Advanced Competitive Position Assignment â Caterpillar
Advanced Competitive Position Assignment – Caterpillar
Introduction Caterpillar is a world-leading producer of heavy machinery equipment. Since establishment in 1886, the company has evolved from producing tractors to a broad range of heavy construction and mining equipment as well as engines, turbines and locomotives. The company serves the construction and resource industry and the transportation and energy sector. In addition, the company has a finance division, which enables customers to finance their purchase. The company owns plants for construction of the heavy machinery equipment but the equipment mainly sells through independent dealers all over the world. The US market is core for Caterpillar and the company has used it as a platform to expand to a worldwide presence. The company has experienced several large periods of economic distress in the societies it serve, but has managed to adapt to the challenges and come out as a company each time. At the last downturn in activity in 2009, the capital market acknowledged Caterpillar for its ability to quickly implement contingency plans and come out stronger and faster than competitors1. The company currently experiences a downturn in activity due to lower levels of worldwide economic activity and depressed prices for resources.
Competition and industry cycle for Caterpillar business All of Caterpillars divisions serves markets that are cyclic in terms of economic activity3. The construction and resource industry has traditionally been the core segments in the company, while service to the Transportation and Energy sectors adds growth opportunities and the divisions has been introduced in the company later2. The most mature segment in terms of the industry S curve must be the resource industry (Exhibit 1).The mining companies which comprise the sales in the business unit has experienced a prolonged period of depressed prices and the response has been decreased capital investments in machines and reductions in employee numbers. It is likely that the current response from the mining companies will lead to a disruption of the industry. If the prices were to increase for resources it is likely that it will not be possible for the mining companies to replace the experience that the employees leaving the industry has. This could lead to heavier emphasis on intelligent machines causing a technology disruption, an emphasis that Caterpillar will be well positioned to capitalize on. The construction business unit also serves a mature industry. Technology disruptions are not foreseen in the division, but the division will still be heavily dependent on the worldwide economic activity. In some countries, the governments will initiate infrastructure projects to stimulate the economy during downturn in economic activity leaving some sales. The finance division acts as a supplement to the purchase of heavy machines using standard contracts, no disruptions foreseen, but also limited growth opportunities. The assessment of the energy sector is that it is a mature industry but with growth prospects. Currently the low oil and gas prices leads to lower activity, but the energy demand projections underpin strong growth prospects for the oil and gas producers. Due to high capital investments needed to enter the market and due to the established players already has a standard for their engines and turbines sold for the segment it is categorized as a mature industry with limited chance for a disruption.
The business unit heading the business in the transportation sector acts in a mature industry with locomotives and railroads already established. A potential disruption could originate from increased pressures to decarbonize leading to increased pressures for electrified locomotives. An efficient provider of electrified locomotives would be a significant threat to the business supported by old technologies for combustion.
Internationalization strategy for Caterpillar Caterpillar has invested heavily in adding production facilities especially in the Asia Pacific region and they now have a worldwide presence of production facilities with the US facilities as core4. Their foreign direct investments is high on this basis and further they ship the equipment around in the world from the specialized plants, so Caterpillars international trade is also high. Based on Caterpillars setup the industry categorizes as a global industry (See exhibit 2). Some competitors act regionally and produce low cost equipment with shorter lifetime span. Caterpillar focuses on competition through a lower cost per unit via a longer lifetime span of its products, but higher initial payment5. A strong worldwide dealer network shares some of the cost of marketing and inventories, letting Caterpillar reach the world with their products.
The Caterpillar group and diversification strategy The Caterpillar business was founded on a capability to produce tractors and more broadly, the key capability in terms of construction of motorized vehicles designed for specific purposes, as well as utilization of the knowledge about construction of engines and turbines has been a core component for Caterpillar throughout time. Today their business are all interlinked with components of these capabilities ie. their business`s has operational synergies leveraging rent from their assets. Knowledge of engine / turbine technologies can be transferred between business and they can all leverage the Caterpillar trademark. Furthermore, a joined finance, procurement function and access to worldwide dealer network is of high worth to their joined group of business. Instead of backward and forward integration of their supply chain, Caterpillar has focused on manufacturing of machines and have left the excavation and supply of materials and the distribution of final products to other companies, in other words they have focused narrowly in the vertical value chain. They have diversified horizontally trying to leverage their knowledge of engines, turbines and construction of motorized vehicles in different customer segments. The diversification also expose Caterpillar to different growth prospects with Energy and Transportation being attractive industries based on longitude of industry and limited competition, while the resource industry seems unattractive due to suppressed prices and overcapacity at least on the short to medium term time horizon. The construction industry will pick up again as soon as the worldwide recession is over, and on this basis, the construction industry is assessed attractive (exhibit 3).
Stakeholders in Caterpillar Caterpillar has many stakeholders with approx. 110.000 employees and several offices and plants around the world as well as an extensive dealer network. Currently, the company presentations and reports focuses heavily on managing the interests of the stakeholders during the current depressed economic environment in which Caterpillar operates. Redundancy plans has been put forward and some executed which affects the organization, but overall the employees is reported to understand the reasoning5. Caterpillar works to improve the use of technology and works to introduce lean methodologies that affects current work procedures again something that can affect the employee satisfaction. The effects of the lean practice is starting to show in the financials, but the investors sees the overall sales decrease more than wipe out these effects. The Caterpillar stock price has not followed the S&P 500 and disappointment from investors has lead the board to redesign the compensation package to management in order to strengthen alignment of interests of management and stockholders. Focus from the management side is also to keep the independent dealers content with improved conditions during the downturn.
Synthesis of findings Caterpillar has demonstrated multiple times that the company is able to survive economic downturns and come out as a strong competitor in the other end. The company has evolved a broader product range serving multiple customer segments but the core product comprising an engine or an engine with a purpose build bodywork (ie. trucks or the like) is still the same. In terms of technology used there is a coherence in the diversification strategy but the conglomerate is vulnerable to economic activity in societies as none of their business units are counter cyclic. Their worldwide presence through a combination of strong independent dealers and worldwide production facilities seems to provide access to a wide range of sales and opportunities which most of their competitors do not possess. This also opens them up to all kinds of competition, so it is not only a clear positive. Further, the key stakeholders, investors and employees, cannot be content with the current development. In conclusion, it seems, as Caterpillar is a resilient company with an ability to weather the most storms but also to compete globally with the challenges it brings. It is not an all in success story as Caterpillar has some vulnerabilities especially their inability to provide good results in downturns, but also the discontent from investors and potentially employees could pose difficulties.
Exhibit 1. The Competitive Lifecycle with plot of Caterpillars 5 divisions (Transportation and Energy split into 2 for this plot)
Resources
Disruption
Construction Financial products
Mature phase
Emergent phase Competitive lifecycle
Energy Transportation Shakeout
Growth phase
Annealing
Exhibit 2. Internationalization pattern Foreign Direct Investment High International trade Low
International Industry Sheltered Industries Low
Global Industry Caterpillar Multi- Domestic Industries High
Exhibit 3. Diversification matrix Transportation
High
Energy
Construction
Finance
Industry Attractiveness
Resource
Low
Low
Business Unit Competitive advantage
High
Exhibit 4. Stakeholders in Caterpillar. Key stakeholders Shareholders Employees Dealers Customers Suppliers
Secondary stakeholders Special interest groups NGO`s Governments
Primary interest at the moment Stock price should catch up to positive market development recent years Fear of redundancy process and concern regarding longitude of downturn Mitigate the worst effects of lower sales by selling spare parts and positioning for the upturn Depressed worldwide economic activity limits appetite for purchases Low prices for resources means that they are struggling to finance new purchases but also that they have a weak negotiation power towards Caterpillar Na. Na. Governments interested in limited layoffs
Sources Source 1. http://fortune.com/2011/05/12/caterpillar-is-absolutely-crushing-it/ Source 2. http://www.fool.com/investing/general/2014/12/29/this-move-might-just-have-crushed-caterpillars-fut.aspx Source 3. http://www.fool.com/investing/general/2016/01/02/will-2016-be-caterpillar-incs-best-year-yet.aspx Source 4. http://www.caterpillar.com/en/company/global-footprint/apd.html Source 5: http://www.caterpillar.com/en/investors/year-in-review.html
Introduction Caterpillar is a world-leading producer of heavy machinery equipment. Since establishment in 1886, the company has evolved from producing tractors to a broad range of heavy construction and mining equipment as well as engines, turbines and locomotives. The company serves the construction and resource industry and the transportation and energy sector. In addition, the company has a finance division, which enables customers to finance their purchase. The company owns plants for construction of the heavy machinery equipment but the equipment mainly sells through independent dealers all over the world. The US market is core for Caterpillar and the company has used it as a platform to expand to a worldwide presence. The company has experienced several large periods of economic distress in the societies it serve, but has managed to adapt to the challenges and come out as a company each time. At the last downturn in activity in 2009, the capital market acknowledged Caterpillar for its ability to quickly implement contingency plans and come out stronger and faster than competitors1. The company currently experiences a downturn in activity due to lower levels of worldwide economic activity and depressed prices for resources.
Competition and industry cycle for Caterpillar business All of Caterpillars divisions serves markets that are cyclic in terms of economic activity3. The construction and resource industry has traditionally been the core segments in the company, while service to the Transportation and Energy sectors adds growth opportunities and the divisions has been introduced in the company later2. The most mature segment in terms of the industry S curve must be the resource industry (Exhibit 1).The mining companies which comprise the sales in the business unit has experienced a prolonged period of depressed prices and the response has been decreased capital investments in machines and reductions in employee numbers. It is likely that the current response from the mining companies will lead to a disruption of the industry. If the prices were to increase for resources it is likely that it will not be possible for the mining companies to replace the experience that the employees leaving the industry has. This could lead to heavier emphasis on intelligent machines causing a technology disruption, an emphasis that Caterpillar will be well positioned to capitalize on. The construction business unit also serves a mature industry. Technology disruptions are not foreseen in the division, but the division will still be heavily dependent on the worldwide economic activity. In some countries, the governments will initiate infrastructure projects to stimulate the economy during downturn in economic activity leaving some sales. The finance division acts as a supplement to the purchase of heavy machines using standard contracts, no disruptions foreseen, but also limited growth opportunities. The assessment of the energy sector is that it is a mature industry but with growth prospects. Currently the low oil and gas prices leads to lower activity, but the energy demand projections underpin strong growth prospects for the oil and gas producers. Due to high capital investments needed to enter the market and due to the established players already has a standard for their engines and turbines sold for the segment it is categorized as a mature industry with limited chance for a disruption.
The business unit heading the business in the transportation sector acts in a mature industry with locomotives and railroads already established. A potential disruption could originate from increased pressures to decarbonize leading to increased pressures for electrified locomotives. An efficient provider of electrified locomotives would be a significant threat to the business supported by old technologies for combustion.
Internationalization strategy for Caterpillar Caterpillar has invested heavily in adding production facilities especially in the Asia Pacific region and they now have a worldwide presence of production facilities with the US facilities as core4. Their foreign direct investments is high on this basis and further they ship the equipment around in the world from the specialized plants, so Caterpillars international trade is also high. Based on Caterpillars setup the industry categorizes as a global industry (See exhibit 2). Some competitors act regionally and produce low cost equipment with shorter lifetime span. Caterpillar focuses on competition through a lower cost per unit via a longer lifetime span of its products, but higher initial payment5. A strong worldwide dealer network shares some of the cost of marketing and inventories, letting Caterpillar reach the world with their products.
The Caterpillar group and diversification strategy The Caterpillar business was founded on a capability to produce tractors and more broadly, the key capability in terms of construction of motorized vehicles designed for specific purposes, as well as utilization of the knowledge about construction of engines and turbines has been a core component for Caterpillar throughout time. Today their business are all interlinked with components of these capabilities ie. their business`s has operational synergies leveraging rent from their assets. Knowledge of engine / turbine technologies can be transferred between business and they can all leverage the Caterpillar trademark. Furthermore, a joined finance, procurement function and access to worldwide dealer network is of high worth to their joined group of business. Instead of backward and forward integration of their supply chain, Caterpillar has focused on manufacturing of machines and have left the excavation and supply of materials and the distribution of final products to other companies, in other words they have focused narrowly in the vertical value chain. They have diversified horizontally trying to leverage their knowledge of engines, turbines and construction of motorized vehicles in different customer segments. The diversification also expose Caterpillar to different growth prospects with Energy and Transportation being attractive industries based on longitude of industry and limited competition, while the resource industry seems unattractive due to suppressed prices and overcapacity at least on the short to medium term time horizon. The construction industry will pick up again as soon as the worldwide recession is over, and on this basis, the construction industry is assessed attractive (exhibit 3).
Stakeholders in Caterpillar Caterpillar has many stakeholders with approx. 110.000 employees and several offices and plants around the world as well as an extensive dealer network. Currently, the company presentations and reports focuses heavily on managing the interests of the stakeholders during the current depressed economic environment in which Caterpillar operates. Redundancy plans has been put forward and some executed which affects the organization, but overall the employees is reported to understand the reasoning5. Caterpillar works to improve the use of technology and works to introduce lean methodologies that affects current work procedures again something that can affect the employee satisfaction. The effects of the lean practice is starting to show in the financials, but the investors sees the overall sales decrease more than wipe out these effects. The Caterpillar stock price has not followed the S&P 500 and disappointment from investors has lead the board to redesign the compensation package to management in order to strengthen alignment of interests of management and stockholders. Focus from the management side is also to keep the independent dealers content with improved conditions during the downturn.
Synthesis of findings Caterpillar has demonstrated multiple times that the company is able to survive economic downturns and come out as a strong competitor in the other end. The company has evolved a broader product range serving multiple customer segments but the core product comprising an engine or an engine with a purpose build bodywork (ie. trucks or the like) is still the same. In terms of technology used there is a coherence in the diversification strategy but the conglomerate is vulnerable to economic activity in societies as none of their business units are counter cyclic. Their worldwide presence through a combination of strong independent dealers and worldwide production facilities seems to provide access to a wide range of sales and opportunities which most of their competitors do not possess. This also opens them up to all kinds of competition, so it is not only a clear positive. Further, the key stakeholders, investors and employees, cannot be content with the current development. In conclusion, it seems, as Caterpillar is a resilient company with an ability to weather the most storms but also to compete globally with the challenges it brings. It is not an all in success story as Caterpillar has some vulnerabilities especially their inability to provide good results in downturns, but also the discontent from investors and potentially employees could pose difficulties.
Exhibit 1. The Competitive Lifecycle with plot of Caterpillars 5 divisions (Transportation and Energy split into 2 for this plot)
Resources
Disruption
Construction Financial products
Mature phase
Emergent phase Competitive lifecycle
Energy Transportation Shakeout
Growth phase
Annealing
Exhibit 2. Internationalization pattern Foreign Direct Investment High International trade Low
International Industry Sheltered Industries Low
Global Industry Caterpillar Multi- Domestic Industries High
Exhibit 3. Diversification matrix Transportation
High
Energy
Construction
Finance
Industry Attractiveness
Resource
Low
Low
Business Unit Competitive advantage
High
Exhibit 4. Stakeholders in Caterpillar. Key stakeholders Shareholders Employees Dealers Customers Suppliers
Secondary stakeholders Special interest groups NGO`s Governments
Primary interest at the moment Stock price should catch up to positive market development recent years Fear of redundancy process and concern regarding longitude of downturn Mitigate the worst effects of lower sales by selling spare parts and positioning for the upturn Depressed worldwide economic activity limits appetite for purchases Low prices for resources means that they are struggling to finance new purchases but also that they have a weak negotiation power towards Caterpillar Na. Na. Governments interested in limited layoffs
Sources Source 1. http://fortune.com/2011/05/12/caterpillar-is-absolutely-crushing-it/ Source 2. http://www.fool.com/investing/general/2014/12/29/this-move-might-just-have-crushed-caterpillars-fut.aspx Source 3. http://www.fool.com/investing/general/2016/01/02/will-2016-be-caterpillar-incs-best-year-yet.aspx Source 4. http://www.caterpillar.com/en/company/global-footprint/apd.html Source 5: http://www.caterpillar.com/en/investors/year-in-review.html
