The Comeback of Caterpillar

The Comeback of Caterpillar, 1985-20002

History:

Caterpillar, the world's largest manufacturer of construction and mining equipment was formed in 1925 when the Holt Company, a combine manufacturer who created the Caterpillar tractor; merged with the Best Tractor Company and moved their headquarters to Peoria, IL.

The first company to use a diesel engine on a moving vehicle in 1931; discontinued their combine business shortly after to focus on road-building, construction, logging, and pipe laying equipment. Caterpillar supplied the U.S. Army with bulldozers during WWII, and its sales tripled in the early 1940's when they included motor graders, diesel engines, and electric generators in their product line.

After WWII, demand for Caterpillar products sprung forth and their equipment was used to build the interstate highways and airports as well as rebuild Europe and construct dams in Third World countries. The company produced high quality, reliable products with fast delivery and service when replacements were needed which set them apart from any competition. By the mid 1960's they had established foreign manufacturing subsidiaries in several countries and had a successful alliance with Mitsubishi in Japan.

Caterpillar's network of self-sustaining dealerships and distribution centers contributed to their success by developing close relationships with their customers since they were strategically located throughout the world.

Competition in the U.S. and Europe was weak and with Caterpillar's quality products they were able to charge premium prices for their products, pay production workers union scale, and provide their shareholders high return rates on their equity while enjoying profits. After recording a record year in sales and profits in 1981, the next three years showed record losses caused by global recession, a long and costly union strike, and a steep rise in the value of the dollar which made exports more expensive and imports cheaper.

While the value of the dollar affected Caterpillar adversely, their rival Komatsu Limited of Japan took advantage and penetrated the U.S. market and went after their Latin American and Europe markets as well by increasing quality and reducing costs. Komatsu doubled their market share while Caterpillar lost 25 percent of theirs.

Leadership Style (George Schaefer vs. Donald Fites):

George Schaefer, Caterpillar's CEO from 1985-1990 responded to the changing environment by with dramatic strategic initiatives in every area of the company including purchasing, manufacturing, marketing, personnel, and labor relations.

Labor relations were strained from a record 205 day strike in 1982 and in order to turn the company around, a good relationship with the union was necessary. George Schaefer's leadership style was cooperative, open and communication of information was encouraged from officers all the way down to production workers. He was low-key and down to earth with an exceptional ability to relate to people. His management style led to an amicable relationship between Caterpillar and the union where he encouraged employee involvement. He incorporated an Employee Satisfaction Process (ESP), groups of teams that met voluntarily on a weekly basis with management and made process improvement and quality suggestions which led to increased productivity, quality and satisfaction. During his tenure, there were no strikes during contract negotiations.

Donald Fites leadership style was completely opposite of Schaefer's in that he believed in top down management and did not hesitate to cut jobs the instant he felt it was necessary.

As an executive, he was feared by his subordinates, respected by his peers, and cheered by Wall Street. Fites led by command, not consensus. With many years spent in Japan as the marketing director of Caterpillar-Mitsubishi, he admired Japanese approach to development and labor relations.

Labor relations during Fites tenure was strained due to his management style and opposition to the UAW. Resistance by the UAW and organized disruptions and strikes were countered by Fites preparedness. He cross trained managers to operate factory machinery and shifted work to non-union plants in the South. During the years of struggle between the UAW and Caterpillar, the company earned record profits. After a 17 month strike in which the company was able to see increased sales and union workers crossed picket lines in fear of being replaced, the union lost ground and an agreement was reached in 1998 that favored Caterpillar.

Both management styles were effective in reducing costs and increasing sales; however, part of the reduction in costs made by Fites was due to elimination of jobs. While Schaefer increased employee satisfaction and quality of products and service, Fites increased tension in labor relations which resulted in strikes, disruptions, slowdowns, and picketing, as well as thousands of unfair labor practice charges against the company.

Opportunities and Threats:

Some of the Opportunities that Caterpillar had and took advantage of in the industry during these years were expanding segments of the business, exploring new market opportunities, diversifying product lines, and joint ventures.

The threats encountered by Caterpillar were increase in foreign competition by Komatsu, increase in domestic competition by John Deere, the push to conserve energy affects their diesel and gas powered engines, downturns in the economy and rising labor costs, along with decrease in labor relations and a slower growth market.

Strengths/Weakenesses/Porters Five:

The strengths of Caterpillar Company were the diversity of products, several product lines, brand name reputation, the ability to outsource manufacturing of parts while maintaining brand identity and design approval, strategic locations of their distribution and dealers, a superior marketing organization, customer focused R & D through their divisional separation, increased Information Technology, semi-autonomous organizational structure along with specific goals for financial management per division.

Caterpillar's weaknesses in the industry were the conflicts with labor relations and the union, the changes in the strength of the dollar bill, cyclical movements of the construction industry, and obsolescence of products.

Caterpillar's is a strong competitor in that it has exceptional marketing, diversity of products, strategic location of dealers and distributors and brand name recognition. By eliminating obsolete products and increasing labor relations, as well as