Leader of the pack: for revolutionizing how business absolutely, positively gets done, Fred Smith of FedEx is the 2004 CEO of the year.

Fred Smith likes to quote Pogo the Possum, who once said in a cartoon strip, "If you want to be a great leader, find a big parade and run in front of it."

There's no question that Smith, chairman, president and chief executive officer of FedEx, is running in front of a huge parade. FedEx, the company that Smith founded as a start-up in 1971, is now a $25 billion giant, soon to become even bigger because of its acquisition of Kinko's. FedEx is at the heart of how the American manufacturing base is globalizing, allowing all manner of parts and products to arrive from mostly Asian destinations in a just-in-time way. "In the high-tech and high-value-added sectors in particular, but also in the lower-value-added sectors, the location of production is almost irrelevant," Smith says. "It's simply a cost/time trade-off. That's all."

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Not coincidentally, FedEx is at the bleeding edge of how companies are targeting supply chains and logistics as the key to competitiveness. Companies don't want to carry one more penny's worth of inventory than they have to. They don't want to have to deal with multiple suppliers to ship documents, parcels and larger loads. They want all that to be integrated, and they want to be able to find out, at any time, where things are. FedEx literally invented that capability.

And imagine what Internet-based commerce would be like if there weren't a reliable, speedy way for customers to get books and CDs from Amazon.com or laptops and PCs from Dell. The whole phenomenon might never have happened. But as etailing continues to grow, the demand for more shipping is certain to expand as well. "We're running in front of these enormous forces," Smith says.

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Of course, he isn't just running in front of the parade. His company has been a leading organizer of this transformation of the economy--a grand marshal, in fact.

In recognition of what Smith, his top management team and 240,000 employees and contractors have accomplished, Chief Executive's panel of CEO judges has chosen Smith as the 2004 CEO of the Year. "Fred Smith is an outstanding executive and entrepreneur," says AIG's Hank Greenberg, 2003 CEO of the Year and chairman of the selection panel. "He took FedEx from being just an idea to being a great company."

The fact that Smith created something from scratch is what impressed so many judges. "The great issue for him is the longstanding, continuous performance he's had in developing an entire industry and altering the business model," says Kevin Rollins, the new CEO of Dell and also a judge. (For other judges, see page 10.)

Smith, who turns 60 this year and has undergone heart bypass surgery, doesn't show any signs of wanting to slow the parade down so that he can relax with his 10 children and assorted grandchildren. "I like what I'm doing at FedEx for a very fundamental reason," he says in his office on South Shady Grove Street in Memphis. "It is an important industry that sits right at the middle of almost everything else that's going on. It is vitally important to the commerce of the country and the world."

And now that he has assembled a Strategy Management Committee consisting of the heads of FedEx's operating companies and top staff functions, Smith can concentrate on what he likes doing--thinking big thoughts. "FedEx Corporation today is a lot more fun for me" than it used to be, he says. "I can spend a lot more time on strategy. Management functions are largely delegated to a very capable group of executives."

Managing this new FedEx is a great deal more complex than it was just a few years ago. (See sidebar, page 34.) There are now four major operating companies, or "op co's" in FedEx speak. FedEx Express is the traditional heart of the company, but acquisitions have been key in creating FedEx Ground, FedEx Freight and now FedEx Kinko's. Integrating the people, processes and technologies of these players in just the right way is the No. 1 challenge facing FedEx.

On one hand, Smith wants each of these units to operate independently so they can best serve their market segments. "If you blended it all together, you'd get an average service that doesn't service anyone well," says Doug Duncan, CEO of FedEx Freight.

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Yet Smith also wants the company's various arms to cross-sell each others' services. That way, corporate customers can get precisely what they want and not have to contend with the traditional silos that have fragmented the transportation industry. And retail customers, whether sitting at home or at a FedEx Kinko's, can ship documents and parcels through the same company.

FedEx also wants its operating companies to appear seamlessly integrated to the world. Whether it's a document, parcel or larger so-called "less than truckload" shipment, customers can track the item on www.fedex.com. A centralized central sales force of 3,000 manages relations with corporate customers, so that the operating arms don't trip over each other.

Getting this balancing act right is tricky. FedEx has even come up with different color codes for different operating companies to help everyone understand the differences and similarities. The corporate motto used to be just: "Operate Independently. Compete Collectively." But now a third phrase has been added: "Manage Collaboratively." Translation: Each operating unit does the best it can in its segment, but all are presented as a single entity externally. And to manage all this, we have to get along with each other.

One other surprising break from the past, and an additional element of complexity, is that the company's No. 1 customer is the U.S. Postal Service, which used to be the enemy. But FedEx now handles $1 billion worth of Postal Service shipments a year because the USPS doesn't have its own fleet of jets. The deal allows FedEx to "double up" the use of its infrastructure, because the Post Office sort happens at mid-day rather than in the middle of the night when the rest of the company's sorting occurs. An additional plus: FedEx gets to put drop boxes in 8,000 post offices.

Smith, an avid reader, turns to history to explain why the market is better served by a more complex FedEx. "It's really embedded in Alfred Sloan's doctrine produced during the 1920s that allowed General Motors to become the biggest industrial corporation in the world," says Smith. "He recognized that there were different segments in the market. But he used common technologies and materials. He married you in a Chevrolet and buried you in a Cadillac and had something for you every step in between."

Never a Doubt

Smith doesn't like to talk about the past very much because he worries that it will perpetuate confusion about what FedEx is today. But the tale is one of the most remarkable entrepreneurial stories of the 20th and now the 21st century, and bears retelling in brief.

Smith graduated from Yale University in 1966 and thought about going to business or law school. But he'd been in the Marine Corps officer program and decided to join the Marines instead. He was sent to Vietnam, where he served as a platoon leader and then became a pilot. He returned home in 1971, profoundly changed by his experience there.

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He says his vision for creating a company was the result of studying a mathematical discipline called topology in college. He was fascinated by the idea that if you connected all the points on a network through a central hub, much as a bank clearinghouse does, the resulting efficiencies could be huge.

Smith never doubted that the network concept would work with packages and letters. "I was always convinced that the market demand for what we were trying to do was just so profound," he recalls. "So it was just a matter of time and money."

He first located the company in Little Rock, Ark., in 1971. Smith used his own money and some from his family to get started. Investors put up $80 million. Smith faced a classic dilemma: He had to first spend the money to build an infrastructure before he could deliver the service and make money. But he did enough research to feel confident he'd be able to deliver a return. "I had it documented three different ways by three separate, independent consulting studies," he says. "We had an awful lot of quantitative data showing that the demand for the service was very significant."

The company, which was relocated to Memphis and bolstered by another $52 million in funding, "went live" in 1973 with 389 employees and 14 Dassault Falcon jets delivering a mere 186 packages overnight to 25 cities. Thus, Federal Express was born and, with it, the hub-and-spoke system that major airlines would soon adopt.

At each stage of expansion, Smith found new ways to apply technology to the mundane task of sorting and transporting documents and packages. Coping with the sheer volume of transactions was one immediate challenge. "We reached a point fairly early on where it was obvious to me that if we didn't have a way to discreetly measure and control each of those transactions, we were going to hit a fundamental sound barrier, a wall," he says. "That's when it really hit me that we had to embrace this IT revolution to a much greater extent than I perhaps realized initially. We decided we had to invent a whole new way to keep up with things."

Over time, FedEx greatly expanded the use of laser bar code and scanners and wireless hand-held computers, which are about the size of a candy bar today. It also built the largest radio system outside the U.S. military to communicate with its fleet of trucks. All were path-breaking innovations, and with their help, FedEx actually knew where things were.

"The second big conceptual leap was when it occurred to us that this information was so valuable to us that it might be equally valuable to the customers," Smith explains. That was in the 1978 to 1979 time frame. "Then the issue became, how do we migrate that information into the customer's shipping locations," he says. "We developed a proprietary network and supplied people with PCs." That Power-Ship system was fully established by 1987. Customers could monitor shipments all over the world, but only through the FedEx network.

As history shows, proprietary networks are of limited value. "When the Internet came along, you had the capability to make the information available not just to your biggest customers, who you could afford to supply with a PC, but to anyone who had access to the Internet," says Smith.

At the same time that the company was making big bets on technology, it was laying down a global infrastructure, long before doing that became fashionable. Smith's decision in 1989 to purchase Flying Tigers, an Asian air-freight powerhouse, was controversial at the time because many analysts didn't see how it could pay off. But FedEx's corporate customers were beginning to shift their manufacturing strategies to take advantage of China's emergence, in particular, and wanted the same kind of shipment predictability they had in the U.S. "The multinationals wanted the same things over there that they had here," recalls Dave Bronczek, president and CEO of FedEx Express and the senior executive with the most international operating experience.

Today, in order to accommodate the explosion of commerce across the Pacific, FedEx conducts sorts in Subic Bay in the Philippines; Tokyo and Osaka, Japan; and Anchorage, Alaska. Each of those sorts is an exercise in precision. In the middle of the night, dozens of jets land at a hub. Pilots, drivers, maintenance crews, offload crews, dispatchers and workers are all choreographed in advance. An absolute avalanche of documents and parcels hits the conveyor belts for sorting. In Memphis, for example, there are 300 miles of conveyor belts that read the laser bar codes on each item. Everything is measured: FedEx knows that a Boeing 729 burns 69 gallons of fuel a minute so that if it can more smoothly coordinate the departure of jets, the savings can be huge. Error rates are microscopic.

As a result of this vast infrastructure, it's no surprise that the company's international business is booming. Its business in China is growing at 50 percent annually, albeit from a smaller base than in more established markets, says Bronczek. The company is operating in 215 countries, including Afghanistan and Iraq.

Most of what Smith has built is invisible to the customer. But there's little question that FedEx works. Perhaps the ultimate proof of the company's impact on American life is that the term "FedEx it" has entered the language, just as Kleenex, Xerox and Google have. And FedEx is one of the world's most trusted brand names.

Driving the Culture

One of the most interesting things about what Smith has accomplished is that he was able to take a company from start-up to global, multidivision business. Part of the explanation, it seems, is cultural. The culture at the top is still very white, male American and slightly militaristic, as it was at the beginning. But the Big Company disease doesn't appear to have taken hold. It is a very driven company that is constantly experimenting and devising new ways to grow. "The notion of constant improvement and consistency in performance is an area in which Fred Smith is very driven," says Dell's Rollins.

FedEx is still pushing hard on technology, for example. It is among the first companies to agree to purchase the new Airbus 380s, which will be able to fly from Singapore to New York. The huge new planes could change the economics of long-distance shipping. The company is also at the center of the debate about radio frequency identification. And it constantly pushes the edge of the envelope by devising its own software. It has developed its own "surface management software" that allows dispatchers to "see" aircraft and vehicles on their computer screens.

But the Internet remains the big opportunity. "We are not anywhere near the end of the revolution," says Rob Carter, the chief information officer. One new service, called Insight, allows customers to anticipate how many parcels they will receive the following day. One example of a customer keen for this capability, says Carter, is a bone-marrow testing service. Bone-marrow samples are painful to extract from patients and must be evaluated within 24 hours. The testing service would like to be able to anticipate how many samples it will receive the next day so that it can be ready. Insight collects that information and makes it available.

Smith maintains a sense of urgency in how he manages the Strategy Management Committee. Sitting around the room each Friday morning are men who have been CEOs of other companies, including FedEx Freight's Duncan and Dan Sullivan of FedEx Ground. Smith encourages these players and key staff functions to hash out any conflicts between them and rarely intervenes. Says Duncan: "If a decision has to be made, he can step in and do it, but he's not inclined in that direction."

Smith has created a style that participants describe as "straight shooting" with "no second-guessing." Through the aggressive use of emailing, he has tried to prevent the development of closed-loop communications in vertical silos. "That's what kills most big organizations," says Smith. "We have a team approach to management that cuts across the traditional bureaucratic boundaries."

Smith says his team is successfully integrating the pieces of FedEx, with their disparate databases and systems. "I would never say that we have gotten to the end of the journey, but we certainly are on the downhill segment of it," he says. "The technology integration has come an enormous way. The sales and marketing and customer experience issues are quantumly better than they were a couple of years ago. I don't know that there's ever an end point to that."

That seems to reflect Smith's conviction that change is permanent. The joke inside FedEx is that things will never settle down, because something could change at any moment. "The company can continue to grow for a long time," says the founder. "It can be a lot bigger than it is today." That may explain why Smith doesn't like to dwell on the past--he's so darned focused on the future.

FedEx's Market Cap Has Increased

In $ Billions

2000     $10.36
2001     $11.55
2002     $16.08
2003     $19.10
Current  $22.30

Note: Table made from bar graph.

RELATED ARTICLE: FEDEX CORP.

The company originally called Federal Express assumed the name FedEx in 2000. It consists of these major operating units, with combined revenues of $22.5 billion in 2003. Internal growth and the acquisition of Kinko's have pushed sales above $25 billion.

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FedEx Express -- The traditional heart of the company, with revenues of $16.3 billion. Has the broadest international presence of all FedEx units.

FedEx Ground -- Formed by the acquisitions of RPS in 1985 and Caliber Systems in 1998. Competes most directly against UPS in parcel delivery. Revenues of $3.4 billion.

FedEx Freight -- Shaped by FedEx's purchase of Viking Freight in the western U.S. in 1998 and American Freight-ways in the East in 2001. Both are less-than-truckload carriers. Revenues of $2.1 billion.

FedEx Kinko's -- FedEx bought the document services company and its 1,100 stores early this year. Expected to generate $2 billion in revenues in 2004.