Editor's Note: To celebrate Inc.'s 35th anniversary, Inc.com is showcasing highlights of our coverage of incredible innovators, risk takers, company builders, and thought leaders since 1979. Here, an article from our archives.
Distinguished Vietnam vet. Creator of the multi-billion-dollar overnight delivery industry. Employer of 38,000 who once met a payroll by winning at blackjack.
When it comes to Federal Express Corp.'s Frederick W. Smith, you've probably heard the tales before. The irony is that Smith may be the most private public figure in American business: even the prospect of a Time magazine "Man of the Year" nomination evidently wasn't enough to prod Smith to talk to a reporter. So when the man who convinced a nation that it "absolutely, positively has to be there overnight" agreed to talk with INC., we knew it would be a noteworthy event -- all the more so when the subject is innovation.
Like Peter Drucker (whose ideas about the same subject were featured here last October), Smith views innovation as a discipline that lends itself to study and practice. Unlike Drucker, Smith can talk about the importance of luck and intuition with the particular authority of the practitioner. And as with many successful businesspeople in rapidly changing industries, Smith thinks of innovation not only in terms of opportunity, but increasingly in terms of necessity and survival.
Contributing writer Robert B. Tucker spoke with Smith at a time when he is doing more than just philosophizing about innovation. In fact, this year Federal Express is betting $132 million in operating losses that its new ZapMail service will eventually come to be viewed as yet another in a long line of innovations. Smith is still very much the gambler, but it's not blackjack he's playing any longer.
INC.: There are a number of adjectives that are frequently associated with your name, among them "innovative." What, from your own experiences, are the secrets of innovation?
SMITH: I suppose you could look at innovation from two perspectives: the demand side and the supply side.
Pogo, the cartoon character, pointed out one time that the way to be a great leader is to see a parade and run like hell to get in front of it. And there's a lot of truth to that. I don't know of many innovations where somebody sort of just dreamed up an idea out of the clear blue and went off. I mean, there are usually some fairly discernible trends available for a long time indicating a demand for a product or a service. And the time to act on that -- to get to the front of the parade, if you will -- is when that demand, and the technology needed to meet it, begin to converge.
Take the example of Gannett and USA Today. We've been a national society in America for about 25 years now, largely as a result of television, but it is only recently that you could describe anything like a market for a national newspaper. And that's because there was only recently the technology available to send the copy via satellite to print sites all around the country quickly and inexpensively. So there was the convergence of a societal change or expectation, and a technology that allowed someone to fulfill it. Al Neuharth, Gannett's president, was one of the first to see it.
INC.: It's proven, so far, to be a very expensive innovation for him, however.
SMITH: Oh, I know. He's been sitting there taking it on the chin year after year, with hundreds of millions of dollars' worth of losses. But I think he's going to prevail -- and that gets me to the supply side of the equation.
Remember, Neuharth didn't have to start USA Today to pay the dividends and turn on the lights. But I think he was aware of a threat to his existing business, Gannett's local newspapers. There is, to one degree or another, a death cycle underway with the local papers. The TV gets you the news faster now, and has more or less co-opted the trendy, glitzy part of the news. And for more in-depth discussion of the issues, there are many other vehicles that do it better. So what the local newspaper is left with is the births and deaths and mirriages and the latest stabbings and the stupid machinations of local politicians. And so long term, you've got to say that, other than as a direct-mail advertising medium, the papers have lost much of their rationale.
It's at that point that the innovator says to himself, "Now's the time that I ought to take a risk. I see the threat on the supply side. I see the opportunity on the demand side. And, oh, by the way, I'd like to do something new and useful and important." And when all of that happens, that's when organizations tend to innovate.
INC.: Surely all organizations aren't the same in that respect, though, in the ability to identify threats and opportunities, to take risks.
SMITH: There is no rule about that, certainly. I think it really depends on what the company's culture is at the time, and how great the threat is. Some companies faced with a threat just lie down and die. Others see the threat but can't come up with a good idea.
IBM is a good example. Twenty-five years ago, the Watsons looked at the computer market and at the technology, and they concluded that IBM was either going to slide back into mediocrity, or that they were going to have to innovate on a very great scale to assume the leadership position in the industry. And so they decided to go for it, and bet the company's net worth a couple of times over on the 360 computer.And, of course, that was an innovation that paid off very nicely for them.
But more recently, in the area of personal computers, IBM was very late to innovate. The organization had got a little bit of hardening of the arteries; the managers were acting a little more like caretakers. And so they missed the fact that there was an emerging market and a technology that was converging on it. So in comes Commodore and Apple and so forth. And only then did IBM put its capabilities together and assert its rightful place at the head of the parade.
INC.: What's the crucial difference, as you see it, between those two stages?
SMITH: In the old days, the company was much more supply-side driven, more clearly doing things because they had a sense of mission for doing things that would be interesting and useful. The orientation wasn't just to make money -- making money is rarely the catalyst to innovation. I mean if you want to make money, go to Wall Street and trade bonds.
INC.: So there is in the innovation equation a factor for risk-taking.
SMITH: Yes, but you have to be careful with that, because there are different types of risks and risk-takers. One type of risk-taker is very self-destructive, and he is characterized more by the mad-inventor type -- somebody for whom the risk itself is the end. For him, risk is a high -- keep the adrenaline going, that sort of thing -- the equivalent of those people who leap off the cliffs of Maui with those little hang gliders. Frankly, there are a lot of people in business like that, including may whom we've come to think of as entrepreneurs. And then there are those people who recognize that if you want to accomplish anything, then by definition you must take risks. And that is the sort of risk that more often is associated with lasting and important innovation.
INC.: How do you foster the right environment for innovation, for supply-side risk-taking as you might call it, in a company that is now as big and successful as Federal Express?
SMITH: I think the key is to be constantly subjecting problems to every possible angle of scrunity that you can think of, with the idea that, unless you're trying to defy the laws of nature, you'll find some way to solve that problem and take the risk necessary to make it happen.
I can think of the problem we had with fog, for example. Since the invention of the airplane, people have been looking for a way to fly through fog. And the solutions all went in the direction of creating systems that eliminated the need for the pilot to see, in favor of machines that "see." As a result, you now have these very complex systems that bring the planes in using lots of on-the-ground electronic equipment, and the damn things are always breaking.
So we kept looking at the problem. It wasn't our biggest problem, but since our goal has always been to improve our service, to be able to offer absolute guarantees on overnight deliveries, it was an important problem to try to solve. And we just would not take no for an answer. We even went to Paris to look at the big machines that blew fog off the runways there. They cost $12 million apiece. Not right. Then, one day I was on a plane with a bright guy who worked for us, Charles Brandon, and he was reading a magazine article about the Air Force using millimeter wave radar to take pictures through clouds. And all of a sudden Charles looked at me and said, "You know, what we ought to do is try to see through the fog." In other words, put the pilot back in the loop, which was 180 degrees from what everyone else had done. Well, to make a long story short, it's absolutely feasible to see through fog, and we've just authorized $35 million to put the first parts of the components on our planes. And I will guarantee you that by 1990, none of our big planes will ever be stopped from landing because of fog. And as ancillary benefits, our pilots will also get a warning system for wind sheer, and we'll enjoy slightly reduced costs for things like tires and brakes.
INC.: That's a good example of technical innovation. Can you give an example of an innovation that solved people-related problems?
SMITH: There's one from our cargo terminal here in Memphis. It was several years ago, when we were having a helluva problem keeping things running on time. The airplanes would come in, and everything would get backed up. We tried every kind of control mechanism that you could think of, and none of them worked. Finally, it became obvious that the underlying problem was that it was in the interest of the employees at the cargo terminal -- they were college kids, mostly -- to run late, because it meant that they made more money. So what we did was give them all a minimum guarantee and say, "Look, if you get through before a certain time, just go home, and you will have beat the system." Well, it was unbelievable. I mean, in the space of about 45 days, the place was way ahead of schedule. And I don't even think it was a conscious thing on their part.
INC.: Is there a way to foster that kind of innovation from the bottom of the company as well as from the top?
SMITH: Yes. We do it by using a number of techniques. In our manager's guide, first of all, we have a chapter called "Change," and we make it very clear that we want people to try to innovate, that they won't get their heads knocked off if they try to change things. And we give awards of up to $25,000 to employees who come up with suggestions and innovations. For smaller things, managers can also reward somebody for doing something creative, or different, or above and beyond with vouchers for things like a dinner for two at a nice restaurant. It's called the Bravo Zulu program, after the navy signal that means "well done and thank you." As far as our senior management group, the top 200 or so people in the company, we have what are called the "Five Star" awards. Every year, the five people who have been the most innovative and creative receive an award that ranges from $5,000 to $25,000. That money is important. And the recognition is very important -- we publicize the hell out of it. But perhaps what's most important is that these managing directors know they have the right to fail -- that it's not a disgrace to try something that is well thought out but misses. Now for somebody who has a continual record of failure, there is another problem. But to experiment, to try something new and creative that doesn't work out the first time through -- we encourage that.
INC.: That sounds great in theory -- in fact, lots of executives tell us they do the same thing. But how do you let people know that it's OK to fail? Do you publicize failures?
SMITH: No we don't publicize them, not literally, anyway. But there are people at all levels of this company who haven't lost their jobs and have even been promoted after an idea they've been associated with hasn't worked out. People know that. And I think that's evidence that we tolerate failure.
Actually, failure really isn't the right word. Just because an idea isn't implemented or doesn't work out doesn't mean that a person has failed. The creative process is of value in and of itself, and we try to let people know that directly -- by publicizing successes and letting our people know that we reward creative problem-solving.
INC.: ZapMail is a big, new venture for Federal Express. It is probably unfair to call it a failure, but it's not as yet an unqualified success. How does it square with all we've talked about so far in terms of innovation?
SMITH: To get to ZapMail, you have to consider where we were with Federal Express several years ago. I mean, we were very proud of the record, and we had created a nice business for ourselves. But it was really just a compromise with the true demand of the vast majority of our customers, which was to move information across the country just as you might move it across the hall to another office. Now the technologists think the way this will be done is that eventually everybody is going to have a computer terminal, and the messages will be sent, and there will be no paper involved. But, you see, the technology already exists. The problem with it is that it is not a medium that lends itself to the way people work. People still want paper -- it's a very useful commodity. In fact, I'd be willing to bet you that the vast majority of communications within this company, among the senior management group, is still being done with the same technology that was available to Ben Franklin -- the handwritten note. And it's like that in most businesses. So we felt very strongly that the technologists were wrong, and that the real market was not for something in lieu of meassage switching, but for a very fast delivery service. And that is ZapMail.
INC.: Which is, briefly . . .
SMITH: ZapMail is a facsimile document-transmission service. It allows businesses to transmit high-resolution duplicates of all kinds of documents -- legal, blueprints, computer printouts, whatever. Our customers that have their own ZapMailers can transmit these within minutes. For others, our couriers will deliver ZapMail within two hours.
INC.: As you explain it, it sounds so natural. And yet it hasn't taken off. What's missing?
SMITH: Well, it's true, we certainly had a running start. We had the network in place to handle it, in terms of people and offices and vehicles. We had the service technicians already, which is enormously expensive. We have the largest number of radio terminals in the western world, outside the U.S. military. And we had these small computers in every truck and with every delivery person. So it was the synthesis of those strengths that led us into the business.
On the other hand, how do you start a whole new communications system like this, where you need a machine at both ends? It's like the early telephone system. The most remarkable salesperson in history was the first telephone salesman. I mean, he was a very capable person. You had this fantastic instrument to talk to people, but unless everyone else had one, it wasn't worth much. So the way it got started was that they put a phone down at the fire station in one town, or the courthouse. And if you needed to reach somebody, you called and talked to the operator for a few minutes, and then somebody ran down to the drugstore or the barbershop and got the person to come to the phone. And after a while, the businesses and the wealthy people said, "Well, the hell with that." And they put phones in their offices. But it wasn't overnight that a 200-million telephone network sprung up. And it won't be overnight that ZapMail catches on.
INC.: But how long is long?
SMITH: Well, price has a lot to do with it. When we started with the first ZapMailers, the cost to us was somewhere between $8,000 and $10,000 apiece. Now a few years have passed, and the next generation we'll be bringing out will cost something less than $5,000. In 18 or 24 months, the third generation will be out, and it will cost us maybe half that. And so on. And it's the same with the satellite dishes. Five or six years ago, they would have cost $250,000 apiece. But two years from now, we'll be putting dishes up that are only one meter in size, and they'll probably come in for about $6,000 apiece. The market and the technology are converging -- the slope of the cost curve is going to be very shallow, where once it was very steep. And so we feel we're in a good position to exploit that convergence.
INC.: You're determined to make a success of ZapMail, despite heavy losses and a slower start than you anticipated. But when does determination cross that thin line into stubbornness?
SMITH: We've had a few things over the years, small things mostly, that we've cut loose where we just couldn't do it -- where we felt we didn't have the skills or we hadn't thought about the business problem in sufficient detail. So I think I know where that line is. But as to ZapMail, as best I can tell at the moment, there's no question it is going to work. We know we're headed in the right direction in terms of the market. The basic numbers are headed in the right direction. It's now just a matter of when.
INC.: Is the judgment always that easy?
SMITH: No. The problem always comes in big companies, particularly ones that are extremely disciplined on the quantitative side, that most innovation doesn't look like it makes much financial sense when you're right in the middle of battle -- it looks like you never should have done it.It's only when it's been done and it's out there that everybody says, "Oh, but of course, that was easy." Then the money starts flowing in and you become a very big deal, and it all looks very logical.
INC.: So there's a healthy dose of intuition that's necessary for successful innovation.
SMITH: Sure. That's what Tom Peters and In Search of Excellence is all about. He's the first guy to relegitimize the creative role of the manager. Otherwise, we were all headed toward a discounted cashflow model of management.
INC.: But how much of it is intuition?
SMITH: In my opinion, it's got to be about half. If you want to innovate, you have to be capable of making intuitive judgments. But intuition isn't guesswork -- it's the amalgamation of a lot of stuff from a lot of different places that leads you to say about an idea that it's a safe bet, not a fool's bet.
INC.: What about market research? Isn't that a more reliable tool than intuition, at least as to the question of what the customer wants? Why ask your intuition when you can ask your customer directly?
SMITH: Because the process of asking your customers will bias what the customer tells you. In doing a survey like that, you create a perfect world that doesn't exist. But people perform very differently in reality from how they do in, say, a focus group.
INC.: But you have used market research in the past, haven't you?
SMITH: Oh, absolutely.
INC.: So how much do you rely on it? What's its role in innovation?
SMITH: Market research is helpful, in the main, in confirming trends you have picked up elsewhere. But if you take it too literally, and let it dictate what you do when writing business plans or setting prices, you are apt to get into a great deal of trouble. There are too many other factors, other trade-offs involved in those kinds of decisions. It's just not an accurate reflection of the way the world works. And so in terms of large-scale innovation, you have to rely more heavily on your vision, your intuition.
INC.: If you were to break it down, what are the components of vision or intuition?
SMITH: Mostly, I think it is the ability to assimilate information from a lot of different disciplines all at once -- particularly information about change, because from change comes opportunity. So you might be reading something about the cultural history of the United States, and come to some realization about where the country is headed demographically. The common trait of people who supposedly have vision is that they spend a lot of time reading and gathering information, and then synthesize it until they come up with an idea.
INC.: How much time each day do you spend reading?
SMITH: I think it's pretty close to four hours a day, maybe even more.
INC.: What do you read?
SMITH: Everything from newspapers to books on management theory and flight theory. I try to keep up with the latest technological developments through journals. And I'm fascinated with the future, whether it be [Alvin] Toffler's future or [John] Naisbitt's future.
INC.: Can you give an example of how wide-ranging, interdisciplinary reading has led to an innovation in your own company?
SMITH: A good example came up quite a while ago, when it became obvious that we had to track at every moment every item that was given to us. And when we got to thinking about it, it looked as if it was impossible -- never been done before. At the time, I had been reading some very different types of things about the grocery business and the price performance of computers.
Well, one thing led to another, and we began to look into using a version of those bar codes that are on the soup cans to give a number in sequence to every package. It turned out to be a good idea. And that one little innovation, probably more than almost anything else, has led us to be able to say, "Absolutely, positively . . ." on television, because without it, we could not have controlled this organization. It would have been just impossible to take half a billion items every night and deliver them with the reliability that we do.
INC.: We've talked about innovation in terms of intuition and reading habits and management techniques. But how about luck -- isn't that a big factor between innovations that succeed and those that don't, between innovators who make fortunes and those who don't? Aren't the odds against an Apple Computer or a Federal Express about a million to one?
SMITH: You know, I just had an operation on my back, so I had a lot of time to sit around and read books, among them a two-volume autobiography of Dwight Eisenhower. And there's a perfect example of the role of luck in terms of success. I mean, Dwight Eisenhower in 1940 was a soon-to-retire lieutenant colonel with a respectable but not particularly outstanding military career. But it just so happened that he turned out to be the right person in the right place at the right time. And most important, he had the right skills, mainly the skill to force coalitions. And then, of course, he built on that opportunity, and those skills, to go on to be President of the United States.
Well, my guess is that there are probably a thousand Dwight Eisenhowers at any point in time. And Fred Smiths, too. So it's the confluence of things that determines success.
SMITH: Very important -- knowing when to really go and when to sit on the sidelines. Once you decide to go, certainly serendipity plays a big part in it. But I think timing is often more important than luck.
In my case, for example, the idea that is Federal Express "absolutely, positively" would not have worked five years before we did it for many reasons. And five years later, the market would have been so clear that somebody would have served it in one way or another. And that is probably true of most start-up organizations.
INC.: And less true of innovation in larger or more established businesses?
SMITH: You could probably plot it on a grid. As the size and resources and managerial skill of an organization go up, the luck coefficient, if you will, probably goes down. And that was probably the case with the Watsons and the IBM 360, or Bill Allen's decision to build the 747 at Boeing, or Al Neuharth with USA Today.
INC.: It's natural to associate innovation with success -- in the case of somebody like the Watsons or Neuharth or Fred Smith. What things do you have to look out for in terms of that success so that it doesn't stand in the way of still more innovation and success in the future?
SMITH: Well, the first and most important thing is to remember something we've already talked about, which is that luck is a major element in anyone's success. Keeping that in mind will help an awful lot in putting things in perspective. Don't believe your own press clips -- I think that's another way to put it.
The second thing I would say is that you have to realize that just because you have done one or two things well, it doesn't guarantee that you'll necessarily be a success in the future, or in other areas. You have to continue to have a high degree of discipline, to assess risks carefully, to stay with your strengths. I think some of the best decisions that I ever made at Federal Express were the decisions that were negative -- the things that we didn't do.
The third thing to remember is that, in terms of building an organization that is big and successful, you are going to have to pay a big price, personally. And you won't realize that until you are far enough along and have already paid that price -- so you'd better be willing to live with it.
Finally, you have to see your professional success as part of something larger -- maybe that's a way of saying you have to have a philosophy of life. Achieving success, being rich -- hell, that doesn't do anything for you. Mostly what it does is bring you a lot of problems. The people who handle that well are people like Ross Perot, and I could name you 5 or 10 others -- people who believe that what they are doing is important, is making a contribution. They are inner directed, not outer directed. They are not living off the publicity and the accolades of the public.
INC.: In fact, you've made almost a philosophy of shunning the limelight, at least as far as you personally are concerned.
SMITH: You know, I am absolutely bound and determined not to be portrayed as something that I am not. I mean, I am just one human being that happened to have a lot of luck, and be in the right place at the right time, with certain skills that allowed me to turn it all into a useful enterprise. And what I object to most is the heroic way in which journalists like to paint the entrepreneur, the innovator, when in fact the efforts of many, many people -- not just of one person -- have made the success.