Union Pacific: A Case Study for Strategic Alternatives Essay
Union Pacific: A Case Study for Strategic Alternatives
PART 1: INTRODUCTION
Union Pacific Railroad Company (UNP) is one of the four major railroad companies that transports a variety of goods across North America and is an American staple of industriousness and endurance. Union Pacific with its workforce of 43,000 highly trained people has been in operation since 1862, and its span of operation stretches from Western to Southern United States and internationally into Western Canada and Northern Mexico. The American Association of Railroads has classified Union Pacific as part of the Class I Railroad Group, which consists of seven other railroad companies but Union Pacific is by far the standout in terms of size, revenue, operation and resources. The success of Union Pacific can be attributed to the 30,000 route miles it runs on, the American population that it serves, and the transport of bulk commodities.
In 2006 Union Pacific had revenues of $15.5 billion dollars which surpassed the required $346.8 million needed to be classified as a Class I Railroad company and in 2010 it reported revenues of $16.9 billion while closing out the year with $43 billion in total assets. Although Union Pacific has dominated the rail industry it does have three major competitors that also serve the continental United States. These competitors include Burlington Northern Santa Fe (BNSF), Norfolk Southern and CSX, all operating and competing with UNP on price, transit time and reliability. BNSF operates west of the Mississippi and is Union Pacific’s major competitor as they both primarily operate in the same region. CSX operates east of the Mississippi with little geographic overlap by Union Pacific around the Chicago and New Orleans area while Norfolk Southern and CSX compete for the same area of operation.
Like its competitors, Union Pacific is dependent upon customers who employ this rail company to not only transport their manufactured goods but to transport them timely, safely, and economically to their required destination. Union Pacific’s varied customers are, but not limited to, industrial, chemical, agricultural, and automotive manufacturers as well as intermodal transportation. Union Pacific remains competitive because it has bridged the gap between time and distance by steadily providing a high speed mode of goods transportation from the manufacturer to the consumer. It is not only the leader of the rail industry because of its efficiency, reliability and visibility as a company but because it continues to develop and implement important advancements that have secured its rightful place amongst the industry’s competitors.
Common practice amongst railroad companies is to have customers sign a lengthy service contract to secure the business deal thereby ensuring customers don’t switch to a competing railroad company and Union Pacific is not the exception. Aside from Union Pacific locking customers into such contracts, other factors have helped this successful company secure its top spot in the rail industry. Union Pacific employs the use of double stack rail cars meaning double the freight per car length and the use of increased rail cars as allowed by the invention of the Distributed Powertrain Operations (DPS). This practice of doubling the cargo and lengthening of rail cars has proved to be successful and profitable for Union Pacific as this combination of long hauls and large amounts of cargo means the consumption of less fuel as well as the reduction of cycle times per shipments.
PART 2: STRATEGIC PROFILE
Union Pacific is primarily owned by domestic firms and the revenues that are generated and originate from domestic operations. Several factors have contributed to the success of Union Pacific and to its long and current standing as the top earner in the railroad industry. Through its historical and long-running establishment in the railroad industry UNP, along with is competitors, have established a barrier of entry into railroad transportation. There simply isn’t any attraction for new entrants to enter into the industry. One reason is the high capital investment for the development of railroad infrastructures and technologies. Consider this, “between 1980 and 2009 Class I railroads spent $460 billion on infrastructure, equipment maintenance, and upgrades” (Hitt et al. 2011, p. 387).
In addition, new rails and routes must be coordinated and integrated into a complex and congested system that is owned and operated by well-established companies. Although there is a clear and formidable barrier into the industry, railroads are not without competition. In addition to the fierce rivalry with the railroad companies within its strategic group, UNP must also compete with the trucking industry. Union Pacific and the rail industry saw a surge in business in 2007 compared to other modes of transportation due to the rising cost of fuel (diesel, jet, and gasoline) and an increase in environmental awareness. This rise and fall of fuel prices have presented both opportunities and challenges for UNP. The trucking industry poses a legitimate threat to the rail industry in terms of freight transportation because of accessibility and logistical versatility. The free-wheeling trucking industry is not subjected to the heavy regulations that the rail industry must face.
Trucks are not restricted by complicated rail networks and benefit from the use of roads and highways that are federally and state funded. Whereas UNP and other rail companies must subsidize their own networks of tracks to establish a market in new territories. In addition, the trucking industry offers more versatility when in comes to door to door services. The rise of fuel prices and a growing environmentally-conscience populace have also created opportunity for UNP as they have marketed themselves as fuel-efficient and cost saving alternative. Also, Union Pacific and its competitor, CSX, came to an agreement in 2003 that in essence provided 63 hour coast to coast freight transport, shutting out the trucking industry in the region, thereby making allies of the two companies and demonstrating a willingness to cooperate for the area they share in the competing market.
In addition to competition with rivals and other modes within the transportation industry, UNP is entangled in a web of regulatory agencies and federal enactments that limit its earning potential and cuts into its profit margins. In addition to oversight and safety agencies, such as the Federal Railroad Administration (FRA) and the US Department of Transportation (US DOT), UNP is subjected to the other regulatory groups such as the Surface Transportation Board (STB). The STB which oversees and regulates rates, disputes and mergers in the transportation industry ensures that UNP adheres to strict hours of operation and passenger service requirements. STB imposes heavy fines for any violations of these enforcements and through legislation is looking to expand its role in anti-trust violations.
This can significantly affect UNP’s future strategic actions that may include mergers with other rail companies or other modes of transportation. It is also regulated and directed by federal acts such as the Rail Safety and Improvement Act (RSIA). Given that the railroad industry is capital-intensive, the RSIA enacted in 2008 has had several implications for UNP’s operations. The RSIA has required all rail companies to further the improvement of rail infrastructures requiring the installation of a system called Positive Train Control (PTC) which improves safety measures that prevent collisions and accidents. This improvement project will cost UNP in the range of $250 million. UNP will reinvest 22.6 percent of profits on projects such as infrastructure improvements in the excess of $2.6 billion. This includes $1.7 billion on new tracks and $500 million on intermodal facilities. Although many of these improvements may be imposed, UNP possess the financial astuteness and savvy to see the value of such upgrades and is positioning itself to enhance its infrastructure to improve measures such as fuel-efficiency and load capacity.
All of these factors contribute significantly to the strategic position of Union Pacific but the company has not succeeded solely on these details alone. It is important to note that the company has a group of individuals who are responsible for ensuring that Union Pacific continues to be top competitor. The company’s executive’s all have extensive experience in the rail industry and in the company as well. Union Pacific’s executive board operates with the belief that unified leadership fosters clear accountability, effective decision making, and a strong focus on corporate strategy and initiatives.
Union Pacific began as a centralized organization but opted for a shift in power to regional divisions enabling regional managers to make operational decisions relating to scheduling and routing thereby improving customer satisfaction, operational excellence, and accountability, resulting in a win-win situation for the company and its consumers. This strategy of empowering its ground troops is a testament to Union Pacific’s confidence in its employee’s ability to impact the company’s profitability and reliability.
PART 3: SITUATIONAL ANALYSIS
There are trends in the various segments of the general environment that have a significant impact on Union Pacific’s business operations and strategic actions. Analysis of these influences is shaping the responsive actions that UNP is taking to sustain its position in the railroad transportation industry to ultimately keep its hold on the largest share of the market. In the general environment, technology is reshaping the way the rail transportation industry is doing business. The implementation of double stack railcars along with innovated technologies such as distributed powertrain operations are allowing for greater load capacities. Increased load capacities obviously will lead to greater efficiency and increased profits through reduced fuel costs but are subjected to already heightened safety regulations.
These increased load capacities also have their drawbacks as they require a revamping of rail infrastructures to support these larger loads. Other technologies have also help support the profitability of the rail industry through the innovation of logistical and data management systems that administer revenue sharing and dispatching systems that provide real-time information. These systems have diminished switching costs incurred through intermodal transportation and have helped managers make more informed operational decisions in regards to delivery. This segment of the general environment is expected to offer new opportunities for the railroad industry as the trend is to move toward more integrated and comprehensive logistical services that will provide doorstep services for its customers. These technologies are providing new opportunities for increased revenue as the rail industry will be able to expand beyond its high dependence on bulk freight transportation that includes agriculture and coal as the majority of its revenues.
In the political segment, as aforementioned, UNP and its competitors are highly entangled in a web of regulations. Regulatory agencies including the Environmental Protection Agency (EPA) and increasing socio-cultural views and concerns with the health hazards of industrial development are truly changing the railroad industry. The “go green” movement has gained serious momentum as public awareness of detrimental byproducts from industries has increased the number of laws and regulations that includes the Clean Air Act. This factor has actually proved to benefit the rail transport industry as it markets itself as a more fuel efficient and cleaner alternative than other modes of transportation. The industry environment is definitely one that is highly unattractive for new entrants.
The capital requirements and challenges of gaining access to the distribution channels make it difficult for new competitors to enter into the industry. As a result, the greatest threat comes from existing competitors in the industry and substitute products from other modes of transportation such as trucking. Although the trucking company does not have the large capacity benefits of rail it is much more versatile and flexible in its door-to-door services. Trucking is an attractive substitute because of these capabilities, but UNP has made attempts to subdue these advantages by working cooperatively with its competitors to offer customers equitable services in respects to time of delivery for coast to coast transports. One trend that is definitely proving to be a benefit for the railroad industry is a move toward cooperative relationships with its suppliers.
Railroad companies, including UNP, “are now showing signs of willingness to share the internal details of capital and maintenance budgets,” (Hitt et. al, p.388). This has actually proved to be a cost-efficient strategy for the suppliers of railroad equipment and the railroad companies because it allows for suppliers to make more informed decision in terms of long-term production to meet capacity demands. These cost saving measures for the suppliers will ultimately turn into savings for UNP. Through industry analysis it becomes apparent that buyers have significant power. According to Hitt et. al buyers have significant power when a buyer represents a large portion of a company’s total output and when a significant portion of a seller’s revenue is represented by the buyer (p. 57).
This is the case for UNP as a significant amount of its revenue is generated from coal and agriculture. A trend in the shipping industry may provide a shift away from this dependence, as customers’ demands for comprehensive shipping options is on the rise. Manufacturing companies are looking for integrated shipping that will provide from the assembly line to final destination services. This is a very promising opportunity for UNP as it can look into mergers and acquisitions that will allow for these types of services. Of course regulatory agencies will have their say as expanded roles include anti-trust laws that will closely monitor these business transactions.
Union Pacific’s competitors do not have the financial resources that Union Pacific currently counts on. With $16 billion in revenues Union Pacific has the ability to expand their territory, purchase and maintain their railcars and vast miles of rail, invest in their workforce and adopt advanced technological safety programs that will ensure their operations run as safely as possible. Union Pacific competitors have adopted the strategy of circumventing aggressive competition by adopting a stance of friendly competition in the form of entering into operational contracts with CSX thereby demonstrating that Union Pacific is unafraid to share some of the market with a smaller railroad company. The result is very little to no differentiation in terms of services and products. So UNP will look to separate itself through alternative shipping ventures that can prove to be very profitable.
PART 4: STRATEGY FORMULATION
Analysis of Union Pacific’s internal operations reveal that it is greatly supported by a strong financial performance, commitment to highly qualified and well-trained employees, and an investment into the integration of technology and information systems that provide market intelligence and real-time information. These support functions are instrumental in influencing and shaping the activities along UNP’s value chain.
Financially UNP is tops, operating with the largest net income in the industry. This is certainly UNP’s strongest support function because it has proven to more financially astute with its assets and capital investment, giving them greater flexibility with its resources. With $43 billion in total assets, of which $1.4 billion is free cash flows, UNP is able to focus on long-term investments in new technologies, improvements to capital equipment to improve fuel efficiency and transportation times, and increased capabilities of human resources all of which translate into increased value. In fact, “22.6 percent of industry revenue is spent on purchases,” (Hitt et al., 2011, p. 387). This helps strengthen UNP’s position in the industry and has significant implications on it’s the different segments of value chain activities.
UNP is strongly committed to the training and development of its professional workforce. They maintain high quality standards and provide extensive training opportunities for all level of employees from facility operations up to management. These training efforts are to ensure that employees demonstrate high competence in operating sophisticated equipment and manage an employee base of nearly 43,000. Because of inherent liabilities due to the high-risk nature of transporting large workloads of, often times, hazardous materials this commitment is critical in ensuring that employees posses the capabilities to work in accordance with UNP’s safety standards and other agency regulations.
This is critical to value chain activities because it establishes a reputable brand name for UNP in the rail transportation industry; providing customers with peace of mind and satisfaction. To support this endeavor, UNP has designed an “Educational Assistance Program to encourage full-time, regular staff employees to enroll in job career related courses,” (Hitt et al., p. 389). In addition to this program it offers management development courses to further increase its managerial capabilities, which ultimately leads to efficiency and productivity. UNP’s investment into such programs shows understanding of adding value through a smarter workforce. It is clear that UNP values people and relationships because it has “invested in policies and infrastructure to address many industry specific needs including better on-the-job sleeping facilities, stress management, and workload flexibility”, (Hitt et al., p. 390).
Management Information Systems
In this technologically advanced age it has become more important to integrate technologies that will provide companies with information and knowledge that gives them a competitive advantage and creates value for its customers. By integrating technologies such as CAD III (Computer Aided Dispatching) that provides market intelligence and real-time information, UNP has done just that! The incorporation of this dispatching system provides UNP with real-time information on train locations and statuses. It also enables UNP management to better utilize its trains and improve decision making processes that will strengthen its on-time performance. Other technologies like its Interline Settlement System (ISS) and Rate EDI Network (REN) provide UNP with important data in regards to revenue sharing and tracking services of inter-carrier rail transports. This data helps UNP management make more informed decisions that improve cost efficiency and delivery time performance when transports require switching carriers.
Supply Chain Management
UNP operates in an industry where there is high depreciation of capital equipment. This equipment is an essential component of its operations and because it must utilize high quality rail equipment and machinery to support its infrastructure, UNP can not afford to use poor quality substitutes because of increased liabilities. This results on a heavy dependence on a few suppliers which gives the suppliers some leverage. But to ensure that it is adding value through its supply chain UNP is committed to working cooperatively with its suppliers.
As quoted in Hitt et al. (2011) , by the company president of Georgetown Rail Equipment, railroads are “‘showing signs of willingness to share the internal details of capital and maintenance budgets that are allowing us to make long-term decisions to meet capacity demands’” (p.388). Because the industry requires a great deal of reinvestment into plant, property and equipment this cooperative relationship with its suppliers will ensure that UNP sustains a cost-efficient flow of equipment to maintain its operations.
Union Pacific operates on over 31,000 miles of rail that connects 23 states in the Western United States. “In total, UNP controls 50,673 miles of track in the US,” (Hitt et al., p.390) through purchases and leases. Its total rail equipment includes: 5,461 locomotives, 41,752 freight cars, and 12,070 containers and chassis. This large quantity of equipment assets gives UNP a well-established infrastructure and the resources to offer its customers greater value. Its locomotives are powered by the use of a distributed powertrain systems (DPS) and incorporates the use of doublestack rail cars. This integration generates greater efficiency and productivity as it both increases load capacities and lowers fuel consumption.
To strengthen its delivery times and develop greater cost effectiveness along its distribution channels UNP has integrated aforementioned technologies and has augmented these actions by making investments into more fuel efficient locomotives. To further support well-organized distribution channels UNP has moved to “empower regional divisions . . . to make operational decision related to scheduling and routing,” (Hitt et al. p.391). This decision to decentralize has given managers greater flexibility to make decisions that increase on-time performance. It has also made strategic actions within its distribution channels that have allowed it to subdue competition with the trucking industry, which eats into it market share, by forming an alliance with its rail competitor CSX to offer its customers a 63-hour coast-to-coast freight delivery.
In respects to its marketing strategy UNP brands itself as Building America which helps affirm its domestic presence but fails to identify a significant trend happening domestically and internationally. UNP is highly dependent on its source of revenue generated from mining companies extracted from the Powder River Basin located in Wyoming. In the United States the demand for coal is steadily decreasing as there are concerted efforts socially and legislatively to promote environmentally friendly fuel alternatives. In the global market UNP has failed to target developing countries’ demand for coal in respects to its marketing strategies. UNP will also need to make considerations for expansion into coastal regions that will offer port access to the shipment of coal to these developing countries if it seeks to gain a competitive advantage.
Follow Up Service
UNP’s customer service is built on the sum of its activities along the value chain. Its investment in technologies that provide tracking and real-time information on freight deliveries provides customers with critical data regarding shipments. Also, the decision to decentralize itself and enhance it regional management and employee capabilities through programs and trainings also enables regional centers to build relationships with its local customers to better identify their needs. This decision improves UNP’s competitive advantage because they are able respond quicker to those needs and make timely improvements to sustain customer satisfaction.
Strengths and Weaknesses
In summary, analysis of Union Pacific’s support functions and segments of the value chain unveils a well-established firm with much strength and some notable weaknesses. These strengths include a strong operating network within the domestic United States, a sizeable financial performance, and competent human resources. UNP’s weaknesses, although few, have significant implication for its long-term success. These weaknesses include a high dependence on revenues generated from a few customer groups including coal and agriculture, a low-global presence which can prove to be its greatest weakness, and lack of distribution channels leading into coastal ports that can help them push into global markets.
Threats and Opportunities
Union Pacific’s direct threats are their direct competitors with whom they share the market, the trucking industry and the fluctuating cost of fuel. Competitors for the vast rail industry are ever competing with each other for their customers business and loyalties. Not only do they have each other to compete with but also with other transport or shipping businesses who offer differing modes of transportation that may provide incentives to customers who are looking to transport their goods across North America in a more timely fashion across the country’s highways. Burlington Northern Santa Fe is the second largest rail company amongst the Class Group I rail group and is Union Pacific’s biggest competitor in the Western United States. BNSF operates and competes across the same regional territory of the country mile for mile as Union Pacific.
BNSF owns and operates slightly more miles of track than Union Pacific claiming ownership of nearly 35,000 miles of track beating Union Pacific out by almost 4,000 miles. BNSF employed these miles of tracks to generate revenues of nearly 16 billion dollars in 2010 closely tailing Union Pacific’s revenues in the same year. BNSF has access to the low sulfur coal of the Wyoming Powder River Basin. This small area of the country produces a large amount of coal and is considered the bread and butter of the railroad industry. Coal is important because BNSF hauls enough coal to generate roughly ten percent of the electricity produced in the United States. BNSF and Union Pacific both share representation in the region and in the transport of this natural fuel. It is safe to assume that BNSF is the biggest threat to Union Pacific’s reign as the top earner of the railroad industry not only figuratively but historically speaking as well.
Union Pacific also competes with the smaller rail companies of CSX and with Norfolk Southern although they account for a smaller percentage of the rail industries overall revenues. The ever fluctuating cost of fuel has also been determined to be a threat to Union Pacific’s business and operation as it has proven to have a negative impact on the company’s revenues. During the 2007 economic recession railroad companies experienced a surge in business and it was determined to be directly related to fuel surcharges and affordable rail shipping prices compared to other modes of transportation that were heavily dependent on fuel. Customers made sound decisions and opted for rail transport instead of the more costly trucking industry to deliver their market goods. In turn, by 2009 fuel prices once again became affordable and the railroad industry was impacted with a 22.3 percent decline in revenues.
The ever shifting prices of fuel have determined the impact of revenues in the past and will most assuredly determine the railroads losses and profits in this most competitive market for the life of Union Pacific. The trucking industry has been determined to be Union Pacific’s most significant competitor as it accounts for 85 percent of all freight shipments by volume in the United States. The trucking industry has proven to be faster in the delivery of goods across the continental U.S., trucks have the ability to travel over highways, roads and streets and are not restricted to rail networks thereby facilitating the delivery of goods from door-to-door with ease and most importantly, the trucking industry is not responsible for the financing or maintenance of the many roads they travel on while Union Pacific is solely responsible for the upkeep and financing of their miles of rail networks.
PART 5: STARTEGY FORMULATION
Alternative Strategy I
Union Pacific’s top position as gross earner in revenues and profits in the rail industry is ever threatened by Burlington Northern Santa Fe’s strong presence in the industry and because of their yearly revenues which come only second to Union Pacific’s numbers by a very slim margin. To say that Union Pacific’s top spot in the industry is ever threatened is an understatement. Not only does Burlington Northern Santa Fe miss the top spot by hundreds of thousands of dollars but they operate in the same regional territory as Union Pacific and are competing for the same rail customers. Burlington Northern Santa Fe started out as a holding company and the formation of this company sought to expand their operational territory and it did so by purchasing the Atchison, Topeka and Santa Fe Railway and Burlington Northern Railroad and formally merged into the Burlington Northern Santa Fe in the mid 1990’s.
In the late 1990’s BNSF and the Canadian National Railway announced their intention to merge and form a new corporation aptly named North American Railways with headquarters in Montreal, Canada. This merger fell through when the United States’ Surface Transportation Board placed a 15 month moratorium on all rail mergers. The deal might have fallen through but BNSF demonstrated that it was unafraid to expand aggressively. This strategy of expanding the company to form and create a company that is a real competitor for the top position served Burlington Northern Santa Fe successfully as their company’s revenues have proven over the last decade. Could this strategy serve Union Pacific as well and could the number one railroad company in the Northern Hemisphere benefit from such a merger and or acquisition? I believe so.
Union Pacific is not a startup company but a company that has been in operation for well over 100 years and that is synonymous with transcontinental railroad history. It is experienced in operations outside of the United States with ownership of northwestern Canadian rails on which it operates and with 26% part ownership in Ferromex, Mexico’s largest private railroad company. With Union Pacific’s interests in a Mexican corporation, their operations in Canada and the purchase of non-railroad companies in the last 30 years Union Pacific has demonstrated that it is not weary of venturing into new businesses and international territories.
Acquiring part ownership or merging with another Class Rail I Group rail company would not only secure additional operational territories, miles of rails, locomotives, and additional customers, but would also increase revenues as well as a stake in the local economies of those territories east of the Mississippi River. The acquisition or merger of another smaller rail company, such as CSX, would also eliminate another competitor from the rail industry arena and would introduce and eventually secure Union Pacific’s presence in a territory previously held by the competition. Union Pacific entered into an operations contract or agreement with their competitor, CSX, demonstrating a willingness to adopt new business strategies. A merger or acquisition would eliminate the need to enter into such business alliances and would definitely secure Union Pacific’s dominance in the rail industry.
Alternative Strategy II
Domestically, the economic downturn between 2008 and 2009 resulted in a significant decrease in the demand for coal, affecting the marginal profits of Union Pacific’s freight shipments. Bulk commodities including coal are the bread and butter of Class I freight shipping. In fact, coal production from the Powder River Basin in Wyoming is a significant driver of UNP’s freight revenue growth. A lackluster economy and depressed domestic market coupled with the increased social awareness for environmental impacts of greenhouse gases and pollutants have stirred up political and social reform. Environmental and governmental agencies have mobilized efforts for the pursuit of alternative forms of energy including wind, solar, and natural gas and have put major constraints on coal use, ultimately cutting into UNP revenues.
These changes in the external environment pose a serious threat to UNP’s revenues in freight shipping as domestic shipping volumes will only further decrease. While these changes have put constraints on UNP domestically, there is growing opportunity in global markets, specifically, in Asia. According to Gambrel (2013), “Indian coal imports are expected to double . . . Chinese imports are expected to increase 133%”. This increase in the foreign demand of coal in the growing economies of China and India has given new hopes for the rail transportation industry, including UNP. Union Pacific is a domestic firm with operations primarily in the US and whose “revenues are largely generated from domestic operations,” (Hitt et al., p. 387) so in order to stay competitive UNP will need to turn its direction overseas and set its strategy at supplying the coal for growing demands in the Pacific Rim. A majority of coal mined and sold throughout the US comes from the Powder River Basin (PRB) in the states of Wyoming and Montana and 99 percent of PRB coal is used domestically.
PRB coal is to some extent a cleaner option because of its low sulfur concentration but its decreasing demands as a domestic energy choice still has major coal companies such as, Peabody Energy and Arch Energy, scrambling to position themselves to get their large coal stock into global markets. According to Bud Clinch, executive director of the Montana Coal Council, “The markets (for Powder River Basin coal) nationally are questionable, but its unquestionable the demand that exists overseas – a wide variety of countries and into the foreseeable future” (Western Association of Resource Councils (WORC), 2011). Coal companies are well aware of what’s occurring in domestic and global markets and that rail transportation is an instrumental piece to them achieving above average returns. Although there are proposals to ship PRB coal through Northwestern routes leading into Cherry Point and Columbia River terminals in Washington State there are serious concerns about the environmental impacts and capacity constraints that this route poses. “Billions of dollars have been spent building and maintaining the railroad connections to the Midwest and South . . . Such a system does not exist in Washington,” (Gambrel, 2011).
UNP has invested in upgrades of over 16,000 miles of existing rail infrastructures leading into the south and on other equipment and technology. They are in a position to engage themselves in the increased capacity demands that Peabody and Arch Energy will demand to get their PRB coal overseas. Of course this endeavor will require intermodal transportation that will include river barges and sea going shipping vessels. An alternative strategy for UNP will be to utilize its existing rail system and its Cora Coal and Cook Coal terminals in Cora and Metropolis, Illinois. There are advantages for UNP to consider this route for the shipping of PRB coal. These terminals are, “remote from population centers, have large available stockpile areas,, can handle multiple unit trains without blocking highways, can unload unit trains quickly” (Gambrel, 2011).
PRB coals freights will then make their way down the Mississippi River on barges and into ports in Louisiana where they will then be transferred onto shipping vessels into Asia. But most importantly, this shipping option is available now and is not under the bond restrictions that are currently hindering the Northwest routes. In addition to increasing its revenues through a focus strategy on PRB coal it would serve UNP well to pursue the acquisition or merger with other modes of transportation including river and sea transports to optimally manage the logistics of its global operations. By acquiring these other modes of transportation, UNP will be in a position to differentiate themselves from its competitors by offering a comprehensive shipping alternative for its customers into global markets.
PART 6: STRATEGY IMPLEMENTATION
To achieve its strategic alternatives Union Pacific will have to overcome formidable opposition in its external environment where major issues will challenge their strategic activities. Concerns about the repercussive affects of increased shipping volume of coal, operating at increased rail capacities through current infrastructures, and a potential corporate merger will be heavily scrutinized by the Environmental Protection Agency (EPA) and the Surface Transportation Board (STB) among a myriad of other regulatory agencies. These agencies, responsible for matters concerning the environment and rail transportation respectively, will ensure due diligence to the impacts of UNP’s proposed strategic actions. The STB is responsible for the oversight and enforcement of rail safety, extension and abandonment of rail lines, and of most concern authority over regulation of merger and acquisition activities in the railroad industry. “The STB launched exploratory proceedings on whether to expand rail regulation and several bills . . . that would include new antitrust provisions,” (Hitt et al., p. 398).
These actions taken by the STB will certainly stifle UNP’s attempts to acquire any company that will provide the supplemental modes of transport that will make its strategic actions more feasible in getting PRB coal overseas. With the increasing demand for coal overseas UNP will look to focus itself on becoming the leading provider of PRB coal overseas and expand its operations globally. To do so they will need to strengthen their current infrastructure to support the increased load demands that coal companies will place upon them. There are inherent logistical challenges of getting large quantities of coal to customers overseas but the greatest of these would certainly be the management of rail capacity.
Rail capacity can be defined as the “the number of trains a segment of rail can handle in one day” (WORC 2011, p. 8). Currently there are up to “135 cars carrying 120 tons each, or 16,200 tons” (Gambrel 2013) per unit train of PRB coal coming out of the Midwestern U.S. and according to Cambridge Systematics it is “determined that the average capacity of a single track rail to be between 16 trains per day and 30 trains per day for multiple train types,” (WORC, p. 8). Increased demand can have adverse affects on logistics, placing burdens on rail equipment. It is expected that safety and regulatory issues will have to be managed by UNP to ensue its operations with the expected efficiency.
The Surface Transportation Board will certainly monitor and regulate any increased levels of volume that are sure to abate the integrity of rail equipment increasing likelihood of rail accidents and liabilities for UNP. Adding to this is the corrosive effects of coal dust on rail track beds. According the WORC coal dust can be “detrimental . . . which could lead to increased need for repair and more derailments” (p.2). In addition these increased shipments of coal and the large amount of coal dust will also pose environmental effects that will have the EPA on high alert. It is estimated that the average “rail car could lose as much as 500 lbs of coal and coal dust per railcar – over 30 tons per unit train – during each trip” (WORC, p. 2). The coal traveling along railroads and along the Mississippi river will further pollute air and water degrading local resources.
UNP providing coal overseas will also be deemed as counterproductive to domestic efforts to reduce greenhouse gas emissions by utilizing alternative energy sources. Although the low-sulfur PRB coal is considered to be a better alternative to the highly sulfuric coal available in northern Asia, environmental agencies domestically and world wide will still see this as a subversive to global efforts to reduce global warming. “The global warming impacts of burning Powder River Basin coal will affect the U.S. no matter where the coal is burned,” (WORC, p.2). The Surface Transportation Board a sub division of the Department of Transportation is granted the regulatory authority in respects to any railroad mergers. Although the STB has approved past mergers, including Union Pacific’s merger with Southern Pacific railroad, they will ensure that any acquisition made by UNP will not have any adverse effects regionally or nationally on railroad competition.
The STB’s authority over railroad mergers is exclusive and it has broad discretion to impose merger-related decisions that can hinder UNP’s attempts to attain comprehensive solutions for shipping into global markets. For Union Pacific to successfully acquire a smaller or comparable competitor in the rail industry not only is a great sum of capital needed but a well-designed strategy is also necessary ,paying the right price, have a good integration process and most importantly retain what they acquired such as knowledge, tools and human capital, meaning their workforce and executive management. Careful consideration of the company to be bought must also be thoroughly examined in terms of the company’s revenues, assets, holdings, debts, and the potential for growth in the area of operation as a result of being a part of Union Pacific Rail Company.
Even with such scrutiny of the company to be acquired it would be important to note that a company as successful as Union Pacific does bare the strong possibility that an acquisition would result in failure for the top earner in the rail industry. Union Pacific does have experience in acquiring businesses and companies not operating within the rail industry. In the 1990’s Union Pacific sought to diversify their portfolio by entering into new markets, specifically the trucking industry as the rail industry relies on trucking for intermodal purposes, and they outright acquired logistics companies and trucking companies, amongst others, but in later years and with a new executive team Union Pacific divested themselves of said companies with a desire to focus solely on their performance within the rail industry.
With a history of only 20% of mergers and acquisitions succeeding in the world of business, Union Pacific must be able to accurately ensure that in acquiring another rail company that they are not overextending themselves and that such an acquisition doesn’t become a detriment to the existing success that they have worked hard to attain. Acquiring a company regardless of size also implies acquiring the company’s debts and operational issues and determining if these pose a substantial risk to the potential parent company. Identifying potential problems or issues in operation, implementing a restructuring of the present operation could possibly help to ensure the acquired company is working in the same cultural business operation as Union Pacific.
But Union pacific must also analyze whether the acquisition is meant to establish that it intends to obliterate all competition should the acquisition become a success or if it intends to gain mutual benefit for both parties involved and how this would impact the mindset of employees already employed by the target company. Union Pacific must also examine how employing the strategy of an acquisition would affect the market in which they operate in and how it affects the people in the market. If Union Pacific can combine their business ideology, values, assets, and missions along with the company they seek to acquire they would most definitely be able to maximize the potential that the acquisition would seek to obtain.
It is important to note that Union Pacific might meet with roadblocks just as BNSF did in their attempts to merge with the Canadian Railway by the Surface Transportation Board, which closely regulates all mergers and acquisitions, and that although acquisitions and mergers are regular practices in the world of businesses that such an acquisition could potentially lead Union Pacific’s competitors to aggressively reduce their rates in order to maintain head above water in the rail industry. If Union Pacific is determined to move ahead in the rail industry as top competitor and is willing to meet with the challenges of acquiring companies then all areas of concern must be identified, addressed and scrutinized so as to make history in the world of the rail transport.
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