Caterpillar Mitsubishi Case Study Essays

Caterpillar Mitsubishi Case Study Essays Caterpillar Mitsubishi Case Study Paper Caterpillar Mitsubishi Case Study Paper Essay Topic: Marketing The case is about the strategies applied by George Schaefer, CEO of Caterpillar, after 1985. In 1982, Caterpillar faced with its greatest crisis because of demand fall. Its sales dropped by almost 50% between 1982 and 1984. Komatsu, the Japanese competitor, fully exploited the situation by adding new lines in U.S.A and announcing the establishment of new manufacturing operations in the U.S.A. and England. On the other hand, Caterpillar closed six plants, laid off approximately 24,000 people between 1981 and 1984. Therefore, Schaefer was taking over a very challenging task by becoming the CEO of Caterpillar in 1985. Till the time of Schaefer, Caterpillars organization structure was hierarchy dominated and the managers were not customer-oriented enough to stay strong in a competitive environment. Hence, immediately after taking the charge, Schaefer set in motion a series of strategic and organizational changes that he hoped would firmly reestablish Cats strong competitive position and rebuild its sound financial condition. The rest of this essay highlights those strategic decisions and actions under separate headings. Business Strategy Conference The purpose was to force managers to step back from the frenetic cost cutting and focus on plans to ensure long-term viability. A debate was whether to diversify or focus on core business. The result was because of slow growth opportunities on the core business market, they decided to develop additional, related products and services. The outcome of BSC was the Ten Initiatives list. This list provided a blueprint for the new directions and activities Schaefer would implement over the next few years. From Manufacturing to Outsourcing One big move was the transition from manufacturing to outsourcing. Manufacturing was once a competitive advantage for Cat but after the 1982 crisis it has been seen that it has now became a liability, because the plants were simply too costly and too inflexible. A new policy of shopping the world led to and increase in outsourcing. While decreasing the manufacturing capacity, Schaefer started the Plant with a Future (PWAF) program to make Cat the industrys lowest-cost, high-quality producer. PWAF achieved in two aspects and failed in other two aspects. The program was able to achieve manufacturing space by 28% through plant closings and achieved savings by simpler manufacturing processes. However, the 15%-20% cost cutting goal by 1990 was seen to be delayed by one year, in 1987 (the achieved cost cutting rate was 7% then). In 1988, the company stopped reporting specific cost reductions, claiming they dont work in a period of rapid production increases. The forth phase of the program which was the development of fully integrated engineering, logistics and factory operations, shortly called paperless factory. In 1986, it is postponed indefinitely due to the lack of integration software. Also, in 1988, management estimated that the cost of PWAF might be 50% more than it was first foreseen. This meant that PWAF could never earn an appropriate return. The New Approach to Markets * Cat adopted a flexible pricing approach to counter Komatsus price challenges. In addition, managers began to focus on percent of industrys sales as the primary performance measure. * The Caterpillar World Trading Corporation was formed to access particularly to closed markets. * The company developed a more flexible approach to ownership and control where it led market access. In 1985, it signed a licensing agreement selling technology to the Chinese to help them develop a national construction equipment business. In 1989, its products were being produced under license by independent manufacturers all around the world. * New product introductions to offset slow market growth. * Marketing leverage: A strategy of outsourcing products to sell through Cats existing distribution network. The backhoe loader production success story, given in the case is very interesting in the sense that the team responsible from the new product development achieved the project by violating several company practices. Also they have outsourced some of the components, even though the counterparts of those components were available from Cat, mainly because of cost reasons. Cats components were high quality designed for top-end, heavy equipment while a backhoe loaders requirements were lower hence the outsourced parts were cost wise more advantageous. The agreement with Mitsubishi Heavy Industries to transfer worldwide design responsibility to Japan was a big step for Caterpillar. The purpose of the Cats management in that deal was to penetrate to Japan market. Besides this main target, learning the Japan way of production was seen as an asset in that deal. The New Organizational Environment Schaefer saw that the root of many problems of Cat was its functionally dominated and hierarchically structured organization. He said that We dont need perfectionwhat we need is the best decision with minimum study and input. The key success factors Schaefer tried to put forward were empowerment and delegation, which was not aligned with the classical way of Cats management. Hypotheses; 1. As presented by Jeffrey R.Williams in his Renewable Advantage book, Schaefer tried to force the company to be a scale orchestrator in its environment. A successful organization has to be dynamic and continually evolving through gradual realignment with its changing environment. 2. Although not clearly said this case presents two types of management style; one manager like Schaefer, who is looking for innovation and trying to find new approaches for the future of the company, while the other is more conservative, hesitant to make changes and not open to new decisions and actions. It can be said that the future will be the managers like Schaefer, who are willing to change both themselves and the company according to their environment. Emotional attachment to the business will lead to failure. Historical Prospective on Business Development Caterpillar Introduction Caterpillar can trace its roots back to the late 1800s when Daniel Best and Benjamin Holt were both working on engine powered agricultural equipment. In April of 1925 the Best and Holt companies merged to form what was then known as the Caterpillar Tractor Co. Caterpillar Inc, headquartered is in Peoria, Illinois and is the world leading manufacturers of heavy construction, earth moving and materials-handling machinery. For more than 50 years Caterpillar dominated their market segment through huge capital investments in the year 1950 1980. It establishment in 1925 means a long history of the company. Indeed, the company experienced different conditions throughout the history. The historical review will highlight major developments of the company in the past. Major Periods of Historical Development 1900 1925: Pre-establishment period 1925 1980: Growth era !980 1985: Crisis period 1985 1990: Turnaround and come back 1990 1999: Continued transformation 2000: New challenges 1900 1925 Pre-establishment Period The heavy construction equipment industry has the root in the agriculture, as tractors were used to plough the cultivating land. From there, the earth moving equipment and vehicle was developed. Invention and technological developments led to the birth of Caterpillar in 1925. 1925 1980 The period can be considered as the most successful period of the company. The period can be further divided into; pre-war (before 1936), during the war (1936 1945) and post-war (1945 1980). The pre-war sales growth can be counted in relation to developments and growth in the agriculture sector and mining sector. The demand for the companys product was exploding during the war, as the military used Caterpillars bulldozers. The demand was tremendously increased when the ruined Europe was reconstructed after the war. The growth of the company was therefore associating with the market development. The company began manufacturing in other countries and set up subsidiaries in the major markets. Thus, the company became a multinational company. The company could position itself in the market as a premium quality products manufacturer. The company held major market shares. The company was gaining high margin as its price is high. The competitors were Komatsu, John Deere and CNH Global. The competitors increased competition through various manners, especially by improving the quality and reducing the price. The company was in fact successful, despite the increasingly threatening situation of competition. In 1931, the company created a separate engine sales group to market diesel engines to other original equipment manufacturer. This group was replaced in 1953 with a sales and marketing division to better serve the needs of a broad range of engine customers. Then in 1963, Caterpillar and Mitsubishi heavy Industries Ltd formed one of the joint ventures in Japan to include U.S. ownership. Caterpillar Mitsubishi Ltd started production in 1965 in a new facility at Sagamihara, 28 miles southwest of Tokyo. In 1987 it was renamed Shin Caterpillar Mitsubishi Ltd to reflect an expansion of the original agreement. 1980 1985 Up until 1973 Caterpillar witness little competitive pressures. This enables them to possess a dominant attitude where they began raising prices for their equipment annually, almost 10%, not expanding their product line. Caterpillars corporate environment was the essence of their problems that hindered their position in the external marketplace. Since the organization was hierarchically structured it bred parochialism and risk aversion. Komatsu, a leading Japanese competitor, began gaining valuable market share away from Caterpillar. Caterpillar also witnessed a major set back in 1982 when the energy boom ended, a major recession kick in and unfavorable currency exchange. Though CAT saw their highest sales and profits in that year, the demand for heavy equipment dropped. CAT also was enduring a long UAW strike that demanded 90% higher wages than their competitor Komatsu. Ultimately CAT suffered heavy losses in the next three years to follow with sales dropping below 50%. Komatsu took advantage of the situation and began major marketing and manufacturing efforts in the US. Komatsu ended up doubling their market share to 25%. Caterpillar was forced to react. They began closing plants which amounted to 15% of its total manufacturing space and began to reduce headcount. Inventories were cut in half and the company ultimately reported $428 million dollar loss in 1984. The company responded to the situation by formulating appropriate strategies. The strategies fall basically in the category of turnaround strategies. 1985 1990 Mr George Schaefer was the first CEO after the 1980s crisis. He was a congenial manager who encourage CAT executive to openly admit the companys past mistakes and implemented the turnaround strategy. He outlines a series of initiatives designed to bring the company out of the hole. Caterpillar was to cut annual costs by 225, or $2 billion, by the end of 1986. In 1986 the company officially recognized that it was much more than just a manufacturer of tractors, and they changed their name from Caterpillar Tractor Company to just Caterpillar Incorporated. Along with this change and the reestablishment of the organization as a world leader and profitable growing company, they changed their trademark Block C logo, for a newer, more modern look. * Global outsourcing * Boarder product line * Labor relations * Employee involvement (ESP) Launched a daring factory-wide plant modernization program termed Plant with a Future, or PWAF. Initial forecasts estimated capital expenditures of $1 billion, which was revised to $1.8 billion, spread between 1986 to1992. The objective was to shift from traditional mass manufacturing to forms of advanced, flexible production through the use of just-in-time inventory techniques and sophisticated factory automation, resulting in estimated savings on manufacturing costs of 20% by late 1992. This would result in about $1.5 billion a year in savings. The long-standing functional arrangement of people and machine on the factory floor was to be dismantled. Instead, all manufacturing work was to be arranged in product and sub-product dedicated cells or modules. Looking back at Schaefers five year-long tenure, the turnover strategy and efforts were effective and successful. Caterpillar had reemerged as a global competitive company, lean, flexible and technology advanced. Caterpillars world market share rebounded up by 7 percent (from 43 percent to 50 percent), while increased the revenues by 66 percent. The success was greatly credited to the good leadership by Schaefer and his adoption of consensual approach. Though the company was in good standing in 1989, Schaefer still had a number of issues to deal with in order to ensure long term growth. 1990 1999 Donald V Fites, born on a farm in Tippecanoe, Indiana, was appointed as CEO in 1990 succeeding George Schaefer. Transformation was continued as the situation was not yet fully recovered because the stock price was lagged behind the earning. During the first two years of Mr. Schaefers retirement, the company actually lost money $2.4 billion in 1992. The reasons behind this situation were an industry-wide downturn in its domestic and international market and the increase in dollar value. Fitess leadership style was totally different from previous CEO, George Schaefer, he expects people to challenge him forcefully, his focus was more aggressive and towards customer orientation. His strategic approaches were towards reorganization, downsizing through cutting thousands of management and production jobs, expansion of worldwide computer network and diversification. Under Fitess leadership, sales had increased by approximately 85% between 1991 and 1997, with annual net income moving from a negative $404 million to a positive $1,665 million during the same period. CATs stock price reflected these financial results, showing an increase of nearly 300% from December 1992 to December 1997. Caterpillars record sales revenue came to an end in 1998-1999, as the industry sliding into a recession. Revenues and profits declining as a result of a strong dollar coupled weak demand for CAT products. The overall sales in 1999 fells by 6% and profit fell 37% below $1 billion and the return on equity fell to 17.9%. Overall, this period was not an absolutely successful period. The situation was also unstable. External shocks came and impact more frequently upon the company than previous period. The company was however more responsive to the changing situations. The company could therefore defend its position in the market. 2000 Glen Barton The year of 2000 and later was very critical to the company, as the company faced many unfavorable situations, such as downturn in the U.S. construction market and despite the rising demand in Asia and Latin America. The new CEO Glen Barton realized that he needed to ensure the future of Caterpillar in the long run and therefore embarked in the following growth strategies: * He believed that the downturn of the US market could be eliminated by an upturn in the international market. * He increased sales of Caterpillars equipment to the developing nations such as Asia, Latin America, and Eastern Europe. By doing this he created new markets for the company. * He made non truck engines incase of a decline in the truck engines. Such diversification enabled the company to produce engines even the truck engine part offset. * Under the leadership of Barton, Caterpillar started to sell mobile power modules. * Caterpillar started to rent business equipment. Barton made efforts to make dealers diversify into rentals. As successful as it is the rental distribution segment of the fastest growing segment. * He also used joint ventures to expand into new markets, and he was very successful. He formed joint ventures with Daimler Chrysler and started to produce medium duty engines. He also started to manufacture fuel systems. Those fuel systems were designed to increase efficiency of diesel engines and thereby reduce diesel emissions. Conclusion The historical analysis of the companys changes and development reveals the changing environment and the need of strategic approach. The slow reaction by the company in early days before 1980 (crisis) shook the position of the company in the industry. Aggressive approach was therefore necessary in such rapid changing environment.