The German railway market of passenger transport

The German railway market of passenger transport

Marije Meijer

1147048

The German railway market of passenger transport

Author: Marije Meijer 1147048

Supervisors: Prof.dr. A.M. Sorge Dr. J. Kratzer

Rijksuniversiteit Groningen

Faculty of Management and Organisation

R. van den Hoek Arriva Nederland

Groningen, July 2005

The author is responsible for the contents of this report; copyrights are with the author.

PREFACE

In this thesis you will find the research that I conducted as my graduation project for Arriva Nederland as the final project for my study Management and Organisation at the Rijksuniversiteit Groningen.

Hereby, I would like to thank all the people that supported me during the research.

First of all I want to thank my parents, sister, boyfriend and friends for all their moral support.

Second, I want to thank my supervisors from the university, prof. dr. A.M. Sorge and dr. J.

Kratzer, for their time, support and suggestions.

And last but not least, I want to thank Mr. R. van den Hoek, from Arriva Nederland, Mr. K.

Bastow and Mr. I. Morton, from Arriva International, for all their information, suggestions and time.

Finally, I hope that this thesis will provide a good insight in the German passenger railway market.

Marije Meijer

Groningen, July 2005

MANAGEMENT SUMMARY

Arriva is one of the largest private sector providers of passenger transport in mainland Europe with operations in seven different countries in addition to the UK, among others the Netherlands. Arriva's most important goal is to be recognised as the leading transport service organisation in Europe. They want to achieve this by growing the business through organic growth, acquisition, better service delivery, innovation and marketing. The aim is to do the things they do well, better.

The Group's turnover in 2004 increased by 3% to £1,800.2 million (2003: £1,751.1 million) and total operating profit was up 8 % to £113.7 million (2003: £105.2 million).

By means of a thorough research, Arriva hopes to get more insight in the complicated market of passenger railway transport in Germany now they have acquired Prignitzer Eisenbahn GmbH and Regentalbahn AG. The research question that has been stated for this purpose is:

Did Arriva plc make the right decision in entering the German passenger railway market by means of acquiring two local railway companies?

In order to answer his question, more detailed sub questions have to be made. First, it is important to gain insight in the German passenger railway market and second it is important to understand which market entry strategies Arriva could choose from. Only after these questions have been answered, a good answer to the research question can be given. The following sub questions will be answered:

1. What does the German environment look like for Arriva?

A. What are the characteristics of the general environment?

B. What are the characteristics of the industry environment?

C. Who are the main competitors and which threat do they pose to Arriva?

2. Which market entry strategy would be the best fitting for Arriva?

The German population (82.5 million inhabitants) is unequally divided across the country and there are a couple of concentrations, where millions of people live. These concentrations can be found in the Rhine-Ruhr area, in the Rhine-Main area, in the Rhine-Neckar area and the areas around Berlin, Bremen, Dresden, Hamburg, Köln, Leipzig, Munich and Nürnberg. A lot of passenger transport will be carried out in these areas every day, so these are interesting areas for Arriva.

Besides the German law, European law is of growing influence. There are several regulations issued the last 15 year and the EU will continue to make important decisions concerning the liberalisation of the railway transport market. Germany will be a slow adaptor of these regulations, but will finally have to adapt. For Arriva, this means a good opportunity to enter the German passenger transport railway market. Still, the Altmark case offers local authorities an exit door through which it can give subsidies to its own local transport operators, who will be rewarded with licences to operate specific railway tracks in stead of other (not local) operators.

Track access sometimes poses a problem in Germany: infrastructure and operating railway

services have to be in separate companies, but in Germany this has been left with Deutsche

Bahn, to a subsidiary called DB Netz. Technically the separation is a fact, but in reality, DB

Netz often favours other DB subsidiaries with their plans. Challenging this will be quite some

work, because of the huge political influence DB has, but also an interesting job.

Competition in the German railway passenger transport market is low, but growing every year. However, at the moment only 8.5% of the regional passenger transport market is provided for by non-DB operators although track access is guaranteed to every licensed operator.

Entry barriers are quite high in the market. This is due to the political influence that DB has.

Because of their enormous scale, they have a lot of influence on German politics and therefore can make sure that some decisions are made or delayed in their favour. Also, DB poses barriers with regard to time tables, second hand rolling stock and access to depot facilities.

These barriers are, however, not enough to keep competitors from the market as market shares of non-DB operators are growing. The market shares vary in the different Bundesländer, from already 30% in Schleswich-Holstein to only 2% in Berlin-Brandenburg.

With a turnover of 23.9 milliard in 2004 and 225,519 employees, DB is by far the biggest player in the German passenger railway market. Other competitors are Connex (which has a turnover of 292 million and 3,300 employees) and Rhenus Keolis.

Furthermore, in the south there are a lot of smaller regional operators (such as Südwestdeutsche Verkehrs AG, Hohenzollerische Landesbahn AG, Hessische Landes- eisenbahn GmbH and AKN Eisenbahn) and foreign operators (from Switserland an the Netherlands for instance) are also willing to enter the market.

The newest trend is that operators of bus and tram in the cities are exploring possibilities to enter the market. In Karlsruhe, Kassel, Saarbrucken and Chemnitz the local already successfully entered the market.

All of these operators want to grow in the market now the opening is getting bigger and bigger. All of the competitors want to compete on special services, like special treatments for less mobile people, it can offer

After an analysis has been made of the possible market entry strategies, it is stated that acquisition would be the best fitting for Arriva. It is a quick way to enter a market and gain experience in the German railway passenger transport market. The regulation concerning passenger railway transport and the tendering process are difficult and often not transparent.

By buying a German railway operator, a lot of knowledge and experience will be directly available. Furthermore, by acquiring a firm, Arriva will have track access from the moment that the deal has been closed. It will not have to start looking for tenders, go through the bidding process and hope that they will receive the tender in stead of the other competitors. It will have the access and can start growing in the market right away.

Moreover, Arriva will be the owner of the acquired firm, so it will be able to control this company totally, because of the majority of share it will have. They will be the owner, so they will be the one to make the important decisions concerning which way the organisation will follow.

Arriva will share the experience it has with tendering regimes, which will be helpful to the acquired company, because the tendering process is just starting to grow at the moment in Germany. With the German knowledge of the market and the language and Arriva's knowledge of how to be successful in acquiring tenders, Arriva can have a good start in the market and possibly grow to be a successful player in the German passenger transport market.

Finally, this strategy requires a big financial investment, but Arriva is financially a very healthy organisation, so it will be able to bear the costs that this strategy brings along with it.

With the German knowledge of the market and the language and Arriva's knowledge of how

to be successful in acquiring tenders, Arriva can have a good start in the market and possibly

grow to be a successful player in the German passenger transport market.

TABLE OF CONTENTS

CHAPTER 1 ARRIVA PLC ...8

1.1 I

NTRODUCTION

...8

1.2 O

RGANISATIONAL OVERVIEW

...8

1.2.1 Structure ...8

1.2.2 Vision and values ...9

1.2.3 Core competences ...10

1.2.4 Working with partners...11

1.3 F

INANCIAL OVERVIEW

...11

CHAPTER 2 RESEARCH DESIGN ...13

2.1 R

EASON FOR THE RESEARCH

...13

2.2 P

ROBLEM STATEMENT

...13

2.3 M

ETHODS

...14

2.4 T

HEORETIC FRAMEWORK

...14

CHAPTER 3 GENERAL ENVIRONMENT...16

3.1 I

NTRODUCTION

...16

3.2 D

EMOGRAPHIC SEGMENT

...16

3.3 E

CONOMIC SEGMENT

...16

3.4 P

OLITICAL AND LEGAL SEGMENT

...17

3.4.1 German governmental structure and laws ...17

3.4.2 European law...18

3.4.3 Altmark case ...19

3.4.4 Eisenbahn BundesAmt ...20

3.4.5 Licensing...20

3.4.6 Competitive tendering ...20

3.5 S

OCIOCULTURAL SEGMENT

...21

3.6 T

ECHNOLOGICAL SEGMENT

...22

3.7 G

LOBAL SEGMENT

...22

3.8 C

ONCLUSION

...23

CHAPTER 4 THE INDUSTRY ENVIRONMENT ...25

4.1 I

NTRODUCTION

...25

4.2 I

NTENSITY OF RIVALRY AMONG COMPETITORS

...25

4.3 B

ARGAINING POWER OF SUPPLIERS

...27

4.4 B

ARGAINING POWER OF BUYERS

...27

4.5 T

HREAT OF PRODUCT SUBSTITUTES

...28

4.6 T

HREAT OF NEW ENTRANTS

...29

4.7 C

ONCLUSION

...30

CHAPTER 5 COMPETITOR ANALYSIS ...32

5.1 I

NTRODUCTION

...32

5.2 D

EUTSCHE

B

AHN

AG ...32

5.3 C

ONNEX

...34

5.4 R

HENUS

K

EOLIS

...35

5.5 L

OCAL OPERATORS

...35

5.6 F

OREIGN COMPETITORS

...36

5.7 C

ONCLUSION

...36

CHAPTER 6 MARKET ENTRY STRATEGIES ...37

6.1 P

OTENTIAL MARKET ENTRY STRATEGIES

...37

6.2 T

HE INVESTMENT STRATEGY

...40

6.3 C

ONCLUSION

...41

CHAPTER 7 END CONCLUSION ...43

LITERATURE ...45

APPENDIX 1 ...47

APPENDIX 2 ...48

APPENDIX 3 ...49

CHAPTER 1 ARRIVA PLC

1.1 Introduction

Arriva plc is one of the largest private sector providers of passenger transport in mainland Europe with operations in seven different countries in addition to the UK.

Arriva has significant positions in the Netherlands, Denmark, Portugal and Italy with smaller positions in Germany, Spain and Sweden. Its businesses in mainland Europe operate buses, trains, commuter coaches and water buses and have some 5,800 vehicles with over 12,000 employees. In total, Arriva has over 34,000 employees.

The roots of Arriva are in Sunderland, Great Britain, where the company still has its headquarters. There, the Cowie family opened a second hand motorcycle shop in 1936. In 1960 the company moved into motor retailing and in 1980 started to buy bus companies. Its first acquisition was the Grey Green bus company in London, its biggest was in 1996 when the bought British Bus Group plc. This takeover made the company one of the largest bus operators in Great Britain. In Great Britain, Arriva also operates a vehicle rental business and a bus and coach business.

From 1997 the name Arriva is used. In the same year it did its first business on European mainland, when Arriva bought Unibus Holdings in Denmark. Since then, Arriva built on its position in Europe.

In 1999 Arriva decided to reposition and make passenger transportation in both Great Britain and European mainland its core business, so it sold its contract hire business and the motor retailing division. This process was completed in 2003.

Today the portfolio includes road and rail passenger transport, rapid transit and a bus and coach distribution business.

1.2 Organisational overview

¹

In this paragraph the organisational overview of Arriva can be found. The structure of Arriva will be discussed in paragraph 1.2.1, after which the visions and values (1.2.2), core competences (1.2.3) and the core competences (1.2.4) will be discussed.

1.2.1 Structure

An image of Arriva's structure can be found in Appendix 1.

The company is divided into 5 divisions:

• Arriva Trains Ltd This division provides interurban, rural and commuter passenger rail services throughout Wales and the border counties of England. Its network stretches from Liverpool and Manchester through North and South Wales to Bristol and Penzance.

The company runs a fleet of 116 trains covering a route of over 2,600 miles supported by over 1,800 employees. Arriva Trains Wales/Trenau Arriva Cymru trains travel some 16.5 million miles each year and it operates 235 stations of which 48 are staffed.

• Arriva Bus and Coach Ltd Arriva Bus and Coach distributes both new and good quality used buses and coaches for operations throughout the UK. It has the exclusive rights to import VDL (formerly DAF) bus and coach chassis and products. The UK Bus division is one of the UK's largest bus operators, with a fleet of over 6,000 buses. It operates bus services in London where it is the capital's biggest bus operator. Outside London, Arriva's

1

www.arriva.co.uk

local bus services operate in major urban areas like Liverpool, Leeds, Leicester, Glasgow and Newcastle. There is a strong presence in the Midlands and Home Counties, with a mix of interurban trunk routes and market town urban networks. Arriva buses also provide important links in rural areas like North Wales.

• Arriva Vehicle Rental Ltd This division operates a fleet of some 12,000 cars and light commercial vehicles from 38 locations across the UK. Over 600 employees provide services for major companies and organisations in the private and public sectors. The commercial rental fleet ranges from car-derived vans and transit vans to many specialist vehicles including panel, short and long-wheeled base, semi-high and high roof vans, tippers, drop sides and specially adapted wheelchair accessible minibuses.

• Arriva Passenger Services Ltd

• Arriva International The Arriva Group's mainland European businesses have some 5,800 vehicles operating an extensive range of services including buses, trains, commuter coaches, taxis, water buses and fully accessible demand response vehicles. There remain significant opportunities as the bus and rail market, which the European Union (EU) estimates to be worth £70 billion, increasingly opens to competitive tendering. Arriva International has experienced substantial growth from acquisitions and tender wins. It has increased its involvement with the European Union institutions and the governments of member states in order to play a part in influencing the development of transport policies.

This division operates in the following countries:

o Denmark In Denmark, Arriva is the largest provider of bus services and the first private company to win franchises to operate rail passenger services.

o The Netherlands From 1998, Arriva is doing business in The Netherlands. First, Vancom Nederland and Veonn & Hanze were taken over. Today it also owns NoordNed which runs integrated bus and train services in Friesland. In Groningen, Arriva also operates train services and extensive demand response services.

o Italy In Italy, Arriva provides bus services to the east of Milan and in the regions Lombardy and Udine.

o Portugal One of Portugal's major operators of scheduled bus and coach services is owned by Arriva. This company operates to the south of Lisboa. In the North West, Arriva operates urban, interurban and charter services.

o Spain In Spain, Arriva operates interurban bus services in Galicia, North West Spain and on Majorca.

o Sweden In Malmo and Jönköping Arriva operates bus services.

o Germany In March 2004 Arriva entered the German public transport market, the biggest public transport market in Europe, with its acquisition of Prignitzer Eisenbahn GmbH (PEG). At the end of 2004 Arriva got a 76.9% stake in a second German company, Regentalbahn AG. With these companies Arriva operates train services in Nordrhein-Westfalen, Brandenburg, Mecklenburg-Vorpommern, Bayern, Thuringen and Sachsen. It also operates into the Czech Republic and into the Netherlands. The combined rail operations have 800 employees and 130 trains. At the beginning of 2005 Arriva acquired their first bus company in Germany in the Rhine-Main area, the Sippel Group.

1.2.2 Vision and values

Arriva's most important goal is to be recognised as the leading transport service organisation in Europe. They want to achieve this by growing the business through organic growth, acquisition, better service delivery, innovation and marketing. The aim is to do the things they do well, better.

Arriva’s strategic focus is exclusively on Europe and in Appendix 2 it can be seen that it is

currently the second largest operator in terms of European operations. The focus is very much upon growing the market and continually seeking to improve the product both for existing and potential passengers and in order to offer a sustainable alternative to private transport.

This is being achieved through significant investment in the latest buses and trains, but also in the application of Information Technology throughout the business; the experimentation and use of alternative, environmentally, friendly fuels; the integration of public transport modes;

and innovative and ongoing marketing activity.

Arriva defined the following values:

• The safety of our employees and customers comes first.

• Working together and taking responsibility for delivery to both our customers and fellow employees.

• Strong local relationships are fundamental to our business.

• Anticipating change and always looking ahead for better ways to ensure consistent delivery.

• A strong commercial focus to create long-term value for our shareholders.

1.2.3 Core competences

Collins and Porras

²

define core competence as a strategic concept that captures an organisation's capabilities- what they are particularly good at.

In its 15 year history of doing business on mainland Europe, Arriva has gained quite a lot of experience in dealing with different regulatory, operating and tendering regimes. This led to a considerable experience of working with local, regional and national governments. Working in a foreign country also means operating under differing social, business labour law conditions. Arriva works in 7 countries outside the UK, so dealing with cultural differences can be stated as one of their core competences.

Another core competence is due to the privatisation that has started in the 1990s. Arriva acquired quite some state owned companies. These companies had to be put through a lot of changes, before they could operate as successful private companies. Arriva therefore had to become good at privatisation and commercialisation of organisations and management of change, otherwise they would have to face huge losses on their acquisitions. Because of these acquisitions, Arriva gained a lot of experience in working with partners and developed strategies for cooperation. These will be discussed in the next section.

Finally, lobbying power is one of their main core competences. Arriva has an employee permanently based in Brussels. He keeps in touch with both the lobbyist in Brussels and the Arriva headquarters in Great Britain. Furthermore, Arriva is a member of the EPTO, the European Passenger Transport Operators. This is a group of ten major European passenger transport services organisations (Arriva, Connex, Connexxion, First Group, Keolis, National Express, Transdev, Go-Ahead, Stagecoach and Barraqueiro). Together these ten represent:

• 235,000 employees (150,000 in Europe)

• 25 countries (18 in Europe)

• 83,000 road passenger vehicles (60,000 in Europe)

• 6,000 trains and trams (3,500 in Europe)

This group is a big supporter of liberalisation of the European passenger transport market and

2

Collins and Porras, Built to last. Successful habits of visionary companies, 2000, p.231.

lobbies with members of the European Committee and Parliament as well as with the national governments and political parties. Key requirements of the EPTO are an open market; a level playing field; protection for deregulated markets; transparency; a strong role for operators and the ability to innovate; minimum bureaucracy; compulsory contracts in regulated markets;

and a contract length of maximum 8 years for bus and 15 for rail.

³

1.2.4 Working with partners

Arriva often enters a new market with local partners and has a very flexible approach to relationships. A variety of partnerships is used. It has experience with consortia, joint ventures, public/private partnerships and acquisitions.

An often used approach is what intern is known as the "Groningen-model". In this approach Arriva acquires a public company in a number of phases. It was first used in the city of Groningen. The city owned the company, but recognised that it needed to sell the municipal transport undertaking, but was concerned about the social implications. Eventually a deal was structured whereby Arriva took over the economic responsibility from “day one” and then over a period of time acquired the legal entity. The outcome proved to be an acceptable solution to both parties.

These private/public partnerships are for Arriva an increasingly important means of providing transportation solutions, including the provision of infrastructure and the operation and maintenance of the system. Arriva has participated in a number of partnerships with local authorities to provide public transport enhancements along strategic corridors. Such schemes have had impressive results leading to sustainable growth in patronage of up to 15%.

Arriva worked on a number of projects as a consortium member – these include rapid transit, regional and high speed passenger rail and transport infrastructure and innovation projects.

Joint ventures can also be of interest where the parties add value to each other.

Arriva is prepared to directly invest in schemes where it can see that there is a commercial advantage. In the city of Leeds for instance, Arriva together with another transport group gifted 7.5 million towards the cost of the scheme which is estimated to increase patronage by up to 20%.

Arriva is also experienced in working with a variety of partners in bidding for large transport infrastructure projects. Such projects can include the funding, final design and building of the infrastructure; the procurement of rolling stock; and the operation and maintenance over the life of a concession.

1.3 Financial overview

⁴

The financial position of the Arriva Group remains strong with the Group making good progress during the year in putting in place the more flexible funding required for further organic growth and acquisition.

The Group's turnover in 2004 increased by 3% to £1,800.2 million (2003: £1,751.1 million) and total operating profit was up 8 % to £113.7 million (2003: £105.2 million).

The profit before taxation that the Arriva Group made, was £98.4 million (2003: £83.8 million), an increase of 17%.

Strong cash generation remains a fundamental strength of the Group’s businesses with operating cash inflow increasing by 9% to £258.6 million (2003: £236.8 million). Investment for the future included £186.6 million (2003: £184.5 million) of capital expenditure and

£116.5 million (2003: £29.0 million) cash invested in acquisitions, principally in mainland

3

Arriva intern presentation, EU & UITP, 2004.

4

Arriva plc, Interim report 2004.

Europe. Notwithstanding the increase in investment, net debt increased by only £56.7 million to £353.4 million, whilst the ratio of year end net debt to operating cash inflow increased slightly to 1.4 times (2003: 1.3 times).

EBITDA (earnings before interest, tax, depreciation and goodwill amortisation) increased by 8% to £234.4 million (2003: £216.6 million) contributing to net cash inflow from operating activities for the year of £258.6 million, an increase of £21.8 million compared with 2003.

The increase is mainly attributable to growth in profitability in the Group’s passenger services activities.

Four significant acquisitions across Europe were made during the year with total consideration for all international acquisitions of £87.5 million, plus net debt inherited of

£32.0 million, a total of £119.5 million.

• German rail company, Prignitzer Eisenbahn Gruppe was acquired in April 2004 for a cash consideration of £4.3 million, plus net debt of £21.3 million.

• In May, the purchase of 49 per cent of the shares in Italian bus company SAF was completed for a cash consideration of £20.6 million. An option is held to acquire a further 11% interest by the end of 2006.

• In August, the acquisition of the Danish bus operator Wulff Bus A/S was completed for a consideration of £10.3 million, including deferred consideration of £4.6 million, plus net debt of £13.1 million.

• In October, 76.9% of the shares in Bavarian rail company Regentalbahn AG were purchased and stake was increased to 89.8% in December.

At the year end, the ratio of net debt to EBITDA for 2004 was 1.5 times (2003: 1.4 times).

The Group recognises that at debt levels above two times EBITDA, the cost of debt increases

for companies with similar characteristics to Arriva and will therefore take this into account

before allowing net debt to exceed these levels, other than on a temporary basis. Arriva

remains comfortably within the principal financial covenants set by its lenders, the principal

covenants being that the ratio of EBITDA to finance charges is not less than 3:1 and the ratio

of net debt to EBITDA is not more than 3.5:1.

CHAPTER 2 RESEARCH DESIGN

2.1 Reason for the research

The British public transport company Arriva plc. did its firsts acquisitions in Germany about a year ago. It took over railway companies Prignitzer Eisenbahn GmbH and Regentalbahn AG and in the beginning of 2005, the bus company Sippel Gruppe was added to these. These companies have access to railway track in five German Bundesländer. With these acquisitions, Arriva gained a base in Europe’s largest public transport market.

Arriva started its European strategy about eight, nine years ago. Today, Arriva operates in eight different countries: the UK and several countries in mainland Europe.

In Germany there has been a certain amount of rail tendering for about eight years. Arriva then started looking for opportunities to enter Germany, but the tenders were all very small and the tendency was to have very short lead times. They have been involved in two tenders, but Arriva decided that that was not the way to enter the market, and they concentrated on the bus market in Germany. This market is very fragmented and again this market did not provide an opportunity.

About four to five years ago Germany started to talk about liberalisation. Arriva started a process of talking to about a hundred companies all over Germany. They then tried to reduce that down to a smaller target and also to try and alter the geographic spread of the research.

They ended up with Nordrhein-Westphalia, Northern Germany down to Hannover and the former Eastern States.

In the spring of 2003 Arriva started to target rail companies and entered into discussion with PEG, which they acquired in March 2004. In November 2004 Regentalbahn was acquired.

This has given Arriva a German face and now they have a platform to become a successful player in the market.

The company has the ambition to grow bigger in Germany, on the railway market as well as on the bus market. There remain significant opportunities as the bus and rail markets, which the EU estimates to be worth around £70 billion, increasingly open to competitive tendering.

By means of a thorough research, Arriva hopes to get more insight in this complicated market. This project will focus only on the railway sector for passenger transport. Points that have to be considered are national and European policies and laws regarding the railway market, competition, the tendering process, culture and passenger information. Furthermore, Arriva is interested in knowing whether they made a good decision by entering the German market by means of acquisitions.

2.2 Problem statement

With the help of the information from paragraph 2.1, a problem statement can be made. This is composed of a research goal, research question, related sub questions and research demarcations. In the research goal will be stated for who the research will be conducted, what the end result should be and why this is important. The research question states the main question of the research. This question will be divided into sub questions. The research demarcations formulate the limitations of the research.

⁵

5

De Leeuw, Bedrijfskundige methodologie. Management van onderzoek, 1996, p. 85.

Research goal

To gain insight in the German railway market for passenger transport and examine the choices Arriva made when it entered this market in 2004.

Research question

Did Arriva plc make the right decision in entering the German passenger railway market by means of acquiring two local railway companies?

Sub questions

In order to answer his question, more detailed sub questions have to be made. First, it is important to gain insight in the German passenger railway market and second it is important to understand which market entry strategies Arriva could choose from. Only after these questions have been answered, a good answer to the research question can be given. The following sub questions will be answered:

1. What does the German environment look like for Arriva?

A. What are the characteristics of the general environment?

B. What are the characteristics of the industry environment?

C. Who are the main competitors and which threat do they pose to Arriva?

2. Which market entry strategy would be the best fitting for Arriva?

Research demarcations

• The geographical area of the research is only Germany.

• The research only targets the railway market for passenger transport, so not on the bus market or other forms of public transport.

2.3 Methods

To describe the organisation Arriva, the website of the company will be used, as well as the annual report and conversations with employees.

The German public transport market will be analysed with use of the EVD, responsible ministries and several reports that have been published by the European Union.

Second, the knowledge that is already present in the organisation with employees in England, Brussels and Germany. Interviews will be held with these people.

2.4 Theoretic framework

In this research paper, the external environment of the passenger railway market of Germany that Arriva will encounter will be researched. The external environment is composed of three components: the general environment, the industry environment and the competitor environment.

⁶

Firms gain information they need, to understand the present and predict the future, if they have an integrated understanding of the internal and the external environment.

In chapter 3 the general environment of Arriva in Germany will be described, with the help of environmental segments that refer to demographic, economic, political/legal, sociocultural, technological and global characteristics.

⁷

The industry environment will be described in chapter 4, with the help of Porter's five forces- model.

⁸

Industry is a group of firms producing products that are close substitutes. Intensity of

6

Hitt et al, Strategic management. Competitiveness and globalization, 1999, p. 46.

7

Ibid., p. 50-59.

8

Ibid., p. 61-71.

industry competition and an industry's profit potential are a function of 5 competitive forces, developed by Michael Porter. These 5 forces are: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of product substitutes and intensity of rivalry among competitors.

In chapter 5 a competitor analysis can be found, which will be based upon Alsem

⁹

who states that the goals of a competitor analysis are gaining insight in the strengths and weaknesses of competitors and identifying the future behaviour of those competitors. A competitor analysis can be divided into five phases:

1 Choice of competitors

2 Identifying goals of competitors

3 Identifying current strategies of competitors

4 Identifying strengths and weaknesses of competitors 5 Prediction of strategy of competitors

For the analysis of market entry strategies, which can be found in chapter 6, the market entry modes as described by Mühlbacher

¹⁰

et al and Driscoll

¹¹

, will be used. Market entry modes can be classified according to whether they require indirect or direct involvement on the part of the firm, and whether they involve marketing activities only or both marketing and production. In the case of marketing and production with direct entry, extensive capital is involved, while indirect never involves extensive capital. The different modes will be described, after which the best fitting for Arriva will be chosen.

Then, a comparison can be made whether or not Arriva made the right decision by entering the German market through acquisitions.

9

Alsem, Concurrentie-analyse in de marketing: theorie, technieken en toepassingen, 1991, p. 18.

10

Mühlbacher et al, International marketing. A global perspective, 1999 .

11

Driscoll, Foreign market entry methods: a mode choice framework, 1995.

CHAPTER 3 GENERAL ENVIRONMENT

3.1 Introduction

In this chapter, the general environment will be discussed. The general environment

¹²

is composed of elements in the broader society that can influence industry and firms within it.

These elements can be grouped into environmental segments called demographic, economic, political/legal, sociocultural, technological and global segments and these will be discussed in the following paragraphs. Finally, in paragraph 3.8, sub question 1A "What are the characteristics of the general environment?" will be answered.

3.2 Demographic segment

The demographic segment refers to demographic aspects as population size, geographic distribution, etcetera.

Germany has about 82.5 million inhabitants and is one of the most densely populated countries of Europe. The population is unequally divided across the country and there are a couple of concentrations, where millions of people live. These concentrations can be found in the Rhine-Ruhr area, in the Rhine-Main area, in the Rhine-Neckar area and the areas around Berlin, Bremen, Dresden, Hamburg, Köln, Leipzig, Munich and Nürnberg.

About 22% of the German inhabitants (18.4 million) live in the former East German state, of which 3.4 million live in Berlin. Estimates are that 8.9% of the population (7.3 million) has a foreign nationality.

In total, the Bundesländer Nordrhein-Westfalen, Baden-Wurtemberg and Bayern have the most inhabitants, whereas the Bundesländer Berlin, Bremen and Hamburg are the most densely populated areas.

¹³

The Bundesländer Brandenburg and Mecklenburg-Vorpommern are the least densely populated Länder. In appendix 3 the complete statistics of Germany can be found.

In the last few years the death ratio is higher than the birth ratio, which means that the population has grown less than before. Prognoses show that after 2013 the population will decline and after 2050 more than half of the population will be over 48 years old and one third will be over 60.

¹⁴

3.3 Economic segment

The economic segment refers to the nature and direction of the economy in which a company competes or wants to compete.

The German economy is based upon the principles of free enterprise and private ownership.

However, there is a degree of state intervention which has resulted in some failing industries being acquired in part or whole to protect employment. Similarly, state, regional or local government are directly involved in the provision of public utilities and other perceived essential services.

The gross domestic product was 2,177 billion in 2004. This is a growth of 2.3% with regard to 2003, when the GDP was 2,128 billion.

¹⁵

12

Hitt et al, Strategic management. Competitiveness and globalization, 1999, p.50-59.

13

www.statistik-portal.de

14

www.evd.nl

15

www.statistik-portal.de

In comparative terms, incomes and wealth in western Germany are quite evenly distributed and, whilst living standards within eastern Germany are much lower, wage levels have increased significantly over the past 5 years and are now only slightly lower than their western German counterparts. Whilst the reunification also impacted negatively upon the traditionally low level of inflation, this has now been reversed and is now running at less than 2%.

¹⁶

The employment of German inhabitants was about 37.6 million people in the beginning of 2004. About 4.5 million inhabitants were unemployed (10.2%). In the west the unemployment percentage lies around 8.8%, in the east around 19.2%.

¹⁷

3.4 Political and legal segment

This segment refers to the laws and regulations that a country posed. Therefore, in paragraph 3.4.1 the German governmental structure and laws regarding the railway market will be discussed. However, the European Union is posing more and more regulations with regard to this market, so these will be discussed in paragraph 3.4.2. Jurisdiction from the EU, better known as the Altmark case, also had a deep impact on the German railway passenger transport market and this case will be discussed in paragraph 3.4.3. The last three paragraphs, 3.4.4, 3.4.5 and 3.4.6, cover the regulation with regard to licensing and tendering.

3.4.1 German governmental structure and laws

Germany is a federation, existing of 16 federal states, called Bundesländer. The Federal Government consists of the Bundestag (Lower Chamber) and the Bundesrat (Upper Chamber). The Bundestag is directly elected by the people, whereas the Bundesrat consists of delegates from the individual states, broadly in proportion to the size of their populations.

Depending on the amount of inhabitants, every Bundesland has three to six members in the Bundesrat. One of their tasks is for instance approving bills. The Bundesrat has a big influence on legislation concerning the separate Bundesländer.

It is well possible that the political composition of the Bundesrat differs from the political composition of the Bundestag. This is due to the composition of the separate Bundesländer, who delegate members to the Bundesrat.

The 16 Bundesländer each have their own government, which are free to determine their own policies on several subjects, like education, cultural matters and media. The only condition:

they have to stay within the framework of legislation that the Bundesgovernment has made.

Furthermore, there are some subjects on which the Bundesländer have no influence, like foreign policy, defence, railway, and (a part of the) taxes.

¹⁸

Since the beginning of the 1990s, Germany is making changes in their railway services. Goal of this so-called "Bahnreform" is to make sure that the ever rising demand for national and international transport of passengers and goods will be in an environmental friendly way by rail, as well as the liberalisation of the railway transport market and the liberalisation of railway operators. Of course, this reform is due to European regulation (see paragraph 3.4.2).

By means of the reform, the German government also wanted to make sure that Deutsche Bahn would be able to survive on its own strengths and so reduce the costs that the authorities had to make for the organisation. Another important implication that the Bahnreform brought along with it is that since January 1

^st

1996, the separate Bundesländer are responsible for the

16

Arriva intern, An assessment of the German public transport market, 2000.

17

www.evd.nl

18

www.evd.nl

tendering process and financing of railway passenger services in their own Bundesland.

¹⁹

Most Bundesländer in their turn handed their obligations with regard to licensing over to the Eisenbahn Bundesamt (see paragraph 3.4.4).

The most important regulations concerning railway services are:

²⁰

• Allgemeines Eisenbahngesetz

• Bundesschienenwegeausbaugesetz

• Gesetz über die Gründung einer Deutsche Bahn Aktiengesellschaft

• Eisenbahnkreuzungsgesetz

• Eisenbahn-Bau- und Betriebsordnung

• Gefahrgutverordnung Straße und Eisenbahn 3.4.2 European law

²¹

Besides the German law, European law is of growing influence. The first piece of major legislation goes back to 1991 and the adoption of a directive by the Council of Ministers, known as Directive 91/440/EEG. This directive introduced a degree of liberalisation into certain areas of rail transport and above all prompting the railways to concentrate more on competitiveness.

The directive requires Member States of the European Union:

• to manage railway undertakings in such a way that these understand the need for competitiveness and sound financial management. Member States must thus, jointly with existing public railway operators, take steps to reduce the indebtedness of railway undertakings.

• to make railway undertakings independent by giving them a budget and system of accounts which are separate from those of the State.

• on specific terms, to guarantee rights of access for rail transport operators in other Member States to international combined transport services. The aim here is to open up the Community markets in these sectors. It has also created the possibility to open the market for international freight and passenger services under certain conditions.

• to have separate accounting for railway infrastructure (track and related equipment) and the operation of transport services as such. The aim here is greater transparency in the use of public funds, but also the ability to measure the actual performance of these two branches better. It is with this requirement in mind that a number of Member States have in recent years set up bodies which manage the railway infrastructure but are separate from the railway companies, which continue to manage the carriage of passengers and freight.

In 2001 the Commission has presented a further series of measures to revitalise the railways in accordance with the guidelines set out in the White Paper "European transport policy for 2010: Time to decide" in which for the first time the Commission is placing the needs of the users at the heart of its transport strategy by proposing over 60 measures to refocus Europe's transport policy on the needs of its citizens.

The first of these measures is designed to shift the balance between modes of transport by 2010 by revitalising the railways, promoting maritime and inland waterways transport and linking up the different modes of transport.

19

www.bmvbw.de

20

bundesrecht.juris.de

21

europa.eu.int

The European Commission wants to ensure that the development of transport in Europe goes hand in hand with an efficient, high-quality and safe service for the citizens. For Railways, the goal to achieve in 2010 is to maintain the modal share of rail transport at the same level of 1998, thus reversing the decline of rail transport observed over the last 30 years. Rail transport is thus expected to grow significantly as the total transport demand in 2010 is expected to be 40% higher than in 1998.

In its White Paper, the Commission also announced its intention to table a set of new proposals to improve access to the railway network for freight transport and to amend existing directives on the interoperability of conventional rail systems and High-Speed Rail systems, as well as a proposal to create a European Railway Safety and Interoperability Agency.

In March 2004, the European Commission presented the "Third railway package". With a quality European railway system the aim, the Commission proposed the opening up of the market for international passenger services in 2010 within the European Union. It is proposed that as from 1 January 2010, railway undertakings which have a license and the required safety certificates should be able to operate international services in the Community. This is an additional phase in the setting up of an internal market for rail services. The package seeks to complete the integration of the European railway and stimulate railway transport.

The Commission has also proposed to establish a framework to protect the rights of passengers using international rail services. It consists of a proposal for a regulation establishing minimum standards for information for passengers before and during their journey, the rules to be followed in the case of delays, treatment of complaints and assistance for individuals with reduced mobility.

Furthermore, the Commission included a draft directive on the certification of locomotive drivers. A driver will have to possess personal certificates attesting to his general qualifications and valid throughout the Community. To this must be added a certificate issued by the railway undertaking recognising specific training relating to the route operated, the equipment used and the operational and safety procedures specific to that undertaking.

Finally in the Third railway package, the Commission has presented a draft regulation aiming to introduce minimum quality clauses in contracts between railway undertakings and their customers, which is already considered a good practice within the industry.

3.4.3 Altmark case

²²

In June 2003 the European court gave its final verdict for a case called the Altmark case. In 1990 the company ‘Altmark Trans’ obtained licences and subsidies for providing bus services for the public in the district of Stendal, Germany. In 1994 the German authorities renewed Altmark's licences and rejected an application for licences by another company ‘Nahverkehrs- gesellschaft Altmark’. This company went to court, claiming that Altmark Trans was not financially viable because it could not have survived without public subsidies and therefore the licences were unlawful. The case was referred to the European Court of Justice, which ruled that public subsidies can be paid without breaking EU competition rules, but only if they are for clearly-defined public service obligations.

This ruling will have a big impact on the German public transport market, particularly on existing financial practices which now have to be changed. At present most public transport companies are receiving public money without any definition for what kind of public service obligations they are given (the subsidies are defined at the end of the year for the

22

Hidson and Muller, Better public transport for Europe through competitive tendering. A good practice guide.

and UITP EUROTEAM, Public Transport Contracts: Guidelines for Competent Authorities and service

providers (draft)

compensation of the companies' deficit). From now on subsidies are only allowed if all of the following criteria are met:

• The recipient must actually have public service obligations to fulfil and these must be clearly defined.

• How the compensation is to be calculated must be established in advance in a transparent and objective way.

• Compensation cannot be greater than the costs to be covered, allowing for a reasonable profit.

• If the undertaking is not chosen by tendering, the level of compensation must be estimated on the basis of the costs which a typical enterprise would incur. To ensure transparency and legal practice competitive tendering will be the best solution of meeting the requirements of the Court’s ruling.

The recent judgement of the European Court of Justice on the Altmark case points heavily towards the need for formal contracts in which clearly is defined why subsidies are given.

3.4.4 Eisenbahn BundesAmt

²³

Although every Bundesland can decide how much it wants to spent on railway and with which railway company it wants to do business, the EBA (the Federal Railway Agency) is concerned with supervision and approval in rail, but has no regulative power. It deals with technical issues like licensing railway companies and issues related to infrastructural planning and financing. It checks technical elements of railway on a periodical basis. This includes infrastructure, rolling stock, technical know-how in workshops, safety for employees, fire safety and conditions for environmental protection.

Furthermore the EBA awards and supervises state aid for infrastructural investment to companies owned by the federal states of Germany.

The EBA also investigates accidents and dangerous events, through a special procedure.

3.4.5 Licensing

Licensing is a complicated issue in Germany. There are several ways in which an organisation can receive a license to operate on rail. A license admits an operator to provide railway services, commercial and non-commercial. Before the license is handed out, the potential operator is checked for its reliability, financial capability and professional competence.

The EBA licences for Deutsche Bahn and railway operators with registered seats outside Germany. The Bundesländer licence other railway companies, but most Bundesländer handed this over to the EBA.

3.4.6 Competitive tendering

Competitive tendering refers to the awarding of an exclusive right to operate a route, or a network of routes, to an operator (or possibly a consortium) following a competitive process.

Along with, or instead of an exclusive right, the Authority may also grant subsidies to the successful operator in compensation for the fulfilment of public service requirements.

Authority refers to public or publicly-owned organisation with a legal responsibility to plan or regulate public transport services in a specific geographical area.

Regional railway services are subject to competitive tendering since the privatisation of the Deutsche Bahn, introduced in 1994. The German Bundesländer or the regional transport associations are responsible for the regional railway services.

23

www.eisenbahn-bundesamt.de

They manage the service and prepare the contracts with the railway companies, for which they receive a fixed amount of money from the German government. Some Länder have already tendered a number of networks and lines, however, the Deutsche Bahn is still operating more than 90% of the whole regional railway services. Private companies like Arriva or public-private partnership ventures are successful and experiences after tendering have been very positive, for example passengers increased whilst deficits have decreased.

²⁴

In 2004, a record of 27 million trainkm was put into a competitive tendering process. For 2005 estimates are that this amount will rise. DB expects that 19 tenders will be issued, with a volume of over 40 million trainkm.

²⁵

Still, there are a variety of tendering regimes now operational within Europe and therefore those authorities that now consider adopting competitive tendering, can learn from existing practice. There are some fundamental issues to be determined:

• Should the tender packages consist of individual routes to encourage small operators or whole networks favouring the large operators or indeed groups of services (mini- networks)?

• The length of tenders needs to be long enough to sustain investment costs: for instance, the industry cannot continually provide new buses for 6 or 7 year contracts when such assets would normally be amortised over 12 years.

The successful outcome will be where the respective skills and expertise of the parties is recognised and is able to influence the product to the end user. There is a big temptation to develop large bureaucratic tendering organisations which dilutes the amount of available public transport spend and does not benefit the public transport user.

3.5 Sociocultural segment

This segment is concerned with different societies' social attitudes and cultural values.

Hofstede

²⁶

claims that there are no such things as universal management theories. There is a great diversity in management practices around the world. For Germany he states that the manager is no cultural hero. If anybody, it is the engineer who fills the hero role. Workers are high skilled through this system and quite a few German company presidents have worked their way up in the company in this way.

Germans expect their boss to assign them tasks and to be the expert in resolving technical problems. Comparisons with French and British companies show that German companies have the highest rates of personnel in productive roles and the lowest in both leadership and staff roles.

Hofstede

²⁷

developed a system of dimensions by which a countries' culture can be described.

The first dimension, power distance, can be defined as the degree of inequality among people which the population of a country considers as normal. Germany belongs to the bottom third of all countries that are included in the test, which means that it has a relatively small power distance. The second dimension is individualism; the degree to which people in a country prefer to act as individuals rather than as a part of a group. On this dimension Germany belongs to the top third, which means that the German people prefer individuality over collectivism. On the third dimension, masculinity, Germany also scores to the top third and this means that tough values like assertiveness, performance, success and competition (associated with the male role) prevail over "softer" values like quality of life and solidarity,

24

Hidson and Muller, Better public transport for Europe through competitive tendering. A good practice guide.

25

Deutsche Bahn, Wettbewerbsbericht 2005.

26

Hofstede, Cultural constraints in management theories, 1993.

27

Ibid.

which are associated with the female role. The fourth dimension is uncertainty avoidance, the degree to which people in a country prefer structured over unstructured situations. Structured situations are those in which there are clear rules (written or unwritten) as to how one should behave. Germany belongs to the medium third on this dimension. The same holds for the fifth dimension, long term orientation. On the long term side, you can find values oriented towards the future, like thrift and persistence, whereas the short term side is more oriented towards the past and present, like traditions and social obligations.

According to a research conducted by Hofstede,

²⁸

the "implicit model" of the German organisation is a "well-oiled machine"; formalised and specialised, but not centralised, in which management intervention is limited to exceptional cases, because the rules resolve problems. German organisations tend to be organised by function with coordination achieved through routines and procedures. There is a strong role for staff to provide technical competence, but also in-depth company knowledge. Furthermore, top management typically consists of a managing board, which integrates the specialized knowledge of the various top managers. German managers are specialists and tend to stay in their job longer, so job descriptions are well internalised and there is less need to formalise them. This means that job descriptions can be unclear.

3.6 Technological segment

This segment includes the institutions and activities involved with creating new knowledge and translating that knowledge into new outputs, products, processes and materials.

EU regulations required that infrastructure is set into a new structure, so a good separation of infrastructure and operations is secured. The aim here is greater transparency in the use of public funds, but also the ability to measure the actual performance of these two branches better. See paragraph 3.4.2 for more details.

In Germany it has been left with Deutsche Bahn, to a subsidiary called DB Netz. The EBA bids with governments for money, but then it’s actually DB Netz which developed the plan.

And these plans are often in favour of other DB subsidiaries. The separation of infrastructure and operations is not yet total.

Consequently, this often means that more money is put in high speed lines than into city lines.

Especially in former Eastern Germany there are lines with severe speed limitations. PEG has some lines where a maximum of 60 kilometres an hour is given. A car would thus mean a quicker way of transporting yourself, so in these parts rail could be less competitive. In the investment plans for the near future, none of those lines will be upgraded.

Deutsche Bahn clearly can influence a lot of things which have to do with infrastructure, including the charging system for access charges. One of Arriva's big challenges is that they have to start to challenge that. Arriva's wish is that the infrastructure will go into another body and out of the direct influence of Deutsch Bahn. Similarly Deutsche Bahn has a subsidiary of stations and services and again they control all the stations. Again there’s a lack of transparency there. It’s a real problem for anybody who is not Deutsch Bahn. This is a common issue that most companies are unsure about.

3.7 Global segment

This segment includes relevant new global markets and existing ones that are changing, important international political events and critical cultural and institutional characteristics of relevant global markets.

With the new entrants in the European Union, the European market for public transport

28

Bartlett and Ghoshal, Transnational management. Text, cases, and reading in cross-border management,

2000, p. 196.

services has grown enormously. Arriva expects that this market can be a new focus point for a lot of European operators.

3.8 Conclusion

In this paragraph, the answer to sub question 1A will be given. This question is: What are the characteristics of the general environment?

In paragraph 3.2, the demographic segment was described. It has been seen that the German population (82.5 million inhabitants) is unequally divided across the country and there are a couple of concentrations, where millions of people live. These concentrations can be found in the Rhine-Ruhr area, in the Rhine-Main area, in the Rhine-Neckar area and the areas around Berlin, Bremen, Dresden, Hamburg, Köln, Leipzig, Munich and Nürnberg. A lot of passenger transport will be carried out in these areas every day, so these are interesting areas for Arriva.

Fortunately, with PEG they already operate a few tracks in the Rhine-Ruhr area and around Berlin. If Arriva subscribes to tenders in these areas, there is a potential to grow there.

In a political and legal view, the German market for railway passenger services is quite interesting: since the beginning of the 1990s, Germany is making changes in their railway services. A part of this so-called Bahnreform is the liberalisation of the passenger transport market. From 1996 the Bundesländer are responsible for the tendering and financing of their railway passenger services. Most Bundesländer in their turn handed their obligations with regard to licensing over to the Eisenbahn Bundesamt. This institute is concerned with supervision and approval in rail, but has no regulative power. It deals with technical issues like licensing and issues related to infrastructural planning and financing. The licensing procedure is quite difficult, because sometimes the EBA is responsible and at other times, the Bundesländer.

After the license is given to an operator, it can enter a tendering procedure. The amount of trainkm that has been given out into tendering is growing every year. In 2004 this was 27 million trainkm, in 2005 DB estimates over 40 million trainkm will be issued. The question with tendering is the package, favour small companies by offering single routes or larger operators by issuing networks of routs, and the length of the tender. A good balance between both has yet to be found, but this is not really in the power of Arriva.

The EU regulation was a main trigger for the Bahnreform. In 1991 Directive 91/440/EEG was adopted. This directive stated, amongst others, that the railway services had to concentrate more on competition and that railway undertakings had to be made independent.

In 2004, the Third Railway Package was presented, in which the European Commission proposed the opening up of the market for international passenger services in 2010 within the European Union. It is proposed that as from 1 January 2010, railway undertakings which have a license and the required safety certificates should be able to operate international services in the Community. From 2010, the complete German market should be open to every operator that wants to offer railway services. At the moment, Germany is not this far. Long distance transport for instance, is for more than 99% in the hands of DB. But, as said before, the amount of trainkm that has been issued in tenders is growing. It can be expected that some day, Germany will be a completely open market, but it will take years before this happens.

Germany will be a slow adaptor of these regulations, but will finally have to adapt. Still, the Altmark case offers local authorities an exit door through which it can give subsidies to its own local transport operators, who will be rewarded with licences to operate specific railway tracks in stead of other (not local) operators.

For Arriva, these changes in the railway market means a good opportunity to enter the

German passenger transport railway market. Arriva has to compete in the tendering

procedures and gradually grow its network

From paragraph 3.5, it can be concluded that the German organisation can be characterised as a "well-oiled machine", which means that the organisation is formalised and specialised, but not centralised, in which management intervention is limited to exceptional cases, because the rules resolve problems. There is a strong role for staff to provide technical competence, but also in-depth company knowledge. German managers are specialists and tend to stay in their job longer, so job descriptions are well internalised and there is less need to formalise them.

For Arriva this means, when entering the market through acquisition or joint-ventures, they gain a lot of experience, but also have to get used to formalisation, which is bigger in Germany than in the UK. Adapting to new possibilities will probably go slower in German companies, as they are less flexible than the average British organisation.

Fortunately, Arriva has already gained a lot of experience in dealing with organisations in foreign countries (see paragraph 1.2.4, Working with partners), so this will not be a problem that Arriva cannot overcome.

As can be seen in the technological segment, paragraph 3.6, track access sometimes poses a problem in Germany: infrastructure and operating railway services have to be in separate companies, but in Germany this has been left with Deutsche Bahn, to a subsidiary called DB Netz. Technically the separation is a fact, but in reality, DB Netz often favours other DB subsidiaries with their plans. Challenging this will be quite some work, because of the huge political influence DB has, but also an interesting job.

Concluding, based upon these characteristics of the general environment, it can be stated that,

despise the high influence of Deutsche Bahn, the German passenger railway looks like a

promising market for Arriva, because of its growing liberalisation. The opening of the market

is already visible and now that Arriva has a "German face" with Prignitzer Eisenbahn and

Regentalbahn it has to enter into the tendering procedures to grow.

CHAPTER 4 THE INDUSTRY ENVIRONMENT

4.1 Introduction

Industry is a group of firms producing products that are close substitutes. Compared to the general environment, the industry environment has a more direct effect on strategic competitiveness and above-average results. The intensity of industry competition and an industry's profit potential are a function of five competitive forces, developed by Michael Porter.

²⁹

These five forces are: threat of new entrants, bargaining power of suppliers, bargaining power of buyers, threat of product substitutes and intensity of rivalry among competitors and can be put into the figure as shown in figure 4.1. The five forces will be discussed in the next paragraphs. In paragraph 4.7, sub question 1B will be answered: What are the characteristics of the industry environment?

Figure 4.1: Porter's five forces model

³⁰

4.2 Intensity of rivalry among competitors

There are approximately 250 organisations providing rail services of some kind, but most of these are freight operators. Approximately 45 of those provide passenger transport services, but still DB rules the market. It is expected that this amount will diminish, because of a growing concentration process.

Furthermore, expectations are that in the long term future, all tracks will be put into public tenders. Long term contracts with DB are ending and the Bundesländer are more and more willing to put these into a public competition, so non-DB operators will have a chance to enter the market.

In 2003, about 8.5% of the total German passenger transport market was provided for by non-

29

Hitt et al, Strategic management. Competitiveness and globalization, 1999, p. 61-71.

30

Biemans, Business marketing management. Strategie, planning en implementatie, 2000, p. 127.

Bargaining power of suppliers

Intensity of rivalry among competitors

Threat of product substitutes Threat of new

entrants

Bargaining power

of buyers