Fred Smith An Overnight Success
Fred Smith
Founder of Federal Express Corp.
Founded: 1971
"You absolutely, positively have to innovate-if only to survive."-Fred Smith
While attending Yale University in the mid-1960s, Fred Smith wrote an economics term paper on the need for reliable overnight delivery in a computerized information age. His professor was less than impressed and responded: "The concept is interesting and well-formed, but in order to earn better than a 'C', the idea must be feasible." Several years later, through a combination of innovative thinking, unbridled charisma and sheer determination, Smith would use this "interesting but unfeasible" concept to found the world's first overnight delivery company and change the transportation industry forever.
Smith was born to a well-to-do family in 1944 in a small suburb outside Memphis, Tennessee. His father, who died when Smith was only 4, became a self-made millionaire after founding the Dixie Greyhound Bus Lines and a chain of restaurants called the Toddle House.
Smith was born with a congenital birth defect-a bone socket hip disorder called Calve-Perthes disease-which caused him to wear braces and walk with the aid of crutches for most of his youth. His mother worked diligently to build his self-esteem, and encouraged his participation in all sorts of physical activities. He eventually grew out of the disease, and in prep school, Smith played both basketball and football.
After earning a bachelor's degree in economics from Yale, Smith enlisted in the Marines and was sent to Vietnam where he received an education of a very different kind. "As a platoon leader in Vietnam, I was in charge of a group of youngsters who had come from very different backgrounds than I had. You know, blue-collar backgrounds: steelworkers, truck drivers, gas station folks," Smith reveals in a 1998 Fortune magazine interview. "The experience gave me a very different perspective than most people who end up in senior management positions on what people who wear blue collars think about and the way they react to things, and what you should do to try to be fair to those folks. A great deal of what FedEx has been able to accomplish was built on those lessons I learned in the Marine Corps."
After two tours of duty, Smith left Vietnam weary of destruction and eager to focus his energy on building rather than tearing down. "I wanted to do something productive after blowing so many things up," he remembers. His stepfather, retired Air Force general Fred Hook, had bought a struggling company in Little Rock that modified aircraft and overhauled their engines, and Smith went to Arkansas to help him run it. Difficulty in getting parts brought Smith back to the overnight delivery concept he'd hit upon in college.
Determined to make it work, he came up with a plan for creating an integrated air and ground delivery system in which packages from all over the country would be flown to a central point, or "hub," sorted, and then flown out again along specific routes, or "spokes" to their destinations. Under this "hub and spokes" system, the flying would be done at night, when airlanes were comparatively empty. The airports used would be in sizable cities, and trucks would carry the packages to their final destinations, whether in those cities or smaller communities.
Convinced his idea was feasible, Smith decided to take the plunge with $4 million he'd inherited from his father. At that point, Smith's life became a marathon nonstop journey into the canyons of Wall Street to raise the capital he would need to purchase the fleet of airplanes vital to his plan. "I was a kind of naive about the whole thing," he confesses in a Nation's Business magazine interview. "I thought there would be basketfuls of checks right away." There weren't. But Smith kept at it. His charisma and the knowledge he gleaned from several years of studying the air-freight industry (both in the military in Vietnam and later in the United States) impressed investors, and by the end of 1972, he had managed to raise $80 million in loans and equity investments.
Federal Express (FedEx) began operation in April 1971, with 14 Falcon jets servicing 25 cities. Initially business was slow. During its first night, FedEx shipped a mere 186 packages. But volume picked up rapidly and service was expanded. FedEx was an overnight success. Then the roof caved in. Because of rapidly inflating fuel prices, costs surpassed revenue, and by mid-1974, FedEx was losing more than $1 million a month.
Smith asked his disappointed investors for more money to keep the company afloat, but they refused. Bankruptcy was a distinct possibility. Then fate stepped in. While waiting for a flight home to Memphis from Chicago after being turned down for capital by General Dynamics, Smith impulsively hopped a flight to Las Vegas, where he won $27,000 playing blackjack. "The $27,000 wasn't decisive, but it was an omen that things would get better," Smith says. And indeed they did. Returning to his quest for funds, he raised another $11 million.
Although FedEx had lost nearly $13.4 million in its first two years, Smith never considered giving up. "I was very committed to the people that had signed on with me, and if we were going to go down, we were going to go down with a fight. It wasn't going to be because I checked out and didn't finish," he says.
But FedEx didn't go down. Thanks to an aggressive ad campaign which featured the now famous line, "FedEx-when it absolutely, positively has to be there overnight," the company scored a profit of $3.6 million in 1976. Two years later, FedEx went public, and by 1980, revenue had zoomed to $415.4 million and profits soared to $38.7 million. From then on, it was smooth sailing for FedEx. By 1999, the company has become the No. 1 overnight shipper in the world, delivering more than 3 million packages to nearly 210 countries each working day.
Fred Smith, now chairman, president and CEO of FDX Corp., FedEx's parent company, compiled a fortune estimated at $700 million by enabling businesses to deliver their goods quickly, anywhere in the world. He was told it couldn't be done. But in the time-honored style of the true innovative visionary, Smith listened to his own counsel, and single-handedly changed the way the world does business.
Head Start
Fred Smith displayed entrepreneurial talents early in life. He learned to fly when he was 15 and took up crop dusting as a part-time hobby. At age 16, he and two friends formed Ardent Record Co., a business that still exists today. The young entrepreneurs operated the firm profitably and even produced a number of hits, including "Rock House" and "Big Satin Mama."
People + Service = Profit
A key ingredient in Federal Express' success has been a corporate philosophy that emphasizes treating its workers fairly. Managers are carefully trained to foster respect for all employees, and their performance is monitored. Managers are evaluated annually by both bosses and workers to ensure good relations between all levels of the company. Fred Smith believes that fair treatment instills company loyalty, and company loyalty always pays off.
