Caterpillar's Core Competency- Strengthening the Companys Survival during the Recession - Case Study Example

? Caterpillar’s Core Competency- Strengthening the Company’s Survival during the 2008 Recession Introduction: As the case study on Caterpillar Company suggests, the company is one of the largest producers of earth moving equipments, manufacturing construction equipments and supplying heavy truck engines. Although several competitors of the company were prevailing in the market, yet the company had been successful in leading at the top position till the 1980s. During the period between 1981 and 1983, the company suffered losses in terms of its sales; however corrective measures soon brought the company back to its successful position. Caterpillar continuously maintained its core competency and followed strategic measures to sustain its state of success in the market of global competition. In the late 1990s, the company was seen to improve more and diversify into engine production, finance, re-engineering and logistics which although showed signs of enhancement in the company’s profits, but at the same time, created concerns over rising debts that could pose troubles for the company in the approaching recession of 2008. Nevertheless, Caterpillar successfully survived the recession and maintained its position in the market (BMAN20002 Caterpillar Inc. Case, pp.1-4). This research study would thus reflect on the company’s strength in terms of its core competency as well as strategic business policies that might have aided the company to survive through the phase of recession. Performance of the company before and after the recession of 2008: The performance of the company before and after the recession can be studied by going through some of the financials of the company. For this purpose, the financials of last four years, comprising the period between 2007 and 2010, have been taken into consideration. The case study indicates that the company had improved its performance in the late 1990s. From a period of 1980 till 2007, the company’s results showed fluctuations but an overall increase in its net sales came about moving from as low as $10000m to $50000m, and the operating profit margins ranging from a negative percentage to as high as 15 percent (BMAN20002 Caterpillar Inc. Case, p.6). The gross profit, the operating income, and the net income of the company from 2007 till 2010 are represented in Exhibit 1 below: Exhibit 1. Gross profit, Operating income and Net income of Caterpillar Company from December 2007 till December 2010 (Bloomberg Business Week, 2011). (In millions of US Dollars) December 31, 2007 (USD) December 31, 2008 (USD) December 31, 2009 (USD) December 31, 2010 (USD) Gross profit 11,200.0 11,756.0 7,465.0 11,307.0 Operating income 4,921.0 4,478.0 1,305.0 3,996.0 Net Income 3,541.0 3,557.0 895.0 2,700.0 Thus if the profits and income as represented for the period before and after the recession are considered, it can be found that the company had suffered losses from the period between 2008 and 2009; however the results improved thereafter reflecting that the company had successfully survived the recession. The return on the company’s equity for the period before and after the recession can be represented through the following table: Exhibit 2. Return on Equity (ROE) of Caterpillar Company for the period from December 2007 till December 2010 (Bloomberg Business Week, 2011). (In millions of US Dollars) December 31, 2007 (USD) December 31, 2008 (USD) December 31, 2009 (USD) December 31, 2010 (USD) Net Income 3,541.0 3,557.0 895.0 2,700.0 Equity 8,996.0 6,714.0 9,300.0 11,325.0 ROE (Net Income / Equity) (in %) 0.39 0.53 0.10 0.24 The return on equity had been reasonably low over the last four years. However after the recession the percentage had fallen very low which can be found to be improving sooner as reflected through the results of December 2010. The debt issued by the company can be represented through the following chart that would show whether the company had to face troubles owing to increasing debt amounts. Figure 1. Debts issued by Caterpillar Company from 2007 till 2010 (Bloomberg Business Week, 2011). (The numerical figures are in million USD) The debts issued by the company therefore can be found to have decreased over the years, particularly post recession, which imply a better status of the company. Thus, over the years, Caterpillar Company showed improvements in its performance and the company’s financial results post recession clearly explain that the company did not suffer a setback but successfully survived the economic slowdown and maintained its leadership in the market. The market value of the company also revealed considerable increase over a trend of last ten years as can be studied from the case given. A View on the Competitors of Caterpillar Company and the company’s competitiveness: Caterpillar has been the largest company in the world in producing earth moving equipments and the second largest supplier of heavy truck engines of the United States. However the company has competitors as well who produce and supply similar products. A few of such competitors competing against Caterpillar include Volvo of Sweden, JCB of the UK, Case and Deere in the US. The company’s closest contender has been Komatsu which is a Japanese firm. The mission of Komatsu has always been to outshine Caterpillar’s performance (BMAN20002 Caterpillar Inc. Case, p.1). Nonetheless, Caterpillar Company has continuously been able to sustain its place against its biggest competitor, Komatsu and successfully achieve its market share in the business world. Reasons for Caterpillar Company to become so competitive: Caterpillar Company always followed a comprehensive strategy that capitulated for the company a competitive advantage in terms of cost and efficiency. Komatsu intended to follow and surpass such strategies formulated by Caterpillar. The management of Caterpillar Company was dedicated to formulate flexible systems to be followed by the company that would make the most out of the economies of scale available from the sales of the company on a global prospect. The capital expenditure of the company was much higher than that of Komatsu. The profitability of Caterpillar was also greater in comparison to Komatsu. Also Caterpillar entered in a joint venture with one of the competitors of Komatsu, Mitsubishi and the joint corporation served to limit Komatsu’s profits by checking on their share in the market and the flow of cash (Porter, 1998, p.296). Discussion on the Strategy followed by Caterpillar: The business strategies followed by the company are of major significance primarily in understanding how the company managed to survive the economic slowdown of 2008 and successfully maintained its position in the market. A most important factor that can be discussed at this juncture is the core competencies of the company. Prahalad and Hamel had presented their analyses on core competencies of a corporation. According to them, the core competencies of an organization represent shared knowledge that explain the coordination between varied dexterity in production and integration of numerous sources of expertise. Not only does core competency correspond to different forms of technology, but at the same time, it organizes work and delivers value. Prahalad and Hamel (1990) observe in this context, “The force of core competence is felt as decisively in services as in manufacturing” (Prahalad & Hamel, 1990, pp.4-5). A core competence reflects statements of message delivered within organizations, participation, and profound dedication in performing across organizations and gets enhanced with greater sharing and applications. However, competencies require cultivation as well. They work as a bond that unites businesses that subsist. Failure in building up of core competencies might occur as a result of inability of top managements. A core competency needs to be built as such that competitors would be unable to emulate them. Thus individual expertise and skills of production are the main factors leading to a complex organization for building up of core competencies (Prahalad & Hamel, 1990, pp.5-7). Core Competency at Caterpillar Company: As the case suggests, the core activity at Caterpillar Company had always been the earth moving equipments. The company also intended to dedicate its performance towards making heavy engines trucks (BMAN20002 Caterpillar Inc. Case, p.5). The “earthmoving equipment industry” of the world was subjugated by the Caterpillar Company’s strategies for a long period of time. In the 1940s and 1950s the company had strategies to entirely bring together original equipments. Later the company established “local subsidiaries” in other countries and spread its operations. Caterpillar Company possesed the ability to distinguish itself from its competitors with respect to quality of products, networks and channels of distribution, services offered after sales, and delivery of alternative parts on time. This attitude of the company was largely responsible for its success internationally (Yoshino, 1996, p.93). These attributes of the company had downgraded the other significant players in the industry of earthmoving equipments. Caterpillar was the solitary “strategic group” that advanced delivery and network channels could recognize (Appendix A.). However, the entry of Komatsu in the market and determining to surpass Caterpillar had caused disturbance in the normal pace of Caterpillar’s success. Depending on the strategic measures undertaken by Komatsu, Caterpillar Company had to match up with Komatsu’s “price value combination”. However, the company’s sales and profits remained unaffected till global competition impacted the company and incurred losses. Responding to worldwide competition, Caterpillar focussed on cost cutting solutions and implemented restructuring that included layoffs, closures of plants, as well as concessions in wages. To regain its position, the company wanted to “reduce risk and gain exposure” in new industries with new technologies. Thus the company formulated strategic alliances in marketing, sourcing of products, research, development, and new business endeavours (Yoshino, 1996, pp.94-97). Although the company seemed to have a difficult journey through some periods of time, it never lost its focus on the core competencies of the company. The management of the company undertook measures to stabilize the company’s focus on its performances and developed certain modifications in the internal operations of its manufacturing, production and services. The position of the company improved since the late 1990s (BMAN20002 Caterpillar Inc. Case, pp.1-4). Tougher times was expected for the company during the time of recession but the financial outcomes clearly declare that the company had not only survived the slowdown but also showed improvements and proved its sustainability towards success. Resource Based Strategy by Caterpillar Company: The success of Caterpillar to a great extent was dependent on its service and distribution networks. This competence facilitated the company to distribute its equipments throughout the world at cheaper costs. The company was able to build up this competency primarily from the support of the government that the company received during the Second World War, as it had become “the exclusive supplier to the Department of War” and making this competency being unique for Caterpillar Company (Markides, 2000, p.115). Thus the Caterpillar Company represented a resourced based view as it had its focus on the use of its skills, resources, assets and competencies and utilized them in a valuable manner. It was not capable of being imitated by others and hence it was rare and developed the core competencies for the company’s success and survival. Marketing Moves and Levers: The Caterpillar Company: A very important concept in marketing is the product life cycle that describes the movement of a product from an introductory phase through growth, maturity and decline. A company’s product identifies its brand name and positions it in the minds of the customers. When a company’s brand is involved it is referred to as the corporate brand. A consumer’s impression of a company is expressed through the value of the corporate brand. Keeping this in focus, Caterpillar Company used “consumer associations with the Caterpillar brand”, a marketing move that it had undertaken to enhance the marketing capabilities of the company in the light of successful competencies (Wheelen & Hunger, 2010, p.160). Discussing about the marketing lever utilized by the company, the main issue that may crop up reflects the company’s effectiveness and efficiency in manufacturing, producing and servicing large scale construction equipments in an unhindered manner even when global competitions prevailed and an economic slowdown had created setbacks for several companies. The company had confidence in its technology and operations which mainly led to their competencies bring success and let the company survive in the hardest times of recession (Porter, 1998, p.294). The company passed through phases when it had to lay off employees, restructure strategic plans through cost cutting and other measures, yet the company presented its struggle through their consistent core competencies. Critical Assessment: A critical study and assessment on the case of Caterpillar Company and their successful survival through the economic slowdown of 2008 clearly reflect the significance of the core competencies of the company that consistently supported the company’s performances towards success. Ever since the company had started its operations their main focus stayed on their core competencies that included their constructions of earthmoving equipments as well as supplying heavy truck engines. Although the company faced global competitions from its rivals and competitors like Komatsu had been determined to exceed the profits of Caterpillar Company, yet the company kept its focus on the core competencies. The company had to match up with the competitors’ strategies, but at the same time it concentrated on the service networks and distributions of its products. Thus, Caterpillar Company can be found to gain strength from its core competencies that ultimately aided the company not only to survive the global recession but also perform at a level best to bring and sustain the company at the position of a leader. The company’s mobilising core competencies assisted it to keep focused on its operations and thus distinguish from its competitors. Critically assessing the case and other relevant supportive materials, it can thus be understood that Caterpillar’s strength in surviving the global economic recession was to a great extent owing to the core competencies of the company. Conclusion: Caterpillar Company being the largest in the world in the manufacturing and production of earth moving equipments, as well as supplying heavy truck engines, represents an example that clearly emphasize on the significance of core competencies within a company and a company’s focus on them. Several companies produced similar products and thus there has been high level of competition in this industry that Caterpillar also had to face. To add to the troubles created by worldwide competition, the economic slowdown was expected to incur the company to huge losses. However, the company survived the recession and the financial results reflect that the company is performing better and improving gradually. This stresses on the company’s ability to keep itself focused on its core competencies and take measures to overcome all difficulties, at the same time matching up with the competitors’ strategies. Caterpillar has reflected the possible measures to sustain its position; however maintaining its focus on the core competencies. Therefore the core competencies of the company can be said to have been the company’s strength in surviving the recession successfully. Appendix A.: Strategic Map of Earthmoving Equipment Industry (Yoshino, 1996, p.94). Reference: 1) BMAN20002 Caterpillar Inc. case 2) Caterpillar Inc. (2011). Bloomberg Business Week, Bloomberg, available at: http://investing.businessweek.com/businessweek/research/stocks/financials/financials.asp?ticker=CAT:US&dataset=incomeStatement&period=A¤cy=native (accessed on August 12, 2011) 3) Markides, C. (2000), All the right moves: a guide to crafting breakthrough strategy, Boston: Harvard Business Press 4) Porter, M.E. (1998), On Competition, Boston: Harvard Business Press 5) Prahalad, C.K. & G. Hamel (1990). The Core Competence of the Corporation, Harvard Business Review, available at: http://tle-inc.com/PDFS/FILES/resources/The%20Core%20Competencies%20of%20the%20Corp.pdf (accessed on August 12, 2011) 6) Wheelen, T.L. & J.D. Hunger (2010), Strategic Management and Business Policy, India: Pearson Education India 7) Yoshino, M.Y. (1996), Strategic alliances: an entrepreneurial approach to globalization, Boston: Harvard Business Press Read More