Strategic Development Study of Caterpillar Inc

INTRODUCTION

This report presents the Strategic Development Study of Caterpillar Inc. Caterpillar Inc. founded on 15th April, 1925 in California, United Stated. Caterpillar is involved in designing, manufacturing, marketing and selling heavy equipments, machinery and engines and it is also involved in selling financial services to the customers all over the world. Caterpillar is the world’s largest manufacturer of manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. The organization is serving worldwide and is providing employment to around 104,490 employees. Its products includes Bulldozer, Excavator, Wheel Loader, Haul Truck, Diesel Engine etc. and its services includes Financing, Insurance, Maintenance and Training.

The developmental strategies used in the past, present strategies and the strategic planning for the future development of the Caterpillar, are discussed further in this report. Strategic Planning is about the finding the best solution for future problems to be faced by the organizations that not only solves the problems but should also proves to be beneficial to the organization. Caterpillar value statement is “We have the people, processes, tools and investments to deliver the quality, reliability and durability customers expect from Caterpillar in each new product introduction.” This strategic planning report focuses on three major tasks:

Describe the strategies deployed by the organization in the past and their resulting outcomes i.e. the strategic development history of the company.

Undertake the evaluation and appraisal of the company’s current strategic situation with reference to the company’s strategic macro industry and competitive environment and company’s endowment of its resources and capabilities.

Explore, evaluate and access the strategic choices available and recommend the best strategic plan available for the organization.

STRATEGIC DEVELOPMENT HISTORY OF CATERPILLAR

It has been more than 85 years that Caterpillar is serving its customers and hence ranked world’s number one in its own industry. The company has been developing every year and has maintained its position into the market. In 1980s, Caterpillar came very close to bankruptcy but still it manages to come back as a high tech globally competitive growth company. The company has now proved itself as the world’s largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines.

Company’s Establishment

In April 1925, the financially strong C. L. Best merged with the market leader Holt Caterpillar to form Caterpillar Tractor Co. Caterpillar is involved in manufacturing of heavy equipments used in construction and mining that are recognizable with “CAT” logo. Because of the intensive competition over the market share, in 1963, Caterpillar forms the joint venture with Mitsubishi Heavy Industries Ltd. which is ranked 2nd in Japan for manufacturing construction and mining equipments. Caterpillar agreement with Shanghai Diesel in China was helpful in improving the market share of Caterpillar as it was a technology sharing alliance.

Come back of Caterpillar from Recession

In the year 1981, Caterpillar faced huge economy downtown and was very close to bankruptcy. For 3 consecutive years, the recession costs around $1 million a day to the company which further forces the company to reduce the employment. There were three reasons for this crisis i.e. global recession, strikes and unfavorable currency exchange rates. Company faced many competitors that time including Komatsu Ltd. as the prime competitor. To overcome this recession, the company CEO’s introduced various strategic measures like cutting costs, employee reduction, out sourcing of machinery, parts and their components, introduction of modernization, diversification of product line and reorganization of company’s structure. These measures were very important that time to save the organization to become bankrupt. Later on the organization worked really well and managed to generate the highest revenues. George Schaefer’s encouraged the executives to respond to recession.

Caterpillar outsources 80% of its parts and components and further they used their brand names for selling the outsourced products keeping the quality control of the products. They doubled their product line in just 4 years from 150 to 300 equipments with an introduction of small and light weighted products along with the customer diversification as well. Caterpillar also focused on repairing its relationship with the labour as they experienced many strikes because of the cost cutting the company successfully achieved the target of an healthy employee and employer relationship. Also employee involvement program was launched by Schaefer in 1986 that involves employee satisfaction, quality improvement and increasing efficiency level. This program was termed as Employee satisfaction Progress i.e. EPS. EPS helps in reducing the rate of absenteeism, decline in labour grievances, saving in costs of upto $10 million and increases employee’s loyalty. “Plant with the future” (PWTF) is launched as a modernization program. Shift from batch production to flexible work cells proved to be good for the organization. The technological improvements and PWTF program resulted in high quality of products, increased efficiency level and high productivity. As a result of all these efforts put by the organization, the Caterpillars 30 worldwide plants managed to cut the inventory level by 50% and manufacturing space by 21% in just 3 years. Also Caterpillar’s world market share goes up to 50% and its revenues increased by 66% from the year 1985 to 1990. Caterpillar beat the Komatsu by having total sales of over $11 billion in the year 1989, which were nearly twice the sales of Komatsu. The company takes the advantage of the growth in global demand for heavy construction industry at a steady rate of 4.5% in the 1990s and was successful in making its way towards the top most position.

Research and Development

In 1904, Benjamin Holt solved the problem of driving tractors smoothly in moist soil faced by farmers in California by manufacturing a tractor with gasoline engine instead of steam engines that are much lighter in weight and that tractor was nicknamed as “Caterpillar”. By 1915, the Holt tractors were sold in around 20 countries. Further they formed a company named Caterpillar by merging with best company in tractors. Caterpillar was the first company that introduces diesel engines on a moving vehicle. In 1931, the company created separate engine sales group for the marketing of diesel engines to other equipment manufacturers and they further replaced it with sales and marketing division for serving better range of customers. The company was highly involved in manufacturing replacement parts as well because it generates over a quarter of the total revenue because of two main reasons i.e. sale of replacement parts is more profitable than the whole machines and the replacement parts market was less cyclical than that of original equipment.

After World War 2, the demand for Caterpillar products increased to reconstruct the disaster happened in Europe because of the 2nd world war. Finally in 1960s, Caterpillar becomes the leader of the heavy construction equipment industry. Further in 1965, Caterpillar expanded its operations to Britain, Canada, France, Brazil, Australia, India and Japan.

In 1983, the company starts providing financial services as well. There has been huge diversification in the product line to overcome the recession in the year 1985 to more than 300 products. As the company was developing and diversifying in its operations, it changes its name to Caterpillar Inc. In 2001, Caterpillar was the first company that launches 6 Sigma that helps the organization in improving its quality to the best level. Caterpillar starts sustainable development in the year 2005 as it responded to the Asian tsunami disaster and earthquakes in South Asia.

CURRENT STRATEGIES OF CATERPILLAR

Caterpillar Inc. is the world’s number one manufacturer of construction and mining equipments, diesel and gas engines and natural gas turbines. The organization is developing day by day and continuously expanding their business. Its market is not only limited to Europe but Caterpillar is selling its products all over the world like China, India, America, Russia etc. Caterpillar serves its customers with the highest quality product at a very reasonable price and also involved in good customer relations. Caterpillar is manufacturing its products at 110 plants worldwide and is selling its products in nearly 200 countries. Caterpillar made its sales through independent dealers that contribute around 66% of the total sales.

Caterpillar uses many business strategies for its development and to compete effectively with its competitors. For the evaluation and appraisal of company’s current strategies, various strategic tools are used like PESTEL Analysis for analyzing the macro environment, SWOT Analysis for analyzing the capabilities efficiency of resources as well and Porter’s Five Force Analysis is used to analyze the market, customers, competitors, suppliers etc.

PESTEL Analysis

For evaluating and analyzing the macro environment of the organization, the PESTEL Analysis tool is used. There are various macro environmental factors that affect the workings of an organization like Political factors, Economical factors, Social factors, Technological factors, Environmental factors and Legal factors. Let us now discuss in detail that how these factors affect the working of Caterpillar Inc.

Political Factors – Political factors are one of the main factors that affect the operations of the organization. Every country has its own governments with different laws and legislations, rules and regulations, import and export policies etc. As Caterpillar is operating and serving the customers worldwide, it should be aware of the political factors.

Economical Factors – The economic factors includes the recession, inflation, growth in GDP, growth in population etc. In 1980s, the recession hits Caterpillar badly as it was very close to bankruptcy but somehow it manages to overcome that economic downtown. The rise in the prices of raw material, diesel, petrol, import and export costs etc. is big problems for the organizations. A rise in raw material prices increases the manufacturing costs in Caterpillar and to maintain a balance, the organization has to increase its prices.

Social Factors – Caterpillar is operating in many diversified countries. Hence it becomes essential to consider the social factors while framing the business strategies. Each and every country has different societies with different values, culture, religions, attitudes etc. the company has to maintain a balance to avoid any kind of discrimination into the organization.

Technological Factors – A manufacturing organization like Caterpillar needs ongoing technological advancements. It should be updated with all the latest technologies to compete in a better way and maintain its position into the market. Caterpillar is always using the best technologies for manufacturing its construction equipments. Moreover it has invented many new products with the best quality and price range among the whole market.

Environmental factors – The Caterpillar has moved towards the sustainable development i.e. they are focusing on new technologies and innovations to increase the efficiency and productivity of the organization by not impacting the environment and also providing guidelines to the customers for doing the same. Their mission is “to enable economic growth through infrastructure and energy development, and to provide solutions that protect people and preserve the planet”.

Legal Factors – The various laws and legislations of the country in which the company is operating cannot be ignored. The laws related to import and export, employment laws, labour laws, should be taken care of. A lawful and legal organization can effectively survives in long run.

SWOT Analysis

The SWOT Analysis shows the Strengths, Weaknesses, Opportunities and Threats available with the organization and provides an opportunity to the organization to use its Strengths and Opportunities for the betterment of the organization and keep the organization safe from its weaknesses and outside threats. Let us discuss the SWOT Analysis of Caterpillar.

Strengths – The main strength of Caterpillar is that it is a global leader in its own industry as it is world’s largest manufacturer the construction and mining equipment, diesel and gas engines and natural gas turbines. It is ranked as number 44 among all the organization in 2009 by Fortune 500. It has the highest revenue generation and highest share value in the market as well. It has a strong financial condition as it can grab the worldwide opportunities available. Caterpillar has 110 plants worldwide and is serving around 200 countries which show its huge customer diversification. It has a strong dealer’s worldwide network which contains over 200 full line dealers that helps the organization in capturing about 60% of the market.

Weaknesses – In recent years the company has faced many downtowns. The sales volume of the company is decreasing since 2003 which results in less revenue. Also the long term debts of the company have been increasing. The company does most of its sales through its independent dealers. Dealers show a very less confidence towards the Caterpillar’s new forecasting system.

Opportunities – Caterpillar has good opportunities of growth in developing countries like India and China. These countries demand lot of construction equipments and engines as well. Again the growth in the population demands more construction. Entering into joint ventures and acquisitions provides good opportunities for the company’s development. In 2004, the company formed Caterpillar Power Generation Systems in association with Solar Turbines Incorporates to market the products of both the companies which further reduces the manufacturing costs of the firm and makes the organization more competitive.

Threats – The outside threats cannot be ignored as they affect the organization adversely. The recent threats faced by Caterpillar include the rise in the prices of raw material especially metal prices. This increases the manufacturing cost and further decrease the organization’s profits. The demand of the mining equipments depends on the population growth and Gross Domestic Product growth which is very uncertain. The deal between Caterpillar and United Auto Workers finishes in 2004 which enable strikes and disruptions in work. Hence such contract expuration are great threat to the organizations.

Porter’s Five Forces

Porter’s Five Forces is a business strategy that is formed by Michael E. Porter. He points out the five forces available in the macro environment that affects the abilities and capabilities of an organization. These five forces are threat of new entrants, intensity of competitive rivalry, threat of substitutes, bargaining power of customers and finally bargaining power of suppliers. This helps an organization to be aware of the outside environment and make their business strategies accordingly. The further discussion on Caterpillar’s Porter’s Five Forces is as follows:

Threat of New Entrants – The threat of the new entrants in very low for Caterpillar. Caterpillar is into manufacturing the construction equipments which requires a huge capital and resources. It is difficult for any new entrant to invest that much into this industry when it knows that there are already highly competitive firms available. Caterpillar should compete continuously with its competitors to maintain its position into the market.

Intensity of Competitive Rivalry – Caterpillar faces a high competition into the market and the other competitors can overcome Caterpillar anytime if they lose focus or using bad business strategy. Caterpillar has around 50 competitors worldwide that controls around 80% of the market.

Threat of Substitutes – There is nearly no threat of substitutes for Caterpillar as it is involved into the manufacturing of such unique construction and mining equipments.

Bargaining Power of Customers – The customers have a moderate bargaining power as most of the sales are done through independent dealers and pricing is done according to the markets.

Bargaining Power of Suppliers – Again the suppliers also have a moderate bargaining power. For manufacturing construction equipments, there is a need of steel or other heavy raw materials which are difficult to transport and also costs very high. Hence an increase in the prices of raw material is a big issue for the organization.

FUTURE STRATEGIC PLANNING OF CATERPILLAR

Caterpillar has set various targets for future and is seriously involved into the achievement of those targets. The organization has set its strategy as Vision 2020. This strategy sets the stage for the next phase of the company’s leadership and growth in the global industries it serves. The visions and missions set by Caterpillar are very practical and will provide further development to the organization. In the past 80 years, Caterpillar has proved itself to be a well established business with effective management and business strategies that helps the organization to maintain its profits and position into the market even at the time of recession. The organization knows the ways of beating the recession and wins back its position into the market.

Caterpillar’s future strategic visions are like becoming a recognized leader in its own industry everywhere, the products, services and solutions provided will helps the customers to succeed, making use of the organization’s distributions system as their competitive advantage, maintaining good labour relations and acquiring highly talented people. The organization has set various targets for its next five years i.e. providing the best return to its shareholders, hiring and maintaining the best talented people into the organization and becoming a global leader everywhere they do business. These targets are already achieved by Caterpillar to great extent. The 100% achievement of these targets needs more efforts. Caterpillar is now focusing towards more sustainable development i.e. making the efficient and effective use of the resources available without impacting the environment and also works for the society as a whole.

Caterpillar has named as one of the top 10 industrial supply chains in 2010 on Gartner’s Inc. top 10 list. Also the Caterpillar’s Chairman and CEO, Doug Oberhelman named into the top 50 people in business according to Fortune’s 2010. Hence Caterpillar is actively involved in the development of its business and competing at its best into the environment.

Future Recommendations

Caterpillar should be opening new markets all over the world as an expansion of its business mostly into the developing countries as around 80% of the population lives there and they demand for such construction equipments on high basis. Also the diversification into the product line and customers is important for further growth. Lack of diversification reduces the sale which has already suffered by the organization. The diversification of the products done by the organization in the past proved to be very profitable.

Marketing has become an essential part of any organization. Successful marketing plays an important role in gaining competitive advantage. A wide spread distribution service network is important is essential in competing with heavy construction equipment industry. Joint ventures are important to expand the new markets and diversify into new products. This is important for the growth and development of the organization and to cover a large number of customers.

Recently the global economy downturn decreases 25% of the Caterpillar sales. The ability to rebound the economy plays a significant role in the profitability maintenance of the organization. The other critical issues for the organization like changes in the prices of raw material, changes in the government monetary and fiscal policies, the credit risk involves into the financial services provided by Caterpillar etc. should be given special attention as their affect on the organization can proven to be the worst.

Continuous growth and development initiatives are important for the maintenance of the topmost position into the market. Like entering into the new markets, diversification of products and services, customer diversification, sustainable development, new distribution channels etc. The full usage of its Strengths like company’s strong reputation, dominating among the industry, good financial condition for upto date technology and beating any competition and diversified business competencies, will provide a competitive advantage to the organization.

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