The Comeback Of Caterpillar, 1985-2002.

MGMT 479 - STRATEGIC MANAGEMENT

Case Study #1: "The Comeback of Caterpillar, 1985-2002."

Synopsis:

In the early 1900's the heavy steam tractors of farmers of the delta in the San Joaquin Valley, California, consistently sunk into the moist soil. Their attempts at bigger wheel to solve the problem proved futile. Benjamin Holt, a combine maker, replaced the tractor wheels with tracks, distributing the tractor's weight more evenly over a broader surface that gave the tractors more traction. Additionally, he replaced the heavy steam engines with gasoline that made the tractors lighter and solved the problem of sinking into the soil. Holt nicknamed the tractors Caterpillar, acquired the trademark and incorporated it into several of the crawler-type machines that his companied had manufactured and sold. By 1915 his tractors were sold in over 20 countries. In 1925 the Holt Company merged with the Best Tractor Company to form Caterpillar (25-3).

The military was the first to use the crawler tractors outside of the agricultural industry. During the early 1930's, Caterpillar discontinued the combine manufacturing and concentrated its efforts into the production road-building, construction, logging and pipe-laying equipment. During the postwar era of World War II there were great demand for Caterpillar prod for the reconstruction of Europe, the building of interstate highways in the US and the construction of infrastructure, dams, and airports throughout the world.

Caterpillar built a strong reputation by producing reliable, durable and high-quality equipment, offering quick after-sale service and prompt delivery of replacement parts that during the 1950's and 1960's they were the undisputed leader in the industry. Caterpillar also established international subsidiaries through independent dealers that distributed, sold and serviced the Caterpillar equipment.

Because of their leadership in the industry, Caterpillar was able to charge premium prices for their quality products, paid high wages and offered high rates of return to its shares holders. However, by 1982, after record years of sales and profits, due to a global recession, a costly strike and devaluing of the US dollar, Caterpillar was thrust into three consecutive years of loses totaling almost one billion dollars. Fierce competitors like Komatsu Ltd. From Japan, launched a massive campaign to dethrone Caterpillar's leadership in the international market even determined to undermine their share of the US market. During this time of crisis, Caterpillar re-examined their past activities and realized the necessity for a drastic change in the way the did business. In 1985, Caterpillar hired George Schaefer, as the CEO of the company.

Under his leadership, Caterpillar devised and implemented several strategies that impacted many functions of the company including purchasing, manufacturing, marketing, personnel, and labor relations. These strategies he accomplished in the following ways:

1. Global Outsourcing: Schaefer replaced the company's heavy reliance on in-house production with global outsourcing. Through its new policy of "shopping around the world", Caterpillar worked closely with and purchased about 80% of its parts and components from low-cost suppliers around the world. However, through branding, Caterpillar sold these outsourced products under its own name.

2. Broader Product Line: Because heavy equipment was no longer selling, Caterpillar had to re-examine it mix of products and switch to light construction smaller machines.

3. Labor Relations: Because of Schaefer consensual style of leadership, he was able to develop a cordially working relationship with the Union. He got the Union to agree to reduce the number of labor grades, job classifications, and to streamline seniority provisions, which gave his managers flexibility in placing the right person in the right job.

4. Employee Improvement: Through the company, Schaefer encouraged employees participation in the decision making process. Work teams were created and weekly managerial meetings with employees festered greater productivity and high employee satisfaction.

5. Plant with a future: The plants were automated and streamlined to be more productive and less wasteful of time and resources. They went from "batch" production to the "just-in-time" technique that provided the product when needed. The reorganization of the planted extended into the tenure of Schaefer's successor, Donald Fites after he resigned in 1990.

Although the company underwent a remarkable turnaround under Schaefer, the company lost money the following two years. Donald Fites leadership style was more assertive and he patterned his labor relations to that of the Japanese. Fites rotated his executives thus cross-training them in ever aspect of the business. He was a marketing manager, and concentrated his reorganization of the company on the customers' needs and changed the structure of the company by:

1. Reorganization: Fites found the old managerial structure redundant so to compete globally he broke the company into 17 "profit-making" divisions, 13 responsible for products and 4 for services. He demanded that the each post a 15% rate of return on assets and threatened penalization for failure. Under this new structure 10,000 jobs were downsized 1990 - 1993 including 2000 salaried managers.

2. Information technology: Fites invested in a computer networking system that linked all the factories, distribution centers, dealers and large customers together, creating the most comprehensive and faster parts delivery system in the industry.

3. Diversification: He expanded the sales into farm equipment, forest produces, and compact machines. The growth in engine sales was the largest Caterpillar had known

4. Labor Relations: He strongly opposed and resisted the UAW pattern agreement that was commonly used by other industry leaders like John Deere. The Union filed many charges with the NLRB and finally in 1998 an agreement that favored Caterpillar were agreed upon.

Glen Barton succeeded Fites in 1999. The same year Caterpillar profit fell by 37% and its North American market, which accounted for half of its sale and two-thirds of its profit, was in a sprawl. Barton sought to use Caterpillar's global positioning to relieve the slump of the American market. Barton strategized his plans as follows:

1. New markets: At this point Caterpillar sales to developing nations accounted for only 23% of the company's total sale. Barton made it a priority to increase the sales to these nations.

2. Diversification:

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