Diversification and innovation strategies in the postal industry

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Diversification and innovation strategies in the postal industry

  1. 1. SAP Forums on Travel and Transportation 2011 27th September 2011 BrusselsDiversification and Innovation Strategies in the Postal Industry Dr Alberto Asquer Lecturer of Business Policy and Strategy Department of Economics and Management Science Faculty of Economics University of Cagliari, Italy
  2. 2. Outline1. Behaviour and performance of the postal industry.2. The strategic issues of diversification and innovation.3. Corporate and business strategy in European postal firms.4. Diversification and innovation in PosteMobile, Italy.5. Conclusions.
  3. 3. Behaviour and performance of the postal industryGeneral industry trends:1. Technology disruption (e.g., digitalisation);2. Institutional change (e.g., liberalisation);3. Emergence of opportunities (e.g., globalisation of trade).Schedule of postal services liberalization in Europe Volume of letter post items in the EU-27, 1998-2007(source: ITA Consulting – WIC-Consult, 2009). (source: ITA Consulting – WIC-Consult, 2009).
  4. 4. Behaviour and performance of the postal industryGeneral issue:How does the postal industry adapt to changing technological,institutional, and market conditions of the environment?General issue, slightly reframed:What strategy do (should) postal companies follow in order toachieve super-normal profits?General thesis:Postal companies (should) pursue diversification andinnovation as a way to reap the opportunities of industrialreconfiguration.
  5. 5. The strategic issues of diversification and innovationTheoretical frame of reference:Evolutionary economics (Nelson and Winter, 1982);Resource-based view of the firm (Penrose, 1959; Hamel andPrahalad, 1995);Dynamic capabilities (Dosi et al., 2000; Teece and Pisano,1994; Teece, 1997);Innovation (Leonard-Burton, 1992).
  6. 6. The strategic issues of diversification and innovationCentral concepts:The firm is“essentially a pool of resources the utilization ofwhich is organized in an administrative framework” (Penrose,1959: 149);Strategic assets consist of those production factors that areimperfectly imitable and imperfectly substitutable (Williamson,1975);Core competences are “a pool of experience, knowledge, andsystems that can be deployed to reduce the cost or timerequired to create a new, strategic asset or expand the stockof an existing one” (Markides and Williamson, 1994: 150);Strategic assets maintain their uniqueness as the result ofsome isolating mechanism (Rumelt, 1987).
  7. 7. The strategic issues of diversification and innovationCentral arguments:Successful business strategy builds on the uniqueness offirms resources and capabilities;Long-term successful business strategy builds on the capacityto renew firms resources and capabilities;Diversification and innovation allow to renew firms resourcesand capabilities in face of strategic decay of existing businessmodels.
  8. 8. The strategic issues of diversification and innovation“Capability life cycle” (Helfat and Peteraf, 2003):
  9. 9. The strategic issues of diversification and innovationRationales for diversification and innovation:Presence of excess capacity;Search for synergies;Expansion into diverse geographical markets;Quest for superior performance, especially through relateddiversification;(Wan et al., 2010; Prahalad and Bettis, 1986; Ginsberg, 1989,1990; Tanriverdi and Venkatraman, 2005; Farjoun, 1998; Nathet al., 2010).
  10. 10. Corporate and business strategy in European postal firmsDeutsche Post (€ million)
  11. 11. Corporate and business strategy in European postal firmsRoyal Mail Holdings (€ million)
  12. 12. Corporate and business strategy in European postal firmsLa Poste (€ million)
  13. 13. Corporate and business strategy in European postal firmsPoste Italiane (€ million)
  14. 14. Corporate and business strategy in European postal firmsDie Schweizerische Post (€ million)
  15. 15. Corporate and business strategy in European postal firmsSociedad Estatal Correos y Telegrafos (€ million)
  16. 16. Corporate and business strategy in European postal firmsBPost (€ million)
  17. 17. Corporate and business strategy in European postal firmsPosten Norge (€ million)
  18. 18. Corporate and business strategy in European postal firmsПочта России – Russian Post (€ million)
  19. 19. Corporate and business strategy in European postal firmsA comparative view (turnover, € million)
  20. 20. Corporate and business strategy in European postal firmsA comparative view (employees, no.)
  21. 21. Corporate and business strategy in European postal firmsA comparative view (Return on Assets, %)
  22. 22. Corporate and business strategy in European postal firmsA comparative view (turnover per employee, € /000)
  23. 23. Diversification and innovation in PosteMobile, Italy.Poste Italiane is the incumbent network operator in the postalindustry in Italy;It consists of a diversified group (mail, parcel, express,financial, and insurance service companies) that originated inthe early 1990s, when the national government reincorporatedthe former post autonomous administration into an economicpublic entity and, in 1998, into a corporation under companieslaws;The national government retained full ownership, partiallyunder the Ministry of Economics and Finance (65%) andpartially under the government-owned financial agency CassaDepositi and Prestiti (35%).
  24. 24. Diversification and innovation in PosteMobile, Italy.In 2007, the group established PosteMobile, a Virtual MobileNetwork Operator (VMNO) that exploited strategic assets andcapabilities of Poste Italiane – including the capacity of thedistribution channel, the effectiveness of the distribution andlogistics network, and the know-how of financial services – togenerate a unique offer through the convergence betweencommunication and financial services.By 2010, PosteMobile achieved a primary position amongnational VMNOs (counting about 1.7 million clients) andturned out as profit-making branch of Poste Italiane group. How did PosteMobile start, why did it start, and how does it count as an instance of successful diversification in the postal industry?
  25. 25. Diversification and innovation in PosteMobile, Italy.
  26. 26. Diversification and innovation in PosteMobile, Italy.Interview with Roberto Giacchi, CEO of PosteMobile:“One day in summer 2006 I was reading the Sole 24 Ore [Italianbusiness press] under a parasol in Sardinia, and I spotted the newsabout the spreading of the VMNO business around the world. Itseemed to me that Poste Italiane had all competitive assets neededto well perform in doing this stuff, at least in principle. When I wasback to Poste, I went to Sarmi [CEO of Poste Italiane since 2002]and I told him that it seemed to me a good idea. He thought about itfor a couple of days, and then he came back to me inviting toexamine the case. I assembled a consulting team, and we startedto investigate how to make this stuff done. The figures lookedpromising. When we started to negotiate the franchise andprocurement contracts, we had confirmation that figures were good.When the decision to choose the CEO [of the new mobile phonecompany] came up, Sarmi told me, as you thought about it, andresearched into it, then show us how whether this is a good thing. Iquit the consulting job and I took hold of the task.”
  27. 27. Diversification and innovation in PosteMobile, Italy.Interview with Roberto Giacchi, CEO of PosteMobile:“There were at least three reasons for the acceptance of the idea toset up a mobile telecommunication company. First reason is thatdiversification has been in the DNA of Poste Italiane so far. This isa group that originated from mail and parcel, then went intofinancial, then into insurance, and then, eventually, into mobilephone telecommunication. This is understood nowadays as astandard corporate process. Second reason is that the topmanagement of Poste Italiane is strongly oriented towardsinnovation. Third reason is that, more precisely, top management ofPoste Italiane possessed high competence on telecommunication,as Sarmi formerly worked as general director of Telecom ItaliaMobile [from 1995 to 1998]. It is easier to trust innovation when aperson understands the business”.
  28. 28. Diversification and innovation in PosteMobile, Italy.Formulation of the mission: providing advanced distinctivevalue-added services (VAS) on mobile phones (e.g., bankaccount information, bank transfers, international moneytransfers, and e-commerce);Staffing: minimally from the parent company group (about 25employees only, out of about 160), while mostly selectionconducted exclusively on the basis of merit criteria;Resourcing: access to network infrastructure provided byVodafone, and management of technological systemssupplied by Accenture (contractual relationships with relativelyflexible cost structure);Marketing: considered a core function and therefore entirelyretained within the organisation.
  29. 29. Diversification and innovation in PosteMobile, Italy.On 26th November 2007, PosteMobile launched itstelecommunication services to the mass market. Early growthof revenues triggered a state of euphoria within the company,although market penetration soon hit reality and sales sloweddown. Since then, as Giacchi put it, PosteMobile “engaged ina daily routine effort to understand how to make sales grow,how to acquire clients, and how to retain them”;The mobile telecommunication industry had reached a stageof maturity, characterised by high market penetration,relatively low barriers to entry, commoditisation of traditionalmobile phone services, occasional abrupt price-wars, andvarious promotional offers intended to make competitorsclients switch to other mobile telecommunication operators.
  30. 30. Diversification and innovation in PosteMobile, Italy.Apart from the synergies between the mobiletelecommunication and the financial businesses, and themarket access provided by the thousands of post officesscattered over the entire country, PosteMobile could alsobenefit from the particular brand image of Poste Italiane group– namely, one that conveyed a sense of reliability, safety, andtrust;Accordingly, PosteMobile constructed a brand story centredon innovation, economy, transparency, and ease of access tocustomer service that was intended to appeal to a large shareof middle-low income clients of post offices.
  31. 31. Diversification and innovation in PosteMobile, Italy.Financial performance (€ /000)
  32. 32. Diversification and innovation in PosteMobile, Italy.Issues of industry competition: Some of the other VMNOs,such as CoopVoce (serving about 0.5 million customers) andCarrefours UNO Mobile (about 0.2 million), relied on a vastretail distribution network; others, like Fastweb (about 0.3million customers) and Tiscali Mobile (about 0.1 million),complemented the fixed line services of their parentcompanies; others, like Noverca of Banca Intesa Group(about 0.2 million customers), aimed to replicate theintegration between mobile telecommunication and financialservices that PosteMobile had introduced;None of the VMNOs in the country (totalling about 15),however, apparently accomplished the levels of marketpenetration and financial performance as those achieved byPosteMobile.
  33. 33. Diversification and innovation in PosteMobile, Italy.Sustained innovation:Expansion to the business segment and extension of tariffplans and tariff options;On-line sale of parking tickets, urban transport tickets, andproducts and services from vendor partners;Infomobility platform for the management of operations ofabout 12,000 postmen of Poste Italiane group;Evolution from Enhanced Service Provider to a full VMNO,entry into the online gaming industry and the acquisition, fromPoste Italiane group, of a business unit focused on thedevelopment of a fixed line network.
  34. 34. ConclusionsHow was the initiative to diversify into the mobiletelecommunication industry taken?Corporate entrepreneurship can be explained by a sociallearning process that results in competences, activities, andstrategies conducive to the launch of new business ventures(Salvato et al., 2009), where a key component is theabsorptive capacity (Cohen and Levinthal, 1990; Zahra andGeorge, 2002);The case rather highlights the importance of individualinitiative, cognitive complexity of top managers, personalbackground experience (Burgelman, 1983, 1991; Prahaladand Bettis, 1986; Ginsberg, 1989, 1990)
  35. 35. ConclusionsWhat accounts for the success of the diversification into themobile telecommunication industry?In general, it is acknowledged that diversification deliversbetter results when companies extend their activities towardsrelated business areas (Tanriverdi and Venkatraman, 2005;Farjoun, 1998);The case suggests that strategic assets of Poste Italianegroup were effectively deployed to support the growth ofPosteMobile, namely (1) a consolidated customer base, (2)the capacity of the distribution channel, (3) the effectivenessof the distribution and logistics network, and (4) the possibilityto generate a unique offer through the convergence betweencommunication and financial services.
  36. 36. ConclusionsHow was the diversification into the mobile telecommunicationindustry immune from bureaucratic impediments of theparent company group?It is acknowledged that diversification can effectively takeplace by setting up special-purpose organisational forms(Harrigan, 1983).The case suggests that the discretion granted to the CEO ofPosteMobile, incorporated as a separate company, on suchdecisions as staffing and resourcing, was pivotal to avoidinterferences. The parent company may also need to shieldthe new organisation from the negative influence oforganisational liabilities, such as organisational norms andpractices that may negatively affect efficient and effectivedecisional processes.
  37. 37. Conclusions

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