Greg Rosen Caterpillar Tractor Company September 30th, 2010

Section #4
Role: A newly hired employee assigned directly to the CEO, Lee Morgan, of Caterpillar, Inc.
(CAT).

Question: The CEO of Caterpillar Co. asks “What are we doing right?”

Answer: We are continuously advancing our research and development program and our
distribution networks are numerous, efficient, and adaptable to change.

Centered Evidence: “At the core of its strategy was a defense of its dominant competitive
position through continuous product development and long-term investment in its production
facilities and marketing channels” (p. 14, ¶2).

Case Observations: Research and Development (R&D)

 Commitment to investing in product development.

o Our R&D investment is $363 million which is over half of our profits for a given
year (p. 11, ¶6).
 We treat R&D costs as expenses in the years incurred (p. 12, ¶7).
 We know R&D is an essential expense that is critical to our
survival as the leading company in the Earth Moving Equipment
market.
 When is good, good enough? We ask this question and answer “Never
good enough”. This is at the core of our huge R&D budget. We are always
trying to improve our products, production, and service to customers.
 Innovative business practices
 We created a national computer network that enabled U.S. dealers
to order any part from our central distribution depot in Illinois for
next day delivery (p. 8, ¶4).
o Priced at a premium of 10% to 20% over nearest competitive model (p. 12, ¶1)…
 Our product quality and service excellence warrant the premium clients
pay for our products.
 Despite competitors trying to specialize products, we, due to investment in
R&D, are able to innovate and remain in a leading position in all but one
of their product segments, which is Crawlers Under 90 hp. (See Exhibit 4)
 Ceteris Paribus, the product with the lowest price will sell;
however, this does not apply to our business strategy. Our price is
more expensive yet we continue to sell more products then our
competitors. It can then be concluded that our quality surpasses
that of our competitors, despite their specialization.
 We continued to expand to different markets (p. 12, ¶4).
Greg Rosen Caterpillar Tractor Company September 30th, 2010
Section #4
o We made engines for Ford vehicles. Ford is in the automotive industry and
despite the fact that we are primarily an Earth Moving Equipment company we
still have profits from a variety of other markets.
o We purchased the solar turbines division from the financially troubled
International Harvester for $505 million.
 We made turbine engines, national gas compressors, generators and power
drives (p. 12, ¶3).
 This is an additional revenue source.
 Diversification
o We have an assorted and broad client base involved in a variety of markets. This
ensures that we will never be reliant on any individual company or market for our
sole income.

Case Observations: Distribution

 Distribution
o Our distribution network surpasses that of Komatsu in the fields of capital, assets,
number of employees, and experience (Bartlett 11, ¶5).
o We have financially robust dealers that survived the 1980 recession particularly
due to our background in financing and sale promotion (Bartlett 11, ¶5).
 Our advantageous relationship with dealers allows them to make profits
and aid in our business expansion (Bartlett p. 11, ¶5).
 Our dealers on average make $100 million annually in the United
States (p. 8, ¶6). Our dealers’ strength reflects our proficiency in
product distribution along with our effective managerial policies
regarding the dealers, which, align with our main management
strategy.
o We control the entire manufacturing process (vertical monopoly).
o We have production facilities around the world this allows us to shift production
in response to various competitive factors (Bartlett p. 11, ¶9).
 Exchange rate fluctuations are one example of these competitive factors.
 We benefit from depreciations of the US Dollar. Dealers around
the world are billed in dollars due to our uniform pricing model.
Along with the fact that we charge a 10% to 20% premium, a weak
dollar allows us to sell more expensive products for less money. A
weak dollar also increases product prices in foreign countries (p.
14, ¶5).

Weaknesses of Position
Greg Rosen Caterpillar Tractor Company September 30th, 2010
Section #4
 “Unless a product is highly capital-intensive, will benefit from high technology, and is
marketable through our current distribution system, it will not fit our product
development strategy” (p. 11, ¶7). Caterpillar is limiting itself by not advancing its R&D
in all departments, instead it only evolves areas that it deems “fit”.
o Caterpillar lets other companies go through the trial-and-error stage of production
and development; we then quickly follow our competitors with the most trouble-
free product in the market (p. 11, ¶7).
 Caterpillar does not innovate first, instead, they wait for others to do the
initial innovation then just improve the process or end result. For
consumers looking for future product innovation first from Caterpillar
they will never be satisfied.
 The rule of thumb was that a crawler tractor, over its six-year economic life, would
require service and parts equal to its initial cost (p. 4, ¶5).
o Caterpillar’s revenue for a product is the same as it takes to service that product.
This is a problem with the initial quality of the product and therefore the earlier
indication of high quality comes into question. However, this is not a valid
assumption because the average life of any crawler tractor could be six years.
 Caterpillar’s labor relations were uncertain and caused problems for the company. Higher
up executives and management personnel formed their own close-knit group while the
lower tier of the Caterpillar ladder did the same. This formed two distinct camps that felt
alienated from one another especially the bottom tier in regards to the executives. This
eventually led to union strikes, another of which is on the way.
o Positive Labor Relations
 As a rule the company did not hire MBAs. Over two-thirds of Caterpillar’s
top executives were born in Illinois or neighboring states (13, ¶1).
 Approach to recruitment and training had led to a close-knit
management group who worked, lived, and socialized together.
 All staff and operating people in a department were responsible for
obtaining results (p. 13, ¶4).
 Consistent willingness to take long-term view of the company’s fortunes
and spend today on tomorrow’s growth (p. 13, ¶6).
 Simple management structure that encouraged easy and informal
communications (p. 14, ¶1).
 Top management decisions are arrived at by consensus (p. 14, ¶3).
o Negative Labor Relations
 Caterpillar’s use of automation to achieve productivity gains was not well
received by its workers. (p. 9, ¶6).
 There was an 11-week walkout by 40,000 workers in Peoria and a 7-week
stoppage at other U.S. plants. In 1980, the company laid off 5,600
workers, further souring management-labor relations (p. 10, ¶1).
Greg Rosen Caterpillar Tractor Company September 30th, 2010
Section #4
 In 1981, the company was in the midst of constructing a training center in
downtown Peoria as well as a huge addition to its Morton worldwide parts
distribution center nearby. With considerable reluctance, Caterpillar
reduced its local work force from a peak of 36,000 in 1979 to its 1981
level of 33,500 (p. 13, ¶3).
 Lee Morgan states, “What the factory needs today should be either made today or
delivered today” (p. 12, ¶8).
o “When introducing new products, the company first built up a two-month
inventory” (p. 12, ¶4).
 If Lee Morgan believes that we should only build what we need today then
why would we stock up on spare parts for a product we are going to
release later on. There is a contradiction here from Mr. Morgan and
Caterpillar’s actual business practices.

Exhibit 4 Position of Competitors in Product Segments

J.L. Int'l Fiat-

  Cat Komatsu Case Harv. Deere IBH Allis Clark
Backhoes XXX X XX XX X
XX
Excavators X XX XX XX
Tractors
Crawler XX
over 90hp X XX X XX X X XX
Crawler
under 90hp XX XX XX XX XXX X X
XX
Wheel X X X XX X X X XX
XX
Graders X X XX X X
Loaders
XX
Crawler X XX X X XX X X
XX
Wheel X XX X XX XX X X XX
Off-Highway
Trucks XX X X XX X XX X XX
XX
Scrapers X X X X X X X
XX
Other X XX X XX X X X XX
Greg Rosen Caterpillar Tractor Company September 30th, 2010
Section #4
Source: Wertheim & Co., Inc.
Note: XXX denotes leading position; XX denotes major participation; X denotes minor
participation.
Greg Rosen Caterpillar Tractor Company September 30th, 2010
Section #4
Works Cites

Bartlett, Christopher A., and Srinivasa Rangan. Komatsu Limited. 1985. Course Packet. Harvard
Business School, Boston.
International Directory of Company Histories. "Caterpillar Inc. -- Company History."
Connecting Angel Investors and Entrepreneurs. Web. 30 Sept. 2010.
<http://www.fundinguniverse.com/company-histories/Caterpillar-Inc-Company-
History.html>.
International Directory of Company Histories. "Komatsu Ltd. -- Company History." Connecting
Angel Investors and Entrepreneurs. Web. 30 Sept. 2010.
<http://www.fundinguniverse.com/company-histories/Komatsu-Ltd-Company-
History.html>.