In their book Billion Dollar Lessons, Carroll and Mui describe the most inexcusable business failures of the last twenty-five years.  One of the failures, “Staying the Course” poses particular difficulties for Risk Analysts.

The difficulty is three fold.  First, management believes if it stays the course everything will turn out fine.  Absent any significant data to the contrary, it is difficult to change managerial, let alone, institutional inertia.

Second, identifying a viable alternative against which to evaluate the impact of staying the course may be difficult because often the costs and benefits are not clear until years afterwards.

Finally, clients and customers are often psychologically and materially locked into the current strategy.  They, therefore, put pressure on the company and its board to stay the course.

Carroll and Mui offer Kodak as an example.  Kodak owned the photo film and print market for much of its history.   In 1981 Kodak conducted a major study on the impact that digital technology would have on its film and print business.  The study concluded the digit process posed no significant impact for at least ten years.  In the early 1990’s Kodak management used this study to justify staying the course.  By 2003, despite attempts to diversify and to enter the digital market, Kodak had to declare bankruptcy.

A current example of the Stay the Course is in the newspaper regularly, the U.S. Postal Service (USPS).  USPS has been bleeding red ink in the billions of dollars for over four years.  The major problem is the pre-funding of health benefits.  This problem can be solved through Congressional action, but given current political divisions and world events, such action seems unlikely. However, this prospect mitigates the urgency for change and encourages the institutional inertial and staying the course attitude.  (While this example is governmental, a mitigating factor can be anything, a prospective merger, a new product, etc. It is simply logical, yet unproven, rationale for staying the course.)

UNITED STATES POSTAL SERVICE
For the past several years, USPS Management has stressed volume over value added.  Post Master General Donahoe believes the Service’s customers are not the general public, but a few hundred bulk mailers. (wired.com/business/2013/08/outbox)  These mailers are the recipients of discounts which total between $14 to $18 billion dollars annually.  These discounts have been a staple of the Service for over twenty years. Yet, according to the Postal Regulatory Commission and a U.S. Court of Appeals, these discounts often exceed the cost of processing the mail.

The former President of the American Postal Workers Union (APWU) believes that “large mailers have corrupted the rate process to the extent that they are now creating their own rate totally divorces from the cost of operating a national system.” (burrusjournal.org/2013/09/07/a-ponzi-scheme)  He, of course, advocates an elimination of these discounts.

The mailers through their lobbying group note a direct relationship between rate increases and volume decline.  According to them a 5.6% increase in price, results in a 5.0% decline in business mail volume.  Studies conducted by the Services Office of Inspector General (OIG) and the Postal Regulatory Commission show no price elasticity.  In fact, the OIG study indicates that a price increase may cause mailers to be more efficient and more targeted in their mailings, thus reducing the complaints about junk mail.  (The junk mail issue aside, the extent of the relationship between price and volume decline is difficult to determine, since the most recent rate increases occurred during the recession.)

CHANGING MAIL MIX
What is certain is that mail mix is changing.  The two largest classifications by volume, as indicated by the first three quarter of 2013, are First-Class Mail (50,492 million pieces) which was down 4% from last year and Standard Mail (60,876 million pieces) up 1.9%. In terms of revenue, First–Class declined 2.2% declined, while the revenue from Standard Mail was up 2.9% from last year.  Shipping and Packages had a volume of 2,804 million, up 5.7% and revenue was up 7.5%.

The reduction in first class volume and accompanying revenue prompted Service Management to consolidate processing plants and reduce of staffing levels.  Management also reduced the delivery service standards by one to two days.  Some feel that the consolidation of plants and the accompanying reduction in service standards have gone too far.  The APWU, for instance, has filed a complaint with the Postal Regulatory Commission claiming that the Service is not even meeting its reduced service standards, noting that some business are not getting their mail until after 5 pm.

POWER OF NETFLIX
That the reduction in service standards is having a negative impact can be seen in Netflix’s decision to close Bloomfield Connecticut DVD distribution center.  There were three reasons for this closure.  First, Netflix, like most businesses, is seeking to be more efficient. Second, with delivery time being increased by one to two days, this area can be covered by other distribution centers.  Finally, there is a shift in the mode of movie delivery.  Over the last fifteen months DVD volume has declined from 10 to 7.5 million, while domestic streaming customers has increased from 23 to 30 million.

Netflix is the largest business mailer for the Service.  The rate of streaming increase versus the decline in DVD volume indicates that first class mail volume will continue to decline.  Since the profit margin of Standard to First-Class mail has traditionally been one third, it will take a 30% increase in business class mail to just cover a 10% loss in First-Class mail.  Such an increase is not likely, as indicated by the Services 2013 third quarter financial report, 4% decline versus a 1.9% increase.

DISRUPTIVE CHALLENGES
This places the USPS between a rock and hard place.  Its options are limited.  It can continue to decrease service and performance standards, but in the long term confidence in the USPS could erode and result in a mailers moving to competitors.  It could try a technological option, but some feel that “their technological innovations have become so narrowly focused that they now commit significant resources to developing mailing products and service that rightfully are the province of the mailers and the private sector.” (savethepostoffice.com/print/11998)

There are also concerns that investment in scanning and other technologies not directly related to mail processing is wasted.  Lastly, it can change it focus stressing the areas where future growth is likely. If Shipping and Package Services continues to grow at its current rate, revenue will exceed that for Standard Mail in a few years.

Making such a shift is problematic.  This area, unlike First-Class or Standard has direct competitors.  USPS is an old line bureaucracy.  It can be more customer service oriented. Nor is it nimble enough to adjust quickly to competitive conditions.  Further, the bulk of the shippers are small and medium sized businesses, not mass mailers.  The mass mailers are organized and have an effective lobby.  Small and medium businesses are a more diverse group and not likely to be as well organized at the national level.  Finally, despite the larger profit margin, and higher rate of growth, Shipping and Package Services makes a smaller revenue contribution.  The size of this contribution is not likely to reach the magnitude of Standard Mail’s for three to five years.

Bio:

James Kline is completing his Ph.D. The emphasis is the impact of innovation and destructive technology on local economies and organizations.  He has written numerous articles on quality in government, and conducted economic, policy and risk analysis studies for local and state government. He is an ASQ certified Six Sigma Green Belt and Manager of Quality/Organizational Excellence.