This master thesis argues that European rail freight is increasingly coming under pressure due to fundamental shifts in market demand, competition and technology. These forces are ever more nagging especially at national incumbents longtime key competitive advantages against road transportation: Price competitiveness in long-distance transports, capacity, dependability and eco-friendliness. To counter this trend, the master thesis argues that national incumbents need to find new answers to the key question of what their unique value proposition and competitive edge will be in a world where road transportation is gradually more becoming like rail freight. For doing so, it is argued that national incumbents need to increase their innovation performance capability. This will above all be achieved by four measures: (1) By identifying, formulating and executing on clear innovation targets. (2) By designing and implementing a comprehensive yet standardized innovation process. (3) National incumbents have to set up pertinent organizational structures that strengthen exploration, agility and organizational learning. (4) Cultural factors that prevent a company from reaching its full innovation potential have to be identified and remedied appropriately. The master thesis studies and discusses general principles, models and frameworks that serve as a foundation for improving innovation performance. It applies these concepts to Rail Cargo Group, one of Europes leading rail freight operators, with the ultimate aim of giving policy recommendations to Rail Cargo Group on how to enhance its innovation capabilities. In view of this: Even though the master thesis covers a specific company, the methods of analysis chosen as well as the conclusions drawn will be of interest to other rail freight companies as well.