caterpillar the little engine that could? web viewcaterpillar is a large, complex organization known...
TRANSCRIPT
Grainne Bonestroo
MBA 617- March 2016
Caterpillar… The little engine that could?
Table of ContentsThe Origin Story:..........................................................................................................................................3
The Organization:........................................................................................................................................3
The Obstacles:.............................................................................................................................................4
Critical Analysis:...........................................................................................................................................5
Recommendations for Change:...................................................................................................................8
Final Thoughts:............................................................................................................................................9
Appendix...................................................................................................................................................11
Figure 1..................................................................................................................................................11
Works Cited:..............................................................................................................................................12
2 | P a g e
The Origin Story:In the early 1900s in the San Joaquin Valley Delta farmland, Benjamin Holt attempted to
tackle the issue of heavy steam tractors which often sunk into the soft ground. In his first
attempt, Holt increased the wheel size and width which resulted in a tractor 46 feet wide. While
this helped solve some of the issues, it was increasingly complex, expensive, and difficult to
maintain. Holt went back to the drawing board and contemplated laying a plank road ahead of
the steam tractor to prevent it from sinking. This idea was dismissed due to the expense, time,
and the fact that it would interfere with the earth moving. However, implementing this thought
in a more practical approach, Holt replaced the wheels on a 40HP Holt steamer #77 with wooden
planks bolted to chains, thus creating the first version of tracks. In 1904, the machine was
successfully tested and observed to have “moved like a caterpillar” by company photographer
Charles Clements, and thus Caterpillar was born. On February 2, 1910 Holt opened a plant in
Peoria, Illinois and began operations with 12 employees. Within two years, the organization
proved to be so profitable that they employed 625 employees and had exports to Argentina,
Canada, and Mexico. (“Caterpillar Inc. - Wikipedia, the free encyclopedia,” n.d.)
The Organization: Caterpillar is a large, complex organization known for their iconic yellow, earth moving
equipment all around the world. In 2009, Fortune ranked Caterpillar number one in their
industry, and number 44 overall on the Fortune 500 list. They manufacture construction and
mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric
locomotives. They operate in three main product segments: Construction Industries, Resource
Industries, and Energy & Transportation. Caterpillar also provides financing and related services
through its Financial Products segment and uses a network of distributers to sell their products.
3 | P a g e
Caterpillar currently has 12 board members, and operates with high vertical and horizontal
differentiation. (“Caterpillar | Company,” n.d.) They operate in a matrix structure which can be
seen on the company’s organizational chart in Figure 1. Caterpillar is publically traded on the
NYSE (CAT) and is one of the 30 companies that comprise the Dow Jones Industrial Average.
Since the organization’s early start, Caterpillar has remained in Peoria, Illinois and has
continued to make this the base of their corporate headquarters. However, since their humble
beginnings on the farmlands of the San Joaquin Valley, Caterpillar has seen increasing
competition from John Deere, Komatsu, Volvo, Mitsubishi, and United Technologies Corp. just
to name a few. The equipment industry follows a cyclical cycle, complete with its ups and
downs, which has been causing turbulence for the organization the last several years.
Caterpillar understands that to ensure that they do not die out in these difficult times, they must
think like a customer, and act like a startup. They continue to invest time, money, and resources
into improving the technology in their equipment to guarantee the best product is being given to
their customers in order to maintain that competitive edge. (“Caterpillar’s Culture of Innovation |
peoriamagazines.com,” n.d.)
Caterpillar is a diverse workforce that speaks over 100 languages and is bound by a
common goal: making the world better tomorrow because of the work they are doing today.
Caterpillar uses the 6 Sigma system to ensure costs are kept low and production is efficient
which has allowed them to remain a leader in the industry.
The Obstacles:Caterpillar is an American company that operates in three main product segments,
Construction Industries, Resource Industries, and Energy & Transportation. A large percentage
of their revenue comes from international sales, while less than half has traditionally come from
4 | P a g e
North America. As the strength of the dollar has grown, this has made it more difficult to
compete globally. In addition, this has opened up competition from other companies to beat
Caterpillar in price, and encroach on their market share. The next hurdle that Caterpillar faces is
decreased commodity prices and declining oil and natural gas prices. Traditionally, when
commodity prices have fallen, Caterpillar was able to rely on the energy sector to help prevent
them from experiencing a loss. This decline will affect them across several of their product
segments as a ripple effect. First they will notice it in the equipment directly related to oil
drilling and production, then areas dependent on oil revenues will reduce their construction
activity. Lastly, the economic conditions around the world are overall gloomy. While the US
has been doing better than average, many economies that are resource dependent are struggling.
The plunging prices of commodities and their inability to rebound have effected Caterpillar’s
mining product segment, causing a decrease in sales. (“Caterpillar Faces These 3 Major Threats |
Investopedia,” n.d.) These three issues have made for an increasingly competitive industry and
have made it more difficult than ever for Caterpillar to operate, it has turned the organization
upside down making the domestic sales their only safe haven.
Much like the popular children’s story “The Little Engine that could”, Caterpillar needs
to make some tough choices to power through these hard-hitting economic times so that once
they reach the crest of the hill, they can congratulate themselves for making it through.
Critical Analysis:Caterpillar is a cyclical organization, in times in which the economy and commodity
prices are good, they see an increase in sales, and when they drop, so does their profits.
Organizations deal with uncertainties by obtaining prior information and forecasting events,
predicting and forestalling negative events, and taking action to reduce the negative
5 | P a g e
consequences. Caterpillar continues to cope with the economic uncertainties by making changes
in anticipation of continued decline. In September 2015, Caterpillar announced that in order to
react to declining sales and profits over the last few years, they would restructure, including
eliminating approximately 100,000 jobs worldwide over the next several years. (“Caterpillar to
Cut Up to 10,000 Jobs, Citing Falling Demand - The New York Times,” n.d.) In February,
Caterpillar announced plans to combine two divisions into a new one titled “Electric Power,
Marine and Oil & Gas” by June. "Consolidating these energy operations along with the recently
announced integration of two divisions within Customer & Dealer Support will bring efficiencies
and a streamlined leadership team," CEO Doug Oberhelman said. "With these changes, we will
have reduced executive leadership by 13% since 2013." (“Further division consolidation at
Caterpillar - Caterpillar Inc. (NYSE:CAT) | Seeking Alpha,” n.d.)
Caterpillar continues to make decisions regarding their declining sales in order to ensure
that they can make it through this cycle. They continue to invest time and money into R&D,
developing products that are more technologically advanced for improved operation and
efficiencies. While they are making appropriate reactions to the economic conditions and
adjusting accordingly, it is still a tough market for heavy machinery sales right now. The dollar
strengthening, decreased growth in China, and falling oil and gas prices have all allowed for
competition to enter the market and take away some of the market share from Caterpillar.
One of the largest issues Caterpillar faces is competition from other companies, in part
due to the strengthening US dollar. While the company is unable to control commodity, oil and
gas prices, they need to ensure that they are the number one choice to those who are buying
equipment and machinery right now. In order to compete in this environment they need to offer
competitive prices, in addition to their well-known quality product. At the end of 2015,
6 | P a g e
Caterpillar reported 47.01B in sales revenue, in 2014 they reported 55.184B, and in 2013 they
reported 55.656B, showing that their sales revenue has been steadily decreasing over the last few
years. To combat this concern Caterpillar has worked to shift their operations globally, mainly
Japan, to reduce the risk of competition taking advantage of the strengthening USD. This
approach has allowed them to remain competitive against Japanese manufacturer Komatsu.
(“Caterpillar CEO: Dollar strength is a tailwind for us,” n.d.)
Caterpillar lacks innovation, as do many organizations in the equipment and machinery
industry. New equipment and product designs are lacking, instead Caterpillar focuses on
improving the technology in their existing product lines. They have lost the ingenuity of their
origins when Holt decided that the current machine being used was not the right piece of
equipment and offered a completely new product. Construction and mining equipment have long
life spans if maintained accordingly, this means that it does not require replacement every few
years. Improving fuel efficiency margins, or adding improved technology do not often warrant
companies spending $500,000, or more, to purchase new units if the old ones are still
operational. In addition, product lines that are unchanging allow for competitors to duplicate that
technology and compete for market share. (“Caterpillar Vision, Mission, Strategy, Five Forces, SWOT -
Panmore Institute,” n.d.)
Caterpillar has several advantages however that will allow them to weather the storm.
The first and foremost is their strong brand image and iconic yellow paint which are well known
for quality throughout the industry, they are well established and have large-scale assets and
manufacturing plants in place, and they have a strong dealer distribution network all across the
globe to sell their products. (“Caterpillar Vision, Mission, Strategy, Five Forces, SWOT -
Panmore Institute,” n.d.) They are a well-established company in the industry and are able to
7 | P a g e
use this to their competitive advantage. This also gives them several assets that they are able to
leverage if needed in order to reduce costs.
Recommendations for Change:As a cyclical organization, there are some things that Caterpillar is unable to control in
the times of decreased economic conditions. They are unable to control the effect of commodity,
oil and gas prices and the effect that they have on those resource dependent areas of the globe.
In recent years, Caterpillar has felt a hit across all of their product segments resulting in
continued declining sales. Caterpillar needs to focus on the areas of business that they can
control.
My first recommendation is that Caterpillar needs to engage in boundary spanning. They
are stuck in thinking inside the box in regards to R&D, and are not implementing new ideas to
add to their product lines, instead they are only focusing on changes to their current products.
While the R&D they are developing is helping make more efficient and smarter pieces of
equipment, they are not adding anything new in which companies will see an immediate need to
buy that equipment right now. They need to look at the environments in which they operate and
see if a need exists that is not being filled. They could also look at developing additional
attachments for their existing equipment that companies will be willing to purchase if it saves
them money from having to buy a completely new piece of equipment. Caterpillar needs to
focus on creating products that do not exist, this will allow them to be the first in the industry and
capture all the profits in the short term. Also, as discussed earlier, equipment has a long life span,
therefore when profits are reduced in the industries that purchase your products, you are less
likely to be able to sell them replacement units.
8 | P a g e
My second recommendation is that Caterpillar focuses on the emerging and developing
markets that are still showing growth. The MSCI Emerging Markets Index shows a slowdown
over the course of last year, this also includes China’s economic concerns. When every sector
that you operate is being hit, you need to focus on where the potential for sales are and focus
there, mainly India and China who are still projecting roughly a 7% annual growth. However,
competition will also see this as an opportunity and pursuit these markets as well, so Caterpillar
needs to continue with their Six Sigma practices and keep costs low to remain competitive. They
should also use their established dealer network as a competitive advantage when breaking into
these markets.
Finally, after 90 years of operations, Caterpillar is positioned fairly well, reporting
78.97B in assets at the end of the 3rd Q in 2015. This gives Caterpillar room to move and
weather this cyclical cycle since there does not seem to be an end in sight. They are in a
position in which they can evaluate their current operations and consolidate divisions and
manufacturing plants in order to create cost savings and keep prices competitive. Due to their
large size, they are also able to eliminate positions as the company’s operations decrease.
Final Thoughts:Caterpillar is an industry leader known for their high quality products, however the
turbulent market and economic conditions over the last 3 years is hitting their bottom line. The
demand for construction and mining equipment has decreased, and the competition in this sector
has gotten stronger, resulting in many equipment manufacturers fighting for decreased product
shares. Caterpillar has survived economic downturns before, but they have been able to rely on
usually one of their product sectors to still produce profits. This cycle is different, all product
9 | P a g e
segments are getting hit, and companies are not willing to invest in new machinery, in addition it
is unknown when conditions will improve.
Caterpillar must go back to their roots and think like entrepreneurs. Since they are
unable to control the current economic conditions globally, and until oil, gas, and commodity
prices increase they will not likely see a marked change in profits. This means that there
continues to be tough times ahead. Therefore they need to go back to the drawing board and
focus on creating a product and surviving in the current market conditions. Caterpillar already
has the infrastructure, talent, and brand name recognition, they need to focus on using these
strengths to create a new product that environment shows a need for. If they are able to do this,
they will create a new demand for a product in a time when sales do not come easy, they just
need to keep repeating “I think I can”.
10 | P a g e
AppendixFigure 1
11 | P a g e
Works Cited:
Caterpillar | Company. (n.d.). Retrieved March 5, 2016, from http://www.caterpillar.com/en/company.html
Caterpillar Faces These 3 Major Threats | Investopedia. (n.d.). Retrieved March 5, 2016, from
http://www.investopedia.com/stock-analysis/032015/caterpillar-faces-these-3-major-threats-cat.aspx
Caterpillar Inc. - Company Profile, Information, Business Description, History, Background Information on Caterpillar Inc.
(n.d.). Retrieved March 5, 2016, from http://www.referenceforbusiness.com/history2/92/Caterpillar-
Inc.html#ixzz40lNO13mn
Caterpillar Inc. - Wikipedia, the free encyclopedia. (n.d.). Retrieved March 5, 2016, from
https://en.wikipedia.org/wiki/Caterpillar_Inc.#Manufacturing
Caterpillar’s Culture of Innovation | peoriamagazines.com. (n.d.). Retrieved March 5, 2016, from
http://www.peoriamagazines.com/ibi/2016/jan/caterpillars-culture-innovation
Caterpillar to Cut Up to 10,000 Jobs, Citing Falling Demand - The New York Times. (n.d.). Retrieved March 5, 2016, from
http://www.nytimes.com/2015/09/25/business/economy/caterpillar-feeling-global-slump-to-cut-up-to-10000-
jobs.html?ref=topics&_r=1
Caterpillar Vision, Mission, Strategy, Five Forces, SWOT - Panmore Institute. (n.d.). Retrieved March 5, 2016, from
http://panmore.com/caterpillar-inc-strategic-analysis-vision-mission-swot
Further division consolidation at Caterpillar - Caterpillar Inc. (NYSE:CAT) | Seeking Alpha. (n.d.). Retrieved from
http://seekingalpha.com/news/3134016-division-consolidation-caterpillar?uprof=16&dr=1#email_link
12 | P a g e