FedEx Corporation and Its Strategies - Research Paper Example

Table of Contents Table of Contents 1 Executive summary 2 Position 3 Sense 6 Uncover 12 Solve 14 Build 15 Achieve 16 Reference 19 Bibliography 21 Executive summary This project deals with the problem faced by FedEx Corporation and the appropriate strategy to be followed to solve the same. Initially the position of the company was analysed through its history, market share, business strategy and financial performance in last few years. This is a vital phase of the project because the data collected in this phase provided clue to find what are the main problems faced by FedEx. It was found that in 2009 the revenue of company declined sharply and net profit declined by 91 percent. Decline in demand, lower customer satisfaction and increasing problems associated with quality were other problems faced by the company. For better understanding certain problem solving tools were used to understand the root problem prevailing in the company. It was found the declining profitability of the company is the main problem that the company should take into account. In the later part of the project certain strategic solutions were suggested, and then the most feasible one was finalised. It was found that the company needs to disinvest loss making businesses which are not the part of the core business and the finance collected can be used to strengthen those business that add core competency to the company. A proper change management process should be followed to minimise hurdles and smooth implication of the change. The management should go on reviving the plan with changing market conditions and in this way the company will succeed in overcoming the major problem in a highly effective manner. Position FedEx Corporation offers transportation facilities along with e-commerce and other business services to different parts of the world. The company has under its banner four main operating businesses with the names FedEx Express, FedEx Freight, FedEx Ground and FedEx Services. The above mentioned business units looks after different areas of operation, as for example, FedEx Express provides shipping services to clients for delivering packages and freights. FedEx Express also offers trade services to its clients through ocean as well as air cargo distribution. It also offers global trade data and customs clearance services that can be used as an effective tool by the customer for tracking and managing the import. Such facilities are used by different international trade advisory service providers to assist their customers. The company publishes specific data related to tax and custom duty information. The other segment, FedEx Ground, delivers parcels with the help of ground services. This business targets mainly the small package markets in North America and hence the main aim is to cater to their specific requirements. The FedEx Freight segment offers transportation services for “less than truckload” freights and shipment carrier services to the respective clients. The services provided by FedEx helps the company to provide value added services to its clients. It mainly offers services related to marketing, sales, IT support and customer service support. The other services offered to the clients includes document solution, providing assistance in copying and digital print, creation of documents, web based printing, internet access and videoconferencing. This segment also provides supply chain solution (Yahoo Finance, “Business Summary”). In the past the company had made several acquisitions for diversifying their business. In 1984, the company acquired Gelco Express International in order to expand their business outside US. Gelco Express International was in courier business and its services were extended to 84 countries. Acquisition of Gelco Express was the first step of FedEx towards the international market. In 1989, the company acquired Tiger International Inc. and this acquisition made FedEx the largest international airline providing cargo services. For enhancing the business further Caliber System Inc. was acquired in 1998 and this provided FedEx with the opportunity to enter “ground, small package” service in US. At present this section is called FedEx Ground. This acquisition has added “less than truck” carrier service offered by Viking Freight [Caliber System Inc] in US. After the merger, the company was rechristened as FedEx Freight. Other business sections of the acquired company also assisted FedEx to diversify its service portfolio. Caliber Logistics was renamed as FedEx Supply Chain Service, Caliber Technology became a part of FedEx Services and Roberts Express is now called FedEx Customer Critical. Tower Group International Inc. and World Tariff Ltd. were acquired in 2000. The acquired companies went on to become FedEx Trade Networks. At present it is the largest network in terms of customer volume. This network is responsible for providing customer clearance service as well as end to end transportation service to the customers throughout the world. In 2001, the company acquired American Freightways Corp for expanding “less than truckload” services in the Eastern and the Central US. This acquisition helped FedEx Freight to become the market leader in “less than truck” business. Again in 2004, the company made two strategic acquisitions, it acquired Kinko's Inc that gave access to 1,200 Kinko's stores and Parcel Direct which was a leading company in parcel delivery business. This was merged with FedEx Ground and was renamed as FedEx Smart Post. In 2006, FedEx acquired ANC Holdings Limited which used to provide direct service to UK market. Watkins Motor Lines was also acquired in 2006; a leading company that provides long haul LTL service. It became an integral part of FedEx Freight business segment and was renamed as FedEx National LTL. With a mission to enter the growing economy in Eastern Pacific counties, FedEx acquired 50 percent shared on Tianjin Datian W. Group Co., Ltd, a domestic express company in China. Similarly in 2007, Prakash Air Freight Pvt. Ltd was acquired to facilitate its entry in the Indian market (FedEx, “Acquisition History”). The mission statement of FedEx is “to provide superior financial returns for shareowners by providing high value added supply chain, transportation, information service to business and retail customers” (FedEx, “Mission”). The mission statement also clarifies that customer’s requirements will be met with utmost quality and the company will pay special attention in developing mutually rewarding relationship with its employees, partners and the suppliers who are attached with the company. This mission statement pays equal attention to guarantee the safety of all its stakeholders. The management makes sure that ethics and professional standards are maintained. The company values those people who assist in the diversification of business. Services are specifically designed to fulfil the precise requirement of each and every customer. Innovation, integration, responsibility and loyalty are the catch words of the organisational culture (FedEx, “Values”). The stakeholders of the company can be segregated into internal stakeholders like employees and management and external stakeholders like customers, shareholders, suppliers, government, public as well as environment. It appears that the company enjoys high market share in US, though the degree of competition is quite high. It also holds a commendable position in other international market. Therefore to retain the market share the company needs to enhance its competitive position. Sense After taking into account the financial performance of the company, following information were excavated. This analysis was conducted to determine the real financial state of the company and its performance in the last 5 years. (Source: FedEx-c, p.8) It has been found that the company’s revenue had been stagnant since 2006 and last year it declined marginally. Operating profit started declining from 2007 onwards and in 2009 it touched its nadir. In response to it, the EPS declined sharply in 2008 and reached the rock bottom in 2009. Company’s total dept also increased from 12.1% to 15.9%. All this information leads to the conclusion that the company’s financial position is declining gradually due to improper management of operating expenses. To finance the operating expenses, the company has raised finance through different long term debt instruments. At present the LT debt equity ratio is 12% whereas total debt equity ratio increased to 14%. At present the company is maintaining high financial leverage, hence the risk of solvency is also high. Declining revenue and net profitability are also a matter of serious concern. In 2008-09, all the major economies of the world were under the impact of economic recession as a result of which the share prices of almost all the companies had declined. Effects of recession were clearly visible on the share price of FedEx. The given chart provides a clear comparison of the share price movement of FedEx, Dow Jones Transportation Average and S&P 500. (Source: FedEx, p.8) After considering the index movement it appears that FedEx had maintained a satisfactory performance till 2006 but from 2007 onwards the company’s share prices had dropped sharply. The performance of FedEx’s was disappointing as compared to other transportation industries in US. To have a better understanding of the performance of each of the business segments, change in revenue was analysed. Revenue per segment FedEx Express segment -2057 FedEx Ground segment 296 FedEx Freight segment -519 FedEx Services segment -161 Other and Eliminations -15 The above given chart and table indicates that among its prevailing businesses, FedEx Ground was the profitable segment whereas FedEx Express was the one that suffered the most and had incurred huge loss. Although the revenue contribution of FedEx Express was 63 percent in 2009 but this business segment made a loss of 84 percent. The condition is same for FedEx Ground segment which contributed 12 percent to the total revenue but incurred a loss of 20 percent in 2009. After considering all these factors it can be concluded that FedEx Express business segment is the one whose revenue generating capacity as well as profitability is declining and company’s negligence could prove fatal in the long run. Apart from the decline in the financial profitability, growing number of complains regarding service quality is also a major area of concern for the company. The customers often complain that parcels are delivered at wrong addresses or are mishandled while delivery (Consumer Affairs, “FedEx - Failed Deliveries”). In 2008-09, the third quarter results were highly unsatisfactory and the company’s profitability declined by 75 percent in the third quarter (Trading Markets, “FedEx Q3 profit falls 75%; to further cut costs; guides Q4 below consensus - Update2”). In 2009, the company had job cuts amounting to 900 jobs in the FedEx Freight business segment. This was equivalent to 2.6 percent of the total employee strength in FedEx Freight (Schlangenstein, “FedEx Trims 900 Jobs at Freight Unit on Lower Demand”). It appears that the company is currently facing certain problems which need to be resolved to achieve the mission of FedEx. Therefore a 2 by 2 table was used to identify the problems that require immediate attention. Urgent Not Urgent Mission Criteria The net profitability declined by 91% and fall in operating profitability of the company was 64 percent. Degree of customer satisfaction is declining due to poor delivery service. Not Mission Criteria Demand is declining at a fast rate in US due to slow recovery from recession phase. Total debt-equity ratio increased to 14% resulting in high insolvency risk. This analysis indicates that the company needs to address the problem of reduced profitability and the resultant fall in revenue, with immediate attention. The given project thereby would focus primarily on the ways and means by which the financial profitability of the company can be increased. Uncover Before solving the problem, it is very important to identify the root cause of the prevailing situation. Henceforth, “Cause-Effect” analysis was conducted with the help of fish bone diagram. As the company is operating in the service industry hence measurement, machine and material components are of less importance. Hence these components have no role to play in determining the success of the company. As per the above given analysis it appears that the root problem is in its corporate strategy, hence the company needs to revive its strategy in accordance to the changing economic condition and customer preference. After considering the above mentioned analysis the effect of declining net profit on different stakeholders was analysed. It was found that the shareholders are the ones who suffered the most because EPS declined by more than 90 percent (FedEx-C, p.8). The impacts of these problems on the stakeholders are discussed below: High financial leverage has resulted in high risk of solvency. If the company files for bankruptcy, the stakeholders will incur huge losses. Due to poor demand the employees are losing their job and this creates a kind of psychological tension among the employees. If the company turns bankrupt the government of home country will have to provide stimulus package which will increase the deficit of the US government. To enhance the revenue, company has reduced the prices related to different services. This will increase the level of competition in the market. The clients are disappointed with the quality of service provided by the employees of FedEx. Hence their level of satisfaction is declining day by day. After analysing the root cause certain possible solutions were derived. A list of them is provided below: As the company is highly diversified it tends to lose its focus on the areas of core competency. The common solution is to disinvest those businesses which are not related to the core competency of the company. The company needs to introduce certain innovation in the prevailing business which has not yet been offered by its competitors. It is high time for the management to reduce its operating expenses. The inability to do so has resulted in low net profit in 2009. The company should identify the main cause behind the reduced customer satisfaction and for that the company can conduct a market survey. This will assist in introducing value added services for the clients. As compared to US and UK the economic condition is quite stable in countries like China and India. FedEx already exists in these markets but revenue from these countries does not contribute much to the total revenue of the company. These countries have potential unexplored market which is expected to perform quite well in the coming future. Management of FedEx can make its presence more palpable in these countries by undergoing a few more acquisitions and developing new strategic collaborations. In US, it is the second largest company that offers transportation service by means of air, land as well as sea. At present the company can make new acquisitions of similar business units to increase its market share. Solve The above given strategies will be quite effective in assisting the company to overcome its problem of declining profitability. Among the solutions presented, the company needs to select the one which can be applied, keeping in mind the present global economy, changing needs of customers and the strategies adopted by its competitors. While selecting the solution the company should also take into account prevailing constants in term of high debt, poor market image and less ability to invest in the business. Since the company is already suffering from low market image, it will be difficult to issue new shares or to take loans through debt instrument. Hence, all those solutions which require investment have to be dropped. The best way is to divest that business which is less profit making and the ensuing cash be used to revive the FedEx Express business, the core business activity. Build The primary attempt should be to analyse the reasons that are resulting in lower profitability of the company. It is quite evident that the company had failed to reduce the operating expenses in 2009. The management should understand that in 2009 due to fall in net revenue direct cost declined. However on the other side company failed to reduce fixed cost, and as a result net profitability of the company fall. First and foremost the management should make a list of all those fixed assets that are non-productive in nature and should try to sell them off. Reducing the manpower creates a negative impact on the employees, On the contrary additional training should be provided to the extra work force so that they can be transferred other business segments. Employees should be motivated to reduce the wastage of raw material. TQM concept should be implemented to reduce the cost related with rework. Achieve While implementing the solution, the management of FedEx should follow a proper change management process so that the process of implementation is smooth and hassle free. The change management cycle is given below: Figure: Change management cycle (Source: Snabe, p.6) The company should form a board which would be responsible for collecting the data and implementing the plan devised on the inferred information. Board should have members belonging to different departments so that a holistic approach can be initiated. Once the plan is framed a feasibility analysis should be conducted to verify its effectiveness. The revised plan must then be communicated to all the stakeholders and they should be requested to participate in the process. The management should ideally implement the process in small parts which must be constantly monitored. Reference Customer Affair. FedEx - Failed Deliveries. 2010. May 18, 2010 . FedEx-a. Acquisition History. 2010. Investor Relations. May 18, 2010 . FedEx-b. Mission, Strategy, Values. 2010. Mission, Strategy, Values. May 18, 2010 . FedEx-c. Annual Report 2009. Schlangenstein, M. FedEx Trims 900 Jobs at Freight Unit on Lower Demand. February 09, 2009. Bloomberg. May 18, 2010 . Snabe, B. The Usage of System Dynamics in Organizational Interventions. Springer. 2007. Trading Markets. FedEx Q3 profit falls 75%; to further cut costs; guides Q4 below consensus - Update2. March 19, 2009. May 18, 2010. . Yahoo Finance. Business Summary. No date. FedEx Corporation (FDX). May 18, 2010 . Bibliography Reuters. FedEx says taking market share despite slump. March 09, 2009. . Schlangenstein, M. & Credeur, M. J. FedEx Rises on Company’s 2009 U.S. Economic Forecast (Update2). Bloomberg. . Read More