The Growth Years
Why has it taken so long for railroads to capitalize on the advantages of growth? Essentially, these companies have needed to go through three distinct stages of development. The first was simply cost improvement, often involving shutting down rail lines, selling noncore assets, and eliminating large numbers of redundant employees. In management parlance, companies plucked the “low-hanging fruit.” The second stage of change involved taking these smaller, slightly more focused organizations and gradually improving the service they offered, mostly in small, incremental ways.
But the third stage, which most rail companies are just entering now, is growth. Whether they are governed by the public sector or privately owned, experience suggests that railroad companies (with the exception of some railroads, like New Zealand Railways, that face unique challenges in their competitive environments) must display four characteristics to achieve genuine growth.
1. Willingness to take risks. Amtrak did not wait for a market for Acela to develop. It used an arsenal of marketing tools, including passenger segmentation, loyalty programs, viral marketing, and targeted promotions, to carve out a niche in a competitive market where none previously existed. If the right management mentality is in place, even a government-sponsored railroad can innovate and succeed.
Equally, CN has not been constrained by the traditional ways of doing business in its markets. Its acquisition strategy, for example, was remarkably bold. The end result is that its freight cars roll on, but they now carry much more profitable loads and serve as a vital connection to the global marketplace.
2. Enhanced leadership capabilities. Until the 1990s, most railroad companies had been unsuccessful in attracting the new talent that all businesses need — infusions to reshape their culture and operating style. Success at CN and Amtrak is clearly linked to the arrival of new players. These senior executives from outside placed in key decision-making roles become the agents of change. That process may involve a wrenching cultural transformation because the traditional utility mind-set of setting prices and controlling routes has to give way to a greater emphasis on strategic planning and marketing.
The most visionary rail companies also recognize marketing as critical at the executive level and give marketing decision makers significant authority. Their scope of responsibility extends beyond advertising and public relations to product strategy. Marketing provides the link between functions performed across the organization: pricing, sales and distribution, product development, and customer service. A railroad chief marketing officer role requires capabilities and technology to truly understand and meet the consumers’ needs.
3. A firm definition of success and the metrics to measure it. The railroad industry’s culture is changing: Executives are recognizing that the point of the game is not to maximize gross revenues (especially when not all business segments can be profitable), but rather to use available information to maximize returns in every line of business. Amtrak is now capable of measuring what its customers are thinking about its services, a remarkable breakthrough in many ways. CN has learned how to measure any new initiative’s impact on revenue growth and profitability.
4. Determination to become truly market-oriented. Customer-facing organization models are in many ways the opposite of the command-and-control models that prevailed in regulated industries. Achieving this kind of organizational transformation is extremely difficult, but the evidence is overwhelming that it is a key to growth. And it can happen whether a railroad is government sponsored or fully privatized.
In short, the railroad organizations that were once inward-looking are now forced to look to the market. They must innovate across all aspects of their business — including their management styles and technological systems. And they have to embrace marketing as a science for helping them understand what customers want and then giving them what they need. If railroad organizations heed these lessons, they can escape low margins and low growth rates, achieve much higher performance, and build a more sustainable and loyal customer base than anyone might have imagined previously.