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The Business External Assessment – Fred Smith and FedEx

The Business External Assessment – Fred Smith and FedEx

Federal Express began as an idea in the mind of CEO Fred Smith while working on his business degree. He wrote it up as a paper, and believe it or not got a “D” on it because his professor found the idea so ludicrous.

A Look At The External Market

Fred was looking at critical business mail and comparing the turnaround time and delivery reliability as offered by the biggest American provider, the United States Post Office. His assessment showed him it was pretty poor, and he thought that he would have a marketable service if he could find a way to deliver important mail overnight and guarantee that it would be there by a specific time the next morning. It’s important to keep in mind that the cost of a special delivery letter at the time Fed Ex started was one dollar, and he was proposing to charge in the neighborhood of $7 for his service. But he bet on the fact that the need was real and he would win if he could make it work. His potential customers were not getting important mail delivered quickly and reliably, and would pay if they knew it could be done.

When It Absolutely, Positively Has To Be There Overnight

In 1973, when Federal Express began continuous operations, a business’s alternatives for overnight delivery were few and very expensive, usually involving specialized courier service (unless you wanted to drive it there yourself!). Post Office Special Delivery delivered after hours and on weekends, but the issue there was the in-between offices, where it could be held up for days until sorting was completed. Fred’s idea involved a central facility to which all packages would come, and where sorting and re-embarking would be completed in two hours. Sounds kind of crazy, huh? Obviously, Fred’s original professor figured it sounded that way! Fred located the main facility in Memphis, Tennessee, and in 1973 the air express industry was born. That first night 389 employees and 14 Dassault Falcon jets delivered 186 packages to 25 U.S. cities.

Assessing Fred’s Assessment

What were the key points that Fred identified in his original external analysis? Let’s take a look:

  • The need to deliver critical documents was as great as ever.
  • Delivery methods were still slow and unreliable. Remember that the Pony Express met this very same business need across the frontier, and was only replaced when the telegraph began to meet the need reliably.
  • Approaches to meeting this need, the courier services, were fairly small and fragmented, and very expensive.
  • American companies had shown a willingness in the past to pay a premium price for reliable, fast delivery. The Pony Express charged about $5 per letter – at a time when the average cowboy earned $1 a day! Couriers were similarly pricey.
  • No company had succeeded in finding a way to gather, sort, and the redistribute large volumes of letters and packages overnight, and the Post Office was not doing anything to address the need.

An External Analysis That Delivers

Was Fred Smith’s external assessment and resulting plan effective? Consider whether the markets like what his company offers. In 2008, 35 years after the start of continuous operations, FedEx had total revenues of $37.9 billion, with an operating margin of 5.5% and a net income of $1.1 billion. More importantly, although its operating margin has narrowed due to the recession, its revenues over the past five years have continued to grow at the rate of $3 billion a year. Obviously then, companies like Fred’s plan, and they use Federal Express. What kind of difference would it make for YOUR company if you sat down right now and took two hours for a careful analysis of the external factors affecting your business? Why not schedule it for this week?

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