During a fireside chat I had with Fred Smith on January 26, 2023, to kick off a series of events to mark the 50th anniversary of the MIT Center for Transportation & Logistics, he talked about how FedEx uses technology to drive competitiveness. The story underlines the increasing importance of technological innovation, and raises questions about how technology will shape the future competitive landscape.
Innovate or perish
FedEx Executive Leadership Founder and Executive Chairman:
“If you are in business and you don’t innovate you are in the process of commoditization or extinction.”
FedEx invented package tracking, and to do that, it developed innovations such as a multi-part airway bill and package data readers. In the 1990s the company pioneered the use of the internet to track packages.
Today, probably the most important innovations under development at FedEx are in artificial intelligence/machine learning, says Smith. He expects FedEx’s capabilities in this area to change enormously over the next couple of years and bring huge changes to the way the organization operates.
The Internet of Things is another major area of development for the company. FedEx has developed proprietary technology that uses Bluetooth to track individual packages with extreme accuracy. Marrying this technology with RFID will enable FedEx to go to the next step of custodial control, Smith says. The company will be able to intervene more effectively to solve supply chain problems on the fly. AI/ML advances will play a part with predictive analytics programs that identify snafus before they turn into supply chain disruptions.
In transportation and logistics, FedEx will deploy robots to load and unload trucks, extending the automation of cargo facilities. And Smith is bullish about the automation of over-the-road transportation, which FedEx is actively developing. “At the very least there will be an autopilot in the truck,” he says, that controls most driving requirements much like the systems in airplane cockpits that allow hands-free flying. He expects driverless trucks to become a reality in three to four years.
How does FedEx maintain the mindset required to keep innovating? Smith points to three key requirements.
First, many innovators are out-of-the-box characters, and an organization must learn to accommodate them. “Great ideas come from strange places,” he says. Second, an enterprise has to “tolerate failure” without betting on its future. Third, keep reiterating the importance of innovation to the company’s very existence.
How competitive is the landscape?
Interestingly, Smith does not regard another technology-wielding market leader in logistics, Amazon, as a peer competitor. Amazon’s primary business is retailing, he insists, and it does not have the global network of freight facilities that makes FedEx such a formidable force in the delivery business. The retailer has deep pockets and could invest in such a network, but Smith thinks this is highly unlikely.
Replicating FedEx’s 150-billion-dollar investment in its freight network would be a “fool’s errand” he says. The fact that another would-be competitor, DHL, failed to replicate FedEx’s footprint in the US market supports this view (I made a similar argument in 2019 in this post).
In a broader sense, FedEx’s sprawling freight infrastructure represents a competitive “moat” that shields the company from attacks by potential rivals, says Smith.
Does the company have a second, technological moat? Its technical prowess has played a key role in enabling FedEx to attain and retain a dominant position in parcel delivery. In a short time, FedEx is likely to pass UPS as the biggest company in the business.
Other companies appear to use their developed technology and existing user base as their own moat. These include “digital natives” or “tech companies” such as Amazon, Google, Microsoft, and Facebook.
A recent article by James Besson, Executive Director of the Technology and Policy Research Initiative at Boston University, argues that technology is actually making it less likely that start-ups will displace dominant industry players. According to Besson, the probability that a top-four firm by sales will lose its position is only half what it was 20 years ago. And the gap could be widening. Firms in the US alone are investing some quarter of a trillion dollars in software annually, he estimates.
“A prominent reason that small productive firms are not growing as quickly is that they lack access to the same technology used by dominant firms.”
The recent push by Congress and the Biden administration as well as the European Union to take the tech giants to task and even break them up is indicative of their market influence.
In that sense, having UPS and USPS as competitors may protect FedEx from such regulatory attacks. Also, unlike the tech giants, FedEx and its rivals in the logistics space have to continue to push the tech envelope while operating and growing their physical networks. Moreover, they do not engage in the unfair practices that have got the tech giants in hot water.
However, the success of these incumbents raises the question of whether another FedEx will emerge and where it might come from. Will technology level the competitive playing field, or make it more uneven by creating barriers to future disruptors?
One can imagine a small firm making inexpensive 3D printers that eliminate most of the parcels moving around the world in favor of digital blueprints and local printing. But the fact that such a development is far-fetched underlines the scale of the task facing enterprises capable of dislodging the likes of FedEx or UPS.