Creating Value by Incorporating Customer-Centric, Sustainability-Driven Innovation into Postal...

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Creating Value by Incorporating Customer-Centric, Sustainability-Driven Innovation into Postal Products

ByMichael R. Barr, Jesus M. Garza and Duy L. Nguyen

Notes:

Good afternoon Ladies and Gentlemen,

First, I like to thank you for attending our Capstone Project presentation

Our team, consisting of Michael R. Barr, Jesus M. Garza and Duy L. Nguyen, will present our research and findings on how promoting a policy or practice involving Sustainability-Driven Innovation can create value economically, socially, and environmentally into Postal Products and Services.

Where innovating its products is not a foreign concept to the United States Postal Service, creating products, services and processes that produce environmental and/or social benefits as well as economic value does pose both a challenge and an opportunity.1

Creating Value, Sustainability-Driven InnovationAgenda

Everything flows, nothing stands still-- Heraclitus of Ephesus, Greek Philosopher2Notes:

Project Idea Why did our research group choose the capstone project idea and concept?Background What is the current business status in relationship to the 3Es?Hypothesis & Objective What is the idea or explanation that can be tested through study and experimentation? What (goal) are we trying to accomplish?Methodology What system of methods used in research of supporting the hypothesis?Research Results What value is demonstrated through Business Strategy, Time Series Analysis, and Life Cycle Cost Analysis?Benefits of Sustainability-Driven Innovation What 3E benefits are realized as the business progresses towards sustainable business? Conclusion Was the null hypothesis supported? Why or why not?Whats Next? What further research is necessary for the Postal Service to become a holistic, sustainable business?

2Project IdeaMy interest would be with a policy or practice relating to Sustainability. In particular, my interest lies with how to move an organization beyond an inward focus to reduce its own environmental impact, to one in which creates products and services to help its customers achieve Sustainability objectives.-- Thomas G. Day, Chief Sustainability Officer, United States Postal Service

The Postal Service is focused on creating greater value for both the senders and receivers of mailIt begins by leveraging data and technology to create compelling tools that make the experience of mail more interesting and valuable. Senders want to realize a high return on their mailing investment. Receivers want useful, relevant and compelling information. Innovations that achieve these goals for senders and receivers will ensure that mail remains a powerful communications and marketing channel.United States Postal Service, Progress and Performance, Annual Report to Congress 2012Driving Innovation, Innovation in Delivery, p. 9

3Notes:

Our product idea focuses on two statementsone that wants to promote a policy or practice to drive Sustainability into products and services, and one that utilizes the power of innovation to create value in mail products and services.

What if one could utilize sustainability in the innovation process to create value in mail products and services for its stakeholders and customers?

Use sustainability-driven innovation to transform a Market Dominant, First-Class Mail product into a Digital Mail product equivalent.

3Background

Current Business StatusEconomyDeteriorating financial situationFirst-Class and Standard Mail rapid volume decline due to Electronic Diversion.Unfunded pension and retiree health benefitsUSPS Five-Year Business Plan, 2012-2017 Equity (Social)Universal Service Obligation (USO)Corporate Social Responsibility (CSR)EnvironmentPractice Environmental SustainabilityVoluntarily alignment of Stewardship practices to Federal Executive Orders, because they make business sense and are the right thing to do.

The Postal Service is an organization like no other. Were in every community in every state, and we deliver mail to every address. This gives us a special responsibility to be good neighbors.-- Patrick R. Donahoe, Postmaster General and CEO4Notes:

Economy Net losses totaling $40 Billion Total mail volumes have declined 25 percent and are forecasted to decline or remain flat through fiscal year 2020 Financial liabilities totaling $96 billionGap between revenues and costs is widening [worst case scenario: $238 Billion by FY 2020] Network Realignment result of First-Class Mail driven process efficiency; part of comprehensive plan to reduce costs by $20 billion by 2015 .

Equity (Social) Universal Service Obligation (USO) refers to the practice of providing an affordable, baseline level of postal services, uniform pricing to every resident in the United States [See PMG/CEO statement]. Corporate Social Responsibility (CSR) - corporate initiative to assess and take responsibility for the company's effects on the environment and impact on social welfare. The term generally applies to company efforts that go beyond what may be required by regulators or environmental protection groups.

EnvironmentThe Postal Service practices several noteworthy aspects of environmental sustainability which are framed in reducing harm to the organization:Cradle-to-Cradle Products [Competitive products: Priority Mail/Express Mail]Nationwide waste/recyclingEnergy ConservationCarbon Footprint/GHG ManagementEnvironmental Management

Environmental sustainability is about making responsible decisions that will reduce your business' negative impact on the environment. It is not simply about reducing the amount of waste you produce or using less energy, but is concerned with developing processes that will lead to businesses becoming completely sustainable in the future.

4HypothesisHypothesis (H): Developing sustainability policy that incorporates sustainability-driven innovation into business strategies will enable the creation of postal products and services that benefit and provide economic, social, and environmental value to the Postal Service and its customers.

One finds the truth by making a hypothesis and comparing observations with the hypothesis.-- David Douglass, American Physicist

5Notes:

Creation of disruptive new products and services by viewing sustainability as a market opportunityDoing good by doing new things. [Organizational Transformation strategy]

Innovation Outcome: Disruptive new products that change consumption habits or that benefit people; replacing products with services or replacing physical products with electronic services (First-Class Mail Digital Mail); services with social benefits (i.e. create shared value).

Organizational Intent: Benefit financially from sustainable products or value-created services.

Requires different mindset since USPS currently exhibits Operational Optimization tendencies. [Innovation outcome: Company-centric, incremental fixes focusing on new technologies as ways to reduce impacts while maintaining business as usual (i.e. reduce harm); Organizational intent: reduce costs or maximize profits]Null Hypothesis H0: Developing sustainability policy that incorporates sustainability-driven innovation into business strategies will not enable the creation of postal products and services that benefit and provide economic, social, and environmental value to the Postal Service and its customers.

[Transition to Jessie]5ObjectivePropose policy and guidance strategy Move beyond environmental sustainability Address 3 Es through the Sustainability-Driven Innovation of customer products.First-Class Mail (Market Dominant) vs. Digital Mail (Strategic Initiative Portfolio)View Sustainability-Driven Innovation through 3-Stage Framework

A sustainable business is resource efficient, respects the environment and is a good neighbour. -- Phil Harding, Head/Sustainable Business Team, Government Office for the South West, UK (2000)6Notes:

The objective is to take the Postal Service from an Environmental Sustainability practicing organization to one that changes its policy to address the 3Es through Sustainability-Driven Innovation.The Sustainability Business Framework was used to determine where the Postal Service currently resides and then decide what is needed to transition into the next Stage. Develop a strategy that will transition First-Class Mail to that of Digital Mail

6MethodologyUse of the Natural Steps ABCD Planning MethodBased on techniques from business strategy, time-series and life cycle analysisAssess Product Current Status vs. Future Status through the 3-Stage Innovation FrameworkValue PropositionOperating ModelEstablish Cause-Effect Relationships for Sustainability-Driven Innovation relating to First-Class and Digital Mail.

Research is to see what everybody else has seen, and to think what nobody else has thought.-- Albert Szent-Gyrgyi, Hungarian Physiologist

7Notes:

The research Team used a Sustainability Principal Methodology better known as the Natural Steps ABCD Planning methodThe Process Diagram on the right was used to guide us through the methodology. It describes the steps used for each stage of the Sustainability Business Framework discussed in the previous slide. The actual process uses the same steps for the other two stages.The team also used a causal research design to explore cause and affect relationships. The experiment selected was Quasi-experiment time series design proposes to use because the design tests the independent variable using groups that are not randomly pre-selected and finally a LCCA which will be discussed by another team member laterFrom the diagram we begin by assessing the current status of the policy by performing a SWOT analysis. It was further analyzed in terms of:Value Proposition What are we offering and to whom?Operating Model - How do we profitably deliver the offering?

7

VisionTo be the first Postal Service that, by its deeds, becomes a holistic, sustainable business By 2033, our customers will benefit from economic, social, and environmental value provided by a safe, trusted, reliable, convenient, affordable and sustainable communication channel in the delivery of mail to all the communities, businesses and households served.

Innovation Framework StageSustainability VisionInnovation ApproachInnovation ObjectiveInnovation OutcomeInnovation Organization Relationship1Eliminate WasteOperational OptimizationCompliance, efficiencyReduces harmIncremental improvements to business-as-usualBenign EmissionsEfficient TransportationRenewable Energy2Closing the LoopOrganizational TransformationNovel products, services or business modelsCreates shared valueOrganization purpose fundamental shift

-- Ray Anderson, Former Chairman and Founder, Interface, Inc. 8Notes:

The vision is to help The Postal Service become a holistic Sustainable Business so that customers can benefit from economic, social, and environmental value.The table below shows how the ideal transformation from the current status of environmental sustainability or Operational Optimization to one of Organizational transformation. The idea is to take the postal Service from a compliant, efficient organization that practices environmental sustainability to one that produces novel products and services y closing the loop.in other words we want to take the postal Service from an organization that gives back to one that creates shared value.

Transition Pass on to DL

8Business StrategyBusiness Model Innovation (BMI)

BMI applied across First-Class Mail and Digital Mail value chain modelsFirst-Class Mails cost mostly in delivery functionDigital Mail demonstrates majority of process efficiencies through elimination of processing, transportation and delivery functions 72% Value Added

Value PropositionQuestionTarget SegmentsWhich customers do we choose to serve?Product OfferingWhat are we offering customers to satisfy their needs?Revenue ModelHow are we compensated for our offering?Operating ModelQuestionValue ChainHow are we configured to deliver on customer demand?What do we do in-house?What do we outsource?Cost ModelHow do we configure our assets to deliver on our value proposition profitably?Organizational ChangeHow do we deploy and develop our people to sustain and enhance our competitive advantage?

99Business StrategySWOT Analysis/TOWS MatrixSituational Analysis is systematic collection and evaluation of past and present economical, political, social, and technological dataDevelop strategies, tactics, and actions for the effective and efficient attainment of its organizational objectives and its mission.Applied across First-Class Mail and Digital Mail modelsThreats from private digital mail providers. Businesses & consumers looking to reduce mailing costs and carbon footprint. Legal documents still required physical signature. Privacy and security concerns with digital communication.

10Situational Analysis - a systematic collection and evaluation of past and present economical, political, social, and technological data, aimed at (1) identification of internal and external forces that may influence the organization's performance and choice of strategies, and (2) assessment of the organization's current and future strengths, weaknesses, opportunities, and strengths.

10Time Series Analysis

Research was concentrated to segments in energy, climate, waste, facilities, and transportation. Transportation is what connects the senders to receivers within the value chain.Reducing building occupancy, lowering its energy consumption, reducing fuel and water consumption, USPS is revamping its carbon footprint thereby helping with climate change and reducing GHG emissions. These incremental changes to business as usual is placing USPS at the forefront of sustainable innovation by maintaining operational optimization11

To get a better picture of the Postal Services organizational status, the team concentrated its analysis to segments in energy, climate, waste, facilities, and transportation.There are many different components within the postal service but the team analyzed the ones they believed would help prove the case for the policy change. The three selected were:TransportationCustodial & Maintenance ServicesBuilding Occupancy All three were analyzed the same way and all three show a downward trend in cost over the 5 year span. These plots all have one thing in common in that they each deal with mail pieces.From these plots, we learned that while the postal Service is making improvements, there is still room for improvement and a need for sustainable innovation. The analysis also reinforces the results found on federal sustainability and energy performance scorecard from the Environmental Sustainability Reports.

Reducing building occupancy, lowering its energy consumption, reducing fuel and water consumption, USPS is revamping its carbon footprint thereby helping with climate change and reducing GHG emissions. These incremental changes to business as usual is placing USPS at the forefront of sustainable innovation by maintaining operational optimization.

11Time Series Analysis

Removal of Seasonalities & Irregularities smooths plot line and confirms downward trend.Total First-Class Mail is predicted to decline to $5,235,763 in Q4 of 2017Single-Piece Letters & Cards has highest correlation to Total Revenue12

Notes:

Once the Status was determined it was time to Analyze First Class mail, we did this by looking at Total revenue.All the data used came from Annual Reports between 2008-2012.The plot in the upper right shows all the independent Variables the have an Impact on the dependent Variable or Total Mail Revenue for First Class mail.The correlation of the variables determined that Total Single piece letters & cards had the highest correlation of 96%. This can be seen by how close the purple plot follows the top most plot.After removing the seasonalities and irregularities we were able to make our forecast and found that by 2017, revenue will go from 7,213,635 in 2013 to 5,235,763 in 2017.We used MS Excels multiple regression tool to determine the results of our analysis. Looking at the Adjusted R square, there is a 98% probability. The coefficients are also a good indication. Non zero variables in a null hypothesis signify that independent variables would have a definite effect on the dependent variable because anything multiplied by zero would be zero.

12Life Cycle Cost AnalysisObjective: LCCA enables economic comparison of First-Class Mail and Digital Mail.Assumptions:Starting capital of $1 billionDiscount rate of 5%Life cycle of 10 yearsCosts category increases by 5% each year Digital mail will reduce mail processing facilities from 461 to 27 (6 Data Centers and 21 Network Distribution Centers)Delivery infrastructure is removed with digital mailNo acquisition costs for IT equipment for digital mail.

1313Life Cycle Cost AnalysisFirst-Class MailDigital MailCosts: Energy = $242,920,050O&M = $42,377,494,375Water = $36,102,224Fleet Vehicles Fuel & Maintenance = $5,823,193,998Costs: Energy = $15,423,495O&M = $2,481,979,060Water = $2,062,721

Savings:

Savings:Fleet Vehicles Fuel & Maintenance = $442,600,000Mail Processing Plants Reduction = $3,040,000,000NPV = - $33,267,292,809

NPV = $787,912,641

Sustainability Details:CO2 Emissions = 538,810 MTEnergy Consumption = 923,173,913 kWhWater Consumption = 686,000,000 gallonSustainability Details:CO2 Emissions = 34,510 MTEnergy Consumption = 58,614,217 kWhWater Consumption = 38,700,000 gallon

1414Benefits of Sustainability-Driven Innovation

EconomyYields top-line and bottom-line returnsCreates Competitive AdvantageReduced life cycle costsLess business risk Equity (Social)Transition from CSR to CSV modelReconceiving products and marketsRedefining productivity in the value chainEnabling local cluster developmentIncreased social benefits (health, well-being)EnvironmentContribution to conservation efforts (Energy, Fuel, Water)Increased use of sustainable energy sourcesReduces emissions and waste (GHGs, paper waste)Lower environmental riskOperational OptimizationOrganizational Transformation

15Notes:

EconomyTop Line refers to RevenuesBottom Line refers to Net Income

Equity (Social)Corporate social responsibility (CSR) is a form of corporate self-regulation integrated into a business model. CSR policy functions as a built-in, self-regulating mechanism whereby a business monitors and ensures its active compliance with the spirit of the law, ethical standards, and international norms. CSR is a process with the aim to embrace responsibility for the company's actions and encourage a positive impact through its activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere who may also be considered as stakeholders.

We contribute to society because we are successful (CSR) vs. We are successful because we contribute to society (CSV)

Creating shared value (CSV) is a business concept that recognizes that the competitiveness of a company and the health of the communities around it are mutually dependent.Reconceiving products and marketsRedefining productivity in the value chainEnabling local cluster development

Many approaches to CSR pit businesses against society, emphasizing the costs and limitations of compliance with externally imposed social and environmental standards. CSV acknowledges tradeoffs between short-term profitability and social or environmental goals, but focuses more on the opportunities for competitive advantage from building a social value proposition into corporate strategy.

EnvironmentTo live within the carrying capacity of the planet. Environment becomes the externalitycost or benefit which affects a party who did not choose to incur that cost or benefit. Human society is a wholly-owned subsidiary of the environmentthat without food, clean water, fresh air, fertile soil, and other natural resources, we place ourselves at considerable risk.

15ConclusionResearch supports Hypothesis (H): Developing sustainability policy that incorporates sustainability-driven innovation into business strategies will enable the creation of postal products that benefit and provide economic, social and environmental value to the Postal Service and its customers.

There's two possible outcomes: if the result confirms the hypothesis, then you've made a discovery. If the result is contrary to the hypothesis, then you've made a discovery.-- Enrico Fermi, Italian Physicist16Notes:

Business StrategyBusiness Model Innovation (BMI): First-Class Mails cost mostly in delivery function Digital Mail demonstrates majority of process efficiencies through elimination of processing, transportation and delivery functions Value Proposition suggests 72% Value Added from Digital Mail ModelSWOT/TOWS Analysis:Suggesting opportunities for Hybrid/Digital Mail solutionsSuggesting opportunities for business model redevelopmentSuggesting opportunities for future value chain sustainability

Time Series AnalysisExploratory analysisReinforces the results from federal sustainability & energy performance scorecard from the Environmental Sustainability Reports.Reduced building occupancy, reduced energy consumption, reduced fuel and water consumption; carbon footprint reduction reduced GHG emissions.Incremental innovation of value chain maintains and improves on operational optimization.Regression analysis Non zero variables in the null hypothesis signify that independent variables would have a definite effect on the dependent variable. Independent variable Developing sustainability policy that incorporates sustainability-driven innovation into business strategies Dependent variable Enable the creation of postal products that benefit and provide economic, social and environmental value to the Postal Service and its customers Coefficient of determination R2 = 98% probability; good model fit.

Life Cycle Cost Analysis (LCCA) NPVFCM = - $33,267,292,809 vs. NPVDM = $787,912,641 NPV is the value in todays dollars of its implementation over the specified timeframe (10 years) with assumed discount rate of 5%. A positive NPV financial metric for Digital Mail indicates the measure is generally considered to be beneficial.

16

Whats Next?To be the first Postal Service that, by its deeds, becomes a holistic, sustainable business.

Innovation Framework StageSustainability VisionInnovation ApproachInnovation ObjectiveInnovation OutcomeInnovation - Organization Relationship2Closing the LoopOrganizational TransformationNovel products, services or business modelsCreates shared valueFundamental shift in organization purpose3Sensitizing StakeholdersSystems BuildingNovel products, services or business models; impossible to achieve aloneCreates net positive impactExtends beyond the organization to drive institutional changeRedesign Commerce

WE ARE SUCCESSFUL BECAUSE WE DRIVE POSITIVE INSTITUTIONAL CHANGE FOR SOCIETY(CREATING NET POSITIVE IMPACT)17The high ground of the holistic, sustainable business lies within the innovation framework known as Systems Building

Oxford Strategic Consulting (OSC) Postal Services will play a prominent role in enabling e-commerce in the future17

Acknowledgements

We would like to thank our project sponsor Mr. Thomas G. Day, Chief Sustainability Officer, United States Postal Service

1818

1919Time Series Analysis

Plot at Left, downward trend can be attributed to the restructuring of USPS infrastructure.Plot at Right, downward trend indicates that USPS is making progress in reducing greenhouse gases

Reducing building occupancy, lowering its energy consumption, reducing fuel and water consumption, USPS is revamping its carbon footprint thereby helping with climate change and reducing GHG emissions. These incremental changes to business as usual is placing USPS at the forefront of sustainable innovation by maintaining operational optimization.

20Time Series Analysis

Research was concentrated to segments in energy, climate, waste, facilities, and transportation. 21

Multiple Regression: Y = a + b1X1 + b2X2 + B3X3 + ... + BtXt + uA null hypothesis where the coefficient of an independent variable is non-zero, and this null hypothesis is accepted, then that particular independent variable would have a definite effect on the dependent variableTo get a better picture of the Postal Services organizational status, the team concentrated its analysis to segments in energy, climate, waste, facilities, and transportation.There are many different components within the postal service but the team analyzed the ones they believed would help prove the case for the policy change. The three selected were:TransportationCustodial & Maintenance ServicesBuilding Occupancy All three were analyzed the same way and all three show a downward trend in cost over the 5 year span. These plots all have one thing in common in that they each deal with mail pieces.From these plots, we learned that while the postal Service is making improvements, there is still room for improvement and a need for sustainable innovation. The analysis also reinforces the results found on federal sustainability and energy performance scorecard from the Environmental Sustainability Reports.

Reducing building occupancy, lowering its energy consumption, reducing fuel and water consumption, USPS is revamping its carbon footprint thereby helping with climate change and reducing GHG emissions. These incremental changes to business as usual is placing USPS at the forefront of sustainable innovation by maintaining operational optimization.

Once the Status was determined it was time to Analyze First Class mail, we did this by looking at Total revenue.All the data used came from Annual Reports between 2008-2012.The plot in the upper right shows all the independent Variables the have an Impact on the dependent Variable or Total Mail Revenue for First Class mail.The correlation of the variables determined that Total Single piece letters & cards had the highest correlation of 96%. This can be seen by how close the purple plot follows the top most plot.After removing the seasonalities and irregularities we were able to make our forecast and found that by 2017, revenue will go from 7,213,635 in 2013 to 5,235,763 in 2017.We used MS Excels multiple regression tool to determine the results of our analysis. Looking at the Adjusted R square, there is a 98% probability. The coefficients are also a good indication. Non zero variables in a null hypothesis signify that independent variables would have a definite effect on the dependent variable because anything multiplied by zero would be zero.

Multiple Regression: Y = a + b1X1 + b2X2 + B3X3 + ... + BtXt + uA null hypothesis where the coefficient of an independent variable is non-zero, and this null hypothesis is accepted, then that particular independent variable would have a definite effect on the dependent variable

21Email vs. Digital MailEmailDigital MailAccount can be created by user with no relation to a verifiable identity. Account is based on physical mailing address. Email is an open platform. Digital Mail is a closed system. Consumer has to remember logins and passwords for many websites.Digital Mail consolidate all communications from companies and organizations in one place. Control is in the hand of the sender. Control is in the hand of the receiver.

22Notes:

Digital Mail: Only registered user can communicate with each other. 22Email vs. Digital MailEmailDigital MailModification of message content: email contents can be modified during transport or storage.Message content is between sender and receiver and cannot be modified once sent. Masquerade: send a message in the name of another person or organizationSenders and receivers are registered and accountable for contents. Replay of previous messages: Previous messages resent to other recipients.Message content is between sender and receiver, and cannot be sent to other recipients. Denial of service: carried out thru Trojan horses/viruses within email contents.Digital Mail platform routinely monitors for Trojan horse/virus activity within contents.Spoofing: false messages inserted into mail system of another userAuthenticated from sender to receiver.Disclosure of information: Most emails are non-encrypted and can be read by non-recipientsDigital Mail follows a similar First-Class Mail modelTraffic analysis: monitoring email messages as part of surveillance.Limited traffic surveillance per Government jurisdiction.

23Notes:

Digital Mail: Only registered user can communicate with each other. 23Current Digital Mail ProvidersName of ProviderTypes of services providedZumboxConnects large transactional, financial, and government mailers to consumer households.VollyDirect connections between institutions and customers, plus bill pay and transactional functionality. DoxoFocuses primarily on bill payment capabilities. ManillaManage and organize bills and accounts in one place.

2424Digital Mail - LimitationsLimitationDigital MailCulture: Some people want to correspond with physical mailpieces (i.e. bills, bill payment, and correspondence).Over time, trend is moving towards secure digital forms of correspondence. Government: Current statutes and laws are not flexible enough to allow USPS to operate autonomously.Congress must pass legislation that enables e-commerce role through Digital Mail platform. Universal Service Obligation (USO): Applies to Postal Service, telecommunications, and broadband communications.USO will need to be redefined to protect Market Dominant products, maintain uniform pricing, and foster cooperation and competition among industries.

25Notes:

Digital Mail: Only registered user can communicate with each other. 25Yes

No

Yes

No

Perform SWOT Analysis on current USPS Policy

Determine USPS status using 3 Stage Framework for Innovation

Does USPS meet requirementsfor Stage 1

Use ABCD Planning method to determine Stage 1 requirements

Start

Will implementation of changes meet Stage 1 Reqs

Implement changes

Perform Experiment

Perform SWOT of Stage 1

Does USPS meet requirementsfor Stage 2