BNSF Railway Transportation - Case Study Example

? BNSF Railway Transportation BNSF Railway Transportation Introduction Edward Hamberger, President and CEO of the Association of American Railroads stated, “Freight rail drives our nation’s economic recovery by delivering the things American businesses need to grow and create jobs. The rail industry is a true success story and something all Americans can support” (Association of American Railroads, 2011). The railway transportation industry is composed of companies which operate railroads across the United States. “This includes large railroads (Class 1 railroads) and regional and local line-haul railroads that carry freight and passengers” (IBISWorld, 2011). The services offered by the industry are bulk freight, intermodal services, passenger services and switching and terminal railroad services (IBISWorld, 2011). According to statistics from the U.S. Department of Transportation, freight shipments have increased from 27% of the ton-miles of U.S. freight in 1980 to 38% in 2005 (Laurits R. Christensen Associates, Inc., 2009). This increase shows the growing significance of the role of railways in the U.S. economy. Among the cargo being shipped through the railroads, coal represents the largest proportion in terms of tons (Laurits R. Christensen Associates, Inc., 2009). Other commodities transported by railroads include chemicals, farm products, non-metallic minerals and miscellaneous mixed shipments. Over the years, the railway industry has experienced consolidations that have reduced the number of Class I from about 40 railways to the current seven. The seven major players in the railway industry are Union Pacific Corporation (UP), Burlington Northern Santa Fe Corporation (BNSF), CSX Corporation, Kansas City Southern (KCS), Canadian National Railway (CN), Canadian Pacific Railway (CP) and Norfolk Southern Corporation (NS). In terms of operating revenues of the major North American railroad, the Union Pacific posted the highest revenue with $15.5 million. It is followed by BNSF with operating revenue of $14.8 million, NS with $9.4 million, CSX with $8.6 million, CN with $6.8 million, CP with $4.1 million and KCS with $0.87 million (Association of American Railroads, 2008) . Porter’s Five Forces Like any other industry, the railway industry is influenced by Porter’s five forces model which shape the strategies of companies, as shown in Figure 1 (Porter, 2008). The first force identified by Porter is the threat of new entrants. This force is the possibility of new companies entering the industry. This force is not very influential in the strategy of a company in the railway industry because of several barriers to entry. The barriers to entry in the railroad industry are (1) huge capital requirement needed; (2) restrictive government policy which is being regulated by the Surface Transportation Board; and (3) the availability of the infrastructure needed to compete with existing ones. In the future, it is expected that mergers will continue in the future and may even reduce the present seven companies to two transcontinental railroads because of the uncertainty of the structure of the railroad industry (IRS, 2007). Fig. 1 Porter’s Five Forces Model The second force identified by Porter is the bargaining power of suppliers. Suppliers of the railway industry include the manufacturers of tracks, railway equipment, structural metal products, freight cars, locomotives and construction companies who build the tunnels and bridges. Investors in railway companies can be considered as suppliers of the much needed financing to improve the industry. Recently, billionaire Warren Buffet invested in BNSF by buying it for $26 billion while Microsoft’s Bill Gates now owns 10% of CN railway. Investment of these two prominent personalities says much of the future of the railway industry (North America's Corridor Coalition, Inc., 2010). To illustrate clearly, the supplier power according to Porter includes (1) charging of high prices; (2) limiting the quality of the service; (3) shifting costs to industry participants; and (4) extracting maximum profits from the companies (2008). The bargaining power of the buyers or customers is the third force which Porter pointed out. The customers of the railway industry are a major influence to the strategies implemented by railway companies. It is projected that the demand for railroad service will increase because of the rising cost of oil. It is becoming more attractive to ship goods through the railroad than trucks because of the higher cost associated with trucking service due to its heavy reliance on oil. This increase in the price of fuel is passed on to the consumers. However, a poor quality rail service can also drive away customers. There is a need to increase both quality and capacity to bring in more customers. Infrastructure improvement is one way of enhancing the quality of the railway service. In short, the buyer power as described by Porter can be enumerated as follows: (1) forcing prices down; (2) demanding better quality for services; and (3) playing off industry participants against each other (2008). The fourth force is threat of substitute products or services. For the railway industry, their services can be substituted with those offered by other shipping industries. The possible substitutes for the railway service are (1) the trucking service, (2) the water carriers and (3) the air shippers. However, more consumers are realizing that railways are safer, friendlier to the environment and more efficient. A study from the Federal Railroad Administration revealed that “rails were much more fuel efficient than trucks, beating them in all 23 types of movement compared. Rail transport was found to be up to 5.5 times more efficient at certain tasks than trucking, and at minimum was 1.9 times as efficient” (Lutts, 2011). This means that the substitute service which threatens the railway industry may not necessarily be attractive to consumers in that, all things considered, the railroad is still a better option. The fifth force is the rivalry among existing competitors. The performance of each existing railway company differs due to the uniqueness of each railroad such as “the terrain, physical routes and network design, traffic mix and volume, extent of passenger operations and operational practices” (Railroad performance measures, n.d.).The Five Forces That Shape Industry Competition The rivalry among the railway industry players can exist in the following aspects namely: (1) price; (2) quality of service; (3) safety measures implemented; and (4) extra services offered. Value Chain Model Porter’s value chain model can be used to further describe the railway industry. Porter states that the value chain of an industry can be divided into (1) primary activities and (2) support activities. For the railway industry, the value chain model is best described in the report by the Joint Transport Research Centre as shown in Figure 2 (Beckers & Von Hirschhausen, 2009). According to the report, the first primary activity is the infrastructure which consists of three support activities namely: (1) the network capacity planning and investment decision; (2) network construction and maintenance; and (3) network access and slot allocation. The report mention s the second primary activity as the transport services which include three support activities namely: (1) rolling stock ownership; (2) sales and distribution; and (3) train operations. Fig. 2 Beckers & Von Hirschhausen’s Value Chain of the Rail Transport Sector The railway industry is an industry that benefits much from Information Technology (IT). Its operation and management becomes more effective and efficient through the various IT systems and designs being implemented. Strategic Uses of IT An example of how IT is used in the railway industry is through the Positive Train Control (PTC). “Positive Train Control (PTC) systems are integrated command, control, communications, and information systems for controlling train movements with safety, security, precision, and efficiency” (IRS, 2007). In particular, the IRS mentions that the PTC system will reduce accidents such as train collisions, casualties to railway workers, equipment damage and accidents due to over speeding; thus, improving the safety in the railway industry (2007). Another strategic use of IT in the railway industry is through the use of sensors. Modern railroad networks uses millions of sensors that can monitor train speeds and disclose when train parts need to be replaced (Industry leaders rally to modernize passenger and freight railroad systems, n.d.) . “Building these intelligent rail networks requires a high-powered, integrated system that can collect, manage and analyze the enormous amount of data flowing in from the tracks, through the trains and stations, and across the maintenance process” (Industry leaders rally to modernize passenger and freight railroad systems, n.d.). Threats Addressed The threats addressed by the IT examples presented above are those of safety, security and efficiency of the railway system. The threat of limited capacity is tackled through an IT application that focuses on the improved scheduling of the railway service. How IT Can Sustain Competitive advantage The innovative use of IT could sustain a competitive advantage among railway operators. Nash, Weidmann and Luethi in their study of the role of IT in the railway industry summarize its benefits (2008). First, it assists in the maximization of existing capacity. Second, it can improve the quality and reliability of service provided to the passengers. Lastly, IT can pinpoint the necessary infrastructure investments and modifications needed to revolutionize the railway service. Railway market share is projected to increase through IT applications in railway scheduling, railway operations and railway simulation (Nash, Weidmann, & Luethi, 2008). Other IT systems can facilitate the flow of information to the people involved in the management of the railway system. Information regarding the need for new and improved services to meet the growing needs of customers can be relayed through a well-developed IT system. References Association of American Railroads. (2008). Class I railroad statistics. Retrieved August 22, 2011, from aar.org: http://www.aar.org/PubCommon/Documents/AboutTheIndustry/Statistics.pdf Association of American Railroads. (2011). Key issues. Retrieved August 22, 2011, from aar.org: http://www.aar.org/KeyIssues.aspx Beckers, T., & Von Hirschhausen, C. (2009). Long-distance passenger rail services in Europe: Market access models and implications for Germany. Retrieved August 23, 2011 from internationaltransportforum.org: http://www.internationaltransportforum.org/jtrc/discussionpapers/DP200922.pdf IBISWorld. (2011, June 15). Rail transportation in the U.S. Retrieved August 22, 2011, from ibisworld.com: http://www.ibisworld.com/industry/default.aspx?indid=1133 Industry leaders rally to modernize passenger and freight railroad systems. (n.d.). Retrieved August 22, 2011, from mtu.edu: http://www.mtu.edu/news/files/IBMRailReleaseFINAL.pdf IRS. (2007, October). Railroad industry overview series - trends. Retrieved August 22, 2011, from ascendcfo.com: http://www.ascendcfo.com/pdfFiles/HBR- The%20Five%20Competitive%20Forces%20That%20Shape%20Strategy.pdf Laurits R. Christensen Associates, Inc. (2009, November ). A study of competition in the U.S. freight railroad industry and analysis of proposals that might enhance competition. Retrieved August 22, 2011, from stb.dot.gov: http://www.stb.dot.gov/stb/docs/CompetitionStudy/Executive%20Summary.pdf Lutts, C. (2011, August 17). Two railroad stock recommendations. Retrieved August 22, 2011, from wikiinvest.com: http://www.wikinvest.com/wikinvest/api.php?action=viewNews&aid=1133966&page=In dustry%3ARailroads&wire=1&format=html&comments=0 Nash, A., Weidmann, U., & Luethi, M. (2008). Can information technology help rail a greater role in preventing climate change? North America's Corridor Coalition, Inc. (2010). Freight rail enters new golden age. Retrieved August 23, 2011, from nascocorridor.com: http://www.nascocorridor.com/index.php?option=com_content&view=article&id=113:fr eight-rail-in-n-america-enters-golden-age&catid=1:latest-news Porter, M. E. (2008, January). The five competitive forces that shape strategy. Harvard Business Review. Retrieved August 23, 2011, from ascendcfo.com: http://www.ascendcfo.com/pdfFiles/HBR- The%20Five%20Competitive%20Forces%20That%20Shape%20Strategy.pdf Railroad performance measures. (n.d.). Retrieved August 22, 2011, from railroadpm.org: http://www.railroadpm.org/ Read More