An Exclusive Interview with FedEx’s Fred Smith
Fred Smith sat down with Bill Holstein in Memphis to talk about FedEx. Here are excerpts:
October 1 2005 by Bill Holstein
What does it take to be a leader who creates a company and then rides it to become a $25 billion-a-year-company? Not many people can have all those skill sets. Even Michael Dell realized he needed to bring other people in at different stages to be co-CEOs or strong vice chairmen.
I think the most important thing that it takes is continual learning and education and the discipline to apply the lessons that are out there to your operation. I don’t think it’s any secret about what it takes to go from a start up to $25 billion company. The literature is all out there. There’s what you need to do to manage a company at start up and what you need to do when it’s transitioning, you know, into a medium size company and so forth. You just have to spend the time and effort to benchmark and learn the lessons of history and then have the discipline to apply those lessons.
There are actually quite a lot of people who started companies who are still running them, many more than the conventional wisdom would have you believe. Hank Greenberg being one of them. And they generally outperformed other companies in their segments. So I am not as unique as a lot of people think. It’s wrong to say that entrepreneurs are all undisciplined and wild and the big corporation person is a consummate bureaucrat.
Where do you get your best ideas?
I get a lot of my ideas from synthesizing things from different disciplines. It might be something from the world of technology, it might be something from the world of retailing or the grocery business or it might be something really just from reading. I read many hours a week, all kinds of different things, a lot of things on business and very little fiction, although a little bit. So I get a lot of ideas from there and I think I get a lot of ideas from the other members of our senior management team.
Not from consultants?
We use consultants but we don’t use consultants generally to tell us what to do. We use consultants to help us do what we know we need to do better.
I’m interested in the culture you’ve created. At your Strategy Management Committee meetings, you have people who have built companies. They’ve been successful CEOs themselves and they’re highly motivated. How do you create an environment where you keep the best talent in the room?
I think there’s sort of three aspects to it. One is they remain CEOs. I mean, I don’t look over their shoulder. They have the authority to do what they need to do and the freedom and the flexibility to do what they need to do. And secondarily, I think they enjoy being part of a very small group that now controls a company operating worldwide and producing revenues north of $25 billion. That’s a joy to them. I mean Gary Kusin was running a very important and successful business when they acquired Kinkos but it was a $2 billion business. Now he’s one of the very small group of people that’s basically running a company than when you add in these revenues, it will be even bigger than $25 billion next year. And then I think third, we try to make it a very attractive financial arrangement for them. They share in the performance that they produce.
It seems that your company is a lot more complex than it was five years ago. You have to get the balancing act just right.
It is, but again I don’t think it is particularly unique. I mean it’s really embedded in Alfred Sloan’s doctrine produced during the 1920s that allowed General Motors to become the biggest industrial corporation in the world. He recognized that there were different segments in the market. He used common technologies and materials and things of that nature. And he married you in a Chevrolet and buried you in a Cadillac and had something for you every step in between.
I think the model of the Defense Department is not completely dissimilar to that-the Navy, the Air Force, the Marine Corps and so forth. They have to accomplish their own missions, but they increasingly have to work together, and they are managed much more collaboratively than they were, say, during World War II when the Navy didn’t talk to the Army and the Air Corps didn’t talk to either one of them.
I think some of the entertainment businesses and some of the financial services businesses are not dissimilar to us where they have different divisions focused on individual segments but there is synergy in offering those capabilities in a broader portfolio. It’s maybe unique only to the extent that we’re doing it in transportation and business services as opposed to financial services or automobiles or so forth.
How long will it take before you get this right in terms of integrating the technologies of the various operating companies and making the cross-selling happen just right? It seems this is one of the major challenges you face now. Is that right?
Well, it is, but we’re a long way down that road. I would never say that we have gotten to the end of the journey, but we certainly are on the downhill segment of it. The technology integration has come an enormous way in the past few years. The sales and marketing and customer experience issues are quantumly better than they were a couple of years ago. I don’t know that there’s ever an end point to that. It’s just an iterative process and it’s enabled, in great measure, by IT technology. You really couldn’t do what were doing today, absent the technologies that are out there. It would have been, I think, almost impossible.
What, in your view, are the next technologies that will take FedEx to the next level?
The profundity of the Internet is only beginning because it is providing, for the first time in human history, a standardized, low-cost, written and visual medium that people can use to sell and source things without regard to time and place. That’s never been the case in human history. And when you look at the numbers that we’re achieving now in our intercontinental business, I mean that’s not just happening by accident. It’s happening because people can look at everything there is to buy and sell in their segment or sector any place in the world, cross referenced by Google or the search engines.
One of my daughters was telling me just last night over dinner. She has been able to pull up this incredible amount of information about a retailing segment that she was interested in that would have been a two-year project. So, the kind of spontaneous combustion, if you will, of economic activity because of this narrow-cast/broadcast capability that the Internet provides, it bodes very well, absent some horrible thing in the terrorist sector, for a lot of growth for a long period of time.
I think there are also some subordinate technologies there too. I think RFID (Radio Frequency Identification) will have big effect on making things frictionless. We’re not too many years away from your going into a store, filling your shopping cart with whatever you want to do and just driving through a little arch there and it automatically bills your credit card that you swipe and you just walk through. No checkers. You don’t have to take it out of the cart or do anything. That’s why Wal-Mart and some of the other people are pushing that. Of course, we’re right in the middle of that too. So I think that’s a transformational technology that’s on the horizon there.
Do you think most American companies are doing a good job of embracing Internet-based technologies or are they behind the curve?
No, I think they’re doing a pretty good job. I think they are definitely working hard and I think there’s a whole infrastructure of support people that are enabling people to utilize the Internet more effectively. I think they’re doing a pretty good job of it.
Why is it that Federal Express, located here in Memphis, has been among the leaders in understanding and applying new technologies, like laser bar codes, scanning devices and handheld computing devices? You’ve been leading-edge adopters. What is it about this company that made you such an early adopter?
It is sort of a chicken-and-egg problem. Bear in mind, the original company was designed to move very, very high value and high tech items with great reliability and precision. As more and more of those types of items began to be produced, more and more items started flowing through our system. We reached a point fairly early on where it was apparently obvious to me that if we didn’t have a way to discretely measure and control each one of those transactions we were going to hit a fundamental sound barrier, a wall. Because if people used you for the reasons that I mentioned to you, and your quality began to degrade, they wouldn’t use you. I mean, it was just that you would start chasing your tail.
That’s when it really hit me that we had to embrace this IT revolution to a much greater extent than I perhaps realized initially. And that led to including Jim Barksdale, who had a distinguished career and is really one of the guys that commercialized the Internet. Jim was my No. 2. He was our COO. We decided we had to invent a whole new way to keep up with things, and there’s a great story written about it in a scientific treatise, the National Academy of Science and the National Academy of Engineering, about how we basically invented the bar code tracking and tracing system that you talked about.
When we first started, you know, the size of the little handheld devices that we needed were about the size of a breadbox. People had crash printed universal product codes but nobody had ever printed multiple form, sequentially numbered items so you could discretely track and trace everything that went through the system. We did all that and finally the handheld device was miniaturized down to about the size of a candy bar, which you’ve seen a million times now. And we developed, at the time, the largest radio system in the country outside the U.S. military and put them in our trucks. What that allowed us to do was to act at hundreds of thousand and later millions of discrete shipments just as if we were handling a few shipments like we were in the early days.
The second big, I guess conceptual leap was when it occurred to us that this information was so value to us that it might be equally valuable to the customers. And the issue then became, how do we migrate that information into the customer’s shipping locations. Then we developed a proprietary network and put it up again, supplying people with PCs. And they were able to sit there in their shipping location and monitor shipments going all over the country and then around the world.
That’s how it all got started. And then, of course, as you can see with that continuum, now when the Internet came along, you had the capability to make it available not just to your biggest customers who you could afford to supply a PC to, you could make it available to anyone that had access to the Internet. And we get better and better and more useful applications on our FedEx.com now and, in turn, that creates more and more usage.
More and more people get on the Internet and can find the products and the things that they need wherever they might be in the world and we just make it so easy to ship thing around the world today. It was very arcane, you know, to ship something from California to Calcutta a few years ago. Well, at FedEx.com, go on the international shipping thing and FedEx local trade manager will tell you exactly what you need and the information you need, the declarations you need, the whole nine yards. So it’s this almost force field that’s feeding on itself. I’m very excited about it.
It seems that you’re positioned very well as the whole pattern of American manufacturing is changing with more going offshore. The very nature of how American business is organizing is playing in your direction.
There’s no question about it. And, essentially, what has happened is that in the high-tech and high-valued-added sectors, in particular, but increasingly in the lower valued-added sectors as well, the location of production is almost irrelevant. It’s simply just a cost/time trade off, that’s all. Because you will make the stuff and in Guadalajara or you can make it in Raleigh-Durham, or you can make in Guangzhou. It doesn’t make any difference. It’s just a matter of being able to calculate the cost and the transit cost because all that’s now visible. And that’s never been true before in any kind of manufacturing or supply process.
So how big can FedEx be?
Well, it can be a lot bigger than it is today. One of my favorite little stories was about Pogo the Possum who said, “If you want to be a great leader, find a big parade and run in front of it.” That’s what we’ve been doing, just running in front of the enormous forces. And I think the company can continue to grow for a long time to come, based one the trends that we just discussed.
Let’s talk more about international. Two hundred locations in China will be added. How far can China run?
China is THE biggest economic factor in the early 21st century. There is nothing that can compare to it. India is coming on; it could become another major factor and Eastern Europe, perhaps a third. But China, at the moment, is such a phenomenon because you have this incredible and capable work force, a very entrepreneurial culture that obviously in the day before the reform took place, it was almost repressed. And now it’s unleashed. You have the 7, 8, 9 percent compounded per annum growth rate. You have them supplying all kinds of things to the United States and Europe. You have them drawing in all kinds of components and items from all over Asia. So, in the next 20 years, China is going to be a very big factor in the economic equation of the world.
What are the constraints?
The big problem about our operation in China is that today the aviation relationship is very constrained. We’re limited to only 11 flights a week. What we would like in China is the same thing that we have in France, which is complete freedom to operate when and where we need to and how we need to to address the market rather than some regulatory framework that was designed in 1944.
The United States and China are meeting, and I believe that there will be substantial liberalization. And we will dramatically expand our service to and from China. We have a very good hub in the Philippines, which we will continue to operate but we will probably build another and companion hub to it somewhere in China. The same way we have in Europe with Paris, London and Frankfurt, and in Asia we have the Philippines, China and Japan.
I thought you were building a big one in Incheon near Seoul?
It’s not a hub, though, it’s just a big operation. There are other good transit points, you know. We use Osaka, Tokyo, Anchorage-we have a huge hub in Anchorage. We’re the biggest employer in Alaska, or in Anchorage, after the oil industry. A lot of people don’t know this but Anchorage is equidistant from London, New York and Tokyo. So it’s our top of the world hub on a great circle route.
Are you concerned at all as an American and a CEO about what it means for our economy? Right now there’s a big backlash about outsourcing, which is a buzzword for globalization. Do you think that as all this activity shifts that we’re going to be able to generate the next wave of jobs and the next wave of economic wealth in this country?
Oh, of course. It’s silly, most of this conversation. First of all, in terms of “outsourcing,” which is a misnomer to begin with, the United States has benefited far more with outsourcing from other countries producing jobs in this country than the other way around. Just go down to Jackson, Miss. You’ll see this incredible automobile plant that Nissan is putting in. Go to Nashville where you’ve got Nissan. Then there’s Mercedes in Alabama and BMW in South Carolina – and just on and on and on down the line.
In the early part of this century, 40 percent of the people in the working economy were on farms producing food. Today, less than 2 percent of the population are on the farms and feeding our population more than they ought to eat. The arguments about this have been going on for a long, long time. I have great faith in the entrepreneurship and ingenuity of our society and our country in particular to continue to improve living standards here.
Now the thing about globalization that creates all of these issues and also has created them in years past is the fact, obviously, that globalization benefits broadly and hurts specifically. And there’s not really much antidote for that other than to say we’re simply going to try to preserve the status quo that we’ve got which history shows, in many places around the world, is impossible. I mean, under that logic you would still have the textile mills in Worcester, Mass., and they would have never gone to South Carolina in the first place, much less go to Indonesia and China.
I have children at the University of North Carolina, and I go over there and I’m always flabbergasted by the standard of living and the wealth in that Research Triangle. And a few weeks ago, I was down in Charleston, S.C. Somehow, they found some awfully lucrative things to do because it’s an affluent population. That doesn’t mean that it’s not terrible for the people who lost their jobs in the textile mill in a small town there. But I don’t know how you deal with that other than the way it’s been dealt with in the past, and that’s try to retrain people, try to give them incentives and try to get the population educated to be able to deal with that type of economic change.
What do you think needs to happen in this country to unleash the next wave of innovation?
I think there’s a lot of innovation that’s under way. You’re really beginning to see it more clearly now that the bubble has popped and we’re back in a more realistic economic environment. The Internet is just going to allow all kinds of interesting things to be done that people really can’t contemplate or describe today.
Then there’s the medical revolution – I’m on the Mayo Clinic Board of Trustees. I’m just stunned every meeting by what’s going on in the medical side of the house. Starbucks, a few years ago who would have thought that would become such a phenomenon? So I just have a great confidence in human ingenuity and entrepreneurship. I think there’ll be plenty of innovation and entrepreneurship.
Is there something about this environment right now that’s discouraging innovation?
I think the litigation system is overall a great public good, but like anything, the pendulum has perhaps swung too far. You listen to all of these horror stories about the asbestos litigation and some of the more extreme class action things. But our society has a way of kind of bringing the pendulum back to the middle. And there’s legislation to deal with these things. It will finally come around. But that is a big concern because almost everything that any commercial enterprise company does today is a legal issue first. Is this something that’s going to bring an undue amount of liability? So that’s one.
Obviously, there are demographic issues and social obligations and then there are issues about global stability and the United States’ role in that. They’re worrisome and I think at the end of the day there are going to have to be some changes in both those areas because what’s going on is unsustainable.
Are you talking about military spending?
I’m talking about Social Security and Medicare, the obligations that are out there. They’re not sustainable. Society is going to have to deal with these issues one way or another. They’re either going to have to be private accounts in Social Security or private savings and some sort of revised healthcare system. It’s unsustainable.
I think in the global area, we are spending a lot of our national wealth, basically, policing the world or creating stability there. What? About 4 percent of our GDP? Nobody else in the world spends a fraction of that amount. So with a real threat the way we have today, I simply don’t think that this country and its taxpayers are going to continue to shoulder that burden alone. I may be wrong, but I don’t think they will, particularly after the experience the country’s gone through in the international community over the Iraq issue.
Getting back to FedEx, how you do your job in a way that other CEOs could benefit from hearing about?
I don’t know if there’s anything that I figured out. Again, the literature is out there as to what it takes to be a CEO or to run a good company at various levels. I think the first thing is you’ve got to break the job down into its component parts. And there are basically three components, strategy, management and leadership.
The most important job of the CEO, in concert with the Board of Directors and the senior management team, is to have a viable business strategy. I had a very good friend who was quite elderly when I spent most of the time with him that I did, Mr. Abe Plough, who was a legendary entrepreneur and manager who built these wonderful brands: Coppertone and St. Joseph aspirin, which is the biggest part of Shearing-Plough to this day.
When he was in his 90s, he used to ask me to come by and see him from time to time, and we would have breakfast together. And when I was leaving, he’d always say, “Now, Fred, I want you to remember one thing.” He’d always say the same thing and I’d pretend like he hadn’t said it, and he knew he was saying it for the nth time. He’d say, “You know what the secret of our being a good business is?” I’d always say, “No, tell me, Mr. Plough.” And he’s say, “Be in a good business.”
If you think about it, it is, you can have the best management team in the world, the best procedures, the best of everything. And if you’re in a terrible business, it doesn’t work. Or if you’ve got a bad strategy, that’s what went on during the dot-com nonsense. You have a huge amount of money, and a lot of management talent in businesses that were simply not viable. The fundamentals of the business were not in any way possible to achieve a good result. So the first thing that the CEO has to do, the No. 1 job, is to make sure that the corporation has a viable business strategy.
The second thing the CEO has to do is to engage in the mostly science, but some art, of management. And to very carefully assess his or her strengths or weaknesses, and where one is weak beef it up by bringing in someone as a member of the senior management team who is strong.
Do you think you have weaknesses?
Oh, a good many. Perhaps “weaknesses” is the wrong way to say it. “Play to your strengths” would be a better way. I mean I can do most of the things that are necessary in the management sector. I can read a P&L, I can read a balance sheet, but I’m going to tell you, I can’t read it nearly as well as Alan Graf (the CFO) can. And I’m not a formally trained accountant or a CPA.
Talk about IT, I understand the fundamentals of it. I understand the fundamentals of aeronautics and what makes airplanes go. But you have to get very expert people, delegate to them a lot of responsibility, make sure you have confidence in them. You’ve got to measure it, you’ve got to supervise it, you’ve got to check on it. But, in the main, the management side of the house is the second function of the CEO.
Then the third is leadership. And leadership is probably most important at the small-unit level and at the CEO level. At the small unit level, you’re actually out there where the rubber meets the road. You have to deal with the customers. And you have to have well-motivated and well-trained and committed employees, particularly in a service business but in manufacturing too, who deliver on the customer expectations. In the middle management ranks, you often have people who are largely specialists where the leadership aspect is not critical.
It’s always important, but once you get them back up to the CEO ranks, you have to be especially adept at leading very strong-willed, very intelligent, generally very ambitious and very, very smart people. Leadership is not something that is a matter of guesswork. The principles of leadership are extremely well known. They’ve been documented since the time of Alexander the Great. You can find them in the management training manuals of every great institution and corporation and military unit in the world.
The problem about leadership is, it’s very difficult to do. Because the heart of leadership is being ready and able to subordinate one’s self interest often to the greater good of the unit or the organization. So that’s what the CEO has to do. They have to manage strategy, they have to manage the administration of the management of the enterprise and they have to be an effective leader. And where you’re strong, play to that strength, and where you’re not as strong, or weak, beef it up with people who can help you. But I don’t think you can be a CEO if you don’t have a good strategy for the organization. That’s sort of fundamental to the job.
I know you don’t like to talk about the past very much but I just want to go back there for a moment. Was there ever a time when you thought that this thing that you created was just not going to make it?
No, I was always convinced that the market demand for what we were trying to do was just so profound. I knew that. So it was just a matter of time and money.
Time and money are pretty important.
They are but, as always, you’re progressing, you know, on a continuum. Generally for most good ideas, you can get the money. It may cost you an arm and a leg but you can get the money. That’s the problem, again, going back to the dot.com thing. All this money went into all these enterprises and almost from the get-go you could fundamentally graph them out into the inevitable, horrible conclusion. But people just sort of, like Custer, went to their doom. It was a remarkable thing. Of course, a lot of it was because they weren’t really playing to customers. They were playing to the stock market.
But how were you so convinced you had a winning idea?
I had it documented three different ways by three separate and independent consultant studies. We just had an awful lot of quantitative data that the demand for the service was just very significant.
So how much longer are you going to do this job?
I like what I’m doing at FedEx for a very fundamental reason. And that is because it is an important industry that sits right at the middle of almost everything else that’s going on. It is a vitally important company to the commerce of the country and the world. You mentioned Michael Dell a few moments ago. I’m a great admirer of Michael Dell. He’s one of the great businessmen alive today.
If he were sitting here, he would tell you that absent the transportation capabilities that FedEx pioneered, and we have able competitors too, but absent those fast cycle transportation capabilities, the business model that has changed the world would not have been possible. Sam Walton and I talked about, on more than one occasion. He didn’t know if he was a good retailer but he thought he was a pretty good logistician. And if you really look at Wal-Mart’s success, like Dell’s, the real powerful concept that underlay his