World Changers

So perhaps there is little wonder that Federal Express founder Fred Smith would find himself in the transportation business as well. Smith, who earned his pilot’s license when he was fifteen years old and used it to fly crop dusters, had ambition and desire in his blood. Building from scratch a massive global transportation company was the process of connecting all the dots in his life.

Like so many entrepreneurs, he experienced tragedy early in life. Smith lost his father at the age of four and was raised by his mother and uncles. Four years later, he contracted a little-known disease called Legg-Calvé-Perthes that put him on crutches for more than two years.

At his mother’s urging, he went to Yale University in the fall of 1962, and the experience would change his life. Smith, who hung a Confederate flag on his dormitory wall, went out for football, joined the exclusive Skull and Bones society, spun records as a disc jockey at the campus radio station, and joined the student platoon leader training program of the U.S. Marine Corps Reserve.

Though Smith now says it is more apocryphal than real, it was his junior-year term paper in Economics 43A that would plant the seed for what eventually would become Federal Express. The paper—not much more than fifteen typed pages—captured Smith’s belief that every aspect of life would become far more automated as a result of major advances in technology.

When he graduated from Yale in 1966, his entrepreneurial wanderlust would have to wait. Instead, Smith enlisted in the Marines. His father and three of his uncles had served in the military, and Smith had trained in the summers while in the Marine reserve. From 1967 through 1969, he would serve two tours of duty in Vietnam, first as a rifle platoon leader and later as a company commander and a forward air controller. He once recalled that an enemy bullet severed the chin strap of his helmet without so much as giving him a scratch, though he earned a pair of Purple Hearts. By the time he returned to civilian life, Smith had flown on more than two hundred combat missions at the tumultuous height of the war.

It was a profoundly formative experience. For one thing, Smith got to see up close the remarkable logistics efforts of the military, effectively mobilizing more than half a million troops and millions of tons of supplies. For another, the discipline, training, and leadership experience absorbed as a Marine captain would stick with him for the rest of his life. “When people ask me what principles have guided me since I started the FedEx Corp. years ago,” he says, “my answer often startles them: it’s the leadership tenets that I learned in the U.S. Marine Corps during my service in Vietnam.”

When Smith returned home, he initially bought a controlling interest in an aircraft maintenance company, Ark Aviation Sales, and a year later in June 1971 Smith founded Federal Express with his $4 million inheritance. It took nearly two full years before FedEx began operations with 14 small planes, delivering 186 packages to 25 U.S. cities on April 17, 1973. The early days were tough: FedEx lost $27 million in its first two years and the company was on the verge of bankruptcy.

Smith, however, was able to renegotiate his bank loans and keep the company afloat. In 1978, FedEx went public. From a tiny start-up with a few planes, FedEx is one of the biggest entrepreneurial success stories ever. Smith built a global transportation company that racks up more than $38 billion a year in revenue, employs nearly 300,000 people, and delivers millions of shipments a day in 220 countries.

Fred, much has been made of your term paper at Yale. Legend has it that as a junior you pretty much laid the groundwork for Federal Express in your economics class. But it seems to me that your experience in the Marines was even more critical to the founding of the company. If you had started your company straight out of Yale would it have been as successful?

The answer to that question is no, for a couple of reasons. First and foremost, the story about the term paper is a bit apocryphal, as a lot of things in life are. The paper I wrote was not about Federal Express. It was about the automation of society and how an entirely different type of logistics system was going to have to be developed to support this automated world.

Circa ’65 and ’66 in New Haven, Connecticut, I was flying around on charter flights and one of the things we did was to pick up critical parts from IBM, Xerox, Burroughs, and Sperry UNIVAC and fly them around for these computers they were putting in place. It struck me that as things automated, the efficacy of a manufacturer’s business depended on getting fast replenishment of parts and pieces to keep the machines running. The problem was that the transportation systems were not built around these new types of automated technology-based systems.

What you had then were mostly supply push systems. Think of a lumber yard: you cut trees down, you mill them, you put two-by-fours and six-by-eights in the lumber yard, and then the builders come and take them away to build a house. Or think of groceries that depend on distribution centers filled with Heinz ketchup and mustard and cereal. They are pushed out to the stores from inventories based on what’s selling and what’s not.

The customer was in essence giving up his ability to compensate for variability or any type of outage of the equipment because it was automated. When Chase Manhattan Bank was right down the road from IBM where they were making 360 computers, IBM could keep those bank computers working all the time. When IBM tried to sell computers to the Bank of San Angelo in Texas, that was irrelevant. Yet the Bank of San Angelo was being asked to get rid of all of their clerks who did the debits and the credits and instead use this IBM 360 computer. It was quantumly more efficient and infinitely more accurate than the manual systems that it replaced. But both the manufacturer and the potential customers would have to rely on a completely different supply chain. IBM could tell you in those days with great certainty how many parts and pieces they would need within an installed universe. The problem is they couldn’t begin to tell you which one was going to need a particular part. So even a mighty company like IBM couldn’t follow all the parts and pieces that they needed to keep their universe of computers operating.

The same thing was true in those days for Boeing, McDonnell Douglas, and Lockheed. They were automating the cockpits in the airplanes and the airports were automating. All of that was really beginning with a tremendous amount of momentum by the middle part of the 1960s. That is what the paper was about.

Yes. I saw a massive supply push logistics system in operation. The Navy would bring in these huge ships of sea rations and ammunition and six-by-six trucks and they would echelon them forward. The problems always came when you had any type of high-tech equipment that required support. My roommate from college was an F-4J pilot and he was always mortified because the F-4J was a sophisticated phantom fighter that should never have been given to the Marine Corps. They could never keep them operating. It was a perfect example of the phenomenon. This is the difference between beans, bandages, and bullets and sophisticated electronics. I go in the Marine Corps and come back and resurrect this idea. In the six years I was in the Marines, society had dramatically moved forward toward a high-technology-based infrastructure.

So I resurrected the idea and at the same time I started looking at the Federal Reserve System. The reason is because it was a microcosm of all the commerce in the United States. In those days there were very few bank wire transactions. The vast majority of people used checks and cash. There were thirty-six branches and district banks in the Federal Reserve System and every one of them transferred checks with each other every day. So the formula for that is thirty-six times thirty-five. It’s N times N minus one. Something like ten thousand separate traffic lanes connected those banks every day.

The Bank of New York and the Bank of Boston would transfer twenty thousand pounds of checks every night because there was a huge amount of commerce going between those two locations. So they would have a truck going from New York to Boston every night. The Bank of Montana also exchanged checks with New York and Boston and each of the other thirty-three banks around the country, but they might have eight pounds of checks going to New York and six pounds going to Boston. So it was a model of the commercial flows of the United States.

That’s true, and that’s where the name Federal Express came from. The problem was that if they had to move a check from California to New York it would take three days. People were making a living on bank float. And what caused float was the inability of the transportation system to move those checks over those ten thousand discrete lanes.

So I went to the Federal Reserve and said, “Look, this system you have is crazy. Here is an unsolicited bid to put in a system that would allow you to move the checks from the Bank of Montana to a small Federal Reserve Bank across the country in the same exact time frame that you could move the twenty thousand pounds of checks from Boston to New York. You could eliminate float.”

This was just completely revolutionary to them. The higher-ups loved the idea because it solved one of the biggest problems the Federal Reserve had at this time: how to get rid of this float. And the only way to do it was this hub-and-spoke system where you sent everything to a single point and then every point was connected to another point on a nondiscriminatory basis. So it was absolutely, positively overnight from all points to all points.

Rather than having ten thousand separate connections with all of the sorting on the origin and the collection on the end, you had one spoke from each bank. So there were thirty-six versus ten thousand. If you took the Federal Reserve and Detroit, the transaction between it and Chicago looked a little bizarre because you would go from Detroit to Memphis before you went to Chicago. But it wasn’t any more absurd than any other mathematical formula that had been used by the telecommunications companies. Otherwise, the entire country would have been buried under two feet of copper wire with every phone having to be connected to every other phone directly.

The only other thing I did was to use my experience from the Marine Corps that it was not heretical to have ground and air groups together. I had served in both. And that has always been a strong point for the Marines. When you come ashore in landing boats, you don’t have any artillery so the Marine Corps is the branch of the service that actually invented close air support, dropping ordnance close to you. So I made Federal Express an integrated air-ground system. It had its own pickup and delivery operation on the ground that was integral to the hub-and-spoke air operation. I tried to sell it to the Federal Reserve but I couldn’t.

The people who were supplying all this automated, high-tech equipment said, “Eureka. That is a solution. I can get the part to the bank in San Angelo, Texas, as fast as I can get it to the Chase Manhattan branch down the street. So sign me up.” That’s how it happened.

A business proposition was not daunting to me. I was very confident the thing would work. The only problem was that to have a product, the network had to exist. You couldn’t go to people and say, “Gee, I have a wonderful service for you for a third of the United States.” It just doesn’t work. So you had to have at least the top markets in the network from day one. We did three separate independent marketing studies and it showed that the requirement was absolutely there.

The only real problem we had in retrospect was the first oil embargo in 1974. If that hadn’t taken place, we would have been profitable from the minute the network was turned on. It was just made more difficult because the price of fuel went up by a factor of three and you had to go to the government to get an allocation for fuel. If you didn’t have a previous record of using fuel, it was very difficult.

That’s why I am so involved to this day in trying to get the United States to come up with an energy policy and why I serve on this Energy Security Leadership Council. We are headed toward a major confrontation with Iran and other people if we don’t do something differently. I’ve been living with this ever since I had gone into business.

Your first move out of the military was interesting because you didn’t simply go with your idea. Instead, you bought an aircraft maintenance firm. Was that because you didn’t quite have the full idea in your head or you wanted a corporate shell from which to build your company?

We are in the information business and that was the second, and in retrospect, maybe the most important of the intellectual insights. Once we started operating, it immediately became apparent that when people were using transportation to substitute for inventory, there was little room for error. Most of the management systems in those days were by anecdote or audit. People would describe quality as “Gee, I had a nice stay at the Holiday Inn.” It was very amorphous or it was by after-the-fact audit. You would go in and take a survey of customers and ask, “How many of you people found the restaurant to be acceptable?”

The problem with that is as you go forward and get bigger and bigger, percentages are no longer acceptable because a 98 percent or 99 percent completion rate sounds wonderful, but you would not be very happy if your bank statement was 99 percent correct. It’s completely unacceptable. So what was very obvious to me was that we could not manage Federal Express by anecdote or after-the-fact audit. We had to have a real-time control system that measured each shipment from the time we picked it up until the time we delivered it, a system that would allow us to intermediate any untoward event in between or, at the very least, be able to tell the customer what had happened.

We began a big process of staffing up an IT unit and I had the very good luck to buy the IT department of Cook Industries in Memphis, which was headed by a former IBM salesman named Jim Barksdale. Jim was originally our chief information officer and later our chief operating officer. He went on to help invent the modern telepathy business as the CEO of Netscape. Under Jim’s leadership, we developed this online real-time tracking system. We had to invent a completely new industry to do it. Nobody had ever printed sequential multiform labels. They had printed universal product codes on grocery items that said “I am a Campbell Soup can,” but nobody ever printed a multipart form with five copies and said “I am shipping one, two, three, four, seven.” We had to take that information in its bar-coded form and get it back in our computers.

We first started out with a little handheld device that was the size of a breadbox and finally it got down to the size of a candy bar when it started making sense. At one time, we were the largest user of radio frequencies in the country. We installed a radio device in all our vehicles so the information could be transmitted from the location into our mainframes. Every day, we could measure with great precision every shipment and whether it was delivered on time. That led in turn to the recognition that information was very useful to our customers and we began to migrate it into our customers’ shipping orders. And at one time, we were the largest purchasers of PCs in the country. We gave our customers these little PCs that allowed them to track these shipments themselves. When you think about it, a warehouse is nothing more than a place to put something so you know you got it. It has no utility other than that.

So for the first time in human history you could monitor inventory, whether it was at rest in a warehouse or in motion with us. It completely revolutionized the world of logistics. Today, nobody would even think about shipping something of any kind of importance if you couldn’t track it and trace it and couldn’t get the date of delivery online. It all came from that observation that the information about the package is as important as the package itself.

And then finally we used that information to develop a very extensive quality management system based on the doctrines of the quality experts W Edwards Deming and Joseph Juran. We used our tracking and tracing system to help us improve service and costs instead of trying to manage through anecdote and audit. That put us so far ahead in the express business that we never looked back from there.

We had plenty of capital other than the Arab oil embargo. We got the capital in place to do what we needed to do and then we went public and we never had to raise money otherwise. We went through a period of time when we were growing very rapidly, and after United Parcel Service came in the business we did a lot of leasing of airplanes. But that is the only capital we raised.

Fred, I also noticed that in the company’s operating manual there is a tremendous amount of detail that suggests you run a very tight ship. In the corporate operating manual, weekly reports have to be delivered before 8:30 A.M. every Friday to the head of each core company and all business meetings must produce a summary with conclusions and follow-up assignments. Where did all this come from?

Some came out of the military. It governs each of the four major segments of the company today. In the main, we operate these highly choreographed networks. And they do require a significant amount of precision, industrial engineering, operations research, and detailed execution. Our hub here in Memphis is the biggest industrial activity in the world. We take 160 wide-bodied airplanes and bring them in here from 10 P.M. to I P.M. and then relaunch them from 2:30 to 5:30. There is no question that I got a lot of my orientation out of the military, and a lot of my management and leadership concepts come straight out of the military.

I’m not all that hands-on. I’m very much a believer in delegation and holding people accountable. If by hands-on you mean I’m shouting orders from the bridge, the answer is no. If you mean I spend a lot of my time trying to get the right people to be my teammates and to work with me, yes I am hands-on in that respect. But certainly I am not involved in the day-to-day operations of FedEx at all. And even in the earliest days, I always believed that because of my military experience I had a certain role. If you are a battalion commander you better be a battalion commander. You can’t be a platoon leader.

My leadership philosophy is a synthesis of the principles taught by the Marines and every organization for the past two hundred years. When people walk in the door, they want to know: What do you expect out of me? What’s in this deal for me? What do I have to do to get ahead? Where do I go in this organization to get justice if I’m not treated appropriately? They want to know how they’re doing. They want some feedback. And they want to know that what they are doing is important. If you take the basic principles of leadership and answer those questions over and over again, you can be successful dealing with people.

We tell our executives that the key to their success is to rely on their first-level managers (FedEx’s counterparts of NCOs); to set an example themselves; and to praise in public when someone has done a good job. All these are standard operating procedure in the Marines.

In the Navy, a ship’s captain flies Bravo and Zulu signal flags when his crew has done a good job. Our FedEx managers affix a sticker with BZ pennants on it to reports from subordinates that are particularly good. Workers who excel get to wear a BZ lapel pin, adorned with Bravo and Zulu flags. When an employee goes out of his way for a customer, he gets a “BZ check” of $150 to $200. Except for the bonuses, these practices come straight out of the Marine Corps leadership manual. And although I’m chairman of the corporation, I can’t get myself to cut into the line in the company cafeteria. Somewhere, a voice reminds me that a good officer lets his troops eat first.

First of all, you have to have technical expertise in what you’re doing. We have many, many technical fields that have to work together in concert, so you have to have people who are technically competent. And in general management you have to understand Henri Fayol and Peter Drucker and all of the great students of management if you are going to be an effective general manager.

The second thing you have to do is have somebody who can be very objective. At the end of the day, if you can’t be objective about things, particularly the facts as they are presented to you, and that includes objectivity about one’s own strengths and weaknesses, it’s impossible to be an effective manager at any substantial level. I always found that the willingness to seek the truth and to be objective about things to be very, very essential.

In our particular area, you have to be team oriented because it takes so many disciplines to do what we do. You can’t be a hot dog. You have to play well on a team. You have to be very results oriented. You have to be tough. I have often said it’s better to ask forgiveness than permission. It requires everybody out there making decisions at whatever level. Our people have to be action oriented and willing to take responsibility for their piece of the pie. You have to be articulate and have a sense of truthfulness.

Oh gosh. You are going to have some setbacks in life and you are going to make some errors in judgment. You’re going to drill some dry holes or whatever analogy you want. The whole secret of life is trying to turn adversity into advantage and to learn from mistakes. A good example of that is we expanded too early in Europe, thinking that the European Union was going to become a more integrated market. So we had to retreat and write off a couple of smaller acquisitions we made that weren’t really thought out. From that, we developed a very disciplined and improved corporate development capability and we changed our strategy in Europe. And for the first time, we’re able to offer overnight service from Europe to the United States. That is an example of taking a setback and turning it into an advantage.

We drill into everybody’s head that not to change is to atrophy, not to innovate is to be surpassed by someone who does. You have to embrace change and innovation. And if there is one thing we push constantly it is, how do we differentiate? All businesses, and I don’t care how different they are, have to be built around a differentiated product or service. You can be protected by a patent; you could find a great location; you could create a great product; but commerce being what it is, somebody is going to find a way to turn your advantage into a weakness. They are going to figure out how to segment your market or differentiate what they do versus you and peel off part of your market. So you have to constantly differentiate.

We do all kinds of things to keep people motivated. We have broad participation in incentive compensation programs. We have a very disciplined annual and five-year planning process integrated with our Management by Objectives system. We do all of those things that I think are required of world-class companies: our broad use of technology, our quality-driven management system, and so forth. The other thing you need to do is you just have to work like hell to make sure you don’t get bureaucratic and fat with a lot of managerial levels that are unnecessary. That is easier to do today with the managerial technology and control systems out there than used to be the case. A lot of middle management used to be nothing more than transmitting information downstream. That’s not required at all.

Barack Obama could actually have been in command of the Seal Team Six that had gotten Bin Laden. He could communicate and possibly see what those youngsters were seeing through their helmets. Think about that in terms of command-and-control systems in terms of what George Marshall and Eisenhower had just fifty or sixty years ago. So a lot of the people that military organizations had were there for no other reason than command and control. In the corporate world, the same thing is true. You have to make sure that you don’t add a lot of staff and managerial people that don’t add value to the enterprise.

One, make sure you have a viable and sustainable business proposition. Make sure you are fulfilling some need that has been unmet and make sure it’s differentiated from everything else out there and that it is defensible. If the idea doesn’t meet that first criterion, at best you may be able to make a living out of it. But you won’t have any sort of financial return that leads to wealth accumulation.

And they say, “Yeah,” and I say, “Well, take it out. Did you know that twenty-five years ago nobody at all would have thought you needed an electronic key that locks your car, turns on the lights, and opens up the trunk. It never would have occurred to anyone. Someone synthesized in their mind that the miniaturization of batteries, RFID [Radio Frequency Identification], and the small electric motor could be put together to make a useful product. Today you wouldn’t even remotely think about buying a car without it.

That is an example of an innovative idea that nobody had been thinking about and that you could put into the marketplace. The second thing I would say is you need to have good verification of your idea and a detailed plan in terms of execution. And finally, if you need other people to help you carry it out you’ve got to get teammates and not people who are waiting for you to bark orders out.

The point about the key in the pants pocket is that you have to have a vision for what is likely to change in the future and how you can take advantage of that change. It’s what Wayne Gretzky said about hockey: “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.”

No question about it. On any kind of industrial product and service, generally you are seeing a need before someone else sees that need. Clearly, the little door opener was created because people didn’t want to leave their car unlocked and they wanted to turn on their lights at night before they got to the car for convenience and safety. It is an example of a now ubiquitous product that nobody saw the need for until someone realized it would make a useful product.

If you have a differentiated idea, it’s easier to get it funded to get it out there. I think it’s quantumly harder to be in business than it used to be. Those are two different things. If you have a good idea today, you can get the money. There is such a huge swash of money out there in the venture capital area today compared to what there was forty years ago. But business as a whole is much more difficult and much more treacherous. If you are starting a company today and somebody doesn’t work out, it’s a potential lawsuit. Those didn’t even exist thirty years ago. Today jobs have been interpreted as property rights. You have to be careful that you’re not doing damage to the environment even though an activity can be quite modest.

That’s really one of the biggest reasons we’re having such a problem these days. As an entrepreneur, you are distracted so much these days from focusing on the customer and value creation. Instead, you’re trying to meet regulatory requirements, avoiding litigation, and being risk averse, covering your ass or anything you want to call it. That is so much more a part of business today than it used to be.