Case 1: Burlington Northern

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1 Case 1: Burlington Northern Christopher Jones CIS /26/2017

2 Burlington Northern s Strategy: Burlington Northern carries massive loads of inexpensive goods: coal, grain, etc. These goods are not susceptible to damage in transit, have low time sensitivity, and generally are shipped in large lots. Because of this Burlington Northern s business strategy is cost leadership. Burlington Northern delivers high volumes of these products, achieving economies of scale. To be successful with a cost leadership strategy, a firm must have a nice market share (BN has few competitors) (Tanwar). Burlington Northern continuously seeks to reduce its costs, while finding ways to increase the amount of goods it can carry per train car. The Case: In this case, Burlington Northern executives are faced with a question: Should the company invest a year and half s worth of net income ($350,000,000) into a technological investment: Advanced Railroad Electronics System (ARES). The idea came from the aviation industry. The chairman of Burlington Northern had posed the question to his employees: Could this system that has worked in the aviation industry work with trains? The ARES system used GPS technology to track trains. Through this tracking, scheduling could be made more efficient, safety is increased because of greater knowledge of train locations, which decreases collisions. The ARES system would be able to locate trains within a range of +/- 100 feet, compared to +/- 10 to 15 miles. The ARES Page 2 of 10

3 By knowing a train s location at all times, the system can calculate the speeds of the trains. A communication network would also be part of the system, including emergency braking by the command center (safety implications). The ARES system can be broken down into three parts: control, data, and vehicle. The control segment uses train speed and position to produce schedules. The control segment also alerted dispatchers of violations so that the train driver could correct them before authorities caught them, which reduces downtime because of less time dealing with the authorities. The major implications of the control segment is higher utilization of equipment and labor. The data segment of the ARES system is the communication component of the system. The communication occurring between trains and the control segment. The vehicle segment of the ARES system consisted of a display, keypad, and monitoring equipment on the train. An Energy management system used information about track conditions, speed limits, fuel considerations, and car weight to calculate an optimal speed. Finally, a Locomotive Analysis and Reporting System used sensors to monitor the train s health. This would prevent trains from breaking down as much, through preventive maintenance. Despite all the benefits touted by the ARES system and its developers, executives at Burlington Northern were extremely cautious about this game changing investment. The system is a technological leap, one that could pay off massively. Yet executives are cautious and want to make sure that this is the right decision. Stakeholders: Page 3 of 10

4 Employees: All Burlington Northern employees, including conductors, maintenance crews, and office personnel. Customers: All Burlington Northern customers. Shareholders: All stockholders of Burlington Northern. Anyone with a vested interest in Burlington Northern. Porter s Five Forces: Competitive Rivalry: Low, Burlington Northern s major competitor is Union Pacific. Union Pacific had already made investments to upgrade their track infrastructure, new technology, and improvements to fuel efficiency. Threat of New Entrants: Low, Burlington Northern is a company that is the result of a merger of four major railway companies, each bringing considerable assets to the merger. In order for a new company to come along into the railway industry, considerable capital will be required. A new company will need to build its own railways, purchase trains, cars, and hire employees. Burlington Northern need not worry about the threat of new entrants. Threat of Substitutes: High, Burlington Northern hauls massive amounts of minerals, agricultural goods, industrial products, lumber, and automotive goods. The nature of the goods that Burling Northern carries are that they are heavy, relatively inexpensive, sold in large lots, and are insensitive to time (coal can sit in a car and be OK, as opposed to ice cream, which would melt in a train car). Trucking companies have gradually taken Page 4 of 10

5 over the shipping of commodities because they can provide door to door deliveries and pickups. Trucks are nearly three times as expensive but customers are willing to pay the premium for the convenience. Bargaining Power of Suppliers: High, the railway carrier industry is dominated by Burlington Northern and Union Pacific. This gives them a great degree of leverage. While they must keep their costs competitive with each other, they can choose the price for their services. The labor force has significant power. Bargaining Power of Customers: Medium, Burlington Northern could lose customers to Union Pacific if their services and prices are not competitive with Union Pacific. Union Pacific may gain a competitive advantage by upgrading to double rails, and investing in technological improvements. If Burlington Northern fails to invest in ARES, they could fall behind in pricing and overall customer satisfaction, and ultimately lose customers to Union Pacific. Courses of Action: Use ARES: Burlington Northern decides to implement the ARES system; organization wide changes must also be implemented. There is also a large upfront capital investment of $350,000,000. The Control center would cost approximately $80,000,000, the Data link would cost approximately $80,000,000, and the on-board equipment costing around $200,000,000. The bottleneck is the fact that train schedules are not optimized, according to Goldratt, if the bottleneck is elevated, throughput will increase (Goldratt, Cox, and Whitford). Page 5 of 10

6 Employee stakeholders would be affected in the following ways: the advanced tracking system would cause a few layoffs because the train schedules would be highly optimized, reducing the need for extra conductors on standby. The employees will generally be safer, notably the track maintenance crew. The ARES GPS system lets maintenance crews know when trains are coming down the track, so there would theoretically be less accidents. Certain employees could get pay increases. Customer stakeholders may see reduced costs, because BN s costs may decrease. They may also receive their goods sooner than without the ARES system. Shareholders of Burlington Northern may see an increase in stock value because they may be an industry leader with the new ARES system. They may gain investors because they are seen as an innovative, progressive company who is not afraid of investing in technology. Do Nothing: Burlington Northern chooses to take no action and continue on with their current infrastructure and business processes. Employees who may have been laid off because of the new system get to keep their positions. Maintenance crews would be exposed to the same amount of risk when working on the train tracks, due to the lack of information about where incoming trains are. Customers would suffer if Burlington Northern doesn t implement the ARES. They will receive a lower quality service, longer wait times, and no decrease in prices. Page 6 of 10

7 Shareholders would suffer in the long term, share prices may drop as Union Pacific may gain a competitive advantage by investing into ARES, and track improvements. Burlington Northern may be seen as not wanting to invest in future technologies, losing potential new capital from new investors. In the short term, shareholders may not be greatly affected. Recommendation: I recommend Burlington Northern acquires the ARES system. Burlington Northern is using old methods to log their arrival and departure times, sometimes the employees forget to create logs, causing inaccuracies in the records. By pinpointing train location with GPS technology, BN can create more optimal train schedules. Dr. Ravi Kalakota s Rule 1 of his Ten Rules of e-business says, Technology is no longer an afterthought in forming business strategy but rather the cause and driver. (Kalakota and Robinson) The ARES system increases safety of the general public, and the employees of Burlington Northern. According to Morgan, 17 people are killed in the US everyday due to a work related accident (Morgan). So the hazards are real and should be considered. The ARES system also is able to monitor the train car s maintenance status. By using sensor which are placed on parts, alerts can be made to ask for repairs. This reduces the time that trains spend broken down on the track. This has cost implications and safety implications. Cost can be lowered because trains won t break down as often on the job. And having a broken down train on the track can pose safety concerns, think about another train ramming the broken train from the back. Page 7 of 10

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9 Works Cited Burlington northern railroad. Wikipedia. N.p.: Wikimedia Foundation, 21 Jan Web. 24 Jan Hertenstein, Julie H., and Robert S. Kaplan. Burlington Northern: The ARES Decision (A). Harvard Business School Case Feb Tanwar, Ritika. Porter s Generic Competitive Strategies. IOSR Journal of Business and Management 15.1 (2013): Web. Kalakota, Ravi, and Marcia Robinson. E-Business 2.0: Roadmap for Success. 2nd ed. Boston, MA: Addison-Wesley Educational Publishers, Book. Morgan, Gareth. Images of Organization: International Version. Thousand Oaks, CA: SAGE Publications, Print. Pg 316. Goldratt, Eliyahu M, Jeff Cox, and David Whitford. The Goal: A Process of Ongoing Improvement. 3rd ed. Aldershot: Gower Publishing, Print. Page 9 of 10

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