9B15M032

PUROLATOR INC.: LAUNCHING INNOVATION R. Chandrasekhar wrote this case under the supervision of Professor Jean-Louis Schaan solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) cases@ivey.ca; www.iveycases.com. Copyright © 2015, Richard Ivey School of Business Foundation Version: 2015-03-25

It was late February 2014. Erik Ragotte, manager (Strategy and Innovation), at Purolator Inc. (Purolator), the leader in the Canadian parcel delivery market, was waiting for his turn to speak at a meeting of the company’s Vice-president (VP) Roundtable. Comprising the company’s 12 VPs as its members, the Roundtable met every Thursday to review performance, resolve cross-functional issues and reach a consensus on course corrections.1 Ragotte had only recently been promoted to the innovation role, as an add-on to his responsibility for a few corporate strategy initiatives. He reported to the director (Corporate and Market Strategy) who, in turn, reported to the company’s VP (Marketing). Ragotte had asked for an hour of the Roundtable’s time, planning to devote 20 minutes to a formal presentation on his roadmap for innovation at Purolator and the rest for brainstorming. The Roundtable had much on its plate and was occupied with such ongoing issues as meeting the annual targets as part of PuroNext, the company’s five-year plan, which had been launched in mid-2013 under a new chief executive officer (CEO). The Roundtable had allotted 20 minutes to Ragotte. As he was about to open his presentation, however, he was asked to shorten it, if possible, as the Roundtable’s agenda was overbooked. Said Ragotte:

Securing internal buy-in is crucial to the success of innovation. At Purolator, however, it means managing a contradiction. Innovation is a long-haul initiative. But our performance yardsticks for management professionals are related to results in the short to medium-haul. For example, earning before tax [EBT] is a metric to which annual employee bonuses are linked at Purolator. How do I bring innovation onto the radar of managers? How do I set an agenda for innovation? How do I institutionalize innovation? These are my dilemmas.

Ragotte knew he had some allies at the Roundtable. One VP had recently taken a course on innovation and was vocal in his desire to support the initiative. But, the reality was that the VPs had challenging operational targets to meet. Their focus was diffused by any issue that was not clearly related either to the

1 The dozen VPs reported to five Senior VPs who in turn reported to the CEO.

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Page 2 9B15M032 current annual plan or to PuroNext, whose metrics had been clearly identified and to which they were singularly dedicated. Ragotte himself was also in a hurry. He had a mandate from the company’s new CEO, Patrick Nangle, to secure “quick wins.” Nangle, having joined Purolator in January 2013 with a background in innovations-led technology firms, was of the view that evidences of demonstrable results, however small, were the way to promote innovation mindset enterprise-wide. Building the momentum was thus a challenge for Ragotte. The external environment had provided its own trigger. The fact that Canada had come through the 2008 recession well had highlighted the country as an attractive investment target for global parcel delivery firms, such as UPS and Fedex. Both competitors had recently accelerated their expansion in Canada by building a series of new facilities. They had the competitive advantages of global brand equity, “made in the USA” technology and resources. Since 2009, both competitors had increased their share of the domestic parcel delivery market at the cost of not only smaller players but also Purolator, which had, nevertheless, remained the market leader in Canada (see Exhibit 1). PARCEL DELIVERY INDUSTRY Parcel delivery enterprises could be divided into two main categories — local messengers and couriers. The former were small establishments serving inner-city needs. The latter offered regional, national and international delivery services and generated 85 per cent of industry revenues. The Canadian courier market was concentrated, with the five largest companies representing nearly 80 per cent of sales. Their advantages included integrated trucking, freight and logistics services, and economies of scale. Overnight services generated approximately 55 per cent of revenue for a courier, while two-days-or-more services comprised the rest. The parcel industry was affected by macro-economic trends. It grew or contracted based on the economic landscape. For example, the 2008 downturn in the economy had decreased shipping volume worldwide. Customers were trading down to less expensive delivery options. Post-recession, the industry had rebounded with improved revenues in 2010. Of late, the courier industry was undergoing transformation. Firms that had traditionally focused on the business-to-business (B2B) market were now competing for the business-to-consumer (B2C) market. Within the B2B portfolio, there was a shift toward customers in the small and medium-sized enterprise (SME) segment. Companies were also transitioning from paper to electronic manifests. The transition was significant in the light of a Best Practices survey in 2012 that showed that courier companies were managing many business processes manually.2 For example, 44 per cent of the respondents to the survey were entering data for all of their shipments manually; 30 per cent reviewed their paper invoices to prepare for carrier rate negotiations manually; 33 per cent were managing trade compliance manually; more than a third of respondents were screening for restricted/denied parties and embargoed countries manually and nearly half of respondents managed licence determination for shipments manually.

2 Kewill Ltd., “2012 Best Practices Survey for Parcel Shipping and LTL/Freight Management,” Kewill white paper, Kewill Ltd., Chelmsford, MA, 2012.

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Page 3 9B15M032 The industry had high barriers to entry. The fixed costs associated with setting up transportation networks were high. The threat of new entrants was low in the parcel industry. Courier companies tried to retain customers by enhancing the portfolio of services and integrating them into their customers’ supply chains. There were no substitutes for a courier service that was characterized by intense rivalry. Said Ragotte:

The basis of competition in the parcel delivery industry is manifold. Foremost is the service network, including the number of retail locations, size of delivery fleet, and the number of hubs and depots. An ability to provide what is known in the industry as “last-mile” delivery is crucial. Brand equity is another lever. It greatly influences the consumer’s choice of a courier.

Companies also competed on the basis of price. They varied the rates depending on the nature of the parcel, the urgency of delivery, the place of origin, the destination and the business volume. On-time delivery was becoming a source of differentiation in the industry because of the commoditization of such product features as signature capture and online tracking. The parcel delivery industry was global in nature. A major driver was the growing relocation of manufacturing capacities across transnational geographies. Another driver was the steady liberalization of trade in many countries, as evidenced by reductions in tariffs, removal of quantitative import restrictions and the shrinkage of multiple exchange rate regimes. With the coverage of the Internet ruling at 98 per cent of the national population, the role of e-commerce was growing in Canada.3 Notwithstanding the constraints of a large geography and low population density, e-commerce was providing an impetus to the growth of Canadian parcel delivery industry. COMPANY BACKGROUND Purolator was a freight and parcel solutions provider in Canada where it was leading the parcel segment with 28 per cent share of the market. In addition to its Canadian market leadership position, Purolator had expanded to 30 cities in the United States in an attempt to facilitate the movement of parcel volume from the United States, Canada’s largest trading partner, to Canada. It had been ranked 19th among a total of 100 Canadian brands in the 2013 Marketing/Leger Corporate Reputation Survey, maintained the largest fleet of hybrid-electric pick-up and delivery vehicles in North America and, through its award winning Tackle Hunger program (www.purolatortacklehunger.com), had helped to deliver the equivalent of more than 3 million kilograms of food to food banks across Canada. The company was majority owned by Canada Post, a Crown corporation and the national postal carrier, which held 91 per cent of stock. Beginning with servicing Eastern Canada with two staffers in 1960, Purolator had grown to become the country’s largest courier company in 2013.4 The company had revenues of $1.6 billion5 and earnings before tax at $66.2 million for the year ending December 2013 (see Exhibit 2).

3 “E-commerce in Canada: Pursuing the Promise,” Report of the Standing Committee on Industry, Science and Technology, May 2012, www.parl.gc.ca/content/hoc/Committee/411/INDU/Reports/RP5535392/indurp01/indurp01-e.pdf, accessed July 27, 2014. 4 Canada Post Annual Report 2011, p. 30. 5 All currency amounts are shown in Canadian dollars unless otherwise noted.

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Page 4 9B15M032 Said Ragotte:

Purolator handles over one million parcels a day with very few errors. We do this through countless repetitive processes for every movement. The result is that change is often met with resistance. It is hard to inject change into a big, efficient machine which is programmed to standard systems and procedures. Standardization helps reduce costs but can constrain innovation.

Purolator was driven by the vision of being the “leading provider of integrated transportation and logistics solutions within, to and from Canada.” Serving as guidepost for all its actions was its five-pronged value system: People First (wherein the company hired for attitude and trained for skills); Customer Focus (aimed at enhancing the quality of customer experience); Corporate Stewardship (strengthening the communities it served); Transparency (being open and honest in its dealings) and Performance Excellence (demanding and recognizing outstanding achievement). The company had 170 operations facilities nationwide, 120 retail centres, 580 authorized agents and 260 drop boxes. It also had counters at 300 STAPLES locations and 10 PostNet business centres. Each day, its two customer contact centres responded to more than 20,000 calls, live chats and emails. The company deployed 23 dedicated chartered aircraft, 3,100 courier vehicles, 170 medium trucks, 1,290 highway trailers, 500 tractors and 940 ground support equipment. It had nearly 12,000 employees, including more than 3,500 couriers who directly interfaced with customers. Nearly 75 per cent of the employees were unionized. The company’s core leadership cadre consisted of three tiers: the Strategic Leadership Team at the top, comprising five senior VPs presided over by the CEO; the VP Roundtable, comprising 12 VPs presided by the first among equals; and approximately 50 directors heading various business activities, reporting to the VPs. Said Nangle:

I had known Purolator, well before I joined as CEO in early 2013, for its performance-driven culture. Its operating model of “pick it up today and deliver it tomorrow” had, over time, led employees to become exceptionally good at securing process efficiencies. But, the highly transactional model had its flip side. Purolator had become inward looking; it was siloed; and was focused less on the customer. As a result, it had stopped being innovative and was frittering away its competitive advantages. It was also planning its business on a one year horizon. Purolator was in need of a long term view.

In November 2013, Nangle had launched a five-year plan called PuroNext. It had two components — process transformation focused on operational improvements in the short to medium term; and new product development focused on meeting the evolving needs of customers over the medium to long term. Innovation became an integral part of the latter. It also became one of the themes for the Leadership Forum in June 2013, a semi-annual gathering of the company’s core leadership cadre. Purolator was focused on business customers and was in the business-to-business (B2B) domain. Its focus complemented Canada Post, which was targeting deliveries to residential addresses and was primarily in the business-to-consumer (B2C) and consumer-to-consumer (C2C) domains.6

6 Canada Post Annual Report 2011, p. 29.

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Page 5 9B15M032 While digitization had presented a challenge to postal organizations worldwide, including Canada Post, Purolator was less affected because it was in the business of moving parcels. Unlike letter mail, parcels contain tangible items that cannot be digitized. Purolator was also positioning itself as a “one-stop logistics provider” for medium-sized companies that either lacked critical mass to invest in a full distribution centre of their own or chose to outsource this activity to focus on their core business. Purolator had five strategic priorities: 1. Building a high-performance culture enabling its employees to help customers succeed; 2. Creating sustainable market advantage through superior customer experience and brand leadership; 3. Strengthening the portfolio by continuing to invest in strategic lines of business to achieve scale and

deliver profitable growth; 4. Growing market share in express parcel service by targeting under-developed high-yield segments;

and 5. Driving cost improvement by leveraging process innovation, technology and asset optimization.7 Purolator had been investing regularly in technology solutions aimed at enhancing growth, productivity and efficiency. It had redesigned its website in 2011 to make it user-friendly and to increase Purolator’s online presence. It was also harnessing social media and building online communities. INNOVATION AT PUROLATOR Purolator had several industry-leading solutions to its credit. For example, in 1989, it had launched an automated shipping system that, at the time, was a novelty. In 2005, it had introduced hybrid electric curbside delivery vehicles into its fleet. In 2011, the company had filed a patent for Arc Flow Management computer software,8 which it had designed with a dual objective: managing capacity and revenue levels in its chain of operations and making its sorting facilities more efficient. The decade of 2000 was uncertain for Purolator on several grounds. In 2001, the company went into financial distress, from which it took long to recover. A significant turnover of senior managers was affecting staff morale. The period between 2008 and 2012 witnessed the churn of three CEOs. In its 2011 Employee Engagement survey, only 38 per cent of respondents agreed that change was well managed at the company. By the time Nangle came aboard as president and CEO in January 2013, confidence levels in the organization were low, ebbed further by the company having missed bonus targets for the 2012 financial year. Purolator managers were trying to reach EBT targets through cost reductions rather than revenue growth. The company was losing market share. It was also losing people at the leadership level. Among Nangle’s growth prescriptions were that Purolator should increase revenues by offering products and services it had not previously offered. It marked the revival of innovative thinking. Said Nangle:

Innovation is not about a few smart people being locked up in a room and creating brilliant products. It is about a structured approach to finding solutions to business problems. It is about

7 Purolator Annual Report 2011, p. 36. 8 Purolator Inc., “Purolator Files Patent for Its Arc Flow Management Computer Software,” press release, September 13, 2011, www.newswire.ca/en/story/840147/purolator-files-patent-for-its-arc-flow-management-computer-software, accessed March 12, 2014.

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Page 6 9B15M032

processes that allow for enough ideas to land on the table and for the best ones to be chosen and taken forward. My experience very early in my career taught me that everyone in a company has ideas but, typically, would not talk about them unless asked. I was keen that we should figure out a way of ensuring that ideas no longer stayed captive in employee minds and also that the ideas we developed had a fit with our strategic goals. They must be scalable. They must also be unique to the culture of Purolator.

In PuroNext, Nangle saw both an opportunity and a challenge in promoting innovation; an opportunity because PuroNext would be driven by collaboration among project leads, technology leads and marketing leads working together on numerous initiatives; a challenge because the near-term targets set by PuroNext were largely in the realm of operations, reinforcing the rigour of “pick it up today and deliver it tomorrow.” He was also keen that the loose strands of creative thinking should be more grounded by bringing innovation under the purview of the corporate strategy team. Within weeks of his taking over as the CEO, Nangle had asked Candice Chow, the company’s director (Corporate and Market Strategy) to determine the structure for managing innovation. In 2012, Chow had already initiated two innovation ideas on her own. The first pertained to managing the e-waste being generated by the company’s hi-tech customers. The second addressed replacing the mandatory printed pay slips for the company’s employees with e-stubs. Both projects, however, had not taken off, largely because, at the time, they had not been top-down initiatives. With a new mandate, Chow picked up the pieces and, with the help of the company’s chief information officer, had compiled an outline of a structured process that Purolator could follow to drive idea generation and capture. The project, built on a template from www.salesforce.com (SFDC), was tentatively named PuroIdeas. It was an online platform, on which any employee could submit an innovative idea for evaluation and funding. It was to mark the beginning of a larger scheme of innovation that was to unfold. When Chow had made a formal presentation on PuroIdeas to the Executive Committee in March 2013, she had sensed some concerns that were rooted in Purolator’s risk management practices and corporate governance protocols. All investments above $50,000 had to be routed through an Investment Committee chaired by the chief financial officer and consisting of the company’s VPs and senior VPs. The review and approval environment would be too rigorous and formal, potentially stifling the ability to nurture innovation. Chow thought that the best way forward was to brief the members of the senior leadership team (comprising the five senior VPs and the CEO) and get their buy-in. Said Chow:

In order to enable innovation at the enterprise level you need to be agile. I knew that agility would not be possible if every innovative idea had to be brought through traditional checks and balances before it even got to a pilot stage.

In addition, Purolator was bound by an agreement to sole-source any information technology services through Innovapost, a member of the Canada Post Group of Companies. The Innovapost team, like the rest of Purolator, was focused on delivering the technology components related to PuroNext; it was not geared to deal with ad hoc innovation initiatives. At the semi-annual leadership conference held in June 2013, Chow had designed a half-day workshop along the lines of the Dragons’ Den television show, around customer experience with the company’s

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Page 7 9B15M032 website. The problem statement and the evaluation criteria had been circulated online (see Exhibit 3). Samsung, Dell and Canadian Tire (all Purolator customers) were invited to speak about how they were driving innovation in their companies. The positive response from the leadership team had led to the formation of an Ideas Forum enterprise-wide (see Exhibit 4). The objective of the Ideas Forum was to build an innovation capability as part of transforming Purolator from a reactive, short-term focused entity to a proactive, market leader delivering long-term profit growth. Chow had made some funding assumptions. While the full implementation costs would be approximately $300,000, the initial seed finance would be $75,000 (covering SFDC licences at $35,000, computer kiosks to enable employee accessibility at $30,000, employee incentives at $5,000 and other costs at $5,000). The cost of time required from the task force, review panels and idea working teams was additional. The returns were expected to be negative for the first two years until innovation ideas took off for implementation and commercialization. It was at this time that Chow started thinking of having a dedicated resource person for innovation. Being keen on an internal candidate with a strategic outlook (see Exhibit 5), she mooted the idea with Ragotte who was the strategy consultant on her team. Ragotte thought that building innovation at Purolator would be a “natural swing” from his role of building business cases for investment. Said Chow:

We were looking for four attributes in a candidate — an ability to think clearly through the practice of innovation in a large commercial enterprise; an understanding of the organizational culture of Purolator; a skill for working around processes with regard to generating ideas and piloting them; and a flair for execution. Erik had been leading cross-functional projects on regional strategy and, even though he was not the most senior executive at the table, he had displayed an aptitude for bringing people together towards a common objective. We expected him to spend 55 per cent of his time on innovation and the rest, as before, on strategy. It was important for him, as we saw it, to stay connected to what was happening in the rest of the organization by being focused on both.

Chow was keen that Ragotte should work on developing an innovation roadmap as a priority. She was open to offer suggestions but expected him to move on his own. Nangle himself had preferred that a candidate for innovation lead “a raw material rather than a finished product.” It was borne out of his conviction that Purolator needed a fresh approach and new ideas. He had observed Ragotte in meetings where he provided compelling inputs to the company’s strategy. He had assessed him as enthusiastic, smart and self-motivated and found his style to be “inclusive.” In his first meeting with Nangle, which progressed into a half-hour touch point every month, it was evident to Ragotte that the CEO wanted immediate results. While an open ear to the CEO was a plus point of the job, it would sharpen his accountability and also, as he saw it, vulnerability.

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Page 8 9B15M032 ISSUES BEFORE RAGOTTE Ragotte faced three managerial dilemmas — dealing with the risk-aversion mindset, setting the innovation agenda and institutionalizing innovation at Purolator. Risk Aversion Mindset One of the issues here was the conflict between efficiency and innovation. Standardization of processes was essential for securing zero-error perfection in operations. But standardization meant compliance with an established norm. It also meant, by extension, resistance to deviation from the norm, which is the hallmark of innovation. It was thus difficult for managers, while being held accountable for compliance with a standard, to choose a path of variance. Ensuring compliance with the process manual was the best way for Purolator managers to secure efficiencies and to also measure and monitor performance for ongoing improvements. Purolator had established standards, for example, for how a courier picks up a parcel, how the parcel moves through the company’s hub-and-spoke system of sortation facilities, and finally how it is delivered to the end recipient. Deviation from norms would be perceived as risky. Innovation Agenda Through conversations with innovation leaders at other companies facilitated by the CEO, Ragotte had identified a few attributes that were important to a successful innovation plan. Purolator needed to have a culture of innovation, which meant identifying and motivating people with an innovation skill set and implementing processes that could quickly transition ideas into implementation. Generating new ideas was not necessarily the problem. The challenge was to identify the appropriate problems to solve. In a company of 12,000 employees, a giant suggestion box risked overwhelming the business with too many ideas. Ragotte needed a way to focus on the right kind of innovation, rapidly identify the best ideas and execute quickly enough on those to create the “wins” the CEO was seeking. Building processes that facilitated ideas to come in and flow into a tangible product or service quickly without being dragged through roadblocks was the main issue. Sustainability As the first few new products would sprout from innovation, it was important to institutionalize innovation to ensure its long-term stability. Innovation needed to have its own systems and processes outliving people. Purolator had to continue innovating irrespective of who was in charge. NEXT STEPS Ragotte was unsure of the VP Roundtable’s commitment to innovation, given that it already had much on its plate. The CEO — and the team of senior VPs reporting directly to him — had, to date, been supportive of Ragotte’s initiatives in innovation. The CEO had asked Ragotte to get the VPs on his side. Ragotte wondered how he should proceed further.

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Page 9 9B15M032

EXHIBIT 1: CANADIAN PARCEL DELIVERY INDUSTRY MARKET SHARES, 2013

Source: Company files.

EXHIBIT 2: PUROLATOR INCOME STATEMENTS, 2007–2013 ($ in millions) 2013 2012 2011 2010 2009 2008 2007 Revenue Expenditure EBT

1,622.5 1,556.3

66.2

1,631.6 1,595.9

35.7

1,615.6 1,542.4

73.2

1,493.0 1,421.2

71.8

1,433.5 1,380.6

52.9

1,562.5 1,472.1

90.4

1,448.4 1,365.1

83.3 ROI (%) 10.0 4.3 9.7 9.1 8.4 13.2 13.9

Note: EBT = earnings before taxes; ROI = return on investment Source: Company files.

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Page 10 9B15M032

EXHIBIT 3: PROBLEM STATEMENT AND SCORING CRITERIA

Problem statement: How can we decrease the attrition rate of customers who access our website to create an account?

Workshop boundaries:

• The ‘nots’: • Do not focus on the look and feel of the website. This is

not a web design challenge. • Do not spend time focused on why we can’t do this.• Do not get caught up in the little details. Be crisp and clear.• Do not try and boil the ocean. Quick wins are important.

• The ‘dos’:• This is a process challenge – do think about the hoops a

customer has to jump through just to create an account and ship with us.

• Do look at how we can increase the rate at which customers will complete the account creation process say by 100%.

• Do look at how to remove the obstacles, making it easier for customers to start a relationship with us.

• Do remember our values when building out your ideas..

Recent data has shown thatonly 22.9% of new customers completed the online registration process.

Scoring Criteria

• Originality, Differentiation

• Customer Experience Impact

• Commercial Viability, Ease of Implementation

Source: Company files.

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Page 11 9B15M032

EXHIBIT 4: PUROLATOR’S IDEAS FORUM

Economic objectives: • Extend/enhance product/ service

offerings and quality, replace obsolete products/services

• Develop environment-friendly products/services

• Maintain and increase market share • Open up new markets - domestic and

abroad • Lower product/service costs through

automation, reduction in manual processes, reduction in material consumption and waste, cutting energy consumption, enhancement of quality (avoid rework), reduction in product cycle time

Sustainability objectives: - Develop environment-friendly

products/services - Improve working conditions - Reduce environmental damages

IDEAS Forum is not for complaints, employees should come with suggested solutions and not just merely identifying the problem

Source: Company files.

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Page 12 9B15M032

EXHIBIT 5: PUROLATOR’S JOB DESCRIPTION FOR A MANAGER, STRATEGY & INNOVATION

Source: Company files.

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