Executing strategies in a global environment: The case of Federal Express

FDX

Value Creation Frontier

The value creation frontier "represents the maximum amount of value that the products of different companies inside an industry can give customers at any one time by using different business models" (Hill & Jones, 2008). FedEx focuses on quality and excellence, as well as responsiveness to customer, as the core elements of its business model. Reliability and efficiency are also facets of business on which FedEx focuses. What this means is that FedEx can and should offer higher prices, because its business has higher costs. FedEx is basically offering a premium service within the package delivery business, in the express division. FedEx Ground is more reliability and efficiency, which implies that division should offer a lower price and move more towards cost leadership.

To maintain above-average productivity, FedEx needs to continually innovate. The company has been an innovator in the past, first when it was the first company to offer overnight service to other cities using the hub-and-spoke model with its aircraft. The company has also been a customer service innovator, and to this day its tracking capabilities far exceed those of its competitors, delivering better value for the customer. Because FedEx excels at the other building blocks of competitive advantage, the company can earn competitive advantage through innovation. Its close competitor, UPS, is also pretty good at the same elements that FedEx is, but FedEx has a history of being the innovation leader in the business. If it can maintain that reputation, then FedEx will most likely be able to maintain competitive advantage.

Product Differentiation and Capacity Control

FedEx has sought to differentiate itself by offering a comprehensive suite of logistics services, essentially branding itself as a logistics provider, with the overnight Express service being just one component of that. This is one element of differentiation that it uses, but UPS seeks to use that as well. These two competitors will often mirror each other -- UPS followed FedEx into the overnight business, but when UPS bought Mailboxes, Inc., FedEx bought Kinko's (Gross, 2004). So the brand and the history of innovation are still major differentiators. Most customers will also have brand loyalty, and that ends up being a large part of how different customers differentiate their service offerings, by enticing customers to be loyal to just one company.

Capacity control has always been a source of efficiency at the company. Now, it has already been established that efficiency is not a source of competitive advantage. This does not preclude the company from focusing on capacity control -- FedEx actually spends a lot of time worrying about this -- but FedEx is not going to outcompete UPS on capacity control because that's not where competitive advantage comes from when you are operating a premium courier company. FedEx does, however, seek to maximize the loads in its aircraft, which are the main cost driver. This is why it consolidates in major hubs, uses third party carriers for remote areas, and has a large number of different types of aircraft in its fleet.

Efficiency

Even though FedEx does not compete as a low cost provider, it is nevertheless a fairly efficient company for what it does. To make FedEx more efficient would require planes and trucks to wait until they were full before moving. That would, of course, run contrary to the company's business model. So while FedEx seeks to manage its capacity for its planes, in order that it is able to optimize shipments, the company has no interest in seeking maximum efficiency because that is not the business FedEx is in.

A new business-level strategy to give FedEx an edge over its rivals would involve streamlining the aircraft fleet. This would lower the maintenance costs on the aircraft, something that is expensive when not only do you have the world's largest fleet but when the fleet is made up of many different types of aircraft. With 650 individual aircraft, but 12 different models, the hodgepodge nature of the fleet is part capacity control, but it is also contrary to lowering airline costs -- most leaders in the field prefer to have a single aircraft type for their fleet as it is much cheaper than operating many different types of aircraft (ICAO, 2003).

By lowering aircraft costs, FedEx will be able to run a more efficient operation, and it will increase its profit margins, because it will be able to operate more cheaply than its competitors. Thus, FedEx can increase profits and efficiency without compromising on service or innovation using this strategy, just by following the best practices borrowed from the passenger airline industry. It can offer better service to the customers, or lower prices, or even both, in an attempt to win some business away from its competitors. The strategy is not without cost, but it could be a long-run strategy that takes a few years to execute -- there is nothing wrong with having a long-term vision for where the company wants to be down the road.

Global Competition

Global competition is not going to change, so does not really affect my strategy. FedEx competes against DHL, UPS, TNT and a variety of local courier companies. Only the big four are worth mentioning on the global scale, however. Each of these companies has their own strategy -- DHL and TNT seek to build out from their European home markets, while UPS competes as a very close competitor to FedEx in terms of strategy. FedEx might gain advantage over these rivals with the strategy, but overall global competition is not pushing FedEx into this move. The company will benefit from benchmarking against the most efficient companies in the industry, and that is not the rivals in the global courier business.