Re-Framing Strategic Thinking: FedEx - Case Study Example

Re-Framing Strategic Thinking: FedEx INTRODUCTION This paper is about FedEx, the logistics and supply chain Management Company and its approach to strategy. FedEx has become the world’s leading logistics company operating in more than a hundred countries and generating more than $10 Billion in revenues in 1998. Contemporary figures run into several billons more. The way in which FedEx evolved over the years is the subject of this paper and the methods that it used i.e. its strategic business practices are analyzed from several frameworks including Porter, Whittington’s Classical and Evolutionary theories of strategy and Processual school of thought. The paper combines theory with examples from FedEx’s operational and decision making strategies and illustrates these examples with theoretical underpinning that goes deep into the reasons for FedEx’s success in the highly competitive logistics business. QUESTION 1) A) PORTER’S FIVE FORCES In this section, I analyze the company using Porter’s Five Forces Model. The analysis of the company is along the forces that are depicted in the figure and which represent the elements of Regulation, Power of Suppliers, Threat of Substitutes, Macro Economy, Power of Buyers, Process Knowledge and Competitive Rivalry. These forces have been chosen as they represent the different dimensions of Hamptons Internationals business from a strategic management perspective. The forces have been selected after careful consideration of the elements that the company is faced with in its approach towards business. The accompanying figure analyzes the forces from a graphical view and the subsequent paragraphs analyze the forces from a qualitative perspective. A note about the analysis of Porter’s Five forces is that two more elements have been added to the analysis. This is because it is my belief that FedEx has to contend with the broader economy as well as the regulatory aspects because of the ongoing economic slowdown and particularly since this slowdown has been precipitated by the ongoing economic slowdown. If we analyze each of the forces in turn: The threat of substitutes is moderate as replicating the international delivery model of FedEx and other logistics suppliers takes time and hence new entrants need deep pockets and staying power to enter the industry The power of buyers is high as the market for logistics and supply chain management has many players and buyers can always choose from value propositions at the same price or cheaper competitors who might forego some aspects of the competitive advantage but nonetheless deliver the shipment or the package. The power of suppliers ranges from the moderate to the high as FedEx being in the logistics and supply chain buiness has to ensure that it delivers the shipments in coordination with its partners in the value chain and hence this aspect rates more towards the power of suppliers. Market Entry by other players is low for reasons mentioned in the threat of subsititutes. However, the force has been rated as high as FedEx cannot enter new markets without substantial investments and thorough due diligence. Industry rivarly is rated moderate as the existing players have more or less settled into their respective niches and hence there is no overarching sense of destablizing competition between the players. B) It is evident from the analysis of FedEx’s operations and strategy in the preceding sections that it has followed a highly developed and evolved strategy that has made it the number one company in the logistics and supply chain management business. There are several critical success factors that have contributed to the success of the company which made use of the differentiators to leverage upon these factors. Some of these critical success factors are the adoption of IT on a large scale, the first mover advantage in many areas of its business as well as building on the brand image of the company. The company has successfully leveraged on these by using differentiators like focus on costs, economies of scale, having a diversified workforce and most importantly, by cashing on its brand that is almost a household word in many developed countries. It is the combination of a well thought out strategy and a “quick on the feet” response to emerging opportunities as well as threats that ensured that FedEx retained its ranking among its competitors. Because of the ongoing economic slowdown, the company has had to forego some of its profits and the decrease in the volumes of international trade has hit the company hard. The fact that the company is sensitive to changes in the way the integrated and interlinked global economy, it is but natural that the company suffered a cutback in its revenues as well as shrinking of its profit margins. It is to the credit of the company and its management that it has emerged relatively unscathed from the recession. It is hoped that the company would continue to innovate and respond to market conditions much in the same way that it has done so far and ensure that it retains its competitive advantage. C) International trade has a special significance to FedEx’s operational strategy and holds both promise of more growth as well as the perils of managing complexity along with the threat of potential entrants into the business. If we consider the advantages first, FedEx gains substantially by increased international trade as its core business is built around moving things around. To put it in other words, FedEx is in the business of transporting and delivering packages and shipments around the world and hence an increase in international trade has obvious benefits in terms of increased volumes of business. Further, FedEx gains from the globalization of businesses as well as integration of economies through increased international trade as it gives it an opportunity to expand into newer countries and expand its reach across the globe. Some of the other benefits include economies of scale achieved because of higher volumes of goods and packages delivered. The higher volumes are primarily driven by the growth in international trade as a result of more business because of more customers entering the market. Hence, FedEx can leverage on these economies of scale by making more productive use of its existing fleet of cargo planes as well as the staff. Further, the use of IT as a differentiator by FedEx means that the economies of scale are leveraged even further as modern IT systems operate on the basis of interlinking huge swathes of business units and arms of the different divisions to drive the business. However, there are certain disadvantages to FedEx from the growth of international trade as there is the threat of new entrants to the business as well as because of development of in-house divisions in its customers businesses. The latter factor i.e. the development of in-house arms in its customers businesses has impacted the operations of FedEx as several customers have developed their own capabilities to move their goods around. Because of increased international trade, it has become necessary for many of these customers to stop relying on logistics providers like FedEx and instead go in for their own modes of transport. Increased international trade means that these companies realize the advantages of doing the logistics part themselves as opposed to outsourcing it to FedEx. The threat of new entrants is a very real worry for FedEx as increased international trade usually means that the industry becomes lucrative for those willing to invest with deep pockets. The other disadvantage for FedEx is purely internal. It has to do with the increased complexity resulting from serving multiple customers in different countries and the scale and scope of the operations means that chance for errors in such a failure conscious industry is limited. Hence, FedEx has to adopt practices like Six Sigma to counter the threat of it making more than the usual percentage of errors. QUESTION 2) A) There are different approaches to strategy. Strategists of today must deeply understand the widely used approaches at least, to be efficient in thinking strategically. Whittington (2001) categorized strategy in four basic generic approaches: Classical, Evolutionary, Processual and Systematic which have different perspectives about strategy. In classical approach, the strategy is a rational process of deliberate calculation and analysis designed to maximize long term advantage (Whittington, 2001). Many scholars argued that classical approach is not applicable any more, since classical theory has no mechanism for strategy creation and doesn’t suit the dynamic environments. French (2009) concluded that a radical change to open systems thinking, especially complex self-adapting systems, is required (French, 2009). In evolutionary approach, the situation is different. Competition is not overcome by detached calculation and analysis but by constant struggle for survival (Cuizon, 2009). Evolutionary approach calls that successful strategies only emerge as the process of the natural selection delivers its judgment. According to Whittington (2001), this means it is the market not managers which makes the important choices (Whittington, 2001). The approach considers markets too tough and unpredictable to plan for long term strategies but agrees with the classical approach objective of profit maximizing. This creates an argument that the approach basic emphasis is on survival which obviously contradicts the objective of profit maximizing. The application of these schools of thought to FedEx’s strategy from 1973 to 2000 would lead us to the answer that the evolution of the strategy at FedEx followed the rational or the classical approach followed by evolutionary approach where FedEx responded to market conditions and the industry trends in an emergent manner. FedEx consciously followed a strategy of entering as many markets as possible and at the same time responded to the challenges of globalization in an evolutionary manner. It is this mix of classical and evolutionary strategies that paid rich dividends for FedEx in the time period under consideration. Hence, when we consider applying Whittington’s classical and evolutionary schools of thought to FedEx, we get the impression that the strategy is emergent or nearer to the Processual school where “learning and adaptation” to the market conditions drives strategy rather than a profit maximizing rational approach alone. The way in which FedEx uses IT and e-commerce to drive its business shows that the company is indeed indicative of the emergent school of thought as far as strategy is concerned. B) This question has to do with applying the two schools of thought to FedEx and determining which approach is my preference. The evolution of FedEx indicates that it followed a mix of Classical as well as Evolutionary approaches to strategy as is evident from the way in which it combined both approaches to its business. The company started off with a classical approach in the 1970’s and slowly learnt to respond to the market conditions as well as chalk out a rational approach to the way it conducted its strategy. However, the fact remains that FedEx followed an evolutionary approach for most of the time as can be seen from its strategies with regards to branding, entering new business areas, launching new product lines and adoption of IT as a driver of business advantage. The strategies followed by FedEx closely resemble that of a company that “evolved” with the times rather than “force the issue” with regards to the strategy. If we consider FedEx’s strategy with regards to branding and adoption of IT in detail, we can see that it was driven more as a response to the changes in the external environment and as result of evolution of the industry to meet the challenges of a globalized world. For instance, it is clear that FedEx’s strategy throughout the 1980’s and 1990’s were more as a steady progression of changes to meet the increase in international trade as well as to successfully exploit the opportunities offered by globalization. In this context, it is worth noting that the use of IT was in itself driven by the needs of the company to integrate its various divisions and bring together the disparate lines of business and services into a unified whole. Hence, my preference would certainly be towards adopting an evolutionary approach towards strategy in Whittington’s scheme of things. QUESTION 3) This question is to examine Stacey’s statement about the four loops of integrated decision making consisting of the rational, overt politics, covert politics and the culture and cognition part to the Processual school of thought regarding strategy. The implications for strategic management would be considered by applying the four loops along with the Processual school of thought to the question of decision making. Stacey’s four loops as enunciated by him consist of: Technical decision making that uses data and analysis to predict the future and base the company’s strategy. This has been considered sound management practice by almost all the leading management thinkers and this approach was favored for a long time in the 20th century that emphasized rational decision making over everything else Political Decision making emphasizes coalition building, negotiation and the art of managing groups of interests within the organization that display an overt interest in playing one group against the other. This type of decision making is especially favored in large organizations that have diverse groups with independent agendas and the task of the manager is to reconcile these coalitions and arrive at a decision. Judgmental Decision making that is brought on by the uncertainty involved in the process that has to do with the covert nature of the politics that is being played across the organization. The subtle and uncertain nature of this method is because of the asymmetries of information arising out of concentration of information within particular groups that on the surface do not display overt agendas but nonetheless have a stake in ensuring their survival in a covert manner. The last part has to do with the culture and cognition of the feedback loops and the blending of these with the organizational ethos. Once the decision making proceeds along the lines mentioned above, culture and cognition aspects come into play when closing out the loops to arrive at a decision. Processual approach is similar to evolutionary approach in the sense that it doubts the value of rational long term planning but it does not agree of leaving the profit-maximizing outcomes to the market since market is full of mess and confusion (Cuizon, 2009). Processual approach states that strategy is an emergent process of learning and adaptation (Whittington, 2001). It adopts a pragmatic view aiming to make the sophisticated processes simple in light of the fact that the environment is not ideal or perfect. This aspect of learning and adaptation rather than a predetermined approach to strategy fits in well with Stacey’s four loops as I shall explain in the succeeding paragraphs. The point to note here is that the four loops exist well in the real world systems where complexity and emergence rule and the systems behave in a non-linear kind of way. It is in this context that Stacey’s four loops and the Processual school of thought dominate the discussion about strategy and decision making. The Processual school emphasizes real world decision making that is often done with imperfect information and knowledge about the actions of other players. When one considers the loops of covert and overt politics, one gets the feeling that there might be unstated agendas operating in an organization that are not necessarily rational and may involve decision making within the constraints. Further, the Processual school emphasizes change as a series of steps that are not necessarily predictable and “emerge” from the decision making loops as a reaction to the external events. Hence, this school of thought takes into account the differences between planned change and change as a result of ongoing accommodations, adaptations to circumstances and events. Decision making is seen as a continuous, unpredictable and political in nature. Applied to Stacey’s four loops, we get the concept of political decision making as opposed to rational decisions taken with full information and perfect data. In this analysis, the culture and cognition aspect that closes the loop is the one where the decision maker is made aware of the different loops operating simultaneously and the decision is arrived at after taking into account all the factors. It is my opinion that both Stacey and Whittington belong to the latter day management theorists who prefer the systems view of decision making as opposed to the rational and mechanistic view of the process. This is something that has great implications to the practice of strategic management and can be called a paradigm shift in the way the art and science of strategy is executed. In concluding this aspect of the discussion, it is clear that modern day organizations like FedEx have to follow a calibrated approach as well as a non-linear one to take advantage of the various factors that contribute to the decision making process. This is what FedEx has done in its transformation throughout the preceding decades. CONCLUSION The logistics business demands high levels of coordination and cohesion among the various divisions in the group and also requires synergies to be obtained from the various business units. It is to the credit of FedEx that it has successfully managed to drive its business through innovative approaches and the use of IT as a strategic driver. The paper has considered FedEx’s strategies in depth starting with the Porter’s five forces and Whittington’s theories and ending with Stacey’s conceptualization of strategy. It is evident from the preceding discussion that FedEx has so far managed to avoid some of the traps that other companies in the same business have had to deal with. It has negotiated the global terrain of the highly competitive logistics industry in a clear and well thought out manner as well as responded to changing market conditions by evolving with the times. Hence, it can be considered that the conceptualization of Stacey’s four loops has progressed from the rational to overt to covert as well as included the culture and cognition in the case of FedEx. References Cuizon, G. (Feb. 2009), Theories of Action in Business Strategy: Classical, Evolutionary, Processual and Systemic Approaches. Retrieved on July 03, 2010 from the World Wide Web: http://strategic- businessplanning.suite101.com/article.cfm/theories_of_action_in_business_strategy French, S. (2009) Re-framing strategic thinking: the research – aims and outcomes, Journal of Management Development, Vol. 28, No. 3, pp. 205-224 Ng, Pauline & Farhoomand, Ali (2000) FedEx Corporation: Structural Transformation through e-Business. University of Hong Kong. Whittington, R. (2001) What is Strategy – and does it matter?, Second edition, Thomson Learning, London. Read More