Q = P: A New Management Paradigm *

Frederick W Smith

On both the national and global levels, and within each organization of modern society, improved productivity is nothing less than the key to our collective
security and prosperity. For this reason, the simultaneous pursuit of greater efficiency and enhanced quality for our customers-commercial productivity - is
paramount within Federal Express. Our management and our employee group as a whole are committed to improved productivity in the years ahead.

THE FEDERAL EXPRESS PRODUCTIVITY STRATEGY

In discussing any subject as broad as "productivity," I think it important to first establish a definition. We believe that improved productivity means the
enhanced wealth or well-being of a particular constituency. Within the business world, better productivity implies 'one or more of the following:

1. greater remuneration and job security for employees

2. better quality and/or lower-cost goods and services for customers
3. an adequate surplus to ensure future operations for the corporation
4. improved earnings to shareholders

On the national plane, we must also include activities and investments made by government and the not-for-profit sectors that improve our well-being in other
ways, such as better airports, greater security, 'or more parks.

The reason I think it important to embrace this relatively larger definition of productivity than is generally the case is to differentiate the subject at hand from
the single-minded pursuit of reducing labor content in goods or services. It is unfortunate, but true, that the word "productivity" has become in many circles
almost a pejorative - a synonym with work speedup or wage rollbacks. This is certainly not true within Federal Express, and I think that we must embrace this
larger concept nationally as well if we are to make real progress in improving U.S. prosperity in an increasingly competitive world. On a global scale, improved
productivity is essential to eliminating hunger, disease, and poverty.

Having established what "productivity" means, it is appropriate to list those subcomponents that determine relative increases in wealth or well-being. There
are, in my opinion, four such major categories: (1) new technologies and methodologies, (2) energy utilization, (3) investment, and -last but the most important
- (4) attitudes.

QUALITY =PRODUCTlVITY
To improve productivity in business, the four variables just listed must be intensively managed. In commercial endeavors, increased profitability is determined
only by constant efforts in these areas, and certainly improving the return to shareholders is wealth creation. Likewise, better wages and job security also
enhance well-being for the employees directly and in their role as consumers, creating employment for others. This underscores our broader definition of
productivity. In short, in our more sophisticated and accountable business environment today, top management must recognize that returns from improved
productivity should benefit severalconstituencies, particularly employees and customers, as well as owners.

It seems to me that one of the most important shortcomings of American management in the last couple of decades has been its forgetfulness about the
number one managerial task: providing enhanced well-being for its several stakeholders. This has had serious consequences, as the U.S. share of global
economic activity and relative income growth have both declined since 1970.

If you believe that the primary reason management exists is to improve productivity, the proclivity not to achieve such results is nothing short of management
failure.

This tendency became obvious to me as Federal Express began to emerge as a very large company. There had never been any doubt in my mind that the
people in our management ranks implicitly understood this key duty. But as competition heated up and the demand for resources began to exceed their
availability - as happens in any large, growing organization - the legions of first-line managers now required to run the business began to exhibit an important
misunderstanding of their role. I was constantly asked by these individuals, "What do you really want, Mr. Smith: improved service or lower costs?" Now it was
obvious that this same simplistic, bipolar choice was not available to me or the other officers of the company. I did not think our Board of Directors would
appreciate my informing them that either our service had improved substantially at the price of insolvency or alternatively, that we lost all of our customers
because of unacceptable service even though we had achieved a fantastic short-term profit.

Because of this very obvious misunderstanding, we searched for new methods to inculcate each manager with the understanding that the pursuit of
productivity was really what management was all about. Moreover, we believe that improving the qualityof our services is also the best route to lowering costs
and, therefore, prices to our customers. This is accomplished by eliminating the expenses and substantial efforts required errors.

As a consequence, we adopted a slogan to clarify our management philosophy. We call this "Q = P" - Quality equals Productivity. In fact, is not just a
philosophy, it is an entirely new paradigm for management, as it rejects the notion that productivity, or efficiency, and quality are antithetical pursuits. We then
formalized this approach further by adopting a new definition of the manager's job at Federal Express that emphasized improved productivity as a vital
management task. We amplified this theme in a new manager's guide that stressed the methods to used to become more efficient. This was all tied back to
our people-service-profit corporate philosophy by committing to share the results of productivity improvements through various employee and management
incentives.

We also established a management school - our Leadership Institute - reflecting our heavy reliance on our employees to provide the level of service
demanded by our customers. Finally, we established a standard that was unambiguous and clear by simply stating that objective was to achieve a 100
percent satisfied customer with every transaction.

Federal Express's service policy is to create a satisfied customer at the end of each transaction. We will achieve 100 percent customer satisfaction by
performing 100 percent to our standards, as perceived by the customer. To realize this goal, we will strive relentlessly to enhance quality in order to improve
productivity.

This proclamation is signified by a symbol used to represent our commitment to achieve 100 percent customer satisfaction and 100 percent levels, while
remaining dedicated to the principles of our People-Service-Profit philosophy.

The very essence of the manager's job is the resolution of apparently conflicting requirements: for instance, the simultaneous requirement for better service
and lower costs. The harmonious achievement of such seemingly dichotomous mandates is the primary reason management exists at all. In the case of
Federal Express, a manager is expected to achieve faultless service with the most efficient use of resources possible. Moreover, as our growth affords
increasing opportunities for economies of scale, the ratio of resources to output should improve.

Progressive businesses around the world have proven that "performance-to-standards" (quality) and elimination of waste are one and the same pursuit. This
is nothing short of a revolution in thinking - an entirely different way of looking at things - wholly new system or "paradigm." The record is clear: where quality
is relentlessly pursued, costs decrease and customer acceptance increases. The old view of 95 percent being an acceptable standard of performance and the
most cost-effective level of production has been proven erroneous. To capture the spirit of this new management paradigm, the Federal Express manager's
creed is succinctly stated:
 QUALITY= PRODUCTIVITYQ=P

It must be stressed: Quality is defined as performance to the standards of the customer. A quality delivery service is one that completes its deliveries within its
commitments, 100 percent of the time.

"Productivity" is not just the measurement of hourly workers' unit production as has been the case in the past. Productive work is the aggregate, efficient use
of all resources, including the knowledge and creativity of management and professional personnel. The result of the work must be services or goods of
sufficient quality and at acceptable prices to induce customers to buy. A surplus or profit must be produced to sustain future operations of the enterprise.

The distinguishing attribute of every major business success in history is the belief that quality can be constantly improved toward 100 percent of the standard
required by the customer, while simultaneously lowering costs. The relentless pursuit of excellence is not only demanded b y our customers; it is the best method to
improve costs as well.

The skills necessary to achieve Q = P performance are the focus of Federal Express management training. Organizational and statistical capabilities, an
understanding of industrial engineering principles, problem-solving techniques, leadership and human relations - all are important management skills needed
to achieve this duality of purpose. The relentless application of these skills will be the decisive element in our achieving both service and cost advantages over
our competition as the future unfolds.

"Quality equals productivity" must be understood and practiced at every level in the organization. People who actually do the work must be continuously asked
how they can do their jobs more effectively. They must be constantly encouraged to look for ways to work smarter with a corresponding reduction in stress
and improved levels of customer and client satisfaction. In short, Federal Express management's primary task is to improve service and lower costs within the
overall framework of the P-S-P philosophy and our Q = P paradigm.

The four key elements of technology, energy, investment, and attitude must be managed successfully to achieve our on-going goal of constant and continuing
improvement in quality and productivity.

TECHNOLOGY

Many people forget that the development of new concepts and inventions is the basis of all improvement in human well-being over these past four millennia.
In this regard, one of the most profound books I have ever read is a small volume by Professor Gerhard Mensch of the International Institute of Management
in Berlin entitled Stalemate in Tech
n o lo g yMensch
. conclusively details the relationship of new invention to economic activity and wealth creation. I think this work
also explains what many economists call the "wave theory." Simply put: New inventions or methods struggle to attract capital and eventually develop new
customers and jobs until competition reduces continued investment to marginal rates of return. This cycle is repeated endlessly, causing, historically, booms
and busts.

While Mensch was describing the macroeconomic effects of new inventions and technologies, I think the same is true on the micro economic level as well.
Moreover, an "invention" may be an improved method as well as a new scientific discovery. A conversation sticks in my mind as an example. I asked the great
soldier and archaeologist, Yagael Yadin, the discoverer of Masada and author of the definitive history of Biblical warfare, what he thought had been the single
most important development in the history of war. He unequivocally answered, "The stirrup." In the space of a few minutes he then described why this very
simple "invention" and new method of riding had changed the face of combat (and the world) forever due to the improved mobility and firing power of the
mounted soldier. Similarly, I know within our company many of the most important improvements in productivity have resulted from relatively minor but
important conceptual changes - new thoughts on old subjects. Whether talking about the major technological discoveries in the larger sense, as Mensch did,
or the myriad minor improvements in methods or designs effected daily, it is important to remember that the first step in improving productivity is to develop
new ideas and new processes. Any chief executive or senior officer of an organization who does not relentlessly sponsor perpetual efforts to do things in a
new and better way is missing the first key ingredient in achieving Q = P results. Wealth creation for all stakeholders is impossible to achieve without such
improvements.

ENERGY
The second major element required to enhance productivity is improved energy utilization. No subject has received more emphasis than the fuel situation.
Beginning with the first and second oil crises of 1973 and 1979, and again in 1990, we have focused enormous attention on reducing the use of various types
of energy in our economic lives. Oil and gas, of course, have received by far the most emphasis or, perhaps better put, notoriety. The important point,
however, is that as efforts continued to reduce energy consumption, the costs of energy were reduced as a result.

Fuel issues became such a cause célèbrebecause the application of technology and energy is, in the main, what separates modern industrial life from the ages
before the Industrial Revolution. This inescapable, overwhelming fact means that managers, whether political or corporate, interested in the improved wealth
and well-being of their constituencies must focus on the use of energy constantly. Although I have used the drama of the gyrations in oil prices to underscore
this fact, I mean to include in this definition of "energy" all sources of power, whether from the earth, from the sun, the seas, from animals or people, and most
importantly, from the human mind.

You often hear people talk about "working smarter rather than harder" or, as the military is wont to say, use the KISS principle - "Keep it simple, stupid." But
by whatever name, whether using the arcane language of the geologist or the vernacular of the drill sergeant, we are talking about the same invaluable
ingredient - energy. It is important to structure all forms of human endeavor along a line of decreasing energy requirements. A small organization can rely on
its personnel working at higher sustained energy levels than a large one. Because of its very size and scope, and its assemblage of individuals of various
motivations, a large organization cannot depend on performance levels beyond a norm except for short, exceptional periods of time. Similarly, processes that
require maximum levels of electricity or other sources of energy, or even intellectual effort, are vulnerable to an "embargo" of one type or another.

The constant effort of management to reduce the required energy inputs of any production process is a key element in lowering their costs, and this is true of
every type of power.

The best example of this conservation of energy at work is the now famous methodology of Dr. W Edwards Deming. The statisticians Dr. Walter A. Shewhart
and Dr. Deming were the architects of modern statistical process control systems. These quality systems have had enormous Impact on the world primarily in
the form of the renaissance of Japanese industry since World War II. Speaking of Dr. Deming's original lectures to the Union of Japanese Scientists and
Engineers in 1950, Koji Kobayashi, the long-term chief executive of the fabulously successful Nippon Electric Company, noted simply in his book, "The impact
of these lectures on the Japanese industrial world was immeasurable." Deming's fourteen-point philosophy and, most importantly, his adaptation of
mathematics and statistics to industrial production are prime examples of energy minimization. The prioritization of work and the elimination of obstacles to
improved quality and lower costs were key elements in the Japanese miracle. In equal measure, the adaptation of such methods by American management
groups is essential to improving productivity.

INVESTMENT

The third element needed to increase wealth is investment. This fact seems to be strangely misunderstood or disregarded in many governmental circles. The
fact of the matter is, however, that investment in new technologies and energy-reducing or labor-saving equipment is what has produced our enormous level
of prosperity over these past two centuries. As documented by the President's Commission on Industrial Competitiveness, chaired by John Young, Hewlett-
Packard's able chief executive officer, our tax and fiscal policies have had the effect of making capital in the United States considerably more expensive than
elsewhere in the industrial world. So long as this continues, we will not achieve the economic growth or improvements in standards of living expected by an
expanding population and demanded by them of our elected officials.
The tax reductions in 1981 and 1983 were probably too liberal in their treatment of investments in real property, but to state that the investment tax credit and
accelerated depreciation schedules permitted by those laws did not stimulate investment in machinery and equipment is to defy logic. Certainly at Federal
Express, taxes that increase the cost of new investments 'have the effect of decreasing our levels of investment, employment growth, and the achievement of
production efficiencies.

Part of the problem stems from the lack of differentiation in our tax code of various types of investments. A major source of the continued misunderstanding of
the importance of investment comes from our bilateral definitions of "manufacturing" and "service" industries. In the real world, of course, industrial distinctions
are not nearly so dear. In fact, most manufacturing organizations exist solely to provide equipment for certain segments of the so-called "service" economy,
such as locomotive or airliner manufacturers.

Scientific Americandevoted a full issue to the subject of "mechanization" - virtually a synonym for most productivity-enhancing investments. This prestigious
journal stated simply, "Such services as finance, transport, distribution and communications are being mechanized even more than the production of goods. In
the process they call for workers who have higher levels of education." Those enterprises which use technology and stimulate its development, and invest not
only for their own operations but engender investment by suppliers and would-be suppliers, are the real engines of our economy. This was recognized in the
original successful introduction of the investment tax credit in the early 1960s. I suspect that the changes made in the 1981 Tax Act designed to stimulate
investment have had consequences far more beneficial than some of the simplistic econometric models now in fashion acknowledged. Any excesses or
problems resulting from these changes in the tax code have resulted from continued high interest rates and too liberal treatment of real estate investment. In
considering tax changes, Congress should not enact changes that will reduce economic activity in one of the four major areas required for improved
productivity. High levels of investment go hand in hand with our Q = =P management philosophy.

Referencing again the quote from Scientific American, the mechanization of commerce requires ever higher levels of employees in order to have the desired
economic effect. This provides the perfect lead into the last and most important element in improving productivity, and that is the attitudes of managers and
employees.

ATTITUDE

Today's industries need sophisticated and knowledgeable personnel if they are to produce the type of high-value-added goods and services required to match
the income aspirations of the average American. To these ends, the first job in assuring appropriate attitudes is to match the value systems of employees with
the available jobs. Much sociological research has been conducted in the last few years that proves that there are different stratifications of lifestyles within our
economy. To improve productivity, we as managers must make sure that people and jobs match. Equally important, once having done so, we can invest in an
appropriate level of training and communications so that these very worldly employees have the skills and understanding necessary to achieve the objectives
of the enterprise and their own personal goals as well.

We at Federal Express spend enormous resources in these related pursuits of training and communications - far beyond what most commercial enterprises
deem necessary. We believe that our willingness to do so has been a key ingredient in our productivity improvements.

Equally important is that the organization and its employees achieve what we refer to as goal congruence. It has always been interesting to me to ride on a
commercial airliner and note that the flight attendants and the airlines have an extreme mismatch of objectives. When the airplane is full, this seems to be a
bad state of affairs for the flight attendant since he or she has to work considerably harder with no appreciable direct award. On the other hand, lower load
factors usually result in a more relaxed and less harried existence. My conclusion, based on the attitudes of most flight attendants with any evidence of long
service, is that they make either conscious or subconscious efforts to have fewer passengers. The point of this not too farfetched example is, of course, that
somehow management must recognize that the goals of the employees and the goals of the company must be well matched. Most often this is done through
incentive programs and other conventional compensation devices, but I suspect an equal measure of communications as to why it's good for the employee to
have that full plane might achieve almost equally beneficial results.

And finally, improved productivity means change - pure and simple - and change engenders fear, so employees must have the promise that they will be
treated fairly and have improved job security as a result of investments or new technological adaptations or improved methods if productivity is to be
improved.

OUR CONCLUSIONS

I hope that the Federal Express view of productivity and our definition of Q = P management can be, in some measure, helpful also to others. I am sure that
constant national and corporate efforts to improve productivity by managing the four key elements will increase wealth and well-being. These results are
absolutely essential for our collective prosperity and security in the coming years as our population continues to grow and age. I believe that our experience at
Federal Express may be instructive in one very important respect: If we can focus our efforts on producing better products and services rather than squandering our
national energies on financial acrobatics, I think we can continue the historic productivity improvements that have made this country the beacon of freedom itand
is prospe
today.