FedEx Corporation: Marketing Strategy and Business Segments

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FedEx follows the marketing strategy, which combines “customer intimacy, operational excellence and product leadership customer value proposition”. According to Noreen, Brewer and Garrison (2008), firms who follow customer intimacy strategy as the ones, who draw customers by meeting the customer demands through a better understanding than the other players in the market. Evidence of this strategy of marketing is found in Form 10-K of the company which states “For instance, through our FedEx’s OneCall Program, we assign a single customer service agent to handle virtually all issues of a customer’s account” (p. 4). The evidence for operational excellence of the corporation can be found in 10-K, where the company declares that they are the global leader in rapid delivery of the parcels and in handling fright. They claim that they handle specialized service such as customs-clearance providing a money-back guarantee to the customers (p. 9). The market strategy of product leadership customer value proposition is evidenced by the following statement made by the corporation in the Form 10-K.

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“We believe that seamless information integration is critical to obtain business synergies from multiple operating units. For example, our Website, fedex.com provides a single point of contact for our customers to access FedEx Express, FedEx Ground and FedEx Freight shipment tracking, customer service and invoicing information and FedEx Kinko’s office and print services” (FedEx Form 10-K, p. 4).

Business Segments of FedEx

Four business segments of FedEx are “FedEx Express, FedEx Ground and FedEx Freight and FedEx Kinko’s” (FedEx Form 10-K 2005, p. 3). According to Noreen et al., (2008), a traceable fixed cost relating to a segment exists because of the presence of the specific segment (p. 446). When the segment does not exist, the cost also disappears. A common cost occurs to provide support to the different business segments and such costs are not traceable to a specific business segment. Even when a particular segment does not exist the costs will remain unchanged.

For the FedEx Express segment, one of the traceable fixed costs is the expenses incurred by the corporation to operate its facilities at Memphis International Airport. This cost includes “aircraft maintenance hangers, flight training and fuel facilities, administrative offices and warehouse space” (FedEx Form 10-K, p. 24). Cost of 557 airplanes owned by FedEx is another traceable fixed cost of FedEx Express segment (FedEx Form 10-K, p. 22).

For the FedEx Ground segment, the cost of operating the offices and information data centers attached to the segment and located in Pittsburg and owned by the segment is one of the traceable fixed cost (FedEx Form 10-K, p. 25). The salary of the President and CEO of FedEx Ground is another traceable fixed cost of the segment (FedEx Form 10-K, p. 29).

For the FedEx Freight segment, the traceable fixed cost is the cost of owning 39,500 vehicles and trailers. Another traceable fixed cost of the segment is the cost of operating the “customs-critical headquarters in Green, Ohio” (FedEx Form 10-K, p. 26).

The traceable fixed costs of FedEx Kinko’s include the cost of operating their 1,290 offices and Print Center and the remuneration of the President and Chief Executive Officer of the segment (FedEx Form 10-K, p. 17 & 27).

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One of the common costs not traceable to the four segments of FedEx Corporation relates to anyone of the PGA golf tournaments sponsored by FedEx (FedEx Form 10-K, p. 19). Another example of common costs is the remuneration of the CEO of FedEx (FedEx Form 10-K, p. 26).

Cost Center, Profit Center and Investment Center

One example of cost center of FedEx is the primary sorting center located in Memphis, Tennessee (FedEx Form 10-K, p. 11). Examples of profit centers are FedEx Kinko’s Office and Print Center (FedEx Form 10-K, p. 17). Four business segments indicated above are investment centers.

Fixed Costs that are Common depending on Definition of Business Segments by FedEx

Although the remuneration of the Chief Executive Officer of FedEx Express is traceable to the business segment of FedEx Express, the cost is common to all the “ten sorting and handling facilities” belonging to FedEx Express (FedEx Form 10-K 2005, p. 24 & 26). Similarly, the cost of operating one of the ten facilities is traceable to that particular facility. However, such cost of operating the facility is common to all the trucks picking up and delivering from that facility. While the remuneration of one of the executive vice presidents Mr. Michael Glenn is traceable to the “Market Development and Communications Department” , the cost is common to all the four business segments of FedEx Corporation (FedEx Form 10-K, 2005 p. 27).

Margin, Turnover and Return on Investment (ROI)

The calculation is shown below:

Dollars in Millions

Particulars FedEx Express FedEx Ground FedEx Freight FedEx Kinko’s
Sales 19,485 4,680 3,217 2,066
Operating Income 1,414 604 354 100
Segment Assets (2004) 13,130 2,776 2,047 2,987
Segment Assets (2005) 12,443 2,248 1,924 2,903
Average operating Assets (2004+2005)/2 12.787 2,512 1,986 2,945
Margin (Operating Income/Sales 7.3% 12.9% 11.0% 4.8%
Turnover (Sales/Average Operating Assets 1.52% 1.86 1.62 0.70
ROI (Margin*Turnover) 11.1% 24.0% 17.8% 3.4%
ROI (Net Operating Income/Av. Operating Assets 11.1% 24.0% 17.8% 3.4%

Residual Income Earned in 2005

Residual income “is the net operating income that an investment center earns above the minimum required return on its operating assets” (Noreen et al., (2008, P. 459).

Dollars in Millions

Particulars FedEx Express FedEx Ground FedEx Freight FedEx Kinko’s
Average Operating Assets (a) 12,787 2,512 1,986 2,945
Net Operating Income 1,414 604 354 100
Minimum Return 15%* (a) 1,918 377 298 442
Residual Income (Loss) (504) 227 56 (342)

Residual Income and Investment Opportunity

ROI calculated on the investment of $ 20 million works out to 20% (20,000,000/4,000,000). FedEx Ground has a previously calculated ROI of 24%. Therefore, if managers of FedEx Ground evaluate based on the ROI, the investment option would not be justified, since the ROI on the proposed investment is 4% less than the expected and current ROI. Investment with a ROI of 20% would result in the overall reduction in the ROI. On the other hand, when the managers of FedEx Express would like to evaluate the investment based on ROI, they may decide to pursue this investment opportunity. This is because this investment gives the segment a ROI of 20%, which is much higher than the previously calculated ROI of 11.1%. Investing in this opportunity would result in an increase in the overall ROI of the segment.

When the managers of both these business segments consider using residual income, they should pursue this investment opportunity. The following table shows that pursuing this opportunity would increase the residual income of these segments by $ 1 million.

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Dollars in Millions

Particulars FedEx Express FedEx Ground
Residual Income (Loss) Previously Calculated (504) 227
Additional Operating Income (Investment) 4 4
Required ROI on New 15%* $ 20 Million 3 3
Residual Income (Loss) from Investment 1 1
Residual Income (Loss) after Investment (503) 228

References

Noreen, E. W., Brewer, P. B., Garrison R. H. (2008). Managerial accounting for managers (2nd ed.). New York, NY: McGraw Hill. Web.

FedEx’s Form 10-K. Web.

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