Caterpillar: A Mission Statement Evaluation

Headquartered in Peoria, III. Caterpillar Inc. is the world’s largest manufacturer of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. It is a fortune 100 company, ranked number 1 in its industry, with more than $26 billion in assets. It is a U.S. based competitor, recording half to its sales to overseas customers; Caterpillar has maintained its position as a leading U.S. exports in excess of $5.2 billion in 1999. The company directly employees approximately 70,000 people in the U.S. and abroad.

The company is a growth oriented, diversified high technology business. The company is strong, resilient and definitely focused on the future. Glen A. Barton, Chairman and CEO, stated “Caterpillar continues to demonstrate an ability to achieve success and generate reasonable profits even when many of the markets served are at their weakest level in year.” The company remains committed to profitable growth, fully leveraging the benefits of its newly designed e-business and is pursuing improvements in quality through 6 Sigma in an effort strengthen it leading global position.

Caterpillar products and components are manufactured in 42 plants in the U.S. and 49 other plants located in Australia, Belgium, Brazil, Canada, England, France, Germany, Hungary, India, Indonesia, Italy, Japan, Mexico, The Netherlands, Northern Ireland, China, Poland, Russia, South Africa and Sweden. Marketing operations are headquartered in most of the major cities in these countries. Caterpillar’s dealer network is the company’s most important competitive edge. They deliver superior customer service through an extensive worldwide network of 220 dealers, which as of June 30, 2001, was composed of 63 dealers inside and 157 outside the United States. Caterpillar dealers operate more than 1,840 branch locations around the world with 643 Cat Dealer Rental Stores.

“Caterpillar is committed to generating attractive returns for its shareholders. Strategic growth initiatives involving its machine, engine, and service businesses are expected to drive these returns over the next several years.” According to a recent article. Since 1993, Caterpillar has increased cash dividends in eight consecutive years, boosting the quarterly dividend to $.35 per share. Since June 1995, they have repurchased approximately 63 million shares, or about 15 percent of all outstanding shares.

The company recently purchased FG Wilson, MaK and Perkins Engines, which enable the company to be more competitive with higher performance, multi-fuel capability engines. Cat Financial continued to add to the bottom line with revenues of $1.2 billion in 1999. That represents an increase of $142 million over 1998. Cat Logistics is also experiencing rapid growth by marketing out its inventory management and distribution expertise to other manufacturers. Cat Logistics is currently providing such services to DaimlerChrysler, BMW, Honeywell and Ericsson. Another growth area is the rental business. In fact, the number of Cat Rental Stores in North America has increased from 235 in January 2001 to over 270 as of June 30th this year. They are also expanding this line of business in Latin America, Asia and Europe.

Cat’s only global heavy equipment competitor is the Japanese company, Komatsu. Komatsu commanded about 8.1% of the worldwide market for construction equipment in 1996 compared to Cat’s 17.1%. The remaining competitors including Case, Deere, Hitachi, Ingersoll-Rand, Volvo and Liebherr hold a combined 24.8% of the market. Over the past decade, cooperative agreements have become very popular and commonplace. “Collaboration is taking place either through joint ventures designed to share production facilities or via technology sharing agreements. Joint ventures, such as the Caterpillar-Mitsubishi one in Japan, are being used to produce specific models for regional or worldwide sales”, according to the case in our class text.

Examples of technology sharing arrangements include Komatsu’s 50/50 JV with Cummins Engine for the manufacture of diesel engines for Komatsu. Komatsu, in the early 1980’s, was very concerned about American protectionism and the inevitable exchange rate issues. It responded by building its first assembly plant in the U.S., the Komatsu America Manufacturing Corporation. Komatsu’s is headquartered in Tokyo, Japan. It employs over 32,000 people and it’s sales last year were $8.7 billion. Komatsu’s weakest link in the U.S. was always its distribution network. To this day Komatsu is a worthy competitor but is still behind Cat as the worlds number 2 producer of heavy construction equipment.

In the early 1980’s Caterpillar was experiencing significant pressure on it cost structure. To try to alleviate that problem it laid off 13,000 hourly workers in the U.S. Salaries of top management and other employees were cut by 10%. In addition salaries of 9,600 secretaries and technicians were frozen indefinitely. Capital expenditures were trimmed by 36 percent. Debt soared to $2.6 billion compared with $1.8 billion a year earlier in 1981. The UAW represented the 13,000 affected employees ended up going out on strike in the second half of 1982 after talks broke down between both parties. Caterpillar demanded wage freezes and a reduction in the cost of living adjustments. The strong dollar and produced huge wage differentials between Cat and Komatsu. Komatsu’s workers earned about 12 of the pay that Cat’s workers received. The strike finally ended in April 1983 after seven months. Cat had actually anticipated the strike and was able to weather it rather well.

In 1987 another financial crisis required Cat to seek more aggressive cost cutting measures. The company had already trimmed its workforce by 60 percent and closed nine manufacturing plants. At the same time their product line had more than doubled from 150 products in 1984 and the company grabbed some of the smaller equipment market from its competitors. Again in 1991 Cat’s new CEO,

Donald V. Fites had to struggle with mounting costs including a $2.2 billion overhead issue. He reorganized the company into 13 functionally independent profit centers and four service divisions each of which would have its own budget along with a before-tax ROA of 15%.

In the early 1990’s Cat had improved it manufacturing processes, realigned it organizational structure and was regaining market share lost in the 1980 due to Komatsu’s expansion into the U.S. The only significant hurdle continued to be labor costs. High labor costs and a relative lack of flexibility of union workers positioned Cat at a disadvantage relative to Komatsu. Cat’s wages and benefits for an average hourly worker in 1991 were roughly the same as Komatsu’s due to the weakening dollar. Fites clearly understood that the fluctuating exchanges rates could easily change this equilibrium. He began to push the union for cuts in health care costs, which amounted to about $9,000 per employee per year.

Health care costs had risen 14% in 1990 and were expected to jump to over 75% by 1994 if the current contract was maintained. Fites also wanted to create a two-tier pay system were new hires were paid at a lower scale and were essentially locked into a lower scale for the length of their employment with Cat. He also wanted to eliminate the company wide contract negotiations thereby allowing each site to determine its own contract needs. The UAW went on strike in November 1991. After five months the company announced that workers had to return to work by April 6th or risk losing their jobs to replacement workers. Eight days after the April 6 deadline the union sent its workers back to work. This entire process and the way the union and company each handled it was interrupted as a significant win for the company. Workers actually stayed on the on without a contract for the next two years.

Cat is leveraging distribution capabilities with independent dealers who continue to be the foundation of a very successful distribution system. This will continue to give the company a significant competitive advantage. It will combine local customer relationships with global product support capacity. The company will continue to improve and modify its distribution channel, where appropriate, to leverage dealer capabilities, maximize customer relationships, coverage and aftermarket opportunities such as global mining. It will also improve cost efficiencies by reducing dealer inventories.

Another developing area within the company is e-Business. The company will expand e-business capabilities to drive consistency, efficiency and velocity throughout the entire value chain. Know for its attention to quality, Cat will continue to make leaps in quality, reliability and cost reductions wherever possible. 

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