Leader of the Pack
For revolutionizing how business absolutely,
positively gets done, Fred Smith of FedEx is the 2004 CEO of the
BY WILLIAM J. HOLSTEIN
Smith likes to quote Pogo the Possum, who once said in a cartoon
strip, “If you want to be a great leader, find a big parade
and run in front of it.”
There’s no question that Smith, chairman, president and
chief executive officer of FedEx, is running in front of a huge
parade. FedEx, the company that Smith founded as a start-up in 1971,
is now a $25 billion giant, soon to become even bigger because of
its acquisition of Kinko’s. FedEx is at the heart of how the
American manufacturing base is globalizing, allowing all manner
of parts and products to arrive from mostly Asian destinations in
a just-in-time way. “In the high-tech and high-value-added
sectors in particular, but also in the lower-value-added sectors,
the location of production is almost irrelevant,” Smith says.
“It’s simply a cost/time trade-off. That’s all.”
Not coincidentally, FedEx is at the bleeding edge of how companies
are targeting supply chains and logistics as the key to competitiveness.
Companies don’t want to carry one more penny’s worth
of inventory than they have to. They don’t want to have to
deal with multiple suppliers to ship documents, parcels and larger
loads. They want all that to be integrated, and they want to be
able to find out, at any time, where things are. FedEx literally
invented that capability.
And imagine what Internet-based commerce would be like if there
weren’t a reliable, speedy way for customers to get books
and CDs from Amazon.com or laptops and PCs from Dell. The whole
phenomenon might never have happened. But as etailing continues
to grow, the demand for more shipping is certain to expand as well.
“We’re running in front of these enormous forces,”
Of course, he isn’t just running in front of the parade.
His company has been a leading organizer of this transformation
of the economy—a grand marshal, in fact.
In recognition of what Smith, his top management team and 240,000
employees and contractors have accomplished, Chief Executive’s
panel of CEO judges has chosen Smith as the 2004 CEO of the Year.
“Fred Smith is an outstanding executive and entrepreneur,”
says AIG’s Hank Greenberg, 2003 CEO of the Year and chairman
of the selection panel. “He took FedEx from being just an
idea to being a great company.”
The fact that Smith created something from scratch is what impressed
so many judges. “The great issue for him is the long-standing,
continuous performance he’s had in developing an entire industry
and altering the business model,” says Kevin Rollins, the
new CEO of Dell and also a judge. (For other judges, see page 10.)
Smith, who turns 60 this year and has undergone heart bypass surgery,
doesn’t show any signs of wanting to slow the parade down
so that he can relax with his 10 children and assorted grandchildren.
“I like what I’m doing at FedEx for a very fundamental
reason,” he says in his office on South Shady Grove Street
in Memphis. “It is an important industry that sits right at
the middle of almost everything else that’s going on. It is
vitally important to the commerce of the country and the world.”
And now that he has assembled a Strategy Management Committee
consisting of the heads of FedEx’s operating companies and
top staff functions, Smith can concentrate on what he likes doing—thinking
big thoughts. “FedEx Corporation today is a lot more fun for
me” than it used to be, he says. “I can spend a lot
more time on strategy. Management functions are largely delegated
to a very capable group of executives.”
Managing this new FedEx is a great deal more complex than it was
just a few years ago. (See sidebar, page 34.) There are now four
major operating companies, or “op co’s” in FedEx
speak. FedEx Express is the traditional heart of the company, but
acquisitions have been key in creating FedEx Ground, FedEx Freight
and now FedEx Kinko’s. Integrating the people, processes and
technologies of these players in just the right way is the No. 1
challenge facing FedEx.
On one hand, Smith wants each of these units to operate independently
so they can best serve their market segments. “If you blended
it all together, you’d get an average service that doesn’t
service anyone well,” says Doug Duncan, CEO of FedEx Freight.
Yet Smith also wants the company’s various arms to cross-sell
each others’ services. That way, corporate customers can get
precisely what they want and not have to contend with the traditional
silos that have fragmented the transportation industry. And retail
customers, whether sitting at home or at a FedEx Kinko’s,
can ship documents and parcels through the same company.
FedEx also wants its operating companies to appear seamlessly
integrated to the world. Whether it’s a document, parcel or
larger so-called “less than truckload” shipment, customers
can track the item on www.fedex.com. A centralized central sales
force of 3,000 manages relations with corporate customers, so that
the operating arms don’t trip over each other.
Getting this balancing act right is tricky. FedEx has even come
up with different color codes for different operating companies
to help everyone understand the differences and similarities. The
corporate motto used to be just: “Operate Independently. Compete
Collectively.” But now a third phrase has been added: “Manage
Collaboratively.” Translation: Each operating unit does the
best it can in its segment, but all are presented as a single entity
externally. And to manage all this, we have to get along with each
One other surprising break from the past, and an additional element
of complexity, is that the company’s No. 1 customer is the
U.S. Postal Service, which used to be the enemy. But FedEx now handles
$1 billion worth of Postal Service shipments a year because the
USPS doesn’t have its own fleet of jets. The deal allows FedEx
to “double up” the use of its infrastructure, because
the Post Office sort happens at mid-day rather than in the middle
of the night when the rest of the company’s sorting occurs.
An additional plus: FedEx gets to put drop boxes in 8,000 post offices.
Smith, an avid reader, turns to history to explain why the market
is better served by a more complex FedEx. “It’s really
embedded in Alfred Sloan’s doctrine produced during the 1920s
that allowed General Motors to become the biggest industrial corporation
in the world,” says Smith. “He recognized that there
were different segments in the market. But he used common technologies
and materials. He married you in a Chevrolet and buried you in a
Cadillac and had something for you every step in between.”
Never a Doubt
Smith doesn’t like to talk about the past very much because
he worries that it will perpetuate confusion about what FedEx is
today. But the tale is one of the most remarkable entrepreneurial
stories of the 20th and now the 21st century, and bears retelling
Smith graduated from Yale University in 1966 and thought about
going to business or law school. But he’d been in the Marine
Corps officer program and decided to join the Marines instead. He
was sent to Vietnam, where he served as a platoon leader and then
became a pilot. He returned home in 1971, profoundly changed by
his experience there.
He says his vision for creating a company was the result of studying
a mathematical discipline called topology in college. He was fascinated
by the idea that if you connected all the points on a network through
a central hub, much as a bank clearinghouse does, the resulting
efficiencies could be huge.
Smith never doubted that the network concept would work with packages
and letters. “I was always convinced that the market demand
for what we were trying to do was just so profound,” he recalls.
“So it was just a matter of time and money.”
He first located the company in Little Rock, Ark., in 1971. Smith
used his own money and some from his family to get started. Investors
put up $80 million. Smith faced a classic dilemma: He had to first
spend the money to build an infrastructure before he could deliver
the service and make money. But he did enough research to feel confident
he’d be able to deliver a return. “I had it documented
three different ways by three separate, independent consulting studies,”
he says. “We had an awful lot of quantitative data showing
that the demand for the service was very significant.”
company, which was relocated to Memphis and bolstered by another
$52 million in funding, “went live” in 1973 with 389
employees and 14 Dassault Falcon jets delivering a mere 186 packages
overnight to 25 cities. Thus, Federal Express was born and, with
it, the hub-and-spoke system that major airlines would soon adopt.
At each stage of expansion, Smith found new ways to apply technology
to the mundane task of sorting and transporting documents and packages.
Coping with the sheer volume of transactions was one immediate challenge.
“We reached a point fairly early on where it was obvious to
me that if we didn’t have a way to discreetly measure and
control each of those transactions, we were going to hit a fundamental
sound barrier, a wall,” he says. “That’s when
it really hit me that we had to embrace this IT revolution to a
much greater extent than I perhaps realized initially. We decided
we had to invent a whole new way to keep up with things.”
Over time, FedEx greatly expanded the use of laser bar code and
scanners and wireless hand-held computers, which are about the size
of a candy bar today. It also built the largest radio system outside
the U.S. military to communicate with its fleet of trucks. All were
path-breaking innovations, and with their help, FedEx actually knew
where things were.
“The second big conceptual leap was when it occurred to
us that this information was so valuable to us that it might be
equally valuable to the customers,” Smith explains. That was
in the 1978 to 1979 time frame. “Then the issue became, how
do we migrate that information into the customer’s shipping
locations,” he says. “We developed a proprietary network
and supplied people with PCs.” That PowerShip system was fully
established by 1987. Customers could monitor shipments all over
the world, but only through the FedEx network.
As history shows, proprietary networks are of limited value. “When
the Internet came along, you had the capability to make the information
available not just to your biggest customers, who you could afford
to supply with a PC, but to anyone who had access to the Internet,”
At the same time that the company was making big bets on technology,
it was laying down a global infrastructure, long before doing that
became fashionable. Smith’s decision in 1989 to purchase Flying
Tigers, an Asian air-freight powerhouse, was controversial at the
time because many analysts didn’t see how it could pay off.
But FedEx’s corporate customers were beginning to shift their
manufacturing strategies to take advantage of China’s emergence,
in particular, and wanted the same kind of shipment predictability
they had in the U.S. “The multinationals wanted the same things
over there that they had here,” recalls Dave Bronczek, president
and CEO of FedEx Express and the senior executive with the most
international operating experience.
in order to accommodate the explosion of commerce across the Pacific,
FedEx conducts sorts in Subic Bay in the Philippines; Tokyo and
Osaka, Japan; and Anchorage, Alaska. Each of those sorts is an exercise
in precision. In the middle of the night, dozens of jets land at
a hub. Pilots, drivers, maintenance crews, offload crews, dispatchers
and workers are all choreographed in advance. An absolute avalanche
of documents and parcels hits the conveyor belts for sorting. In
Memphis, for example, there are 300 miles of conveyor belts that
read the laser bar codes on each item. Everything is measured: FedEx
knows that a Boeing 729 burns 69 gallons of fuel a minute so that
if it can more smoothly coordinate the departure of jets, the savings
can be huge. Error rates are microscopic.
As a result of this vast infrastructure, it’s no surprise
that the company’s international business is booming. Its
business in China is growing at 50 percent annually, albeit from
a smaller base than in more established markets, says Bronczek.
The company is operating in 215 countries, including Afghanistan
Most of what Smith has built is invisible to the customer. But
there’s little question that FedEx works. Perhaps the ultimate
proof of the company’s impact on American life is that the
term “FedEx it” has entered the language, just as Kleenex,
Xerox and Google have. And FedEx is one of the world’s most
trusted brand names.
Driving the Culture
One of the most interesting things about what Smith has accomplished
is that he was able to take a company from start-up to global, multidivision
business. Part of the explanation, it seems, is cultural. The culture
at the top is still very white, male American and slightly militaristic,
as it was at the beginning. But the Big Company disease doesn’t
appear to have taken hold. It is a very driven company that is constantly
experimenting and devising new ways to grow. “The notion of
constant improvement and consistency in performance is an area in
which Fred Smith is very driven,” says Dell’s Rollins.
FedEx is still pushing hard on technology, for example. It is
among the first companies to agree to purchase the new Airbus 380s,
which will be able to fly from Singapore to New York. The huge new
planes could change the economics of long-distance shipping. The
company is also at the center of the debate about radio frequency
identification. And it constantly pushes the edge of the envelope
by devising its own software. It has developed its own “surface
management software” that allows dispatchers to “see”
aircraft and vehicles on their computer screens.
But the Internet remains the big opportunity. “We are not
anywhere near the end of the revolution,” says Rob Carter,
the chief information officer. One new service, called Insight,
allows customers to anticipate how many parcels they will receive
the following day. One example of a customer keen for this capability,
says Carter, is a bone-marrow testing service. Bone-marrow samples
are painful to extract from patients and must be evaluated within
24 hours. The testing service would like to be able to anticipate
how many samples it will receive the next day so that it can be
ready. Insight collects that information and makes it available.
Smith maintains a sense of urgency in how he manages the Strategy
Management Committee. Sitting around the room each Friday morning
are men who have been CEOs of other companies, including FedEx Freight’s
Duncan and Dan Sullivan of FedEx Ground. Smith encourages these
players and key staff functions to hash out any conflicts between
them and rarely intervenes. Says Duncan: “If a decision has
to be made, he can step in and do it, but he’s not inclined
in that direction.”
Smith has created a style that participants describe as “straight
shooting” with “no second-guessing.” Through the
aggressive use of emailing, he has tried to prevent the development
of closed-loop communications in vertical silos. “That’s
what kills most big organizations,” says Smith. “We
have a team approach to management that cuts across the traditional
Smith says his team is successfully integrating the pieces of
FedEx, with their disparate databases and systems. “I would
never say that we have gotten to the end of the journey, but we
certainly are on the downhill segment of it,” he says. “The
technology integration has come an enormous way. The sales and marketing
and customer experience issues are quantumly better than they were
a couple of years ago. I don’t know that there’s ever
an end point to that.”
That seems to reflect Smith’s conviction that change is
permanent. The joke inside FedEx is that things will never settle
down, because something could change at any moment. “The company
can continue to grow for a long time,” says the founder. “It
can be a lot bigger than it is today.” That may explain why
Smith doesn’t like to dwell on the past—he’s so
darned focused on the future.
The Art of Disciplined Leadership
is determined to keep FedEx growing.
What does it take to be a leader who creates
a company and then rides it to become a $25-billion-a-year
business? Not many people have all those skill sets.
The most important thing is continual learning and education
and the discipline to apply those lessons to your operation.
The literature is all out there. There’s what you need
to do to manage a company at start-up and then what you need
to do when it’s transitioning into a medium-size company
and so forth. You just have to spend the time and effort to
benchmark and learn the lessons of history and then have the
discipline to apply those lessons.
At your Strategy Management Committee meetings,
you have people who have been successful CEOs themselves.
How do you create an environment where you keep the best talent
in the room?
There are three aspects to it. First, they remain CEOs. I
don’t look over their shoulder. They have the authority
to do what they need to do and the freedom and the flexibility
to do what they need to do. Second, I think they enjoy being
part of a very small group that now controls a company operating
worldwide and producing revenues north of $25 billion. That’s
a joy to them. Third, we try to make it a very attractive
financial arrangement for them.
How long will it take before you get this right
in terms of integrating the technologies of the various operating
companies and making the cross-selling happen just right?
Well, it is but we’re a long way down that road. I would
never say that we have gotten to the end of the journey, but
we certainly are on the downhill segment of it. The technology
integration has come an enormous way in the past few years.
The sales and marketing and customer experience issues are
quantumly better than they were a couple of years ago.
What are the new technologies that are going
to take you to the next level?
The profundity of the Internet is only beginning because it
is providing, for the first time in human history, a standardized,
low cost, written and visual medium that people can use to
sell and source things without regard to time and place.
The kind of spontaneous combustion of economic activity
that the Internet provides bodes very well, absent some horrible
thing in the terrorist sector, for a lot of growth for a long
period of time.
It seems that you’re positioned very well
as the whole pattern of American manufacturing is changing
with more going offshore.
There’s no question about it. And essentially, what
has happened is that in the high-tech and high-valued-added
sectors, in particular, but increasingly in the lower valued-added
sectors as well, the location of production is almost irrelevant.
It’s simply just a cost/time trade-off, that’s
all. Because you can make the stuff in Guadalajara or you
can make it in Raleigh-Durham or you can make in Guangzhou.
It doesn’t make any difference. It’s just a matter
of being able to calculate the cost and the transit cost because
all that’s now visible. That’s never been true
How big can FedEx be?
Well, it can be a lot bigger than it is today. One of my favorite
little stories was about Pogo the Possum who said, “If
you want to be a great leader, find a big parade and run in
front of it.” That’s what we’ve been doing,
just running in front of the enormous forces.
How much longer are you going to do this job?
I like what I’m doing at FedEx for a very fundamental
reason. It is an important industry that sits right at the
middle of almost everything else that’s going on. I’m
a great admirer of Michael Dell. If he were sitting here,
he would tell you that absent the transportation capabilities
that FedEx and our able competitors have pioneered, the business
model that has changed the world would not have been possible.
Sam Walton and I talked about that, on more than one occasion.
He didn’t know if he was a good retailer, but he thought
he was a pretty good logistician.
How do you maintain work-life balance?
That’s part of the discipline I told you that you have
to bring to your job. Anybody who works themselves into exhaustion
or incoherence doesn’t have the discipline to do the
job to begin with. So I don’t take the job home with
me with worry beads or anything like that.
And I have a very great, full family life. I have grandchildren.
I still have children in college. I have some kids who are
athletes. I love to go to their games and watch them play,
as I have for all of the children. I play a lot of tennis,
trying to get my heart rate up. And I read a lot, particularly
history. The biggest influence on my management style comes
not from current CEOs but from historical figures whom I admire.