Caterpillar, Case Study Example

Caterpillar Global

Caterpillar aims to be a financial and qualitative leader in equipment and services. For over 80 years, outperformance of the company’s targets is primary to the company’s brand identity and expertise in the Caterpillar is the leader in construction and mining equipment, diesel and natural gas engines and industrial gas turbines. The company is also a leading services provider through Cat Financial, Caterpillar Logistics Services Inc., and Caterpillar Remanufacturing Services and Progress Rail Services Corporation. In 2008, annual sales and revenues totaled $ 51.324 billion, making Caterpillar the largest manufacturer in its industry class.[i] Caterpillar is top in U.S. exports in manufactured categories. The foregoing Case Study analyses the strategic market prospectus for the corporation in direct sales of certain products and through its global network of independent dealers. At Caterpillar, social responsibility is a core value in service intended to substantiate long-term relationships with customers around the world.

In 2008, Caterpillar’s business developments suffered in response to the conditions of the global economy. Financial results of operations were materially affected by the market crisis. Volatility which began in 2007 had a significant impact on the company’s overall profitability. Strong sales were seen in the first three quarters, but due to deterioration of the investment market profit per share in the fourth quarter had declined by 28 percent ($1.08). Although sales had increased in comparison to the fourth quarter in 2007 at $12.293 billion, at a $779 million in additional revenues, company profit from those sales decreased by $314 billion. Caterpillar’s financial results for 2008 were affected by significantly higher manufacturing costs, derived from higher material and freight costs, and manufacturing inefficiencies. Due to the drop in financial services industry performance, our brokerage services for property, casualty, life and health insurance, and financial products all sustained negative results. On April 27, 2010, the Public, NYSE:CAT indicated continued poor performance (Caterpillar Inc. CAT 69.44 -2.21 (-3.08%) 43.38B).[ii]

In 2009, global economic conditions and key commodity prices continued to decline, with major impacts from national economies in default due to the financial market around the world. A ‘trough’ plan was enacted in response to the company’s multi-scale challenges within the global business environment, with the projection that those actions would mitigate further damage to the company’s finance through the following strategy:

• Significant compensatory reduction of executive management benefits
• Voluntary and involuntary employee layoffs
• Hiring freezes and suspension of salary increases
• Reduction in indirect expenses by 15%

In result of the impact of the global economic downturn on Caterpillar, planned expansion plans announced in 2008, are under review for schedule of implementation based on budgetary audit, and prioritization of those projects will be affected by company finance going forward. In the interim Caterpillar expects:

• Significant reduction in capital expenditures
• Sharp declines in overtime work
• Shortened workweeks at some locations
• Shift of resources to short- and medium-term material cost reduction
• Shift of resources to inventory reduction projects.

January 26, 2009, the company announced that it would temporarily suspend its stock repurchase program.

Like most global conglomerates, Caterpillar is focused on sustainable growth in its commitment to make sustainable development a ‘strategic are of improvement’ in all enterprise and strategy. In spite of our economic difficulties, the company was selected as a member of the Dow Jones

Sustainability World Index (DJSI World) for the eighth consecutive year. Caterpillar is also a leader in the Industrial Engineering sector within DJSI ‘best-in-class’ approach to classification; designed to identify best practices across the economic, social and environmental dimensions of corporate sustainability.

Internal development through global deployment of Caterpillar Production System (CPS) with Six Sigma planning and implementation is essential to meeting our 2010 strategic goals of significant improvement in product availability, and increased inventory returns. In 2009, the company achieved its target assessment score at the end of the fiscal year, and is proud to announce early production returns with a great improvement in reported safety. Emergent markets in China and elsewhere continue to be a priority to global operations toward our overall strategy, Vision 2020. To those ends, Caterpillar took initiative in the following areas:

• Asia – Acquisition of existing corporations in those countries (i.e. Shandong Machinery Co. Ltd. (SEM), a leading wheel loader manufacturer in China)
• Southeast Asia – strategic plan to increase its manufacturing footprint in the rapidly growing Asia-Pacific region, Caterpillar announced a four-year, $200 million investment to increase manufacturing capacity in India
• Latin America – Caterpillar also reached an agreement to acquire all of the capital stock of MGE Equipamentos & Serviços Ferroviários Ltda. (MGE), based in Diadema and Hortolandia in Sao PauloState, Brazil
• Europe – hydraulic excavators assembled in Tosno in 2008 are the first Caterpillar core machines in EU
• Russia – Tosno-built machines to rapidly expanding Russian market
• Research and Development – value chain developments in machinery and in software

Since April 2010, Caterpillar, the world’s largest maker of construction and mining equipment gave a positive forecast for its business and the global economy after reporting first-quarter earnings of $233M (£151M) on Monday. The announcement reversed losses from the past year. According to Chief Financial Officer, Dave Burritt, the company is in a ‘revival’ and posed to meet the huge rise in demand from emerging markets in both Asia and Latin America.[iii] Product demand in the mining industry is the main rationale for the insurgency in interest in expansion to those markets. Corporate partners in ‘commodity-rich developing regions are prompting this rise in capacity building opportunities and rationale for reconsideration of global market reach as part of the company’s plan of strategic growth. Hesitation in increased hire of new employees within the current business development strategy will continue due to excess capacity.

Challenges to Sustainable Growth

Caterpillar’ competitive edge in products and product support services is based on product performance, customer service, quality and price. Occasional price discounting in a particular industry or region occurs only in cases where market retraction has been great. Factors within Caterpillar’s competitive environment include externalities related to home market competition in the global market. For instance, our competitors like ‘Komatsu Ltd., Volvo Construction Equipment (part of the Volvo Group AB), CNH Global N.V., Hitachi Construction Machinery Co., Terex Corporation, J.C. Bamford Ltd. and Doosan Infracore Co.,Ltd.’  all offer varied product lines that compete with Caterpillar in varying degrees both at the local and global level. In spite of high impact competition within, as a market leader Caterpillar is well positioned to meet global industry demand increases. Decline in the developed economies has declined recently, but developing countries in our current market portfolio offer new opportunities to replace demand elsewhere.

Logistics integration into Caterpillar services makes the company exceptionally well versed in production to market distribution, through a supply chain with over 55 other companies worldwide. Since its inception in 1987, the Division has grown rapidly, and competes with global, regional and local competitors, including DHL International, GmbH and United Parcel Service, Inc. Rail transport services by the North American wholly owned subsidiary Progress Rail, acquired by Caterpillar in 2006, make the company a leading provider of remanufactured locomotive, railcar and track products and services; and extensive rail service and supply networks. The expansion to the railroad aftermarket business was imperative for furtherance of Caterpillar’s strategic projects, and serves as a mechanism for leveraging the company’s global remanufacturing activities.

Cat Power Ventures, a wholly owned subsidiary of Caterpillar, is an equity investment interest in the power business. Power generation projects throughout the world also in some cases utilized an interface of our construction, operations and maintenance services provided by other Caterpillar subsidiaries. Since 2005, upon Board decision, Cat Power Ventures has not made any new equity investments in power generation. The company has sold a majority of its project investment portfolio, including divestiture of its investment interests in Poland and the Dominican Republic. The company continues to hold an equity interest in a project in Tunisia. Although Caterpillar remains dedicated to energy based projects, and especially in the environmental sector, the expansion of Cat Power Ventures is no longer of consideration within the company’s global strategic plan.

In keeping with current global priorities linked to Kyoto Protocol GHG emissions reductions, and resultant international legislative policies pertaining to the mandated mitigation of carbon dioxide through regulatory compliance of industry, Caterpillar is dedicated to building environmentally sound products, and works actively toward an energy efficiency standard that exceeds current recommendations in our class.  Our internal operations have also been revised according to our environmental development policies, with lowered water consumption for the past three years, and no increase to emissions. Having met the zero increase goals set forth by the corporation, the Caterpillar Company is committed to aggressive systems review and implementation of mechanisms for mitigation of GHG emissions by the corporation in the years leading up to 2020. The following reports Caterpillar’s Metric results for environmental mitigation:

• Greenhouse Gas Management

Operational Goal: Reduce absolute GHG emissions at existing facilities by 25 %

• Materials Efficiency
• Water

Operational Goal: Hold water consumption flat

• Waste

Operational Goal: Eliminate waste by reducing waste generation and reusing or recycling all that remains

• Alternative/Renewable Energy

Operational Goal: Use alternative renewable sources to meet 20 percent of our energy needs through the 6 Sigma process, operational definitions and expanded tracking were instituted in 2008. Enterprise analysis tools are under development to evaluate renewable energy alternatives

• Energy Efficiency

Operational Goal: Increase energy efficiency by 25 percent

• Leadership in Energy and Environmental Design (LEED)

Operational Goal: Design all new construction to meet LEED or comparable green building standards.[iv]

Environmental LEED building projects suggest that energy reduction measures and pollution mitigation are baseline priority factors within engineering and construction planning.  Operations and procedural elements of the quite complex processes on international projects is compounded, then, with further challenges in material sourcing, systems and subsystems management, and risk assessment and management.

Social Responsibility at Caterpillar

With a high degree of attention to the sustainable society model a core value within Caterpillar’s market strategy, integration of the company’s process oriented services and high quality infrastructural relationships with its brand identity has resulted in quite effective reach in terms of consistency in sales. Caterpillar brand is one that is resonates with the ‘American Heartland.’ Its   ethical consistency is seen in the company’s model of social responsibility and sustainability within development of products and services globally. Caterpillar is therefore conscionable – a name to be trusted. The intelligence incorporated into the company’s international agreements is one that is atypical amongst less competitive firms. Given the relative level of intelligence required by customers, whether business-to-business or public entity, the resultant interest by those consumers is predicated upon associated decision making that is beyond mere cost or material construction.

Macro environmental market interests are now prompting investment in activities such as carbon securities mitigation as CDM (Clean Development Mechanism) now provide offset opportunities for investment, not to mention long-term GHG emissions reductions measures for better living environments. Both the International Standard Organization (ISO) and Organiaztion for Occupational Safety and Health (OSH&A) now regulate companies according to compliance measures related to those market interests. There is risk in idealism. Yet, for Caterpillar, incorporation of environmental standards into its planning and processes, those risks are opportunities to make inroads in new markets in ways that are actually highly efficient and cost affordable. At this time, we are reviewing the company’s menu of financial services and annuity investment portfolio products for advancement of this effort, and toward sustainability of the organization as an environmentally and fiscally sound business in perpetuity.

Strategic Recommendations

Recommendations for Caterpillar are few, but in an age of rapid transformations on an international market that is increasingly sophisticated in consumer and public choice. Communication of Caterpillar’s knowledge base through its logistics and inventory software should inevitably lead to expansion of existing markets and into collaborative projects beyond the current prospectus. In furtherance of company-wide evaluation strategies, a SWOT Analysis (Strengths, Weaknesses, Opportunities and Threats) would reveal several core issues related to the concurrent interests of the various divisions within the company, and also some of the challenges that all entities faced once dedicated to serving a new market.

[i] Caterpillar, Inc. (2008). Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934. Washington: D.C.: US Securities and Exchange Commission.

[ii] Google Stock, April 27, 2010. Retrieved from: http://www.google.com/finance?q=NYSE%3ACAT

[iii] Caterpillar Ramps Up Production. Lexis Nexis, April 27, 2010. Retrieved from http://www.forconstructionpros.com/publication/printer.jsp?id=15932

[iv] Environmental Metrics. Caterpillar. Retrieved from: http://www.cat.com/cda/components/fullArticle?m=327718&x=7&id=1718218&mode