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


On Track for Growth

Thus, the government was thinking not just of the rail sector but of the economy as a whole when it converted the railway to a corporation with a private-sector board. It brought in new leadership, eliminated government subsidies and interference in operations, gradually removed the constraints on trucking and other measures that had protected the railroad from competition, and sold the corporation to outside investors in an initial public offering. By 1996, three years after privatization, the company’s revenue had increased from NZ$489 million (US$337 million) to NZ$572 million ($395 million), labor costs had been reduced from 46 percent to 34 percent of revenue, and operating profits had more than doubled, from NZ$54 million ($37 million) to NZ$111 million ($77 million). The railroad also saw an explosion of new and creative services in both passenger travel and freight transportation, including just-in-time freight delivery, value-added logistics, and new equipment and pricing schemes. Creative branding and marketing approaches for commuter and long-distance transportation won a number of awards in marketing, sales, and advertising.

But there is also a cautionary tale in the case of New Zealand Railways’ privatization. From about 2000 on, its financial position deteriorated markedly, and increasing debt and declining margins seriously undermined its financial sustainability. The struggle was the result of increased non-rail competition, with too many operators charging too little for freight, primarily through aggressive pricing. Lacking cash, New Zealand Railways did not invest sufficiently in its rail lines. Ultimately, the government stepped back in and renationalized the network of rail lines for a purchase price of NZ$1, recognizing that a rail system couldn’t operate effectively when it did not have a truly competitive environment.

A lesson here, then, is that governments are not, by definition, the enemy; they can be capable and even visionary operators. Governments have played a simi­larly positive role in such locations as Hong Kong and Singapore, where mass transit organizations have been highly effective and competitive under government ownership. Those transit systems have, of course, benefited from high population densities, but Singapore’s policies have also buttressed ridership. Singapore has granted long-term rail franchises to the government-owned SMRT and more recently to a private operator, SBST, a major bus operator in Singapore that has expanded into rail. In this way, the government has been able to promote competition.

The New Zealand model has also imparted lessons to rail operators in North America. On the freight side, for instance, CN has freed itself from the strictures of government ownership. In doing so, it has proved agile and responsive to the changing needs of its markets, providing end-to-end supply solutions for its customers and creating new demand in the process. In general, the freight operators, most of them private but heavily regulated since their founding, have become highly effective organizations over the past decade. They have grown their top lines and improved profitability while investing substantially in new technology. As a result, they are attracting major investments from the likes of Warren Buffet and Bill Gates; Gates, in fact, is the largest investor in CN.

But market responsiveness does not work just for privately held operators. Amtrak’s Acela Express high-speed train is proving surprisingly successful, steadily building its ridership in the seven years it has ferried passengers along the Northeast Corridor. Like CN, Amtrak has shown itself able to drive growth in mature markets and to create opportunities in an industry that has only recently recognized the need to compete for business.

Canada’s Transcontinental Turnaround
Since it was privatized in 1995, CN has gone from being a stodgy Canadian Crown corporation to becoming one of the leading railroads in the world by identifying and addressing customer needs. In a dramatic improvement from the era in which goods placed on a train seemed to disappear until they mysteriously reached their destination weeks later, now customers can track their freight on CN just as they would with FedEx or United Parcel Service. Customer billing has improved, and CN has also demonstrated a sophisticated understanding of its freight customers’ supply chain needs.

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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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