Printer-Friendly Going with the Flow

Frederick W. Smith
Chairman, President and Chief Executive Officer
FedEx Corporation

Going with the Flow:  How to Succeed in a Macro-trend Environment, 8 February 2006

On a typical business day in the United States, 

  • Some 20 thousand ocean containers arrive daily in American ports.
  • Another 25 to 35 thousand truckloads a day pour in from Canada and Mexico.  
  • At U.S. airports, about 15,000 containers and pallets and hundreds of thousands of individual shipments arrive in both passenger and all-cargo planes each day.
  • Similar scenarios, with different statistics, occur daily in Europe, Asia, Latin American and the Middle East—creating a worldwide trading system of about 10 trillion dollars a year.

This is an exciting time to be in the world of business because business is changing around the world. And because it is changing quickly and unequivocally, the global marketplace is full of opportunities.

  • We, in response, must be prepared to act on those opportunities by going with the flow, so to speak.  By understanding the forces influence the flow of planes, trucks and ships around the world and driving our global economy. 
  • These forces can be summarized into four macro-economic trends that affect everyone from car parts manufacturers in Tokyo to high-fashion garments-makers in New York.

The first trend is the increase in high-tech and high-value-added goods as a percentage of total economic output.

  • These types of goods can be defined as any product with a relatively high value-to-weight ratio or a high value-added content. 
  • Examples range from artificial discs for spinal surgery to iPods to automatic car door openers—anything with a low weight and high price.
  • As Alan Greenspan has noted, the weight of the United States’ economic output has barely changed in the past half-century while its value has increased fivefold.
  • For example, international air cargo accounts for only about 2% of the tonnage moved, but over 40% of the total value.

What does this high-tech/high-value trend means for business leaders? I believe it calls for us to constantly raise the innovation bar.

  • People like new things.  So innovation means new and better products for consumers.  
  • But innovation also adds value to companies.  It can reduce their costs and increase their corporate value.  In fact, innovation is one of the most important criteria investors look for in a company.
  • Some experts estimate that innovation accounts for about 7.5% of a company’s total market value.  
  • As business leaders we must not only ask ourselves how we can innovate for our customers, but also how we can approach our business creatively.  Is there a new way to structure our business, develop our strategy, or produce our products?  Is there a better way to hire, train and reward our workers? 
  • It’s by thinking innovatively about our business processes that we can add value to the technology of our products and services.

The second macro-trend is globalization, the integration of many micro-economies into one worldwide, interdependent economy.

  • For many of us, globalization ironically starts pretty close to home.  My friend commented recently that his daughter was wearing a global outfit.  Her jeans were made in Taiwan, her blouse in India, her jacket in the Philippines and her shoes in Argentina.  Her purse, though, was made in the good old USA.
  • Since no single country has cornered the market on innovation, great new products are produced all over the world.  And since companies can have the ability to source and sell globally, they have begun to streamline their supply chains and open new markets in places with names we’re not sure how to pronounce.
  • In 1970, about a dime of U.S. GDP was related to international trade.  Now it’s more than a quarter per dollar and growing.
  • Since 1990, the volume of international trade has grown 6 to 7% a year, almost double the growth rate in real GDP.

This vaulting growth of international trade is great for businesses around the world, but it also means they must deal with governments, cultures and values very different from their own. 

  • For example, since FedEx operates in some 211 countries and territories, we must regularly deal with settings of political unrest.
  • It also means we deal with a myriad of cultures, so when we begin service in a country we very quickly try to appoint managers from within the culture to remain sensitive to an area’s inherent values and practices.
  • In essence, globalization means that business leaders must go with the flow by being good listeners, by staying open-minded, and by becoming good citizens of the local community. 
  • It means they have to be prepared to cross borders, time zones and language barriers with patience, flexibility and perseverance.

As the economy has become increasingly global, it also has become more fast-paced. People all over the world need things fast.

  • Doctors need medical devices quickly to save more lives. 
  • Florists need tropical flowers from Central America in time for weddings.
  • Toy manufacturers need to get their goods into stores for Christmas. 
  • Companies cannot wait weeks to source components and finished goods from around the world, especially in technology industries with high obsolescence rates.
  • Ohio State University estimates that about 40 percent of U.S. economic activity is conducted on a fast-cycle basis.
  • At FedEx, we saw U.S. exports grow by 300 percent from 1993 to 2000, an expansion that tells us the most vibrant parts of the economy thrive on fast delivery.
  • And the value of U.S. exports by air has grown tremendously—from $181 billion in 1995 to more than $270 billion in 2004, according to the U.S. Bureau of Transportation Statistics.
  • Other industry experts figure that for every $1 spent on express transportation, companies can expect to save $1.50 in inventory and warehousing costs.
  • So companies of all sizes depend on the delivery of just-in-time inventory to help them compete faster and more efficiently.
  • Naturally, the air cargo/air express industry, pioneered by FedEx, has become the leading facilitator of transcontinental trade. 

What are the repercussions of fast-cycle logistics for business?

  • Obviously, we must produce and move goods faster through a more sophisticated supply chain management.  This will not only satisfy the customer, but it will also save companies the cost of warehousing inventory.
  • Just as important, due to the speed of change, businesses must quicken the flow of real-time information. 
  • At FedEx we’ve always believed that information about the shipment was just as important as the shipment itself.  Speed up the information people need to make sound business decisions, and you’ve turned the fast-cycle logistics to your advantage.

The fourth trend—the growth of the Internet and e-commerce—adds fuel to the other three.

  • E-commerce is a major facilitator of our economy and remains a vital growth engine for businesses today.  It makes low-cost standardized information exchange available to anyone with a PC, regardless of time or space.  With a few clicks of your mouse, you can order parts for your Mack truck or a cashmere blanket for your baby.
  • According to the Census Bureau, business-to-consumer e-commerce sales are skyrocketing.  Forrester Research places 2005 retail sales at $172 billion and projects growth to $329 billion by 2010.
  • The business-to-business sector is about 9 times greater than the business-to-consumer market, currently about $3 trillion, according to Forrester.
  • E-commerce will be key to fostering economic growth for countries around the world, as it gives small and mid-sized companies the same market muscle as many larger companies.

I don’t really need to talk about what this trend means to business.  Any growth-oriented company is already up to its neck in e-commerce.  Here are a few statistics and trends that will encourage you to keep your eye on the e-commerce ball.

  • Over the next five years, online retail sales will grow at about 14 percent a year, and e-commerce will take a 13-percent share of total retail sales
  • As people who grew up with Net access begin to get married and attend weddings, look for 14 percent of jewelry and 29 percent of small appliance sales to migrate online.
  • Loyalty programs and private-label credit cards are on the rise to increase online customer retention.  In addition, tighter security, more payment options and greater multi-channel integration are trends that will blossom in 2006 and beyond.

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The four mega-trends—the increase in high-value goods, globalization, fast-cycle logistics and e-commerce—have set the rhythm of modern commerce.  Despite setbacks and slowdowns, these trends have driven economic growth in the recent past and will continue to do so in the foreseeable future.

Of course, these trends and the more customer-centered marketplace that has grown up around them present challenges for today’s managers.  In short, business people serve many constituencies in the marketplace. 

  • Corporations must juggle the demands of customers, employees, shareowners, financial regulatory boards, trade and Customs organizations, media, government bodies, and voters, to name a few.
  • While management has never been simple, it’s never been so complicated as it is today.  We’re definitely not in Kansas anymore.

However, we are still in a great place, in terms of the potential for greater wealth for more citizens of the world. 

  • It is up to us to re-write the rules of the marketplace so that more countries and people can participate in the growing global prosperity.
  • Countries that DO embrace the world economy improve their standard of living significantly.
  • For example, Taiwan in the late 60s and early 70s languished economically well behind Europe and America.  But Taiwan began to develop a business-friendly political leadership and operating environment.  In the last three decades Taiwan has increased its GDP 16 times as compared to the U.S.’s three times, and brought higher living standards to its citizens.  

The one rule that we cannot re-write--because it is at the core of all cultures and translates well across all of them--is the golden rule of do to others as you would have them do to you. 

  • That will go along way toward keeping goods, services and ideas flowing across borders. 
  • It will help us focus on coming up with win-win solutions for our companies, our countries and everyone who participates in the world marketplace.

Thank you.