Caterpillar Case Paper
Caterpillar Case Analysis EXTERNAL ENVIRONMENT ANALYSIS Global. In 1915, the British military invented the armor tank and modeled it after Benjamin Holt’s steam tractor, Caterpillar. Also during World War I, the United States and its allies used Holt’s track-type tractors to haul artillery and supply wagons. Shortly after it formation, during World War II, Caterpillar served as the primary supplier of bulldozers to the US Army. Although it was a successful company for many years, for three consecutive years, 1982-1984 it had lost $1 million a day.
This was partially caused by tough global competitive challenge and the collapse of the international markets. Sociocultural / Demographic. Instead of focusing on large clients like multinational engineering and construction firms, Cat began marketing to a new category of customers like small scale owner operators and contractors. Developing nations in Latin America, Asia and Eastern Europe were a big part of Cat’s sales, accounting for 23% of total company sales. These countries have a strong demand for Cat’s equipment since they are undergoing development. Also, Caterpillar entered the market for rental equipment.
Another sociocultural phenomenon that affected Caterpillar and other companies was the rise of unionization across America and their ability to make changes in a company’s structure. Legal / Political. Caterpillar faces the policies and laws of many governments because of its heavy involvement in the international markets. High tariffs and taxes have a negative impact of foreign transaction. The company also faced legal challenges as the United Auto Workers Union (UAW) filed numerous charges with the National Labor Relations Board (NLRB) in claiming that Caterpillar had unfair labor practices.
Economic. Unfavorable currency exchange rates were one of the leading causes of Caterpillar’s loses during 1982-1984. The steep rise in the value of the dollar (relative to Yen and other currencies) made US exports more expensive abroad and US imports cheaper at home. The strong dollar was a major part of reduced sales and earnings for Cat. On the other hand, the steady growth for construction machinery since 1945 came to an end in 1980. As highway construction slowed down, oil prices depressed the global market of mining, logging, and pipe laying equipment as the global recession began.
Technological. The heavy construction equipment industry supplied engineering firms, construction companies, and mine operators. The industry typical lines included earthmovers (bulldozers, loaders, and excavators), road building machines (pavers, motor graders, and mixers), mining related equipment (off-highway trucks, mining shovels), and large cranes. On a global basis, earthmoving equipment counted for about half of industry’s total sales in the 1990’s. INDUSTRY ANALYSIS Barriers to Entry. The barriers include diversification, economies of scale, marketing and distribution, and alliances.
New companies in the industry must diversify their product lines to compete with the multinational companies. A barrier to entry is the need to achieve economies of scale. According to the case, the optimal scale of operation was approximately 90,000 units annually. The typical amount of global sales per year in 1997 was 200,000 to 300,000. This low number of annual sales further intensified competition over market share. Lastly, manufacturers built alliances because of intense competition over market share.
This included full scale joint ventures to share production, technology sharing agreements between equipment manufacturers and engine makers, and technology sharing alliances between major global firms and local manufacturers. Power of Buyers. The power of buyers in this industry is fairly strong. The buyers have the options available to pick what type of machinery they need whether it is a new machine or replacement parts. The buyers have the advantage of stiff competition between retailers which drives prices down.
The buyers in developing countries have less power because the equipment retailers know there is higher demand for machinery in developing nations. The buyer has the option to buy an entire new machine or keep the same machine but purchase replacement parts. Power of Suppliers. Under a new policy created, “shopping around the world,” Caterpillar chose to outsource 80% parts and components from low-cost suppliers who maintained high quality standards. There was the risk a supplier may refuse to work with Caterpillar or charge excessively high prices.
With vertical integration, Caterpillar would make sure its products were made of the highest quality by branding the final products. Product Substitutes. The heavy machinery industry is not worried about substitute products or services from outside industries. The equipment sold is made for the purpose of earthmoving or construction jobs. No other substitute product will do this job effectively. Competitive Environment Analysis. This industry is highly competitive. Caterpillar’s major competitors were Komatsu, John Deere, and CNH Global.
However its direct competitor and rival was the Japanese giant, Komatsu. Komatsu was challenging Cat by gaining advantage in the Latin America and European, and the U. S. markets instead of only remaining in Asia. It launched a massive drive to improve quality while reducing costs. Komatsu achieved a 50 percent labor productivity advantage over Caterpillar, and in turn, underpriced Caterpillar’s products by as much as a 30 percent. The result was devastating as Komatsu’s market share doubled to 25 percent between 1979 and 1984 as Caterpillar’s fell by almost a quarter to 43 percent.
Under George Schaefer’s direction, Caterpillar focused on the important functions of the company like purchasing, manufacturing, marketing, personnel, and labor relations. Its sales more than doubled to that of Komatsu’s in 1989 as a result of these improvements. RESOURCES: TANGIBLE Physical. Caterpillar is a heavy construction equipment firm with a product line of earthmovers (bulldozers, loaders, excavators), road building machines (pavers, motor graders, and mixers), mining related equipment (off-highway trucks, mining shovels), and large cranes.
The company was broken down into 17 semi-autonomous divisions, 13 responsible for products (tractors engines, etc. ), and 4 for services. In 1999, 207 independent dealers served Caterpillar, 63 of who were stationed in the US and 144 abroad. Caterpillar purchased the Mak Company- a German maker of engines for power generations (1996) and Britain’s Perkins Engines, a manufacturer of engines for compact construction machinery. With the purchase of Perkins Engines, Caterpillar obtained Perkins’ best-selling engine that powered the skid loader.
Financial. Cat’s sales grew over $15 billion in the first half of the 1990s due to reorganization and cutting back on managers. Fites purchased the Mak Company, a German engine maker. This purchase helped increase the sale of engines by 20 percent each year from 1995 to 1999. In addition, in 1998 Fites also bought the British company, Perkins Engines with $ 1. 3 billion. “The new acquisition contributed to Caterpillar’s efforts to increase its share in the small equipment market, which was growing at a rate of 10 percent a year”.
By 2010, Cat’s engine sales were expected to exceed $14 billion. In 1998, Fites agreed to sign a contract agreement concerning changing policies of employee’s wages. Fites wanted to retain relations between the company and employees by enforcing flexible working hours and competitive wages. By 2000, Cat entered into a joint venture with DaimlerChrysler to explore the medium duty engine market. By the end of 2000, Cat’s sales and revenues reached $20 billion, which generated $1 billion in profit. Organizational.
Caterpillars outsourced product manufacturing while maintaining high quality standards by choosing to keep product design in house. By keeping control over the design of many of its outsourced products, Caterpillar managed to keep in-house design capability and ensure quality control. When Schaefer came up with the plant modernization program, “Plant With A Future,” it combined just-in-time inventory techniques, a factory automation scheme, a network of computerized machine tools, and a flexible manufacturing system. Caterpillar reconfigured the layout of its manufacturing plants flexible work “cells. Workers would use computerized machine tools to perform several manufacturing steps in sequence, processing components from start to finish and sending them “just in time” to an assembly area. To reduce material handling the company used an automated electrified monorail which delivered parts to storage and assembly areas, traveling on a long aluminum track throughout the modernized plant. Managers were given control over the speed of the line. However, the managers empowered production workers to change the speed of the assembly line at will to better suit the needs of the workers.
Under Fites control, he chose divisional structure instead of functional and broke down the company into 17 semi-autonomous divisions or “profit centers;” 13 responsible for products and 4 for services. With this new divisional structure, Caterpillar cut 10,000 jobs in three years between 1990 and 1993. This new reorganization plan also affected the company’s distribution network. For example, dealers began to contact the 17 product and service-profit centers directly. With 22 distribution centers, Caterpillar serviced 500,000 different parts, keeping over 300,000 in stock and manufacturing on demand.
RESOURCES: INTANGIBLE Human Resources. Caterpillar’s intangible resources include its top leadership and its network of distribution. After the company suffered huge losses in 1984, its CEO George Schaefer was largely responsible for the turnaround of the company in the years 1985-1990. The CEO that followed Schaefer, Donald Fites, has also played a big role in the company’s continued growth and competitiveness. Another intangible resource of Caterpillar is the relationship with its network of distribution centers. Many of Caterpillar’s dealerships were privately owned and sold Caterpillar products independently.
Caterpillar maintained these relationships by actively encouraging dealers to keep the business in their families and by running various seminars and regular conferences. They have also taken steps to protect their dealers by offering discounts and helping reduce dealer costs. Reputation. Caterpillar maintained a strong reputation amongst its customers. Caterpillar has been an industry leader and prime provider of heavy equipment for the US government during WWII. Due to its longevity, Caterpillar has built a strong reputation by maintaining a strong brand name.
Caterpillar is also known for their service and their close relationships with their customers. By striving to provide quick repairs and replacement parts to customers to avoid downtime, they have maintained a reputation for their great service. Caterpillar currently remains an industry leader in all aspects of their business. Innovation. In 1904, the Holt company (which later became Caterpillar) was the first to put a gasoline engine on a tractor to replace the heavy steam engine. Caterpillar has also shown great innovation in their information technology.
They developed an electronic alert information system under Donald Fites that monitored machines remotely and identified parts that needed replaced them before they broke down or failed. Caterpillar has also honed the operation processes of their plants by taking innovative ideas from their Japanese competitor Komatsu and developing them further. In the case of the plant at Grenoble in France, the assembly time for machines was cut down from between 8 to 20 days to just 3 days. VALUE CHAIN ANALYSIS Marketing & Sales. Cat marketed its products mostly through dealerships all over the world. The network consisted of mainly independent dealers.
In 1999, there were 63 dealers in the US, 144 dealers outside the US, 382 brand stores in the US, and 1122 brand stores outside the US. These dealers worked closely with their customers which were mainly large, multinational companies. They generated 100 percent of their revenues through selling and supporting Cat’s products. A dealership of Cat products generated $150 million annual sales in 1996 while large dealerships generated up to $1 billion. Under the policy of George Schaefer, Cat began to expand their target market to smaller scale businesses in the 80’s and started outsourcing their products.
Under the leadership of Fites, Cat promoted guaranteed 48 hours delivery of parts anywhere in the world with the help of vast computer network and distribution channels. Operations. After the crisis in the 1980s, George Schaefer made big changes to the operation system of Cat. He set the company’s goal to outsource 80 percent of the product’s parts and components while the other 20 percent of product’s parts and components were to be produced by Cat. The assembling channel was to be controlled by Cat in order to ensure product’s high quality. George Schaefer also initialized changes to the company’s assembling channel and system.
The batch production system was changed to a cellular manufacturing system. Under cellular manufacturing, parts and components of a product were put together in one assembling channel. Also, the automated electrified monorail delivered parts and components to needed areas. In addition, computerized assembling systems cut the costs of storing, controlling and fixing inventories. HRM. Caterpillar has had some difficulty with their human resource management. Strikes in the early 1980s organized by worker unions contributed to the company’s heavy losses.
Under George Schaefer, Caterpillar implemented the Employee Satisfaction Process to help please the unions. However, under the leadership of Donald Fites, relationships with the unions faltered. Fites was very stern when it came to cutting costs. He pushed for lower wages and more control of Caterpillar by the management rather than the unions. This resulted in various strikes against Caterpillar, for which Fites was prepared. The poor relationships with employees and the union caused increased dissatisfaction and a higher number of grievances being filed. Fites eliminated the Employee Satisfaction Program due to tensions with the unions.
Service. Caterpillar used a worldwide network of dealerships to sell machines, provide support, and offer after sales service. Dealers in need of assistance could contact any of the 17 product and service profit-centers directly. Caterpillar also worked directly with dealerships to conduct surveys to improve its service and parts delivery. In the 1990s, 90,000 survey forms were sent out through the dealers with a response rate of 40 percent. Caterpillar’s service guaranteed a 48-hour delivery time. Company Technology. Caterpillar started out very technologically advanced.
Benjamin Holt created a tractor named “Caterpillar” that utilized a gasoline engine instead of a heavy steam engine. The Caterpillar tractor solved farmer’s problems of wheels sinking in moist soil. Holt then acquired the “Caterpillar” trade mark and applied it across other various machines his company sold. Caterpillar was the first to introduce a diesel engine on a moving vehicle in 1931 and began to focus on production of road-building, construction, logging, and pipe laying equipment. The company’s technology was advanced enough to create the DC10 bulldozer which became Caterpillar’s signature item for a decade.
It was 15 feet tall, 73 tons, $500,000 and had no competitors. But demand for this product dwindled as demand for highway construction projects shrank. Cat’s technology and equipment have been used to reconstruct Europe, build the US interstate highway system, erect the giant dams of the world, and lay out the major airports of the world. Caterpillar also pioneered a new electronic alert information system under Fites. The new system monitored machines remotely and identified parts which needed to be replaced before they failed.
The new system was designed to help dealers repair machines before they broke down and provide Caterpillar and related dealers to cut inventory costs. OUTSOURCING Formerly, Caterpillar was vertically integrated and relied heavily on in-house production. Caterpillar self-produced two-thirds of its parts and components. The company also assembled nearly all finished machines. Caterpillar began a new policy called “Shopping Around the World”. Within this policy, the company looked for low-cost suppliers who maintained high quality standards. Caterpillar’s goal was to outsource 80 percent of its parts and components.
Caterpillar took advantage of its superior marketing organization and began to purchase final products for resale under its own brand name. In the mid-1980s, Caterpillar purchased lift trucks from a Norwegian company, hydraulic excavators from a West German manufacturer, paving machines from an Oklahoma corporation, off-highway trucks from a British firm, and logging equipment from a Canadian company. Caterpillar resold them all under their name. Caterpillar made sure, however, to outsource product manufacturing but not product design. This allowed Caterpillar to manage in-house design capability and ensure quality control.
CORE COMPETENCIES Caterpillar has several areas in which it was superior to its competition that allowed it to stay competitive and profitable over the years. First, Caterpillar’s research and development has always been superb and the company had top of the line technology for which it was known for. Second, Caterpillar had built strong relations with its distribution network which was its main advantage over its competition. Its distribution network was honed by strong marketing practices of Donald Fites. Third, Caterpillar provided superior customer service.
They strived to reduce downtime for the customer was another core competency of Caterpillar, and gave it advantage over its competitors. COMPETETIVE DYNAMICS In 1904, Benjamin Holt was the first one to remodel the original tractors with gasoline engine in order to make it lighter and more efficient. In 1931 Caterpillar was the first to introduce a diesel engine vehicle. In late 1970s Komatsu adopted just-in-time inventory techniques and flexible manufacturing system. Caterpillar later in 1986 also adopted the two just-in-time inventory system and the “quick change over tooling” technique. BUSINESS LEVEL STRATEGY
Caterpillar’s Business Level Strategy consisted of a mixture of Integrated Low-Cost/Differentiation Strategy. As it started its global outsourcing strategy, it became a low-cost leader because it reduced its in-house building of parts and made them cheaper by building them elsewhere. This outsourcing strategy combined with their joint ventures for sharing technological advances and a global dealership distribution differentiate Caterpillar as the most diversified and innovative company in the industry. SWOT ANALYSIS Strengths Reputation and Brand Name The first strength of Caterpillar is that they had a very strong brand name.
They are currently the world’s biggest manufacturer of earthmoving machinery, construction and mining equipment. During the 1950s and 1960s, Caterpillar was the uncontested leader of the heavy construction equipment industry and had the market share in sales of said equipment. They were also known for their superior customer service because they provided 48-hour equipment repair and replacements to reduce costly downtime. Due to the fact that they have been in business for so long and their strong customer support, they have established a strong brand name and are recognized throughout the world. Distribution and Dealer Network
The second strength of Caterpillar is its worldwide distribution system. Caterpillar had a strong and efficient system of worldwide distribution. Caterpillar maintained strong relationships with its network of 207 independent worldwide dealers. Each dealership generated $150 million in average revenue annually in 1996 and several of the large dealerships generated up to $1 billion. Caterpillar took care of its dealers by maintaining close personal relationships with them. The company CEO Donald Fites mentioned that Caterpillar’s distribution system was their biggest advantage over its competitors, primarily Komatsu.
Superior Technology and Research and Development Caterpillar had a superior worldwide computer network system linking together factories, distribution centers, dealers and large customers. Due to this network, Caterpillar had the most comprehensive and fastest part delivery system in the industry and was able to promise its customers 48 hour delivery of parts anywhere in the world. Another technological strength Caterpillar possessed was their electronic alert information system. This system was designed to monitor machines remotely and helped identify parts that needed replacement or repair before they broke down reducing downtime.
Caterpillar also had strong research and development capability and was a leader of technological innovation in the industry. They were the first company to introduce a diesel engine on a moving vehicle in 1931. Using research and development, Caterpillar improved the operation process of their plants. For example, in Grenoble, France, the assembly time for machines was cut down from 28-8 days to just 3 days. The superior technology and research and development of Caterpillar was a major strength for them. Weaknesses Relationships with worker unions and employees
Throughout the company history, Caterpillar had problems with employee and union relationships. Caterpillar has had a poor relationship with the worker unions in an attempt to increase its flexibility and reduce union influence. Caterpillar experienced numerous strikes, including a 205 day strike in 1982 which was the longest company-wide work stoppage in the UAW history. CEO George Schaefer was successful at mending relationships with the workers and implemented the Employee Satisfaction System. However, this system deteriorated later under CEO Donald Fites.
After the deterioration, company grievances have significantly increased. Opportunities Emerging Markets There were opportunities for Caterpillar to increase sales in emerging markets. There are many developing nations that do not have a fully developed infrastructure thus creating a demand for Caterpillar earthmoving products. Also, some of these developing countries such as China and India are experiencing annual growth of 7-8%, and thus have a strong demand for the equipment Caterpillar provides. New Energy Technology
There is opportunity for Caterpillar to gain a large market share in the new energy markets. The world is moving to the direction of cleaner energy sources and Caterpillar is moving in the same direction. For example in 2001, only 10% of Caterpillar’s generators were powered by natural gas. In 2011 however, their use of natural gas generators is projected to increase to 50%. Threats Sensitivity to economic factors The demand for Caterpillar products heavily relies on various economic factors. Some of these factors are foreign exchange rates. When the dollar trengthens in relation to foreign currency, it makes Caterpillar products more expensive in the foreign markets thus decreasing demand. Also, the demand for earth moving equipment is heavily dependent on world events such as wars and economic crises, which may lower demand. Legal issues The United Auto Workers union filed charges against Caterpillar to the National Labor Relations Board. There were 400 “unfair labor practice” charges filed and this could negatively affect Caterpillar’s bottom line by increasing legal costs and create future losses.
PROBLEMS E-commerce is currently playing an important role in today’s global marketplace. Caterpillar is faced with a choice to participate or to be left behind if they do not. If Caterpillar chooses to sell its equipment online, it can hurt the distribution network by taking away some of the networks business. This can severely undermine Caterpillar’s position as a global market share leader. If Caterpillar does not participate in E-Commerce, they risk a competitor gaining a competitive advantage over Caterpillar.
As a multinational firm, Caterpillar faces numerous tariffs, policies and laws of different governments. Also, its inconsistent labor relations and their deteriorating relationship with their employees can limit its flexibility. Another problem Caterpillar faces is the lack of consistent upper-level leadership. They have had 3 different CEO’s in the past 20 years and each CEO has made inconsistent decisions in regards to certain policies such as labor. STRATEGIC COMPETITIVENESS Caterpillar should use its superior Research and Development to focus on new product development in the new clean energy sector.
They should also take advantage of emerging markets by increasing their brand presence in developing countries. Caterpillar should not fully convert to e-commerce. However, they should use the power of the internet to market themselves and limit search cost for its customers. Caterpillar should works with its dealers to slowly intergrade the internet with their marketing strategy. Caterpillar should mend its relations with its employees by re-inventing its Employee Satisfaction Program and allowing for their voices to be heard.
This will help mend relationships with the United Workers Association as well. Caterpillar needs to establish a strong leader and hire competent management to help mend labor relations and manage the company. They should encourage its employees to climb the corporate ladder into upper leadership positions. EPILOGUE In 2004, James Owens replaced Glenn Barton as CEO, and in 2010, Douglas Oberhelman became CEO and is currently still in office. In 2011, Caterpillar recognized a 41% increase in revenue from 2010, and an 82% increase in total earnings. Earnings have been mostly growing in the last 10 years.
This is attributed in the company’s annual report to three different factors: a reorganization of strategic businesses, a new Enterprise Strategy that brought renewed focus to customer-service and expansions that included the acquisitions of Electro-Motive Diesel, Inc. , MWM Holding GmbH and Bucyrus International, Inc. Cat made its global diversification stronger by completing these acquisitions. Currently, Caterpillar is the leader in its industry market. It is currently leading all of its major competitors in almost every area like revenues, net income, market cap, assets and etc.