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Firm growth is an area of research which is important to many scholars. Of greater importance may be the process by which firms grow over time. Acquisitions, strategic alliances, foreign direct investment and internal development are all modes of expansion. This paper addresses the sequence of moves firms make as they grow over time. To address this important issue, the North American railroad industry is examined from the time period of 1980 to 2002. One reason we do not have a complete understanding of how firms grow over time is because it is difficult to determine a starting point. The starting point that I have selected is the point at which an industry is deregulated. Specifically, I examined the North American railroad industry beginning at the point at which the industry was deregulated (1980). Deregulation creates a fundamentally new environment for firms. This study explains how firms grow within the industry by examining the sequence of modes of expansion over time. The research shows that firms which grew within the deregulated industry followed the same general sequencing of moves. Firms which did not follow this specific sequencing were either acquired or went out of business. Do other deregulated industries follow the same general sequencing of modes? We may be able to apply what we learn from the North American railroad industry to other industries in other countries which have recently been privatized.
The railroads did not stop growing because the need for passengers and freight transportation declined. That grew. The railroads are in trouble today not because the need was filled by others (cars, trucks, airplanes, even telephone), but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry wrong was because they were railroad-oriented rather than transportation-oriented; they were product-oriented instead of customer-oriented.--Theodore Levitt.
GROWTH MATRIX
The North American railroad industry has grown considerably since Levitt's (1960) paper. How this growth has been achieved in a sequential manner is the focus of this paper.
Ansoff (1957) was one of the first scholars to address the sequential stages of firm growth. Ansoff's product-market expansion grid identified stages that a firm would follow to generate growth. The firm would first attempt to gain more market share from its existing products in existing markets (market penetration). Next, firms would find new markets for its current products (market development). Third, the firm would develop new products for its existing markets (product development). Fourth, the firm would develop new products for new markets. From a growth perspective, firms can grow by developing related products or expanding into related markets.
The concept of relatedness is important from both a product and market perspective. Related products provide the firm with sources of growth that are complimentary to the firm's existing products or resources. Firms develop complimentary or co-specialized resources which are related to a firm's existing resources (Teece, 1987). These co-specialized resources can serve to further leverage a firm's excess capacity and provide products that are distinct but related to a firm's existing products.
Firms are likely to perform better and grow in a related market because firms have developed products to be competitively viable (Chang and Singh, 1999). By moving into related markets, it is possible for a firm to utilize its excess capacity to achieve both economies of scale and economies of scope (Teece, 1980, 1982).
By incorporating related products and markets into Ansoff's 2 x 2 matrix and by incorporating domestic and international expansion I developed the classification matrix cube illustrated in Figure 1.
[FIGURE 1 OMITTED]
TRANSITIONING FROM REGULATED TO DEREGULATED ENVIRONMENTS
To study change over time, we need a logical starting point. The point at which deregulation is implemented provides such a point. Table 1 shows the fundamental differences between regulated and deregulated environments. In a regulated environment, competitive actions such as market entry and exit, price, and scale and scope of operations are controlled by the regulatory agency (Mahon and Murray, 1981).
In a regulated environment the primary customer is the regulatory agency. Mahon and Murray (1981, 225) state, "Since many of the traditional market and competitive forces are weakened in a regulated environment and because of the influence and impact of the regulatory agency, the focus shifts from the consumers to the regulatory body itself." Because the regulatory body serves as the "control" for the industry, the precise role that the regulatory commission assumes is quite important. It can act as a buffer to change. Regulatory agencies often serve as buffers by protecting existing firms from market and competitive forces (Mahon and Murray, 1981).
Deregulation represents a significant change (Meyer, 1980). Hambrick and Finkelstein (1987) view the impact of deregulation as similar to a shock in which a new environment is created that would require fundamentally new approaches to doing business. It has been shown that some firms develop an innovative strategy in response to the drastically new environment brought about by environmental deregulation (Mahon and Murray, 1981; Smith and Grimm, 1987; Gruca and Nath, 1994). Deregulation permits firms to utilize their resource base differently (Bailey and Williams, 1988). Upon deregulation, the firm has the option to more fully utilize its existing resource base (Mahon and Murray, 1981). This has been empirically demonstrated by Kelly and Amburgey (1991) in their study of the deregulation of the U.S. airline industry.
A major environmental change such as deregulation does not simply result in a change in strategy; rather, there is a pattern of strategic change in a nonrandom direction (Zajac and Shortell, 1989).
THE RADICAL TRANSFORMATION OF THE U.S. RAILROAD INDUSTRY
This study examines growth within the North American railroad industry after the Staggers Act of 1980 partially deregulated the industry. Some aspects of regulation remained within this industry. The Interstate Commerce Commission (ICC) retained the authority to set maximum rates or take actions if a railroad was found to have abused its market power or engaged in anticompetitive behavior. Thus, rail customers retained a "safety net" to protect against unreasonable railroad behavior (Association of American Railroads, 2001). The rail industry was radically transformed as a result of the Staggers Act.
According to Interstate Commerce Commission's (ICC) 1980 transport statistics, there were 40 Class I railroads in 1980. Class I railroads are based upon a given annual revenue. In 1980, it was $67 million. In 2002, it was $250 million. In 2002, there were eight Class I railroads: the Burlington Northern Santa Fe Railroad (BNSF); CSX Transportation (CSX); Grand Trunk Western Railroad (GTW); Illinois Central Railroad (IC); Kansas City Southern Railway (KCS); Norfolk Southern Railroad (NS); Soo Line Railroad (SOO); and Union Pacific Railroad (UP). GTW and IC are both owned by Canadian National Railway (CN); SOO is owned by Canadian Pacific Railway (CP). Thus, it would be accurate to say that the eight Class I railroads in 2002 are part of seven major railroad systems (BNSF, CN, CP, CSX, KCS, NS, and UP) (Association of American Railroads, 2001). The 40 Class I railroads or railroad systems in 1980 have been combined in various ways to form the eight Class I railroads in existence today (Association of American Railroads, 2001). How this combination occurred is the focus of this study.
Table 2 illustrates the change in revenues for the eight major railroads from the year before deregulation, 1979, to 2002.
In 2002, the Burlington Northern Santa Fe and Union Pacific were the two railroads that serviced the western United States. CSX and Norfolk Southern were the two primary railroads that serviced the eastern United States. The Kansas City Southern provided service from Kansas City to the Gulf of Mexico. The Illinois Central provided service from Chicago to the Gulf of Mexico for the Canadian National Railway. The Grand Trunk Western provided service from St. Louis and Chicago to Buffalo and Pittsburgh for the Canadian National Railway. The Soo Line provided service from Kansas City and Louisville to Detroit and Minnesota utilizing a hub in Chicago for the Canadian Pacific Railway. Most of the Class I railroads in 1980 did not survive deregulation.
The Burlington Northern, ranked number 2 in 1979, the Union Pacific, number 5 in 1979, and the Kansas City Southern, number 20 in 1979, are the only three railroads that exist from the 40 Class 1 railroads in 1979.
RESEARCH APPROACH
To address how the railroads grew, archival data was utilized. Collecting archival data is a particularly useful method of obtaining longitudinal data with which to study strategic change (Huff, 1982; Ginsberg, 1988). Researchers have used material from annual reports to identify changes in corporate strategies and to assess causal reasoning within firms. (Barr, Stimpert, and Huff, 1992) asserted that "while statements in annual reports may not precisely mirror the time period of a change, over long periods of time, the overall patterns of change can be identified." As Miller and Friesen (1980) pointed out, "The only way to perform longitudinal research on many organizations is through detailed published reports containing continuous history." Agreeing with these positions, I used annual reports as a source of data for measuring the change within this industry from 1980 to 2002. The study begins in 1980: the year of deregulation enactment. The study ends in 2002. The Surface Transportation Board did not allow acquisitions after 2002 because it felt that additional acquisitions may not be beneficial to the industry.
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