Organizational Change in Late 2003, FedEx Announced Case Study

Organizational Change

In late 2003, FedEx announced the acquisition of Kinko's, the chain of office stores, for $2.4 billion. In part, the deal was a response to the purchase of Mailboxes, Etc. By UPS two years previous. The Kinko's deal with clearly a response to that move, but there were also some perceived synergies for FedEx. The customers of Kinko's tended to be small businesses, many of which overlapped with FedEx's own customer base. As such, the idea that traffic could be driven from Kinko's to FedEx, and vice versa, was one of the key strategic considerations behind the acquisition (Flanigan, 2003). At the time of the acquisition, Kinko's had sales of $2 billion and 22,000 employees. FedEx immediately began installing counters in the Kinko's stores and making the transition to a culture and organizational structure more like that of FedEx. Five years later, the Kinko's name was eliminated, FedEx took a huge charge on that transaction, and the deal was officially labeled a bust. Among the many operating problems was that margins fell, revenue flatlined and turnover increased dramatically (Deutsch, 2007),

Kinko's

Kinko's was started in California by Paul Orfalea, who lent his nickname to the company. Kinko's initially set up its stores in areas in college areas, but its growth came in the mid-1980s with small business customers. Personal computers played a critical role in this growth, as entrepreneurs were able to perform more tasks on their own. In 1996, Orfalea sold 80% of the company to a private equity firm, signaling the first shift in the corporate culture. Under Orfalea, Kinko's had been a company characterized by a casual atmosphere, creative people and employment flexibility. While there was turnover, this was mainly because the people working at Kinko's were younger, and left for better opportunities. Customers appreciated the casual atmosphere, as it helped put them at ease, knowing that the employees were there to help them meet their own business objectives. The company's culture began to shift under the private equity ownership, and Orfalea even expressed gratitude when FedEx bought the firm, noting that FedEx was still under the management of its own entrepreneur, Fred Smith.

FedEx

Coming from a much different background, the well-connected and well-financed Smith started FedEx in the early 1970s, offering a unique service to the nation's businesses. FedEx grew quickly, expanding to having an international network of stations serving as much of the world as possible. The corporate culture at FedEx was built around the culture in the Marines, with whom Smith served in Vietnam. The company's leadership training program is based on principles borrowed from the Marines (Smith, 2008).

Both companies put people at the forefront of their HRM strategy, but there were significant differences between the approaches that the two companies took. The approach at Kinko's reflected the Californian origins of the company, and the personality of Orfalea. The company recognized that its employees were not usually going to see their jobs as a career, but as a means to make money. Thus, employees were given significant leeway in terms of their appearance and mannerisms, specifically because it was felt that this would not only attract from a broader pool of employees, but would allow the company to retain employees much longer. The small businesses and students that made up the Kinko's customer base were fully accepting of the practice and many preferred Kinko's to competitors specifically because of the laid-back and friendly nature of the workforce. By contrast, FedEx employees are brought into FedEx culture, which is more conservative and discipline-oriented. Employees wear uniforms and are expected to conform to standards of appearance. Employees must also be punctual, and are expected to perform to a high level at all times.

The nature of the work at the two companies explains the different approaches to achieving high levels employee performance. At Kinko's the tasks are routine but the nature of the workflow is sporadic. Demand ebbs and flows throughout the day, and there is little predictability in terms of when each task will need to be performed. This work therefore calls for a staff that is highly flexible and adaptable, and is able to cope with short periods of intense stress. Being able to maintain a casual approach is one mechanism by which employees were able to deal with the unpredictability of their days. At FedEx, the work is far more regimented. The same people perform the same tasks at the same times -- and in many cases for the same customers. While there needs to be some flexibility, the degree of flexibility required is nothing in comparison to what is required at Kinko's. FedEx therefore benefits from a more regimented, militaristic corporate culture. This helps it meet its performance standards, which involve guarantees on deliveries. Such perfection can only be delivered if employees are exacting and have highly regimented days.

Post-Acquisition Kinko's

When Orfalea sold Kinko's to the private equity firm, that firm began the process of making Kinko's stores more uniformly run, and FedEx accelerated that practice (Goldgeier, 2007). FedEx sought to professionalize the staff, including appearance, and instituted a more FedEx-like approach to hiring. Yet, these employees were never truly integrated into FedEx, but instead were viewed by the rest of the organization as something of an inferior adjunct. Staff numbers were reduced, and this affected the service levels. Palmeri (2008) notes that customers used to see something known as a "Kinko's moment," which was an exceptionally positive experience related to Kinko's having the staff available to help customers with their big projects. Such moments have become fewer and farther between. The focus of Kinko's moved from being a copy center to a more cluttered multi-purpose store with no sense of focus, something that also derived from employees who had difficulty figuring out whether they worked for Kinko's or for FedEx. Eventually, FedEx eliminated the Kinko's brand in an attempt to foster a greater sense of belonging for employees of the new FedEx Office, and a clearer sense of the expected culture. However, the unit continued to struggle both in terms of financial outcomes and in terms of human resources outcomes. The culture of the two organizations clashed badly, and FedEx continues to struggle in reconciling this.

Management Structure

Prior to the acquisition, Kinko's had a highly decentralized organization structure, where store owners and managers would run the stores according to their own designs, fitting the stores in with the local area. The private equity firm then brought in a retail professional to run the company. In order to attract more corporate business, the service offering and culture became more standardized, a move that involved clawing back some of the power from management. This bred considerable mistrust at the store level of the corporate ownership. This trust was violated again when headquarters was moved from California to Dallas. Most head office employees were not given the option to relocated, but few chose to anyway. The result was a dramatic shift in the corporate culture at the leadership level.

When FedEx arrived, it brought with it its own highly-centralized organizational structure. All of the major decisions for the company are made at the Memphis headquarters and disseminated to the different stations from there. This included decisions that affected stations at the operating level, like the timing of flights and the capacity of aircraft used to serve a city. FedEx head office implemented controls that governed employee behaviors, and implemented its own hiring system to change the type of employee that was hired. Kinko's had lost the decentralized structure that made it special, and this has been cited for both morale problems and for the financial problems that the unit has faced (Deutsch, 2007).

Motivation and Performance

The reason why these changes are often cited for the problems post-acquisition is that the motivation was completely different for Kinko's (especially under Orfalea) compared with the post-acquisition Kinko's. Under Orfalea, the decentralized structure at Kinko's gave the local managers and employees a sense of power in terms of being in control of the decisions that affected them the most. This in turn created a culture where the people working there were accountable primarily to one another. There was also a high level of intrinsic motivation built into that system, because the employees felt better about their menial jobs with this higher level of control.

Under both private equity and FedEx, the degree of intrinsic motivation decreased dramatically. Workers no longer felt that they were contributing to something important, but rather the culture developed that the workers were merely working to support their corporate overlords. Managers, stripped of most of their responsibility, undoubtedly felt disaffected, no longer able to commit energy to their jobs, since their jobs had become much less important. That FedEx never really integrated the Kinko's workers into their workforce was another contributing factor. The FedEx culture is strong, such that most of its workers feel as though they are contributing to something worthwhile. By not engaging the Kinko's…