Question

The Railway Service in Andaleland

The Railway service industry in Andaleland is categorised into groups according to the areas of operation and revenue. International rail services are offered by firms who own large and luxurious trains that travel to just about anywhere in the continent. Companies in this segment typically have revenues in excess of $1 billion. National trains have revenues between $100 million and $1 billion and travel domestically only. Regional rail companies have smaller trains with revenues below $100 million. Cargo trains do not carry commercial passengers. They specialise in the transportation of goods.

The suppliers to the railway industry are caterers, railway stations, train manufacturers and security firms which are oligopolies, meaning that the railway companies are in a less advantageous position. Key suppliers include manufacturers of trains Zanzi and Taraget who dominate the market and are able to garner significant profits at the railway companies’ expense by virtue of their specialised position. Another key supply for the industry is fuel, the price of which is currently proving a very problematic issue for companies.

The top three competitors are Virgin, Bota and Dannes railway companies. Other competitors include TubaTran, Canker Rail, Andale West, Continental Rails, Jama Rail, Atlantic Rail Northwest Rail, Southwest Rail and Una Railways. Most rail companies make extremely low returns; indeed many are currently losing as the industry is characterised by many price wars. Most railway companies also compete with non-price competitive tactics such as frequent traveller programs.

The customers of the industry can be categorised into three groups; business travellers, leisure travellers and buyers of large blocks of seats known as consolidators, who buy excess seat inventory at large discounts. Switching costs are very low and buyers are price sensitive.

Communication technology has proven to be a viable substitute for some form of business travel. Also, alternatives such as auto travel and bus transportation exist for leisure travellers who frequent regional and national train travel.

The capital intensity of the railway industry would appear to pose a formidable entry barrier. However, Atlantic Rail, TubeTran and other entrants have proven that financing is available when there is a convincing business plan and when economic conditions are conducive to the business. Brand name and frequent traveller plans would also seem to be deterrents to entry however, Atlantic Rail’s success demonstrates that customers are willing to switch to other railway companies if the price is right.

(Source: Adapted from Carpenter et al, (2011) Strategic Management, A Dynamic Perspective, New Jersey, Pearson Prentice Hall)

a.​Identify four strategic groups in the railway service industry and explain why they do not compete directly against each other in the industry​​​

b.​Examine two barriers in the case that could act as obstruction to keep away new entrants from entering and reducing the profits of the established firms.​​​​​​​​​​​​

c.​Explain two reasons why these barriers have or have not been effective in preventing new entrants from entering the industry​​​​​​​​​​​​​​​​

d.​Identify two supplier groups in the industry and explain why they have high bargaining power over the rail companies.​​​​​​​​​​​​​​​​

e.​Explain how two substitute services would pose a threat to the profitability of the companies in the industry?​​​​​​​

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Answer 1

Answer a:

Four strategic groups in the railway service industry are International rail services, National trains, and Regional rail and Cargo trains. These strategic groups do not compete with each other directly as their scope of operation varies widely from one another and it is on the basis of the size of their businesses. Moreover, the kind of customers and the services that they deliver to the customer also restrict them from competing directly with each other. International rail services are offered by firms who own large and luxurious trains that travel to just about anywhere in the continent. Companies in this segment typically have revenues in excess of $1 billion. National trains have revenues between $100 million and $1 billion and travel domestically only. Regional rail companies have smaller trains with revenues below $100 million. Cargo trains do not carry commercial passengers. They specialise in the transportation of goods.

Answer b:

Two barriers in the case that could act as obstruction to keep away new entrants from entering and reducing the profits of the established firms are convincing business plan and conducive economic conditions to the business.

Answer c:

1. Convincing business plan helps the company in generating funds from the financial institutions which can help them in establishing their business and enforce competition upon the existing firms.

2. Conducive economic conditions for the business build up the confidence of the business to invest in the new market opportunities.

Answer d:

Two supplier groups in the industry are the manufacturers of trains Zanzi and Taraget and fuel suppliers. Both of them have high bargaining power over the rail companies. Manufacturers of trains Zanzi and Taraget dominate the market and are having higher bargaining power over the railway companies’ by virtue of their specialised position. Fuel is the basic need of all of the rail companies which they require to run their trains. Because of this reason they possess higher bargaining power over the rail companies.

Answer e:

Buyers in the industry are very sensitive to the changes in the price. With the rising cost of running the trains to the rail companies, they are bound to increase the prices. However, as soon as the price of the rail companies escalates, customer will shift to the substitutes for enjoying the lower cost services that are being provided by buses and auto travel and communication technology that helps the business travellers to conduct meeting from their remote places without being required to travel.