Managing Innovation at FedEx: Barriers and Solutions

Introduction: FedEx as an Innovation Case Study

FedEx was founded as an innovator in a logistics field that had never seen overnight delivery before. The company has always positioned itself as a premium provider in the industry, based on its sophisticated technology, superior network size, and quality of service. However, as the company has matured, its ability to be an innovation leader has come under threat. There are several issues at play.

The first is that, as in any mature industry, the pace of innovation is generally slow. As the only company that genuinely seeks to position itself as premium to its competitors, FedEx is the only firm truly competing on innovation. Over the years it has had some tremendous innovation successes, pioneering the ability to maintain communication with its drivers on the road, introducing tracking that allows customers to see where their packages are at every step of the journey, and developing the hub-and-spoke model of delivery for courier services. Every major competitor — UPS, DHL, TNT — imitates the things that FedEx pioneered, and usually not as well.

But in an industry with a slow pace of innovation, where most customers have a high degree of loyalty and relatively little new business is in play, the incentive to innovate is relatively low. Furthermore, there are high costs to innovating for a company with hundreds of thousands of workers scattered around every corner of the globe. Rolling out a new technology for its couriers will cost FedEx many millions of dollars. An additional challenge is that the pace of technological innovation outside the industry is moving faster than the pace inside it. FedEx took years to roll out a handheld device for its couriers, and in that time the outside world had moved from bulky early mobile phones to the first iterations of the iPhone. FedEx's new technology was obsolete before it was even completed, and grossly overpriced compared with off-the-shelf solutions that had been developed in the time it took the company to complete its rollout.

These issues point to a fundamental problem with innovation at FedEx. Given that innovation is one of the areas where the company has traditionally extracted competitive advantage, maintaining the ability to out-innovate competitors is critical to the business model. Having identified a need to improve innovation processes, it is necessary to evaluate the current state of the company's innovation pipeline and determine what steps might be taken to improve it. This paper analyzes how large corporations can manage innovation, with an eye toward improving both the pace and quality of that innovation, using FedEx as the primary case study.

Academic Frameworks for Understanding Innovation

The academic study of innovation is relatively recent. It arose out of the desire to understand one of the most dynamic and valuable processes in any business. In a rapidly changing global economic environment, a single innovation can give a company an advantage, but companies that can innovate continuously are the ones that develop sustainable competitive advantage. Innovation was once studied as part of economics, but has in recent years become more psychological in nature, focused on what steps a company can take and what systems it can implement in order to foster a continuous flow of new ideas (West & Farr, 1990).

To foster innovation, a company first needs to understand what innovation is. While it is tempting to take a "you know it when you see it" approach, the point of innovation as an academic discipline is to move beyond that and formalize the definitions and explanatory theories. Sawyer (2012) explains that innovation begins with creativity as its antecedent. A creative idea is one that is original and understandable; Sawyer adds that it must also be useful or valuable. Arguably the latter quality is not strictly necessary in all contexts, but it will be essential for a creative idea to gain traction in a commercial setting.

With creativity as its antecedent, innovation occurs when a creative idea is taken through the formal development stages within an organization. Sawyer (2012) notes that companies tend to have pathways through which they filter new ideas, and the study of innovation as a managerial discipline focuses on the design of these pathways, how organizations are structured around them, and how innovation pathways are implemented. An organization may have the ability to generate creative, valuable ideas constantly, but without a pathway to bring those ideas to market, innovation will fail to exist and the creative idea will fail to add value. If creativity is the person sitting in a café thinking up ideas, then innovation is when that person goes to the workshop, builds a prototype, and takes it to market.

The first critical concept for understanding the process of innovation is the innovation system. In any organization, there will be a system for handling creativity, and that constitutes the innovation system. In some companies this system is the corporate equivalent of a failed state — there are few good ideas and the ones that do emerge are quickly quashed. In other companies, there are specific pathways that not only encourage the generation of good ideas but evaluate those ideas and create channels through which the best ones are developed and brought to market. Sawyer (2012) highlights several thinkers and the ways they describe innovation systems; the common theme is that these systems are comprised of multiple institutions working together.

Edquist and Hommen (1999) note that innovation systems are not linear — there are myriad external influences that affect the system, one of which is demand. Innovation systems theory suggests that even within mature, competitive industries, improvements to systemic efficiency or customer service would be welcomed if the organization were structured to pursue them. The reason innovation may take a back seat at FedEx could be related to NESTA's (2011) public innovation capability framework, which posits that impact on performance is related to both innovation capability and innovation activity. If a company believes that innovation will have little impact on performance — that is, that innovation activities will have a negative net present value — it may constrain its innovation pipeline as a matter of policy.

Organizational Culture and Innovation Systems at FedEx

Organizational culture is another key element discussed in innovation frameworks. Culture is related to creativity, the key antecedent of innovation, and will also be reflected in the innovation systems a company develops. Lau and Ngo (2004) argue that the role of human resources, long considered a vital link in innovation, has been overstated, which suggests that organizational culture is a more powerful driver. There is logic in this: hiring gets you creativity, but the structures of the organization's innovation system determine what the outcomes of that creativity will be. Knight and Cavusgil (2004) identified a link between innovation as a value in organizational culture and firms that are not only more entrepreneurial but better able to adapt to internationalization.

One of the issues at FedEx is that the culture is not generally geared toward innovation. The workforce is large but is almost entirely motivated by attention to short-term efficiency. This orientation has been built into the culture, and additional cultural emphasis falls on exceptional customer service. Innovation is not promoted internally. The lack of emphasis on innovation means that the culture does not promote it, which naturally has a negative impact on the organization overall. There is little motivation for workers to be creative, and even if they have a good idea, few have any sense of what to do with it. As one employee noted: "I could tell my supervisor, but even they would have no idea what to do with the idea. Everything goes through Memphis, which is a long way from here."

The unfortunate result of this reality at FedEx is that it excludes, rather unnecessarily, the possibility of innovations that would improve efficiency. The 4Ps model makes the point that there are different types of innovation — product, process, position, and paradigm (Tidd & Bessant, 2013). Even if head office prefers to centralize innovation, there should be room for process innovation, given that tens of thousands of people work on processes every day, possess a high level of knowledge about their functions, and might be able to contribute meaningfully to how those tasks are performed more efficiently or effectively. There is simply no pathway to move a creative idea into the implementation stage. Even at the station level, innovation would be ad hoc, and even if proven successful locally, it might never be expanded company-wide.

A theory that applies directly to FedEx's situation is the distinction between radical and incremental innovation. While radical innovation might have tremendous value in changing the competitive landscape of a mature industry, it is also unlikely to occur frequently. Incremental innovation is much more likely, and could ultimately prove highly valuable, representing exactly the sort of efficiency or effectiveness improvements that can give FedEx a competitive edge. Even saving a fraction of a cent on each item shipped would have a tremendous effect over the large volume of shipments FedEx handles daily, so incremental innovation carries significant potential value for this company (Gatignon, Tushman, Smith, & Anderson, 2002).

Another element of an innovation system is the methods by which the organization evaluates and validates ideas. Interview evidence indicates that no such system is diffused across the company. Innovation at FedEx is highly centralized, so a system exists, but it is not accessible to the average employee. This poses a serious roadblock, because good ideas that do not originate from the centralized innovation team will simply die — there is nowhere for them to go. Not only is there a barrier to getting an idea to head office, there is no formal pathway to make that happen anyway. Only when a local manager takes initiative — something that is not necessarily rewarded — will there be any direct pathway to validate an idea.

This raises the concept of incentives in the role of fostering innovation. Wages are determined centrally, which removes the incentive for workers to bring forward their creative ideas. The average front-line worker is evaluated on performance metrics that emphasize productivity and efficiency, reported daily. This keeps people oriented toward those objectives rather than toward innovation. Lower-level managers are similarly incentivized toward productivity, and are only marginally more empowered than front-line employees to pursue innovation. Haucap and Wey (2003) showed that a centralized structure performs poorly at incentivizing innovation, yet this is the structure FedEx employs for almost all of its activities. People who work at stations away from centralized head offices are, in effect, caretakers of systems developed and refined elsewhere, and are incentivized to perform that role and nothing more.

Conclusion

These recommendations will help FedEx reduce the structural barriers, and to some extent the cultural barriers, that are inhibiting innovation at present. The company has evolved a risk-averse culture, despite the continuing need for innovation to maintain competitive advantage. The barriers within the company have emerged as a result of industry maturation and the increasing need for bureaucracy as FedEx has grown into an international organization. Yet with targeted changes to its innovation pathway and incentive structures, along with leadership training for innovation, FedEx can restart the creative process and foster a quicker, more sustained pace of innovation.

The experience at FedEx is representative of many large companies — they have evolved to be excellent at doing the same things repeatedly, but have not kept pace with the innovation that allowed them to dominate their industries in the first place. FedEx was born of radical innovation, yet today it is exposed to precisely that kind of disruption from outside. Addressing the internal barriers described in this paper is therefore not merely a matter of organizational improvement, but of long-term strategic survival.

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