Matthew Kuboushek

ACC334 Advanced Cost Accounting

Professor Karen Sturm

March 7, 2017

Cost Strategies Paper: Caterpillar

Mission and History:

Caterpillar is a heavy manufacturing company headquartered in Peoria, Illinois. They are a

highly diverse heavy manufacturing company that produces equipment for construction, mining,

forestry, drilling, and emergency power supplies1. Caterpillar is also involved in manufacturing

some major parts of their equipment such as machine implements and engines2. Caterpillar began

in 1925 after the merger of C. L. Best Tractor Company and Holt Manufacturing Company3.

Initially the new company was still focused primarily on manufacturing tractors for agricultural

use, but over time began to acquire companies operating in more diverse kinds of heavy

industry4. Caterpillar no longer makes agricultural equipment but has become one of the largest

companies in the country; Caterpillar is currently ranked at 59 on the fortune 5005 and has many

subsidiaries and business interests in international markets67.

Profile:

Industry: Caterpillar is heavy manufacturing company focused in three primary products

1
http://www.caterpillar.com/en/company.html
2
Ibid
3
http://www.caterpillar.com/en/company/history.html
4
Ibid
5
http://beta.fortune.com/fortune500/list/filtered?searchByName=Caterpillar
6
http://www.caterpillar.com/en/company/brands.html
7
http://www.cat.com/en_US/language-selector.html
segments: “Construction Industries, Resource Industries, and Energy & Transportation.”8

“Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel

and natural gas engines, industrial gas turbines and diesel-electric locomotives.”9

Products: Caterpillar produces many products used in the construction, mining, and forestry

industries such as bulldozers, excavators, feller bunchers, pavers, backhoes, and pipelayers;

Caterpillar also produces attachments for their products and engines.10

Locations: Caterpillar operates and/or sells products in every inhabited continent11 and operates

in over 180 countries and has over 500 dealership locations globally.12

Number of Employees: Globally, Caterpillar employs 97,100 full-time employees.13

Ticker Symbol: CAT

5 Year Trend in Stock Price: Caterpillar’s stock price over the last five full years has varied

from a high of $114 per share in February of 2012 to a low of $62 per share in January of 2016;

currently (February 28, 2017), Caterpillar’s stock price is $96.66 per share.14

15

8
http://www.caterpillar.com/en/company.html
9
Ibid
10
http://www.cat.com/en_US/language-selector.html
11
Ibid
12
http://www.caterpillar.com/en/company/global-footprint.html
13
http://s7d2.scene7.com/is/content/Caterpillar/CM20160815-32360-49108
14
http://www.morningstar.com/stocks/xnys/cat/quote.html
15
Ibid
Caterpillar Pricing and Cost Management Strategies:

Based on Caterpillar’s business model description Caterpillar seems to be following a product

differentiation strategy. According to Caterpillar,

We win by delivering valued, quality products, services and solutions to our customers

that provide them the best economic proposition for their business. This value

proposition, enabled by our unmatched customer support, creates the largest global field

population, highest customer loyalty and attractive profitability through the business

cycle.16

Caterpillar is trying to eliminate features of their products that customers do not perceive as

adding value to the product while at the same time adding to their products and services in ways

that help the customer lower costs and add value.17 Caterpillar does not want to be perceived as

just selling a product; they want customers to enjoy the support Caterpillar provides with their

dealer network by providing easy access to parts and services.18 Caterpillar launched a BUILT

FOR IT marketing campaign in 2013 to emphasize this point. According to the Customer and

Dealer Support Group President, Stu Levenick, “When a customer hears BUILT FOR IT, we

don’t want them to think of just a product or solution, but an entire organization that’s dedicated

to their success.”19 One of the services that Caterpillar has expanded in order to increase value

for Customers is remanufacturing services. Customers know that in case of an engine failure

(which is unlikely due to Caterpillar’s commitment to quality), Caterpillar is able to

remanufacture engines to like-new condition at a reduced cost.20

16
http://s7d2.scene7.com/is/content/Caterpillar/C10211355
17
http://s7d2.scene7.com/is/content/Caterpillar/C10133618
18
Ibid
19
Ibid
20
Ibid
Five Year Trend in Revenue: Caterpillar’s revenue has been steadily decreasing over the last

five years from its high in 2012 of $65,874,000,000 down to $38,537,000,000 in 2016.21

22

Five Year Trend in Profit: Caterpillar’s profit has been decreasing over the last five years from

a high of $5,681,000,000 in 2012 down to a loss of $67,000,000 in 2016.23

24

21
http://financials.morningstar.com/income-statement/is.html?t=CAT&region=usa&culture=en-US
22
Ibid
23
Ibid
24
Ibid
Five Years Income Statement:25

25
http://financials.morningstar.com/income-statement/is.html?t=CAT&region=usa&culture=en-US
Five Years Balance Sheet:26

26
http://financials.morningstar.com/balance-sheet/bs.html?t=CAT&region=usa&culture=en-US
Five Year Statement of Cash Flows: 27

27
http://financials.morningstar.com/balance-sheet/bs.html?t=CAT&region=usa&culture=en-US
Efficacy of Caterpillar Pricing Strategy:

As can be clearly seen on the income statement, Caterpillar’s Cost strategy has not prevented the

company from reporting a net loss in 2016 or reversing the downward trend that began after

2012. Given that Caterpillar has chosen a product differentiation approach the key measure of

determining whether or not this approach has been successful is the amount of cost Caterpillar

has been able to transfer to their customers. The gross margin should increase or at least not

decrease.

The year after the BUILD FOR IT marketing campaign was launched (2013), a slight increase in

gross profit seems to follow. The gross profit as a percentage of revenue rises from 26.82% to

28.23% in 2015 but falls again in 2016 to 26.54%. The marketing campaign may have helped in

2014 but it is not a likely cause for gain in 2015; between 2015 and 2014 Caterpillar experienced

a reduction in inventory, and because Caterpillar used the LIFO method for inventory the gains

experienced that year are probably due to the change in inventory.28

28
http://phx.corporate-ir.net/phoenix.zhtml?c=92466&p=irol-
SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTExNDAxMDcwJkRTRVE9
MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3#s715B4648340CF33F6E8DD894ABEEBF98
Caterpillar has not been strong on their income statement, but the weakness of their income

statement is not likely due to imprudent costing strategies. According to the CEO of Caterpillar,

in 2015 demand for Caterpillar products was depressed by “weak economic growth, especially in

developing markets; depressed commodity prices; and mining, construction and infrastructure

investments down across much of the world.”29 Caterpillar’s cost strategy was not enough to

save the company from lousy economic cycles. Caterpillar is currently restructuring in order to

deal with the new market conditions.30

29
http://reports.caterpillar.com/yir/leadership/letter.php
30
Ibid
 Sources

http://reports.caterpillar.com/yir/leadership/letter.php

http://phx.corporate-ir.net/phoenix.zhtml?c=92466&p=irol-

SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2l

wYWdlPTExNDAxMDcwJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9F

TlRJUkUmc3Vic2lkPTU3#s715B4648340CF33F6E8DD894ABEEBF98

http://financials.morningstar.com/balance-sheet/bs.html?t=CAT&region=usa&culture=en-US

http://financials.morningstar.com/income-statement/is.html?t=CAT&region=usa&culture=en-US

http://s7d2.scene7.com/is/content/Caterpillar/C10211355

http://s7d2.scene7.com/is/content/Caterpillar/C10133618

http://www.caterpillar.com/en/company.html

http://www.cat.com/en_US/language-selector.html

http://www.caterpillar.com/en/company/global-footprint.html

http://s7d2.scene7.com/is/content/Caterpillar/CM20160815-32360-49108

http://www.morningstar.com/stocks/xnys/cat/quote.html

http://www.caterpillar.com/en/company/history.html

http://beta.fortune.com/fortune500/list/filtered?searchByName=Caterpillar

http://www.caterpillar.com/en/company/brands.html