Caterpillar Tractor Co.

Case Analysis
Submitted By:
Ankit Jain (17) Ankita Shrivastava (21) Anubhav Dhyani (25) Anupam Verma (28) Arpita Karmakar (31)

Executive Summary:
Caterpillar Tractor Company (CTC) is a large manufacturing firm headquartered in Illinois, USA. Its familiar 'CAT" logo and yellow paint are known throughout the world. Indeed in its business, CTC has an estimated 37% of world market. Its closest rival, Japans Komatsu has an estimated 15%.

The case analyses of the competitive environment at the macro level, i.e. national or global economy within which the firm in the case operates: economic conditions, social factors, technology, government regulation and macro environmental trends.

Next the strengths, weaknesses, opportunities and threats are evaluated. Various aspects at the firm level like management issues, market issues, business expertise, financial resources and inventory management etc are taken into consideration.
Finally a set of recommendations to Mr. Lee Morgan is provided which focus chiefly on the feasible breaking up of the international strategies CAT is following to incorporate elements of multi-domestic and global elements with a more competitor sensitive, socio-political environment sensitive strategies.

Business Landscape: A. Company Profile

Caterpillar Tractor is headquartered in Peoria, Illinois. It is a multinational company which has manufacturing and dealer representatives throughout the world. The products, which the firm designs, manufactures and markets, can be classified into two basic segments: Earth moving, construction and materials handling equipment-track type tractors, bulldozers, rippers, track and wheel type loaders, pipe layers etc.

Engines for earth moving and construction machines on highways trucks, marine, petroleum,
agricultural, industrial and electric power generation systems.

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

TECHNICAL
Product technical changes are limited to incremental improvements rather than wholesale alterations. Earth Moving Equipment (EME) manufacturers are concentrating on higher energy efficiency, improving operator comfort and modification for specialist tasks.

Production methods, however, are undergoing radical change driven by manufacturing techniques pioneered within Japanese industry. Several marketing and service developments are also underway. Time and cost constraints for EME users are forcing them to seek longer lives from their equipment and to improve performance using scheduled maintenance programmes. Reliability is critical. EME users are increasingly turning to rental arrangements to counter capital constraints and are increasingly asking for sales details that include several years replacement parts.

C. Porters five force model

Threat of new entrants- The threat of new entrants can be said to be relatively low,
the main reason can be the high capital requirement. However big players can have economies of scale and small scale entrants can have a disadvantage. Due to the nature of the product the differentiation can be said to be a good strategy. Customer loyalty mainly depends on competitive pricing, after-sales technical support and quick delivery. For new entrant capital requirement is high due to requirement of manufacturing plant and lot of inventory. Marketing activity is not costing much as compared to the percentage of sales figure. Switching cost for customer can be said to very high.

Bargaining power of suppliers- Bargaining power of supplier is less. There are a

large number of big and small suppliers in the market. Changing supplier doesnt have any switching cost. But recently increasing cost of the raw material is a big threat both for the suppliers and the CAT.

Bargaining power of buyers- Bargaining power of buyers is relatively high. As

the main buyers are contractor, equipment rental companies and OEMs. Construction industry itself is highly concentrated. Buyers are large and they purchase a large number of industry output. But they cant easily switch to other competitors; CAT has a very good network of dealers who provide an amazing after sales services and maintenance support.

Threat of substitute- For some product category there can be a threat of substitute
product. But for most of the product there is no such threat of product substitute.

Rivalry among competitors- There is definitely high rivalry among the major
market players. There are few but equally balanced competitors. The opportunity for differentiation is there and there is enough richness in the market for the survival of all.

Firm Level Analysis:

Mission:
TO BE RECOGNIZED ASTHE LEADER EVERYWHERE WE DO BUSINESS

Vision:
Is a world in which all people's basic requirements - such as shelter, clean water, sanitation and reliable power - are fulfilled in a way that sustains our environment?

Management Values:
Integrity Excellence. Team work. Commitment Living by the code of conduct.

SWOT Analysis:
Strength:
Global market leader. Improving financial condition. Diversified geographical spread. Mix of business reduces earnings volatility. Strong dealer network.

Weakness:
Falling sales in Europe. High debt structure. Dealers low confidence of Caterpillars forecasting system.

Opportunities:
Opportunities in China and India. Increasing construction activity due to growing population. Joint development and acquisition programs.

Threats: Rise in raw material prices. Mining dependent on coal prices and global GDP.

Key change issues

Caterpillar was bound to change some of the ways in which they used to do business mostly due to changing Socio-Economic conditions. Now customer requirements started to derive the products rather than what is proposed by the manufacturers. Clearly the major factors that were driving the change were external. Overall demand pattern started to change, the oil rich Middle Eastern countries had witnessed a massive rise in construction activity and also considerable potential existed in the less developed countries (LDC) or developing countries and at the same time demand was slowing in the U.S. or in most developed countries. Due to these changes Caterpillar had to change its prioritised locations in terms of its customers requirements and their changing geographies. Customers were shifting from U.S. contractors to construction companies in newly industrialized countries (NICs) as well as the direct bid business to government agencies in LDCs and NICs. Moreover the concentration of buyer power had become such that 29 construction companies accounting for 94% of non-US construction and 54% on the U.S. construction in 1980. Governments in NICs and LDCs represented large buyers. It is evident from the case that Caterpillar seized every possible opportunity that came its way. Post war Caterpillar established independent dealerships to service the machines left in Europe and Asia. They became the core of Caterpillars marketing strategy. Caterpillar tied the dealers close to it, encouraging them to devote primary attention to Caterpillars products and this soon led the field population of its machines to become 20 times that of the nearest competitor, Komatsu, which was a phenomenal lead and it strengthened their competitive advantage over others.

By adapting the Global Strategy Caterpillar centralized its facilities (near Peoria) to supply to overseas assembly plants that added the local features. Local plants not only avoided the high transportation cost of end products but also help the company respond to the demands of local Governments for manufacturing investment. In order to meet foreign competition, especially from Japan (Komatsu) Caterpillar started experimenting with quality circles and also used employee newsletters to emphasize the importance of increasing productivity.

Management Issues
1. The demand for EME worldwide is going down which is affecting Caterpillars policy of building capacity ahead of demand. 2. The customers will require Cat to increase their local value in developing countries since the importance of governments of developing countries is increasing. 3. The increasing price consciousness in purchase decision creates a problem for company with its manufacturing capacity concentrated in a high labour cost economy. 4. Cats profit margin on parts was twice that on original equipment. 5. Its prices were higher in United States as compared to other overseas markets. 6. Its products were overpriced by 10-20%. 7. Caterpillar never offered a new product and let other companies go through initial stage of trial and error and then follow with most trouble free product in the market. 8. Cats balance sheet was not as tight as its competitors due to its manufacturing policies. It follows Last-in First-out (LIFO) method of inventory valuation. 9. Dealer network represents a barrier to selling directly to the emerging customer group such as governments and contractors in less developed nations. 10. There is a need of a corporate planning office.

Opportunities
1. It should become the R&D leader in the market rather than becoming the follower. 2. The price should be flexible to maintain the volume. 3. It can reduce its overload by closing down the excess capacity. 4. It can take advantage of lower labour costs by shifting the manufacturing offshore. 5. The union should be dealt in a proper way with the company adopting hard stand towards it. 6. The focus should shift on Asia-Pacific region and it should set up separate corporate planning office. 7. The policy of First-in First-out(FIFO) should be followed in inventory valuation.

Recommendation and Implementation

To captivate the local markets and to be affordable to them, Caterpillar should opt for locally differentiated products.

Caterpillar should ensure that the company labour force and unions are aware of the market environment. Labour costs are almost 65% of the revenues of the company, so taking the huge labour force into confidence will be of great help to the company in the long run.

Caterpillar should try to take a hard stand towards labour union to reduce labour cost differentials.

Being in such a strong financial position Caterpillar should not be so conservative in its strategy and bring in more debt. Rather they should use the fund to expand in other geographies. It can thus increase its low dividend payout ratio to boost shareholder sentiments.

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

Develop strong local presences in foreign markets with indigenous personnel to strengthen government relations and reduce the risk of adverse government policies. Better focus on newly industrialized, developing and third world e c o n o m i e s . C A T s h o u l d strategically shift from its OECD biased outlook and gain a better global image

Maintain labour contingency plans while taking a long-term approach to the upcoming contract negotiations and working to strengthen labour relations.

Close the production systems gap with Japanese competitors. The JV with Mitsubishi is a key resource and they need to capitalize on that.

Caterpillar should locate its production facilities in areas where it can leverage upon various factor endowments. Komatsu has advantage over Caterpillar in direct labour costs .Caterpillar has almost 70% of its sales in third world countries which are via exports from USA. Therefore there is cause for Cat to setup manufacturing facilities in low cost destinations like Japan, China etc.

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

To improve the quality of a product, the focus must shift from the product to the process that m a k e s t h e p r o d u c t b y e l i m i n a t i n g t h e c a u s e s o f d e f e c t s . The processes of the company must be thoroughly examined in order to identify the ways of reducing difficulty while providing a better service or producing a better product.

Direct selling, local currency based price strategies, price reduction or value addition etc. should be considered as viable options for CAT future wellbeing.