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Strategic thinking

May 21, 2013

As is evident from numerous recent conferences and workshops dedicated to innovation in the postal industry, it is widely viewed as a panacea for economic growth and business success. Yet despite all the talk, key questions remain on how to focus innovation, and how it relates to strategy formation.

Innovation is best approached as a strategic initiative, in that it can be thought of as both supporting and informing business strategy. Furthermore, without strategic support innovative initiatives have little chance of survival in an organisation. However, innovation cannot necessarily be fully controlled, nor is it likely that innovative ideas start at the top of the organisation. In many of the most innovative companies the CEO and top management play only a limited operational part in innovation. That the CEO is unlikely to come up with the next big idea is particularly true in larger and more diversified businesses, where top management is further removed from customers, suppliers and production. What is important is to create the right conditions and culture for innovation to take place, rather than trying to dictate how, when and by whom innovation may occur.

An example of a company that has long recognised this is 3M, which is considered as one of the most innovative companies in the world. As CEO George Buckley wrote in the company’s 2011 annual report: “Innovation is built on a belief in the power of R&D, belief in the people doing that kind of work and a deep conviction that the collective power of their imagination and creativity will generate future opportunity and financial betterment for the company. We don’t always know how or when that opportunity will unfold, so it requires an element of faith and it can be a little scary.”

Although in the long term innovation can usefully be aimed at discovering new opportunities, or exploring new technologies not necessarily closely related to the core business, in the short term it is at its most powerful when it serves the competitive strategy of a company or business unit. If, for example, the competitive strategy is for the company to be a cost leader, innovation activities can ideally be directed towards discovering and unlocking potentials for cost savings, such as developments to reduce material content or packaging, facilitate ease of manufacture or simplify logistical requirements for the delivery of mail and parcels.

For differentiators, innovation can be directed towards product design (to match the exact needs and requirements of customers), enhancing product features, improving product quality, or increasing switching costs. Over the past 15 years Apple, for example, has been focusing its innovation on precisely these areas. Innovation that supports overall competitive strategy is most likely to deliver short-term benefits and return on investment.

Within the postal context, innovation has not surprisingly become the big discussion point of the moment. One reason for this is that technology and innovation in other sectors are now threatening parts of the core business of posts; another is that posts are now, more than ever, free to innovate and create a new future for the industry.

However, for the modern post, becoming innovative is not going to be an easy task. In a small piece of research this author carried out on behalf of SAP in 2008, it was shown that “the most important internal barriers [to innovation in posts] have to do with being too slow to make decisions, too much bureaucracy and having a corporate culture that doesn’t encourage creativity.”

A few years later these barriers probably still exist, but an increasing number of postal operators have made substantial efforts to become more innovative – and these efforts are starting to pay dividends.

Where to focus?
What are the big strategy areas for postal operators today, and how can innovation support them? Strategic imperatives can probably be reduced to three building blocks. The first has to do with ownership and regulation. It is very clear that following the total liberalisation of the postal market in Europe, the intended next big step will be partial or total privatisation, as has already been seen in some countries around the world. As postal activities cease to be perceived as a necessity-driven public good, and operators continue to diversify away from the core mail business, governments are quite naturally re-examining their ownership position. Many postal organisations are therefore in the process of preparing for such a privatisation. At the same time, there is a need to redefine the universal service obligation and regulations more generally.

 

Left: Post Danmark’s MobilPorto postage app acts as a mobile franking service. Customers can use the app to gain access to a unique number, which is written on a letter and acts as a stamp 

 

 

The second building block is the adaptation of the core business to new market realities. For letter mail, it is clear that the downward volume trend cannot be reversed – but it can certainly be slowed down and margins can, to a degree, be protected. On the one hand price policies can be revised; on the other hand downsizing can be managed in a coordinated and responsible way.

For example, a smaller volume has a major effect on costs due to the erosion of economies of scale, but many posts have not fully explored opportunities for optimisation and are now gradually downsizing their infrastructure while updating equipment to raise productivity. Done right, these steps can help offset the cost effects of lower volumes.

Furthermore, service innovations can be used effectively to help slow down the volume decline. An example of this is MobilPorto, a mobile postage app launched in 2011 by Post Danmark, which won the Postal Technology International Delivery Innovation of the Year award that year. Although the business opportunity for such applications is limited, they can nevertheless play a positive role in slowing the decline of mail and in introducing new generations of customers to the postal brand and services.

Meanwhile the growth in the parcel side of the core business shows no signs of stopping. The industry association Ecommerce Europe estimates that e-commerce grew by 22% in 2012 alone. In this area the business imperative for traditional operators is to compete effectively with both the large global integrators and the many smaller parcel delivery companies that tend to follow a niche strategy. Innovation in this context must focus on growing the business. Some postal operators have developed solutions for small e-commerce businesses, for example. Many have also fully integrated or merged their various networks. As one postal CEO told me recently: “The distinction between letter, parcel and pallet is becoming irrelevant. We can now move almost anything from anywhere to anywhere in the country. We are a logistics company, with a postal heritage.”

The third strategy building block is diversification – with three main types taking place. The first is diversification related to mail, where the aim is typically to move up or down the value chain. Examples include investment in a media business or in hybrid mail solutions. Innovation in these related areas may aim to capture value from, or add value to, digital substitutes. The second is diversification related to parcels, which includes expanding into logistics, warehousing or even logistics-related IT, as Finnish Itella (the former Finnish Post) has been doing.

Innovation in this context can successfully be aimed at capturing more value from customers’ supply chains. As recently retired Itella CEO Jukka Alho explained to me: “I think our transformation started earlier than most other European countries. In Finland it was realised over 20 years ago, in the early 1990s, that the internet and electronic communication will come and some kind of privatisation or liberalisation will take place. We took Itella first as a brand name for our information business, but then when our logistics started to expand as well we rebranded the whole company.”

The third type of diversification is unrelated to the core business. Examples include moves into banking, insurance and mobile telephony. Innovation in this context is usefully aimed at differentiating from existing competitors in those industries. For example PosteMobile in Italy has developed some interesting applications in mobile banking that have helped it differentiate itself from other mobile network operators.

 

Right: Handheld technology is one example of innovation, which has helped improve postal efficiency. © Itella

 

 

Key challenges
There are some key challenges facing postal operators wanting to innovate in today’s environment (see Figure 1). One of the toughest has to do with innovation capabilities and the willingness to be creative. The majority of postal workers are not used to being creative and creativity has not traditionally been encouraged – and doing so while downsizing the workforce is never going to be easy. Why would anyone stick their head out of the crowd when the company is letting people go? Furthermore, how can you expect someone to be creative when you want them to follow very strict processes to maximise productivity? Empowering the workforce to bring forward good ideas, and allowing those ideas to grow, is therefore a huge challenge. This is especially the case within the core business, where operators automate and standardise processes, yet need to innovate to slow the mail decline and capture value from the digital space. It is not surprising that some innovations tend to be appropriated through acquisitions rather than through internal development.

Diversification typically is not just about looking for new business opportunities, but also linking them to the traditional business and extending existing capabilities – capitalising on potential synergies between the existing and the new businesses. When a postal operator makes strategic acquisitions within the logistics business, for example, it is in the belief that the value of the acquired business when added to the overall portfolio will be higher than the value of the acquisition by itself. In reality these synergies seldom materialise and this is another challenge facing many operators today. If you run multiple businesses with no real business logic binding them together, individual parts may as well be spun off – as a corporate parent you are not adding value to them.

There is also the fundamental question as to the relevance of government ownership. At a time when nationalisation is no longer considered the way to go, is it reasonable that a leading retail bank, logistics firm or telecommunications company, for example, should be owned by the government? Is this fair to the competition?

Being innovative has not traditionally been part of the postal DNA. Building innovative competencies creates tensions – between different categories of employees as well as between business areas. New initiatives therefore need to be shielded from the rest of the organisation if they are to grow. Too many good ideas are killed by middle managers and in many cases innovations may actually replace existing products or services and hence disrupt the status quo. A real difficulty for many postal operators is therefore how to shield smaller and more innovative businesses within their portfolio, while encouraging the synergies and knowledge transfers needed to add value.

A diverse future
While the future of the postal sector is still very much open, it is a fair guess that in the future some posts will remain focused on the core business of mail and parcels, some will become logistics companies with a mail business, and others will become highly diversified with mail or parcels playing only a small role. This suggests that the key strategy and innovation priorities will differ widely from operator to operator, and from country to country. The future is no longer uncertain as such – the industry knows very well what the challenges are – but it is diverse and exciting. Now more than ever posts can shape their own future.

 

Dr Kristian J Sund is a principal lecturer in strategic management and director of MBA programmes at Middlesex University Business School in London, UK. He is co-author of the book series ‘The Future is in the Post’.

 

 

 

 

To read interviews with six leading postal operators on their latest innovations, see Post modern in the June 2013 issue of Postal Technology International magazine

May 21, 2013

 

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