1. SAP Forums on Travel and Transportation 2011
27th September 2011
Brussels
Diversification and Innovation Strategies
in the Postal Industry
Dr Alberto Asquer
Lecturer of Business Policy and Strategy
Department of Economics and Management Science
Faculty of Economics
University of Cagliari, Italy

2. Outline
1. Behaviour and performance of the postal industry.
2. The strategic issues of diversification and innovation.
3. Corporate and business strategy in European postal firms.
4. Diversification and innovation in PosteMobile, Italy.
5. Conclusions.

3. Behaviour and performance of the postal industry
General industry trends:
1. Technology disruption (e.g., digitalisation);
2. Institutional change (e.g., liberalisation);
3. Emergence of opportunities (e.g., globalisation of trade).
Schedule of postal services liberalization in Europe Volume of letter post items in the EU-27, 1998-2007
(source: ITA Consulting – WIC-Consult, 2009). (source: ITA Consulting – WIC-Consult, 2009).

4. Behaviour and performance of the postal industry
General issue:
How does the postal industry adapt to changing technological,
institutional, and market conditions of the environment?
General issue, slightly reframed:
What strategy do (should) postal companies follow in order to
achieve super-normal profits?
General thesis:
Postal companies (should) pursue diversification and
innovation as a way to reap the opportunities of industrial
reconfiguration.

5. The strategic issues of diversification and innovation
Theoretical frame of reference:
Evolutionary economics (Nelson and Winter, 1982);
Resource-based view of the firm (Penrose, 1959; Hamel and
Prahalad, 1995);
Dynamic capabilities (Dosi et al., 2000; Teece and Pisano,
1994; Teece, 1997);
Innovation (Leonard-Burton, 1992).

6. The strategic issues of diversification and innovation
Central concepts:
The firm is“essentially a pool of resources the utilization of
which is organized in an administrative framework” (Penrose,
1959: 149);
Strategic assets consist of those production factors that are
imperfectly imitable and imperfectly substitutable (Williamson,
1975);
Core competences are “a pool of experience, knowledge, and
systems that can be deployed to reduce the cost or time
required to create a new, strategic asset or expand the stock
of an existing one” (Markides and Williamson, 1994: 150);
Strategic assets maintain their uniqueness as the result of
some 'isolating mechanism' (Rumelt, 1987).

7. The strategic issues of diversification and innovation
Central arguments:
Successful business strategy builds on the uniqueness of
firms' resources and capabilities;
Long-term successful business strategy builds on the capacity
to renew firms' resources and capabilities;
Diversification and innovation allow to renew firms' resources
and capabilities in face of strategic decay of existing business
models.

8. The strategic issues of diversification and innovation
“Capability life cycle” (Helfat and Peteraf, 2003):

9. The strategic issues of diversification and innovation
Rationales for diversification and innovation:
Presence of excess capacity;
Search for synergies;
Expansion into diverse geographical markets;
Quest for superior performance, especially through related
diversification;
(Wan et al., 2010; Prahalad and Bettis, 1986; Ginsberg, 1989,
1990; Tanriverdi and Venkatraman, 2005; Farjoun, 1998; Nath
et al., 2010).

10. Corporate and business strategy in European postal firms
Deutsche Post (€ million)

11. Corporate and business strategy in European postal firms
Royal Mail Holdings (€ million)

12. Corporate and business strategy in European postal firms
La Poste (€ million)

13. Corporate and business strategy in European postal firms
Poste Italiane (€ million)

14. Corporate and business strategy in European postal firms
Die Schweizerische Post (€ million)

15. Corporate and business strategy in European postal firms
Sociedad Estatal Correos y Telegrafos (€ million)

16. Corporate and business strategy in European postal firms
BPost (€ million)

17. Corporate and business strategy in European postal firms
Posten Norge (€ million)

18. Corporate and business strategy in European postal firms
Почта России – Russian Post (€ million)

19. Corporate and business strategy in European postal firms
A comparative view (turnover, € million)

20. Corporate and business strategy in European postal firms
A comparative view (employees, no.)

21. Corporate and business strategy in European postal firms
A comparative view (Return on Assets, %)

22. Corporate and business strategy in European postal firms
A comparative view (turnover per employee, € /000)

23. Diversification and innovation in PosteMobile, Italy.
Poste Italiane is the incumbent network operator in the postal
industry in Italy;
It consists of a diversified group (mail, parcel, express,
financial, and insurance service companies) that originated in
the early 1990s, when the national government reincorporated
the former 'post autonomous administration' into an 'economic
public entity' and, in 1998, into a corporation under companies
laws;
The national government retained full ownership, partially
under the Ministry of Economics and Finance (65%) and
partially under the government-owned financial agency Cassa
Depositi and Prestiti (35%).

24. Diversification and innovation in PosteMobile, Italy.
In 2007, the group established PosteMobile, a Virtual Mobile
Network Operator (VMNO) that exploited strategic assets and
capabilities of Poste Italiane – including the capacity of the
distribution channel, the effectiveness of the distribution and
logistics network, and the know-how of financial services – to
generate a unique offer through the convergence between
communication and financial services.
By 2010, PosteMobile achieved a primary position among
national VMNOs (counting about 1.7 million clients) and
turned out as profit-making branch of Poste Italiane group.
How did PosteMobile start, why did it start,
and how does it count as an instance of successful
diversification in the postal industry?

25. Diversification and innovation in PosteMobile, Italy.

26. Diversification and innovation in PosteMobile, Italy.
Interview with Roberto Giacchi, CEO of PosteMobile:
“One day in summer 2006 I was reading the Sole 24 Ore [Italian
business press] under a parasol in Sardinia, and I spotted the news
about the spreading of the VMNO business around the world. It
seemed to me that Poste Italiane had all competitive assets needed
to well perform in doing this stuff, at least in principle. When I was
back to Poste, I went to Sarmi [CEO of Poste Italiane since 2002]
and I told him that it seemed to me a good idea. He thought about it
for a couple of days, and then he came back to me inviting to
examine the case. I assembled a consulting team, and we started
to investigate how to make this stuff done. The figures looked
promising. When we started to negotiate the franchise and
procurement contracts, we had confirmation that figures were good.
When the decision to choose the CEO [of the new mobile phone
company] came up, Sarmi told me, 'as you thought about it, and
researched into it, then show us how whether this is a good thing'. I
quit the consulting job and I took hold of the task.”

27. Diversification and innovation in PosteMobile, Italy.
Interview with Roberto Giacchi, CEO of PosteMobile:
“There were at least three reasons for the acceptance of the idea to
set up a mobile telecommunication company. First reason is that
diversification has been in the 'DNA' of Poste Italiane so far. This is
a group that originated from mail and parcel, then went into
financial, then into insurance, and then, eventually, into mobile
phone telecommunication. This is understood nowadays as a
standard corporate process. Second reason is that the top
management of Poste Italiane is strongly oriented towards
innovation. Third reason is that, more precisely, top management of
Poste Italiane possessed high competence on telecommunication,
as Sarmi formerly worked as general director of Telecom Italia
Mobile [from 1995 to 1998]. It is easier to trust innovation when a
person understands the business”.

28. Diversification and innovation in PosteMobile, Italy.
Formulation of the mission: providing 'advanced distinctive
value-added services (VAS)' on mobile phones (e.g., bank
account information, bank transfers, international money
transfers, and e-commerce);
Staffing: minimally from the parent company group (about 25
employees only, out of about 160), while mostly selection
conducted exclusively on the basis of merit criteria;
Resourcing: access to network infrastructure provided by
Vodafone, and management of technological systems
supplied by Accenture (contractual relationships with relatively
flexible cost structure);
Marketing: considered a 'core' function and therefore entirely
retained within the organisation.

29. Diversification and innovation in PosteMobile, Italy.
On 26th November 2007, PosteMobile launched its
telecommunication services to the mass market. Early growth
of revenues triggered a state of euphoria within the company,
although market penetration soon hit reality and sales slowed
down. Since then, as Giacchi put it, PosteMobile “engaged in
a daily routine effort to understand how to make sales grow,
how to acquire clients, and how to retain them”;
The mobile telecommunication industry had reached a stage
of maturity, characterised by high market penetration,
relatively low barriers to entry, commoditisation of traditional
mobile phone services, occasional abrupt price-wars, and
various promotional offers intended to make competitors'
clients switch to other mobile telecommunication operators.

30. Diversification and innovation in PosteMobile, Italy.
Apart from the synergies between the mobile
telecommunication and the financial businesses, and the
market access provided by the thousands of post offices
scattered over the entire country, PosteMobile could also
benefit from the particular brand image of Poste Italiane group
– namely, one that conveyed a sense of reliability, safety, and
trust;
Accordingly, PosteMobile constructed a 'brand story' centred
on innovation, economy, transparency, and ease of access to
customer service that was intended to appeal to a large share
of middle-low income clients of post offices.

31. Diversification and innovation in PosteMobile, Italy.
Financial performance (€ /000)

32. Diversification and innovation in PosteMobile, Italy.
Issues of industry competition: Some of the other VMNOs,
such as CoopVoce (serving about 0.5 million customers) and
Carrefour's UNO Mobile (about 0.2 million), relied on a vast
retail distribution network; others, like Fastweb (about 0.3
million customers) and Tiscali Mobile (about 0.1 million),
complemented the fixed line services of their parent
companies; others, like Noverca of Banca Intesa Group
(about 0.2 million customers), aimed to replicate the
integration between mobile telecommunication and financial
services that PosteMobile had introduced;
None of the VMNOs in the country (totalling about 15),
however, apparently accomplished the levels of market
penetration and financial performance as those achieved by
PosteMobile.

33. Diversification and innovation in PosteMobile, Italy.
Sustained innovation:
Expansion to the business segment and extension of tariff
plans and tariff options;
On-line sale of parking tickets, urban transport tickets, and
products and services from vendor partners;
'Infomobility platform' for the management of operations of
about 12,000 postmen of Poste Italiane group;
Evolution from Enhanced Service Provider to a 'full VMNO',
entry into the online gaming industry and the acquisition, from
Poste Italiane group, of a business unit focused on the
development of a fixed line network.

34. Conclusions
How was the initiative to diversify into the mobile
telecommunication industry taken?
Corporate entrepreneurship can be explained by a social
learning process that results in competences, activities, and
strategies conducive to the launch of new business ventures
(Salvato et al., 2009), where a key component is the
'absorptive capacity' (Cohen and Levinthal, 1990; Zahra and
George, 2002);
The case rather highlights the importance of individual
initiative, cognitive complexity of top managers, personal
background experience (Burgelman, 1983, 1991; Prahalad
and Bettis, 1986; Ginsberg, 1989, 1990)

35. Conclusions
What accounts for the success of the diversification into the
mobile telecommunication industry?
In general, it is acknowledged that diversification delivers
better results when companies extend their activities towards
related business areas (Tanriverdi and Venkatraman, 2005;
Farjoun, 1998);
The case suggests that strategic assets of Poste Italiane
group were effectively deployed to support the growth of
PosteMobile, namely (1) a consolidated customer base, (2)
the capacity of the distribution channel, (3) the effectiveness
of the distribution and logistics network, and (4) the possibility
to generate a unique offer through the convergence between
communication and financial services.

36. Conclusions
How was the diversification into the mobile telecommunication
industry immune from 'bureaucratic impediments' of the
parent company group?
It is acknowledged that diversification can effectively take
place by setting up special-purpose organisational forms
(Harrigan, 1983).
The case suggests that the discretion granted to the CEO of
PosteMobile, incorporated as a separate company, on such
decisions as staffing and resourcing, was pivotal to avoid
interferences. The parent company may also need to 'shield'
the new organisation from the negative influence of
'organisational liabilities', such as organisational norms and
practices that may negatively affect efficient and effective
decisional processes.

37. Conclusions