WHY SHOULD THE P OSTMAN ALWAYS RING TWICE?

ANALYSING THE PROCESS OF S TRATEGIC RENEWAL IN S TATE-OWNED P OSTAL SERVICES

CARLO A. CARNEVALE-MAFF SDA Bocconi School of Management Bocconi University Via Bocconi 8 20136 Milan, Italy tel. +39.02.5836.6856 fax 6892 e-mail: carloalberto.carnevale@sda.uni-bocconi.it and MARKUS VENZIN SDA Bocconi School of Management Bocconi University Via Bocconi 8 20136 Milan, Italy tel. +39.02.5836.6856 fax 6892 e-mail: markus.venzin@sda.uni-bocconi.it

***

Paper submitted for the 18 th Annual International SMS Conference, November 1998, Orlando (FL) USA

Neither snow, nor rain, nor heat, nor gloom of night stays these couriers from the swift completion of their appointed rounds. Often thought to be the official motto of the United States Postal Service, the statement was actually written in about 430 BC by the Greek historian Herodotus. He was describing the perseverance of the mounted messenger service used by Xerxes, king of Persia. Some type of postal service has existed in civilized parts of the world since at least 2000 BC. Although the appearance of the postal services has changed in many respects over almost four millennia, a few things are still as they were at the time the first postage stamps were issued in 1840. Most European postal services are large and rather inefficient organizations operating on a national basis, strongly influenced when not totally controlled by the government. But there are cases in which postal services have undergone significant change processes, above all in the last few years. In some countries, the postman today does not have to ring twice anymore waiting patiently for market opportunities and political approval at the same time.

You have new mail

The newborn Netherland-based TNT Post Group provides a striking example of the possible results of an innovative strategic approach. Emerged from a complex process of privatization and reorganization of KPN, the former national services for post and telecommunications, the new company has been leveraging on sound competitive results and direct access to the financial market for gathering the necessary resources to support an aggressive policy of acquisitions and international expansion. No longer focused on its role of "national" postal service, it has redefined the industry segments proposing itself as a "one-stop shopping" for European businesses in such wide areas of services as mail, express and logistics. Deutsche Post has responded acquiring a large share of DHL's outstanding stocks, and is preparing further international strategic moves. The entire European industry of postal services is likely to be deeply influenced by this new breed of competitivelyminded postmen, if they still can be named so.

This article aims at sketching the possible strategic renewal paths for state-owned European postal services. We start with a brief overview of the current competitive situation and actual trends, which brings us to focusing on three main issues: How can postal services define their competitive corridor? Once they managed to position themselves in the competitive environment, how can they instill a sense of organizational purpose? In
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which way can they manage the deregulation process needed to move towards the targeted position? We will conclude with outlining a set of research propositions describing the strategic renewal path of European postal services based on data from the major European postal services. These propositions will in turn provide the basis for the formulation of testable hypotheses for future empirical work.

1. The European postal services in motion

Address: unknown

Strategic renewal may be defined as the development of new products, services, capabilities, processes and structures that have a considerable impact on the course of the organization (Volberda, 1998). The process of strategic renewal is interdisciplinary and involves different perspectives: from changes in corporate governance to the influence of historical culture, from technological developments to changes in regulation. It has a deep impact both on internal processes (new organizational structures, new venturing and business structure) and external processes (alliances, competition, investments/divestments), affecting the economic performance of organizations as well as their ability to develop new capabilities and competencies or to revamp existing ones.

The postal industry in Europe and the financial services that have been traditionally channeled through post offices are in motion, facing deregulation and re-regulation, the introduction of the Euro currency, the process of concentration through mergers and acquisitions, the impact of technology on logistics, telecommunication and electronic means of transaction. This makes the industry an ideal case for strategic renewal, whose final address is however still unpredictable. The incumbents are restricted in their freedom of action. They have to meet competition with a shortage of effective arms, moving at the borderline of being a public service company and an economic enterprise, with the heavy burden of their thousands of post offices spread all over the country. To start with, we need to consider four different environmental trends.

The evolution in technology

The expected growth of electronic means of communication will provide an inexpensive and standardized platform for exchanging information and completing commercial deals, causing a dramatic shrink of the market for traditional postal services of documents and desk-level financial transactions. At the same time, this trend generates new demand for logistic services of goods delivered directly to the consumer's home. The challenge is to transform the threats posed by the diffusion of electronic means of communication and transaction into new business opportunities: increased demand for distribution of goods from business to households may well offset the decrease in physical traffic for traditional mail-based communication.

The changing role and expectations of customers

Large customers, which account for about 80% of the total traffic of mail objects, are getting more demanding and are requiring at the same time more services (integration in customers' own operations, outsourcing of logistics) and lower costs. There are some early cases of downstream integration in France (Distrihome) and Germany (AZD) to overcome the deficiencies of official postal services, and more and more erosion by leaner competitors in the rich, service-sensitive segment of customers. There is a potentially disruptive mismatch between the discounts that big customers expect for their large volume of mail objects and the operational savings that can be achieved using integrated and undifferentiated operations, originally designed for supporting universal service. It is difficult for an organization that has been born and raised as a traffic-taker to become a traffic-seeker, and to shift from a oversized and bureaucratic structure designed to support the segment of "many-to-many" (anonymous, fragmented, with neither bargaining power nor viable alternatives) towards a lean organization able to serve the "few-to-few" or the "one-to-one" segments, with sophisticated customers, having clear expectations in terms of services and prices.

The increasing costs of managing a network of local offices

Like in all other network-based business, sustained demand volumes are the only way to cover the high level of fixed costs related to the maintenance of a physical network, which is oddly dimensioned due to political influence and to the necessity of handling seasonal traffic peaks. In front of inexorable erosion of their historical market base, therefore, the strategic challenge for most postal services is to keep the network alive with new

products. Managing to do so would provide an interesting opportunity. In fact, with the fading of clear industry borders in banking and insurance, the cost of maintaining separate and specialized networks of retail distribution of financial or insurance services in small villages or rural areas will soon become unaffordable for most actors, forcing the evolution towards exploiting economies of scope. Moreover, the fatter slice of profitable financial and insurance transactions, those performed by businesses and wealthy families, will progressively migrates on "virtual" platforms.

The process of deregulation

Deregulation is not only a trend for the future, but a defined agenda for the current years that is likely to force a reshaping of the whole industry much sooner than most would expect, triggering a wave of mergers and acquisitions in the same fashion as for the consequences of liberalization in US telecommunication market after 1996. In the EU "Green Paper" issued in 1992, public Postal Services are defined as actors of relevant social importance. T he reasons appear to be more related to their role as employers (they enroll about 1,300,000 employees in EU countries) than as generators of overall economic value: public postal services (excluding revenues from financial services) account for roughly 0.6% of EU gross product.

The latest EU directive, issued as recently as December 1997, limits the area of reserved services, where restrictions to competition are allowed, to delivery of postal objects within the unit weight of 350 grams and a price up to five times the tariff of a standard 20-gram ordinary mail. All postal services exceeding these limits should be liberalized. Other steps towards a complete deregulation of all services are planned over the next five years. The directive EU also urges natio nal regulatory body to be separate from postal services operations, with the latter expected to keep unbundled accounting for reserved, universal and liberalized services. The implicit aim is to control cross-subsidization from margin-generating protected segments towards unprofitable service areas.

In sum, the current challenges in the competitive corridor of most European postal services come from the increase in cost, technological development providing electronic alternatives, product misfit due to changing customer needs, deregulation and with it new entrants in profitable sectors, and the increasing influence of the

EU on national legislation. Bot et al. (1997) argue that it will be however more critical for postal operators to manage the transition than to know what role they should play in the future. The authors propose three critical areas to investigate in: (1) to understand the competition and to find a stable corridor where its competitiveness keeps pace with that of newcomers; (2) to increase their freedom to act and to instill a sense of purpose in the organization; and (3) to manage deregulation to ensure a smooth transition. The next three sections aim at extending the work done by Bot et al. (1997) which is one of the few recent comprehensive study on the competitive renewal path of postal services. Because this industry has not been a popular subject for strategic research, we aim at defining research propositions that add value to practice as well as to further research in the field of strategic management.

2. Creating a Competitive Corridor

To understand the competitive situation is the crucial task for national post offices. Some European postal services broadly defined their competitive corridor and behavior in form of a corporate mission. The Swiss Post's mission statement, for example, puts emphasis on such concepts as:

1. We want to perform the overall basic supply of Switzerland in a reliable, low-priced and cost-covering way. 2. We complement the basic product scope with a broad range of additional services to meet customer expectations, to make further profit, and to manage basic supply more efficiently. 3. To be more flexible than the competitors, we shift decision-making power as close to the market as possible. 4. As a team, we ourselves a re responsible for our workflow; we remedy weak points independently and ensure that our customers get the service-quality they need. 5. To strengthen our market position, we look for alliances with partners in areas where this is needed. 6. The company provides to every single employee that helps us in achieving our goals, an employment guarantee, exemplary social contributions and training programs as well as the necessary support for successful work.

As a first step in developing a deeper understanding of the competitive situation described above and finding or creating a competitive corridor is to identify the basic human needs that should be targeted in the future. The second step we take is to identify the critical resources and capabilities leading to a superior competitive position.

2.1 Basic Human Needs

Basic human needs, in our view, extend the concept of customer needs because they are (a) stable over a long period of time, (b) only partly known by the customers themselves, (c) hard to substitute by satisfying other needs, (d) discovered by studying cultural changes (James 1996, pp. 89 - 103) rather than by asking the customers. The ability to see a photographic picture immediately after it has been taken, the possibility to listen to music wherever one goes, or the freedom to pay without cash are examples for such basic human needs.

In order to discover basic human needs of (potential new) customers the Swiss postal services had to identify the existing customers first and to attempt to meet their clearly stated needs first. As an initial step, the Swiss postal services realigned their organizational structure as described by Figure 2 around 8 product-business units (GBs) and 5 service centers (SB). This new organizational structure brought the employees closer to the customers and with it closer to their needs. Among those basic needs, the first paragraph in the above mission identifies three; reliable, low-priced and cost-covering supply of services. The reliability and cost efficiency are thus two major elements in the competitive corridor of postal services, which to a certain extent implies that they would stay in the mass segment.

Yet what do customers understand if they speak about reliability; time and security of delivery? What are the basic customer needs that might hide behind this empty phrase? Is it possible to buy reliability by sending a registered letter or is more behind the concept? To what extent is reliability transferable to financial services or simple insurance? How does a relationship based on trust in the postal services evolve and how can it be sustained? Reliability of mass services is certainly stable over a long period of time, and it is hard to be substituted by satisfying other needs. Furthermore, it is only partly known by the customers themselves because it is being extended to other segments. The Swiss postal services for example run a TV-commercial,
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showing a average citizen on a bike entering a post office commented by: Although he does not have a car like a millionaire, he has the investment strategy of a millionaire. To transfer previously exclusive financial services into mass products, and to open up new customer groups by meeting the needs of reliability seems to work in the case of Swiss postal services. To meet basic human needs of reliability of mass products is increasingly neglected by the merger process of the banking industry and the partial retreat from the retail business.

2.2 Resources and Capabilities

What are the critical resources needed by postal services to compete in the future industry arena? Barneys (1992) defined four criteria for assessing what kind of resources would provide sustainable competitive advantage: (1) value creation for the customer, (2) rarity compared to competition (3) imitability and (4) substitutability. Of course, the last two criteria are the decisive factors for the question whether potential competitive advantage can also be sustainable. Now, what are the critical resources and capabilities behind the product of postal services? In general, the activities of postal services include the material transmission of communication, transportation of small goods, and the transfer of money. The product range of the new Swiss postal law in particular foresees two main parts; The first one are universal services which are partly protected and regulated by the government such as addressed letters up to 1kg, addressed parcels, express letters, international circulation, payments, giro accounts, and transportation services by bus. The second part consists of competitive services such as heavy packages, express mails, financial services, parcels without address, electronic services, and free market transportation services. In this second part, the government left a space open for new services, which again widens the potential competitive corridor.

The Swiss postal services identified its network of local branches, one the most compact in the world with its density of one office every 3700 inhabitants, as a resource that meets the four criteria. The logical conclusion of the Swiss postal services is therefore to formulate their strategic challenge as follows: "To keep alive the net of branches with new products". To make use of the net of branches, the Swiss postal services introduced a range of new products that have little connection with their core business of distributing packages and letters. Among the services offered in addition, you may find financial services including the management of investment
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funds, simply structured insurance policies, and transportation services by bus. Although a lot of entrepreneurial responsibility is given to the managers of the branches, the Swiss postal services once more control the invention of new products centrally. In the early nineties the product portfolio namely included the sale of bread in some branches. Hence the challenge is to search for new products that somehow fit to the existing portfolio and are within the product and service range prescribed by the Swiss Bundesrat (upper house of the federal parliament). In fact, the network of postal offices appears to be the most important strategic asset for many postal operators. To manage such a large network has mostly been seen as the core competence of postal services today, it is often considered to be a core rigidity (Leonard-Barton, 1993). But some attempts are being made in order to break this potential rigidity.

Breaking the postman's chain

The need to exploit their network has led some national postal operators, such as the Italian Post, to separate the (until now) fully integrated operations of postal services into separate entities: the local post office network will be an independent division serving both the postal and the financial business. In New Zealand, regulators have recently split the network of post offices and the services of mail sorting and transportation, allowing independent operators (banks, insurances, direct mailing companies, business using electronic commerce) to inject mail traffic in the last segment of the logistic chain. The progressive opening up of downstream access to postal networks has gained acceptance also in many European countries, from the Netherland to Switzerland but also to United Kingdom and Germany. Competitors are moving in this direction in order to sustain their penetration of foreign markets. An example is provided by the strategy of TNT Post Group, which recently opened in Italy thousands of "TNT points", licensing the collection of parcels and express deliveries in many small retailers of office supplies located downtown of cities and also small villages. At limited costs, this move helped in increasing the brand visibility for a much interesting segment of customers such as small businesses and professionals, establishing at the same time a much wider network for item collection.

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For state-owned postal organizations, the rationale for separating the network itself from the services therein being supported is the same as the one that has been applied in other public services such as telecommunications, railways, electricity: diversification, closer managerial control, more room for alliances and partnerships. Offering universal service implies a ubiquitous network, which generates high fixed costs that in turn call for high volumes to be covered. If volumes are to be achieved in a shrinking market, then attracting a larger share of traffic, regardless from its private or public origin, has become a viable solution. At the same time, many postal services have started a process of diversification in the portfolio of services channeled on their network. A publicly accessible network of "versatile" post offices, charging for their services on a "cost-plus" basis or selling financial products in exchange for commissions is therefore a new element of the process of strategic renewal. This kind of organizational restructuring has the effect of unbundling the traditional logistic chain upon which all the performances of postal services used to be measured. Delivering a certain minimum percentage of mail objects within a given number of days after the date of posting has always been the first and the most important measure of performance. Although this indicator is not going to be abandoned, the unbundled set of logistic activities resulting from this kind of restructuring opens the way for a new range of performance indicators related to more specific needs of the various customer segments. The reorganization of operating activities results then in a new set of value-creating processes, whose optimization is based on the interactions with market forces rather than on top-down re-engineering projects. Applying to this new configuration the methodology of the value net analysis (Parolini, 1996) provides interesting insights and holds many strategic implications. The value net approach represents an industry as a value-creating system, i.e. a set of activities linked by physical and information flows, which define critical value processes with respect to the final customer. According to this methodology, to be taken as object of analysis is not the firm, but rather the set of activities and processes that create and control the largest share of value for the customer. A firm is then the subject whose strategy designs, performs and controls the activities and the processes, which are considered critical and in turn will constitute the fundamental source of competitive advantage.

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Collecting

Transportation Sorting

Transportation Delivery

Financial Services

Distribution of own financial products

Distribution of financial and insurance products Electronic mail

Counter services

Delivery of goods

Payments
Network of local offices

Pre-collected mail Remote printing

Pre-sorted direct mail

Delivery

Trasportati on
Postal Services

Local collecting

Sorting

Figure 1: The transformation of the traditional logistic chain into an unbundled network of activities

For example, bulk mailing for commercial purposes and the related services of good deliveries will follow a completely different process with respect to personal correspondence, because of their expected impact in

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terms of possible orders and consequent parcel deliveries and payments that need an efficient coordination of processes, rather than single-phase excellence in mail delivery. Separating mail-sorting activities from delivery processes will also have other effects, such as fostering the development of remote printing technologies to be installed at local post offices. The experience of "Postel", one of the few successful services (in volume, revenues and margins) of Italian Postal Services offers an example of this effect. It is a hybrid electronic mailing and remote printing systems, jointly developed with another state-controlled engineering company, Elsag Bailey, to which thousands of business or institutional subscribers (banks, insurances, public utilities, and governmental agencies) send their mail in electronic format. Whereas the integrated logistic chain is prone to a kind of "hub-and-spokes" economics (efficiency is achieved through large "sorting" centers), the unbundled network associated to latest remote printing technologies embodies an open platform, in which capacity can be added more easily where required.

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2.3 Pointing to the moon

On the basis of the previous consideration, how can be defined in terms of products and customers the area termed as "competitive corridor" for national postal services? A possible competitive region may be identified in the following matrix: after the "full moon" of old good monopolistic times is fading out, for Postal Services remains a possible "strategic crescent" of competitiveness which gets ever thinner day after day.

From Business (few)

To Business (few) Business Information Trade Procurement Fast growth Fierce Competition Technology as substitute

To Consumers (many) Direct Mailing Distribution of Goods

Expected growth Selective Competition Technology as complement

From Consumers (many) Requests of Information Orders Payments Limited market Limited Competition Technology as substitute

Mail Personal communications

Shrinking market Niche Competition Technology as substitute

In fact, at the observatory of state-owned postal services, a dark shadow covers the area of services in the business-to-business segment. The endowment of resources and capabilities which characterizes the large organization specialized in this rich and growing segment appears to be reachable only through a process of

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mergers and acquisition, as the recent moves of KPN with TNT Post Group and of Deutsche Post with DHL tend to demonstrate.

The only area where public postal services still hold a strong presence is in the "many-to-many" segment, which, although large, is the less profitable one, where technology act as a substitute. The two segments in which traditional postal services still have some card to play are those connecting business to consumer and, to some extent, viceversa. In the "few-to-many" segment the technology of communication works as a complement: on one hand, it subtracts volume of mail traffic replaced with electronic communication, but on the other hand it increases the market demand for a modern and extensive service of parcel delivery to households. Also handling the flow of communication from households to businesses, postal organizations may become, with respect to this segment, a sort of "infomediaries" (Hagel and Rayport, 1997), playing on the customers' side rather than on the vendors' one. The defense of this "strategic crescent" will however imply the "decommoditization" of the existing letters and parcels, escaping both from the heritage of the old processbased or product-based segmentation and the traps of traditional regulatory classifications.

3. Instilling Organizational Purpose

After the comprehension of the competitive challenges and the definition of a clear strategic position, European state-owned postal services need to have their organizations evolve fast, sharing a sense of urgency an common goals.

3.1 The experience of Swiss Postal Services

The example taken from the mission statement of the Swiss postal services already broaches some important aspects of organizational change and with it of instilling organizational purpose. However, in the case of Swiss Post, it is not easy to transform a corporate culture of 38 500 employees dispersed in 3636 different post offices. In 1992, the Swiss postal services started their turnaround process with the project change post that ended spring 1998. Two phases may be distinguished; the first phase from 1992 - 1995 was characterized by
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drastic changes in the organizational as well as the legal structure. A new post law prevented the cross financing, or to put it differently the subsidy, between the Swiss Telecom and the postal services of about 830 ML Swiss Francs in 1990. This was the start for a cost reduction program and with it of an installation of a systematic controlling system. In the early nineties, the postal services had no cost transparency, even a balance sheet for their own activities was missing. Therefore, an internal accountancy has been developed and introduced as an important leadership tool. In addition, new organizational structures have been introduced as shown in Figure 1. The underlying principles could be described as follows: flat hierarchies, decentralization, process orientation, product management and sales, management by objectives, and cooperative leadership.

Figure 2: Organizational Chart of the Swiss Postal Services

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The second phase of the change post - project was then characterized by inventing new products, promoting customer orientation, redefining sales. In sum, it was about changing from a more egocentric, inward-oriented culture to a market-oriented one. This was internally called the real reengineering of the postal services. The main objective was not to change the postal service, the project rather intended to develop a permanent capacity for change. The core-challenge in this phase was to find a way to change government employees with life-long employment. However, the Swiss postal services were able to create an incentive system to support the change process:

1. The creation of new, exciting jobs. 2. Early retirement for employees over the age of 55. 3. On the job coaching. 4. Training programs (internally and externally). 5. Implementation workshops of the corporate mission (contribution of each organizational unit was required). 6. New models for flexible working hours. 7. Freedom in the modification of existing jobs.

This incentive system has been lined up to support organizational activities characterized by total quality and continuos learning - or to put it differently - an enterprising atmosphere has been created. Based on the principles of TQM and Learning Organization, Rey and Finger (1994, p. 57) outlined 10 principles for the Swiss postal services to become a company in motion:

1. Support in house competition among the distinct services. 2. Encourage citizen to cooperate in shifting control from the bureaucracy to the society. 3. Focus on results rather than on input. 4. Motivate through objectives and mission rather than through rules and regulations. 5. Treat your colleagues as customers. 6. Avoid problems through preemptive solution generation. 7. Concentrate your activities on earning money instead of spending it.

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8. Decentralize power by involving middle management. 9. Favor market-mechanisms instead of bureaucratic ones. 10. Go beyond being a provider of services and bundle up the willpower of the team to solve the problems of our society.

3.2 Assessing needs in the portfolio of managerial skills: a survey

Among the main concerns of Postal Service top management teams there is to find out which skills and competencies are required to facilitate the process of strategic renewal.

In order to perform an initial evaluation of the problem, we have run a preliminary survey on 200 managers of Poste Italiane at the moment of the transformation into a state-owned company (first half of 1998). The survey was based on a self-assessment questionnaire about managerial skills needed for supporting the change process. Participants were asked to grade their current individual level in crucial areas of functional skills and the estimated urgency of further investing in them in view of the new environmental and organizational challenges.

We tested the hypothesis that at least among managers, the message of the need for a strategic shift is getting acceptance, but there is still limited awareness about the real competitive gap existing between the organization and the new competitive and environmental requirements.

The descriptive statistics present a scenario of relative optimism about three key areas of skills: marketing, competitive policies and customer relations. The skills in dealing with competitive issues are considered insufficient by a narrow majority (54%), whereas the cumulated values of those who consider their personal skills to be at a good or sufficient level exceed 70% for marketing and reach 76% for customer relations.

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Self-assessment of level of current individual skills

100%

90% 80% 70%

60%

insufficient
50%

sufficient good

40% 30% 20%

10% 0%

Marketing 30% 46% 25%

Competitive Policies 54% 35% 11%

Customer Relations 24% 43% 33%

insufficient sufficient good

Source: SDA Bocconi survey, 1998

Things seem to be different when it comes to assessing the need of further investing in managerial education with respect to the same areas of competence. Those who deem as not important for their future to invest in these directions are a small minority, justified by the personal perception of being asked a strictly functional role.

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Self-assessment of need for further individual skills

100%

90%

80%

70%

60%
required

50%

useful not important

40%

30%

20%

10%

0% required useful not important

Marketing 41% 56% 4%

Competitive Policies 60% 34% 6%

Customer Relations 46% 41% 13%

Source: SDA Bocconi survey, 1998

Although this initial survey suffers a lack of comparability due to the self-assessment process, it provides interesting signals about not only the need of instilling a sense of purpose and urgency, but also a clear view of the competitive situation. Only the latter would in fact put an end to the sense of monopolistic isolation and would provide more objective terms of reference to assess the pool of resources and competencies within the organization. Postal Services managers have been emphatically talking for years about the need for a change. Not all of them seem to have been coherently exposed to the bitter reality of a shrinking customer base, the effects of technology substitution and the ever-greater threats by competitors.

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These considerations were controlled for the influence of demographic factors such as age, firm and industry tenure, and educational background. There was no significant correlation between the results of the selfassessment questionnaire and neither the level of educational background (almost all of them have a University degree) nor the field of undergraduate studies. Since most of them have spent their entire career within the public Postal Services, there is virtually complete overlapping between professional age, firm tenure and industry tenure. However, age shows a positive correlation with what can be termed as a sort of selfcomplacency: the "old dogs" consistently grade themselves better than their younger counterparts in all major areas of competencies. The positive correlation between age and the self-assessed grade of current skills is 0.19 in marketing, 0.17 in competitive policies and 0.11 in customer relations. Consistently, correlation with age becomes negative when referred to the expressed need for further training in the same areas. The mean of age (48.8 years) for the surveyed sample is close to, if not lower than, the mean age of managers in Italian public institutions and services, thus offering no room to invalidate the outcomes of descriptive statistics. If anything, being young in the postal business helps in reinforcing the perception that the industry is on the verge of a radical and irreversible change.

4. Managing Deregulation
Founded in 1849, the Swiss postal services experienced its first rupture when they founded the Swiss PTT in 1920, a marriage between post, telegraph and telephone services. In 1978, PTT introduced the first postomatdevice, which allowed customers to get access to their post-giros. Since 1989, the money on the giro even yielded an interest. By the end of 1997, two companies develop from the PTT; the Swiss postal services and the Swisscom. The former is still competent for transportation of people, mail, parcels, and money. The latter, Swisscom, has been formed as a joint-stock company underlying a special law in order to increase competitiveness in an increasingly liberalized market.

Nevertheless, the Swiss postal services are still fully dependent from the Swiss government and are to a large extent protected by it. To some extent more liberalized is La Poste in France, which may be described as an autonomous public company where employees enjoy the status of being in the public service. Great Britain, as

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an avant-garde in the history of the liberalization of national postal services, which started in 1969, has made it up to establish British Post Office as a public company with employees under private law.

Rey and Finger (1994, pp. 91/92) describe the emancipation of the national postal services of the Netherlands, Great Britain, Germany and France as a steady process of reducing governmental protection and increasing market exposure. The postal services need to increase the speed of their reforms even in countries with a conservative economic policy if they want to keep their market position. The declared objective of the German postal service DBP Postdienst, for instance, is to become the market leader for postal services in Europe. The fact that DBP Postdienst has already an increasingly strong presence in Switzerland shows that this statement is not only part of a big dream. The Swiss postal services, on the other hand, enter other markets too; although PTT is a state-controlled company, they act in Northern Italy as a private unit. As a consequence from the first deregulation of the European market, the national postal services do not only compete against the usual competitors but also against each other.

The institutional structures emerging from the deregulation have a few common characteristics according to Rey and Finger (1994, pp. 91/92): They changed from monolithic giants including telecommunication, postal and financial services to separated units (two in France and three in the Netherlands, Great Britain and Germany). This change may be illustrated by the metaphor of an oiler steering to the Dutch cost with its breaking distance of roughly 60 kilometers, transformed into three small tankers with a smaller turning circle and breaking distance. To make the post-ship even further maneuverable, the new units have been subdivided into product-based profit-centers as already shown in Figure 2. The reduced influence of the government has facilitated furthermore the development of a net of alliances and joint ventures to achieve a strong position in the international market and to increase the degree of diversification.

Does the size of post matter?

With an expected wave of mergers and acquisitions ahead, another question gains legitimacy: What is the optimum size of mail distribution, sorting and transportation operations in Europe? It is likely that the activities
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which can benefit most from economies of scale or scope will lead to a concentration among few large players in the European market, allied with the major US companies. The ultimate question is therefore: who will survive in a market that would probably see no more than four or five large "postal" operators in the next future? In order to prepare the ground for further analysis, we have investigated the relationship between level of demand, operating efficiency, market size and performances of national postal services in EU countries.

We hypothesize that the level of demand, the operating efficiency and the total size of the market would have a positive correlation with the financial performances of national Postal Services in the EU countries (including Switzerland).

As an indicator of financial performances we have chosen the operating margin (defined as the difference between operating revenues and operating costs in percentage with respect to the operating revenues) referring only to postal services. It constitutes one of the few comparable indicators of financial performance in an industry were financial data are not easy to standardize. The revenues of possible financial services sold by postal organizations are not included since they would largely bias the results due to substantially different national regulations.

As a first-level operationalisation of the level of demand of postal services, we used the average number of mail objects send in each country by one person in one year. There is a large difference in national values, which range from 35 mail objects per person/year in Greece to more than 600 in Switzerland.

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Correlation between mail volume per person and operating margin (%)

10,0%

5,0%
2

R = 0,0857 0,0% 0 100 200 300 400 500 600 700

[(op. revenues-op.costs)/op.revenues]

Operating margin (%)

-5,0%

-10,0%

-15,0%

-20,0% Mail objects per person/year

Source: Elaboration on UPU data (1996)

The weak correlation obtained between the level of demand (measured as indicated) and financial performances (operating margin %) of Postal Services in EU countries does not conclusively support the first hypothesis. A relatively stronger influence is instead seen on performances when correlating with an indicator of operating efficiency. As a proxy of efficiency we used the average number of mail objects handled by an employee in one year. Here, too, there is a wide range of value within European countries: from the inefficient Italian and Greek postal organizations which barely move little more than 30.000 postal object per employee every year, to the excellent performances of France, United Kingdom and Switzerland which are as much as three times more efficient.

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Correlation between mail volume per employee and operating margin (%)
10,0%

5,0% R = 0,1083
[(op. revenues-op.costs)/op.revenues]
2

Operating margin (%)

0,0% 20 40 60 80 100 120

-5,0%

-10,0%

-15,0%

-20,0% Mail volume per employee (,000)

Source: Elaboration on UPU data (1996)

In a business like the postal services, where all the analyses refer to the exploiting of economies of scale as a clear way towards achieving higher efficiency, it would be legitimate to expect a marked relationship between total size of the (national) market and financial performances. Though, from this initial analysis derives no decisive support for the hypothesis that "big is beautiful", at least when market size is measured (as we did) in terms of undifferentiated "mail objects per year". Looking at anecdotal signs, indeed, the size of the "natural" national market would have never permitted to Dutch post the results it has achieved in terms of successful competitive evolution.
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Correlation between total mail volumes/year and operating margin (%)

10,0%

5,0%

R = 0,0417
[(op. revenues-op.costs)/op.revenues]

0,0% 5.000 10.000 15.000 20.000 25.000

Operating margin (%)

-5,0%

-10,0%

-15,0%

-20,0% Mail objects handled per year (millions)

The purpose of this initial assessment is not, therefore, to verify or falsify already well-defined hypotheses on the pattern of strategic renewal for European Postal services, but rather to suggest the adoption of a cautious process of sound conceptualization and accurate operationalisation before drawing clear-cut conclusions on the nature of the undergoing process. In particular, as Bot et al. (1997) implicitly suggest, the relationship between the degree of autonomy from the government and financial performances should be investigated accurately.

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5. Knocking at market's door

It is not too late for European state-owned postal services to search for a competitive corridor where they can successfully compete. But, for many of them, it is unlikely that defining this corridor will be easy, and that moving through it will be straightforward, if all feasible. In order to carefully study and monitor this interesting evolution in the next few years, we outline a list of research propositions aimed at describing the current and future strategic renewal path of European postal services. These propositions are to be intended as a possible basis for the formulation of testable hypotheses in further empirical research.

Proposition 1

A higher degree of deregulation and privatization, when jointly and smoothly managed by both the national regulatory authority and the postal organization, represents a major factor of influence in a process of strategic renewal, to a greater extent than market demand and size. Our point is that deregulation is not to be investigated as a mere environmental factor: on the contrary, the degree and the speed of deregulation might well be one of the element of national postal services' policy and an important result of its bargaining power as long as it retains a recognized social role and attracts the public opinion's support.

Proposition 2

The competitive corridor will be defined, at least in a first phase, on the basis of resources, competencies and skills of the organization, rather than on generic market needs. Operators focusing on building and reinforcing such competencies as marketing, customer relations and competitive policies are expected to show faster change processes than those who hit competitors' challenges before consolidating these critical capabilities. The traditional weaknesses of postal firms in terms of organizational purpose cannot be easily overcome by whatever brilliant strategic plan written by management consultants using a "one-size-fits-all" approach. Putting the trolley of customers in front of disoriented postal horses is not the quick-fix solution for this industry.

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Proposition 3

Postal operators with unbundled networks tend to show better performances than integrated ones. Future research should address a formal definition of the "value-creating system" represented by the new industry of unbundled postal and financial services, also attempting a comparison among the various configurations of "value nets" showed by postal organizations. As a caveat, the cases where the unbundling of integrated postal operations represented a specific phase in the program of liberalization and privatization should be carefully investigated to avoid misstated relations of causality.

Proposition 4

Better late than never, or better late than early? In the transformation from logistic-based operations to information-based business, and in particular for retail banking business, we envisage a possible application of a "latecomer advantage". This concept refers to having the opportunity to enter attractive markets by imitating and adopting operating systems, organizational structures, information technology and product design already tailored to the market needs, at a fraction of the costs of the competitors. The latecomer advantage is possibly supported by explicit or implicit provisions of the national government, willing to offer new opportunities of revenues in exchange for a reduction of direct or indirect financial transfers to postal organizations. But the latecomer advantage is also related to lower "cost of unlearning" of previous competencies and lower "costs of adoption" of the state-of-the-art processes, in particular when they are supported by information technology solutions such as ERP systems. As examples of this kind of advantage we refer to "tracking and tracing" solutions, call-center and "virtual banking" technologies adopted by early innovators at much higher costs, both in terms of investment and learning processes, which are now available at lower cost and with faster implementation processes.

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