Caterpillar-Tractor-Co

HarvardBusinessSchool9-385-276Rev.September12,1988U.SrinivasaRangan,ResearchAssociate,preparedthiscaseunderthesupervisionofAssociateProfessorChristopherA.Bartlettasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©1985bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685orwriteHarvardBusinessSchoolPublishing,Boston,MA02163.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeans—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1CaterpillarTractorCo.ItwaslateafternoononthetwentiethofOctober1981,andapositivemoodpervadedthecorporateheadquartersofCaterpillarTractorCo.(Cat)inPeoria,Illinois.PreliminaryreportsshowedthatCat,theworld’slargestmanufacturerofearth-movingequipment(EME),washeadedforthebestfinancialresultsinitshistory.Salesin1981wereprojectedtoreach$9.2billion,exceedingtheprevioushighof$8.6billionachievedin1980,andprofitswereexpectedtojumpfromthepreviousyear’s$565milliontoabout$580million.AtopmanagementmeetinghadbeencalledbyLeeMorgan,chairmanandchiefexecutiveofficer,toreviewthepreliminaryresultsandappraiseCaterpillar’scompetitivestrategyforthenextseveralyears.Morganwantedtoknowwhatmeasureswererequiredtoensurethatthecompany’simpressiveperformancecontinued.WorldEarth-MovingEquipmentIndustryin1981EMErepresentedabout70%ofthedollarsalesoftheconstructionequipmentindustryin1981,encompassedadiverserangeofmachinessuchasexcavators,bulldozers,graders,loaders,off-highwaytractorsandhaulers.Someofthesemachineswereavailablewithwheelsorcrawlertracks,andmostwereavailableinawiderangeofsizesandhorsepower(hp)ratings.TheMarketWorldwidedemandforEMEhaddoubledbetween1973and1980.OveralltheUnitedStatesexportedroughlyone-thirdofitsproduction.(SeeExhibit1forshipmentsbyyearincludingexports.)Estimatesofworldwidemarketsizevariedbetween$14and$15billionfor1981,dependingonthetypeofmachinesincluded.Besidestheoriginalequipment,theworldmarketforpartsandattachmentswassubstantial,accountingforasmuchasone-thirdofconstructionmachinerysalesvolume.Mostattachmentsweresoldalongwiththeprimemoveratthetimeofsaleandwereincludedintheinitialsalesfigures.IllustrationByJaneSimonDoNotCopyorPostThisdocumentisauthorizedforeducatorreviewuseonlybyzijieli,HEOTHERuntilFebr[e-mail]617.783.7860385-276CaterpillarTractorCo.2Generally,Profitmarginsweresubstantiallyhigherforpartsandattachmentsthanforwholemachines.TheUsersTheconstructionandminingindustrieswerethekeyusersofEME,theformerrepresentingover60%ofthemarketandthelatterforalmost30%.Forestryaccountedforthebalance.Thetermconstructionindustryusuallyincludedworkrelatingtobuildings,dams,airports,roads,wastedisposal,andsoforth.TheUnitedStatesaccountedforroughly5%ofworldnew-constructionexpenditures,oranestimated$230billionin1980.Repairsandmaintenanceexpenditureswerebelievedtobeanother$75billionworldwide.Since1979,theconstructionindustryintheUnitedStateshadfacedamajordownturn.TheCommerceDepartmentconsideredtheindustrydepressed,witha12%dropinaggregatehoursworkedbyconstructionworkersandaseasonallyadjustedunemploymentrateof16%inlate1981.(SeeExhibit2forsomedatarelatingtotheindustry.)Theendoftheinterstatehighwaysprograminthelate1960shadshrunktheroadconstructionmarketconsiderably.TheEMEdemanddependedlargelyonthepaceatwhichmachinesweresubstitutingforlabor.Thus,demandhadtraditionallybeenhigherindevelopedcountriesthanindevelopingones.Recenttrends,however,werechangingtheoveralldemandpattern.(SeeTableA.)Sincethemid-1970s,theoil-richMiddleEasterncountrieshadwitnessedamassiveriseinconstructionactivity.Amongthelessdevelopedcountries(LDCs)ingeneral,considerablepotentialexisted,sincetheyrequiredextensiveinfrastructure.Many,however,facedfinancingproblems.TableAWorldwideConstructionExpenditure(1981)ExpenditureProjectedRealAnnualGrowthRegionPercentRates,1982-1986UnitedStates50.0%1%Canada3.52LatinAmerica7.54Europe5.02MiddleEast7.55AsiaandAustralia26.56%Total100.0%Source:Compileddatafromvarious1981issuesofEngineeringNewsRecordandFirstBostonResearch.TheconstructionindustrywashighlyconcentratedandU.S.dominated—althoughboththesecharacteristicswerechanging.Alloftheindustrializednationshadindigenousconstructioncapabilities,andmanyhadsuccessfullyexpandedtheiroperationsoverseas.Severalofthe“advanceddevelopingcountries”werealsoupgradingtheirconstructionservicesandenteringtheinternationalmarket.Untilrecently,theU.S.contractors,whohadalargedomesticbaseandassuredU.S.government-sponsoredconstructionworkabroad,hadalsowonalargeportionoftheoverseasconstructioncontracts.Asurveyindicatedthat29companiesaccountedfor94%ofnon-U.S.constructionand54%ofU.S.constructionin1980.ButthesefirmswerefacingincreasingcompetitionfromThirdWorldconstructionfirms,whichtendedtousetheirlow-costlaborastheirmaincompetitiveweapon,shiftingworkcrewstoconstructionssitesworl