Chapter 1
Innovating and Outperforming the Competition

Our vast progress in transportation, past and future, is only a symbol of the progress that is possible by constantly striving toward new horizons in every human activity. Who can say what new horizons lie before us if we can but maintain the initiative and develop the imagination to penetrate them-to the end that greater degrees of well being may be enjoyed by everyone, everywhere.

-Alfred P. Sloan Jr.

CREATING A NEW INDUSTRY . . .

On FedEx's first night of operation, April 17, 1973, a small group of people stood around a makeshift system and sorted 186 packages. They then loaded them onto 14 small planes that promptly took off for 25 cities across the United States. On that night, FedEx became the first transportation company dedicated to overnight express package delivery. Thirty-two years later, FedEx handles over five million packages every day serving 215 countries around the globe.

FedEx's revenue grew from just $6 million in 1973 to over $24 billion in 2004. In 1983, it was the first company to grow to $1 billion within the first 10 years of its existence, without acquisitions. During the first three years of its operation (1973-1975), FedEx lost over $29 million as it built its infrastructure and established the network that would allow it to start making a profit. For the past three years (2002-2004), its net income has been over $2.3 billion.

Today's FedEx, which has constantly evolved to meet customer needs, consists of four operating companies connecting the global economy with a full range of transportation, information, and supply chain services. This change and growth did not happen overnight. The factors that contributed to FedEx's phenomenal success included developing customized business solutions. One example is FedEx's relationship with Hewlett-Packard. In the fast-changing computer industry with new models coming out every month, HP realized that any computer stored in a warehouse runs the risk of becoming obsolete. FedEx and Hewlett-Packard worked together to develop a supply chain solution that eliminated the warehousing of HP's industry-leading notebook PCs. The notebooks were shipped directly from the manufacturing facilities in China to homes and businesses throughout North America in just two to three working days.

Over the past five years, FedEx's stock price has doubled. During the same period, the stock price of its main competitor, United Parcel Service (UPS) increased by only 15 percent, and the Standard & Poor's 500 fell by 20 percent. FedEx has been recognized as one of the 100 Best Companies to Work for in America (Fortune, 1998-2004) and also as one of America's Most Admired Companies (2001-2004).

. . . BY TAPPING EMPLOYEES' CREATIVITY AND COMMITMENT

Before starting FedEx, Fred Smith hired consultants to do a feasibility study and help develop his business idea into a detailed business plan. The consultants estimated the total market potential for air freight to be around $1 billion. Today, FedEx's share of the express transportation industry is over $17 billion. What allowed FedEx not only to create the express industry and grow the overall market, but to continue to enjoy a dominant market share?

FedEx became an international powerhouse and one of the most trusted global brands by implementing leadership practices that tapped into the discretionary effort, creativity, and commitment of its employees at all levels of the organization-the foundation of a thriving innovation and performance culture. True, Fred Smith had the original business idea, but it was the creativity and commitment of employees that turned it into a successful business. The employees of FedEx have designed and delivered unique customer value propositions (what customers value) that have kept FedEx one step ahead of the competition.

Even though the managers at FedEx did not consciously set out to build and sustain an innovation culture, that is precisely what they accomplished. The open and supportive environment allowed employees at all levels in the organization to be part of the innovation process. The day-to-day leadership practices and behaviors and the company's organizational support systems have been keys to FedEx's phenomenal growth.

This book provides a model, or a framework, that explains how these leadership practices and organizational support systems, working together, built and sustained the FedEx's innovation and performance culture.

There is no company manual entitled The FedEx Way: How to Build and Sustain an Innovation Culture. The book you are reading is based on FedEx managers' firsthand experiences and interpretation of those experiences in the context of the innovation culture model and the three-step process (generation, acceptance, implementation).

Business leaders also should keep in mind that it is neither feasible nor practical to adopt principles and practices "lock, stock, and barrel" from another organization and try to fit them into their own existing culture because each organization is unique.

Some organizations may already apply some of the leadership practices that promote innovation but do not get the collective benefit-a thriving innovation culture-because some of the pieces may be missing. The goal is to help managers identify and implement the missing piece(s) to actively engage every employee in the innovation process.

The leadership practices and support systems discussed in this book are not unique to FedEx; they have proven to be equally effective in other organizations.

DEFINING CREATIVITY IN THE BUSINESS WORLD

Two key terms are often used interchangeably-creativity and innovation. People normally associate creativity with artistic endeavors-Monet, Picasso, Michelangelo, and Mozart, the artist's studio, the visual arts, or the performing arts. In the context of the business world, I define creativity as the process of generating ideas that will help the organization become more competitive in the marketplace. Business creativity is generating ideas that will improve the customer experience, increase revenue and market share, or improve efficiency. The thought process uses imagination just as artists do: "What if . . . ?" What if we make this change in our business strategy, product design, manufacturing process, distribution process, billing system, accounting system, and so on?

Walt Disney, after seeing run-down rides and bored adults during a visit to an amusement park with his daughter, thought, "What if there was a place where kids and adults could play together?"

Similarly Sam Walton, CEO of Wal-Mart, asked, "What if we connect the cash register to the inventory planning systems and substantially reduce the cost of doing business?"

After realizing that there was a growing demand for a time-definite express mode of transportation for shipping high-priority, time-sensitive cargo such as computer parts, critical documents, medicines, and electronics, Fred Smith thought, "What if we develop an airline dedicated to providing overnight express service to meet this growing need?" He went one step further and thought, "What if this airline used the hub-and-spoke system?"

Initially, Fred developed and proposed the hub-and-spoke system to the Federal Reserve System for overnight delivery of checks between their 36 locations around the country. At that time, clearing checks used to take anywhere from one to four days. This created a huge float, that is, checks written and presented for deposit but not yet cleared and credited in the recipients' accounts. The overnight express system would have eliminated the float. The word "Federal" in the company's original name came from the proposal to carry the Federal Reserve's checks and "Express" represented the speed with which the new company would carry them.

Creativity in the business world means exploring what ifs-taking time to seek the connection between seemingly unrelated variables, to see other possibilities, and to look at the bigger picture when making decisions. Fred Smith thought out his ideas while he wrote his now-famous Yale term paper. When he was raising venture capital in the early 1970s to start FedEx, a shipper could send a critical package using passenger airlines.

Passenger airlines, for many reasons, did not always guarantee a time-definite and cost-effective service. First, because the primary goal of the passenger airlines was flying passengers, the departure and arrival schedules were built around the needs of the passengers. A flight might not be scheduled to leave at the time a customer wanted to ship a package. Or a flight may not have been scheduled to the destination the package needed to reach, or there might not have been a flight scheduled to arrive at the time the shipment needed to be there. Second, customers had to take packages to the airport because the airlines did not provide pickup service. The only way to avoid that problem was to have a third party pick up the package and transport it to the airport, which added substantially to the shipping cost.

A similar situation existed at the destination end. On arrival, the recipient or a designee had to pick up the package and deliver to the final destination. In general, the handling systems of the passenger...