The Us Postal Service - Product Market Conditions and Strategies - Case Study Example

Common Case Study on U.S. Postal Contents Background to the companys current operations and architecture 4 Analysis of product market conditions and strategies 4 Strategic analysis of the product market 4 Revenue 4 Boston Consulting Group matrix 5 Porter’s Five Forces analysis 5 Product Life Cycle analysis 7 Review of combined PLC of USPS 8 Comparative analysis of USPS with its competitors\ 9 Strategic recommendations in managerial perspective 11 Capital Market Conditions and strategies 11 Capital Structure 12 Equity and Debt 12 Merger and Acquisition 12 Equity and Share purchase 13 Leasing and off balance sheet financing 13 The internal organization architecture system 13 USPS’ Business Model 14 Business strategy affecting organizational structure 15 Efficacy of USPS’ organizational structure 15 Technological impact on business model 16 Cost reduction and quality improvement 16 Conclusion 17 References 18 Background to the companys current operations and architecture USPS is an independent body under the regulation of the US government. Its revenue is collected by the US treasury. It has a workforce of 700,000 employees. Its delivery system comprises of trucks, flight, air taxis, freights and trains. It has 31,686 post offices across US. The US postal service is spread across 5 regions and 85 districts. It follows a simple model in delivery of letters and packages. The operations include collection, culling, cancelling, sorting, transporting and delivery. Board of governors of USPS is responsible for setting policies and framework. They appoint the US post master general and the deputy post master general, who work on behalf of the board and looks after the overall business operations. Analysis of product market conditions and strategies Strategic analysis of the product market Revenue The US postal service has an outstanding debt of $5.5 billion to the US treasury department. It is facing a financial crisis owing to the falling demand of its first class mail service. The first class mail volume fell to 68696 million pieces in 2012 from 103656 million pieces in 2001. The prolific use of mobile communications, text messages, emails have led to the fall of the business volume of USPS. Electronic bills i.e. telephone, power, etc and banking have also contributed substantially to the decline of trade volumes. Boston Consulting Group matrix Figure 1: BCG matrix of USPS The above figure represents the growth share matrix of USPS. The SBUs of USPS are first class mail, standard mail and packages. Each of the quadrants in the matrix is significant of the cash generations of USPS. Considering the case of USPS, it lies in the fourth quadrant, which symbolises a dog. The dog in the BCG matrix signifies that USPS has high net cash consumption in a slowing moving industry (Proctor, 2000). The postal services market has a slow growth rate. USPS has high net consumption owing to its high cost of technological up gradation and debt payments to the US treasury department. USPS has reached it maximum borrowing limit of $15 billion and has lost $1.3 billion for the quarter ended 2012 (Hutt and Speh, 2012). Porter’s Five Forces analysis 1. Existing rivalry – USPS faces stringent rivalry from UPS, DHL, FedEx, etc. Though the market for postal services is in the declining stage, still SBUs like first class mail and packages are still thriving, still it has lost a lot of its trade volume to its counterparts i.e. FedEx and UPS. Better technology of its competitors has resulted in strong competition faced by USPS (Jayachandran, 2004). 2. Threat of substitutes – USPS’ trade volume has significantly decreased owing to continuous technological innovation. The rise of internet use in various business spheres has contributed to the declining business of USPS. Demographic change and cost advantages with high value proposition have resulted in the usage of cellular networks, SMS, facebook, whatsapp, email, electronic bills and invoices, which led to the fall in trade of USPS (Daft, 2008). 3. Threat of new competitor – Owing to high entry barriers, the new entrants’ threat is not much of a concern for USPS. Customer brand loyalty is also another major determinant of the intensity of potential threats. 4. Bargaining power of suppliers – USPS has no control over the entities in its distribution network. It has no control over fuel prices, flight charges, etc thus indicative of high supplier bargaining power. 5. Bargaining power of customers – The customer segment is characterised by business or domestic customers. With the advent of technological innovation, customers have become more vulnerable. Other alternative sources of communication have led to better prices that attracted newer market segments. Customers enjoy high bargaining power characterised by low switching costs (Schermerhorn, 2011). Product Life Cycle analysis Figure 2: PLC of first class mail and standard mail Product life cycle of first class mail and standard mail is in the decline stage. The postal services market has witnessed significant changes over the last decade in respect to alternative sources of communication which offers low cost solutions to business and household customers. The first class mail volume dropped from 103656 million in 2001 to 68696 million in 2012. The standard mail has also witnessed a significant loss in the trade volume owing to low cost alternate solutions like, email, text messages, mobile communication, social networking sites, etc (Grieves, 2006). Figure 3: PLC of Parcel and packages Product life cycle of parcel and packages have reached a maturity and are expected to decline over the years. Private players like UPS, DHL and Fedex have eaten a large portion of USPS market share. Its counterparts have employed better resources to enjoy economies of scale, thus offering better prices for their services. Customers have been driven by the competitive forces, reducing the business volume of USPS (Stark, 2007). Review of combined PLC of USPS USPS’ revenue has started to decline, owing to technological innovation and competition. It is in the decline stage, and should consider the implications of its existing outdated business model. High technological up gradation has resulted in high prices; customers are switching brands that offer competitive price. With the evolution of internet and alternative mail services, it has lost a substantial share to big companies like Google, yahoo, Microsoft, etc. Tech companies have driven the expansion of the mail service market, with low cost. USPS’ major revenue is generated from mail service that has been on a down trend from the last decade and was seen to drop at much faster rate, owing to stiff competition from tech and cellular companies (Hill, and Jones, 2007). Comparative analysis of USPS with its competitors\ Comparison in financial perspective Figure 4: Net revenue of USPS and its peers (2014) The above figure represents the comparative analysis of USPS and its peers based on net revenue for the fiscal 2014. UPS consolidated tops the list with $58.2 billion followed by Fedex with $11.7 billion. USPS reports a net loss of $5.5 billion. USPS’ net loss has increased from its last fiscal which stood at $5 billion. USPS reported $67.8 billion as its operating income and $73.2 billion as its operating expense. USPS has a confined market that caters to the states of US, which resulted in such poor performance, unlike its peers that have a global presence. Comparison in service perspective Key Factors USPS UPS Fedex Weight Up to 70 lbs Up to 150 lbs Envelopes should be within 10 lbs and packs and boxes should weigh less than 50 lbs. Delivery options PO box or APO Requires delivery address or pick up location Requires delivery address or pick up location Packaging Priority mail has free packaging It offers free packaging that includes packs and tubes Provides packaging facilities. Tracking Free for priority mail and for others only visibility tracking. Detailed tracking, up to 25 numbers. It also allows detail tracking up to 30 numbers. Drop off locations Caters to the states of US. It has 63000 shipping locations across the globe It accounts for 51000 shipping locations worldwide along with drop box facilities. Bulk mail discounts Discounts available for first class business mails i.e. for every 500 mails. Gives discounts to business mails It also provides discounts to business mails. Insurance $100 for priority expresses mails. It also offers flat rate. Up to $100 and additional charges for additional insurance coverage. Up to $99 Strategic recommendations in managerial perspective USPS needs to consider downsizing its unprofitable product lines and look to reduce its resource utilization. Streamlining workforce would work well in the short run, but to achieve long term sustainability, it needs to address the resource gap that affects is service standards (Ferrell, and Hartline, 2012). Making strategic alliance with tech companies with the aim of sharing each other’s resources will help improve the revenue line. Such strategic partnerships will prove to be sustainable for USPS in the future. The organization had witnessed a fall in its service standard, owing to delayed delivery, which can be improved by restructuring its business model (Crew, and Brennan, 2014). There exists a service gap across its business and household segments, which calls for immediate measures to increase its focus on the household segment and not only on the business mail category. Capital Market Conditions and strategies USPS’ falling revenue has resulted in deteriorating financial health. It has reported a per day loss of $25 million. It has lost more than $41 billion over a period of six years till 2012. Its outstanding debt for the year end 2012 stood at $11.1 billion. The above performance outcome has proven to be detrimental for the cash flow of USPS’ business. Capital Structure USPS’ depend on US government funds for expansion. The entire stake is with the US treasury department. Owing to its structural limitations, it is restricted from issuing equity. US government’s regulation on capital market access has impeded the flow of fresh capital (Chandra, 2011). Though the Postal Reorganization Act of 1970 allowed USPS to raise funds by issuing bonds, still it needs to access other forms of financing to lower its cost of borrowing to fund its investment. Following the Modigliani-millers model, USPS should have independency in choosing the source of finance i.e. equity or debt which is aimed at increasing the value of the firm from its earning potential and risk of its assets (Cox and Fardon, 2008). Equity and Debt After the postal Reorganization Act of 1970, USPS was allowed to raise finance only through debt capital by issuing bonds. US treasury should divest its stake in USPS and allow it to access the capital market to fund its investments (Arnold, 2008). Changing the source of funds from taxpayers to shareholders will result in better and effective governance. Paying dividends would prove to be an effective measure of USPS value, which can be further used by other stakeholders to assess the overall performance (Higgins, 2008). Merger and Acquisition On account of declining revenue streams, USPS should either merge or tied up with tech companies on immediate basis to leverage its resources or try to acquire other small companies to benefit from their existing resources and markets (Cox and Fardon, 2008). Through mergers it will be able to use the existing technology of the partnering company as well as share its resources to enjoy higher economies of scale. Either of the strategic decisions would require additional funds, which can be financed through either debt or equity. It should consider privatising its stake i.e. divestment of the US Treasury’s stake in USPS to private companies (Pandey, 2009). Equity and Share purchase USPS, in order to expand its business operations through technological up gradation, would require additional capital. As a public enterprise it is prohibited to raise equity, but can issue bonds (Graham, and Smart, 2011). Such structural inhibitions limit its scope of expansions. It should commercialize its status in order to accept public money for financing its activities. Having the status of corporation will allow it to buy shares that will help USPS in enjoying the physical and financial resources of the other company (Periasamy, 2009). Leasing and off balance sheet financing Apart from using the above methods to raise finance for its investments, it can use off balance sheet financing which includes partnerships, leases, etc. It can save the large expenses involved in up grading technologies in improving its operations of mail delivery and processing. Usually such form of raising capital does not feature in the balance sheet (Shim, and Siegel, 2000). It will help save its investible surplus in daily operations, resulting in lowering its unit cost unlike in a capital expenditure which involves high initial cost per unit in the short run (Spurga, 2004). The internal organization architecture system The total workforce of USPS stood at 700000 having an annual budget of $9.8 billion which accounts for 80% of its total budget. It lacked control of the payroll and incentives provided to its employees and had to depend on the Treasury department for capital expansion, resulting in deficit and inadequate budget allocations. However, after the implementation of The Postal Reorganization Act of 1970, administering policies were changed, which eliminated the control of the US Treasury board in matters of framing policies, employee incentives and appraisal. Following the Zimmerman’s three legged stool of capability, technology and people, USPS after the implementation of the Reorganization Act was able to increase its capability by having better budget allocations that saw better technologies, effective management and improved working conditions, which led to increased productivity. It made budget allocations for postmasters that helped to reduce the postal deficit from $2.3 billion to $1.5 billion. The new administrative policy was implemented across its entire operational network that is spread across 5 regions and 85 districts (Ross, 2012). USPS’ Business Model It followed a centralized model for its mail delivery system. Its mail processing system comprises collection, culling, cancelling, sorting, transportation and delivery. It introduced mechanization like letter sorting machine, zip mail translators and optical character readers which replaced the clerks who used to manually handle the process. Though it managed to reduce the time involved in sorting mails, still it suffered delay in transportation and delivery. It implemented two programs i.e. managed mail program and area mail processing that helped USPS gain cost advantage but at the same time it increased the time of delivery due to problems relating to transportation. It introduced colour tags to identify mails based on its priority of delivery. It introduced a new process where mails were sorted at every service distribution centres, which led to increased efficiency (Lasserre, 2012). USPS should try and reduce the round trip journeys which accounts for delays more than 100 miles. A new electronic system that provides real time data to the customers should be developed. Alternatives to air transportation should be employed that will help reduce the spiralling cost of USPS. To meet the demand, it should look to foster structural change to its existing business model. It should have separate business process for business and household mails that will help build on its ability to cater to the different segments (Mcfarlin and Sweeney, 2008). Business strategy affecting organizational structure USPS adopted a strategy, to cut its workforce which accounted for 85% of its budget, to reduce its deficit and rate rise. It witnessed an annual rate increase of $900 million. USPS offered early retirement to its workers. Such a move helped them to adjust its annual rate rise by $400 million and also reduced its workforce by 33000. Downsizing the workforce had adverse effects on its efficiency and productivity. SDCs were understaffed that led to an increase in the delivery time, affecting the entire mail processing system. New technologies failed to impact the process, owing to its inherent faults, which coupled with the job freeze disrupted the service system when encountered with large volume of mail during Christmas (Bocij, Greasley and Hickie, 2008). Efficacy of USPS’ organizational structure The postal service industry is labour intensive. Downsizing workforce is bound to disrupt the mail operations. It works as a public body under the US treasury that makes it even more difficult to frame policies and create budgets. It should divest its share to the public to push the much needed capital in the system to expand its scope of operations. Going public will also benefit USPS with a good governance framework, this will be indicated by the price movements of its stock. The change in its organizational structure from public to private will create better management and control. High attrition rate creates scepticism among the existing workers that will affect the overall productivity. Moreover it is a short term approach that will create adversities in the service delivery standards in the long run (Boddy, 2005). Technological impact on business model With continuous technological innovation like mails, SMS, e-banking, e-commerce, social networking has reduced the usage of handwritten letters and changed the dimensions of communication. It has added value to the process by making delivery in seconds at a low price. The rise of major tech companies that came up with new and better solutions of communication has posed major challenges to the existing business model of USPS. Less documentation in trade and banking, owing to e-documents and invoices has led to the declining business of United States Postal Service (Lasserre, 2012). Cost reduction and quality improvement Quality improvement in the postal service can only be achieved by adding value propositions to customers by promptness in delivery. USPS should focus more on its business customers that account for 70% of its revenue which will help USPS in achieving economies of scale. Investing in better technology will affect the initial outlay, but in the long run it will help reduce the cost per mail. The organization can use drones in their service delivery process that will eliminate the high air transportation cost and also add value to its delivery system. Quality improvement needs investments. USPS’ stake should be divested in order to invite public funding that will transfer the control of the government to the shareholders, ensuring better governance and management (Henry, 2011). Conclusion The US postal service suffers various challenges internally and externally. With the declining use of mails owing to technological innovation, the mail service industry has taken a hit. It witnessed a fall in demand of its products. Though there is very little scope of improvement, owing to the nature of its business, competition and technological threats, still if it can bring about change in its organizational structure and new service streams, it will improve its revenue stream and retain customer confidence. Restructuring of organizational hierarchy and policies will help USPS in gaining better control and fostering effective management practices. Ineffective management practices have lead to fall in its service standards which also needs to be considered in making new reforms. 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