allocating and managing capital...does not account for
risk (and the cost of capital)..” and disregards growth. “Y” companies are established firms that
have a positive EVA and are earning returns above their cost of capital. “-X” companies are losing
EVA and “destroying wealth while they are growing Sales at a rate less than 15% on average”.
PRVit is a performance and investment analysis tool by Stern Stewart It takes various indicators
from a firm’s performance, risk, and value and is calculated by subtracting the R score from P score,
then dividing this amount by the V score. The system goes from 0-100. A score of 0-33 indicates a
very competitive task environment, and without reasonable hope of an important reversal of trends,
means investors should “Sell” or avoid. A score of 50 signifies a balance between the firm’s
intrinsic and traded value. A high score of 67-100 indicates a “Buy”.

Upon analysis, we see UPS has a much higher MVA in 2002 than FedEx although for the three year
period UPS had declining profit growth, whereas FedEx’s had increased. FedEx showed a negative
EVA most likely attributable to the high operating costs of FedEx Express, whereas UPS’s had
increased. Although FedEx had a higher Risk score, it did have a very stable PRVit score in
comparison to a 5 point lower score by UPS.

3. Operations and Logistics


Strengths
ƒ Each of FedEx’s subsidiaries serves a separate and specific market sector where it has
expertise, which results in “optimal service quality levels, reliability and profitability from
each of the businesses.” This strategy is known as the “operate independently, compete
collectively, manage collaboratively” and is noted in the 2003 10-K in addition to other
strategies under “FedEx Operating Strategy”.
ƒ In 2003, the firm modified the incentive compensation plan of each company to be tied to
FedEx’s total performance.
ƒ A $1.8 billion six-year expansion plan for FedEx Ground was made in 2003, which would
“nearly double its daily package volume capacity from 2.5 million to 4.8 million by the end of
2009. This includes adding 10 new central distribution hubs and expanding 23 existing c.d.
hubs, in addition to expanding/relocating more than 300 facilities. Four of the ten new central
distribution hubs should be operating by 2006 in the following cities: Memphis, Dallas,
Cincinnati, and Hagerstown, Maryland. Due to the increased popularity of the FedEx Home
Delivery Service, many of their new facilities will be “co-located with existing FedEx Ground
facilities.”
ƒ In 2003, capacity on flights between Europe and Asia were increased in addition to increased
flight frequencies into Hong Kong. This has allowed for later shipment cutoff times offered.
FedEx also agreed to purchase ten Airbus A380 to complement long-term needs of the FedEx
Express global network.
ƒ In 2003, FedEx Freight and FedEx Trade Networks combined resources to offer Less-than-
Container-Load (LCL or consolidated shipments) services via two new services: FedEx
Trade Networks Ocean Transport (US<->Europe; import/export), and FedEx Trade Networks
Ocean-Ground Distribution (Asia->US; import only). The international aspects are handled
through FTN Transport & Brokerage by agreements with GeoPost and Frans Maas in Europe,
and S-Net Freight and Capital Distribution Services in Asia.
ƒ FedEx Express operates three major world hubs: Memphis, Tennessee; Paris, France; Subic
Bay, Philippines. The second US major hub is in Indianapolis; regional hubs include Newark,
Oakland, Los Angeles, Fort Worth, Chicago. International hubs include Tokyo, London, and
Toronto.
ƒ The Subic Bay, Philippines hub will be relocated (locally) to Clark International Airport
under a $450 million investment plan with a 25 year lease. The decision was made because
expansion in Subic was unfeasible due to Subic’s primary function for port terminals.
ƒ Two operating agreements with the US Postal Service through 2008 had been made to offer
domestic air transport for postal shipments while giving FedEx Express the option to have
self-service drop boxes in every U.S. Post Office location. By mid-2003, 5,000 drop boxes
were available at U.S. Post Offices in around 325 metropolitan areas.
ƒ FedEx Ground as of mid-2003, operated primarily with 15,300 owner-operated vehicles and
17,600 company-owned trailers. Having the trucks being owner-operated keeps asset costs
low and is a common practice among LTL carriers in the industry.
ƒ FedEx Express, Ground, and Services are ISO 9001 certified, which is currently “the most
rigorous standard for Quality Management and Assurance.”
ƒ With the acquisition of Kinko’s in 2004, FedEx plans to offer FedEx Ground, FedEx Home
Delivery, and FedEx Express “shipping services at all 1,100 U.S. Kinko’s stores, replacing
drop boxes with full-service counters.” The synergy of the two companies is very profound.
ƒ In March 2004, FedEx announced an exclusive distribution deal with Saks, which will
encompass the services of FedEx Express, Ground, and Home Delivery.
ƒ In May 2004, FedEx Corp. “will start building a 330,000-barrel fuel storage and pipeline
system, giving it a 13 day fuel supply during peak consumption days.”

Weaknesses
ƒ The air operations of FedEx are vulnerable to strikes from its pilots which belong to the Air
Line Pilots Association, FedEx’s only union. New negotiations have recently begun.
ƒ FedEx continues to greatly rely on operating leases to acquire use of its airplanes.
ƒ FedEx Supply Chain Services is a subsidiary of FedEx Services, and not a distinct company
such as other large companies have. Examples include: Maersk Logistics, UPS Supply Chain
Solutions, and OOCL Logistics. This maintains a lowered strategic scope and identity for
FedEx SCS.

4. Research & Development


Strengths
ƒ FedEx works continuously on improving and upgrading their e-commerce and technological
capabilities.
ƒ In 2003, FedEx Services and Motorola introduced the FedEx PowerPad, a PocketPC based on
MS Windows which was specifically designed to increase customer service levels “by
equipping FedEx Express couriers with online, near real-time, wireless access to the FedEx
network.” Additionally, “FedEx Ground handlers wear ring scanners that capture and
transmit package data.”
ƒ In Asia, it's experimenting with a digital/ink pen called Anoto Chatpen. The cigar-sized
device, made by Ericsson, uses Bluetooth wireless technology to transport written
information, such as a signature or an address, into a database.
ƒ In March 2004, FedEx Express started utilizing in Sacramento its new OptiFleet E700 hybrid
electric vehicles which “will decrease particulate emissions by 90%, reduce smog-causing
emissions by 75% and travel 50% farther on a gallon of fuel, reducing fuel costs by one-
third.” The company plans to put 18 additional vehicles in selected cities within the year.

Weaknesses
ƒ No data available or weaknesses known.

5. Human Resources
Strengths
ƒ FedEx Express has over 52% of its employees being part-time, which allows for
flexibility in scheduling and adjusting to variable periods of demand.
ƒ All Part-time employees at FedEx are offered full benefits Union participation is limited
only to its pilots. FedEx Express has been able to reduce its workforce to meet flat
growth rates in its domestic business through "early retirement incentives with
enhanced pension and postretirement healthcare benefits" to certain employees aged 50+,
and through voluntary cash severance incentives offered to eligible employees.
ƒ These programs were instated on August 1, 2003 and expired during the second fiscal
quarter. Over 3,600 employees accepted these offers, which substantially exceeded
expectations.

Weaknesses
ƒ The Airline Pilots Association contends that FedEx "often forces its pilots to put in as
many hours as it can and gives them little say on flight schedules." This is a result of its
flyers working primarily at nighttime and the growth of FedEx's international business.
Some pilots are flying longer and "more tiring" flights.
ƒ If a new agreement with the pilots' union isn't reached, there can be serious ramifications
for short-term operations suspension.
ƒ A consequence of the overly popular early retirement and severance program at FedEx
Express has resulted in a need for replacement management and staff, in addition to
deferring some of the employee departure dates to May 31 so that Human Resources can
adequately find and replace the Personnel it requires.

6. Information Systems
Strengths
ƒ Primary customer IS solutions include:
o FedEx Ship Manager Software, API, and server for pickup, cancellation, and
tracking.
o FedEx Insight, a web-based system for enhanced level of shipment visibility.
o FedEx Global Trade Manager, which provides import/export forms, licensing
requirements, country regulation/duty/embargo information.
o FedEx Certified Solution Program, which “allows access to other carriers and
complete integration solutions through certified third-party automation solution
providers.”
o FedEx NetReturn API, which integrates with a company’s order/inventory
management apps.
o FedEx Consolidated Return Service, which simplifies reverse logistics (returns
process) for merchants by providing a low-cost, streamlined process.
o FedEx EDI Electronic Invoice and Remittance, which sends invoice data
electronically into the Accounts Payable systems of its clients.
o FedEx Expressclear, a worldwide electronics customs clearance system,
allowing customs agents in other countries to review shipment information
before it arrives and process it faster.
o Customer Link from FedEx Custom Critical is “an integrated proprietary
shipment control system with two-way satellite communications.”
o WorldTariff from FedEx Trade Networks provides continuously updated
customs duty and tax info for more than 118 nations.
ƒ MyFedEx.com was launched in 2002, which offered a customized portal solution for
registered customers that offered personalized services, going “beyond simple tracking
and tracing..”
ƒ As of mid-2003, 70% of FedEx shipments were automated.
ƒ CIO Magazine awarded FedEx’s CIO, Robert B. Carter with their “20/20 Vision Award”
in 2003.
ƒ FedEx Supply Chain Services announced in Sept. 2003 that it would launch an enhanced,
integrated SCM platform with Cap Gemini Ernst & Young. Douglas Witt, the CEO of
FedEx SCS was quoted as saying, "With these services on an integrated platform, their
customers will have enhanced visibility to movement in their supply chain, providing us
with the ability to better manage customer inventory, lower customer operational costs
and free up customer capital for investment in other areas."
ƒ IBM provided to FedEx Trade networks in 2004, a Enterprise content management
(ECM) system for processing U.S. Customs and Border Protection documents. It would
result in faster clearances, a 100% payback after one year, $120,000 annual reduction in
operating costs, and $100,000 yearly savings in warehouse consolidation.
ƒ In April 2004, FedEx Trade Networks announced an agreement with SAP AG to provide
its WorldTariff service to SAP customers through the SAP Global Trade Services. This
is a major competitive advantage for SAP customers and a new revenue and marketing
channel for FedEx.

Weaknesses
ƒ No data available or weaknesses known

V. Analysis of Strategic Factors (SFAS see Exhibit 3)

VI. Strategic Alternatives and Recommended Strategy


A. Strategic Alternatives
Growth: Use the money saved from lowering ongoing salaries and benefit costs to invest in
companies that offer synergies to the FedEx family of companies.
Pro:
• FedEx may gain market shares
• FedEx may win over some of it competitors.
• FedEx may expand into a new market.

Con:
• There is an investment risks as with any investment
• Acquiring another company means increasing expenses as well.
• New company may not work well with current operations; the synergy may not be there as
originally thought.

Stability: Continue to use current family of companies to compete collectively.


Pro:
• FedEx currently has a good financial standing.
• FedEx will be able to defend its current competitive position in the industry.

Con:
• FedEx will not be able to eliminate competitors out of the competition.
• FedEx will not dominate the market.

Retrenchment: Focus dominating one market at a time starting with the US market. Stop
extensive funding to investments in the international market.
Pro:
• FedEx will earn more US market share.
• FedEx may succeed and become dominant in US market.

Con:
• FedEx’s growth in other areas will be put on hold.
• Competitors in international may take advantage and excel to a higher level of competition to
make it harder for FedEx to compete with them.
• FedEx may lose international market shares.

B. Recommended Strategy
The most suited alternative for FedEx is the growth alternative of investing in companies that offer
synergies to the FedEx family of companies with the money saved from lowering ongoing
salaries. Currently FedEx is going strong. There are no problems holding it back to the stability
alternative. Its financials continues to grow. Its revenue growth has increased by 11% to $630
million in the FedEx Freight segment. FedEx Freight segment’s operating income has increased
32% to $37 million. They are already gaining more market shares internationally as they
continued their globalization strategy. They have also succeeded in the past with investments in
companies offering synergies to FedEx.
VII. Implementation
We recommend the following strategies for each of the operating companies while considering the
competitive environment each company operates in.

FedEx Express
Volume growth at the Express market in the U.S. has been flat. But in Asia it definitely is
growing dramatically each year. They have to continue expanding operations there otherwise they
lose out to DHL or UPS who will be happy to take some share from them. In order to counter the
long-term potential threat DHL, it will be quite important to continue adding more drop boxes in
post offices, selected retail partners, and business districts.

FedEx Ground
Although this company is still a distant #2 behind UPS, we believe that there's still quite some
room for volume expansion through marketing campaigns, cross-company promotion, and
expanding existing facilities or opening new strategically placed hubs. Additionally, there is
further potential for the Home Delivery Service. Particular areas of specialty services deserving
attention are reverse logistics (returns management), and B2C e-commerce.

FedEx Freight
While this company operates in a very competitive industry, it has room for growth by acquiring a
handful of SMALL regional LTL firms (thus expanding service coverage), and by promoting the
FedEx brand.

FedEx Trade Networks


The alliances and joint ventures are really what are making this company grow. The potential
with Frans Maas for gaining market share in Eastern Europe is very lucrative in the long term, in
addition to immediate growth in Southeast Asia (Thailand, Vietnam, etc.) with regional partners
there. We also recommend acquiring companies with agents in specific country markets with high
growth potential.. In doing this, we'll have immediate customers and presence, reduce the number
of external intermediaries, process the cargo faster, and offer a higher quality service that better
serves the shipper and consignee.

FedEx Custom Critical


Since this is a niche market with perhaps limited growth, we recommend this company to continue
marketing its services, by heavily emphasizing the FedEx brand, to unique customers with
expedited transport needs. Examples include film/television studios and various sports teams.

FedEx Services
Since the Supply Chain Services subsidiary is the only operational arm that brings in revenue (the
rest gives marketing strategies and tech support to Express and Ground), we think eventually the
SCS should be its own company, but perhaps now is not the moment. For the time being, we
recommend that SCS take a proactive step in convincing existing large clients of its strengths and
capabilities while pursuing a low-cost operational strategy (the SBU incurred losses in its Q2
earnings for 2004).

FedEx Kinko's
This company has been doing extremely well and has serious potential for increased sales at the
Express and Ground operations in the US. Kinko's as a business model in specific country
markets has tremendous potential for itself and increased Express sales growth. We recommend
following the firm’s plans for shipping centers in all its existing stores, as well as adding
additional stores according to Kinko’s original growth plan.
VIII. Evaluation and Control
Information systems are a distinct competency for FedEx, the company has led the industry in
introducing new technology. FedEx uses SAP R/3 as their ERP system, enabling the company to
provide superior service to their customers and solidify their own evaluation and control
information strategies. Being the industry leader in technology, FedEx should continue with their
successful path and rely on their computer generated data for evaluation and control.

IX. EFAS, IFAS, and SFAS Exhibits

Exhibit 1
External Factor Analysis Summary
Weighted
Key Internal Factors Weight Rating Score Comments
Opportunities
FedEx is improving its information The improvement helps FedEx
technology. achieve its single-point of
0.08 4 0.32 access concept.
FedEx Express holds certificates of
authority to serve more foreign
countries than any other U.S. all-cargo
air carrier. 0.13 5 0.65
The number of people making internet It gives FedEx the opportunity
purchases is increasing worldwide. to provide small-package
0.09 3 0.27 delivery service.
FedEx exploits technology as soon as it FedEx is experimenting with
becomes available. Anoto Chatpen, a digital/ink
pen, which transport written
0.13 5 0.65 information into a database.
FedEx has an enhanced infrastructure. FedEx accomplished this
through alliances with such
0.11 5 0.55 companies as La Poste.
Threats 0
Some businesses are setting up
alternative delivery networks. 0.09 2 0.18
FedEx's major competitors, UPS and Differentiation is hard in this
USPS, offer similar service for a similar industry.
or cheaper price. 0.14 3 0.42
FedEx has about 22% of the market
share while UPS has 55% of the market
share. 0.07 3 0.21
Many of FedEx's international Government businesses have
competitors are government-owned, greater resources, lower costs,
government-controlled, or government- less profit sensitivity and more
subsidized carriers. 0.10 2 0.2 favorable operating conditions
The U.S. Department of Transportation Their unpredictable actions
and Federal Aviation Administration has may negatively impact FedEx.
right to exercise regulatory over FedEx
Express. 0.06 3 0.18
TOTAL SCORE 1.00 3.63
Exhibit 2
(IFAS) Internal Factor Analysis Summary

Weighted
Key Internal Factors Weight Rating Score Comments
Strengths
Known for high-quality,
Brand name 0.09 5 0.45 speed, and reliability
Increasing Revenues,
Operating Income, and
Operating Margins 0.13 5 0.65
Intensive Brand Promotion 0.15 4 0.60
Increased activity in foreign
markets 0.09 4 0.36
Strong R & D 0.05 2 0.1
Quickly becoming more By mid-2003, 70% of
automated 0.07 4 0.28 shipments were automated
Currently being tested in
Integrating hybrid vehicles Sacramento, CA distribution
into delivery fleet 0.08 3 0.24 area
Weaknesses

Behind DHL in Foreign


Markets 0.08 4 0.32
FedEx air operations are
vulnerable to strikes 0.05 2 0.10
Realignment costs very high 0.06 4 0.24
Costs for customers
increased 0.04 3 0.12
7% return on capital Calculated by including leased
compared to a 8.7% cost of aircraft as invested capital,
capital 0.06 2 0.12 meaning a high leverage.
FedEx Supply Chain
Services is affecting other
areas negatively 0.03 2 0.06 Mostly affects FedEx Ground
Little differentiation in
services provided versus their
competitors 0.02 2 0.04
TOTAL SCORE 1.0 3.68
Exhibit 3
SFAS (Strategic Factor Analysis Summary)

Weight Rating Weighted Duration


Key Strategic Factors
Score ST IT LT

Operationally Excellent (S) .10 3 .30 x x x

Known for reliability (S) .20 3 .60 x x x

Excellent marketing (S) .15 2 .30 x x

No service distinction (W) .05 3 .15 x

Very high cost (W) .10 3 .30 x

Improvement in technology (O) .05 2 .10 x x

Operate globally (O) .05 3 .15 x

Small delivery package (O) .15 2 .30 x x

Competitors (T)
.05 3 .15 x

Change in transportation policy


.10 2 .20 x x x
(T)

Total Score 1.00 2.55


References:
Websites: Fedex.com, finance.yahoo.com
SEC Filings: 2003 Annual Report, 2004 3rd quarter 10-Q, 2004 4th quarter Pre-Announcement.
Articles:
FedEx "buy," price objective raised
http://www.newratings.com/new2/beta/article_407451.html
FedEx Completes Acquisition of Kinko's
http://www.kinkos.com/about_us/newsroom/newsroom.php?ItemTypeID=1&ItemID=363
Versatility key to FedEx, Saks deal
http://memphis.bizjournals.com/memphis/stories/2004/03/22/daily10.html
FedEx to remain in Philippines
http://www.atimes.com/atimes/Southeast_Asia/FD07Ae04.html
FedEx China business booming
http://www.commentwire.com/commwire_story.asp?commentwire_ID=5481
FedEx to Begin Building Massive Fuel Tank Farm at Memphis, Tenn., Airport
http://www.miami.com/mld/miamiherald/business/national/8377449.htm?1c
New Fedex Express Hybrid Electric Trucks Begin Service
http://www.ewire.com/display.cfm/Wire_ID/2056
FedEx starts talks with pilots, hoping to avoid another slugout
http://www.signonsandiego.com/news/business/20040418-1109-fedex-pilots.html
SAP and FedEx Trade Networks Come Together to Ease Global Trade
http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=109&STORY=/www/story/04-22-
2004/0002157132&EDATE=
FedEx Trade Networks opens borders with IBM content management solution
http://www-306.ibm.com/software/success/cssdb.nsf/cs/TKNC-
5UCPZS?OpenDocument&Site=cmportfolio
FedEx Supply Chain Services, Cap Gemini Ernst & Young Harness Respective Experience to Bring
Greater Supply Chain Value to Customers
http://www.us.capgemini.com/ind_serv/services/supply_chain/current_news.asp?ID=327
Competition keeps post office hopping
http://greenvilleonline.com/news/2003/12/08/2003120820548.htm
DHL and Airborne Express ready to face the competition in the US
http://www.eyefortransport.com/index.asp?news=40555&nli=freight&ch=
FedEx's China sales up 40%
http://www.eyefortransport.com/index.asp?news=41152&nli=freight&ch=
The UPS Store rings up first year success
http://www.eyefortransport.com/index.asp?news=41252&nli=freight&ch=