Background

Caterpillar Inc., the world's largest maker of earth-moving machinery - and a frequent
disappointment to shareholders during the 1980's. It often lost money because of industry
overcapacity, fierce price competition and a strong dollar. And, like other capital goods producers
in recent years, it suffered in the depressed economic conditions worldwide.
Caterpillar finished at $64.875, up $1.875 for the week, after selling at $65.875 - its loftiest price
since 1981. The stock has bulldozed its way consistently higher since October, when it sold at
$36.625.
The turnabout in Caterpillar's fortunes resulted chiefly from cost cutting and restructuring moves,
along with a decline in the dollar that restored pricing flexibility and enabled the company to
regain market share.
'The company had been negative on the stock for three or four years, but later on when the stock
was at $45.25, it recommended its purchase, based on an improved outlook for earnings.
Caterpillar's stock has been rated as a buy since August 1983. It was estimated that the
company's earning power at between $8 and $10 a share by 1990. It is now operating at 60
percent of capacity and talking about that rate going up to 90 percent in time.
Caterpillar accounts for 40 percent to 45 percent of the worldwide market for earth-moving
equipment and other heavy machinery. A leading competitor is Komatsu Ltd. of Japan, with a
market share of about 15 percent.

Timeline of Caterpillar

199

D.V. Fites is named Chairman of the Board.

199

Around 300 Caterpillar machines help construct the Three Gorges Dam in China.

199

Caterpillar machines work on the Kansai International Airport, Osaka, Japan.

199

Caterpillar introduces the worlds largest mechanical drive mining truck the 797.

199

Caterpillar introduces a compact construction equipment product line.

199

Caterpillar acquires Varity Perkins and changes the name to Perkins Engines Company

Limited in England.

199

G.A. Barton is named Chairman of the Board.

The key to improving performance is not to blame individual performers, but to realign those
building blocks to support decision making thats more consistent with the overall strategy and
performance objectives of the company.
That is exactly what happened during the late 1980s and early 1990s at Caterpillar Inc., a $30
billion global manufacturer of large construction and earth-moving equipment, engines, and

power systems. Cat, as people call it, is a company that had enjoyed a long-standing record of
profitability and market leadership until 1982, when it was almost put out of business by an
unanticipated surge of competition. Caterpillar rebounded reasonably quickly and successfully at
that time; it returned from near-bankruptcy to profitability in a few short years. But many
companies can do that once. What distinguished Caterpillar was the moves it made afterward:
The Company reshaped its DNA on all four levels in a way that permanently changed the culture
and capabilities of the enterprise.
This was a revolution that became a renaissance, says Chairman and CEO James (Jim) Owens,
who was a midlevel manager at Caterpillar when the story began. It was a spectacular
transformation of a kind of sluggish company into one that actually has entrepreneurial zeal.
Problem Identification:
Caterpillar had a terrible problem in South America, and thats where the company sent Doug
Oberhelman. It was the early 1980s, in the depths of the Latin American debt crisis, when the
region got economically clobbered. The company sold 1,200 machines a year in Argentina in the
late 70s. It was a miserable experience including putting PROPERTY OF CATERPILLAR
decals on repossessed construction equipment but its value has lately become evident.
Its not that Caterpillar was doing poorly before the downturn. It was and still is the worlds
dominant maker of construction and mining equipment, as well as a leading producer of diesel
and gas engines, industrial turbines (essentially jet engines that power equipment and generate
electricity), and locomotives. No competitor can match the breadth of Caterpillars product line.
Its largest rival, Japans Komatsu, will take in an estimated $25 billion in revenue this year
compared with Caterpillars $50 billion. Other competitors include Volvo, John Deere, Doosan
Infracore of South Korea, and Chinas LiuGong plus hundreds of small, local, specialized
producers.
While none of those companies threatened Caterpillars dominance in the boom years, they were
(and remain) tough competitors, and Cat, as the big, old, successful incumbent, faced the
inevitable dangers of success: loss of strategic focus, weak discipline, and maybe someday being
overtaken by an industry disrupter. The recession pushed Caterpillar off that road.

SWOT Analysis

SWOT Analysis

1.

Superior

Channel

network

throughout

the

world

2. Top notch Dealer service, which is the same everywhere

3. Strong portfolio of products to meet every application
4. It acquired three big companies like Bucyrus, EMD, and MWM
which are already adding to the companys top line
Strengths

5. It has an employee base of over 150,000 employees

1. Europe accounts for nearly a quarter of Cat's total revenues;

The
2.
Weaknesses

current
Falling

crisis,
sales

therefore,
in

Africa

remains
and

a
Middle

concern
East

3. US Real Estate Housing Market has fallen down

1. Higher construction and mining activity in the emerging

markets
2. After the Bucyrus acquisition, Cat has a broader mining product
range than closest competitor and mining giant Joy Global
3. Future trends such as natural-gas powered vehicles can provide
Opportunities

Cat newer avenues

1. Stiff competition from Joy Global, which is upgrading and

setting

up

new

capacities

in

China

2. High inflation and construction slowdown in U.S. & China

remains

challenge

3. Mining operations dependent upon material prices and political

Threats

stability

Strengths: Caterpillars strengths include its strong brand image, large-scale assets, and its
strong global distribution network. The companys strong brand image is based on the fact that
the Caterpillar name is well-known around the world for quality. The company also has largescale assets that can be used to support further business growth and development. In addition, the
firm has a large global network of distributors. 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 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: Caterpillars weaknesses include its low rate of innovation and limited connections
in emerging markets. The low rate of innovation is typical in the heavy equipment and financial
services industries. However, this weakness makes Caterpillar vulnerable to competitors that
aggressively invest in technological innovation. Limited business connections in emerging
markets prevent the firm from maximizing revenues. For example, while it already operates in
China, Caterpillar still lacks an extensive network of distributors in the Chinese market. In recent
years the company has faced many downtowns. The sales volume of the company is decreasing

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: Caterpillars opportunities include increasing its revenues through growth and
expansion, and increasing competitive advantage through innovation. The company can grow
and expand in emerging and developing markets, especially in Asia. The business can exploit the
construction boom in these markets. Caterpillar can innovate to develop better or new products
to capture more of the global market. Caterpillar has good opportunities of growth in developing
countries like India and China. These countries demand lot of construction equipment 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. 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 threats to Caterpillars business are imitation and aggressive competition. Imitation
has become an issue in the advent of local or regional firms that simply copy the original designs
of global firms. For example, some Chinese manufacturers could easily use Caterpillar designs
with some modifications to produce products that compete against Caterpillar. On the other hand,
aggressive competition could come in the form of rapid technological advancement of major
competitors. For example, Japanese competitors could integrate robotics in their products to
make them more competitive than Caterpillars. 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 equipment depends on the
population growth and Gross Domestic Product growth which is very uncertain. The deal
between Caterpillar and United Auto Workers will enable strikes and disruptions in work. Hence
such contract expiration are great threat to the organizations.
Porter 5 Forces:

Threat of new entrants: There is a low threat of new entrants in the industry because of the very
high capital required to establish a new firm that produces heavy equipment. Small businesses
could enter the industry and provide heavy machinery through small-scale production. However,
these small new entrants have minimal effect on firms like Caterpillar. Caterpillar is into
manufacturing the construction equipment 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.
Competitive rivalry: Caterpillar faces high competition in the industry. In heavy equipment
manufacturing, there are significant competitors from countries like Japan and the Netherlands.
These competitors are also major players in the global market. They have engineering expertise
comparable to that of Caterpillar. In financial services, competition is even higher. There are
many small, medium and large financial service companies that directly compete with firms like
Caterpillar. 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: The threat of substitution is low. For instance, crude tools can be used as
substitutes to heavy equipment from Caterpillar. However, the current trend is toward
mechanization and automation. Thus, customers are unlikely to shift away from using heavy
equipment like those from Caterpillar. There is nearly no threat of substitutes for Caterpillar as it
is involved into the manufacturing of such unique construction and mining equipment.
Bargaining power of buyers: Caterpillars buyers include groups and organizations. For
example, construction firms and government agencies purchase heavy trucks and machines from
firms like Caterpillar. The bargaining power of buyers is low because of limited options. Only a
few major companies offer products with high quality and durability compared to those of
Caterpillar.
Bargaining power of suppliers: Caterpillars suppliers are companies that provide raw materials
and components for its products. The company uses various suppliers for its production because

it has different manufacturing locations around the world. No single supplier can exert
significant pressure on Caterpillars business. Thus, the bargaining power of suppliers is low. For
manufacturing construction equipment, 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.

Recommendation:
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 equipment 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.