Preview Case Federal Express Losing a Packet in Europe

FEDERAL EXPRESS (FEDEX), PIONEER OF the express-delivery industry as we now know it, has pulled out of the European market with a red face and an even redder balance sheet. Left to fight for Europe's express package deliveries market are Brussels-based DHL, Australian TNT and new US entrant, UPS (United Parcel Service).

Founded in 1973, EedEx got off to a slow start - educating the American public about the value of overnight delivery took time. However, building

doggedly on the advertising promise, 'When it absolutely, positively has to be there on time', FedEx went on to become one of the fastest start-ups in American history. Central to its success was the company's innovative and now much-copied 'hub-and-spoke' distribution system. This capital-intensive system had vans picking up parcels and delivering them to local airports. That night FedEx's aircraft then Hew to the national hub for sorting on to a same-night flight out to their destination and final delivery by van,

By the early 1990s the US express-delivery market was for 3 million packages shipped daily, generating more than $20 million in annual revenues. Despite strong challenges from a glut of imitators in the United States, FedEx remains the undisputed market leader. It has 45 per cent US market share, comfortably ahead of the main challengers UPS at 25 per cent, Airborne at 14 per cent and the US Postal Service at about 8 per cent.

FedEx did not succeed by being the lowest-priced express-delivery service. Even in the face of cut-throat pricing by competitors, the company has been careful not to let cost cutting undermine its main source of competitive advantage - superior quality. FedEx has traditionally differentiated itself not by luring customers with low prices, but by giving them unbeatable reliability and service. Over the years, it has sunk money and effort into improving service quality. In 1987, it established a formal Quality Improvement Process, which set simple yet lofty quality goals: 100 per cent on-time deliveries, 100 per cent accurate information on every shipment to every location in the world, and 100 per cent customer satisfaction.

At Federal Express, quality goes beyond slogans. It developed a Service Quality Index (SOJ - pronounced 'sky'), made up of 12 things that it knows disappoint customers — how many packages were delivered on the wrong day, how many were late, how many were damaged, how many billing corrections the company had to make, and other such mistakes. It computes the SQJ daily and takes it very seriously. 'Quality action teams' study SQJ results, looking for trouble spots and ways to eliminate them. Even management bonuses are keyed to achieving SQI goals. Bach year, the company invests more than $200 on each of its 86,000 employees for quality initiatives, FedEx believes that top-flight quality is well worth the heavy investment, even if it results in higher prices. In an industry where late delivery can spell disaster, even a 98 per cent success rate isn't good enough. Most customers will gladly pay a little more for the added peace of mind that comes with superior service and unwavering reliability.

In the early 1980s, flush with domestic success, FedEx decided that the time had come to go global. It began to buy into Europe through a series of small acquisitions, including Lex Wilkinson and Littlewoods' Home Delivery Service, It invested heavily to set up a European hub-and-spoke system, and prepared to launch a full frontal assault on Europe. In 1989, to cap its global network it bought the legendary Flying Tigers, the world's largest carrier of heavyweight cargo. With this acquisition, it could move freight of any size. By the early 1990s FedEx had poured $2.5 billion into international expansion to become the world's largest express transportation company, with 441 aircraft and 30,000 pick-up and delivery vans serving 173 countries. Its new global goal: to be able to deliver freight anywhere in a global network within just two days.

Despite its high hopes and heavy investment, however, the global effort turned out to be-' a disaster. Whereas FedEx is the clear market leader in the United States, in Europe it was a challenger. To win in Europe, it had to takeon a well-en trenched competitor, DHL, the world leader in international express delivery. FedEx's aggressive attack on international markets

Preview Case: Federal Ex?iress

provoked an equally aggressive defence, not just from DHL, but also from UPS, TNT and other large international rivals. For example, DHL strengthened its international hase by forging new relationships with Lufthansa and Japan Airlines, TNT had a joint venture with GD Net, an express delivery network set up by the post offices of Canada, France, Germany, the Netherlands and Sweden. UPS invested heavily to strengthen its global delivery network, expanding coverage to 175 countries. Once all these competitors had set up their expensive networks with high fixed costs, the marketing departments had to compete intensively to get business.

The basis of the courier business is people's willingness to pay more for a fast and reliable service, a basic quality the European competitors found hard to achieve. The business journal Management Today experimented by sending its magazines by five carriers (DHL, FedEx, Securieor, TNT and UPS) from. London to Dusseldorf, Paris and Milan. The times ranged from 16 hours to 49 hours for Paris; from 18 to 46 hours for Dusseldorf; and from 19 hours to 10 days for Milan. Also, in each case the slowest delivery was by the most expensive courier. Customs and border controls were part of the problem, a barrier FedEx did not have in the United States.

It is not surprising that Europeans were not enthusiastic users of expensive overnight delivery services. As Martin White of Coopers & Lybrand explains: 'they realized that they get the same level of reliability as they get on an overnight contract, but at a price 30 to 40 per cent lower'. Experienced users quickly started trading on domestic services, but the habit quickly spread to the international market too. The diminished interest in speed took away the aircraft operators' big advantages. FedEx appears to have overestimated the European market for overnight delivery, which reached a maximum of only 100,000 packages daily. Europe's rail network also worked against aircraft; DHL already has a Paris-Brussels train link and plans to increase the triangle to include London. The six-wagon train carries 60 tonnes and costs 811,000 to run, the same as a 12-tonne capacity aircraft.

While the attention of FedEx was on its losing international operations, competitors were busy stealing customers at home. In 1989 US competitor Airborne had its best year in company history, achieving an astounding 171 per cent increase in sales, TNT caused a tumult in the industry when it bought up the world's supply of British Aerospace Quiet Trader 146 aircraft, now known in the industry as 'the quiet profit-makers'. This aircraft could fly at night from any airport denied to the noisier old jets used by FedEx and others. This facility proved to be a boon in environmentally conscious California and Germany, where TNT has its European hub.

Eventually enough was enough and FedEx began a decisive retreat from its disastrous European campaign. It closed down operations in more than 100 countries, fired 6,600 employees, and contracted with other companies to handle its deliveries to all but 16 large European cities - such as London, Paris and Milan - that it still serves directly. FedEx executives insist that the retreat doesn't mean surrender. The company still leads in the US market, and it has retained a strong base for building more solid international operations. 'Fear of failure must never be a reason not to try something,' said FedEx's chairman and chief executive, Fred Smith. It is an attitude that has cost him dearly.1

QUESTIONS

1. What was the role of quality in the original success of FedEx in the

United States?

2. Tlow .successful was FedEx in implementing high quality standards in Europe?

3. How did the competition faced by FedEx change between its foundation and its decision to pull out of Europe?

4. How did the competition faced by FedEx in Europe differ from that it faced in the United States?

5. Why did FedEx's attack on the European market fail and how do you think it could have attacked the market more successfully?

6. How did the new competition successfully attack FedEx in its home market and was their success related to FedEx's European venture?

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Responses

  • ADRIENNE VANN
    Did fedex make a mistake buying flying tigers?
    6 years ago
  • Giorgia
    What was the roll of quality in the success of fedex in the Us?
    6 years ago

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