CANADIAN NATIONAL RAILWAY COMPANY LIMITED (CN) Hunter Harrison sat in his office at CN headquarters in Montreal reflecting on his experience as CEO of North America’s most successful railway. On the wall beside him was the large screen monitor he had installed that was linked into the railway’s computer system, allowing him to see every train on the railroad, its exact location and its status. He had identical systems in both of his weekend homes in Connecticut and Florida. He was known to wake up at two in the morning and check the screen. “I might pick up the phone and call Edmonton and make a suggestion or two,” Harrison noted.i When he arrived at CN in 1998, Harrison did not anticipate he would end up becoming the CEO. He came in with a job to do and he did it – he turned the company into the best performing company in the industry. In 2003, he transitioned from COO to CEO, leading one of the most highly praised cultural transformations of all time. Now, as he prepared to pass the reigns to the next CEO, he wondered whether there was anything else he needed to do to ensure his legacy was sustained. History of CN CN is one of the six major Class I North American railways. Currently, a Class I railroad is defined by the Association of American Railroads (AAR) as one with annual revenue exceeding $319.3 million. CN’s competitors include the other five: Burlington Northern Santa Fe (BNSF), Norfolk Southern (NS), Union Pacific (UP), CSX Corporation, and Canadian Pacific (CP). CN operates the largest rail network in Canada and the only transcontinental network in North America. The CN network covers 12,900 route miles across eight Canadian provinces, including the nation’s five major ports – Vancouver and Prince Rupert, British Columbia, on the Pacific; the key Great Lakes port of Thunder Bay, Ontario; and Montreal and Halifax, Nova Scotia, on the Atlantic. The U.S. network is made up of 6,400 route miles in 16 states and connects the Canadian network to the U.S. Midwest (including Chicago) down the Gulf of Mexico and the ports of Mobile, Alabama, and New Orleans. Through a marketing alliance with the Kansas City Southern Railway Company, the company can also offer its customers access to Mexico and the U.S. Southwest. CN transports diversified freight over its rails, including petroleum and chemicals, grain and fertilizers, coal, metals and minerals, forest products, automotive products, and intermodal services (the movement of trailers and containers on railroad freight cars). This has helped balance the company’s performance in the difficult economy over the years. CN was formed in the post-World War 1 era when two of the country’s largest railroads, Canadian Northern and Grand Trunk, were integrated and nationalized after their near collapse. This consolidation prevented a default on $1.3 billion in loans held by the companies and it also gave Canada the second largest railway system in the world, with about 100,000 employees and over 22,000 miles of track, almost double its closest competitor Canadian Pacific Railway (CP). On November 17, 1995, after 78 years as a Crown corporation, CN was part of the largest privatization in Canadian history through an initial public offering (IPO) that raised CAD 2.26 billion for the Canadian government. This was led by a new management team of ex-federal government bureaucrats, including Paul Tellier and Michael Sabia who began preparing CN for privatization by improving productivity and enhancing profitability. These objectives were achieved by massive cuts to the company’s management structure, massive layoffs (CN went from 32,000 employees to about 23,000) and the sale of its branch lines. In Tellier’s final year as CEO, the publicly traded company earned $800 million. But, it is under the leadership of Hunter Harrison that CN has become the continent’s best-managed railway. By all measures, CN is much more efficient than every other major North American railroad. For example, one key metric in the industry is an organization’s operating ratio and CN has led the way. Whereas CN’s competitors have remained in the range of 77 to 85 cents on the dollar, CN’s operating ratio has dropped from about 77 cents to 62 cents during Hunter Harrison’s tenure (see Exhibit 1 for a comparison of CN and its competitors). In addition, CN’s sales have increased by nearly one-third, and profits have almost doubled, even during tough economic times (see Exhibit 2 for CN’s financial performance). Today, CN is worth $25 billion in stock market capitalization, more than ten times what it was in 1995. During his time as CEO, Harrison has received many accolades, including Report on Business Magazine’s CEO of the Year Award in 2007 and Railroader of the Year in 2003 by Railway Age Magazine. In October of 2009, Harrison was again recognized for his success – this time on the front page of the Globe and Mail’s business section where he is described as leaving CN “with a reputation as one of the most successful railroaders on the continent.”ii How did he do it? Hunter Harrison’s Arrival at CN Hunter Harrison arrived at CN in March of 1998 but he did not plan it that way. As the CEO of IC (Illinois Central Railroad) in the US, he met Paul Tellier a couple of times before the company was acquired by CN in 1998. It was clear that acquiring the IC was part of Tellier’s strategy to penetrate the US market -- CN’s lines ran from Halifax to Prince Rupert in Canada and only as far as Chicago in the U.S. By acquiring 2 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady the IC, it allowed CN to increase its lines through Mississippi and Alabama, all the way to New Orleans. Whereas Hunter was getting ready to hand in his resignation, Paul Tellier made it clear to him that the deal was conditional upon him staying with the company. Harrison recalled their agreement, “Paul said ‘I’ll run the company; you’ll run the railroad.’” As CEO, Tellier handled government, investment and major corporate decisions, as well as the Board of Directors; as COO, Harrison was responsible for the efficient and effective operation of the railroad. In 2003, after five years serving as Tellier’s right hand man, Harrison was promoted to CEO within hours of Tellier’s announcement that he was leaving -- what may have been one of the most rapid successions of all time. Hunter Harrison recalls his first experience at CN – a company he knew nothing about: There had been a number of employee reductions, there was a history at CN of being a Crown corporation, and it showed. If I thought I was going to be CEO at the time, I would have done things differently. I may have made a great political speech, shook everyone’s hand, and so on. But, Paul had explained the sense of urgency to me and I only planned to stay two to three years. And, I had a job to do. I had a blueprint for how to run a railroad that was extremely effective. So, the first day I called in one hundred of the top operating officers of the company to the Bonaventure Hotel and I told them, “This is how we’re going to run a railroad. What you have been doing is out. And, I’m going to tell you why. If there’s feedback, I’ll be glad to listen. But, when we leave this room, we need to all have a clear understanding of where we’re going.” When Harrison returned to CN around 6:30 pm later that night, Paul Tellier said, “I understand you stood up for 10 hours today without a slip of paper in your hand talking about railroading.” Harrison replied “Paul, I can talk for 1200 hours about railroading without any paper in my hand.” What Tellier was referring to was Harrison’s concept of “Precision Railroading” that he had developed and implemented while working at IC and that had been responsible for turning it around. He was now responsible for rolling it out at CN. This was a totally different operating philosophy that involved running the railroad according to a schedule. Under Precision Railroading, the plan is sacred, discipline is paramount, and people are expected to do what they say they will. Traditionally, rail carriers were in the habit of holding trains until they were completely full before departing. While this maximized efficiency for the railroad, it meant customers were delayed in receiving their shipments. Traditional railroading moves full trains from point A to point B. Precision Railroading is focused on moving a customer’s shipment from point A to point B, as quickly as possible (versus the whole train). To do this requires disassembling and reassembling trains as required, and 3 Professor Shawna O'Grady, Queen's University at Kingston Canada, wrote this case as a basis for classroom discussion. Not to be used without permission. © 2010, Shawna O'Grady transferring customers’ railcars from train to train to keep them moving. Precision Railroading is a simple concept but executing it requires a great deal of discipline, planning and leadership. Precision Railroading transformed CN and is slowly transforming the industry. In 1998 when Harrison arrived, customers would ask how long a shipment would take and their order was always quoted in days.