The Railway Service in Andaleland
The Railway service industry in Andaleland iscategorised into groups according to the areas of operation andrevenue. International rail services are offered by firms who ownlarge and luxurious trains that travel to just about anywhere inthe continent. Companies in this segment typically have revenues inexcess of $1 billion. National trains have revenues between $100million and $1 billion and travel domestically only. Regional railcompanies have smaller trains with revenues below $100 million.Cargo trains do not carry commercial passengers. They specialise inthe transportation of goods.
The suppliers to the railway industry are caterers,railway stations, train manufacturers and security firms which areoligopolies, meaning that the railway companies are in a lessadvantageous position. Key suppliers include manufacturers oftrains Zanzi and Taraget who dominate the market and are able togarner significant profits at the railway companies’ expense byvirtue of their specialised position. Another key supply for theindustry is fuel, the price of which is currently proving a veryproblematic issue for companies.
The top three competitors are Virgin, Bota and Dannesrailway companies. Other competitors include TubaTran, Canker Rail,Andale West, Continental Rails, Jama Rail, Atlantic Rail NorthwestRail, Southwest Rail and Una Railways. Most rail companies makeextremely low returns; indeed many are currently losing as theindustry is characterised by many price wars. Most railwaycompanies also compete with non-price competitive tactics such asfrequent traveller programs.
The customers of the industry can be categorised intothree groups; business travellers, leisure travellers and buyers oflarge blocks of seats known as consolidators, who buy excess seatinventory at large discounts. Switching costs are very low andbuyers are price sensitive.
Communication technology has proven to be a viablesubstitute for some form of business travel. Also, alternativessuch as auto travel and bus transportation exist for leisuretravellers who frequent regional and national traintravel.
The capital intensity of the railway industry wouldappear to pose a formidable entry barrier. However, Atlantic Rail,TubeTran and other entrants have proven that financing is availablewhen there is a convincing business plan and when economicconditions are conducive to the business. Brand name and frequenttraveller plans would also seem to be deterrents to entry however,Atlantic Rail’s success demonstrates that customers are willing toswitch to other railway companies if the price isright.
(Source: Adapted from Carpenter et al, (2011) StrategicManagement, A Dynamic Perspective, New Jersey, Pearson PrenticeHall)
a. Identify four strategic groups in the railway serviceindustry and explain why they do not compete directly against eachother in the industry
b. Examine two barriers in the case that could act asobstruction to keep away new entrants from entering and reducingthe profits of the established firms.
c. Explain two reasons why these barriers have or havenot been effective in preventing new entrants from entering theindustry
d. Identify two supplier groups in the industry andexplain why they have high bargaining power over the railcompanies.
e. Explain how two substitute services would pose athreat to the profitability of the companies in the industry?
