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 / Autumn 2006 / Issue 44(originally published by Booz & Company)


FedEx Delivers on the Deal

“We know that Fred Smith is always going to be a heat seeker for new technology,” says Paul Saffo, a director at the Institute for the Future in Palo Alto, Calif. “Is he going to build a network of 3D printers? Absolutely. I am sure you will see a steady stream at FedEx Kinko’s of those gizmos that everyone wants, but that are too expensive for a home or small business. But more importantly, the stores can act as a physical point of presence for cyberspace. I am holding my breath waiting for things like this to start, and Fred Smith is the logical guy to make it happen.”

But FedEx Kinko’s still has some work to do to improve its current offering. FedEx has long been known for its superior customer service, but Kinko’s has not. How can FedEx Kinko’s raise its employees’ game without alienating them and, in the process, losing the company’s tight relationship with small and medium-sized business customers? Where FedEx can bring its expertise to bear, and where the integration is headed next, is developing within FedEx Kinko’s employees that same day-in and day-out high level of execution and commitment to excellence for which FedEx is known.

“At the rest of FedEx’s operating companies you’ve got 240,000 employees, many of whom are part-time, doing this thing that people could do in a very mediocre way but they don’t. Compare FedEx to the U.S. Post Office,” says James Wetherbe, Stevenson Professor of Information Technology at Texas Tech University and author of The World on Time: The 11 Management Principles That Made FedEx an Overnight Sensation. “It’s the same type of work, but Fred Smith is able to get this extraordinary loyalty and performance from his work force. You will never have great customer service unless you have great employees. That’s what FedEx does well, but it takes some time.”

Recent leadership changes suggest that those changes are coming. In January, Gary Kusin, the man who led Kinko’s through the acquisition, resigned as CEO of FedEx Kinko’s with no real explanation from FedEx. Drooping margins certainly played into his departure, says Satish Jindel, a transportation logistics consultant based in Pittsburgh who advised FedEx on the purchase of RPS. “The prior management leadership was more focused on generating shipping revenue by selling other things, like janitorial supplies, through FedEx Kinko’s outlets rather than putting more document shipping on the network,” he says. “They lost their focus.”

Whatever the reasons for Mr. Kusin’s departure, FedEx capitalized on the opportunity by bringing in two FedEx veterans, Ken May as CEO and Brian Philips as COO, to push the company to a higher level of execution and service that will in turn drive revenue growth.

“FedEx has patience with its investments,” Mr. Jindel says. Indeed, Fred Smith’s patience has confounded many over the years. When he bought the air cargo carrier Flying Tigers in 1989 for $880 million, naysayers, especially on Wall Street, said he was throwing his money away. The investment eventually paid off fantastically. Mr. Smith was again dinged for building on his less-than-truckload business (which he had gotten into with the 1998 purchase of Caliber) when he gambled $1.2 billion to purchase American Freightways in 2001. UPS watched smugly from the sidelines until 2005, when FedEx started to dominate the market. Then UPS paid $1.25 billion in cash for its own piece of the less-than-truckload industry and bought Virginia-based Overnite Corporation.

As with other acquisitions, Fred Smith saw something in Flying Tigers and American Freightways that others didn’t because his point of focus lay far beyond theirs. Mr. Smith doesn’t always get it right when he looks into the future. His expensive and ultimately failed experiment in ZapMail, a dedicated fax network that couldn’t compete in the early 1980s with the new, inexpensive consumer fax machines, is proof. “A guy like Fred Smith doesn’t build a company like FedEx without taking some risks and making some mistakes,” says Mr. Hatfield, the Morgan Keegan analyst, “but clearly the successes far outweigh the failures.”

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  1. Gerald Adolph, “Mergers: Back to ‘Happily Ever After,’” s+b, Spring 2006: Why growth through acquisition is becoming popular again. Click here.
  2. Madan Birla, FedEx Delivers: How the World’s Leading Shipping Company Keeps Innovating and Outperforming the Competition (John Wiley & Sons, 2005): How FedEx became a leading global brand by tapping into the creativity of its employees.
  3. Nicholas G. Carr, “Top-Down Disruption,” s+b, Summer 2005: Epoch-making technologies, products, and business models don’t always come from industry newcomers. Sometimes they come from the established leaders. Click here.
  4. Geoffrey Colvin, “The FedEx Edge,” Fortune, March 20, 2006: CIO Rob Carter discusses how FedEx manages to ship 6 million packages a day. Click here.
  5. Charles Fishman, “Face Time with Fred Smith,” Fast Company, June 2001: Mr. Smith on what he learned in the Marines and why he’s obsessed with speed. Click here.
  6. Ellen Florian et al., “Special: CEOs on Innovation,” Fortune, March 8, 2004: Mr. Smith and others weigh in on the need for constant change and open-mindedness. Click here.
  7. Gary L. Neilson and Bruce A. Pasternack, Results: Keep What’s Good, Fix What’s Wrong, and Unlock Great Performance (Crown Business, 2005): Contains a section on FedEx’s culture as an example of a resilient company that learns from its customers’ complaints.
  8. Rob Norton, editor, CFO Thought Leaders: Advancing the Frontiers of Finance (strategy+business Books, 2005): Includes an interview with Cathy Ross, chief financial officer of FedEx Express, describing how culture and controls reinforce each other. Click here.
  9. C.K. Prahalad and Venkatram Ramaswamy, “The Co-Creation Connection,” s+b, Second Quarter 2002: Companies spent the 20th century managing efficiencies. They must spend the 21st century managing the consumer experience. Click here.
  10. Michael Sisk, editor, The Whole Deal: Fulfilling the Promise of Mergers and Acquisitions (strategy+business Books, 2006): Overall guide to world-class M&A strategy for those who would emulate — or surpass — Fred Smith. Click here.
  11. Fred Smith and Brian Dumaine, “How I Delivered the Goods,” Fortune Small Business, October 1, 2002: Mr. Smith explains his management philosophy. Click here.
  12. James C. Wetherbe, The World on Time: The 11 Management Principles That Made FedEx an Overnight Sensation (Knowledge Exchange, 1996): What managers can learn from Fred Smith.
  13. For more business thought leadership, sign up for s+b’s RSS feeds. Click here.
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