[Gene Harmon]

Marketing and Traffic Department Operation and Insights by Gene Harmon

In 1977 Southern Pacific Transportation Company hired Pete Vajta as Vice President Marketing to establish Marketing within the Traffic Department. As well, Bob King was shifted from Vice President Operations to VP Traffic. Pete had previous been in executive positions with Xerox and Crocker Bank. King had been in SP operations his entire career and had no backf=ground in the commercial part of the railway.

Previous to establishing the Marketing Department, SP had a traditional railroad commercial arrangement with Pricing handling rate making and sales handling customer relationships. SP had begun loosing customers and saw declines in revenue ton miles starting in the early 1970s. The interstate highways system was near completion, fast economic growth in the western states slowed, and SP began feeling significant declines in profitability. Top management brought in McKinnsey & Co., management consultants often held in high regard, to determine what needed to be done. Among their recommendations was the addition of a marketing function. Marketing is the attempt to align the services provided with the service customers need while maximizing profitability. SP historically used pricing as its main lever to attract business.

All the while the heavy burden of ICC and other government regulations limited some of the efforts by US railroads to compete by requiring complex and very slow rate making, limiting competition between railroads and stifling innovation. In SP’s case, the problems went far beyond simply bolting on a new marketing program but improving the ability of the railroad to innovate and develop new programs attractive to a wider variety of customers was hoped to be part of the “solution”.

If you are interested in SP’s commercial efforts from 1977 onward, this forum provides an opportunity for you to add your comments and/or questions.

Gene Harmon
SP Market Manager

[Peter Baumhefner]

Gene, when the new Marketing Department came on line at SP, we, in the Operating Department, wondered where we were heading as a railroad. We all grimaced and criticized (rightly justified in my opinion) the hiring spree of new Marketing employees, the remodeling of a certain portion of One Market Plaza, the brand new furniture and other expenses associated with this decision while we had to make do with whatever we could find (band aids and bailing wire) to keep things operating for the Customer while keeping costs to a minimum. I even remember having to cut management positions in the field level as many of these new Marketing “experts” were being hired. Then when some of these new Marketing folks, who were nice enough on a personable basis in a general sense, came to review particular aspects of the operation and asked really naive questions without explaining “big picture” thoughts and where they were headed, we all thought it was nothing more than a group of boondogglers, riding trains for fun, living the good life and producing nothing. In retrospect, some good things came out of the Marketing Department efforts, but it was very hard to see at the time. The numerous silos in the Southern Pacific, the egos contained in those silos, and the inability to work as a team across all those silos made it a “no win” situation. I wonder where the railroad would have gone had there never been a Marketing Department. Faster demise, or more viable for a longer time…?

[Gene Harmon]

Pete, thank you for your comments. When Marketing was formed, it was done with less than adequate communication with other departments. It was not even clear at the executive level. As an example, Mr. John Kaufman, VP Transportation and Distribution for Weyerhaeuser, one of our top 10 customers, came to our offices one day in 1978. Mr. McNear, Bob King, Pete Vajta, Dave DeBoer and I were in the meeting. Mr. Kaufman wanted to know what the new marketing group meant for Weyerhaeuser. Mr. McNear attempted to describe it and was completely at sea. What he said made no sense. Pete stepped in and described the reasons SP started a marketing department and what we hoped to achieve. The communications both within the company and with our customers left a great deal of ambiguity with both groups.

Then there were the resentments carried by some parts of the SP organization. Many in Pricing and Sales felt threatened by a new group that did not fit within the existing structure and by implication indicated they were not doing a good job. Salaries paid were more attractive than typical SP salaries (I came from the ICG where I was a Market Manager to the SP with a raise from $24,000 to $29,000 annually in 1978). About 1/3 of the new hires came from outside the rail industry or straight out of colleges; about 1/3 came from other railroads and the balance from within the SP. There were some real boneheads in all three groups but most washed out quickly.

Leadership in the SP failed to end the sniping especially within the Traffic Department. The AVP Sales in Oakland threatened to fire anyone of his salesmen who promoted intermodal or worked with Marketing people. In my experience, George Scholibo, AVP Sales in Portland, was a backstabber in contrast with all his sales staff with whom I worked closely and effectively. I also found working with operating personnel very helpful and supportive. Al Heinrich and the pricing crew in Houston were extremely cooperative. Bob Thruston later became head of Sales in Houston and he was terrific to work with.

One of the major causes for friction was the combative relationship between Bob King and Pete Vajta. Vajta never really accepted the older SP culture and would roll his eyes at inopportune moments which did not go unnoticed. King’s approach to business, as described to me by Rob Krebs, was to run the department from a switch list. He was purely transactional and when he put Yogi Sethi in as head of pricing the house of cards began to crumble. Price cuts do not pass for strategic business decisions and this is what was going on after deregulation. By 1980 the recession hit SP just when deregulation came in. King and Sethi fount back with rate cuts even when they were not required. Oftentimes customers think a rate cut is what they want but what they really need is transit time predictability or other non-oricing solutions to their supply chain problems. It was the perfect storm for the SP with inadequate leadership to pilot us through the mass of competitive and economic challenges we faced.

As for your comments on the new offices let me tell you many SP offices were a shambles. Our first marketing offices on the 7th floor at One Market Plaza had broken linoleum floors with wires taped across them, broken furniture, poor lighting and mice. It was a place you would never bring a customer. The fact that many other SP offices looked like the 1940s reflected more on the top management’s unwillingness to create a professional work environment than anything Vajta did to create one for the Marketing Dept.

In my opinion, in the long run, establishing Marketing at the SP took hold long after the SP was already headed for absorption by another carrier. The company suffered too many structural and management deficits and no amount of skillful marketing after 1978 could have altered the outcome. It was too late.

Gene Harmon

[Jack Fuller]

PKB: The Product Managers in Vajta’s Marketing Dept. had responsibility for the contribution of equipment. Their ranks included several who did have Operating experience: Keeney – Irvine – Fuller – Erickson – John West. WFK may remember more names. So there were at least some in the Dept. that did know the difference between a spike and a spike maul. — JGF

[Jack Fuller]

As for Krebs’ comment that King’s approach to the Traffic Dept. was to “… run the department from a switch list ” — what else would one expect from a person whose entire career was spent doing just that in the Operating Dept.?

There must have been a certain insanity in moving RLK from Operations [which he knew very well] to Traffic [of which he knew very little]. RLK’s early morning call to Yardmasters were well known. Whether that is the correct way for a VPO to function can be debated elsewhere, but one shouldn’t be surprised that he’d do that in Traffic.

Mr. King died in his company car in the GOB garage. With his boots on, no doubt.

[Gene Harmon]

Jack, thank for joining the forum. Krebs made his comments to King the first day he was promoted to assistant to King when King was VPO. It earned Krebs a period in purgatory with no assigned work. I have never heard the story about why King was reassigned to Traffic. I have been told that after he was “promoted” he disappeared for three days to lick his wounds.

[Jack Fuller]

I am sure RLK viewed his ‘promotion’ as anything but. He had diesel lube oil in his bloodstream.

[bradrobt]

I was the first, only..and last Manager of Marketing Research. Hired in Jan ’78 and had
with 18 in my group including two young female Stanford MBAs. Only one person worked at SP
(or other railroad) prior. He was a negative person and it was clear he was shoved
over into marketing and trickled down to my department. I did hire someone from Norfolk Southern and
another from MIT with an academic freight transportation background. But that was it.

There was no doubt friction existed from the get go. Much had to do with terminology.
We couldn’t talk ‘railroad’. On the other hand most SPers had no idea about marketing and
the imminent tidal wave of deregulation. We all bought into the challenge of moving
SP from a railroad to an integrated (freight) transportation and communications company.
As it turned out, easier said than done.

There were several social events (usually at Seven Hills) with other groups. Remember the one
with Pricing. Awkward as could be. A lot of cynicism from SPers. No laughter, people stayed in
their groups.

It seemed just when I completed my hires in mid-79 that I was asked to lay people off. A few
moved to other groups including the one who lodged a formal complaint to the EEOC against me.
Gender discrimination. Interestingly I promoted another woman over her. Funny. She felt entitled due
to age/experience. It was an action packed 1 1/2 years. I left before I was laid off.
And given the narrow time period of the Marketing Department it’s not clear there were many
actual accomplishments. But then again I was in a ‘staff’ department.

The people in Marketing were dedicated, intelligent and optimistic that they had an opportunity
to truly move SP to a higher more sustainable level. Everyone worked very hard.
Admittedly I never learned the difference between a spike and a spike maul. Still don’t and didn’t care.
Therein was the difference between two cultures.

[Gene Harmon]

Brad, I remember you well – a calm voice of reason as inter-department conflict swirled about the Traffic Dept. I recall asking your help. We had a serious problem with profitability on sanitary paper (TP and tissue products). I asked for a research report to identify the markets, what were the competitive issues, and what changes were affecting how sanitary paper was distributed among other things. One of your people produced the most comprehensive research report I have ever seen in 50 years in business. It was the bedrock on which, as Market Manager – Paper, I could decide how to approach repairing the loss producing business we had as well as formulating programs to go after business that we could make a descent return on.

There was a clash of cultures on multiple levels. The commercial part of the SP was organized to oppose change. I found the Operations personnel much more oriented to adapting to changing conditions. It was easy for people to resent formation of the marketing group 1) we were brought in at salaries often higher than what was typical within the SP, 2) the offices we moved into had been remodeled though previously we had digs similar to the rundown offices found on much of the One Market Plaza building, 3) leadership failed to get everyone focused on taking care of customers rather than fighting among ourselves. They/we failed to quell the angst and fear we encountered. 4) Deregulation forced changes that few were prepared for or understood since federal and state regulation had provided a safe competitive environment for so long lulling many railroads into complacency while the trucks roared down interstates in ever increasing numbers. SP as a company was not prepared for any of these changes. Moving on was the best choice for most of us and you pulled out earlier than many.

I was struck at our Sparks event last May by the contrast between those of us who joined the SP at the beginning of the Marketing Department and those who worked in marketing from the late 1980s until the UP acquisition. The latter group had a much more positive outlook since the conflicts within Traffic (renamed Marketing in 1983) were gone. It was a better place to work by that time even if it was too late to turn the firm around.

Brad, thank you for your post and I welcome your further comments.

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