The Comeback Of Caterpillar

1. What are the dynamics of competition in the heavy construction equipment industry?

Students should respond to this question by suggesting as list of factors:

* The need to establish economies of scale helps reduce cost; capturing a large market share was therefore essential.

* The low volume of global sales intensifies competition.

* Fierce worldwide competition drives firms to seek alliances with global competitors.

* The heavy reliance on outsourcing reduces costs.

* Sales of parts and components are more profitable and less cyclical than sales of original equipment.

* Equipment users in developing countries keep their machines in service much longer than users in the U.S., Europe, and Japan, and therefore the potential for profits (resulting from the ongoing sales of replacement parts and components) is considerably higher in developing countries.

* A widespread distribution and service network is critical for effective competition because machines operate in tough environments, break down frequently, and as a result, "downtime" is very costly.

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2. What were the sources of Caterpillar's spectacular success up to the early 1980s ?

Students may suggest the following points:

* Cat's joint ventures with global competitors such as Mitsubishi Heavy Industries

* Cat's excellent reputation as a supplier of high quality equipment

* A marketing organization based on a stable, longstanding, independent dealer network that was strategically located throughout the world.

* A worldwide service and support system -- linked to the dealership network -- which provided for the supply of parts and components anywhere in the world in 48 hours.

* A steady increase in worldwide demand for Caterpillar's products from WWII through the 1970s.

8. What were the strategies introduced by Schaefer, Fites, and Barton to reduce the impact of cyclical downturns on Caterpillar's results?

Students might answer this question analytically by suggesting any one of the following strategies:

* Globalization. Because exports accounted for more than half of Cat's total sales, the company was not dependent on a single market. Rather, Caterpillar had the capability of using its global positioning to cushion a decline in one market by increasing sales in another market. Cat's competitors, by contrast, were more heavily dependent on their home market, and therefore were more likely to be affected by a decline in a single market. Barton's decision to expand into new markets in Asia, Latin America, and Eastern Europe, was intended to strengthen Cat's global positioning.

* Diversification. Cat's diversification into new products provided the company with another layer of protection against cyclical movements of boom and bust. Schaefer diversified into the small equipment market, Fites into engines, and Barton into farm equipment, fuel systems, and electric generators.

* Replacement Parts. Caterpillar's continual reliance on the service and sales of replacement parts was another strategy. Because the spare parts business was far less sensitive to the economic cycle than the original equipment business, diversification into spare parts helped Caterpillar reduce the impact of slumps.

* Flexible manufacturing. The change from "batch" production to "cellular manufacturing" provided Caterpillar with a flexible manufacturing system based on three elements: a just-in-time delivery system, reduced inventories, and a "quick changeover tooling" technique. The flexible manufacturing system gave Caterpillar the capability to adapt quickly to changes in demand resulting from cyclical downturns and upturns.

9. Caterpillar's marketing and distribution system, according to CEO Don Fits, was the company's single greatest advantage over its competitors. Do you see any disadvantages in Cat's marketing and distribution system?

* No direct Sales to Customers. Caterpillar's long standing practice of selling equipment exclusively through dealers may undermine Cat's competitive edge in the future, especially in developing countries. Large construction companies and government agencies in developing countries seek high quality equipment at lower prices. Since some of Cat's competitors combine indirect sales through dealers with direct sales to customers, they may be in a position to underprice Caterpillar, and hence increase their global market share at the expense of Cat.

* Underutilization of E-Commerce. E-Commerce provides Caterpillar with an excellent opportunity to sell directly to customers, yet the company is reluctant to do so. Instead, Cat continues to work together with dealers to enhance indirect dealers' sales by means of E-Commerce. But the internet has created an entirely new marketing environment, more conducive for direct sales to customers than ever before. Cat should therefore reconsider its marketing strategy so that it can take advantage of the new economy.

External Environment

A. Societal Environment

1. Economy

a) World Economy coming out of recession (O/T)

b) Downturn in US markets (T)

c) Upturn in International Markets (O)

d) Economy in Asia and Latin America rebounding (O)

e) War in Iraq (T)

2. Technology

a) Cyclical movements of boom or bust (O/T)

b) Shifts towards cleaner micro power (O)

c) Impact of E-commerce (O)

d) Internet utilized for marketing, distribution and service (O)

3. Political-Legal

a) Free