Caterpillar Tractor

Co.

Novemb
er 7
2011

Group Members:
Devanshu Mehta(36)
George Attokaran(42)
George Phillip Mathew(43)
Ilayaraja
Dhatchinamoorthy(48)

TABLE OF CONTENTS

Table of Contents
EXECUTIVE SUMMARY................................................................................................. 3
ANALYSIS OF INDUSTRY AND COMPETITIVE ENVIRONMENT........................................4
Economic................................................................................................................. 4
Technical.................................................................................................................. 4
Michael Porter Analysis of the Industry...................................................................5
Implications of the environmental changes.............................................................5
STREGENTH OF COMPETITORS...................................................................................6
KOMATSU................................................................................................................. 6
FIRM ANALYSIS............................................................................................................ 7
Management........................................................................................................... 7
Marketing................................................................................................................ 7
Product Development.............................................................................................. 7
Financial.................................................................................................................. 7
SWOT ANALYSIS OF CATERPILLAR............................................................................... 8
OVER SEAS EXPANSION:............................................................................................. 8
Cats international strategies..................................................................................9
RECOMMENDATIONS FOR LEE MORGAN:....................................................................9
CONCLUSION............................................................................................................ 11
REFERENCES............................................................................................................ 11

EXECUTIVE SUMMARY
Caterpillar Inc., headquartered in Peoria, Illinois, has dominated the world in earth moving, construction,
and materials machinery for more than 50 years. Their global dominance; however, created a stagnant and
risk averse environment. Komatsu, a leading Japanese competitor, had gained market share by offering
low cost, high quality options in a variety of product lines while Caterpillar was busy raising prices in
their existing product lines at an average of 10% per year. The key strengths of the company were its
commitment to product innovation and its large loyal distribution base. The changing socio-economic
conditions of the world could force CAT to change some of the ways they are doing business now and
offer products that the customer requires rather that the manufacturer proposes. Developing countries are
building highways, bridges, and waterways necessary to sustain economic growth. Caterpillar will need to
ensure its product line can meet the growing demands of these countries. All the while, Caterpillar also
needs to look at the United States market and identify pockets of opportunities. Small residential
contractors or individuals may need heavy equipment for a shorter period of time to accomplish
landscaping, moving earth.
This report assesses CAT against competitors in its major operational business segments. The report
compares the companys financial performance, products and services and business strategies with those
of its competitors. The report also gives an insight into the competitiveness of the sector and identifies the
gaps that could be exploited by the company. The assessment covers the growth trends in key business
segments and provides information about the client base of the competitors.
Finally a set of recommendations to Mr. Lee Morgan is provided which focus chiefly on the feasible
breaking up of the international strategies CAT is following to incorporate elements of multi-domestic and
global elements with a more competitor sensitive, socio-political environment sensitive strategies.

ANALYSIS OF INDUSTRY AND COMPETITIVE ENVIRONMENT

Economic
The most immediate change is the boom in oil rich nations and the recession in developed economies
following the 1979 oil shock. Oil-rich nations have continued an ambitious construction programme.
Nevertheless, concern is being expressed regarding the sustainability of the growth given its reliance on a
single commodity and trends suggesting current soft demand for oil may move to a glut within the
immediate years.
A second area of growth is within Asia-Pacific. This appears deeper than that of the oil-rich nations as it is
not reliant on a single commodity. The Far East is experiencing a period of overall expansion while
Australia is appears set to experience a boom in coal and mineral exports. Latin America continues to see
economic growth although this has slowed.
While growth is strong, many of the nations in these regions are facing capital limitations due to
decreased aid from developed nations, a downturn in commodity prices and a looming debt crisis.North
America and Europe are in recession due in part to the oil shock and in part to the anti-inflationary stand
of the US Federal Reserve. This has had significant impact on the construction industry. 1982 economic
activity is forecast lower and the US dollar is forecast to strengthen.

Technical
Product technical changes are limited to incremental improvements rather than wholesale alterations.
Earth Moving Equipment (EME) manufacturers are concentrating on higher energy efficiency, improving
operator comfort and modification for specialist tasks.
Production methods, however, are undergoing radical change driven by manufacturing techniques
pioneered within Japanese industry.
Several marketing and service developments are also underway. Time and cost constraints for EME users
are forcing them to seek longer lives from their equipment and to improve performance using scheduled
maintenance programs. Reliability is critical. EME users are increasingly turning to rental arrangements
to counter capital constraints and are increasingly asking for sales details that include several years
replacement parts.

Michael Porter Analysis of the Industry

High Barriers to Entry:

Customers are mostly governments or large construction and mining

companies. They are very price sensitive, quality conscious and have experts to analyze and assess a
product. Forecasting their demand correctly and properly satisfying them is indeed a difficult task.
Customer training of complex machines and after-sales service is a daunting task.
Because of the large capital investment required to produce heavy construction machinery, this segment
of the market is mainly served by the large manufacturers.
Balanced Supplier Power: Purchased materials and components from around 49.6% of the total cost of
the company. Industry focuses on constant improvement of existing products to make them more
efficient, comfortable, or suitable; steel purchases formed 15 % of the product cost but Japanese steel
costs on an average about 30 % less than US made steel. Backward integration of manufacturers.
Balanced Buyer Power: Bids from buyers who are generally few large state owned enterprises, included
prices for parts needed over the next two years. Normal tariff barriers like specification requirement
analysis that pressured EME companies to build offshore plants. Demand depended largely on the pace at
which machines were substituted for labor.
Low Threat of Substitution: Industry operates under severe cost and time constraints. Equipment
purchase decisions mainly made by committees of high level management and technical persons.
Manufacturers reputation, machine performance and dealer capability are the most important criteria for
decision making of buying of equipments, followed closely by price and parts availability.
High and Increasing Rivalry: 7 major contenders in the EME industry, myriad of local specialists
Smaller firms approaching the market indirectly, some manufacturers chose to offer a full line of only one
of the product, while others chose to offer one product of each type. Non -U.S. companies are better
placed to bid for and perform contracts in developing countries since they do not face curbs similar to the
US Foreign Corrupt Practices Act (FCPA) of 1977, which forbade U.S companies from indulging in
unethical activities such as bribery and kickbacks in overseas dealings

Implications of the environmental changes

Overall, EME manufacturers will need to focus less on the US market and more on both Asia/Pacific and
the Middle East.
Project work in these regions and the success of regionally based contractors will require EME
manufacturers to provide adequate sales support locally.
A strengthening US dollar will place pressure on manufacturers with production facilities in the US.

Manufacturer-User relationships will alter from simple supply of equipment to one emphasizing total
services Coinciding as it does with the US downturn and the strengthening US dollar, Caterpillar will
come under pressure to maintain volume sales. With volume core to Caterpillar's cost control this could
lead to low profitability over the next few years. This will test the loyalty of Caterpillar dealers.
Compounding this, labour problems that disrupt the ongoing supply of spare parts will damage the
reputation of Caterpillar and cause great difficulties for users of their equipment.

STREGENTH OF COMPETITORS
Of the competitors Komatsu appears of most concern and is steadily gaining ground. As the No.2 EME
manufacturer and holding a dominant 60% of their Japanese home market the company is already
providing strong competition.

KOMATSU:
Manufacturing: Japanese production systems are some 5 years ahead of Caterpillar. It also enjoys labor
cost advantage relative to U.S and European Competitors
Pricing: Komatsu is 10% to 15% cheaper. Morgan believes this reflects true values but 5% is due to
access to cheaper Japanese steel and 10% is due to financial arrangements when selling. Neither therefore
reflects value.
Relationship: Komatsu has cultivated direct relationships with Communist and Developing Nation
governments. In the growth areas of Asia and the Middle East the major projects are controlled by
government agencies and they can be expected to heavily influence any buying process.
Technology: Komatsu has arrangements with Cummins, International Harvester and Bucyrus-Erie and
therefore has access to leading product design apart from their own considerable capabilities.

Komatsu is weaker in terms of market spread and depth and in dealerships and does not have a similar
hold on the vital US market as does Caterpillar.
Of the domestic based competitors Deere appears strong in low-cost production and design innovation
using electronics and CAD/CAM. Deere matches the loyal dealership of Caterpillar and is expanding into
non-US markets. Deere leads the world in farm equipment manufacture. J.I CASE strength lies in using
the same distribution channels for agricultural and construction equipment, had a strong network of 1200

independent dealers. CASE by focusing on a few products they concentrated on offering a wide array of
machines in each category.

FIRM ANALYSIS
Caterpillar was dominant player in the EME industry over the entire value chain from designing,
manufacturing and marketing its products. Cats large geographic base and broad product line
were intended to protect it from a dependence on domestic business cycle. The focus was to
produce high quality product backed by effective service. Hence the products were priced at a
premium of 10% to 20% on account of product quality and service excellence
Management: The management engaged in careful strategic analysis and tried to take a long term
view of its business. The strength of the companys classic strategic posture of high quality products
backed by effective service was well understood throughout the company, and the management was
committed to its maintenance and defense. Caterpillar was an employee focused and employee driven
company. A labor relation was the major concern for the company.

Marketing: Caterpillar Dealer Network: Caterpillar's global dealer network provides a key
competitive edge - customers deal with people they know and trust. Almost all dealerships are
independent and locally owned. Many have relationships with their customers that span at least two
generations. These dealers were the core of CATs marketing strategy. Caterpillar tied the dealers close to
it by enhancing their position as entrepreneurs. They conducted regular training programs for the dealers,
and even conducted a course for dealers children to encourage them to remain in business. CAT
advertised its products heavily in specialist magazines.

Product Development: Substantial R & D directed towards product development, product

improvement, and applied research. The product development strategy was to concentrate on a highly
capital intensive products that can be marketed through their distribution system. Their motto was to build
sophisticated, durable, reliable products and providing good support.

Financial: Caterpillar is a financially conservative company with a low dependence on debt. Offered
low dividend payout ratios and used retained earnings for financing. The current and liquidity ratio for
Caterpillar have both come down over the years .Also the inventory turnover ratio has increased
indicating an increase in non liquid assets in the form for inventory and is an area of concern

SWOT ANALYSIS OF CATERPILLAR

Strengths

Leading positions in all product segments ( Good

Product Mix)
High Quality products backed by effective service
Close Knit management group (Inbred)
Low dependence on debt and strong financial

position
Strong Dealership Network
Diversified geographical reach
Premium pricing based on good product quality
and strong brand image

Opportunities

Opportunities in Middle East and Asia pacific

Joint development and acquisition programs
Adaptation to the Japanese system of efficient

Weakness

for basic research when it could not get

desired materials from suppliers

Higher Direct Costs
Inefficient production systems
Uniform pricing policy throughout the
world based on U.S. manufacturing cost in

dollars
Falling European Sales

Threats

Intense competition and US FCPA act

which could shift the contracts to non US
companies which are more labor intensive

production systems and reduction of inventory

levels

Low presence in farm equipment business

Undertook Applied research and went in

and can reduce EME requirement.

Economic slowdown in US
Increase in raw material prices like steel.
Currency fluctuations which can hamper
profitability from exports

OVER SEAS EXPANSION:

Cat decided to expand overseas due to the fear of losing out and being present on the scene as they
believed that if it wasnt present, it should lose out.

Cat also decided to expand overseas because the overseas dealers did more than half of its business. They
cemented the relationship with these dealers and encouraged them to give more attention to Cats
products. Initially Cat opened offices in UK; Europe etc. In the late 1960s the Mexican joint venture took
place. Then Cat tried entering the Japanese market by linking up with Komatsu. Initially its entry into
Japan did not manifest but later it formed a joint venture with Mitsubishi.

Cats international strategies were:

Complete managerial control over all subsidiaries and complete ownership. Joint ventures were
agreed to if the above was not possible due to government regulations. This was done to ensure the
same quality and uniformity of products and services delivered and to avoid the creation of
competitors by divulging their technologies.

Cat would send some of their best senior managers to manage the operations in subsidies as this
would help them garner the experience of running a business in foreign markets so when they
returned, they would apply the same elsewhere.

The international operations were broken down into three parts to help better sourcing of products.
This strategy did result in some friction when an independent dealer in British Columbia imported
Mitsubishi cat machines and started selling them at a lower price.

The international sales efforts were coordinated by the sales managers based in Peoria. This was done
to maintain consistency and uniformity in worldwide prices and dealer policies.

RECOMMENDATIONS FOR LEE MORGAN:

As mentioned in the case the EME demand depends largely on the pace at which machines were
substituting for labor. Hence CAT should restructureits International Corporate Strategy where
needed so and incorporate elements of multi-domestic and global strategies. Direct selling, local
currency based price strategies, price reduction or value addition etc. should be considered as

viable options for CAT future wellbeing.

Review the dollar based pricing strategies. Especially in developing economies where the local
currency is deliberately priced low to dollar purely for export promotion purposes, CAT should

adopt a local currency based pricing.

Caterpillar should locate its production facilities in areas where it can leverage upon various
factor endowments. Komatsu has advantage over Caterpillar in direct labor costs .Caterpillar has

almost 70% of its sales in third world countries which are via exports from USA. Therefore there

is cause for Cat to setup manufacturing facilities in low cost destinations like Japan, China etc
Close the production systems gap with Japanese competitors. The JV with Mitsubishi is a key

resource and they need to capitalize on that.

Better focus on newly industrialized, developing and third world economies. CAT should

strategically shift from its OECD biased outlook and gain a better global image.
To improve the quality of a product, the focus must shift from the product to the process that
makes the product by eliminating the causes of defects and reducing variance (by using
Pokayoke method). The processes of the company must be thoroughly examined in order to
identify the ways of reducing difficulty while providing a better service or producing a better

product.
Establish financing systems that allows for rental or financial lease arrangements without
extending Caterpillar's risk into to unfamiliar areas. The US$ exchange arrangements with
affiliates needs be monitored.

Inventory Turnover should be improved to enhance liquidity position of the company. Also the
excess funds can be deployed for generating more non product revenue in line with its competitor
Komatsu.

Adopt a hard stand towards labor union in order to reduce labor cost differentials.

Caterpillar being in such a strong financial position should not be so conservative in its approach
and bring in more debt in its capital structure and use that money for expansion in other
geographies. In that way it can even increase its low dividend payout ratio to boost shareholder
sentiments.

Ensure that company laborers and unions are aware of the market environment Caterpillar needs
face over the next few years. Labor costs are almost 65% of the revenues of the company, so

taking the huge labor force into confidence will be of great help to the company in the long run.
To captivate the local markets and to be affordable to them, Cat should opt for locally
differentiated products.

The changes bought by these recommendations are a move to modern manufacturing techniques, a new
relationship with users and a more outward looking Caterpillar.

CONCLUSION
In todays environment competitive conditions are so intense that in order to survive in the global
marketplace companies must exploit experience-based cost economies and location economies, transfer
distinctive competencies within the company, and do all this while paying attention to pressures for local
responsiveness. To deal with cost pressures, Caterpillar redesigned its products to use many identical
components and invested in a few large-scale component manufacturing facilities, sited at favorable
locations, to fill global demand and realize scale economies. At the same time, the company augments the
centralized manufacturing of components with assembly plants in each of its major global markets. At
these plants, Caterpillar adds local product features, tailoring the finished product to local needs. Thus
Caterpillar is able to realize many of the benefits of global manufacturing while showing local
responsiveness by differentiating its product among national markets.
In the modern multinational enterprise distinctive competencies do not reside just in the home country.
They can develop in any of the companys worldwide operations. Developing countries are building
highways, bridges, and waterways necessary to sustain economic growth. Caterpillar will need to ensure
its product line can meet the growing demands of these countries. All the while, Caterpillar also needs to
look to the United States market and identify pockets of opportunities. Small residential contractors or
individuals may need heavy equipment for a shorter period of time to accomplish landscaping, moving
earth. Their dollar based pricing strategies also should be reviewed and elements of multi-domestic and
global strategies should be incorporated into the current international corporate strategy where needed so.

REFERENCES
www.caterpillar.com
hbr.org/product/caterpillar-tractor-co/an/385276-PDF-ENG
digitalcommons.iwu.edu/cgi/viewcontent.cgi?article=1038.