This case study looks at how new business models can create vast improvements in competitiveness. However, the models must be suited to the business environment at the time and will have a ‘shelf-life’ as the business environment changes. The case study looks at one on the world’s most successful adopters of a new business model that transformed the airfreight and package delivery sectors worldwide. But the advent of the internet in the mid-1990s meant that the FedEx business model had to change or the company would decline. This is also the story of how it rose to that challenge. l l l
In 1965, Yale University undergraduate Frederick W. Smith wrote a term paper about the passenger route systems used by most airfreight shippers, which he viewed as economically inadequate. Smith wrote of the need for shippers to have a system designed specifically for airfreight that could accommodate time-sensitive shipments such as medicines, computer parts and electronics. In August of 1971 following a stint in the military, Smith bought a controlling interest in Arkansas Aviation Sales, located in Little Rock. While operating his new firm, Smith identified the tremendous difficulty in getting packages and other airfreight delivered within one to two days. This dilemma motivated him to undertake research on how to resolve the inefficient distribution system. In an interview with Fortune Small Business in 2002 he explained his business model for solving the problem: My solution was to create a delivery system that operates essentially like a bank-clearing system does. Put all points on a network and connect them through a central hub. If you take any individual transaction, that kind of system seems absurd – it means making at least one extra stop. But if you look at the network as a whole, it’s an efficient way to create an enormous number of connections. . . . If, for instance, you want to connect 100 markets with direct point-to-point
deliveries it will take 9,900 direct deliveries. But if you go through a single clearing system it will take at most 100 deliveries. . . . So you’re looking at a system that is about 100 times as efficient. Back in 1971 my belief was that you could run small, high-value-added [packages] through this hub-and-spoke system. Also I did something else a little bit unusual, which was to combine the airplanes and trucks into one delivery system. This didn’t seem to me to be controversial, but all the traditional people thought that it was highly iconoclastic. So that’s the genius of Federal Express.
Thus, the idea for Federal Express was born: a company that revolutionised global business practices and now defines speed and reliability. It offered a service to ship packages of many sizes over both short and long distances. The company began operations in April 1973, with the launch of 14 small aircraft from Memphis International Airport. On that night, Federal Express delivered 186 packages to 25 US cities. Company headquarters were moved to Memphis, Tennessee, a city selected for its geographical centre to the original target market cities for small packages. In addition, the Memphis weather was excellent and rarely caused closures at Memphis International Airport. The airport was also willing to make the necessary improvements for the operation and had additional hangar space readily available.
This case study was prepared by Professor Kevan Scholes, Sheffield Hallam University, from published sources. It incorporates some of the work of S. Poovadan – undertaken as part of the MBA programme at The University of Strathclyde. It is intended as a basis for class discussion and not as an illustration of either good or bad management practice. © Kevan Scholes, 2004. Not to be reproduced or quoted without permission.
Federal Express – delivering the goods
The company soon became the premier carrier of...