Caterpillars Resilience for Strategic Change Management Process - Case Study Example

Caterpillar’s Resilience for Strategic Change Management Process- Case Study of the of the Introduction “Changing organizations is as messy as it is exhilarating, as frustrating as it is satisfying, as muddling-through and creative a process as it is a rational one” - Palmer, Dunford & Akin (2005, p. 1) These above mentioned lines are not only mere scholarly jargon or illusion used by some well known academic scholars but the lines are truly reflecting the core essence of change management. In such context, Zajac, Kraatz & Bresser (2000) pointed out that the question is not about whether an organization is able to change or not rather the focus should be whether the mentioned organization is able to successfully implement the change management mechanism in competitive environment or not. Palaniswamy and Sushil (2003) argued that going for change for organizations is always directed by external factors because no organizations would want to change the existing system equilibrium without any bankable reason. Well, the argument has point because historical analysis of data shows that without the presence of certain reasons or the objective of achieving certain benefits, none of the organizations have invested its financial and non-financial resources to achieve change management (Zajac, Kraatz & Bresser, 2000). Although, previous research scholars identified dilemma in strategic decision-making, rigidity in organizational structure or lack of synchronization of organizational culture with change management as the sources of complexities surrounding change management process but very few of them tried to highlight the role of organizational leaders in dealing with complexities surrounding the change process. In such context, this study will highlight a complex organizational change problem/initiative in order to show how the organizational leader(s) led the organization through the problem solution or the change initiative. In such context, the describe the complexities surrounding the change process in Caterpillar Inc, which is global leader in manufacturing construction and mining equipment, diesel-electric locomotive, industrial gas turbines and diesel and natural gas engines (Caterpillar, 2013a). In the next section, the study will shed light on business dimensions Caterpillar Inc in order to develop background for the case context. Caterpillar Inc- Business Dimension Caterpillar Inc or Cat is an American corporation which is global leader in manufacturing, construction and mining equipment, diesel-electric locomotive, industrial gas turbines and diesel and natural gas engines. The company was established in 1925 and at present, headquarter of the company is located in Peoria, Illinois, United States (Caterpillar, 2013a). The engineering giant offers wide range of products ranging from construction and mining equipment (the yellow equipment of the company has become symbolic icon for both industrial and retail consumers), customized industrial gas turbines which can lift heavy loads, natural gas engines which can work in low carbon emission state, remanufacturing services, end to end logistic services and even financial services (Gillett, Fink & Bevington, 2010). As of 2012, Caterpillar Inc has earned revenue of more than US $65 billion from its global business operation while the company has reported asset worth around US$89 billion (Caterpillar, 2013a). As of 2008, the company has established presence in every continent while total employee base of the company exceeds 0.1 million (Gillett, Fink & Bevington, 2010). Now, the fact is that Caterpillar Inc never targeted retail customers or sell items to end users because from the starting days, the engineering targeted construction and mining companies or the dealers who sell construction equipment to both industrial and retail customers. In such business ideology, Caterpillar Inc has established global dealer distribution network crossing 185 partnerships across countries in Europe, South America, Africa, North America and Middle East. In past few years, Caterpillar Inc has established vision statement for 2020 and already taken initiatives to allocate resources as in order to fuel the strategic initiatives. As part of the business strategy, the engineering and construction equipment manufacturing leader has established three verticals such as customers, stockholders and employee of the company (Caterpillar, 2013b). For the next five years, the company has drawn business strategies covering needs of all the three verticals such as, 1- reach top 25% of the S&P 500 in terms of return on investment for shareholders, 2- increasing safety and collaboration among employee and 3- increase profitability and top line growth for business customers using equipments manufactured by Caterpillar. Gillett, Fink & Bevington (2010) reported that the Peoria based company spends more than US$1.9 billion in updating and reshaping plant, property, and equipments and equal sum of money is being spent by the company in research and development activities which can help them to deliver customized and state of art manufacturing solution to customers. Customer and Technology Driven Strategy of Caterpillar Inc There are 5P’s in business dimension of Caterpillar Inc such as, 1- to explore the full potential in manufacturing state of art and innovative construction, mining and other related equipment, 2- to achieve the leadership position in the market, 3- to develop a feasible and successful plan to provide end to end solution to customers, 4- creating a better and collaborative organizational culture within the organization which can help employees to perform in better manner and 5- achieve better financial performance by delivering better products to client which can satisfy requirements of customers in efficient manner (Caterpillar, 2012). In recent years, the manufacturing and engineering giant has started putting more importance to cater requirements of clients from emerging markets such as China, India, Brazil, Russia, South Africa, Indonesia etc. For example, Caterpillar has faced challenge from low cost Chinese competitors while it had entered Chinese construction, infrastructure and engineering equipment market. In emerging market, Caterpillar was needed to change its value proposition of delivering customized machinery to offering utility products that can fit the budget of the client. For example, in emerging market, Caterpillar Inc developed Shandong SEM Machinery Co., Ltd. (SEM) which is a utility brand. SEM started offering low priced sturdy machines which are being distributed through large numbers of distribution points and wide supplier network supports the parts supply of the equipment. In this way, Caterpillar overcame the competition in emerging market by customizing the product portfolio as per requirement of the geo-demographic and economic conditions (Caterpillar, 2012). Figure 1: Caterpillar Machine (Source: Caterpillar, 2012) There is no doubt that success of Caterpillar Inc is being driven by its ability to integrate state of art technology and research and development activities to manufacture equipments that can satisfy requirements of client in responsive and efficient manner. The construction equipment manufacturing giant has developed enterprise-wide Technology Enabled Solutions (TES) Strategy which consists of three stages, 1- understanding the requirement of client, 2- develop cross industry applications by ensuring meeting of quality standard and 3- provide support for technology solutions to customers through the dealership network of the company (Caterpillar, 2012). Therefore, it can be said that Caterpillar Inc has successfully integrated technological expertise, financial and non-financial resource capabilities and customer focus altogether in order to achieve leadership position. However, the question is whether the road was always smooth for Caterpillar Inc or it had gone through massive organizational level changes in order to achieve current leadership position? To answer this question one has to understand the strategic changes that have been occurred in Caterpillar Inc over the course of 20 years from 1985 to 2005. According to Neilson & Pasternack (2005), Caterpillar Inc or the Cat has faced challenges regarding quality of the product, poor market penetration and low customer satisfaction till 1980s but existing problems had forced the top level management of the company to think about implementing organizational change process. In the next section, the problems and context of the change process will be discussed. Problem in Organizational DNA of Caterpillar Inc Consideration of the research works of Purser & Petranker (2005) reveals that change process for a ill-defined problem, is bound to fail due to three reason such as, 1- absence of reference coordinate to understand context of the problem, 2- presence of ambiguity among organizational leaders regarding the understanding of the reasons causing the problem and 3- presence of uncertainty among participants in the change process regarding the objective and outcome of the change process. Mintzberg (2009) stated that certain strategic building blocks create organizational DNA and during organizational change process, those strategic building blocks are being aligned in such a manner that it supports decision making of top level management. Neilson and Pasternack (2005) conjecturally questioned, what is the difference between human DNA and organizational DNA? For supporters of theories of organizational change, the answer is obvious that organizational DNA can be changed through shifting and realigning building blocks but human DNA cannot be changed. However, Tsoukas & Chia (2002) argued that organizations are not leaving system so from rational viewpoint; it is not possible for organizations to go through change process by itself. In such context, Van de Ven & Poole (2005) argued that it is fact that organizations cannot go for change process by itself but it is the responsibility of organizational members to identify the symptoms of the problems which might affect the overall system equilibrium. That is what exactly witnessed by Caterpillar Inc. during 50 years time period from 1930s to 1980. In the previous section, the study has stated success stories of Caterpillar Inc but the success stories are backed by the learning of the company from previous failures in terms of marketing, engineering, developing a sustainable decision making process, centralized process and bureaucracy in organizational structure (Neilson & Pasternack, 2005). Problem of Centralized Decision Making Today, the Peoria based construction equipment manufacturing company is leader when it comes to innovation and technology integration as per requirements of client but the case was different during 1980’s. At that time, the company had highly centralized decision making process and all major decisions were taken by functional divisions called General Offices (Neilson & Pasternack, 2005). Each of the General Offices or “G.O.s” were responsible for conducting specific activities like manufacturing, sales & marketing, engineering and research & development. Each of General Offices or strategic division of Caterpillar Inc had its own set of vice president, president and formal reporting style. Caterpillar Inc replicated the same centralized strategic decision blocks in its other global business operation. Neilson & Pasternack (2005) found that each of the G.Os operated independently and rarely communicated with each other. Due to presence of centralized decision making process and lack of communication between division heads, it took time for the company to make a strategic decision and even it was burdensome task to communicate the objectives of the decision to all the functional silos in top down manner (Neilson & Pasternack, 2005). Steve Wunning (who was divisional head for logistics division in Caterpillar Inc during 1980s) stated that most of the decisions made by G.O.s were functional ones while at that time; company needed implementation of strategic decisions. Neilson & Pasternack (2005) gave example of Don Fites (who was CEO of Cat from 1990 to 1999) who faced challenge to sell Caterpillar equipments at a price point which was at least 20% higher than competitors like Komatsu. At that time in Caterpillar Inc, sales & marketing team had no stake in strategic decision making and setting of price of the product because communication between marketing G.O and pricing G.O almost non-existent. Therefore, sales team of Cat were more concerned for getting exceptions to list prices rather than putting more effort to sell the product because they were aware of the fact that competitors like Komatsu was offering same quality of product at 20% lower price. As a result, overall sales revenue of Caterpillar Inc was decreased by almost 30% during 1980’s and the company faced stiff challenges from competitors to retain its leadership in global marketplace. Four Face of the Problem Consideration of research works of Mintzberg (2009) and Van de Ven and Poole (2005) reveal the fact that DNA of the organization can be corrupted by poor performance of any of the building block but in case of Caterpillar Inc, four building blocks were performing poorly such as strategic decision making, employee knowledge about the requirements of strategic decision making, biased compensation system and function-dominated organizational structure. Four dimensions of the problem can be summarized in the following manner. Strategic Decision Making: Neilson & Pasternack (2005) stated centralized decision making process and lack of communication between departments not only slowed down decision making process but ultimately created utter confusion among internal and external stakeholders regarding the direction of the company. Caterpillar Inc failed to understand the altering balance in the market place and due to lack of communication; divisional heads did not have the sufficient knowledge about the level of completion in the market. As a result, the company failed to incorporate marketing or operational strategy in responsive and time efficient manner which perturbed competitive position of the company in global construction and mining equipment manufacturing marketplace. Siloed Information: position of employee was pretty much restricted in Caterpillar Inc during 1980s and organizational leaders were not ready to empower employees to make them accountable for decision making. Individual initiatives were completely in the organization in that time and accountability of employees limited only to follow instructions of G.O. Neilson & Pasternack (2005) pointed out that absence of accountability, individual initiatives, knowledge sharing and lack of employee engagement created problem for Caterpillar Inc to achieve innovation or develop capabilities in sustainable manner. Another important fact is that, management of Peoria based construction equipment manufacturing giant never shared information regarding competitive position, stakeholder requirements and internal profitability to employees which further increased confusion among employees regarding the strategic direction of the company. Biased Talent Management Strategy: until 2001, Caterpillar Inc struggled with establishing a non-biased talent acquisition and talent management strategy which can help top level management and human resource department of the company to link pay to performances in un-biased manner. Neilson & Pasternack (2005) gave examples of employees outside USA who performed exceptionally well in global business units of the company but when it comes to payment of incentives or promotion, mediocre performing local employees residing USA were given higher preference as against employees outside USA who performed exceptionally well in global business units. Due to presence of such biased compensation system, global workforce of the company developed sense of de-motivation which ultimately affected their performance level. As a result, overall performance of Caterpillar Inc in global business units hampered and output reduced. Function-Dominated Culture: throughout the 50 year of operation from 1930s to 1980, Caterpillar Inc mainly focused on developing the distribution system as competitive asset and focus only on daily functional activities rather than looking strategic horizon of the business. As a result, the company continued to sell products to deals at a low price which can help dealers to keep the margin. On the other hand, due to combined effect of poor sales and marketing performance and global recession during 1980s, cost of providing profit to every distributor had increased for the company. For example, during the time of 1983 to 1984, Caterpillar Inc was losing millions of dollars from its every day operation. As a result, the company was forced to post the first annual loss during 1980s (Neilson & Pasternack, 2005). Therefore, it can be said that requirement for change in Caterpillar Inc was become urgency and first annual loss had worked as wake up call for the company. Top level management of the company recognized the fact that operating cost of the company was too high and decision making process of the company lacked the speed and responsiveness to become effective. As a result, top level management of Caterpillar Inc launched organizational change process in order to achieve positive top line growth but achieve the sustainable leadership position in the marketplace. However, the problem in front of Peoria based company was pretty much complex due to involvement of four building blocks such as organizational structure, business process, human resource system and employee engagement. According to Neilson & Pasternack (2005), it was very difficult for Caterpillar Inc to address all the four problems in quick success along with ensuring the non occurrence of these problems in future point of time. On the other hand, cross functional and complex nature of the problem demanded effort of organizational leader(s) from each division and change initiatives that can cover all the verticals of Caterpillar. In the next, the study will discuss how organizational leaders of Caterpillar took the change initiatives which successfully addressed mentioned problems. Strategic Change Initiatives in Caterpillar Inc Consideration of case study presented by Salazar & Va¨likangas (2008) and Linder (2004) reveals the fact that strategic change initiatives start with identification of the problem. In case of Caterpillar Inc, the problem has been already identified by divisional leaders and it was the time for them to formulate strategy in order to overcome the problem. Although, in the 20 years time period from 1985 to 2005, group of organizational leaders and team members participated in change management process but in the initial years, George Schaefer (who was appointed CEO of the company in 1985) took the leadership role to drive the strategic change process. Denis, Lamothe & Langley (2001) and Farjoun (2008) also found that a particular organizational member (in case of Caterpillar Inc, it was the CEO George Schaefer) should take strategic initiatives and show dynamic leadership skill which can influence other organizational members to take part in the change process in later context. Plant with a Future (PWAF), Change in Management Style & Integration of 6 Sigma Culture To decrease the operating and manufacturing cost, CEO George Schaefer established Plant with a Future (PWAF) agenda which is basically modernization of manufacturing process and Caterpillar Inc invested close to US$2 billion in this modernization process. At the first phase of change management process from 1985 to 1991, implementing PWAF or modernizing the manufacturing process had helped the company to decrease manufacturing cost by almost 30% and achieve record profit margin in 1989 (Neilson & Pasternack, 2005; Gillett, Fink & Bevington, 2010). However, internal problems regarding slow decision making process, non-existent communication between different management divisions and unresponsive attitude to requirements of customers remain persistent despite the implementation of PWAF model. Therefore, it was challenge for CEO George Schaefer to address the persisting problems rather than relishing the success of PWAF model implementation. In such context, CEO George Schaefer started rotating the mid-level management groups in periodic manner in order to attain first phase of decentralizing the organizational structure. By the end of 1987, senior managers of the company prepared the list of best and brightest subordinates who can drive the future growth of the company and from the list, CEO George Schaefer selected 8 candidates to establish Strategic Planning Committee (SPC). It was the first time in the history of Caterpillar Inc that the centralized structure is being dismantled and replaced by decentralized model like Strategic Planning Committee (SPC). Prime responsibility for SPC was to conduct meeting every week regarding strategic issue such competitive position of the company, resource capabilities, change in macro-environmental trends etc and find out tentative solutions to problems. During the meeting, CEO George Schaefer carefully listened to all the suggestions of team members in the meeting and decisions being taken by analysis of the most optimal suggestions. During 1990, the concept of G.O.–dominated organizational structure in Caterpillar Inc was completely banished and few presidents and vice presidents cross functionally shifted to other departments. The day was Friday, January 26, 1990, when the announcement for organizational restructuring took place in Caterpillar Inc. New “accountable” business units were being established and division like marketing, pricing, engineering were entangled with each other under the umbrella of business units. For example, some of the vice presidents and presidents of G.O.s were being demoted to the role of managers in their respective business units and divisional profitability became the success parameters for these business units (Neilson & Pasternack, 2005). CEO George Schaefer and members of SPC replaced performance previous non-functional metrics and flow charts with profit and loss (P&L) statements as performance parameter for sales, product and marketing managers. As part of the flexible decentralized structure, each business units got the chance design products as per requirement of market by customizing the schedule and manufacturing process planning. Each of the global business units became empowered to make their own pricing decision as per market requirement and they did not need to take permission of headquarters while making the marketing plan (Neilson & Pasternack, 2005). In 2001, organizational leaders of Caterpillar Inc established unbiased performance parameters through implementation of balance scorecard which offers neutral assessment of performance of employees and linking rewards to the performance. Specialized reward program was being implemented to boost the performance of employees in global business units and establish parity between performance evaluation of local and global employee pool. On the other, information distribution among mid and low level employees had become comprehensive through the intervention of SPC. Employees in business units were encouraged to communicate with each other and share knowledge regarding marketing condition, scope of innovation in product development, optimal pricing policy etc. For example, CEO George Schaefer established the tradition of monthly meeting between business unit managers and employees in Caterpillar Inc in 1990 and the tradition being followed even today. In 2001, Caterpillar CEO Glen Barton established 6 Sigma culture in the company and encouraged managers of business units to participate in 6 Sigma program (Gillett, Fink & Bevington, 2010). To improve the quality of the products and reduce defects in process, organizational leaders of Caterpillar Inc appointed The Black Belts. For example, Craig Brabec (head of Global Finance and Strategic Support section of the company) had The Black Belts of quality and helped the company to achieve strategic changes in the field of engineering, human resource management, engineering and manufacturing. In this way, organizational leaders took the change initiatives which had not only helped Caterpillar Inc to achieve sustainable top line growth but also addressed internal problems. Conclusion Parnell, Lester & Menefee (2000) stated that organizations go for change process due to multiple reasons such as, 1- reducing the cost of overall operational process which can positively impact top line growth of the company, 2- improving the business process in order to optimize the product offering and diversifying product portfolio that can satisfy customer requirements, 3- expanding the business in foreign countries through opening strategic business units might need change of organizational structure and 4- implementing state of art technological processes might need organizational change orientation. Zajac, Kraatz & Bresser (2000) stated that process of implementing change is associated with variety of complexities regarding ambiguity in identifying the prime objectivity of change process, uncertainty regarding return on investment of the change process, uncertainty regarding common understanding among organizational members about the outcome of change process, resistance from organizational members to the change process etc. Due to involvement of such complexities, process of change implementation has been perceived as risky and uncertain from management perspectives. According to Burke (2002), certain process areas are associated with successful change management process such as leadership, communication of the urgency of the change through all verticals of the organization, collaboration of team members and change agents, resource allocation, change resistance management, conflict management, successful negotiation by top level management with organizational members and knowledge management which can open the door for innovation. In this context, case study of Caterpillar Inc shows that the organizational leaders took time to assess the change situation and they implemented the change initiatives in systematic manner in each strategic block over the course of 20 years. The study has also found that not only CEOs of Caterpillar Inc acted as the change agents but engagement of leaders of different of business units has helped the company to sustain the benefits of organizational change initiatives. Therefore, it can be concluded that Caterpillar Inc had successfully implemented change initiatives through the collaboration between organizational leaders and change agents. References Burke, W. W. (2002). Organization change: Theory and practice. foundation of organization science. London: Sage Publications Series. Caterpillar. (2012). 2012 Year in Review. Retrieved from http://www.caterpillar.com/cda/files/2674611/7/2012_Year_in_Review_updated%20maps_9.11.13_ENGLISH.pdf. Caterpillar. (2013a). History. Retrieved from http://www.caterpillar.com/company/history. Caterpillar. (2013b). Strategy. Retrieved from http://www.caterpillar.com/cda/layout?m=398115&x=7. Denis, J. L., Lamothe, L., & Langley, A. (2001). The dynamic of collective leadership and strategic change in pluralistic organizations. Academy of Management Journal, 44(94), 809-37. Farjoun, M. (2008). Strategy making, novelty and analogical reasoning. Strategic Management Journal, 29(11), 1001-16. 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Purser, R. E., & Petranker, J. (2005). Unfreezing the Future: Exploring the Dynamic of Time in Organizational Change. Journal of Applied Behavioral Science, 41(2), 182-203. Salazar, J. M., & Va¨likangas, L. (2008). Sun Ray’s struggle to overcome innovation trauma. Strategy & Leadership, 36(3), 15-20. Tsoukas, H., & Chia, R. (2002). On Organizational Becoming: Rethinking Organizational Change. Organization Science, 13(5), 567-582. Van de Ven, A., & Poole, M. S. (2005). Alternative approaches for studying organizational change. Organization Studies, 26(9), 1377-1404. Zajac, E. J., Kraatz, M. S., & Bresser, R. K. (2000). Modeling the dynamics of strategic fit: A normative approach to strategic change. Strategic Management Journal, 21, 429-53. Appendices Figure 2: Market Performance of Caterpillar Inc (Source: Caterpillar, 2012) Figure 3: 5-Year Financial Performance of Caterpillar Inc (Source: Caterpillar, 2012) Read More