2012

CASE 2: CATERPILLAR

Ayman Jarrar Ibrahim Abu Einain Alaa Sawalha Ali Al-Sharif

3/24/2012

1. Why was Caterpillar able to meet Japanese competition and succeed while other major U.S. manufacturers failed? For example, what did Caterpillar do that the big three auto makers have not done?
- diversified sales portfolio: Caterpillar generate revenues from three independent business segments, which provide immunity for the company so that any cutback in one of these segments will, on one hand not affect the results of other segments and keep the negative effect of this segment results on overall profitability at minimum on the other. - over a century of innovation by Caterpillars inventors: since 1889 Caterpillars inventors Daniel Best & Benjamin Holt strived to introduce and develop new Equipments based on their technological leadership and commitment to total quality. - Profit deteriorated due to economical external Factors: the collapse of construction industry and the dollar revaluation against Yen has provided a temporary cost advantage to Japanese competitors to pursue the U.S. Equipment Market and seriously affect Caterpillars Profits. - no Pattern Agreement with Union Auto Workers anymore: refusal of Caterpillar to enroll in another Pattern Agreement in 1991 has reduced the Japanese cost advantage in the U.S. Equipment Market by 15%, because it gave Caterpillar the opportunity to negotiate favorable wage and benefit terms with workers. - fast revival after failure to react to changing world environment: despite losses incurred between 1982 1984, Caterpillar has managed properly to respond to changing world environment by: - cutting prices to match prices offered by Japanese competitors, to protect market share to insure long-term survival. - focusing on revenue generating strategies other than pricing to strengthen its position such as, distribution of products and logistic services. - outsourcing agreements with subcontractors and service providers to gain a cost advantage from more focused manufacturing processes against other competitors. - implementing Plant with a future program to drive cost down and improve quality standards to ensure long-term profitability. - reorganizing the work processes to become more product-oriented, which contributed to enhance direct communications with customers and dealers.

Case 2: CATERPILLAR

2. Evaluate Caterpillar Inc.s marketing and management strengths and weaknesses.

Caterpillars Strengths: Diversified sales portfolio. Over a century of innovation and technology advancement. Rapid and continuous introduction of superior equipments. Market leader and dominant with the largest market share in U.S. Solid distribution system consists of a network of 215 independent dealers worldwide. Improved information flow and communication capabilities.

Caterpillars Weaknesses: Risk from economic conditions (recession). High concentration of sales and profitability on the U.S. market (Local Market). Currency exchange risk.

3. In the United States, Caterpillar is competing in a mature industry. This means that for Caterpillar to increase its U.S. market share, it must take sales from competitors, rather than increase the size of the market.
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a. Are there other major growth opportunities in the domestic market which have not been identified by Caterpillar? There are a couple of strategies Caterpillar could pursue to increase growth in the domestic market: Caterpillar must consider other market segments to increase its operations and diversify its sales portfolio, like what it did when it has introduced multipurpose products for small business contractors.

b. If the U.S. market is close to saturation, should Caterpillar maintain the majority of its manufacturing operations in the U.S.? Caterpillar need to think about moving a good portion of its operations to lower labor cost countries. Caterpillar also need to seize the opportunity to start selling for developing countries, like what id did when it has established Caterpillar World Trade Corporation to facilitate dealing with developing countries by offering convenient payment terms that suits these countries.

4. Identify the strengths and weaknesses of Komatsu and Caterpillars other major competitors.
Komatsus Strengths: Cost advantage due to dollar revaluation against Yen. U.S. foreign policy constraints for selling to many former communist countries gives Komatsu the opportunity to develop strong trading relationships them easily.
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Case 2: CATERPILLAR

Lower per unit labor cost compared to Caterpillar Komatsu has a better relationship with workers in its North American factories.

Komatsus Weaknesses: Weak dealership network. U.S. employees in Komatsus plants could not understand the Japanese management style (work ethics and culture). Affected with recession. Unsuccessful joint venture with Dresser from the beginning.

Other Competitors Strengths: Deere & Company has the largest union. Deere & Company has a good and long experience in farm equipment Market. Customer-oriented manufacturing facilities. Tennecos J.I. Case has the no.2 position in farm equipment Market just behind Deere & Company.

Other Competitors Weaknesses: Deere & Company are more focused on specific market segment (farm equipment segment). Tennecos J.I. Case also operates in specific Market segments (farm equipment & smaller construction lines Segments).

5. What are the major growth opportunities for Caterpillar, Inc. in the international market? What are the risks associated with expansion into these markets?
Opportunities Great opportunities in developing countries. Dealing directly with countries governments, which mean safer and longerterm projects. Southeast Asia, China and Pacific Rim Countries represents the best opportunities for business, followed by Africa due to corrupted local business practices (bribery and other kickbacks), and came at the end Brazil and Eastern Europe and countries of the former soviet union with restrictions on government spending in Brazil, and the requirement of counter-trade
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Case 2: CATERPILLAR

agreements and international loan program in Eastern Europe and countries of the former soviet union. OPPRTUNITIES: Growth in International Sales: The international market, which can be grouped to four or five major regions, represents the great opportunities for Caterpillar to boost their sales. The developing countries, Eastern Europe countries and countries of the Former Soviet Unions are expected to be an area with continuous growth in its demand in deferent products in industrial segment, mining applications and infrastructure projects. Africa is expected to demand for more mining equipments due to the continents mineral wealth. In Eastern countries and countries of the Former of Soviet unions there is a defined opportunities for industrial equipments. In the Far East region; Southeast Asia, china and Pacific Rim countries; Caterpillar will continue pursuing opportunities taking advantages from their factory which located in Indonesia. Product Improvements opportunities: Due to global environmental concerns, the need for more environmental friendly products is increasing considerably. Assigning teams and budgets to achieve such a development in new products that comply with the new environmental regulations will add an advantage for Caterpillars products. Risks Currency exchange rate risk due to floating exchange rate, this risk affecting two areas: 1. International competition 2. Subsidiaries Sales in their local territories. Financing risk: Complex means of receiving payments from Developing countries. Political Risk: instability in many regions that complicates economy situation and curtailed governments spending. Economical Risk: Unstable financial position and inability to do business with Caterpillar in English by parties that are interested to do business. The recession and the contraction situation of many countries that force governments to execute austerity programs that curtailed government spending on infrastructure projects and other projects. this reduce the total market value and increase the competition in every market.
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Case 2: CATERPILLAR

Environmental concerns have contributed to create restrictions on some industries and projects expansions, those restrictions affect Caterpillar sales in many counties like Australia and New Zealand.

6. Caterpillar has been a major corporate voice in the call for the reduction of trade barriers not only in the U.S. but also worldwide. Explain the benefits to Caterpillar if trade barriers were eliminated.
Eliminating the barriers worldwide will affect the following areas and functions in Caterpillar: Sales and Revenues: Due to barriers that were erected by governments in several countries, Caterpillar is not able to develop those markets. Eliminating those barriers will allow Caterpillar to go to those markets and start establishing their business that will generate revenues and assist in achieving growth for the company. Those markets have great potentials and expected to demand for Caterpillars equipments due to poor infrastructure, industrial demands or positive economic outlook. Caterpiller Supply chain: the new opened market could also give the company the ability to find new suppliers, venders, subcontractors and partners that could contribute positively in reducing manufacturing cost, facilitate their entrance to specific market and reduce the risk of acting in new markets.

7. Caterpillar, Inc has had severe labor difficulties during the past decade. What can the company do to establish a more cooperative environment in its U.S. factories?
In 1991, after over than 4 decades of compliance to Union Auto Workers regulations represented with Pattern Agreement, Caterpillar has successfully ended this relationship with UAW by refusing to use this Patter Agreement with
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Case 2: CATERPILLAR

workers and use their own agreement. Caterpillar go further in their refusal to obey by announcing that there is a plan to replace all striking workers, which was considered by workers as a threat to accept what is offered without discussion. If Caterpillar is willing to protect its current position or even think about getting more growth, then more attention need to be taken into consideration to re-gain workers trust.

Case 2: CATERPILLAR