Strategic Issues in Admin Federal

Strategic Issues in Admin

Federal Express is courier company with global operations. The core business of FedEx is their overnight courier operations, but they operate several other divisions as well. These include ground package delivery, LTL (less-than-truckload) freight, customs clearance and FedEx Office, the chain of retail office services outlets formerly known as Kinko's.

FedEx is considered an industry leader in most of their businesses, and is one of the most admired U.S. corporations. The overnight business operates on a hub-and-spoke model using the second largest airplane fleet in the world. The company has seen some challenges in recent years, in particular the rising cost of fuel and corresponding economic downturn.

Situation Analysis

One tool for understanding an organization's situation is the SWOT analysis.

FedEx has several key areas of strength. The first is their brand. FedEx has been able to cultivate a strong, consistent brand image over the course of its existence. The company is respected, and has a high level of customer satisfaction. The brand is recognizable worldwide, and carries the same connotation of excellence and innovation everywhere.

Their established transportation networks are another key strength. FedEx has developed both a sophisticated hub-and-spoke system for its air freight business, but also has one of the largest trucking fleets in the shipping business. This means they are well set-up to move goods efficiently anywhere in the country via different modes.

Another key strength is their staff. FedEx has made a point of developing talent both on the front-line and at the executive level. The front line staff have been able to forge strong relationships with the customers through regular face-to-face interaction. Among other benefits, this provides a barrier for competitors looking to steal business away from FedEx. FedEx operates a complex set of systems with precision in order to achieve its strong performance. The experience of the management team in running these systems is another key strength the company draws upon as a source of competitive advantage.

A key internal weakness for FedEx is the FedEx Office brand, which shown disappointing performance since it was acquired as Kinko's. The first few years of integration saw a profound clash of organizational cultures. Turnover was high and Kinko's on the whole failed to adapt to the new culture FedEx was trying to instill. The performance of the unit still leaves much to be desired.

Another weakness of FedEx is their reliance on fossil fuels. Aside from staff, the major expense of their operation is jet fuel. The current dramatic rise in fuel prices, for example, has exposed this weakness by putting substantial pressures on profits. There seems little, however, that FedEx can do, as the entire business model of the core Express unit is based around air freight.

FedEx is faced with a few key opportunities at present. The first is that they are moving into the LTL market aggressively. This market is highly fragmented, with only a couple of national competitors, UPS and YRC Worldwide. FedEx's strong brand and established transportation networks will help them to pick up market share from this market. Moreover, they will be able to build economies of scale into their operations to a far greater extent than the bulk of their competitors, who are small companies and owner-operators.

Another opportunity for FedEx is in the ground package delivery. High fuel prices and a slumping economy are hurting the overnight segment, but much of that business is being transferred to the ground side, where delivery typically takes 2-3 days. As a result, this segment has been experiencing growth over the past several years. Again, FedEx has the opportunity to leverage their name and network to build out this business more in the coming years.

There are a few key threats to FedEx's success. The first is rising fuel prices. These have eaten into FedEx' profits significantly, with the company posting a rare loss last quarter and giving a dim forecast for the coming months. The company has used a fuel surcharge to disassociate fuel costs from their regular costs, but that surcharge is still taken into account by prospective customers. The result has been that not only have high fuel prices cut into FedEx' margins, but they have also reduced demand for its core overnight services (which are most adversely affected by the fuel price increases).

Another threat is that of economic downturn. FedEx is considered a bellwether company for the U.S. economy, since they have a broad customer base in both the corporate and retail sectors. What this means is that FedEx' revenues tend to track economic activity. For example, FedEx revenues declined significantly following the 9/11 terrorist attacks, in line with the decline in the economy overall. The recent quarterly loss indicates that the company is once again unable to weather adverse economic conditions.

Given the apparent fragility of the economy in recent years, this presents a significant threat to FedEx.

FedEx' external environment is moderately favorable. Their fortunes are highly correlated to those of the economy overall, and in particular to fuel prices. The outlook for both of these factors is, by FedEx's own admission, not good for the coming months. However, their core market has very favorable conditions. The barriers to entry are very high, in particular the cost of building out infrastructure - DHL is estimated to have spent over $3 billion just to gain a toehold in the U.S. market. The competition within the market is intense, but there are only a handful of competitors. Customers have relatively low switching costs, but there is little to differentiate the main players in the industry, which gives the buyers little power. FedEx is large enough that there are few suppliers who could exert power over them. The threat of substitutions is moderate. Many packages can be shipped via slower modes of transport, which creates opportunities for FedEx both in the residential ground market and the LTL market. For many overnight packages, there is no acceptable substitution (medical samples, parts for repairs to high-end equipment, superconductors, to name a few examples).

FedEx' has a favorable internal environment. They have a strong and well-ingrained corporate culture. They have been able to find, identify and develop staff well over the years. FedEx also has strong operational systems that allow it to focus on constant productivity improvements. The company has no history of governance issues or scandal. They are well-positioned internally to deal with whatever situations arise.

Key Issues

The first key issue faced by FedEx is the rising fuel prices. These have not only cut into the company's margins but have also created an economic downturn, which has reduced demand for FedEx' core service. The company is, above all else, engaged in the transportation business. As such, they are highly sensitive to fuel costs, including jet fuel and diesel. Because of this, FedEx faces a huge challenge in maintaining profitability during fuel price spikes such as we are in currently. The company itself has admitted that the outlook is not good, and long-range fuel increases will undoubtedly force their customers to evaluate the way they do business.

Another key issue is the FedEx Office unit, which continues to struggle. This unit has never been fully integrated into the company, and the synergies that were expected to flow from the merger have yet to materialized. Worse yet, they operate in a market that is highly competitive with low barriers to entry and high buyer power. The result is that FedEx Office/Kinko's has consistently struggled to achieve profitability.

Recommendations

FedEx should take a two-pronged approach to the issue of rising fuels prices. The first part of the strategy will be to make substantial investments in their ground and LTL infrastructure.