Delivering on the Purple Promise

The combination of a broadened business model, operational innovation, and a strong corporate culture has allowed FedEx to secure its position as one of the world’s most admired companies.

Executive Summary

Today, FedEx Corporation is one of the most admired companies in the world.[1] Founded in 1973, FedEx (formerly Federal Express from 1973-2000) has grown from a modest expedited parcel delivery company to a diversified logistics firm worth over $47 billion in annual revenue.

Key Financial Performance Measures for FY 2015. (FedEx Annual Report 2015)
Key Financial Performance Measures for FY 2015. (FedEx Annual Report 2015)

FedEx’s ability to create and broaden a solid business model, coupled with constant operational innovation through service expansion, acquisitions and organizational culture, has allowed the company to enjoy nearly 40 years of constant growth. The alignment of their business and operating models, enabled by the characteristics described above, gives FedEx a tremendous competitive advantage and allows the company to deliver value to its customers by providing reliable logistical services.

Genesis and the Business Model

            Legend has it that Fred Smith created the idea behind Federal Express as a sophomore at Yale University. Writing a paper for a course on aviation history, Smith identified the lack of a credible airfreight capability. Smith argued that transporting parcels by air would only be economically feasible if carried out by a company specializing in that service. [2]   Whether or not that story is true, Fred Smith would go on to join the Marines after Yale, serve two combat tours in Vietnam, where he was awarded both the Bronze and Silver Stars, and return to Memphis, Tennessee to create such a company.  

            FedEx began as a parcel delivery service that specialized in overnight air delivery. Over time, this business has been broadened to offer its customers a wider range of logistics solutions. FedEx Express, their core overnight delivery service, still continues to be the most profitable segment within the company, but they have expanded into other areas. In the end, FedEx seeks to provide reliable logistical solutions to its customers at both the business and retail levels. FedEx charges premium prices for most of their services, especially the traditional expedited parcel delivery service, but their customers willingly pay the price for guaranteed, on time delivery. For parcel and freight delivery, prices are based on size, weight and the time horizon for the delivery.[3]

Operating Model

FedEx Corporation Structure. From http://about.van.fedex.com/our-story/company-structure/, accessed 2 December 2015.
FedEx Corporation Structure. From http://about.van.fedex.com/our-story/company-structure/, accessed 2 December 2015.

            The FedEx operating model directly supports their business model and allows them to deliver a great deal of value to their customers. Currently, FedEx is broken into the following operating segments:

  • FedEx Express Segment: This segment includes the heir to the original express delivery service FedEx Express but includes broader logistical services from FedEx Trade Networks (air and ocean freight forwarding and customs brokerage), FedEx SupplyChain Systems (general logistics services), and Bongo, which helps enable cross-border logistics.
  • FedEx Ground Segment: This segment includes FedEx Ground (a traditional small-parcel ground delivery service similar to UPS), FedEx SmartPost (low-cost residential small parcel delivery partnership with the U.S. Postal service), and GENCO, which provides third-party logistics support to their customers.
  • FedEx Freight Segment: This segment includes FedEx Freight (a less-than-truckload freight service for small businesses) and FedEx Custom Critical (provides time-critical ground and air freight delivery to include climate controlled transportation of goods).
  • FedEx Services Segment: FedEx Service Segment includes FedEx Services (FedEx’s own sales, marketing, information technology and back office functions), FedEx TechConnect (technical support and electronics repair) and FedEx Office (a chain of document, shipping and business services retail stores, formerly Kinko’s prior to acquisition).[4]

FedEx leverages the strengths of these different operating segments to provide services to a wide range of customers from large businesses to individual consumers. Each segment is designed to operate independently, and their operating businesses within each segment use different networks of distribution nodes to deliver their services. In 2015, FedEx acquired GENCO and Bongo to expand their logistics offerings.

            FedEx owns its own distribution and sorting facilities, aircraft, trucks and vans. A look at FedEx Express is illustrative. FedEx employs a hub-and-spoke model to their traditional expedited parcel service. If a customer needs to send time-sensitive documents anywhere in the United States within one day, they can input the parcel into the FedEx Express system in four different ways. They can take the documents to their local FedEx Office store, they can print the label out online and drop it in a FedEx drop box, they can drop it off at their local post office, or they can call FedEx and have it picked up. The parcel is then brought to the national hub in Memphis, Tennessee or to a regional hub, sorted, loaded on an airplane that evening, and delivered by the next morning. From the time that the document leaves the hands of the customer to the time it is delivered to the recipient, it remains in FedEx’s hands and is transported by FedEx personnel in FedEx vehicles. The success of the operating model for this particular business depends very much on the timely and safe transport of the parcel. The hub and spoke air route system allows FedEx to efficiently transport expedited items in a timely manner at minimal cost by limiting the number of possible routes and consolidating packages for delivery to the same city. As a result, FedEx Express’s airplanes are as full as possible when they make their deliveries. The company initially consolidated all packages at the national hub in Memphis, but, over the years, regional hubs have been added.[5] FedEx Express currently provides service in over 220 countries and territories, utilizing a fleet of 652 aircraft, over 49,000 ground vehicles, 10 air express hubs, 375 airports, and over 47,000 drop-off locations. They have over 165,000 employees, who deliver over 4 million packages a day. This activity allowed FedEx Express to gross $27.2 billion of revenue in FY 2015. [6]

Corporate Culture

            Underlying their wide array of logistical solutions is the corporate culture, for which FedEx has become well known. Most impressive is the consistency of the culture and core values over time. One longtime FedEx employee, who began working there in 1980, discussed his early exposure to FedEx’s “People, Service, Profit” philosophy. This philosophy essentially means that FedEx puts its employees first, who, in turn put the customer first. This superior service delivered by employees who believe in a company that values them drives profitability.[7] Underpinning the PSP philosophy is the “Purple Promise.”   This promise, “I will make every FedEx experience outstanding,” places the emphasis on providing top-level customer service for its employees and focuses the company’s attention on the frontline workers.[8] This philosophy is still relevant today, as CEO Fred Smith mentioned both PSP and the Purple Promise in his introductory letter to the FY15 Annual Report.[9] Prioritizing the customer is extremely important because, according to Smith, FedEx “is essentially selling trust.” The company’s customers entrust some of their most important, time-sensitive items to FedEx. Customers are willing to do so because they trust the company due to its reputation based on customer service.[10] It is this superior customer service and on-time delivery that differentiates FedEx from other parcel delivery and logistics companies.

Conclusion

            FedEx continues to be an effective company after 40 years of innovation and growth. While the company did experience a bit of downturn in the midst of the 2008 financial crisis, it has made a dramatic comeback in the last five years and returned to its usual trajectory. FedEx continues to be a company of unparalleled global reach, and its ability to deliver packages in an expeditious manner nearly anywhere in the world through its hub-and-spoke network is impressive. Through acquisitions and business expansion, FedEx has been able to broaden the logistical solutions the company can provide to its customers, whether those customers are large global businesses or individual consumers. Underlying their operational excellence is a culture that supports both their operating and business models. By placing its people first and prioritizing customer service through the “Purple Promise,” FedEx is able to deliver on its value proposition to its customers. All of these features give FedEx a competitive advantage and help the company create and capture value.

[1] Fortune magazine ranked FedEx as the world’s 12th most admired company in 2015. See “World’s Most Admired Companies 2015,” http://fortune.com/worlds-most-admired-companies/, accessed 2 December 2015.

[2] Roger Frock, Changing How the World Does Business: FedEx’s Incredible Journey to Success—The Inside Story (San Francisco: Berrett-Koehler Publishers, 2006), 10.

[3] For more on FedEx rates, see the FedEx Rates Tools at http://www.fedex.com/ratetools/RateToolsMain.do?link=2.

[4] FedEx Corporation, Annual Report 2015, 18. Accessed at http://annualreport.van.fedex.com/2015/docs/FedEx_2015_Annual_Report.pdf on 2 December 2015.

[5] Madan Birla, FedEx Deliver: How the World’s Leading Shipping Company Keeps Innovating and Outperforming the Competition (Hoboken: John Wiley & Sons, 2005), 24-6.

[6] FedEx Corporation, “FedEx Express Fact Sheet,” accessed at http://about.van.fedex.com/our-story/company-structure/express-fact-sheet/ on 2 December 2015.

[7] Birla, 9-10.

[8] FedEx Corporation, “The Purple Promise,” accessed at http://purplepromise.van.fedex.com/purplepromise/en/mission/ on 2 December 2015.

[9] FedEx, Annual Report 2015, 4.

[10] Brian Dumaine, “FedEx Chief Fred Smith on…Everything,” Fortune, Vol. 165, Issue 7, 21 May 2012. EBSCOHost.

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Student comments on Delivering on the Purple Promise

  1. FedEx seems to be one of the great companies in America and I can definitely see how it is one of the “cool” companies to work for. They have built an operating model and culture that many companies envy. I like how you captured the essence of logistics solutions and how that relates to the operating model, because that is well beyond what many of us think about when we see FedEx. I would be curious to see what you think about the stereotype that FedEx owns the air, and UPS owns the ground. Do you think that is true, and does FedEx structure their operating model to favor this perceived niche? Does FedEx disagree and if so, how do they compete with UPS on the ground side and is this stereotype completely unfounded?

    1. Aaron,

      Thanks for the comment. One of our classmates actually wrote his post on FedEx Ground. I encourage you to check it out here: https://digital.hbs.edu/platform-rctom/submission/fedex-grounds-remarkable-ride-to-the-top/. FedEx Ground has grown its market share to about 37%, while UPS maintains about 60% of the ground parcel market. In the express delivery business, FedEx has about 80% market share. So, to answer you question, there is some truth to the idea that UPS dominates ground and FedEx dominates the air. However, it is important to note that both companies have expanded their logistics solutions, and competition remains high.

  2. Hey Carlo, great piece. What stood out to me most was Fred Smith’s application of comparative advantage. He strongly believed that the market was underserved, subsequently focusing on narrow specialization. This drive, compounded over the decades, enabled FedEx to build a globally dominate market position. One thing I’ve always wondered, is what types of goods are increasing overall airfreight volume. Will they continue in the next decade? I’ve heard seafood is a huge category for airfreight logistics, but don’t have data to back up the claim.

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