INTERNATIONAL BUSINESS

ASSIGNMENT –III

Komatsu Limited

Submitted By:
Aishwarya Rangarajan (006)
Ajay Raj (007)
Aksshat Seth (008)
Amit Ahuja (009)
Ankush Bahri (015)

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 EXECUTIVE SUMMARY

This case analysis touches upon the environment in which Komatsu finds itself, in the face of increasing
competition from various players, and most importantly Caterpillar. It also defines the reasons for Komatsu‟s
success on various fronts, from financial to HR and leadership strategies. Finally we narrow it down to establish
what the biggest problems are that Komatsu faces today, and how best to tackle these situations.
One reason postulated for the success of Japanese firms was that unlike western firms they do not simply focus
on attaining a strategic fit between their existing resources and the opportunities in the marketplace. Instead
Japanese firms continually reinvent their market position with innovative competitiveness; and this innovative
competitiveness is driven by their strategic intent. In the case of Japanese organizations their strategic intent was
to become a global leader.
Avoiding static analysis of competitors and industry structure and allowing the future to unfold into the present
strategic intent has been a guiding force in the attainment of global leadership by Japanese corporations such as
Komatsu and a force for change. What has gone right for Komatsu, what are its problems, and how it can hope
to resolve the same, is detailed out in the case analysis.

INDUSTRY ANALYSIS
The EME industry was heavily dependent on the construction and the mining industries and both these
industries were undergoing a sea change in the 1970s. The construction industry in the developed countries had
reached the maturity stage and the majority of demand was supposed to be coming from the developing
countries. In these developing countries the financing of the machines played a major role in the purchase
decision and also often the government of these countries was amongst the major buyers.
The world EME industry was dominated by few firms and according to The New Trade Theory, in such
an industry achieving economies of scale becomes very important because it represents a significant portion of
the world demand. One of the firms which enjoyed the first mover advantage and was the market leader in this
industry was Caterpillar. Caterpillar‟s main source of competitive advantage was its dealer network in North
America, Europe and Latin America. Caterpillar‟s strategy was to build advanced enduring machines using
specialized components and selling them at a premium price and offering a fast, high quality service. Basically,
Caterpillar followed the differentiation strategy and commanded a premium price for its products by
increasing the value proposition of their products by offering high quality products coupled with high quality of
service.

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 COMPANY ANALYSIS/FIRM-LEVEL ANALYSIS

ENVIRONMENTAL SCAN
Komatsu Ltd. headquartered in Tokyo, Japan, manufactures and markets a wide variety of products such as
construction and mining equipment. Founded in 1921, Komatsu currently has close to $8 billion in sales
annually. Although Komatsu‟s line of bulldozer was in demand through the 1950‟s, it was not too highly
revered. The machine was of poor quality and its customers complained of the company‟s poor service
capability. The company itself admitted “The quality of our products in terms of durability during that period
was only half that of the international standards.” Given these terms no dealer agreed to sell its products due to
which they had to set up their wholly owned branch sales offices and repair shops. Thus Komatsu started
following an International Strategy.
Right from the early days the need for export was stressed on. The two areas of focus were:
 Overseas Orientation
 User Orientation.

Initially the company diversified into the production of agricultural tractors, bulldozers, tanks, howitzers,
etc. But later after the World War II it began to concentrate mainly on the EME sector. But the main obstacle on
the way of Komatsu‟s growth as a worldwide competitor were the protectionist policies of Japan which
prevented the company‟s any real exposure to competition and thus there was no efficiency in the production
process or the product quality of Komatsu.
The 1960‟s brought about change for Komatsu Limited. The whole environment changed when the market
was opened for competition in 1963. Cat decided to enter the market through a Joint-Venture with Mitsubishi
and suddenly Komatsu faced a formidable threat. Thus they had to make the company a competitor of World
Standards in order to survive. The company focused on its survival by setting a goal to acquire advanced
technology abroad and to improve the product quality. Total Quality Control (TQC) concept was adapted to
ensure the highest quality in every aspect of Komatsu‟s operation.
The 1970‟s brought about market maturity for CAT and Komatsu‟s EME. Komatsu identified this
market maturity and developed relationships with Eastern Bloc countries. Caterpillar the Illinois' based
company was a world leader in producing construction, mining, and agricultural equipment with an extensive
dealer-distribution network.
In the 1980‟s the management practice of relying on the TQC system was supplemented by another system
called the “PDCA” management cycle. The initials stood for Plan, Do, Check, and Act. The starting point for
the PDCA cycle was the long-term plan announced by the top management team.
The intertwined system of TQC, PDCA, and management by policy contributed to company performance
and employee development.

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SWOT Analysis
• Strengths
• Quality:
Komatsu name has became
synonymous with quality and value.
Among the first in the industry to
institute TQM
• Manufacturing costs:
A lower salary base and lower raw
material costs enables Komatsu to
offer a discounted, quality piece of
equipment
• Management:
Competitive strategy transformed
Komatsu from a second rate EME
manufacturer, to an industry leader.
Komatsu management, from the
1970's strongly decided to focus on
improving the competitiveness of its
products
• Opportunities
• North American market:
Although strangled by an economic
recession, the US market offers the
greatest opportunity for growth.
• Diversification:
Komatsu developed an employee
suggestion program; in which lead to
the development of many diverse
new products.
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• Weaknesses
• Logistics:
Komatsu‟s strongest competitor,
CAT, has production sites throughout
the world. This globalization allowed
them to shift production in response
to protectionism, exchange-rate
fluctuation, and changes in other
competitive factors
• Domestic& Global markets:
Komatsu‟s market was reaching
maturity. In addition Komatsu didn‟t
have an extensive sales and service
network
• Threats
• Competition:
CAT poses the greatest threat to
Komatsu‟s prosperity. Apart from
this there are also many other
competitors in markets around the
world.
• Currency exchange:
Fluctuation in currency rates will
continue to threaten Komatsu‟s
profitability. Management constantly
worked on a cost-structure that would
be profitable under 'worst-scenario'
situations.
 FINANCIAL ANALYSIS

Comparative analysis between Caterpillar & Komatsu

The comparative analysis of Komatsu‟s financial performance with that of Caterpillar‟s was made
based on the consolidated financial statement analysis of Caterpillar‟s as presented in the appendix.

Komatsu Consolidated Financial Statement Analysis

Particulars 1984 1983 1982 1981 1980 1979

Total Assets 0.76 0.85 0.87 0.802 0.78 0.704
Turnover
Debt to Assets 0.086 0.064 0.073 0.055 0.076 0.097
Ratio
Debt to Equity 0.094 0.068 0.079 0.058 0.082 0.107
Ratio
Return on 2.40% 2.90% 3.50% 3.80% 3.30% 3%
Assets
Net Profit 3.17% 3.50% 4% 4.70% 4.30% 4.30%
Margin
EPS 27.2 32.6 41.9 44.0 37.8 32.8
yen yen yen yen yen yen
Dividend 8 yen 8 yen 8 yen 8 yen 8 yen 8 yen
Invested 392805 321453 321649 232373 231803 228188
Capital yen yen yen yen yen yen

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10

5 Caterpillar
Profit Margin
0 Komatsu
1979 80 81 82 83 84
-5

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 Leverage Ratios: Debt to Asset & D:E

Debt: Asset and the Debt to Equity Ratio of Komatsu are very low compared to Caterpillar. While
Caterpillar maintains a D/A ratio of around 0.22 and D/E ratio of 0.28, Komatsu has only 0.086 for D/A and that
of D/E is 0.094. This shows that the firm is underleveraged and it could benefit by raising more debts from the
market. It wouldn‟t be difficult for Komatsu to find lenders in the market, given its reputation and brand name

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when it emerged as a significant competitor to Cat. Komatsu should hence look for employing the debts as
investments in foreign countries.
 Turnover Ratio
Total Assets turnover is quite high implying that the company‟s assets were being employed effectively.
However Cat is still ahead of Komatsu in this respect and maintains a high assets turnover ratio of over 1. Thus
Komatsu needs to improve on the ways it uses and manages its assets.
 Profitability Ratios
Although the Net Profit Margin of Komatsu had gone down by about 1%, the company still continues to
earn a profit of around 3.2% year on year. The firm fares better than Caterpillar whose Net Profit margin has
gone down to negative 6.5%. Also the firm‟s Return on Assets is quite good and stands at around 2.4%
compared to negative 6.87% of Caterpillar.
The reason for Komatsu‟s profitability can be attributed to the fact that the firm has actually identified that
the shift in the world demand pattern is not just cyclical thing but would be a trend. Also the company had
invested in developing countries such as China, USSR, and Latin America and had built strong relations with
individual Governments.
 EPS: Earnings per share also had remained positive and the company had been able to give out a stable
dividend of 8 Yen to the shareholders. This stable dividend payment makes the shareholders more confident
about the company, thereby adding to the investor trust in the company and building the reputation in the market
place.
Also, Komatsu, unlike Caterpillar, had increased their investment on capital expenditures and other forms
of investment. The amount invested per year has gone up by about 164617 Yen in the previous six years. This is
because Komatsu had capitalized upon on the opportunities in the developing countries.
Thus, in the period between 1981 and 1984, Komatsu had done better than Caterpillar in recognizing and
capturing the trends of demand shift. Komatsu could still do better in terms of leveraging the company. Their
Capital Structure needs reconsideration and the company needs to raise more money from the market.

Marketing perspective

Komatsu‟s focus was mainly on operations to increase the quality and lower the cost of the machines.
Some of the important points under marketing perspective are
Greater service through pre sale service department:
Company established a new presale service department that provided assistance from the earliest stage of
planned development projects in Least Developed Countries (LDC). The services that the department made
available to LDCs free of cost included advice on important issues such as site investigation, feasibility studies,
planning of projects, selection of machines and training of operators, etc.

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 Adaptability:

As their export increased, they had to adapt the products according to the requirement of the customers in
different countries. For E.g. the Company send their field engineers to study the Australian market to understand
the difficulties faced and their expectations.
 Portfolio expansion:

Company introduced various products to provide a better choice for the consumers. The number of models
increased from 46 to 77.
 Innovative:

The world‟s first radio controlled bulldozer, amphibious bulldozer and remote controlled underwater
bulldozer were introduced by Komatsu. They also introduced the first 1,000 HP bulldozers even before
Caterpillar.
 Exclusive dealer network:

Through exclusive dealer network the focus of the distributor would only be on Komatsu rather than a wide
variety of other brands. This was done to increase the sales and service.

Operations strategy Analysis

Komatsu has been a leader in innovative quality-control initiatives with 2 goals: to acquire the best
advanced technology from overseas and to improve of product quality. This was made possible initially by
licensing agreements. The company benefitted out of the agreement and later decided to discard these
agreements which restricted its overseas entry into certain markets. It established R&D laboratories and made
considerable investments in these laboratories.
The company also launched Total Quality Control concept ensuring the highest quality in Komatsu‟s
operations by ensuring the connection between user needs and product development. A step by step process of
analysing the value chain activities with regards to quality and cost were laid out as projects. The company also
concentrated on providing supplementary services like advising the client on machines, training on operations
for customers, project planning etc.
The company became a fully integrated company by producing all of its components and parts in house and
also the company entered into research agreement with Cummins Engine for sharing the improvements in diesel
equipment improvements. It also developed a heat pump that reduces the costs by about 40% and breakthrough
technology in developing a cast iron alloy which is superior. As Komatsu didn‟t have an effective sales and
service system it had to maintain extensive parts inventories with all the dealers in each country. But it should
be noted that Komatsu has been continuously able to reduce the cost and sell the products cheaper than their
competitors.

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Recommendations

 Komatsu‟s quality control drive should be maintained for the future as well. This has enabled the
company to differentiate itself from the competitors. It was because of this quality focus only that Komatsu
was able to present better machines to the market as compared to the Caterpillar during the 1980‟s
 The pressure of responsiveness will keep on increasing in the future. Komatsu have to concentrate
on their EPOCHS project for sustainable competitive advantage. Adapting their products to the market
conditions is one of Komatsu‟s core competencies. The company has to follow on this on future as well.
 Komatsu‟s research labs and product development centres are their backbone. The company have
to increase the effectiveness of these in the coming future in order to gain competitive edge in the EME
market.

HR STRATEGY
Komatsu‟s top leadership team knew what they wanted. The company‟s basic philosophy, from the very
beginning focussed on the need to export. Strategic goals and plans focussed on overseas and user orientation.
This philosophy cascaded further onto the middle management level which focused on acquiring technology and
improving quality of the machines and finally to the lowest level which focused on making Komatsu products a
competitor of world standards.
The major source of success was the leadership of Ryoichi Kawai. He was a visionary and a strategic
thinker. The realization that the industry was changing, led him to reflect on Komatsu‟s position. He had the
ability to learn from Caterpillar‟s mistakes and reappraise Komatsu‟s strategy accordingly in a competitive
industry.
One important characteristic of Kawai‟s leadership style was that he was that he was an „asker‟ and he paid
attention to what was happening in the company – he was aware of what the employees felt about their work
and about the company. He kept himself involved through two means. First, he ensured that he had constant
personal contact with managers throughout all levels of the organization. Second, he participated in an
organization-wide program of auditing quality control. This program consisted of monthly meetings held
between a Tokyo University professor and different groups of company managers. In these sessions, managers
would be queried by the professor concerning the quality of the company‟s products, especially from the angle
of customer‟s perceptions and needs. From these interactions, Kawai was able to discern the attitudes of
employees towards quality and the state of quality initiatives within the company.

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 KEY CONCERNS/ISSUES

 Lack of a strong distribution, sales, and service network

One of Komatsu's weaknesses lies in the operations department. This is due to a lack of a strong
distribution channel, a dedicated and experience external sales force, and a strong service and support network.
Komatsu‟s strength is evident in the quality and cost reduction projects that enabled Komatsu to develop a
product line where their quality is as good, if not better than Caterpillar‟s for less cost to the consumer.
Caterpillar‟s distribution channels and sales and service areas obstructed Komatsu‟s ability to compete with
them. Komatsu‟s market share will continue to lag to Caterpillar until they can match or surpass their strong
distribution, sales, and service network.
 Centralized Production
Centralized production has been a strong factor for Komatsu in terms of controlling quality and reducing
costs, but with all business decisions there are invariably trade-offs that occur. Due to the nature of these
trade-offs, there is a threat to Komatsu regarding the future of transportation costs when shipping
equipment overseas, and possibility of losing contracts in the developing nations. Until this time,
Komatsu rejected suggestions to expand or move any plants to overseas locations.

 YEN Fluctuation
Throughout Komatsu‟s history, the Yen has been extremely volatile. This fluctuation has threatened
Komatsu's ability to grow. For example, if the Yen increases in value against the dollar, and no actions
are being accomplished to mitigate the effects, this increases the price of Komatsu's products. Although
the reverse affect could prove to be beneficial to Komatsu.

RECOMMENDATIONS

1) Lack of a strong distribution, sales, and service network

Recommendation:
 Acquire a larger network
 Attracting more dealers
 Strengthen the service and sales network
The lack of a strong distribution, sales, and service network has long been a disadvantage in Komatsu‟s
ability to compete with Caterpillar. Komatsu has focused on these problems and as a result implemented
several projects to address the lack of a strong distribution, sales, and service network by increasing the
size of their product line.
As a result, Komatsu is hoping to attract more dealers and persuade them to become exclusive dealers for
their company. This also ties into their distribution channel problems and the lack of a service network
problem.

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One option for Komatsu is to continue down the path of attracting more dealers, acquiring a larger
network, and strengthening their service network. Another option for Komatsu is to attempt to set up
limited partnerships with companies with strong existing distribution channels, sales, and service
networks.

2) Centralized Production

Recommendation:
 Relocate plants needing expansion to developing nations
 Maintaining current operations as is
 Combination of both

The concept of centralized production was to gain high degrees of quality in Komatsu‟s products, and
reduce component costs. As a result, this has become a great strength for Komatsu. An option available
to Komatsu would be to move any plants needing expansion to a developing nation. This option would
allow Komatsu to create jobs and help strengthen the developing nation economy.

Komatsu should obtain global sourcing arrangements through:

a) wholly owned subsidiary – May be established in a country with low-cost labour to supply components
to the domestic plant, or the subsidiary may produce a product not made in the domestic market.
b) Overseas joint venture – Established where labour costs are lower than those in the domestic market to
supply components to the domestic manufacturer.
c) In-bond plant contractor – The domestically located plant sends components to be machined and
assembled or only assembled by an independent contractor in an in-bond plant.
d) Independent overseas manufacturer

3) YEN Fluctuation
Recommendation:
Initially Komatsu followed the export model, i.e., it used to manufacture everything in Japan and then
export it to the different countries. The operations of Komatsu are thus highly vulnerable to this
fluctuating exchange rate. If the Yen appreciates then the company will suffer considerable losses, if it
depreciates then it will enjoy more profits. But it is better not to leave the position open for gain or loss. It
should try and limit its losses though in this case the maximum amount of profits that can be earned due
to this exchange rate fluctuation will also be limited.
According to the trend shown in the balance sheet we can see that the Yen has consistently
depreciated against the $ in these 6 years. But even then in between a year also the Yen-$ fluctuations
have been quite tremendous as we can see in the High-Low spread given in the balance sheet. Thus the

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company has to prepare itself from sudden shocks of an appreciating Yen. This can be effectively
accomplished by appropriate hedging strategies.
Komatsu can go in for Forwards with its buyers, i.e., agree to sell the goods at a
predetermined price on a particular date in the future at a rate agreed to by both the parties now. So it can
take a stance (depending on the trends they have seen in the past as to the currency fluctuations and also
the external market variables) as to at what price they want to lock in their forward contract. This will
definitely limit their losses if the Yen suddenly appreciates against the $ by an unprecedented level. But
in doing this what can happen is they can limit their profits also. But the entire decision depends on the
risk appetite of the Komatsu management.
Komatsu can also sell its products at the local currency in every market, thus even if the
Yen-$ value undergoes a lot of change it will barely have any effect as it will be having the receivables in
form of domestic currency of every country and it is quite improbable that yen will rise against each of
these currencies in the future. The diversified currency receivables will actually help in eliminating the
unsystematic risk of fluctuations.
Komatsu should also take the below mentioned factors into consideration.
 Improve the competitiveness of its machinery by:
 Reduction of costs by 10%
 Reduce the number of parts by 20%
 Redesign the products to gain economies in material or manufacturing
 Rationalization of the manufacturing system

 Creating Strategic Intent for the future:

Strategic intent envisions a desired leadership position and establishes the criterion the organization
will use to chart its progress. The process is one in which leadership team transform themselves and
culture of their organizations through a creative commitment to radically different future. Leading
from the premise of a strategic intent requires one to think and plan backwards from that envisioned
future in order to take effective action in the present.

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