CSX Strategic AssessmentSETH ROESE

Company Overview

Established in 1980 as a result of a merger between Chessie System and Seaboard Coastline

Headquarters: Jacksonville, Florida CEO: Michael Ward Operates in Eastern region of United States from the Atlantic

Coast to western gateway cities such as Chicago, St. Louis, and New Orleans

Mission

To capitalize on the efficiency of rail transportation to serve America

Vision

To be the safest, most progressive North American railroad, relentless in the pursuit of customer and employee excellence

Company Strengths

Only one primary competitor which is Norfolk Southern. The only other class I railroad company that operates in the Eastern

region of the United States. Ability to outprice the trucking industry that offers a similar but

substitute service. Ability to save on costs due to fuel efficiency and operational

efficiency compared to transportation from trucks (Bitzan & Keeler, 2011).

Strategic placement of railways. Ability to capitalize on existing businesses along owned railways and

capitalize on the use of railways by competitors.

Company Weaknesses

Poor Customer Service Capacity restraints causing poor quality service to

be delivered to customers (CSX, 2015). 2014 on-time arrivals was 45%, down from 81% in

2013 (CSX, 2015). Not in line with the company vision of pursuing

customer and employee excellence.

Company Weaknesses

Amount of business dedicated to the coal industry 22% of the company’s 2014

revenue was from coal (CSX, 2015).

The coal industry is very volatile and production has fallen in the last few years due to decreased global demands resulting in lower exportations of coal. The decreased production of coal nationally is depicted in the chart shown (U.S. Energy Information Administration, 2015).

Company Threats

Trucking industry and other modes of transport This industry has the ability to provide a substitute service and take

away a portion of CSX’s market. Declining coal production in the United States.

Increase in natural gas being produced from shale (Powell, 2015). Renewable energy use increasing along with growing government

subsidies for using renewable energy (Powell, 2015).

Company Threats

Implementation of government mandated Positive Train Control system (PTC) Highly advanced technological system being put into place to help

prevent railroad accidents typically caused by human error. The system does nothing to help improve service, but will play a factor in more degrading service (Ditmeyer, 2011).

Costing the company over $300 million per year to install (CSX, 2015).

Unknown future costs that will be associated with maintaining the government mandated system.

Opportunities for CSX to Capitalize

Poor customer service experienced industry wide. All major class I railroads have reported a steady decline in customer

satisfaction with services that have been provided. Some of those ratings have dropped to a 60% - 70% customer

satisfaction rating for some railroad companies. With little direct competition the railroad companies have not found it

necessary to go above and beyond to please the customer base.Murray, 2006.

Opportunities

Domestic oil and natural gas production has seen a steady increase In the last 10 years, production has increased 50% (Melek, 2015). Rising costs of crude oil has driven the increase in production of

domestic oil and natural gas. While prices will fluctuate and drop at times, the graph below shows that the price range will remain relatively the same or higher in the future.

Opportunities

Financial ability to invest more in company infrastructure. The company has reported record revenues and operating income for

the last several years. The record revenues could be used to strengthen and expand

infrastructure.

The Problem Needing Solved

CSX is not following the mission & not trying to achieve the vision CSX is not ensuring an efficient railroad if it is operating near

capacity and is not investing more to expand to accommodate growing business.

CSX is not becoming the most progressive railroad in North America if its performance is at the same level as other competitors.

36% decline in on-time arrivals in one year is not progression, it is regression. 45% on-time arrivals does not show a pursuit of employee and

customer excellence.

Why Are Improvements Needed Now?

Michael Porter’s five forces model of competition lays out the different areas that will affect competition in each industry. Every company has to understand how and why competitive forces increase in the industry it operates in. (Thompson, Peteraf, Gamble & Strickland, 2014, p. 50-57).

In the railroad industry competitive pressures will increase from two areas: The trucking industry provides a substitute service that is very

similar to the service provided by the railroad industry. Other competing railroad companies because the cost to switch to a

different company is low for the customer and the railroad companies offer the same products and services.

Areas Needing the Most Improvement

Customer service performance HAS to improve.

Infrastructure HAS to be improved and expanded. This will aid to increasing the customer service performance.

Resources committed to transporting coal HAS to be diversified into other raw material areas. This will ensure enough money is continuously available to make

much needed improvements and expansion to the infrastructure which will:

Increase customer service performance.

Steps to Implement a New Company Strategy

Step One

Almost one quarter of CSX’s annual revenue comes from the transportation of a commodity that has been declining in production and has been very volatile which is coal.

The company can devote more resources to domestic oil and natural gas transportation that has been steadily increasing the last several years that will be depicted in a graph on the next slide.

This will ensure that the company does not see a decrease in revenues because of declining coal production. There is also a very real possibility that the company will continue seeing record increases in revenue with the new diversification.

U.S. Domestic Crude Oil Transports

Association of American Railroads, n.d.

Step Two

The record revenues and operating income being realized now should continue to increase with the diversification of transport services offered and will provide sufficient funds to reinvest back into the company to improve and expand the infrastructure. The company is currently operating near capacity now, making it harder to reasonably take on new customers.

Instead of spending $2 billion over a two year period to buy back stock (Funk, 2015), invest at least $1 billion improving existing infrastructure and expanding to more easily accept new business.

Step Two

The investment needs to be utilized to expand the rail capacity and to improve and expand local yards to optimize the use of the yards.

This will help in ensure cars end up on the proper outgoing trains, accrue less dwell times, or a lower time of cars sitting in a yard waiting to leave, and reach their final destinations sooner. This is an area that all railroad companies are struggling with and are

not investing the time and money to improve the problems.Liu, Ahuja & Sahin, 2008

Step Three

Focus on driving and improving customer service performance of the company. With the additional funds having been allocated to improving the

infrastructure, the company can then focus on improving performance.

This will ultimately provide a differentiation strategy that will set CSX apart from not only its main competitor, Norfolk Southern, but other class I railroads nationwide. This is because the railroad industry as a whole is known for poor quality service with some companies measuring only 60% - 70% satisfaction rates (Murray, 2006).

Being able to create excellent service quality will enhance the company’s revenues because customers are willing to pay a premium for outstanding services (Yoo & Park, 2007).

Additional Benefits to New Strategic Plan

This new plan should allow the company to compete better against the trucking industry. Not only will CSX be able to provide a cost effective way of transportation, but now the quality of service will be better.

The new revenues that the company will realize once the strategy is in full implementation will offset the costs of maintaining PTC, which are still unknown, but also cannot be avoided since it is mandated by the federal government.

Wrap Up

The new CSX strategy will: Address the company’s weaknesses by:

strengthening the business portfolio by diversifying revenue streams. Improve customer service through better company performance.

These actions will be accomplished by seizing opportunities being provided within the industry

Poor customer service being provided by all other class I railroads. Domestic oil and natural gas steadily increasing. Current record revenues allows for investment to improve infrastructure.

Wrap Up

The new strategy will also remove or reduce threats to the company by: Out performing the trucking industry that provides a similar

substitute service. Not having as much dependency on the coal industry and being

susceptible to its volatility. Potentially creating larger revenues in the future to offset

maintenance costs of PTC.

Wrap Up

Overall this new strategy will bring CSX back into alignment with its mission of capitalizing on the efficiency of rail transportation to better serve America. The company will also be better aligned with the vision of being the most progressive North American railroad that is pursuing customer and employee excellence.