The effects of globalisation are evident in the fortunes of a German rail components and systems company, which has multiplied its revenues by more than 20 times to several billion euros, and a small locomotive OEM with a long and proud history, which was forced to announce insolvency last year.

 

A company's position on the Innovation-Differentiation Degree axis is determined by its ability to consistently create both new and market-oriented products and solutions. Typically, it involves high levels of research and development, which contributes significantly to overall revenues. It is also important to consider that this metric represents the application of new business models or a change to differentiate from the competition.

The Indicative Company Size axis refers to a company's revenue. A small company is defined as an SME with yearly revenues of up to $US 50m whereas revenues at a large company are over $US 1bn.

With many railways still nationalised, the state ownership model used in many countries where registered suppliers sell their proven products and solutions based on pre-determined frame contracts, results in limited competition and a very long-term, conservative attitude towards innovation.

Companies focused only on the local market may thrive in this situation. However, in the long run these firms cannot counter the winds of liberalisation, with recent developments in the British, Dutch and Swedish rail markets showing that this is a precarious position to take.

For many companies access to large global markets provides the basis for economies of scale. By churning out standard products in large volumes, they are able to derive a very competitive cost advantage that only large players can provide. This outweighs a low degree of innovation, positioning such companies as natural opponents of companies in the Maybe quadrant.

The recently-announced acquisition of Faiveley Transport by Wabtec is a perfect example of a company looking to benefit from economies of scale: the merger will create one of the world's largest public rail equipment companies, and help the US firm to realise at least €40m in annual pre-tax synergies and efficiencies.

Niche players are typically very successful, family-owned companies that have clearly defined goals and objectives. They intentionally serve only a niche market which requires a high degree of specialisation.

In general, the dynamic nature of this sector means there is a continuous influx of new innovative players, but even these challengers soon realise growth limitations and set out on a globalisation strategy.

The Funnel of Globalisation provides an opportunity for highly innovative companies to become global players. By demonstrating their willingness to explore new markets, many have been able to convert their competitive advantage into new global sales.

Outside Europe, Asia is the most important market for rail, where significant growth continues in emerging economies where urbanisation and expansion of infrastructure is occurring at a much faster rate, and it is where the aforementioned German company was able to increase its revenues by more than 20 times.

However, if companies are to proceed through the funnel of globalisation and become a global player they need a clear understanding of their own business: what is core? What is non-core? What can be outsourced? How can I remain cost competitive? Where do I need the help of experts to develop to the next level?

One thing is clear: innovation and differentiation must be the two pillars of any business strategy. If companies decline this option, then globalisation will eventually take its toll.

There are several strategic recommendations that should be considered. For the Maybe occupants, progress is only possible by entering the risky zone in the medium to long-term. The best method of doing so is to identify a market niche through innovation and specialisation. Niche Players are in a far more desirable position, and can become global players by expanding their workforce and inventory.

Companies in the Economies of Scale quadrant are also well- placed to reach the top and they should focus on moving away from standardisation by embracing continuous innovation. However, there are potential pitfalls, as shown by a German company once heralded for its groundbreaking products. Instead of continuous innovation, the company optimised production and introduced a sophisticated controlling system to fine-tune its margins. Plainly, this company is making a living from its glorious past.

However big or small companies may be, complacency is not an option. In fact, it is a recipe for disaster. As shown by the successful global players in the market, fortune favours the bold - even if that means pain in the short term.