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 / Spring 2008 / Issue 50(originally published by Booz & Company)


On Track for Growth

The railroad industry has existed for almost 200 years; indeed, the first modern corporations were railroads. Andrew Carnegie, Cornelius Vanderbilt, and the original Standard & Poor’s all built their enterprises through the growth of railroads. But the industry went through a moribund patch starting with World War I, in which ridership around the world dropped wherever the automobile was introduced. Mass transportation, and rail in particular, became perceived as a “mature” sector, with less opportunity for the type of product de­velopment seen in fast-moving industries such as computing or telecommunications. Not prime hunting ground, according to conventional wisdom, for innovative marketers.

This trend finally began to change with the development of high-speed rail transport in 1964 in Japan and 1981 in France. These rail systems broke new ground by promoting passenger services, mimicking airline-style marketing campaigns, and seeking to understand and provide the amenities that customers wanted. The success of the government-owned French National Railway Company (SNCF) gradually inspired other European countries to establish high-speed rail systems. In Japan, the state-owned Japanese National Railways fell into debt in the 1980s, was privatized (beginning in 1987) as the Japan Railways Group, and then recovered. Even so, despite the generally strong reputation of the rail systems of Europe and Japan, it has taken more than 40 years for the idea of high-speed, customer-centric train lines to catch on globally.

From the experience of the past few years in particular, key lessons are emerging. The best railway organizations, whether public or private, are absorbing both new computer-based technologies and proven leadership talent from the most innovative companies in industries such as manufacturing and airlines. This makes it easier for them to move from a government model that concentrates on merely managing routes and setting prices for the masses to a market-oriented mind-set that allows them to differentiate their services for different kinds of customers and to charge accordingly. In becoming more market-facing, these railroads have had to become customer savvy — a significant evolution for companies that did no marketing for most of their history. This in turn required substantial organizational shifts: Companies that thought of their basic business as “wheels on rails,” or one-size-fits-all utility offerings, had to learn to build product and service offerings to meet specific customer needs. They had to segment the market, as any customer-aware company would have to, and cater to the most profitable segments. To accomplish this, they had to become capable of making successful acquisitions, and of starting new businesses and services from the ground up. This seemingly impossible transition turned out to be very possible — with a shift in management attitude.

New Zealand’s Privatization Lessons
There is no universal path to commercial success, but there are certainly signposts set out by railroads that have already made the journey — as well as the remnants of previous failed attempts. For instance, the New Zealand Railways Corporation’s success after becoming privatized in 1993 has served as a model for many other railroads, including those in North America.

At first glance, New Zealand presents many obstacles to the railway operator who hopes to be profitable. New Zealand is a small country of fewer than 4 million people living on two narrow islands. It has a high cost-to-serve environment: difficult, mountainous terrain; seismic geography; extremely circuitous routes requiring slower, smaller “narrow gauge” lines; and short distances between markets, all in a country with mandatory union participation. Moreover, because railroads usually make money hauling large volumes over long distances, it is a major challenge to operate a profitable railroad in a country with a small farm economy, low demand, and a small industrial base. And, indeed, during the 1980s, the New Zealand Railways Corporation (then owned entirely by the national government) had problems — declining productivity, growing railway losses, and an increasing government subsidy. More important, the true cost of transport in New Zealand was high relative to that in other countries and was continuing to rise, which had a negative impact on the country’s industrial growth and economic attractiveness.

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  1. Harry Bruce, The Pig That Flew: The Battle to Privatize Canadian National (Douglas & McIntyre, 1997): An overview of CN’s history and illustrates its progress and growth as a company.
  2. Viren Doshi, Gary Schulman, and Daniel Gabaldon, “Lights! Water! Motion!s+b, Spring 2007: Forward-looking view of expansion of transportation, energy, and water infrastructure, which are all linked together, with rail systems particularly important for travel within and between cities.
  3. Edward Landry, Andrew Tipping, and Jay Kumar, “Growth Champions,” s+b, Summer 2006: Survey data from Booz Allen Hamilton and the Association of National Advertisers identifies marketers who drive growth by leading product innovation and new business development.
  4. Geoffrey Precourt, ed., CMO Thought Leaders: The Rise of the Strategic Marketer (strategy+business Books, 2007): Insight from 15 top marketing leaders on the current and future direction of their field.
  5. National Association of Railroad Passengers (NARP) Web site: Includes a helpful overview of the U.S. Passenger Rail Investment and Improvement Act of 2007, with regular updates.
  6. For more business thought leadership, sign up for s+b’s RSS feed.
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