By Isaac Cohen I

:r or three consecutive years, 1982, 1983, and 1984, 1'"" the Caterpillar Company lost one million dollars
a day. Caterpillar's major competitor was a fcrrnidable Japanese company called Komatsu. Facing a tough global challenge, the collapse of its international markets, and an overvalued dollar, Caterpillar had no choice. It had to reinvent itself, or die. Caterpillar managed to come back as a high-tech, globally competitive, growth company. Over a period of 15 years, and throughout the tenure of two CEOs - George Schaefer (1985-1990) and Donald Fires (1990-1999) - Caterpillar had transformed itself. George Schaefer introduced cost-cutting measures and employee involvement programs, outsourced machines, parts, and components, and began modernizing Caterpillar's plants. Donald Fites diversified Caterpillar's product line and reorganized the company structurally. He also completed Caterpillar's plant modernization program, revitalized Caterpillar's dealership network, and altered radically Caterpillar's approach to labor relations, As Donald Fites retired in February 1999. Glen Barton was elected CEO. Barton was in an enviable position. The world's largest manufacturer of construction and mining equipment, and a Fortune 100 company, Caterpillar generated 21 billion dollars in revenues in 1998, the sixth consecutive record year. Leading its industry while competing globally, Caterpillar recorded a $1,5 billion profit in 1998, the second best ever. Notwithstanding Caterpillar's dramatic comeback, Barton could not count on the continual prosperity of the company because the US construction industry was moving into a grinding economic downturn. At the time Barton completed his first year as CEO, on February I, 2000, the company announced its 1999 result: sales declined by 6 percent and earnings by 37 percent. In March :WOO,

Caterpillar share price was trading close to its 52 week low ($36 against a high of $66) and one industry analyst declared: 'The stock for the foreseeable future is dead money' What should Barton do? Should Barton follow the strategies implemented by Schaefer and Fites to enhance Caterpillar's competitive position relative to its principal rivals, Komatsu, John Deere, and CNH Global (CNH is the product of a 2000 merger between Case Corp, and New Holland)? Should he. instead, reverse some of the policies introduced by his predecessors? Or should he, rather, undertake whole new strategies altogether') To assess Barton's strategic choices in improving Caterpillar'S results, the case looks back at the experience of his two predecessors. How precisely did both Schaefer and Fites manage to turn Caterpillar around?

The heavy construction equipment industry
The heavy construction equipment industry supplied engineering firms, construction companies, and mine operators, The industry's typical product line included earth movers (bulldozers, loaders, and excavators), road building machines (pavers. motor graders, and mixers), mining related equipment (offhighway trucks, mining shovels), and large cranes, Most machines were offered in a broad range of sizes, and a few were available with a choice of wheels or crawler tracks. Most were used for the construction of buildings, power plants, manufacturing plants, and infra-structure projects such as roads, airports, bridges, tunnels, dams, sewage systems, and water lines. On a global basis, earthmoving equipment accounted for about half of the industry's total sales in the 199{)s (Table I). Among earthmovers,

'Source: This case was presented at [he October ~OOI Meeting: of the North American Case Research Association (NACRA) at Meillphis. Tennessee. Copyright by Isaac Cohen nnd ~ACRA. Reprinted with permission, All rights reserved. ~Michael Arndt. 'This Cat Isn't so Nimble: Busines Week. February 21. 2000. Start p. 1,.8, Online. Lexis-Nexis, Academic Universe: Mark Tatge. 'Caterpillar', Truck-Engine Sales May Hit Some Breaking', 1\'<111 Street Journal. March 13.1000.

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perhaps 20 to 30 years. however. 7U.000 to 300. for parts. especially in devel. In other words. Replacement parts and 'attachments' (work tools) made up together over a quarter of the total revenues of tile heavy construction equipment industry (Table I).200. 85. hydraulic excavators accounted for 45 percent of the sales. 85. and Latin America than among the developed nations." Another characteristic of the industry was the need to achieve economies of scale. July 1996. 'Industry Cornel': The Global Demand for Heavy Construction Equipment: Business Economics.756 :-. but in many cases. was faster among the developing nations of Asia. and related services. March-April 1996. Pavers." The distinction between original equipment and replacement parts was an essential feature of the industry. pp. . the optimal scale of operation was about 90. The rate of growth. Typically. JAndrew Gross and David Weiss..' Global demand for heavy construction machinery grew at a steady rate of 4. -. p. manufacturers used a worldwide network of dealerships to sell machines. p. Successful marketing . p.further intensified competition over market share among the industry's leading firms.000 earthmoving equipment units per year (1996)8 .-}. were another category of fast selling equipment. 'Making Your Dealers Your Partners. and second. and the developing nations for the remaining 30 percent. 'Cutcrplllar Tractor Co. Transatlantic Munagetnent: Text..." As a rule of thumb.' in Christopher Bartlett and Sumuntra Ghoshal. Japan for 20 percent. average equipment unit cost declined as output increased. 'Industry Corner: The Global Demand for Heavy Construcuou Equipment: Business Economics.[(110" (1. 296. oping countries. Off-highway trucks that hauled minerals. ] 985-2005 7985 1994 Percentage of total demand Earthmoving Equipment Off Highway Trucks Construction Cranes Mixers. Africa. thus creating an ongoing stream of revenue. 3Fites. and Readings in Cross Border Management (Homewood IL: Irwin. more versatile. and Related Equipment Parts & Attachments Total Demand (billions of US $) 2000 49 7 2005* 49 7 10 50 8 9 6 27 38 49 7 11 10 7 27 6 27 7 26 56 72 90 *Percentages do not add up to 100 because of rounding. 3 J:3 (July 1996). and easier to use in tight spaces than either bulldozers or loaders. components. the market for replacement parts was less cyclical than that for original equipment. Srinivasa Rangan.also played an important role in gaining competitive advantage. . up to a production level of 90. 54-55. 'Industry Corner: p. Excavators were more productive. the economic life of a heavy construction machine was 10 to 12 years. In the early 2000s. . Source: Andrew Gross and David Weiss. and therefore capturing a large market share was critical for benefiting from economies of scale. S4 'Ibid. Dealerships were TAG LE I Global demand of heavy construction equipment by major categories." The relatively low volume of global sales . ('Donald Fitcs. provide support. According to industry observers.000 units annually. but accounted for a substantially larger share of the industry's earnings for two reasons: first. rocks. "Gross and Weiss. equipment users kept their machines in service much longer. North America and Europe were each expected to account for 25 percent of the industry's sales.' Harvard Business Review.000 units a year. and dirt. 'Making Your Dealers Your Partners. and offer after sales service. Cases. A widespread distribution service network had always been essential for competing in the heavy construction equipment industry because 'downtime' resulting from the inability to operate the equipment at a construction site was very costly. 56.5 percent in the 19905.. the safe of replacement parts was more profitable than that of whole machines. J992).' p.

the steamer's huge wheels . 1999). Illinois. pp. India. the British military invented the armor tank. and providing a speedy delivery of replacement parts. in addition.in Britain. p. and pipelaying equipment. and electric generators. He nicknamed the tractor 'Caterpillar". its sales volume more than tripled between 1941 and 1944 to include motor graders. and in return. logging. solved the problem by spreading weight on a broader surface.' Hoover's Handbook of American Business 1999 (Austin: Hoover Business Press.. Canada. .measuring up to 9 feet high . The third type of agreements were technology sharing alliances between major global firms and local manufacturers whereby the former gained access to new markets. The company managed to differentiate itself from its competitors by producing reliable. farmers in California faced a serio LIS problem. The Story of Caterpittar Tmcror Co. ]('William L. Shortly thereafter. durable and high quality equipment. during the 1950s and 1960s. crawler tractors were first used by the military. Holt. II·Caterpillar lnc. 10 Outside agriculture. Caterpillar discontinued its combine manufacturing during the 1930s and focused instead on the production of road-building.Com. thus improving the tractor's mobil- ity further by reducing its weight (a steam tractor weighed up to 20 tons). Caterpillar had emerged as the uncontested leader of the heavy construction equipment industry. The first were full scale joint ventures to share production. the Best Tractor Company. construction. Using steam tractors to plow the fine delta land of the San Joaquin valley. By 1965. Manufacturers built alliances as well. Caterpillar's joint venture with Mitsubishi Heavy Industries was a notable case in point. Cat's equipment was used to reconstruct Europe. Since heavy construction machines operated in a tough and inhospitable environment. despite their efforts. offering quick after-sales service. France. on the one hand. (New York: the Newcomen Society. nevertheless. Caterpillar served as the primary supplier of bulldozers to the US Army. Benjamin Holt. had become one of the "Gross and Weiss. the United States and its allies in Europe utilized Holt's track-type tractors to haul artillery and supply wagons. established in 1963. Retrieved March 9.CASE 8 independent. Naumann. During World War II. and layout the major airports of the world. company owned. 7-9. or both. and were normally organized on an exclusive territorial basis. diesel engines. Belgium. In 1915. supplied the latter with advanced technology. and therefore manufacturers placed dealers in close proximity to equipment users. As a result. 58. Mexico. and Komatsu did so with the BEML company in Inclia. build the US interstate highway system. By 1915 Holt tractors were sold in 20 countries. provided two examples. and Japan. 328: 'The Story of Caterpillar: Online. Caterpillar moved its corporate headquarters and manufacturing plants to Peoria. Caterpillar. Caterpillar utilized such an arrangement with Shanghai Diesel in China. and applied it to several crawler-type machines that his company manufactured and sold. 1997). to form Caterpillar (Cat). building a global service network that spread all over the world.either wholly owned or joint ventures . The first company to introduce a diesel engine on a moving vehicle (1931). and the Case Corporation and Cummins. equipment wore out and broke down frequently. parts needed to be rebuilt or replaced often. California farmers fitted their tractors with large drive wheels to provide support on the moist soil. apart from tractors and wagons. the Holt Company merged with another California firm. on the other. modeling it after Holt's machine. erect the giant dams of the Third World. acquired the 'Caterpillar' trade mark. I I Demand for Caterpillar products exploded in the early post-war years.9 l~\HRIIIL. Brazil.2000. In 1904.-\CZ 757 At the turn of the century.sank deeply into the soil. The second were technology sharing agreements between equipment manufacturers and engine makers to ensure access to the latest engine technology. The joint venture between Komatsu and Cummins Engine. In 1925. Australia. and during World War 1. 'Industry Corner: p. Intense competition over market share drove the industry's top firms to form three types of cooperative agreements. a combine maker from Stockton California. far ahead of any rival. replaced the heavy steam engine with a gasoline engine. Caterpillar's 50/50 joi nt venture with Mitsubishi in Japan. Caterpillar had established foreign manufacturing subsidiaries .

From the outset. Komatsu issued a battle cry. 1986. 1986. the total number of employees working for Cat dealers was slightly lower than the company's own workforce. Online. (~r . a Caterpillar dealership had remained in the hands of the same family . 'for Caterpillar. Yetlo»: POII·cr· The Storv q{ the Earthmoving Equipmelll Indusrrv (Urbana.: p.758 most successful. then sought to challenge Caterpillar's dominance in the markets of Latin America and Europe. Attacking Caterpillar head-Oil. pp.' pp. Strategic Ailionces. and unfa- I~Michael Yoshino and U. led by the United Auto Workers (UAW) union. predated the 1925 merger that gave birth to Caterpillar. pp. and eventually penetrated the United States to rival Caterpillar in its domestic market.. Kaislia. 304: James Risen. the company's marketing organization rested on a dense network of independent dealers who sold and serviced Cat equipment. March-April 1989. stable. 118-121. The crisis of 1982-84 stemmed from three sources. Caterpillar charged premium prices for its high quality products. in 1982. 1987.' p. October 27. Srinivaxa Rangan. The third element in Caterpillar's crisis was a steep rise in the value of the dollar (relative to the Yen and other currencies) that made US exports more expensive aborad. Komatsu Limited had emerged as Caterpillar's principal rival. paid its production workers. August 31. p. 1985). following a record year of sales and profits.for over 50 years.' Hoover's Haudbool: (:(Worid Business. 'Caterpillar's Triple Whammy. "Cited in Dexter Hutchins." Fortune. an executive vice president at Cat conceded. these dealers were self sustaining entrepreneurs who invested their own capital in their business. Strategically located throughout the world. 'Quite frankly. the combined net worth of Cat dealers equaled that of the company itself. and enduring alliances among all American-Japanese joint ventures. a global recession. Illinois: University of Illinois Press.S. 15Cited in Kathleen Deveny. pp.. Academic Universe. 94-95: 'Komatsu Ltd. 12-14: Williatll Haycraft.. offered its shareholders high rates of return 011 their equity. the steady growth in demand for construction machinery. and US imports (shipped by Caterpillar's competitors) cheaper at home. p. Second. MRangan. on the eve of the impending crisis.' 16 said Car's annual reports for 1982 and 1984. Indeed. a costly strike. 1999. 117-1 18: Yoshino and Rangan. including several located overseas. 'Caterpillar Tractor Co. 19951. I" Caterpillar's distribution and dealership network also contributed to the company's worldwide success.or company . Strategic Alliances: An Entrepreneurial Appm(Jch to Glohaiizatlon (Boston: Harvard Business School Press. Taking advantage of the expensive dollar. came to an end in 1980. pp. logging. and pipelaying equipment. 320. underpriced Caterpillar's products by as much as 30 percent. 'Maru c. 'Caterpillar: A Test of U. Caterpillar's efforts to freeze wages and reduce overall labor cost triggered a seven month strike (1982-83) among its US employees. and cultivated close relationships with Caterpillar customers. some dealerships. The outcome was a dramatic change in market share. 81-83. 14 vorable currency exchange rates. Komatsu ('little pine tree' in Japanese) had initially produced construction machinery for the Japanese and Asian markets. p. Lexis-Nexis. Caterpillar suddenly plunged into three successive years of rising losses totaling nearly 1 $billion.' meaning 'encircle Cat. 196-203. The strong dollar is a prime factor in Caterpillar's reduced sales and earnings . Trade Policy: Los Angeles Times. as highway construction in the US slowed down to a halt while declining oil prices depressed the world-wide market for mining. Between 1979 and 1984 Komatsu global market share more than doubled to 25 percent while Caterpillar's fell by aJmost a quarter to 43 percent. 2000). even arrogant. 62. On average. J7 Facing weak competition both at home and abroad. Then. 91. [and] is undermining manufacturing industries in the United States. dating back to 1945. See also Robert Eckley. our long years of success made us complacent. Komatsu achieved a 50 percent labor productivity advantage over Caterpillar.94. p. derived close to 100 percent of their revenues from selling and supporting Cat equipment." In 1981. I. 72. unionscale wages. and enjoyed superior profits. 'Making Your Dealers Your Partners. 159-167. 11James Abegglen and George Stalk. the strike accounted for a sizable portion of the company's three year Joss.'Fites. 'Caterpillavs Ordeal: Poreign Competulon in Capital Goods: Business Horizons.' Launching a massive drive to improve quality while reducing costs. 'StOIY Caterpillar. June S.' 15 Pierre Guerindon. and in turn. 93: Naumann. the Japanese Corporation (New York: Basic Books. First. the Metamorphosis Isn't Over: Business Week.

'We have experienced a fundamental change in our business . the light equipment market leaders. Between 1984 and 1987. pp. Cat self-produced two-thirds of its parts and components. Cat contracted to buy lift trucks from a Norwegian company. 'Caterpillar's Ordeal. marketing. including purchasing. It stood J 5 feet tall. was a congenial manager who encouraged Cat executives to openly admit the company's past mistakes.C\S [8 C ·\1 r.' Caterpillar sought to purchase parts and components from low-cost suppliers who maintained high quality standards. 21Romlld Henkotf. and labor relations. to the new world in which we find ourselves. i. Under the new policy of 'shopping around the world. Strategic Alliances. But as demand for highway construction projects dwindled. 73: Yoshino and Rangun.a typical user of heavy bulldozers .'? An additional goal of the policy was branding. p. contract negotiations erupted in a 205 days strike. Sales of light construction equipment. 67. Caterpillar's new CEO (1985). the DC to bulldozer had served as Caterpillar's signature item. August 31.' p. Caterpillar managed to retain in-house design capability. Ordinarily. 1987. . Caterpillar functioned as a vertically integrated company that relied heavily on in-house production. In 1979. following the expiration of its collective bargaining agreement. 83. turing but not product design. and assembled practically all of its finished machines. Caterpillar out-sourced product manufac- Labo r re latio ns To compete successfully. 'Caterpillar's Ordeal: pp. and three years later. Caterpillar also needed to repair its relationship with the union. the shift in Car's product mix had a clear impact on the company's bottom line. George Schaefer. weighed 73 tons. 84. Unlike the heavy equipment market where profit margins were wide. 97: Eckley. ""Eckley.t 'f Under Schaefer's direction. BII. that is. accordingly. on the other hand.I'. and sold for more than $500. off-highway trucks from a British finn.R i' I L [ '\ R 759 Competition with Komatsu and the crisis of 1982-84 forced Caterpillar to reexamine its past activities.II"S. and resell them all under the Cat nameplate. 97. hydraulic excavators from a West German manufacturer. and keeping production costs down. and ensure quality control''' Broader product line For nearly a decade. Caterpillar moved towards the goal of outsourcing 80 percent of its parts and components.it will never again be what it was. multinational engineering and construction firms like the Bechtel corporation . p. Caterpillar devised and implemented a series of strategies that touched upon every important function of the company. Caterpillar doubled its product line from 150 to 300 models of equipment. were fast increasing. ancllogging equipment from a Canadian company. the purchase of final products for resale. 73. Working closely with its suppliers. Still. Through its branding program. and diversi-' fietl its customer base. Beginning in the mid 19805. SUYllegic AlliwIC"S. George Schaefer led the next two rounds of contract negotiations. and respond vigorously. Rather than focusing solely on large clients. 'This Cal is Acting like a Tiger: Fortune. 76.e. personnel. p. p. intense competition in the market for light products kept margins slim and pitted Caterpillar against John Deere and the Case corporation. in 1982. 72. taking advantage of its superior marketing organization. introducing many small machines that ranged from farm tractors to backhoe loaders (multi-purpose light bulldozers). To ensure product quality as well as an uninterrupted supply of parts. 1988. By keeping control over the design of many of its out-sourced products. 21 Global outsourcing Traditionally. Caterpillar sold outsourced machines under its own brand name. 'We have no choice but to respond.' Schaefer said as he became CEO.Cat began marketing its light-weight machines to a new category of customers: small-scale owner operators and emerging contractors. 'Caterpillar's Ordeal: p. It had no competitors. paving machines from an Oklahoma corporation. Caterpillar experienced an 80 days strike. manufacturing. 81. I'IYoshino and Rangan." Named CEO in 1985. p. Strategic Alliances. ~HEckley.000 (1988). 96.\· Week. the longest company-wide work stoppage in the UAW history. August 3 L 1987. 84. BlIsil1e~'s Week. December 19. I~Quoted in Yoshino and Rangun. Caterpillar needed to reevaluate its product mix because heavy equipment was no longer seiling well.

managers. a trade journal. the program was voluntary. We zeroed in on quality.8 billion plant modernization program launched by Schaefer in 1986. the NUMMI plant (a GM-Toyota joint-venture in Fremont California). and promoted open communication at all levels of the company. 'Caterpillar's Ordeal: p.. December 19. quality improvements. the local ESP chairman recalled: the ESP program 'changed everything: the worker had some say over his job .. and cost savings totaling $10 million. The certified vendors received preferential treatment. the program resulted (] 990) in productivity gains. Under Schaefer's direction. the union agreed to reduce the number of labor grades and job classifications. 76. met weekly with management. p. and other controls. Asked to evaluate Schaefer's performance. the UAW lent its support to Caterpillar's employee involvement program. 1986. September 25. and quality enhancement. and a reengineering effort of plant modernization and automation. '1Brian Bremner. Kaisb«. 84. Now everyone will listen: Caterpillar applied the ESP program to outside suppliers as well. December 19. j 18. 75. Schaefer possessed exceptional people skills. anything to make the customer happy: Management credited the ESP teams at Aurora with a steep fall in the rate of absenteeism. Schaefer advocated the free flow of ideas between officers. 1988. Typically. . . and a flexible manufacturing system. US plants." More important. At the Cat plant in Aurora Illinois. a move that enhanced management flexibility in job assignment. December 19. p. and launched by Schaefer in 1986. an employee involvement plan based on team work. a sharp decline in the number of union grievances filed. 76: Alex Korlowitz. the modernization program combined just-in-time inventory techniques. namely. said: 'Schaefer is probably the best manager the construction machinery industry has ever had.. 1989. a network of computerized machine tools. ESP teams made up of Caterpillar machinists visited suppliers' plants to check and certify equipment quality. ~'Abegglen and Stalk. 76.8 percent for non-certified suppliers. 1988. and production workers. The industry's technological leader. a Cat assemblyline worker told a Fortune reporter in 1988: 'Five years ago the foreman wouldn't even listen to you. 1995. Called the Employee Satisfaction Process (ESP). p. p. Online. a factory automation scheme. '''Fortune. John Stark. never mind the general foreman or plant supervisor . including production management.. '"Eckley. .6 percent of the parts delivered by certified suppliers were rejected by Caterpillar compared to a reject rate of2. A low-key CEO who often answered his own phone. Online. ESP members were organized in work teams.n Dubbed 'Plant with a Future' (PWAF). Only 0. Academic Universe. and offered suggestions that pertained to many critical aspects of the manufacturing process. improved labor relations contributed to the success of two programs that played a critical role in Caterpillar's turnaround strategy. workplace layout. 1988. March S." At another ESP plant. 'The Inside Strategy: Less Work and More Play at Cat: Los Angeles Times. May 16. each cycle of bargaining was settled peacefully. and increased employee satisfaction.sBuTrY Bearak. . and the 'quick changeover tooling: technique. on the contrary. 'Can Calerpillnr Inch Its Way Back to Heftier Profits?' Business Week. Several of these innovations were pioneered by Komatsu late in the 1970s. 'Caterpillar Faces Shutdown with \JAW: Wall Street jO"J"IIai. Fortune. ABI data base. Lexis-Nexis. furthermore. for example.'n Schaefer's social skills led to a significant improvement in Cat's relations with the UAW. editor of Off Highway Ledger. 26 Plant with a future Caterpillar'S employee involvement plan went hand in hand with a $1. counting. Komatsu had been the first construction equipment manufacturer to introduce both the just-in-time inventory system. and to streamline seniority provisions. Not a single strike broke out over contract negotiations during Schaefer's tenure. . p. mostly in the form of reduced inspection. and elsewhere. By contrast to the autocratic style of his predecessors. 760 ~ it r i (l "" I' Schaefer's leadership style was consensual. Implemented in a growing number of "Quoted in Fortune. a flexible tooling method designed to produce a large variety of equipment models in a single plallL~s Employee involvement An industry-wide union famous for its cooperative labor-management efforts at the Saturn corporation. [and tjop management was very receptive. and facilitated the cross utilization of employees.

pp. Under batch production. workers used computerized machine tools to perform several manufacturing steps in sequence. September 25. 'Caterpillar Slashes Lead Times lrom Weeks to Days: Modem Materiais Handling. hydraulic tanks.) in small lots. on a global basis both at home and abroad. and workers grew lax and made mistakes. At the Aurora plant in Illinois. subassembly lines produced components (radiators. 75.1989. ~(}K. factory workers managed to reduce the assembly process time four-fold. 'Cat Climbs High with FMS: MWlllf. finally. traveling on a long aluminum track throughout the modernized plant. drill. processing components from start to finish and sending them 'just-in-time' to an assembly area.lI-e1l Augustan. assembly tasks were highly specialized. .and in the order required. Formerly. 74: Business H'eek. it should be noted. February 1990. the modernization efforts of several manufacturing companies. improved product quality. all three operations were carried out automatically in single tractor-tread cells linked together by computers. workers slashed the time it ~"FOrt1II'''. in addition. on the other hand. 75. More important. components moved automatically between work areas and remained stationary during the actual assembly operation. p. under the PWAF plan. November 1989. France. furthermore. Implementing such a cornprehensive program took longer than expected. ~9 The traditional manufacturing process at Caterpillar known as 'batch' production. to mention another case. '·Augllston. by contrast. granting them the flexibility necessary to resolve quality and safety problems. Donald Fites. When parts arrived at the delivery point. To manufacture steel tractor-tread under the batch production layout. and 2} to implement the program company-wide. not just selected departments within a plant. and arrived at two important conclusions: it was necessary 1) to change the layout of an entire plant. Cat workers were required to cut. lasting seven years." Caterpillar. 51. p. Correcting assembly mistakes.lcfllril1g Svstems. 49. Managers alone controlled the speed of the line. not intermittently. Parts delivery 'was also problematic. Augnst 31. etc. instead. managers empowered production workers to change the speed of the assembly line at will.CASE 8 CA. was common among US assembly plants in a number of industries. Under batch production. This was not enough. n.1987. December 19. September 25. and therefore workers were unable to respond quickly to quality problems. semi-automatic gates (operated by infrared remote control) opened. components moved down the assembly line continuously. 'Caterpillar Slashes Lend Times: pp. however. and the entire production system required large inventories of parts and components owing to the high level of 'work in progress' (models being built at anyone time). delays in delivery of parts to the assembly areas forced workers to leave the line in order to locate a missing part." To solve these problems. that is. a flash light alerted the assembly line workers. reduced material handling by means of an automated electrified monorail which delivered parts to storage and assembly areas. 49. Occasionally. and heat-treat steel beams on three distinct assembly lines. Caterpillar reconfigured the layout of its manufacturing plants into flexible work 'cells. Under cellular manufacturing. 'Caterpillar Slashes Lead Times: pp. Occasionally.' Grouped in cells. as the following example suggests. building and shipping a custamer order in four rather than 16 days. jJ The PWAF program resulted in productivity and quality gains across the board in many of Caterpillar's plants. "Angus[on. the early arrival of parts before they were needed created its own inefficiencies. took more time than the assembly process itself because workers needed to disassemble components in order to access problem areas. we hold about a 4 hour supply of large parts' and components on the line.3~ At the Cat plant in Grenoble. 73. Don Western. top executives at Caterpillar did not seek merely to imitate the Japanese. 49. work was monotonous and dull. 50-5\. 1989. 16-22: Bnsiness Week. a manufacturing manager at Cat Aurora plant. Final assembly lines put together complete models. p. pp. "Barbara Dutton. Under the new assembly plan. They studied. for instance. observed: 'Materials now [1990] arrive at the assembly point only when required . and a lift lowered the components directly onto an assembly. '"Quoted in Auguston. At most.HRI'I Ll. 'Caterpillar Slashes Lead Times: p.AR 761 To challenge Komatsu.'~2 Caterpillar. p. and three more uncler the direction of his successor. 1988. four under Schaefer's direction. and cutting product defects by one-half in four years (1986-1990).

1989. and another (fanner Cat CEO Lee Morgan) described Fites as 'one of the most determined men I've ever met. 74. and also as a result of an increase in the value of the dollar (a weak dollar in the late 1980s helped Caterpillar's foreign sales). 56.36 revenues increased by 66 percent (1985-1989). p. For one thing.6 4. August 10. Source: for Caterpillar. lean. Chairman and CEO Donald V. p. Replacing Schaefer in the winter of 1990.was growing (Table 2).9 1. Komatsu was retrenching. December in Tracy Benson.':" Fites was a hard line executive. p. 1992. respected by his peers. in Kevin Kelly.8 % of sales 2.' p. 1992. 329. J5BIIsincss Week. March 28. asserted the company's 'right to manage' in face of mounting union opposition. 75.t '? Income Income as % of sales 1. 1995-96.'38 'It's hard to change an organization when you're making record profits. Caterpillar's profit margins exceeded Komatsu's..1 1. 32. For Komatsu. Reingold. and technologically advanced. [a] recession . 789 billion Yen). 'CEO of the Year. p.' Finonci«! World. p.7 7. 'Caterpillar Wakes Up. 'Caterpillar's Don Fites: Why He Didn't Blink: Business Week... 1986.4 2.' Inter-Business Issues.) 1985 1986 1987 1988 1989 versus Komatsu KOMATSU as Sales ($Bi/) 'k Notwithstanding Schaefer's achievements."40 one Cat executive said. and the company was profitable once again.3 8.9 Leadership Fires' leadership style stood in a stark contrast to Schaefer's.in terms of both market share and income on sales . 796 billion Yen. Fites led by explicit command rather than persuasion. Caterpillar's 30 worldwide plants cut inventory levels by 50 percent and manufacturing space by 2 [ percent in three years-" Looking back at Schaefer's five year-long tenure.3 0. September "Yoshino :nJennjfer .0 10. in Reingold. Caterpillar was facing an industry-wide downturn in both its domestic and international markets.1991. 1995. 36. Caterpillar revenues and profits fell. and the gap between the two companies . p. TABLE 2 Caterpillar CAT Sales ($BiI. . An imposing man standing six feet five. but [the recession] made it easier to accept the fact that we needed to change. and Rungan. SIJ'(l/t!gic Allionces. 98. 1995. the company actually lost money.2 * 5. Caterpillar's world market share rebounded from 43 percent to 50 percent 0984-1990).took to assemble machinery parts from 20 to 8 days in three years (1986-1989). a consensus builder' while '[Don] expects people to challenge him forcefully. Hoover's Handbook of American Business. . in 'An Interview with Caterpillar Inc. the transformation of Caterpillar was far from over. In 1989.8 2. During the two years following Schaefer's retirement. Caterpillar's sales totaled over $11 billion or nearly twice the sales reported by Komatsu." lndustr» Week. flexible. 6.9 5. May 20. Partly as a result of the cyclical nature of the construction equipment industry. Hoover's Handbook of World Business.4 11. Cat shares underperformed the S&P 500 index by over 50 percent for five years (1987-1992).0 3.. Caterpillar had reemerged as a globally competitive company. and cheered by Wall Street. 291. 'George was .l~Quoted 39Quoted ")Quoted "'Quoted 25.5 *Sales are available only in Yen (1985. p.. feared by his subordinates.2 6. 'CEO of the Year. the company stock lagged far behind its earnings.37 For another. and did not hesitate to cut thousands of management and production jobs at a stroke. Company wide changes were equally impressive: collectively. As Caterpillar prospered.1 6. p. Donald Fites viewed Caterpillar's financial troubles as an opportunity to introduce change: 'I certainly didn't count on . Files. 68 .

Switzerland. August 10. 32. "'LQuoted in Benson. decisions were made at the top of each functional unit. were company-based organizations.v" To equip Caterpillar with the flexibility. and in Fires' words. Under the new structure.' p. p. each functional unit tended to focus on its own goal rather than the enterprise's objectives (marketing was preoccupied with market share. 57. cooperative. all located within the United States. utilizing an integrated approach based on Japanese-style functional teams.~k.\·.: Caterpillar Wakes Up. and agility necessary to operate in the global economy. Of the 7. by contrast. 56-57. Promoted to President in 1989. Reorganization A marketing manager. developing a company-wide reorganization plan under Schaefer's direction. Japan. . the limitations of such a structure had become apparent. speed.500 employees who lost their jobs between January 1990 and August 1992. He stood by his words.000 jobs in three years. Fites transferred it into an 80 percent-20 percent joint venture controlled by Mitsubishi.). for top management to coordinate functional goals.['rLL'\R 763 The son of a subsistence corn fanner. Brazil.CASE 8 (~\TFI"l. loyal. and four for services.\2.engineering. and other countries. by the ways in which the Japanese trained their managers. A centralized body with only four primary functions . August 10.'Blisine. rotating executives through functional departments in order to educate them in all aspects of the business. Fites broke the company into 17 semiautonomous divisions or 'profit centers. Fires' Japanese experience resonated throughout the remainder of his career." And third. serving nearly five years as the marketing director of Caterpillar-Mitsubishi joint venture.1"Businl'ss Week. He was impressed.the old structure served Caterpillar well until World War II. Historically. Fites was convinced that Caterpillar did not pay sufficient attention to custamer needs because global pricing decisions were made at the company's headquarters in Peoria with little knowledge of the local market conditions around the world. 199:!. Trade unions in Japan.. Under the old structure. Germany. Fires applied the same principle to Caterpillar's entire structure. 'Caterpillar Wakes Up: p. Returning from Japan to Peoria in the mid 19705. etc. In 1971.':" Leading Caterpillar in the 1990s. manufacturing with assembly problems. rising through the ranks. ·. 2. as he took charge of Cat's worldwide marketing organization. pp. Fires had joined Caterpillar in 1956. writing a thesis entitled 'Japan Inc. . the bureaucratization of the decision making process impaired effective communication. 'deeply dedicated to the success of the [firm]. American unions had been organized on an industry-wide basis and therefore labor relations in the United States were often adversarial. Fites revamped Cat's product development process. he worked for Cat in South Africa. Caterpillar cut 10. engines.f Caterpillar's old organizational structure was archaic. and spending 16 years overseas. etc. marketing. Fires sought to bring Caterpillar's labor relations closer to the Japanese model.). . p.: Can US Industry Compete')' and soon thereafter. "6Benson . thereby pushing responsibility down the chain of command to the lowest possible level. 1992.\·W~i'k. Fites recalled. and finance . He also admired Japanese labor relations. August l O.000 were salaried "~QUO{ed in Business W.' Inter-Business issues. and threatened to penalize any division that fell behind. the flow of information upwards was 'so filtered with various prejudices . 56. A career marketer. and executives were reluctant to delegate authority to mid-level or lowlevel managers. first of all. 1990-1993 (Table 3). making it difficult. but as the company expanded globally in subsequent decades. First. Fites had earned an MBA from MIT. In 1985.particularly functional prejudice]s] that you didn't know whether you were really looking at the facts or looking at sorneone's opinion. engineering with product safety. 33.' 13 responsible for products (tractors."? Caterpillar's new divisional structure facilitated downsizing. he received an assignment in Japan. When Caterpillar'S forklift division failed to improve its return on assets in 1992. 1992.. lS'An Interview with Fites." He then required each division to post a 15 percent rate of return on assets. Fites delegated district offices the authority to set prices. manufacturing. p. Second. It was a functional structure suitable for a small company that operated just a few plants.

and allowed each party to terminate the contract at will. Caterpillar actively encouraged its dealers to keep the business in their families. -"Fites. several times a week. On average. activities under the new plan were more customer driven than at any other period in the past. senior corporate executives. 4~J. coupled with the drive for profit making.000 64. 34. Caterpillar decentralized its research and development activities. 207 independent dealers served Caterpillar. siDonlon. Caterpillar based all its incentive compensation schemes on return on assets. /999 Annual Report.' p.i managers and 5. p." In addition.000 60.000) by nearly one third. Caterpillar Inc 1999 Annual Report. Online. To Caterpillar. Nexis Academic Universe. Dealership agreements ran only a few pages.000 54. 52 The new structure also facilitated a more frequent interaction between Caterpillar's managers and dealers. Under the new structure.9 21.' p.2 11. 'Managing Technology at Caterpillar." As Caterpillar's sales grew from $10 billion to $15 billion in the first half of the 19905.0 1990 1991 1992 1993 1994 1995 1996 1997 1998 60. several of the large dealerships.000 54. 'Caterpillar Wakes Up."> -J Donald Fites' Caterpillar: employment and sales Number of employees Sales ($Bil. Lexis- . August 10. R&D. 329. dealers seeking assistance could contact any of the 17 product and service profit-centers directly.5 18. 50 Caterpillar's network of dealerships was extensive.' Research Technology Management.000 57. p. 1992. 56. P. The number of employees working for Cat dealers exceeded the company's own workforce (67. Tn 1999. Cat managers were paid in proportion to the size of the budget they controlled or the number of employees they supervised. Traditionally. With each division controlling its own product development programs and funding. 49-51.5 billionj'" by nearly one quarter (Table 4). Under the new plan. they no longer needed to call the General Office in their search for assistance within the company. low level managers at Caterpillar communicated daily with their counterparts at Cat dealerships. January 4~Andrew Zadoks. p. 1. the move from a functional into a divisional structure. however. saving time and money. 'Heavy Metal. generated annual revenues of up to $1 billion. for 1998. a development of which resulted in '[vjirtually everyone from the youngest design engineer to the CEO' having 'con1. following 90-days notice.000 52. the combined net worth of Cat dealers surpassed Caterpillar'S stockholders' equity ($5. 5>iCalelpiliar Inc. 1997.()Business Week. Many of Caterpillar's dealerships were privately owned.000 Source. brought about a change in the methods of managerial compensation. pp. 'Make Your Dealers Your Partners.' Chief Executive. 5'Benson.000 56.6 14. the number of managers employed by the company fell by 20 percent. p. September 1995. 36. holding regular conferences in Peoria for the sons and TABLE .1 16. p." Lastly.3 16. 50. Donlon.0 ~ ~ tact with somebody in [a] dealer organization [wrote Fites]. running seminars on tax issues and succession plans for dealers.) 114 10. 'Heavy Metal: p. 63 of whom were stationed in the US and 144 abroad. a few were public companies.764 . the annual sales of a Caterpillar dealership amounted to $150 million (1996). . For 1990-1997. 1999.500 hourly workers. turnover among Cat dealerships was extremely low. 93. the information relationships between the company and its dealers were far more important than the formal contractual relations.000 50.' Ordinarily." Marketing and dealerships Caterpillar's reorganization plan affected the company's distribution network as well. 50. had no expiration date.2 10. Notwithstanding the open ended nature of the contract. Hoover's Handbook of American Business.

'Make Your Dealers Your Partners: pp. Caterpillar sometimes offered discounted prices. 93 5"Quoled in Donlon. 'distribution' . 50. During the I990s. ITIRl'. Cat received a response rate of nearly 40 percent. Outside U.709 Dealers Branch Stores 63 382 Employees Service Bays Estimated Net Worth (billion US $) 34.. linking personnel at Cat plants and dealerships. 55 While Caterpillar had always protected its dealers against failure. was the company's single greatest advantage over its competitors. product application. [Tlhe» knoH' more about distribution than anyone else .i rv. Marketing people and salespeople historically have been looked down upon in japanese societv/" 55Fites. Caterpillar worked together with its dealers to conduct surveys among customers in order to improve customer service and parts delivery.504 88.77 Source: Caterpillar Inc 1999 Annual Report...122 54.370 5.. but see also pp. emphasizing the lower lifetime cost of a Cat machine relative to a competitor's." Caterpillar'S worldwide distribution system. Fites explained: Dealers can call me or any senior corporate office at any time. Periodically. 86. 'Make Your Dealers Your Partners: p. 90.that is. '!'!eavy Metal: p. I consider the majority of dealers personal [riends. and occasionally launched a promotion campaign in the dealer's service territory. HQuoted in files. To help a dealer.000 survey forms annually. Pires' Caterpillar helped vulnerable Cat dealers survive the downturn. daughters of 'dealer Principals' (dealership owners). Caterpillar's competitors.. Caterpillar did so more aggressively than before. Of course. after-sales support.. 89. 144 1. Caterpillar also protected dealers during recessions. Caterpillar invited its entire body of independent dealers to a week long conference in Peoria to review corporate strategy. 91-93. S6 Fires' Caterpillar cooperated with dealers in other ways. distribution traditionally has not been a strength of Japanese companies. manufacturing plants. Through its 'Partners in Quality' program. Quite jrankl». and service information .22 3. 765 TA BLE 4 Caterpillar dealerships.'will be what separates the winners from the losers in the global economy. A firm believer in strong personal business ties.' pp. It was a strategic asset whose importance was expected to grow in the future: '[ ujntil about 2010: Fites predicted.. Sending out 90. >"Fites. assisting individual dealers who were subjected to intense price competition by rival manufacturers.529 Worldwide 207 1. and order equipment in advance of the' 1993 upturn. 'Make Your Dealers YOLl!. and sponsoring quarterly meetings. stay in the business. 'Make Your Dealers Your Partners. US companies may have the edge this time around . in contrast. And I'll know what is happening in his [amily. Caterpillar involved dealers in quality control discussions. 43. Virtual!_v any deafer ill the world is free to walk in my door: I'll know how much money he made last year and his market position. 94.338 6. one reason J know the dealers so well is that J rose through our distribution organization. and they do. 91-9~. saw several of their dealers go out of business during the recession. p. according to Fites.CASE 8 t . . under Fires' direction. 1999 Inside US.. Fites elaborated: Although many Japanese companies had the early advatuage in manufacturing excellence.167 6.54 12. Despite the company's losses during the industry slLImp of 1991-92.S.638 3.I" Contrasting American and Japanese manufacturing firms. and marketing policies. 94. '·Quoted ill Pires. and taking concrete steps to encourage a proper succession from one generation to another. sometimes helped reduce the dealer's costs.Partners: p.

88. 'A New Cat on the HOI Seat: Business Week. By 1996. increase annually Engines. thereby reducing machine downtime. moved dirt. 'Making Global Connections in Culerpillnr. March 9. Caterpillar and its dealers with the opportunity to slash their inventory costs. '::' Information Fites' Caterpillar technology invested generously in expanding and upgrading Caterpillar's worldwide computer network . and shipbuilding of the diesel engines in !999 were equipmenr. keeping over 300. Although Caterpillar had long guaranteed a 48-hours delivery of parts anywhere in the world. and compact construction machines. ottMyroll Magnet.1998: Wall Street Journal. Caterpillar. 1994. 'Make Your Dealers Your Partners: pp.I". 1999. ~'BlIsjJless Week. dealers. Perkins' best selling engine powered the skid steer loader. . 'The Productivity Payoff Arrives. Caterpillar duced engines for internal engine sales was tbe bad traditionally prothem use only. worldwide demand for generators was fast increasing. as the company was recovering from its most severe crisis. 2000: David Barboza. by 1996. Between 1991 and 1999. 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. March 13. identify parts which needed to be replaced. but see also p. In 1999." struction machinery.I" Diversification Fires' Caterpillar expanded its sales into farm equipment. Cat embarked on a strategy of prodUCing engines for sale to other companies.a system linking together factories. and saving repair costs. 20()O.' Fortune. for $1. the value of the combined inventories held by Caterpillar and its dealers al11oun~ed to $2 billion worth of the company compete in the engine market. and large customers. up from 21 percent about one-third Apart duced in 1990. Cat dealers supplied 80 percent of the parts a customer needed at once. A compact wheel tractor operated by one person and capable of maneuvering in light spaces. Caterpillar proengines for a variety of other customers petroleum firms. p. provide. installing on Cat machines. Fites bought Britain's of engines for compact parts.f'' A critical element in Caterpillar's the remainder drive for tech- many of which contributed to diversify. June 27. 50. In 1995. 'Aiming for Greener Pastures: Nell' York 7/m£'. one at a time.not stocked by the dealers was shipped by the company on the same day the parts were ordered. and manufacturing on demand. and Cat engines powered of the big trucks in the United States. With 22 distribution centers spread all around the world. . to help dealers repair machines before they broke down.766 ~fCT!C. but beginning in the mid 1980s. Caterpillar serviced a total of 500. developing under Fites. the network connected 1.2000. August 4. the remaining 20 percent . the new IT system was expected first. providing Caterpillar with the most comprehensive and fastest part delivery system in the industry.64 a manufacturer by 20 percent Perkins con- Similarly. 'Heavy Metal: p. in 1998. 82-83: Benson. . 61: Wall Street Journu}. In 1996.' Harvard Busilless Review. forest products. 89. 1998. the skid dug ditches.3 billion. MDe'Anll Weimer. The new system was designed to monitor machines remotely. on 'the other. distribution centers. on the one hand.000 locations in 160 countries across 23 time zones'. and replace them before they failed. and Donlon. introducing new lines of products. Caterpillar entered a total of 38 mergers and joint venture agreements.' p. and partly because the utility industry in the United States deregulated and new electrical suppliers entered the market. The rise in demand helped Caterpillar its sales of power generators between 1995 and 1999. ("'Cnterpillar's Growth Strategies: Copyright 1999. engine sales accounted for 35 percent of Car's revenues. Online. Only 10 percent manufactured by Caterpillar on the company's own helped including nies. 36: Fites. 'Caterpillar Wakes Lp. March 13. Mmch-April 1996.Com. broke lip asphalt. and performed a wide variety of other tasks. electric utility compaconcerns." to the company's elforts The growth in Caterpillar's company's largest. Donald Fites purchased the MaK Company -a German maker of engines governments for power of developing generation. from trucking companies. March 13.i" U '. countries Partly because were reluctant to build large power plants. ("111'(1/1 Street Journal.v' Two important installed acquisitions by Caterpillar nological leadership was an electronic alert information system the company was. pp. p. 88-89. Once fully operational in the early 2000's. 61Quoted in Steven Prokcsch. and second.000 different parts.000 in stock. March 9.

For nearly seven years. 30 percent of the strikers crossed the picket line. pure and simple. labor dispute in the 1990s.I"' pp. global companies like Komatsu. 1uMiehaei Verespej. John Deere. Online. 'CEO oftbe Year. effectively put an end to Car's ESP program which George Schaefer had launched in 1986 and strove so painstakingly to persevere. in order. the number of grievances at the final stage before arbitration rose from less than 20 prior to the strike to over 300 in the year following the end of the strike. selling over SO percent of its American-made equipment in foreign markets. giving Cat dealers special incentives to buy and stock parts and equipment in case a strike shut down the company's US plants. Start p. in the meantime. Lexix-Nexis. 72. 'Caterpillar Chairman Fites to Retire: Wi:ill Street JOUJ"lw/. On the one side."? Yet economics did matter. Online.].P" In part.f The first Caterpillar strike erupted in !991. slowdowns ('Work to Rule'). The strike. 6"Michael Cimini. August 26. in the history of the union. a collective bargaining contract modeled on agreements signed by the UAW and Caterpillar's domestic competitors. ABI data base.' Inter Business (S.S. ABl data base. Academic Universe: Cimini 'Caterpillar's Prolonged Dispute Ends. 'Bulldozing Labor Peace at Caterpillar: !JUllI. Because Cat's global competitors paid lower wages overseas than the wages paid by Cat's American-based competitors at home. the Case Corporation. and Fites was determined to ensure Caterpillar's global competitiveness by cutting the company's labor cost. When Cat employees began wearing their own ESP buttons to read 'Employee Stop Participating. They organized shopfloor disruptions ('informational picketing'). Caterpillar's contract offer included three principal demands: no pattern on wages. ABI data base. __. p.' 011 the other. 'C8t May be Trying to Bulldoze tile lmrnovuble. exported a far smaller proportion of their domestically made goods. wildcat strikes in selected plants. February 15. T!.~·\r[PI'ii . At the Aurora plant at Illinois.' Caterpillar terminated the program altogether.. Online. pp. Labor: Hardhars Anyone?' Business Week. flexible work schedules.t" One casualty of the 1991~1991 strike was Caterpillar's Employee Satisfaction Process. December 2. by contract.000 unionized employees were working under a contract. and as the strike prolonged. Caterpillar could not afford paying the UAW pattern of wages. 6l. 116. "'Caterpillar: Union Bull: Economist.' and Cat's unionized employees continued working without a contract under the terms of the rejected offer. "s'An Interview with Pites. Lexis-Nexis. and picket lines at Car's dealerships. 1991. Fites rejected pattern bargaining because Caterpillar was heavily dependent on the export of domestically manufactured products.' p. 'Caterpillar's Prolonged Dispute Ends. About SO percent of the strikers were within six years of retirement. .I'' During 1992~1994. Academic Universe. The contract was set to expire on September 30. 1992. and thus competing head-to-head with foreign-based.e\l~ 767 Labor relations Perhaps no other areas of management had received more attention than Caterpillar's labor relations under Fites.: Carl Quintunilla. Start p. 1993.' Compensation and Working Conditions. and a two-tier wage system. are from Reingold. 1991~1998.' pp. 34--'15: 'What's Good for Caterpillar: Forbes. Online. Fites argued. Start p. 1991. 48. trained managers and office workers to operate factory machinery and reassigned many of them to the shopfloor of plants undergoing short-term ""The quotations. Car's US-based competitors. He had built up enough inventory to supply customers for six months. the strikers went back to work 'unconditionally. 'CEO of the Year: p. a Wall Street analyst called Fites 'the guy who broke the union. Fires threatened to replace the strikers permanently if they did not return to work within a week. His principal target was a UAW 'pattern' agreement. As the climate of labor relations at Caterpillar deteriorated. December 7.. the union called off the strike. The union rejected the offer outright and staged a strike. Fall 1998.CASE 8 . Fires' opposition to the UAW was ideological: it 'is not so much a battle about economics as it is a battle about who's going to fun the COITIpany. "'Quoted in Reingold. 19." Fires. 5-6: Kevin Kelly. and others (a pattern agreement tied separate labor contracts together so that changes in one led to similar changes in others within the same industry J. January 9. Shortly thereafter. and Fires was prepared.I·O)' Week. Caterpillar's unionized employees continued to resist Fires' hard-line stand against the UAW.I'W!. the number of unresolved grievances increased. 7···9. at a time when Caterpillar's 17. 'Cat VS. a union official described the UAW relationship with Fites as 'the single most contentious . Fires fought the UAW in what had become the longest U. October IS. 1998.' Business Week. 1993. Five months into the strike.

Another provision favorable to the UAW was a moratorium on most plant closings.665 5.work-stoppages. 'Caterpillar Contract with UAW MJ)' be Tough to Sell 10 Workers. 3. March 24.J 1991 10. 4.000 reassigned white collar employees. February 17. Academic Universe.1 8.361 1.136 1. and skilled workers borrowed from its dealerships.7 7. The contract's key economic provisions included an immediate wage increase of 2-4 percent and future increases of 3 percent in 1999. and reduce the number of union jobs below a certain level. filed numerous charges with the National Labor Relations Board (NLRB). and 2003: cost of living allowances." Operating effectively all through the strike. 13Cimini. ible work schedule. the contract was expected to secure Caterpillar with a relatively long period of industrial peace. in response. In 1995. March 29.329. Caterpillar racked up record profits for the fourth year in a row.63 48.700 full-time and part-time new hires. II.'76 nCimini. 9: Robert Rose. and managed to keep up production. The 1994-95 strike broke out in June 1994. Caterpillar supplemented its workforce with 5. and drive up the company stock price. at long last. The terms of the 1998 agreement clearly favored Caterpillar. shifted work to non-union plants in the South. lasted 17 months. alleging that the company committed unfair labor practices. allowing management to keep employees on the job longer than eight hours a day and during weekends (without paying overtime). .6 6. as AFLCIO Secretary Treasurer Rich Trumka observed: 'The message to corporate America is this: Here's one of the biggest companies. 8-·9. In February 1998. 'Gulf Remains Wide in Caterpillar's Home: 51.?" Meanwhile.97 13.182 10. 'CEO of the Year.072 16. furthermore.' p. expand sales. 1998: Dill Johnson. First and most important. 'Auto Union Backs Tentative Accord with Cutcrpillar.38 37. Japan. 'Caterpillar's Prolonged Dispute Ends: p.328 16. 'Caterpillar's Prolonged Dispute Ends. Caterpillar issued strict rules of workplace conduct. increase profits. 1998. the contract allowed Caterpillar to introduce a two-tier wage system and pay new employees 70 percent of the starting union scale. The contract also granted management the right to hire temporary employees at certain plants without the union's approval. ABI data base: Reingold.925 (404) (2. Additionally. 'Caterpillar Touts Its Gains us UAW Battle Ends. was bitterly fought by the striking unionists.' Journal. Caterpillar supplied the US market with equipment imported from its plants in Europe.615 14. in 1997. he was fully prepared TAGLE C. and came to an abrupt end when the UA W ordered its members to return to work 'immediately and unconditionally' in order to save their jobs." Several provisions of the contract were favorable to the union.2 8.435) 652 955 1. February 14. 'Catcrplllars Prolonged Dispute Ends: pp. for a long stike. The UA W. 199~ Online. 14lbid. the shopfloor struggle between Cat management and the union resumed.) Net Income Income as % of Sales Stock Price Close ($) ($Mil. Caterpillar and the union reached an agreement. Second. Running for six years rather than the typical three years. the NLRB issued formal complaints. A third clause of the contract provided for a more flex- Caterpillar's financial results during the labor disputes of the 1990s Sales ($Mil.194 11. The company. Louis Post DI!SI'UfCh.000 union members who crossed the picket line.56 29. launched a work-to-rule campaign in Cat's unionized plants.41 22. 2001. 1998.' New York Times. and they couldn't walk away from the union.:111 SII'I'I'I n. Union activists. limiting employees' behavior as well as speech.25 27.' p. During the two years following the end of the strike. the contract allowed Caterpillar to break away from the long-standing practice of pattern bargaining. in addition. 1992 7993 1994 1995 1996 7997 Source: Hoover's Handbook p.50 Business. See also Cimini. Accepting many of these charges.522 18. Lexis-Nexis. Caterpillar avoided massive customer defection. Online. But perhaps the most significant union gain was simply achieving a contract.' Wall Street JOf/}'JI({/.72 During the strike.8 for American 10. 15Cnrl Quintanilla. and Brazil. the company earned record profits for the second year in a row (Table 5). w. and substantial gains in pension benefits (the average tenure of the j 994-95 strikers was 24 years). Once again. 76Quoted in Philip Dine. 1999.

One of Caterpillar's principal demands in the 1998 settlement . diversification. 148. by an increase in sales of non-truck engines. Cat's engine business itself was further diversified. was in a slump. with truck -engine sales making up just over one-third of all Car's engine sales in 1999 (Table 6). the worst results since 1993. In 1999. February 21. Glen Schaefer and Donald Fites. 79 Barton believed that the downturn in the US construction market could be offset by an upturn in the international market. according to Barton. and Caterpillar's sales to'. ~I Wd! Sire". therefore. ~'l'Gl"Ow\hStrategies: Caterpillar. In 1999." market. a 39~ year Cat veteran.f Barton faced other difficulties.il 769 Why. In January 2000. The move was intended to safeguard the interests of stockholders and prevent the company's inside directors from opposing swift actions proposed by the board's outside members. as the industry was sliding into a recession. Latin America. suddenly seek to reach an agreement with the UAW? Fires' decision was influenced by two developments.'ll. Caterpillar'S total engine sales were expected to double to nearly $14 billion. Another reason why Fites sought accommodation with the union was the need to settle some 400 unfair labor practice charges filed by the NLRB against the company during the dispute.2000. Caterpillar Strike: Not Over Till It's Over. then.to which the UAW agreed . and waterways. 2. and the build up of alliances with global competitors. By 20 10. and transportation. and its North American Diversification Just as globalization protected Caterpillar from the cyclical movements of boom and bust. developing nations accounted for only 23 percent of the total company's sales. p. and operated efficiently during strikes. During his first year in office. and the Commonwealth of Independent States (the former Soviet Union) was a top strategic priority. which accounted for half of Cat's sales and nearly 2/3 of its profits. and a more cooperative workforce in order to smooth its ride during the impending downturn. 80 As Fires retired in February 1999. so did diversification. 80 percent of the world's population lived in developing countries. But being cautious. dams. New markets In L999. bridges. Caterpillar. electricity. needed a flexible wage agreement. 7~BIJsirJess Week. was Fites willing to sign a contract? Why did a company which operated profitably year after year without a contract. Eastern Europe. at least in part. First. 2000. These charges were not only costly to adjudicate but could have resulted in huge penalties which the company had to pay in cases where the NLRB ruled in favor of the UAW. Start p. and therefore needed to invest in building highways.Com.' Economist. February 28. March 13. Under Barton's leadership. Barton also realized that he needed to ensure the future of Caterpillar in the long run. Caterpillar's Board of Directors revised the company's corporate governance guidelines to prohibit retired Cat employees from sitting on the board. Journal. Barton lost two potential allies on the Cat Board of Directors.C"''it g \:\ri~i~. Caterpillar's record revenues and profits during 1993-97 came to an end in 1998-99. Developing countries had limited access to water. He therefore embarked on four growth strategies: the expansion into new markets. yet its engine sales rose by 5 percent. ensured the company that any future decline in truck engine sales could be offset. Caterpillar's profits fell 37 percent to $946 million.to the developing nations of Asia.was dropping these unfair labor practice charges." "'The 79Ibid. the development of a new distribution channel. Glen Barton. ~-- . 1998. assumed the company's leadership. stable employment relations.l. Caterpillar's overall sales fell by 6 percent.l. Cat's expansion into the engine business is a case in point. Such a diversification. He thought that Caterpillar could take advantage of its global positioning to cushion the US decline by increasing sales in Asia and Latin America whose economies were rebounding. Revenues and profits were declining as a result of a strong dollar coupled with a weak demand for Cat products. increased sales of Caterpillar's equipment .

) As % of Total Revenues 1996 1997 1998 2000 2001 1. the growth in sales of electric diesel generators . 'Cashing In On the Wol'id's EnergyHunger: The New York Times.3 6.20 percent a year since 1996 . and the CNH Corporation (former Case Corp. S4Hcather Landy. April 21. May 22. p. Implemented by Barton in 1999-2000.c. re-rented the equipment to end-users. manufacturing facilities. A new distribution channel Under Barton's direction. .1 11. Academic Universe. Caterpillar nevertheless faced a serious challenge in its efforts to transform itself into an ET (energy technology) company: diesel generators produced far more pollution than other sources of power. 1999.2 1.84 In the agricultural equipment market. in 20 11. Caterpillar's energy business clearly benefited from the energy crisis. R5Michaei Roth. May 12." The world's largest manufacturer of diesel generators. the Cat Rental Store Program was designed to assist dealers in operating a one-stop rental shop that offered a complete line of rental equipment from heavy bulldozers and tractors to light towers. and utility companies had installed back up diesel generators for standby or emergency use.6 1. and these centers. work platforms. Lex is-Nexis.2001. 'Cashing In On the Worlds Energy Hunger: New York Times. Barton planned to double its farm equipment sales in five years (1999-2004). Rarely did Caterpillar rent directly to customers. Lexis-Nexis Academic Universe. 'Seeing (he Light: Rental Equipment Register.9 1. .770 "FCTION b \. To address this problem. Lexis-Nexis. Nearly half of all Cat's machines sold in North America in 2000 entered the market through the rental distribution channel. Nikki Tail. 'Cal Sharpens Claws to Pounce Again: Financial Times.3 7. in the nine months ending May 200 I. 8JNeH' York Times. May 22. 24. Academic Universe. and 2000 Annual Report. 200]. 2000: Online.P To diversify the company in still another way. internet server centers.had been the fastest (Table 7). ~5 1'A B L E 7 Caterpillar's sales of power generators Safes ($Bil. 'Putting More Cats Down on the Farm: Chicago Sun Times. Barton's Caterpillar accelerated its shift towards cleaner micro power. Caterpillar needed to compete head-tobead with the John Deere Co. R~Davjd Barboza. In 200 I. Of all Cat engine sales. Caterpillar sold or rented equipment to rental centers. 1999 Annual Report. Online. and the fastest growing segment of the business was short-term rentals. March 28. Online. reaching a new category of customers both at home and abroad. Large corporations. January 2000.200 I: 'Energy Technology Beyond the Bubble: EC()1l0IJlisl. Caterpillar expanded its rental equipment business. in turn. November 8. Cat sales of mobile power modules (trailer equipped with a generator) quadrupled.8 2.3 7.2001. and New Holland). Formerly. the corresponding figure was expected to climb to 50 percent. Now Barton was making aggressive efforts to help Cat dealers diversify into rentals. only 10 percent of Caterpillar's generators were powered by natural gas.4 Source: David Barboza. and hydraulic tools. i: TA i-\ LE () Cat engine sales to end users 1999 2000 Percentage of Total Sales Trucks Electric Power Generators Oil Drilling Equipment Industrial Equipment Ships and Boats 34 26 27 33 19 20 11 9 13 8 Source: Caterpillar Inc. the leading US manufacturers.6 9.

One bad to do with the state of labor relations. the ESP program.066 6.0 723 854 4. contributed to increased labor productivity.648 9.619 11. Salaries & Employee Benefits Number of Employees Total Assets Consolidated Machinery & Engines Financial Products Long Term Debt Consolidated Machinery & Engines Financial Products Total Debt Consolidated Machinery & Engines Financial Products 925 838 4.018 3.957 19. The sales of fuel systems were even more promising.2 3.2 3D4 1.175 1.775 36.977 1.796 72 4.200 28.829 13. Caterpillar had used joint ventures to expand into new markets and diversify into new products. In November 2000. the other was for manufacturing fuel systems.437 54.'\TERf'l LL. check out Caterpillars web site at www.0 4. as reported Inthe company's annual reports and other financial documents.366 20.452 3.067 3.17 1150 30.681 5.411 12.66 1275 179 790 814 4.806 6.044 66.367 4.618 11.968 18.317 10. .554 14.575 8.069 7.474 6.KIll Street Journal. Fuel systems were designed to increase the efficiency of diesel engines and thereby reduce diesel emissions. except per share data) 1998 20. and reduced ° engine market TABLE 8 Caterpillar: Five year financial summary (Million 1999 US $. particularly Cat's employee satisfaction program which Schaefer had introduced and Fites terminated.54 0.773 58.522 1.802 3.s" Future prospects Notwithstanding their initial prospects. 'Cuterpillar. Barton's Caterpillar announced a plan to form two joint ventures with DaimlerChrysler. DuimlecChrysler Team Up.102 9.188 7. Georgia.158 12.4 3.925 1.9 on Equity (%) Capital Expenditures.480 15.345 19.928 3.7 3. The combined share of the two companies in the medium-duty engine market was only 10 percent.com ~·Joseph Hallinan. One was for building medium-duty engines.665 8.513 1997 18.568 2.CASE B C.\. For additional financial data.1 4. p.427 11.469 2.8 2.087 2. Net R&D Expenses R&D Expenses as % of Sales & Revenues Wage. Participating in the two joint ven- tures were Cat and DaimlerChrysler plants in four US states (South Carolina.711 16.361 8.464 16.433 2000 Sales and Revenues Profits Profits as % of Sales & Revenues Profits per Share Dividends per Share Return 20.2 4.029 67.099 6.225 26. November ~3.146 64. and Michigan) and at least five other countries. 2000.993 6.756 14.562 Source: Caterpillar Inc 2000 Annual Report.R 771 Ioint ventures Increasingly. yet the medium-duty generated world-wide sales of $1 billion annually.728 13. we have seen.128 15.950 379 824 700 3.3 506 570 3.942 2.caterpillar. Illinois.702 946 4.' .334 2.338 1996 16.8 4.176 5.053 5.951 9. Implemented effectively by Schaefer.441 25.44 0.854 8.404 2. improved product quality. the world's leading manufacturer of commercial vehicles. 39. Barton's strategic initiatives failed to address adequately two major concerns that could have effected the company's future. enhanced employee satisfaction.

then. and service of its products without weakening its strong dealers' networks? Barton wondered. Should Barton. distributing.employee absenteeism. could Caterpillar benefit from utilizing the internet for the marketing. 'What should I do next?' . reintroduce Cat's employee satisfaction program and thereby improve the climate of labor relations at the company's US plants? Would Barton be able to cooperate closely with the local union leadership to persuade shopfloor employees to join the program? Another challenge Barton faced pertained to the impact of E-col11merce. in other words. How could Caterpillar take advantage of the opportunmes offered by Ecommerce without undermining its distribution system? How.