Business Strategy of of Caterpillar Inc - Case Study Example

Business Strategy Executive Summary This particular topic, deals with the brief of Caterpillar (CAT Inc), a Heavy Construction Equipment Company, its origin, development, and present scenario as well as the future prospects. Caterpillar established itself within a stipulated time, but during 1982-1984 periods, they faced a lot of global challenges. But under the proper guidance of two successive CEOs George Schaefer and Donald Fites, Caterpillar survived its difficulties, and marked its position in the global market. The revenue status and other relevant working conditions of Caterpillar were quite outstanding. But after the retirement of the above leaders, Mr.Glen Barton took over the position of CEO. The direction given by him was not as successful as his predecessors. So, the overall functioning of Caterpillar declined to a considerable level. However, subsequently, Barton himself developed various strategic measures for overcoming the difficulties and to improve the functioning of Caterpillar. Thus, he evolved several growth strategies for restoring the earlier position of Caterpillar through: Expansion in to new markets. Undertaking of various diversification programs. Advancement of latest distribution channel. Development of various joint ventures. Accordingly, at present, Caterpillar is aiming to clinch a loyal name in both domestic and global markets. Moreover, Caterpillar also aims to develop a sustainable organization in the ensuing future. For this, Caterpillar keeps updating and executing its corporate strategy and business goals. A. External Assessment for Opportunities and Threats: Industry trends Caterpillar products belong to the market of construction equipments. Caterpillar belongs to the construction machine industries. The products of the company are supplied to the sectors like forestry, mining, power, marine etc. The recent trends in the industry are the supply of high-tech machineries or equipments. The companies in this sector are competing very highly for grabbing market share. These companies have now started introducing products that are technologically advanced than before. Analysis of the competitors Caterpillar Inc faces stiff competition from John Deer of USA, Komatsu Ltd of Japan and CNH global of UK. All the three competitors of Cat are equally competent. The competitors of the company can be analyzed on the basis of the following factors. Goals Komatsu Ltd had laid down a three years plan of profit maximization and it is one of its several important goals. The plan is named by the company as ‘Global teamwork for 15’. By this plan the company had targeted to attain an operating profit ratio of 15% by the year 2010. The company had planned to impose pressure on the production of industrial use machinery. Komatsu is carrying on with the goal of expanding its market to greater Asia. The company has planned a global expansion plan for the coming years. The global expansion plan is the major goal of the company. The goal of John deer is to grow and become a company that is worthier than the products it makes. CNH global has set the goal of reaching the target through aggressive campaigning. Strategies The basic strategy of Komatsu Ltd is the improvement of the quality of the products. The company thereby aims at maximizing the brand value of the product. The company is not only focused on improving the quality of the products but also improvement in every component of the business that contribute to the final results. The basic strategy of John Deere is to focus more and more on agricultural products so that they will be able to deliver specialized services to the customers. And also through this strategy the company aims to attain a distinctive name in the agri-machine market. The major strategy of CNH global is to be the market leader in the industry worldwide. Offerings Komatsu ltd offers a variety of products for use in different sectors. The products offered by the company are forest machines, Forklift trucks, large press system, medium and small presses, sheet metal machinery, machine tools, excimer lasers and temperature control equipment. These machines are produced by the company directly and through the subsidiaries. The products supplied by John Deere are mainly the machines that are used for agricultural purpose. Apart from that the company also produces equipments for military, construction, forestry and engines and components. The product lines of CNH global include agricultural equipments, manufacturing equipments, financial equipments and power generation equipments. Strengths One of the major strength of Komatsu ltd is its varied product lines and the subsidiaries in various countries. Another added advantage of the company is that they operate through three divisions such as the construction and mining, electronic segments and the industrial machinery division. The innovation of new products and ideas are one of its strength. The strength of John Deere is that it has a very strong customer base and brand value in the agricultural equipments though they have equally good presence in other sectors too. One of the major strength of CNH global is that it has presence in almost 160 countries through 11, 500 dealers. Weakness Limited usage of IT in the business is the weakness of the company. However Komatsu is coming out of that situation and have started implementing IT solutions for business purpose. One of the major weaknesses of John Deere is the excess focus on the agricultural equipments market. Equal focus must be given to all the product lines in order to achieve a uniform growth. CNH global has limited usage of IT in its business process. This is one of the major weaknesses of the company. Capabilities The capability of the company is the implementation of IT in its production technology and products. The company had produced trucks and machines that have many integrated IT features. With a very satisfied group of customers and a strong brand value the company is capable of capturing better global markets. CNH’s presence in 160 countries and its efficient dealership makes the company capable of capturing more and more markets. Analysis of Customers The customers of caterpillar include the users of CAT products from the construction, power, industrial and engine sectors. The customers of this industry are more demanding. The customers of this industrial goods sector looks for higher quality products as this is an investment that requires huge cash outflow. Most of the customers invest this as a long term asset. So they look forward for high quality products. The customers of this sector not only belong to a particular area but include a global group. Technology- During recent days, development of innovative technological measures is a must for competing with its rivalries. Caterpillar Technology Licensing have several advantages such as diminution in the time and cost aspects of Research and Development. Resources (suppliers and complementors) - The main asset of any business is its customers. Moreover, there should be a proper link between the organization, suppliers and customers are crucial. Political/legal factors- The overall aspects of the CAT are also affecting political and legal factors also. It is one of the fundamental macro economic factors affecting the business. Various legal policies and local economic integration is widely affecting the business functioning of an entity. Economic issues- One of the major economic issues faced by the CAT is its non co-operation and lack of co-ordination among the workers and labor unions. So, for solving this issue, it is crucial to develop better labor relations and other employee satisfactions measures. In addition to this, replacement of union workers, disagreement among labors and unfair trade practices are also effect the working of CAT. B. Internal Assessment for Strengths and Weaknesses SWOT Analysis a strategic tool which is used to analyze the four core areas of business entity such as Strength, Weakness, Opportunity, and Threat. Both Strength and Weakness are internal factors influencing the entity, and these two factors are closely related. “The competitive analysis looks at the strengths and weaknesses of the competitors in the key business segments. The assessment covers the growth trends in key business segments and provides information about the client base of the competitors. The report assesses the financial performance of the company and its competitors through an examination of its stock performance, income statement/balance sheet and valuation multiples.” (Caterpillar Inc. Competitive Benchmarking Report). 1. Ratio analysis (3-5 year trend in key ratios, and comparison to benchmark competitor or industry averages) Ratio analysis is very essential for the effective computation and evaluation of various financial data. Ratio analysis is giving stress for analyzing the value of each item, and comparing how such individual value is related with the overall performance of the company during past, present and future. Ratios are usually expressed on percentage basis, which is easier for comparing the performance of the company in a proper manner. The overall profitability of Caterpillar is consistently growing during the last few years. The rate of Earnings per Share and sales has declined to certain extend but its revenue growth concept increased substantially. “With a PE (ttm) of 12.6 and a PEG ratio of 0.82, CAT stock seems extremely cheap. The only valuation measure that suggests overvalued is the price to sales ratio, but large PS is justified for CAT’s terrific profitability. In the four profitability measures, CAT is operating at peak efficiency based on the past 5 years. ROE, ROA, profit, and operating margins are at their 5- year highs. Caterpillar is consistently more profitable than its nearest competitors.” (Garret 2007). Present Price earning ratio of Caterpillar is quiet satisfactory. Price Ratios Company Industry S&P 500 Current P/E Ratio 13.4 26.7 23.5 P/E Ratio 5-Year High NA 12.4 36.5 P/E Ratio 5-Year Low NA 2.6 7.4 Price/Sales Ratio 1.01 1.13 2.62 Price/Book Value 5.14 3.71 4.32 Price/Cash Flow Ratio 8.70 12.10 13.20 (Caterpillar Ord Shs: Key Ratios. 2007). The Caterpillar have developed better result during the last five years in respect of the average of the overall financial data is taken in to consideration. Return on Equity 30.1% Return on Assets 4.9% Return on Invested Capital 9.5% Gross Profit margin 30.5% Pre tax profit margin 9.5% Post tax profit margin 6.8% Net profit margin 6.8% R&D as a %of sales 3.1% SG&A as a %of sales 10.9% Debt/Equity ratio 2.18% Total Debt/Equity ratio 3.32% (Caterpillar, Incorporated (NYSE: CAT). 2007). 2. Resources, capabilities and distinctive competencies- The combination of resources, potentiality, and distinctive competencies is contributing an appropriate portion towards the significance and profitability of an entity. The proper and effective usage of adequate resources and the ability to compete with the rivalries is essential for the existence of an organization. Resources of an organization mainly consist of either substantial or insubstantial. But capability means the organization’s potentiality to maintain an interaction between its adequate resources. Distinctive competency means an organization’s capability to compete. Caterpillar is giving significant impact for its resources, capabilities and competency in a suitable manner for improving their efficiency. 3. Functional issues and value chain analysis Under strategic management both functional issues and value chain analysis is playing a major role. Functional concept is giving stress on marketing, financing, and other Research and Developmental activities. But on the other hand, value chain analysis is a logical approach to analyze the competitive advantage. Caterpillar is using ABC (Activity Based Costing) as well as Value chain analysis, which require to capture both global and domestic market. “The activity-based costing database that Caterpillar has constructed over many years that details for every component, assembly and finished good its total cost structure, from variable to “periodic” (fixed) to other overhead elements, by specific sourcing or manufacturing location. But to get really good, especially for making decisions about where to source supply chain processes, it would help to layer on value stream mapping and relentlessly analyze what steps add value and how the value relates to those costs.” (CSCMP Lessons from the Limited Brands, Toyota, Hershey, Caterpillar, Ingram Book, and More. 2006). 4. Product/service offerings The major products being offered by the Caterpillar is mainly of various constructional equipments. CAT is also providing necessary service facility to its customers. The major categories of goods and services offered by CAT consist of trucks and scrapers, and other construction and motor equipments. CAT has extended its business activities in to the field of rental equipment business also in addition to the regular product and service offerings. Due to the emergence of rental equipment business, the markets have reached not only to local market but also in abroad. But earlier, CAT undertakes this service on a link of CAT-Rental Centers-End users; but now this distribution or supply chain got changed from CAT to Customers directly. 5. Overall issues with current performance Caterpillar Inc., one of the leading manufacturers of heavy construction equipments is holding a prominent market position in the present market scenario. Even though the CAT had suffered lots of difficulties, now it is in a position to restore their strength by mitigating the weaknesses. Caterpillar attained tremendous growth in its entire areas of functioning under the direction two fabulous leaders Mr. George Schaefer and Mr. Donald Fites. It was an outstanding achievement of CAT, as far as the earlier challenges faced by them during 1982-1984 periods. But after the retirement of both magnificent leaders, in 1999-2000 periods, Mr. Glen Barton undertook the charge as CEO of CAT. During such time Barton faced a lot of difficulties; among them the fell of the profit margin was quiet important. In order to wipe out those difficulties Barton developed certain growth strategies in the business aspects of CAT. But the strategic issues developed by Barton also faced certain difficulty, such as failure to maintain labor relations and ESP (Employee Satisfaction Programme). Therefore the major forecast of CAT will be whether they should corporate with local unions, and whether CAT will be able to exploit the advantage of E-commerce? Presently due to the advanced technological innovations and better co-operation among the workers, CAT is holding a massive position in the global market. C. Critical Strategic Issues The development of appropriate strategic plans and procedures are essential for the effectiveness of business. Strategic issues or critical challenges may ultimately affect the organizational goals and values. While dealing with the business strategy, strategic issues playing a fundamental role which is essential for achieving the organizational goals. One of the major strategic issues faced by any business entity is that of its competitors. Major rivalries of CAT are Komatsu, a Japanese company; John Deere company, CNH Global etc. “Coolant or cooling system problems contribute to more than 50% of all engine failures. These failures can be due to inadequate cooling system maintenance, incorrect concentration, poor operational procedures such as extensive lugging or inadequate cool-down procedures, or system problems such as stray electrical current or block heater failure. These problems will eventually affect the oil condition, and may cause oil oxidation or antiwear additive dropout. Cooling system problems will also reduce the life of the transmission and hydraulic components served by coolant heat exchangers. S•O•S coolant analysis is a two-level program that does more than just check the condition of your coolant. It determines the overall condition of the cooling system and can identify problems with maintenance procedures and operational practices.” (S.O.S.Coolant Analysis. 2007). Recommendations The company is a market leader in the industry. But the SWOT analysis have shown that the competitors are coming up with better strategies and clear-cut goals. This competition by the other companies will definitely affect the market share of the company. When technologically advanced products are introduced by the companies a threat will be imposed on the market share of CAT. The company should therefore come up with products that are equally competent and of high quality. Expansion of market is another strategy that the company should focus on. Works cited Caterpillar Inc: Competitive Benchmarking Report. Bharat Book Bureau. 15 Nov. 2007 . Garret. My Overall Opinion on Caterpillar. My Opinion of Caterpillar. Garret Bonnema. 2007. 15 Nov. 2007 . Caterpillar Ord Shs: Key Ratios. Msn money. 2007. 15 Nov. 2007 . Caterpillar, Incorporated (NYSE: CAT). Ratios and Returns. Five Year Averages. Forbes.com. 2007. 15 Nov. 2007 . CSCMP Lessons from the Limited Brands, Toyota, Hershey, Caterpillar, Ingram Book, and More. Caterpillar Uses Activity-Based Costing and Value-Analysis to Drive Global Decision Making. Supply Chain Digest. 2006.15 Nov. 2007 . S.O.S.Coolant Analysis. Caterpillar. 2007. 15 Nov. 2007 . Read More