The State of Affairs and Sustainable Business Model for the USPS - Assignment Example

Submit a report to the Directors of USPS diagnosing the of affairs and offering some prognosis on what might be a more sustainable business model. Contents Contents 2 Introduction 3 Analysis 4 Financial performance of the USPS 4 The product market conditions 5 Capital market conditions 7 Recommendations 9 Conclusion 11 References 11 Introduction The United States Postal Service (USPS) is also known as the Postal Service or the US mail. This agency was originally known as the United States Post Office Department. The agency was completely controlled and managed by the Federal government of the United States of America. Today, it is an independent agency which has its headquarters in Washington D. C. The USPS functions as an independent agency under the governance of the United States Federal Government and is responsible for the provision of postal services in the country. The agency boasts of a proud tradition in which the roots of the agency can be traced back to 1775 when the agency was formed for providing postal services on the pre independence era of America. Currently, the USPS is the largest Federal and civilian employer in the country with more than 600,000 direct and on direct employees working for the organization. The contribution and impacts of the USPS can be prominently noted in the society of America. However, in the current times, the USPS as an organization is facing a number of challenges and is showing declining revenues and financial performances at the end of every financial year. Thus, the threat of solvency for the agency has been raised which makes it necessary to analyze the root cause of the depleting competitiveness and efficiency of the organization and to find out ways in which the sustainability of the organization as a value adding agency in the country can be ensured. This report is prepared with the aim of identifying the main reasons that have driven the current low performing state of the USPS and suggesting suitable recommendations and strategies that may enable the agency to regain its position in the market. For this purpose, the product market conditions, the capital market conditions, the external environment of the agency and the challenges faced by the agency are evaluated along with a comparison drawn to another very successful postal agency, the Royal Mail Services in the United Kingdom. The unique feature of the legal and regulatory environment in which the USPS operates is also studied in the report. The strategic business model of the USPS is analyzed and the ways in which modifications can be made to the business model to negate the challenges for the agency are proposed. Analysis The business model of any organization or agency comprises of the financial and corporate strategies, philosophies of the organization and the resources and capabilities of the organization. The ways in which a company competes and strategizes in the product market and the manner in which it finances different types of business operations determines the strength of its strategic business model (Carbaugh and Tenerelli, 2011). The consideration of the ways in which an enterprise mobilizes the available resources and capabilities within the organization is also an important determinant of a sustainable business model and consequently the short term and long terms success of the organization (Magretta, 2002). The evaluation and analysis of the effectiveness of the business model used in the business as well as the examination of the state of affairs affecting the functioning of an organization are critical for proposing appropriate ways of developing a more sustainable business model for the organization (Musacco, 2009). Financial performance of the USPS The last year that USPS generated profits was in the financial year 2006. From 2006, the financial performance of the agency started deteriorating at a steady state. As per the financial reports presented by the company, from 2006 to 2013, USPS reported a total loss of USD 46 billion. The organization has low cash reserves and has reached the limits of its maximum permissible borrowing level (Herr, 2011). The total default amounts of the agency stands at USD 16.7 million and the liabilities of the agency have far exceeded the asset values in the business. As per a report published by McKinsey in 2014, the cumulative losses of the USPS are likely to have a value of USD 238 billion if the loss levels are continued at the current trajectory basis. The analysts blame the unsustainable and outdated business model of the USPS for its deteriorating financial performance and increasing non sustainability (Mckinsey, 2014). Since the USPS operates as the central agency in the USD 800 billion values US mail industry, therefore, the insolvency of the agency can have far reaching ramifications for the economy as well as the society of the country. The insolvency of the agency would further impact the lives of the thousands of people that it employs and also disrupt the postal and mail delivery system in the country to a large extent. Since, the USPS have been continuously denying the access to federal funding, therefore, the agency is also criticized to have protected the money of the taxpayers in the country which is tarnishing the corporate image of the USPS. The product market conditions The USPS as a postal service providing agency offers two main types of services which are the competitive services and the market dominant services. The market dominant category of services of USPS includes the Standard Mail services, the Periodical Mail services and the First Class Mail services. The competitive range of services of the USPS includes the International Mails service systems and the Shipping and Packaging services (Cusumano, 2012). A single customer of the USPS accounts for around 3% of the operating revenue of the agency (Ellis, 2013). USPS maintains a statutory monopoly and in the domain of the Market dominant mail services (Herr, 2011). In contrast, the agency faces intense competition from the other service providers like the United Parcel Service (UPS) and FEDEX in the area of the competitive category of postal services (Sudarsanam and Lai, 2011). Figure 1: Revenues of USPS by product categories (Source: Trahms, Ndofor and Sirmon, 2013) The product performance of the USPS as studied over a period of 3 years from 2011-2013, shows that the main revenues of the agency are generated from the First Class Mail Services. Around 70% of the total revenues of the organization are brought in by this class of product along with the revenues generated by the Standard Mail services. Since, the volume of the orders for the First Cass Mail Services have been decreasing at a steady level over the last few years, this has led to major concerns regarding the turnover the organization. A report published by the Boston Consulting group on 2010, forecasted that the mail services of the country would decrease from the all time high level of 213 billion to less than 150 billion by the year 2020 (Boston Consulting Group, 2010). The group has also forecasted that the First Class Mail services of the agency would face major threats because of the increasing control of the competitors on the priority mail services and the volumes for this service is projected to drop from 84 billion units to 50 billion units by the year 2020, thereby showing a decline in the pieces transacted by a whopping 35%. This problem would stem from the exceeding influence of the electronic division which would act as a major substitute product for the hardcopy or regular mail systems. Since, the bills, statements, payments and invoices have stated being transacted and delivered through the internet (Reichard, 2006). Therefore, the sale of the mail services have faced serious declined in the last few years. Also the increasing focus of the corporate and individuals to use the interest as a faster and cheaper method of transacting and communicating and the focus on saving paper has been another main reason that has made the strategies used in the current business model of the USPS more unsustainable and redundant over the last few years (Smith, Brickley, Willett and Zimmerman, 2009). The revenues from the standard mail services are forecasted to increase marginally in the future years; this is not expected to add major value to the business because one unit of the First Class Mail service generates three times the profit levels as compared to one unit of a Standard Mail. Capital market conditions The level of debt of the agency is increasing at an accelerating rate which has also influenced the widening of the gaps between the asset value and liabilities values held by the organization. The short term liquidity position of the agency is weak as suggested by the values of the current ratios in the last 5 years (Bridger, Fortunato, Alter, Montopoli and Schramm, 2013). Year Current Ratio 2009 0.35445614 2010 0.126044121 2011 0.139531209 2012 0.10473699 2013 0.102063626 The debt levels of USPS have increased to threatening levels and the reserves have become sufficient for funding the day to day operations of the agency. The interest expense for the USPS was reported to 91 million in the financial year 2013 (USPS, 2013). The USPS operates within a challenging business environment in which dynamic shifts are being noted over the last few years (Kosar, 2013). These main challenges that are being faced by the postal service agency are the challenging economic factors, reduction in the mail volumes, emergence of multiple substitute products of the postal service system and the increasing level of competition from private and public postal agencies in the country (Kielbowicz, 2003). Also, the USPS is facing major challenges due to the back dated business model on which it operates and the internal architecture of the agency which makes it incapable of competing in a dynamic, fast shifting and highly competitive business environment as existing in the postal services sector of the United States of America. The high operational costs coupled with the constantly declining revenue and profitability is acting as major threats to the solvency of the organization. Amid these kinds of threats and challenges, the USPS seems to be in an extreme financial crisis and little means to recover from these crises situation. The organization is experiencing high recurring costs, has accessed the maximum limit for its borrowings and does not generate sufficient revenues that can be used to meet its financial obligations and cover its operational expenses. Further, the focus of the USPS to stick to its traditional business model and refusing to access federal funding and sources has led to further deterioration in the financial position of the organization (Geddes, 2012). Recommendations A broad based restructuring seems to be the solution for the weakening financial situation of the USPS. USPS should immediately develop a more strategic and sustainable business model that would act as an appropriate business model in the current dynamic business environment in the United States of America. USPS can integrate new systems and strategies in their business model and corporate functions so that the inherent weaknesses associated with the internal structure of the organization can be adequately dealt with. USPS should immediately allow the government agencies and the businesses in the country to tap into the widely established logistics infrastructures and the delivery networks through the provision of suitable service and platform development strategies (Henkin, 2007). Another main strategy that can be used in the business model of the organization is to develop partnerships with third party businesses for the delivery of products, Since, the delays in deliveries of mails and the high volumes of loss of mails have been a primary cause of the functional weaknesses of the postal service agency, therefore the partnerships developed with third party logistics system would not only enable the organization to provide better and faster services to its customer groups but also help to extract the potentials of the vast network that has been established by the agency over the years of its existence (Reisner, 2002). The use of a cash balance plan would also be a recommended change that the agency can bring within its business model. This would ensure the better management of the RHB funding burdens for the agency. Currently, the USPS is using a defined benefit plan which does very less to mitigate the problems and burdens associated with the funding for the agency (Schieber, 2011). The comparison of the defined benefit plan and the cash balance plan as given in the following chart shows the need for the adoption of the cash balance plan by USPS. Figure 2: The force of RHB prefunding on USPS (Source: Cancelosi, 2013). The cash balance plans are expected to be much less cost incurring for USPS as compared to the defined benefit plan which the postal service agency is using currently. As such, this would help USPS to control the high level of operating expenses incurred in the businesses (Adelman, 2010). Other strategies like the tie ups with online retailers and the employment of the USPS resources in different partnership initiatives like census, delivery of official and corporate documents and researching ion governmental projects may act as alternative avenues generating revenues for the agency. The organization can also provide consulting services and business inventorying consulting services in the domain of logistics development services. Using the base banking avenues and services like the Royal Mail Service in the United Kingdom can help the organization to compete more effectively against the financially strong competitors in the sector (Zimmerman, 2011). Additionally, introducing higher price flexibility for its different products and services can act as a competitive strategy for the business. These strategies have already been used by the highly successful Royal Mail Services in the UK. Debt restructuring and reorganization of the cost delivering unit of the organization would act as a main challenge in the business model that would enhance the financial performance and long term sustainability of the agency by improving the cash flows and reducing stakeholder conflicts to a controllable level (U. S. Government Accountability Office, 2014). Conclusion The problems that USP is facing are not cyclical in nature. Instead the agency is burdened by structural problems which are essentially related to the internal architecture and the business model of the agency. As such, the restructuring of the product market, the internal architecture of the agency and the capital market and focusing towards the employment of growth and sustainability strategies as discussed in the analysis would help the agency to develop a more sustainable business model that would add value to the financial and operational performances of the agency by making it more competitive, efficient and dynamic in nature. References Adelman, J. M. 2010. A Constitutional Conveyance of Intelligence, Public and Private: The Post Office, the Business of Printing, and the American Revolution. Enterprise & Society. Vol. 11(4), pp. 709–752.  Boston Consulting Group. 2010. Projecting U.S. Mail Volumes to 2020. Boston: Boston Consulting Group. Brickley, J., Smith, C., Zimmerman, J., & Willett, J. 2009. Using Organizational Architecture to Lead Change. Journal of Applied Corporate Finance. Vol. 21(2), pp. 58-66. Cancelosi, S. E. 2013. Under the knife: health law, health care reform, and beyond: The Shifting Focus of Federal Intervention in Retiree Health Benefits. Nev. LJ, Vol. 13(1), p.16. Carbaugh, R. & Tenerelli, T. 2011. Restructuring the US Postal Service. Cato Journal. Vol. 31(1), pp.129-130. Cusumano, M. A. 2012. Can services and platform thinking help the US Postal Service? Communications of the ACM. Vol. 55(4), pp. 21-23. Ellis, R. 2013. Critical Communication History| The Premature Death of Electronic Mail: The United States Postal Service’s E-COM Program, 1978-1985. International Journal of Communication. Vol.19 (7), p.100. Fortunato, M. W. P., Alter, T. R., Bridger, J. C., Schramm, K. A., & Montopoli, L. A. 2013. Weighing the universal service obligation: introducing rural well-being as a consideration in the viability of the United States Postal Service. Community Development. Vol. 44(2), pp. 200-221. Geddes, R. R. 2005. Policy watch: Reform of the U.S. Postal Service. Journal of Economic Perspectives. Vol.19 (1), pp. 217–232. Henkin, D. M.  2007. The Postal Age: The Emergence of Modern Communications in Nineteenth-Century America. Stanford: Cengage.  Herr, P. 2011. U.S. Postal Service: Mail Trends Highlight Need to Fundamentally Change Business Model (Report No. GAO-12-159). Washington, DC: Government Accountability Office (GAO). Herr, P. 2011. U.S. Postal Service: Modernization and Restructuring Needed to Address Financial Challenges (Report No. GAO-11-428T). Washington, DC: Government Accountability Office (GAO). Kielbowicz, R. 2003. The Press, Post Office, and Flow of News in the Early Republic.  Journal of the Early Republic. Vol. 23(1), pp. 254-260. Kosar, K. R. 2013. The US Postal Service’s Financial Condition: A Primer. Library of Congress. Washington, DC: Government Accountability Office (GAO). Magretta, J. 2002. Why business models matter. Harvard Business Review. Vol.80 (5), p.80. McKinsey. 2014. USPS Future Business Model. New York: McKinsey & Company. Musacco, S. 2009. beyond Going Postal: Shifting from Workplace Tragedies and Toxic Work Environments to a Safe and Healthy Organization. London: Book surge Publishing. Reichard, R. R.  2006. Spreading the News: The American Postal System from Franklin to Morse. New Jersey: Wiley.   Reisner, R. A. 2002. When a turnaround stalls. Harvard Business Review. Vol.80 (2), pp. 45-52. Schieber, S. J. 2011. Political economy of public sector retirement plans. Journal of Pension Economics and finance. Vol.10 (2), p. 260. Sudarsanam, S. & Lai, J. 2011. Corporate financial distress and turnaround strategies: An empirical analysis. British Journal of Management. Vol.12 (3), pp.180-182. Trahms, C. A., Ndofor, H. A. & Sirmon, D. G. 2013.Organizational Decline and Turnaround A Review and Agenda for Future Research. Journal of Management. Vol. 39(5), pp. 1277-1307. U. S. Government Accountability Office. 2014. Restructuring the U.S. Postal Service to Achieve Sustainable Financial Viability. [Online]. Available at http://www.gao.gov/highrisk/restructuring_postal/why_did_study. [Accessed on 18 March 2015]. USPS. 2013. Five-Year Business Plan Washington, DC. United States Postal Service. [Pdf]. Available at http://about.usps.com/strategic-planning/five-year-business-plan-2012-2017.pdf. [Accessed on 18 March 2015]. Zimmerman, J. L. 2011. Accounting for decision making and control. New York: McGraw-Hill/Irwin. Read More