Caterpillar Value Chain Strategies - Assignment Example

Running Header: CATERPILLAR VALUE CHAIN STRATEGIES Changes That Have Taken Place in Caterpillar Inc's Value Chain in Recent Years Affiliation Abstract This study examines the factors behind the changes that have taken place in the structure and geographical location of Caterpillar Inc's value chain in the recent years. Companies in today's world need continuous improvement to differentiate themselves and to ensure they stay competitive in a very turbulent market. Caterpillar Inc can be seen as one of the companies who had to rejuvenate itself several times in the last three decade's, to ensure its survival and success. Through a series of different strategies driven by it's CEO's, the organization have successfully initiated major overhauls of its strategies and operations after slumps in the market resulted in large losses of income. Through transforming itself to be more focused, responsive, variable and a resilient enterprise, that can connect their businesses end-to-end with suppliers at the one end, and customers at the other, by fusing the best business practices and technology, Caterpillar Inc have successfully introduced accelerated value creation. Introduction to Caterpillar Inc Caterpillar Inc is the worlds leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company is a technology leader in construction, transportation, mining, forestry, energy, logistics, electronics, financing and electric power generation. In 2005, Caterpillar posted sales and revenues of $36 billion and a profit of $2.8 billion, maintaining its position as an International supplier and leading U.S. exporter. Currently Caterpillar has more than 85000 employees in its different businesses and divisions world wide. The current success achieved by Caterpillar was no mere coincidence, but due to the strong influence and direction set by its current and former CEO's in periods were Caterpillar lost ground against competitors and registered huge losses. Many different factors influenced the productions, sales and operations during these periods. Factors such as and overvalued dolor, collapse of major markets, union strikes and an inefficient supply chain. To be able to better understand the factors that forced Caterpillar to introduce major changes we need to review each of these trouble periods individually. 1980's Caterpillar has already established an international network of manufacturers, suppliers and dealers after being in the business for more than 75 years. But by 1982 Caterpillar was in trouble with over $1 billion dolor from 1982 through to 1984, with an annual sales figure of approximately $5 billion annually. Factors that contributed to the losses were an overvalued dolor, the concurrent collapse of world markets, a crunching labor strike and the emergence of a fast growing and highly productive competitor, Komatsu. External factors can be seen as an end to a decade long growth in the demand for construction machinery and declining oil prices, led to a decline in investment in the oil exploration and mining operations. The strong dollar versus other currencies resulted in a cost disparity for Caterpillar in relation with their competition and Komatsu an relatively unknown Japanese firm won the market share at the expense of Caterpillar. Komatsu could under price Caterpillar by up to 30% due to a much higher productivity level. During this time Caterpillar reacted to the downturn in the market by reducing labor cost through freezing employee's wages. This resulted in a national U.S. strike, led by labor unions, which caused huge losses. 1990's In the early 1990's Caterpillar yet again found itself in trouble due to the rise in the value of the dollar and slowing down of demand in construction equipment. At the same time Caterpillar was doing very badly at the stock exchange, limiting the access to capital to support its operations. The CEO of the time took drastic actions to reorganize the company and to yet again cut down on labor costs. But due to some executive decisions increasing the power of the board of directors the new CEO's power was limited to a degree, restricting his ability to implement needed strategic changes. The negative effects of the bad labor relations was leading to lower quality and increasing production costs. All these factors making the company vulnerable to a hostile take over. 2000 - Onwards In 1999 Caterpillar experience another slump in profit and sales as the U.S. market for construction vehicles experienced another depression. Caterpillar introduced new strategies to turn the company around, but the 9/11 incident shook the whole U.S. economy and delaying Caterpillars recovery. According to the 2001 annual report the North-American truck engine demand collapsed and there was a prolonged weakness in general construction. Wall Street ended 2001 as one of its worst in decades, with major indexes loosing ground for the second year in a row. Strategies implemented by Caterpillar Inc During the early 1980's Caterpillar reduced cost by freezing employee's salaries, cutting down on operational costs, which aggravated the downturn of the company even more due to strikes. Then in the mid 80's the CEO implemented renewal strategies by changing its entire business systems and parts of the organization. Caterpillar also started expanding into international markets, and outsourcing some none core businesses. Manufacturing plants was upgraded and unions were consulted in the change process which improved labor relations, but increased their power. When a slump in the economy yet again threatened the organization in the early 1990's, Donald Fites took drastic action to further reorganize the company, by completely renewing Caterpillars organizational system. His strategies were almost the opposite of that of Schaefer in the 80's, as he anticipated union action and through clever planning broke the back of the strong unions. He continues with increasing outsourcing and International expansion. Fites expected employees to just let themselves be managed, and pushed to bring managers closer to the dealership networks, by changing the reward system to put greater focus on financial performance indicators, and a greater emphasis on entrepreneurship than of managerial administration. He lastly changed the management from a centralized management system to a de-centralized management system. Making each business unit accountable for its own results. In 1997 Caterpillar set itself a target of reaching $30 billion sales within the next decade with increased profits. Yet the worldwide slump in the market in 2000 and 9/11 incident in 2001 almost crashed the market. The CEO at that time, Barton have continued diversifying Caterpillar's businesses and drove further internationalization. He also started floating the idea of introducing e-commerce and experience strong rsistance from the dealership networks. 2001 Barton launched Six Sigma throughout the Caterpillar organization. Six Sigma is the unifying framework for the company's strategic initiative-enabling profitable growth, championing continuous quality improvement, aggressively reducing costs, and developing integrated e-business strategies. Caterpillar surpassed its goal of $30 billion sales in 2004, two years ahead of schedule. 2004 sales and revenues were $30.25 billion, 33% above 2003 figures. The increase in sales was driven by higher machinery and engine sales, a favorable dollar due to the strengthening of the euro and British pound, and lastly an increase in price realization and higher Financial Product revenues. Jim Owens, who became Chairman/CEO in July '04, led Caterpillar's transformation from a good to great company through a strategy he has defined as the 3Ps (Profitable Growth, Performance through 6 Sigma, and People). Caterpillar Global Area of Operation Caterpillar has 100 facilities in 25 countries that ship to 200+ countries. Countries it operates out of are: Australia Belgium Brazil Canada Egypt England France Germany Italy Japan Mexico Netherlands Poland Singapore Spain South Africa South Korea Sweden United Arab Emirates United States Venezuela Key Clients Key Cat Logistics clients are: AGCO Daimler Chrysler Ford Motor Company Harley-Davidson Motor Cycles Hewlett Packard Honeywell Hyundai Kodak MAZDA Mitsubishi Caterpillar Forklift NAVSTAR PEUGEOT Rover TRW Saab Kodak Business Strategies In 1999 Day acknowledged the need for market driven organization to be flexible and responsive. Scholars such as Day and Ashkenas agreed that the generic key success factors for an organization to gain the competitive edge are flexibility, integration, innovation, and coordination. Porter offers a view of the role of 'value' in a strategic context: The quest for productivity are also highly tuned to changes in customer requirements and priorities or signs of value migrating to different parts of the value chain, and keep modifying their value propositions with these changes in mind. Caterpillar's business strategy clearly meets the above criteria. Caterpillar, based on its focus on core strengths and products, research and developments, global ties to its dealers and exceptionally strong customer/quality commitment, has developed a value proposition that exceeds its customers' expectations. At Caterpillar the Corporate Strategy Council develops the corporate business strategy. The council not only develops and tracks the implementation of corporate business strategy by the business units, but also ensures the strategy is communicated throughout the enterprise. The senior leaders believe that the business strategy is everyone's job, and circulate the strategy from the top down, after which it is executed from the bottom up. The business units then develop their own strategies that links back to the corporate strategy, with supporting goals and initiatives. Employees are tied to the strategy via Specific, Measurable, Action-oriented, Realistic, and Time/Resource Constrained goals (SMART Goals) that are linked to corporate strategy and business units' Critical Success Factors. Caterpillar's current strategy is focused on 3Ps: Profitable Growth: Increase demand for infrastructure. Grow engine business Increase presence in the emerging markets of China, India, and the Commonwealth of Independent States Growing the service side of our business Profitable growth coupled with managing costs through the cycles People: High level of employee engagement is essential Emphasis on strong leaders who coach, mentor, encourage, motivate, and reward A culture of safety first: currently at 60% reduction in lost time due to injuries and intentionally on the path to the goal of zero injuries Performance through Six Sigma: The way Caterpillar manage quality, eliminate waste, and reduce costs. Six Sigma allows Caterpillar to be innovative, to create new products and services, and help the company grow profitably. Critical Success factors that are key enablers for strategy attainment are: Six Sigma institutionalization to drive continuous improvement throughout the value chain. Best distribution channels tailored for each market segment at competitive costs. Best products and solutions for each market at competitive costs. Cost structure management to deliver outstanding financial results through the business cycle and maintain our global competitive position. Establishment of Cat's global business model and achievement of profitable leadership in the emerging markets of China, India, and the CIS by 2010. Achievement of $30 billion in sales and revenues during this decade. Implementation of a fully integrated, highly responsive, and flexible value chain that satisfies our customers' order fulfilment needs in the shortest time from order receipt to cash. Caterpillar people will be recognized, along with our products and services, as key enterprise strength. We will empower our talented employees and their leaders to create a positive culture in which safety, diversity, integrity, and performance are highly valued. Maximize customer value through product support excellence. Make a quantum leap in quality and reliability by adopting Six Sigma process improvement methodologies throughout the value chain. Extend our worldwide rental leadership position and build dealer retail used equipment capability within each dealer's service territory. Be recognized as a profitable, innovative, well-managed industry leader with a strong focus on social responsibility and sustaining the environment. Six Sigma From the analyzes of Caterpillars sales success and history, the introduction of Six Sigma is without doubt the largest contributing factor to Caterpillars Success. The vision that Barton showed when he fused the best business practices and technology through the introduction of Six Sigma can today be seen as the best strategic move that Caterpillar could had hoped for. In today's turbulent markets unstoppable drivers are creating a new type of demand, with intense competition, continuous change and unrelenting financial pressures. In addition this new market promises increased pricing pressures as customers expect more for less. Stranded assets due to market requirements that have evolved beyond the fixed investment infrastructure, sudden risks from unexpected business, geopolitical and natural disaster shocks, and lower levels of profitability. But, for a new breed of businesses prepared for the inevitable market realities, this supercharged environment serves as an incubator for a brand new phase of accelerated value creation. Figure 1: The New Demand Environment To meet this new market environment head on Caterpillar have very successfully introduced and used Six Sigma from 2001 and the record sales recorded can only be seen as proof of its effectiveness. But what is the Six Sigma Six Sigma is a disciplined, data-driven approach and methodology for eliminating defects from the manufacturing process to transactional and from product to service. To achieve Six Sigma, a process must not produce more than 3,4 defects per million opportunities. A Six Sigma defect is defined as anything outside of customer specifications. The objectives of the Six Sigma methodology is the implementation and variation reduction through the application of Six Sigma improvement projects. This is accomplished through applying the two Six Sigma sub-methodologies: DMAIC and DMADV. DMAIC stands for: define, measure, analyze, improve and control, and is used for improving existing systems falling below specifications by looking for incremental improvements. DMADV is the abbreviation for: define, measure, analyze, design and verify, and is a process for improving systems used for developing new processes or products at Six Sigma Quality levels. It can also be employed if a current process requires more than just incremental improvement. Both Six Sigma processes are executed by Six Sigma Green Belts and Six Sigma Black Belts, and are overseen by Six Sigma Master Black Belts. Glen established the below "Recipe" (See Figure 2) for the successful implementation of Six Sigma. Committed leadership and selection of high potential employees, trained as fulltime Master/Black belts, were identified as keys for successful implementation. Figure 2: Caterpillar Six Sigma Recipe Success Factors Source: Caterpillar Inc. In January 2001, Caterpillar kicked off its Six Sigma implementation. 700 top leaders at 13 locations across 6 continents were trained simultaneously. Figure 3: Caterpillar's Launch of Six Sigma Source: Caterpillar Inc. Today, Caterpillar has 271 active Master Black Belts, 3,406 active Black Belts, and 23,000 trained Green Belts. Six Sigma is being imbedded and encoded in every part of the corporation to include dealers and suppliers. It has resulted in a greater than 10% increase in the value proposition and is the critical enabler for Caterpillar's future success. Conclusion Caterpillar experienced very turbulent times but managed to come out on top each time. Today it is one of the top 100 companies with sales that could break the $40 billion mark within the next two years. This from a company who could barely maintain $5 billion sales during the 80's, and operated at huge losses on three periods in its history. The main factor that ensured the current success of Caterpillar can be seen as the three Chairmen/Chief Executive Officers: Donald Fites, Glenn Barton and Jim Owens who distinguished themselves as true strategic leaders. During their tenures, each Chairman laid the foundation that has accelerated Caterpillar's obtainment of the number one company in its industry and for its reputation as one of the most admired and best Fortune 100 companies for which to work. Donald Fites reorganized Caterpillar into business units initiating its move to become a global corporation with exceptional ties to its dealers and customers. Glen Barton drove Caterpillar's implementation of Six Sigma throughout the organization. Six Sigma is the unifying framework for the company's strategic initiative-enabling profitable growth, championing continuous quality improvement, aggressively reducing costs, and developing integrated e-business strategies. Jim Owens, who became Chairman/CEO in July '04, led Caterpillar's transformation from a good to great company through a strategy he has defined as the 3Ps (Profitable Growth, Performance through 6 Sigma, and People). He clearly understands that getting the right people in the company and developing them as leaders is critical to Caterpillar's future global success. References 1. Caterpillar 2005 Annual Report. www.cat.com/cda/layoutm=37424&x=7 2. Caterpillar 2001 Annual Report. www.cat.com/cda/layoutm=37424&x=7 3. Chowdhury, Subir. The Power of SIX SIGMA. Dearborn Trade Publishing, 2001. 4. Parker, Howard. Transforming From A Good To Great Company. 23 May 2005. Secretary of Defence Corporate Fellows Program. 5. Day, G. The Market Driven Organization. 1999. The Free Press. New York. 6. Porter, M.E. What is Strategy. 1996. Harvard Business Review, November/December. 7. Hancock, Randall et al. On demand business: The new agenda for value creation. 2003. IBM. Accessed: 26 Ocktober 2006. Webpage: www-03.ibm.com/industries/chemicalspetroleum/doc/content/bin/ibv_on_demand.pdf 8. IBM Institute for Business Value, 2003. 9. Six Sigma. Accessed: 28 Ocktober 2006. Webpage: http://www.isixsigma.com/sixsigma/six_sigma.asp 10. Giovanetto, Kevin and Noah Giovanetto. Giant Steps I. Peoria: Caterpillar Inc., 2001. 11. Collins, Jim. Good To Great. New York: HarperCollins Publishers Inc. 2001. 12. Semini, Marco et al. Value chain profiling. Norwegian University of Technology and Science. Supply Chain Knowledge base. Accessed: 27 Ocktober 2006. Webpage: http://supplychain.ittoolbox.com/topics/t.aspt=474&p=474&h1=474# 13. Caterpillar. History. Accessed: 24 Ocktober 2006. Website: http://www.cat.com/cda/layoutm=38033&x=7 Read More