Restructuring of Caterpillar Incorporated - Case Study Example

Restructuring of Caterpillar Incorporated Introduction Caterpillar Inc. is the global leading manufacturer of mining and construction equipment, natural gas and diesel engines, diesel-electric trains and industrial gas turbines. The corporation is also a principal services provider through Caterpillar Remanufacturing Services, Caterpillar Financial Services Company and Progress Rail Services Company. Caterpillar is also a principal exporter in the United States and in 2012 the company recorded $65.875 billion in sales and earnings. Through an international network of autonomous dealers and direct retailing of certain products, the corporation builds long-standing associations with clients around the globe (Caterpillar, 2012). In 2010, Caterpillar adopted a revised tactic and reorganization of its commerce into tactical business units. As a result, the company’s operations were divided into five operating divisions (Caterpillar, 2012). This reorganization may be considered as part of the restructuring program initiated by the company in 1990s. In order to maintain competitiveness, firms require instituting a balanced set of nonfinancial and financial performance measures, which have a direct relationship with the firm’s objectives, mission, strategies and vital success aspects such as productivity, flexibility, quality, customer delivery and monetary performance (Chapman 2005, p. 70). This paper seeks to explore to what degree marketplace maturity caused Caterpillar restructuring and the extent to which the new tactic transformed financial, market and productive performance. Market Maturity as a Cause of Caterpillar’s Restructuring A firm operating in a mature marketplace implies that the service or product does not have the capacity to grow further. This implies that the product or service has reached its climax, with no prospects to augment. A service or product that has a mature market implies that the service or product has become most popular in the marketplace, and exceedingly few individuals are willing to pay for or purchase it (Thompson & Martin 2010, p. 381). A cyclical marketplace is one in which demand changes as a result of external aspects involving to the product. These aspects may be weather, time of the week, month, or year. An organization performs poorly when there is low climax in the cyclical marketplace. In order to augment the demand for services and products in mature markets, companies will result into restructuring. Through restructuring, an organization anticipates enhancing of the products or services in the market. Mature product marketplaces are a factor of all product lifecycles. After the initial fast growth period is complete, sales will persist to increase but at a slower rate (Thompson & Martin 2010, p. 383). Predicaments associated with mature markets comprise; increased threat of rivals capturing market share, slower expenditure recovery, and risk of products budging into the decline phases of product lifecycle. Once entire product marketplaces go into maturity, there is petite scope for expansion through innovation since the marketplace is already saturated. However, it is significant for every technology based corporations to retain research and expansion expenditure with an aim of sustaining a competitive advantage and keeping up with rivals. In a mature market, possibilities for expansion become significantly limited; alternatives comprise exploiting fresh markets and tactics to endeavor capturing rivals’ marketplace share. Maturity of markets increases the significance of brand names. Caterpillar has an advantage of a tremendously well established and globally known product name (Thompson & Martin 2010, p. 385). Until 1990, the organizational structure of Caterpillar paid attention to functional areas for instance accounting, manufacturing and engineering. The notion was that if every functional area attained its objectives and goals, the client would be satisfied and the firm prosperous. In mid-1990, the company instigated the restructuring of its functional structure into one comprising four service center segments and thirteen profit center segments. Product groups under the profit center segments focus on fulfilling the requirements of the clients related with a product line. Managers of the product groups have a direct power over marketing, engineering and manufacturing. Bookkeeping is a separate managerial unit that offers monetary services to the product clusters (Hendricks, Defreitas & Walker 1996, p. 18). As noted by Hendricks, Defreitas & Walker (1996, p. 19), the following were the goals of reorganization of Caterpillar. The first goal of the new performance assessment system and reorganization was to increase flexibility, responsiveness, and client focus. Caterpillar developed mini-businesses within the corporation, which focus on each client’s product requirements. This decentralized approach permits every division to concentrate on product design, pricing, manufacturing, and components and service for every client. The second goal of the reorganization and fresh performance assessment system was to drive responsibility, authority, and resolution making downward in the corporation. This involved empowering workers and holding them responsible for results. Through this, Caterpillar believed it would create more broadly based business individuals throughout the organization and permit them to make superior utilization of their innovativeness and experience in their areas of proficiency. Caterpillar is an old structure manufacturing firm that downsized in 1980s. The company has three key divisions; engines, machinery and financial products. Before Caterpillar initiated restructuring process, its products were mature and had cyclical demands. This market maturity and change in demand followed a long boom in business which the firm experienced. Caterpillar was experiencing high labor costs, as a result, of declining demand of its products. The declining demand of Caterpillar products was, as a result, of market maturity and cyclical market. Market maturity significantly influenced the restructuring of Caterpillar (Chapman 2005, p. 75). At the beginning of 1990, Caterpillar Chairman and Vice Chairman of the Board decided to execute all fresh performance measures. They requested input from within the firm and from other firms such as IBM and AT & T. The team, which was selected to develop fresh performance measures, decided that these measures should relate to the mission of the company, the fresh organizational structure, the vital success aspects, and the aspiration to push responsibility and authority downward in the organization (Hendricks, Defreitas & Walker 1996, p. 20). The development of new performance measures was part of initial stages that the management was undertaking to restructure and improve the performance of the company. Transformation of the Productive, Market and Financial Performance by the New Strategy The new strategy largely transformed the productive, market and financial performance of Caterpillar. After the development of the assessment concepts for the overall performance assessment system by the ad hoc team, a business assessments team was instituted, in corporate accounting, to suggest precise performance measures and assist execution. The team organized the efforts of various cross-functional teams in the divisions and worked with an auditing firm, Price Waterhouse & Co., which was involved to assist in making the system operational. This business assessments team endeavored to guarantee that all users supported and understood the behavioral insinuations of the fresh performance procedures before they were executed (Chapman 2005, p. 77). In mid-1990, the business assessments team created and executed monetary performance procedures used to evaluate divisional performance. All divisions of Caterpillar were required to utilize these performance procedures. Financial measures; proceeds are based on the price of products in the merchants’ price list. Indirect costs are allotted on the basis of cause and effect technique while averting arbitrary allotments of indirect expenditures to these divisions since they may distort earning. The company describes a benefit of this technique of establishing profit as being the capability to push responsibility for earnings to lower levels of the corporation and the capability to develop productive conflict between units (Daft 2009, p. 387). Nonfinancial measures; even though the company utilizes figures such as employee/customer satisfaction, process enhancement, and delivery performance, the principal measure is the effectiveness ratio of direct work hours to machine hours. Nevertheless, this measure can inspire activities, which would be unhelpful in the long run, therefore, is not being emphasized as the prime measure. Nonmonetary measures have also added advantage of being reportable on a timely basis as compared to monetary numbers, and counteractive action can accordingly be taken much faster. Service department measures; these were measures, which were taken to improve the performance departments of Caterpillar, which included human resources, business resources (bookkeeping), and technology resources. The principal assessment of these departments involves comparing budgeted and actual spending. User satisfaction offers the most critical nonmonetary measurement (Daft 2009, p. 389). Even though, Caterpillar is a leading manufacturer and has the capacity to charge best prices, the company is still has no capability to regain its previous performance. Its profits margins are grinding down, and this scenario is been worsened by the recession in the United States market. Since 1994, there have not been considerable changes within the company, despite the much consolidation and restructuring. Since 1994, Caterpillar has strengthened its position by sequence of acquisitions. The financial segment of the company accounts for more than 25% of the earnings. Through restructuring, Caterpillar deployed more than 38, 000 employees from 1979 to 1992 despite the economic boom which was experienced after 1980s recession. This may be attributed to the fact that Caterpillar took almost twenty years to attain its peak in 1978 (Froud et.al 2006, p. 109). As Finney (2008, p. 240) notes, the huge decline in the sales resulted to job losses, as a result, of factories closure. The 1980s economic boom was consumer led and the government did not augment the expenditure on infrastructure, and this implied that the boom had no effect on Caterpillar. Caterpillar was also experiencing stiff competition from Komstua which affected sales and was largely assisted by the yen rate of exchange. All these aspects led to restructuring and reduction of the workforce. Even though, Caterpillar had an impressive stock turnovers and value-added, this does not imply better performance. After restructuring, Caterpillar was offering wage rates, which were much lower as compared to those of rivals. Even though Caterpillar had managed to reorganize in a way that stabilized labor expenditure, this reorganization had negative spillover effects on its performance. Labor costs are the key component in cost of production; therefore, labor is always vulnerable in any restructuring process. Companies opt at reducing the number of employees in order lower cost of production. However, sacking of employees does not always result to cost saving since job has to be done after these employees are sacked. A company may result to outsourcing labor, in order to fill the positions left vacant. Therefore, all savings made after plummeting the number of workers within the corporation are used to pay the outsourcing firm contracted to perform functions previously carried out by company own employees (Milgate 2004, p. 23). These changes resulting from the restructuring of Caterpillar had positive and negative effects on the productive, market and financial performance. However, the positive effects exceeded the negative effects on performance since the introduction of fresh performance measures and restructuring of the organization resulted to enhancement of the market, financial and productive performance of the company. The development of fresh performance assessment measures a reorganization of business units enabled Caterpillar to achieve its chief goals. The restructuring and execution of the fresh performance assessment system enabled Caterpillar to increase flexibility, responsiveness and customer focus. Secondly, restructuring and adoption of new performance assessment system enabled Caterpillar to drive responsibility, authority, and resolution making downward to all employees (Froud et.al 2006, p. 111). In 2010, Caterpillar adopted a new business strategy that divided its operations into five operating divisions. The following are the categories of the business organization, which was adopted by Caterpillar in 2010. Machinery and power systems; this category represents power systems, resource industries, construction industries, and all other divisions. Financial products; this category involves the corporation’s financial products division. This category comprises Caterpillar Insurance, Caterpillar Financial and their subsidiaries. The developing countries have led to market growth for Caterpillar products. The increasing demand of Caterpillar products in developing countries has enhanced the performance of the company. The new strategy has enabled the firm to take advantage of the emergent market in developing economies, thereby, enhancing its competitiveness (Caterpillar, 2012). Conclusion Caterpillar Inc. is the global dominant producer of mining and construction equipment, industrial gas turbines, natural gas and diesel engines, and diesel-electric trains. The corporation is also a dominant services provider through Caterpillar Remanufacturing Services, Caterpillar Financial and Progress Rail. In 1990s, the company initiated restructuring process in order to enhance its performance. The restructuring process was largely influenced by the fact Caterpillar products were operating in mature and cyclical markets. The new strategy, which was adopted by the company in 1990s positively, transformed the financial, market and productive performance. However, the new strategy had negative spillover effects on the performance of the company although the impact was not substantial. In 2010, the company adopted a new business tactic, which has enhanced its performance and competitiveness especially in developing economies. References List Caterpillar Inc. (2012). Annual Financial Statements, Form 10-K [Online] Accessed 16th March, 2013. Available at: http://stockproinfo.com/doc/2012/US1491231015_2012_20121231_US_10K.pdf Chapman, C. S. (2005). Controlling Strategy: Management, Accounting, and Performance Measurement, Oxford University Press, Oxford. p.70-78 Daft, R. L. (2009). Organization Theory and Design, Cengage Learning, New York. pp.386-392. Finney, M. I. (2008). Building High Performance People and Organization (3 Vol. Set), Greenwood Publishing Group, Westport. Pp.239-243. Froud, J., Johal, S., Leaver, A. & Williams, K. (2006). Financialization and Strategy: Narrative and Numbers, Routledge, New York. pp.17-21. Hendricks, J. A., Defreitas, D.G. & Walker, D.K. (1996). Changing Performance Measures at Caterpillar, Cengage Learning, Aurora. Pp.15-25. Milgate, M. A. (2004). Transforming Corporate Performance: Measuring and Managing the Drivers of Business Success, Greenwood Publishing Group, Westport. Pp. 20-25. Thompson, J. L. & Martin, F. (2010). Strategic Management: Awareness & Change, Cengage Learning, New York. pp. 380-389. Read More