Company History
Caterpillar Inc is the leading maker of earthmoving moving machinery like tractors, graders, excavators and other heavy machinery used by road contractors, miners and heavy industries. The company also manufactures the engines used in power generators, trains and industrial machinery. The company has more than 50 plants in United States of America and more than 60 in 50 other countries. The company has dealers in almost all the countries in the world. The company was started by Charles Henry Holt Benjamin Holt during the summative years of the 19th century. The two brothers invested $ 70,000 into their first plant called the Stockton wheel and they equipped this production plant with the best production machinery available during this time. The company started by manufacturing wooden wheels and this helped it to enter into the vehicle market. At the end of the 1880’s the company manufactured the first combine harvester and this had a positive effect on the farming sector because of its ability to perform multiple tasks during harvesting of farm produce. The first combine harvester produced by the Holt brothers was a link belt combine harvester which revolutionised agricultural technology through flexible innovations that reduced instances of machine breakage.
Daniel Best, another entrepreneur in the heavy machine industry produced his first combine harvester some years later and the two combined their efforts to solve the animal power problem by using steam driven engines. Stockton Wheel Company was renamed Holt manufacturing company in 1892 and ten years later, the company produced the first caterpillar style tractor that worked on tracts instead of wheels meaning that it could operate on all types of terrains. Holt Company started selling tractors using the caterpillar brand name. In 1908, the company manufactured its first gas driven crawlers and they were so effective that the company made record sales and boosted its credibility in the market. Holt’s competitor, Daniel Best sold his firm called Best manufacturing company to Holt manufacturing company but Best’s son, C.L Best started his own tractor manufacturing company called Best Gas Tractor Company and he embarked on modifying tractor technology. Caterpillar Tractor Company was created in 1925 when Holt manufacturing company and Best Gas Tractor Company merged with C.L best being the chairman of the newly formed company while Raymond Force, a board member at Holt manufacturing Company became the President cum C.E.O of the company. The New caterpillar company started by choosing outlets that would address the concerns of the new company and they consolidated the dealerships that the respective companies had before their merger in 1925. The company picked the most successful dealerships and started operating outside United States of America by establishing dealerships in Holland, Netherlands, East Africa and Australia. The merger also saw changes in production sites where tractor manufacturing was taken to Peoria while Combine manufacturing was taken to Stockton.
Caterpillars’ domestic strategy
To succeed domestically, caterpillar has applied two business level strategies. One of these strategies is cost leadership strategy which refers to an amalgamated set of actions that are structured to deliver services and goods at the lowest cost possible in comparison to the rivals while maintaining value that appeals to the existing and the new customers. This means that the products must be standardized, with features that are acceptable to the consumers. This strategy has enabled the firm to cut costs as it maintains quality of service and satisfaction given to the customers. There are some costs saving actions that this strategy needs to be effective and Caterpillar has implemented these actions. These actions include the installation of effective scale facilities, tight control of the entire overhead cost, minimal sales costs, existence of efficient facilities for manufacturing, simplification of the process of production and the proper monitoring of outside costs (Potter, 1999). There are certain requirements that must suffice for the strategy to be used effectively. According to an acclaimed business author, Michael, E Potter, there must be the economies of purchasing meaning that the relative market share must be very high.
Secondly, firm must have a favourable access to raw materials because if the access to raw materials is not that favourable, the cost leadership strategy my encounter some difficulties. Caterpillar has made structures and designs that can be easily manufactured and this has driven down the cost of operations. The maintenance of cost leadership has been enhanced through the reinvestment of high margins. The other business level strategy that the company has used domestically is focused strategy. Caterpillar’s focused strategy exploits the narrow differences of targets from the balanced industry by creating a market segmentation that isolates some buyer groups and unique segments of a certain line of a product. This has enabled the company to concentrate on a particular segment of the geographic market thus creating what is called matching (Potter, 1988). This integrated business level strategy that uses embraces the cost leadership and the differentiation strategy is beneficial to caterpillar because it has enhanced the position of the company in the market. Caterpillar has therefore managed to protect its position in the market and can now adapt to the dynamic macro and micro environmental changes. The focused strategy has also helped caterpillar to use new skills and technologies that have enabled it to efficiently leverage its vital competencies while competing with the rivals in the competitive market. This has guaranteed long term returns because of the resultant customer loyalty and affiliations. Caterpillar customers also benefit by getting two levels of values.
Caterpillar’s International Strategy
The company’s international strategy works within an environment that is influenced by various factors and some of these factors are not controllable. These factors include competition, marketing, culture and logistics with competition being the most important factor that influences the foreign strategy that this firm adopts. The heavy equipment industry worldwide has matured and there are 27 major competitors with caterpillar enjoying the position of the market leader because it has superior product quality and quality product servicing. There is a stiff rivalry between the major players in the heavy equipment industry and this illustrates the competitive nature of this industry. Caterpillar has therefore employed several foreign strategies that have helped it to create extra value in order to remain competitive. To start with, Caterpillar offers an extensive range of products and services to its domestic and international clients while their competitor’s compromise quality of support service delivery as they try to cut costs
The other international strategy that Caterpillar has been pursuing is creation of alliances and recently, the company created a business alliance with Ford. The purpose of this business relationship is development of supply chain software based on the wealth of experience that Ford has in the vehicle market and this partnership will enhance profitability of Caterpillar especially if the company integrates it universally. However, this strategy may not be profitable in all international contexts and cultures meaning that the company has to choose the contexts that it will integrate this business relationship wisely.
The company’s international strategies have been successful and have evolved within a business environment that calls for reliable products and services and dynamic customer requirements. The foreign strategy adopted by caterpillar is a specific response to match the capacities with the dynamic demands of its customers. The company has therefore concentrated on successful products that will enable to maintain its position of market leader. Product innovation is another foreign strategy that the company has been pursuing and this has given it a high level of competitive advantage. The company studies its foreign market demands and makes products that befit each international environment. For example, the caterpillar products found in Australia may differ significantly with products in Great Britain because Caterpillar has been differentiating its products to serve the demands of different customers in different contexts. Another international strategy that the company has been pursuing is creation of barrier to entry by using logistical networks that enhance brand management and marketing.
The company has a structural design that looks like a transnational network company and this network has been expanded all over the world ensuring that the company has the highest level of international presence in the world. Caterpillar has leveraged its distribution capabilities with private dealers who have helped the firm to develop a successful distribution all over the world. This has enabled the company to enhance its competitive advantage and also provide value for its customers and shareholders. The company has also combined strong client relations with its world wide support capacity to ensure that it protects its market niche form its nearest rivals. To beat these rivals, the company has modified its distribution channels and leverage dealer capacities especially in the mining sector where Komatsu and Hitachi seem to be enjoying a higher degree of success. In summary, the competitive forces within the construction equipment industry which are the need for reliability and excellent support structures have seen caterpillar develop a networks structure as its foreign strategy and this has created an international competitive advantage. Its local and foreign strategies have enhanced its market dominance.
The Nature of Caterpillar’s Position
The heavy equipment industry is a sector that requires a lot of capital and it has a significant amount of barriers. New entrants within the industry face serious challenges that compromise their effectiveness. However, Caterpillar has been successful in this industry because of the protection it gets from its strong legacy of customer satisfaction that has run for more than seven decades. The company has a significant share of business around the world that has been created by its strong relationships with customers. Another factor that has made the company successful is its commitment to quality and not pricing strategies that its competitors use. Despite selling its products at a premium price, way higher than the competitors but it has still maintained its market share because of its quality products and support services. Most of the contemporary success of the company has been brought by free trade. Caterpillar has become an example of how American companies can excel in the international market. Since NAFTA was implemented, Caterpillars exports have increased by more than 400 percent and this has made the company to create more than ten thousand new jobs. For the aforementioned business level strategies to work caterpillar must adopt a higher level strategy called the corporate level strategy.
This means that the firm should address some several questions like the diverse businesses that should be incorporated in the firm and how the corporate team plans to manage these units of business. For the business level strategies to be effective there must be strategic leadership in the firm. A strategic leader works through others to create a strategic direction for the company or the firm. A strategic direction refers to the long term vision of the strategic motives of a company and it requires leaders who are charismatic for the strategic intent to be achieved. While making changes to take a new strategic direction, the existing strengths of a firm are very important. This means that the executives of a firm must make a design that is effective in order to help the firm achieve its vision. They should exploit and maintain the core competencies of the firm as they develop new strategies for the success of the company (Coyne, 1996). This calls for the emphasis of the competencies of the firm in the strategic implementation documents. Core competencies cannot be emphasizes in the absence of the human capital.
The capabilities of the human capital are the key resources that are important to strategies laid out by a firm. The knowledge and skills of the entire workforce are capital resources that need to be factored in any strategic effort. This means that any business level strategy must be grounded on the ability of a firm to develop and retain able workforce who will be able to implement the strategic process. This calls for an organizational culture that consists of different sets of ideologies and values that will in the long run influence the way a firm conducts its operations. It is only a strategic leadership that can manage to shape the culture to enable it attain a competitive advantage over its rivals in the market. This is because it will enhance the development of an orientation in the firm that has entrepreneurial roots giving it flexibility over its culture. The returns on the investment in the human capital of a firm can be guaranteed if there exists a transformational leadership in the firm. Transformational leadership is a form of leadership where the leaders and their followers are involved in a process of engagement that is aimed at mutually raising each other extra heights of motivation.
Caterpillar divisions
This part of the paper will focus on three divisions of Caterpillar Inc. These are the mining, construction and agricultural divisions. Almost the entire mining industry around the world is served by caterpillar through its mining division situated in Peoria in the state of Illinois. The mining division has regional offices around the world and the company provides mine specific products and services which include mining trucks designed for operator comfort and high productivity. The other product provided by this mining division is the track type tractors that are built for demanding roles in the mines. These tractors are durable and are made to suit tough working conditions. The company also manufactures large wheel loaders that are engineered to provide safety and maximal performance using the least possible down time leading to optimized production. The company manufactures motor graders used in mining industry and they are made to provide high value for the customers. Large wheel dozers manufactured by caterpillar are used in surface mining, road maintenance and land reclamation and they have been designed to offer high level of production capabilities and they are highly versatile and mobile. The company also manufactures a wide range of underground mining loaders and trucks that have several configurations and packages which go hand in hand with the unique needs of every customer. The last major products produced caterpillar’s mining division is the open pit mining equipment and the underground miners that are used in drilling, blasting, loading and hauling in the mines. No other company produces these equipment and caterpillar’s products in this category are highly productive, efficient and safe.
Caterpillar’s agricultural division is called the Agricultural products Inc and it is the leading manufacturer of heavy agricultural machinery that have revolutionised farming around the world. The most successful product in this division is the combine harvester whose multiple functions provide value to the consumers. The company also manufactures a wide range of tillage equipment and in response to customers and dealer’s demands; the company has opened a new line that is providing products designed to provide optimal value to the customers. These tillage equipment include disc rippers, in line rippers and seed bed tools which will be produced by one of is subsidiaries based in Kansas City. These tillage tools have unique features that complement the challenger tractor line which has been highly effective and the tillage tools have been providing quality that goes hand in hand with the industry standards that caterpillar has set. The tools have been designed to offer superior performance that will enable farmers to optimize their yields and the new product line has also expanded the opportunity for its dealer to provide higher level of customer service.
The agricultural division in summary has seven models of challenger tractors that are used widely around the world and seven models of Lexion combines have remained unrivalled since the company first manufactured its first combine in the summative years of the nineteenth century. Apart from the tractors and the combines, the division also manufactures handling equipment like the tele-handlers. Others include VSF track trailers and Skid steer loaders which are common in maize and wheat plantations around the world. All the three divisions of caterpillar Inc have in the last one decade been under pressure because of the ever rising demands of the construction mining and agricultural products all over the world but the demand has been extremely high in emerging economies. Between 2007 and 2010, sales of its machineries and engines doubled every year and demand for its products has outpaced its production capacity. To keep up with the rising demand, the company had to increase its employment. In year 2010 alone, the company has added more than four thousand employees around the world with a third of this figure coming from United States of America. The company has also made several strategic initiatives to address the rising demand for its products.
These include construction of a new excavator facility to boost production in United States of America and multiple investments in mining shovels and mining trucks, because the demand of the aforementioned machineries has been rising two fold every year and it seems that they have been generating a significant percentage of the company’s revenues. The company has also planned to increase its excavator production in China by more than 400 percent to meet the high demand especially in Xuzhou region. The demand for small wheel loaders in South America has also outpaced the company’s production capacity and the company has responded by creating a new facility for manufacturing small wheel loaders and backhoes in Brasilia. Finally, the company has expanded its construction equipment facility in Sanford, US to meet the high demand of construction equipment. This strategic direction aimed at meeting the increasing demand for its construction, mining and agricultural products will see the company employ more than 2000 people every year annually.
Caterpillars Profitability
Caterpillar is one of the most profitable international companies recording an exceedingly high rat of growth per annum. Its second quarter profit last year exceeded that highest estimate made by analysts. What are the factors that have led to the success of this company? One of the factors that have made the firm profitable is its global leadership strategy. The company has plants all over the world and its marketing operations are headquartered in almost all major cities in the world. It has a network of dealers and this network is its most vital competitive edge. Commitment to provide shareholder value is another factor that has enhanced the company’s profitability. The company has over the years instituted growth strategies that are aimed at boosting the firm’s profitability in order to increase the value for its shareholders. Since 1993, dividends given out to the shareholders have been increasing by more than 18 percent annually. The other strategy that has made this company profitable is diversification. Caterpillar recently bought Wilson, Max and Perkins engines which have made it to enhance its performance and competitiveness because these engines have multi fuel capabilities. Caterpillar is currently providing logistical services to BMW, Chrysler, Ericsson and Honeywell and the company has also ventured into another into rental business with its number of rental stores increasing from 230 to 270 over the last five years.
The other strategy that caterpillar has used is differentiation strategy.differentiation strategy is a set of actions that are structured by a company to deliver services and goods at a cost that is acceptable in that the customers see as if something different has been done to guarantee satisfaction and promote affordability. According to Fred smith, the founding director of the FedEx, the main tenet of differentiation is innovation (Eisner, 2006). For a firm to create products that will constantly appeal to the mass market without losing its lustre, it must be enhanced through differentiation. The price of the goods and services can be more that what the clients are willing to pay so long as the differentiation creates value that was not there in the first place. The price can also be low for the low end customers to benefit. A customer can go for a unique product that is more expensive that the ordinary version of the product because they expect more value from the different product. Business level strategies that caterpillar used include differentiation strategies that offer the customers unique products even if it means at a higher price. Unique products at a higher price have been able to fetch more revenue than ordinary ones at a lower price and this is a factor that can have made caterpillar more profitable and competitive. The company has also used the same strategy to capture the low end customers especially in emerging economies. When the expensive machineries are differentiated so that they can have a cheaper version, more and more people will be able to buy and this will enable the company to fight some of the economic factors that push down the demands for products.
There are certain decisions that were made that have contributed to the profitability of this company. The major decision was to use the sigma six strategies. Caterpillar was the first company globally to deploy the sigma six strategies and within the first three years of deployment the company’s sales and revenues rose to$ 30 billion. Sigma six has really changed the way this company carries out its business, transforming the way employees work by fostering understanding and cooperation among different divisions of the company and this has created business success within the entire firm. Sigma six ensures that energy within the company is channelled towards the right direction by helping the company to set priorities and use the best business level strategies. The sigma six methodology has also allowed the company to improve product development processes and also address issues raised by customers and the manufacturing efficiency these methodologies have created have contributed enormously to the financial success of caterpillar inc. The methodology has helped the company to effectively execute its strategic goals and this has ensured that the company builds better products and services that have enhanced the company’s financial position.
The future
To maintain its high performance and profitability in the future, Caterpillar plans to leverage its distribution capabilities with private dealers who have helped the firm to develop a successful distribution all over the world. This will enable the company to enhance its competitive advantage and also provide value for its customers and shareholders. The company will also combine strong client relations with its world wide support capacity to ensure that it protects its market niche form its nearest rivals, Komatsu and Hitachi. To beat these two rivals, the company must modify its distribution channels and leverage dealer capacities especially in the mining sector where these two companies seem to be enjoying a higher degree of success. The future will also see the company expand its e-business capabilities to ensure successful and effective operations within the value chain. Caterpillar commands about 45 percent of the worlds heavy equipment market with the closest rival, Komatsu commanding 19 percent and Hitachi comes third with 15 percent. The remaining is shared by Deere, Ingersoll, Rand, Case, Volvo and Liebherr. To beat the threat posed by Komatsu and Hitachi, Caterpillar has engaged in cooperative agreements aimed at sharing production facilities and one of its most successful agreements that the company made recently is a joint venture with Mitsubishi in Japan where the two companies share production facilities to produce some models for global and regional sales. This is an intelligent move given that Japan is the home turf for the two main competitors.
Investment in Caterpillar
Caterpillar shares have been bullish around the world since 2007 when the company started posting extra ordinary financial results. The rate of growth of caterpillar shares in the US stock market can only be rivalled by Apple. Caterpillar is a blue chip company that will definitely guarantee good returns for ones investment. This means that caterpillar is one of the best companies around the world to invest in because of its excellent financial performance in the recent past and bright future outlook. The 2010 mid year financial results were figures higher than the highest prediction of financial analysts meaning that the company performed beyond its expectations. The rate of growth has been going up by double digits and the demand for the company’s products has never abated. Though the heavy equipment industry was one of the hardest hit by the 2008 economic downturn, Caterpillar continued posting excellent financial results and its shares did not depreciate as much as the shares of other blue chip companies (Keown, 2011). The present financial and market position of the company is better than it was a decade ago meaning that the company has a high level of sustainable competitive advantage. The future of this company lies in its construction and agricultural division because the company seems to enjoy less competition in these fields. The rapid growth of the construction industry over the last three years has really boosted the position of this company and if this trend continues, the division might make caterpillar, one of the most profitable companies in the world.
References
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