Grainne Bonestroo

MBA 617- March 2016

Caterpillar… The little engine that could?

Table of ContentsThe Origin Story:..........................................................................................................................................3

The Organization:........................................................................................................................................3

The Obstacles:.............................................................................................................................................4

Critical Analysis:...........................................................................................................................................5

Recommendations for Change:...................................................................................................................8

Final Thoughts:............................................................................................................................................9

Appendix...................................................................................................................................................11

Figure 1..................................................................................................................................................11

Works Cited:..............................................................................................................................................12

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The Origin Story:In the early 1900s in the San Joaquin Valley Delta farmland, Benjamin Holt attempted to

tackle the issue of heavy steam tractors which often sunk into the soft ground. In his first

attempt, Holt increased the wheel size and width which resulted in a tractor 46 feet wide. While

this helped solve some of the issues, it was increasingly complex, expensive, and difficult to

maintain. Holt went back to the drawing board and contemplated laying a plank road ahead of

the steam tractor to prevent it from sinking. This idea was dismissed due to the expense, time,

and the fact that it would interfere with the earth moving. However, implementing this thought

in a more practical approach, Holt replaced the wheels on a 40HP Holt steamer #77 with wooden

planks bolted to chains, thus creating the first version of tracks. In 1904, the machine was

successfully tested and observed to have “moved like a caterpillar” by company photographer

Charles Clements, and thus Caterpillar was born. On February 2, 1910 Holt opened a plant in

Peoria, Illinois and began operations with 12 employees. Within two years, the organization

proved to be so profitable that they employed 625 employees and had exports to Argentina,

Canada, and Mexico. (“Caterpillar Inc. - Wikipedia, the free encyclopedia,” n.d.)

The Organization: Caterpillar is a large, complex organization known for their iconic yellow, earth moving

equipment all around the world.  In 2009, Fortune ranked Caterpillar number one in their

industry, and number 44 overall on the Fortune 500 list. They manufacture construction and

mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric

locomotives. They operate in three main product segments: Construction Industries, Resource

Industries, and Energy & Transportation. Caterpillar also provides financing and related services

through its Financial Products segment and uses a network of distributers to sell their products.

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Caterpillar currently has 12 board members, and operates with high vertical and horizontal

differentiation.  (“Caterpillar | Company,” n.d.) They operate in a matrix structure which can be

seen on the company’s organizational chart in Figure 1. Caterpillar is publically traded on the

NYSE (CAT) and is one of the 30 companies that comprise the Dow Jones Industrial Average.

Since the organization’s early start, Caterpillar has remained in Peoria, Illinois and has

continued to make this the base of their corporate headquarters. However, since their humble

beginnings on the farmlands of the San Joaquin Valley, Caterpillar has seen increasing

competition from John Deere, Komatsu, Volvo, Mitsubishi, and United Technologies Corp. just

to name a few. The equipment industry follows a cyclical cycle, complete with its ups and

downs, which has been causing turbulence for the organization the last several years.

Caterpillar understands that to ensure that they do not die out in these difficult times, they must

think like a customer, and act like a startup. They continue to invest time, money, and resources

into improving the technology in their equipment to guarantee the best product is being given to

their customers in order to maintain that competitive edge. (“Caterpillar’s Culture of Innovation |

peoriamagazines.com,” n.d.)

Caterpillar is a diverse workforce that speaks over 100 languages and is bound by a

common goal: making the world better tomorrow because of the work they are doing today.  

Caterpillar uses the 6 Sigma system to ensure costs are kept low and production is efficient

which has allowed them to remain a leader in the industry.

The Obstacles:Caterpillar is an American company that operates in three main product segments,

Construction Industries, Resource Industries, and Energy & Transportation. A large percentage

of their revenue comes from international sales, while less than half has traditionally come from

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North America. As the strength of the dollar has grown, this has made it more difficult to

compete globally. In addition, this has opened up competition from other companies to beat

Caterpillar in price, and encroach on their market share. The next hurdle that Caterpillar faces is

decreased commodity prices and declining oil and natural gas prices. Traditionally, when

commodity prices have fallen, Caterpillar was able to rely on the energy sector to help prevent

them from experiencing a loss. This decline will affect them across several of their product

segments as a ripple effect. First they will notice it in the equipment directly related to oil

drilling and production, then areas dependent on oil revenues will reduce their construction

activity. Lastly, the economic conditions around the world are overall gloomy. While the US

has been doing better than average, many economies that are resource dependent are struggling.

The plunging prices of commodities and their inability to rebound have effected Caterpillar’s

mining product segment, causing a decrease in sales. (“Caterpillar Faces These 3 Major Threats |

Investopedia,” n.d.) These three issues have made for an increasingly competitive industry and

have made it more difficult than ever for Caterpillar to operate, it has turned the organization

upside down making the domestic sales their only safe haven.

Much like the popular children’s story “The Little Engine that could”, Caterpillar needs

to make some tough choices to power through these hard-hitting economic times so that once

they reach the crest of the hill, they can congratulate themselves for making it through.

Critical Analysis:Caterpillar is a cyclical organization, in times in which the economy and commodity

prices are good, they see an increase in sales, and when they drop, so does their profits.

Organizations deal with uncertainties by obtaining prior information and forecasting events,

predicting and forestalling negative events, and taking action to reduce the negative

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consequences. Caterpillar continues to cope with the economic uncertainties by making changes

in anticipation of continued decline. In September 2015, Caterpillar announced that in order to

react to declining sales and profits over the last few years, they would restructure, including

eliminating approximately 100,000 jobs worldwide over the next several years. (“Caterpillar to

Cut Up to 10,000 Jobs, Citing Falling Demand - The New York Times,” n.d.) In February,

Caterpillar announced plans to combine two divisions into a new one titled “Electric Power,

Marine and Oil & Gas” by June. "Consolidating these energy operations along with the recently

announced integration of two divisions within Customer & Dealer Support will bring efficiencies

and a streamlined leadership team," CEO Doug Oberhelman said. "With these changes, we will

have reduced executive leadership by 13% since 2013." (“Further division consolidation at

Caterpillar - Caterpillar Inc. (NYSE:CAT) | Seeking Alpha,” n.d.)

Caterpillar continues to make decisions regarding their declining sales in order to ensure

that they can make it through this cycle. They continue to invest time and money into R&D,

developing products that are more technologically advanced for improved operation and

efficiencies. While they are making appropriate reactions to the economic conditions and

adjusting accordingly, it is still a tough market for heavy machinery sales right now. The dollar

strengthening, decreased growth in China, and falling oil and gas prices have all allowed for

competition to enter the market and take away some of the market share from Caterpillar.

One of the largest issues Caterpillar faces is competition from other companies, in part

due to the strengthening US dollar. While the company is unable to control commodity, oil and

gas prices, they need to ensure that they are the number one choice to those who are buying

equipment and machinery right now. In order to compete in this environment they need to offer

competitive prices, in addition to their well-known quality product. At the end of 2015,

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Caterpillar reported 47.01B in sales revenue, in 2014 they reported 55.184B, and in 2013 they

reported 55.656B, showing that their sales revenue has been steadily decreasing over the last few

years. To combat this concern Caterpillar has worked to shift their operations globally, mainly

Japan, to reduce the risk of competition taking advantage of the strengthening USD. This

approach has allowed them to remain competitive against Japanese manufacturer Komatsu.

(“Caterpillar CEO: Dollar strength is a tailwind for us,” n.d.)

Caterpillar lacks innovation, as do many organizations in the equipment and machinery

industry. New equipment and product designs are lacking, instead Caterpillar focuses on

improving the technology in their existing product lines. They have lost the ingenuity of their

origins when Holt decided that the current machine being used was not the right piece of

equipment and offered a completely new product. Construction and mining equipment have long

life spans if maintained accordingly, this means that it does not require replacement every few

years. Improving fuel efficiency margins, or adding improved technology do not often warrant

companies spending $500,000, or more, to purchase new units if the old ones are still

operational. In addition, product lines that are unchanging allow for competitors to duplicate that

technology and compete for market share. (“Caterpillar Vision, Mission, Strategy, Five Forces, SWOT -

Panmore Institute,” n.d.)

Caterpillar has several advantages however that will allow them to weather the storm.

The first and foremost is their strong brand image and iconic yellow paint which are well known

for quality throughout the industry, they are well established and have large-scale assets and

manufacturing plants in place, and they have a strong dealer distribution network all across the

globe to sell their products. (“Caterpillar Vision, Mission, Strategy, Five Forces, SWOT -

Panmore Institute,” n.d.) They are a well-established company in the industry and are able to

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use this to their competitive advantage. This also gives them several assets that they are able to

leverage if needed in order to reduce costs.

Recommendations for Change:As a cyclical organization, there are some things that Caterpillar is unable to control in

the times of decreased economic conditions. They are unable to control the effect of commodity,

oil and gas prices and the effect that they have on those resource dependent areas of the globe.

In recent years, Caterpillar has felt a hit across all of their product segments resulting in

continued declining sales. Caterpillar needs to focus on the areas of business that they can

control.

My first recommendation is that Caterpillar needs to engage in boundary spanning. They

are stuck in thinking inside the box in regards to R&D, and are not implementing new ideas to

add to their product lines, instead they are only focusing on changes to their current products.

While the R&D they are developing is helping make more efficient and smarter pieces of

equipment, they are not adding anything new in which companies will see an immediate need to

buy that equipment right now. They need to look at the environments in which they operate and

see if a need exists that is not being filled. They could also look at developing additional

attachments for their existing equipment that companies will be willing to purchase if it saves

them money from having to buy a completely new piece of equipment. Caterpillar needs to

focus on creating products that do not exist, this will allow them to be the first in the industry and

capture all the profits in the short term. Also, as discussed earlier, equipment has a long life span,

therefore when profits are reduced in the industries that purchase your products, you are less

likely to be able to sell them replacement units.

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My second recommendation is that Caterpillar focuses on the emerging and developing

markets that are still showing growth. The MSCI Emerging Markets Index shows a slowdown

over the course of last year, this also includes China’s economic concerns. When every sector

that you operate is being hit, you need to focus on where the potential for sales are and focus

there, mainly India and China who are still projecting roughly a 7% annual growth. However,

competition will also see this as an opportunity and pursuit these markets as well, so Caterpillar

needs to continue with their Six Sigma practices and keep costs low to remain competitive. They

should also use their established dealer network as a competitive advantage when breaking into

these markets.

Finally, after 90 years of operations, Caterpillar is positioned fairly well, reporting

78.97B in assets at the end of the 3rd Q in 2015. This gives Caterpillar room to move and

weather this cyclical cycle since there does not seem to be an end in sight. They are in a

position in which they can evaluate their current operations and consolidate divisions and

manufacturing plants in order to create cost savings and keep prices competitive. Due to their

large size, they are also able to eliminate positions as the company’s operations decrease.

Final Thoughts:Caterpillar is an industry leader known for their high quality products, however the

turbulent market and economic conditions over the last 3 years is hitting their bottom line. The

demand for construction and mining equipment has decreased, and the competition in this sector

has gotten stronger, resulting in many equipment manufacturers fighting for decreased product

shares. Caterpillar has survived economic downturns before, but they have been able to rely on

usually one of their product sectors to still produce profits. This cycle is different, all product

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segments are getting hit, and companies are not willing to invest in new machinery, in addition it

is unknown when conditions will improve.

Caterpillar must go back to their roots and think like entrepreneurs. Since they are

unable to control the current economic conditions globally, and until oil, gas, and commodity

prices increase they will not likely see a marked change in profits. This means that there

continues to be tough times ahead. Therefore they need to go back to the drawing board and

focus on creating a product and surviving in the current market conditions. Caterpillar already

has the infrastructure, talent, and brand name recognition, they need to focus on using these

strengths to create a new product that environment shows a need for. If they are able to do this,

they will create a new demand for a product in a time when sales do not come easy, they just

need to keep repeating “I think I can”.

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AppendixFigure 1

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Works Cited:

Caterpillar | Company. (n.d.). Retrieved March 5, 2016, from http://www.caterpillar.com/en/company.html

Caterpillar Faces These 3 Major Threats | Investopedia. (n.d.). Retrieved March 5, 2016, from

http://www.investopedia.com/stock-analysis/032015/caterpillar-faces-these-3-major-threats-cat.aspx

Caterpillar Inc. - Company Profile, Information, Business Description, History, Background Information on Caterpillar Inc.

(n.d.). Retrieved March 5, 2016, from http://www.referenceforbusiness.com/history2/92/Caterpillar-

Inc.html#ixzz40lNO13mn

Caterpillar Inc. - Wikipedia, the free encyclopedia. (n.d.). Retrieved March 5, 2016, from

https://en.wikipedia.org/wiki/Caterpillar_Inc.#Manufacturing

Caterpillar’s Culture of Innovation | peoriamagazines.com. (n.d.). Retrieved March 5, 2016, from

http://www.peoriamagazines.com/ibi/2016/jan/caterpillars-culture-innovation

Caterpillar to Cut Up to 10,000 Jobs, Citing Falling Demand - The New York Times. (n.d.). Retrieved March 5, 2016, from

http://www.nytimes.com/2015/09/25/business/economy/caterpillar-feeling-global-slump-to-cut-up-to-10000-

jobs.html?ref=topics&_r=1

Caterpillar Vision, Mission, Strategy, Five Forces, SWOT - Panmore Institute. (n.d.). Retrieved March 5, 2016, from

http://panmore.com/caterpillar-inc-strategic-analysis-vision-mission-swot

Further division consolidation at Caterpillar - Caterpillar Inc. (NYSE:CAT) | Seeking Alpha. (n.d.). Retrieved from

http://seekingalpha.com/news/3134016-division-consolidation-caterpillar?uprof=16&dr=1#email_link

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