can help companies to refocus on their core
businesses. When Royal Mail was partly privatised in 2013, the Post Office arm was separated
into an independent entity with a management
structure centred on the postal service the company provided. Early policy clarity is the key to
providing the robust signals needed for companies
to optimally plan their longer-term strategy and
organisational responses. Deutsche Post benefited
from this level of clarity, as it was able to diversify
into new markets and geographies before its
domestic market declined, when it still had significant cash flows to invest. In contrast, Innogy,
the green asset subsidiary of RWE, was separated
from RWE in 2016, well after the German
renewable energy revolution had cut into the
earnings of RWE’s legacy assets. The rapid
escalation of renewable energy policies in Germany prevented a clear policy signal from forming, contributing to RWE’s continued use of
legacy assets and subsequent losses.
Appendix 1: Postal Companies: Responding
to Lower for Longer Trends
Introduction
Since the early 2000s, the postal industry has
faced two global trends: a decline in letter volumes
from the spread of electronic communications;
and a parallel, but smaller, increase in parcel
volumes due to the rise in e-commerce. Combined, these two trends yield a fall in total volume
of 1–2% per year, and global revenue growth of
only 1.6%, significantly below the economy-wide
average of 4.3% revenue growth. The effect on
postal companies has clear parallels with oil and
gas companies facing lower for longer hydrocarbon prices. Major postal companies have been hit
particularly hard by the decline in letters, historically their main source of revenue and over which
they had a monopoly—they were often
state-owned and seen as delivering an essential
service. Postal companies have revenues of the
same magnitude as oil and gas companies.
On top of these two global trends, some
countries have experienced deregulation and
rising competition, while others have remained
closer to a regulated monopoly. Beginning in
1997, the European Commission has abolished
national monopolies on mail in Europe. EU
member states were required to allow competitors to enter their national postal services, at first
only in certain product categories (such as parcels) and by 2012 across the full spectrum of
postal services. In contrast, the USA allowed
competition in parcels and express letters, but the
United States Postal Service (USPS) continues to
hold a legal monopoly on standard mail.
Postal companies have had a range of
responses to the challenge of declining value in
their main area of business—understanding the
factors that led to these can help oil and gas
companies plan their own transitions. The individual decision factors and circumstances facing
each postal company dictated the way in which
they responded to the lower for longer trend of
falling letter volumes. Broadly speaking, the
responses to lower for longer can be organised
into three categories:
(1) Inaction: No organisational changes or
divestments, with cost-cutting and efficiency
improvements limited to a few areas due to
restrictive legislation.
(2) Divestment and cost-cutting: Large efficiency gains from divesting inefficient,
non-core areas and fully utilising cost-cutting
opportunities. This has often been achieved
through privatisation or reorganisation by
separating mail operations from other parts
of the business (such as pensions and post
office operations).
(3) Diversification: In addition to separating
certain parts of the business from core
operations, companies can diversify into new
geographies and new lines of business.
We have analysed the responses of three
companies, each of which represents a different
category of response. USPS, protected by a
continuing monopoly on letters but prohibited
from entering new non-postal markets and with
limited cost-cutting options, represents the minimal response or inaction to industry-wide trends.
Royal Mail, unbundled and privatised in 2013,
has enacted a wide range of cost-cutting and
70
W. Xiaoming et al.
businesses. When Royal Mail was partly privatised in 2013, the Post Office arm was separated
into an independent entity with a management
structure centred on the postal service the company provided. Early policy clarity is the key to
providing the robust signals needed for companies
to optimally plan their longer-term strategy and
organisational responses. Deutsche Post benefited
from this level of clarity, as it was able to diversify
into new markets and geographies before its
domestic market declined, when it still had significant cash flows to invest. In contrast, Innogy,
the green asset subsidiary of RWE, was separated
from RWE in 2016, well after the German
renewable energy revolution had cut into the
earnings of RWE’s legacy assets. The rapid
escalation of renewable energy policies in Germany prevented a clear policy signal from forming, contributing to RWE’s continued use of
legacy assets and subsequent losses.
Appendix 1: Postal Companies: Responding
to Lower for Longer Trends
Introduction
Since the early 2000s, the postal industry has
faced two global trends: a decline in letter volumes
from the spread of electronic communications;
and a parallel, but smaller, increase in parcel
volumes due to the rise in e-commerce. Combined, these two trends yield a fall in total volume
of 1–2% per year, and global revenue growth of
only 1.6%, significantly below the economy-wide
average of 4.3% revenue growth. The effect on
postal companies has clear parallels with oil and
gas companies facing lower for longer hydrocarbon prices. Major postal companies have been hit
particularly hard by the decline in letters, historically their main source of revenue and over which
they had a monopoly—they were often
state-owned and seen as delivering an essential
service. Postal companies have revenues of the
same magnitude as oil and gas companies.
On top of these two global trends, some
countries have experienced deregulation and
rising competition, while others have remained
closer to a regulated monopoly. Beginning in
1997, the European Commission has abolished
national monopolies on mail in Europe. EU
member states were required to allow competitors to enter their national postal services, at first
only in certain product categories (such as parcels) and by 2012 across the full spectrum of
postal services. In contrast, the USA allowed
competition in parcels and express letters, but the
United States Postal Service (USPS) continues to
hold a legal monopoly on standard mail.
Postal companies have had a range of
responses to the challenge of declining value in
their main area of business—understanding the
factors that led to these can help oil and gas
companies plan their own transitions. The individual decision factors and circumstances facing
each postal company dictated the way in which
they responded to the lower for longer trend of
falling letter volumes. Broadly speaking, the
responses to lower for longer can be organised
into three categories:
(1) Inaction: No organisational changes or
divestments, with cost-cutting and efficiency
improvements limited to a few areas due to
restrictive legislation.
(2) Divestment and cost-cutting: Large efficiency gains from divesting inefficient,
non-core areas and fully utilising cost-cutting
opportunities. This has often been achieved
through privatisation or reorganisation by
separating mail operations from other parts
of the business (such as pensions and post
office operations).
(3) Diversification: In addition to separating
certain parts of the business from core
operations, companies can diversify into new
geographies and new lines of business.
We have analysed the responses of three
companies, each of which represents a different
category of response. USPS, protected by a
continuing monopoly on letters but prohibited
from entering new non-postal markets and with
limited cost-cutting options, represents the minimal response or inaction to industry-wide trends.
Royal Mail, unbundled and privatised in 2013,
has enacted a wide range of cost-cutting and
70
W. Xiaoming et al.