Mature Market: Caterpillar - Essay Example

Mature market(Moschis, 1994) is that stage of marketing where there is equilibrium characterized by the criteria that there is no longer any way to grow more or make new changes or innovations.(Munkirs, 1985) MARKET ANALYSIS. The mature construction machinery industry generated sales of around $15.4 billion in 2005. The machinery growth rate is only a small 5% per year. This is really very slow. But the construction industry is tied up to the economy (Samuelson,1973). The construction machinery industry included such products as power cranes, dragline, and excavators. The customers in this mature caterpillar industry(Neson, 1999) are commercial construction companies, equipment rental and leasing companies, general construction firms and includes the mining, agricultural, waste management, industrial and forestry companies. The commercial construction companies are the lion's share of this saturated mature market because the commercial companies have more money to spend, the greatest need for machineries and the greatest need for precision controlled equipment. All market situations contain risks.(Harringon,1999) Although the small construction companies market is now growing, there will be a small income opportunity here because of the small capital investments that the customers will shell out. The machineries market,(Meyer,1983) as is the case with other industries, is affected by the economic situation. In fact Caterpillar and its competitor Komatsu could not help but watch their annual sales go down to the slowing down of the global economy. The Consumer's confidence in the product is another factor in studying the downturn in sales volume which has been long lasting. The weakening of the global economy has contributed much to the saturation or maturity of the machineries market. It is now very difficult to get a new sales orders from construction and commercial companies that need the Caterpillar products. One way to get a higher chunk of the machineries market is to create more specialized equipment that is tailor made for each type of customer. (www.bplans.com,2006) Based on the pie chart in Exhibit A, the major commercial construction companies is estimated at eighty percent of the Machineries market. COMPETITION. Presently there are fifty five major players in the machineries business. Caterpillar occupies the number one spot because it has been in operation for the past forty years. Caterpillar equipments are in demand worldwide because it has gained the trust and confidence of its many clients. Caterpillar is known for products that are of quality and durability but also versatile. The sales people of Caterpillar are very adept at product demonstrations of their machineries and this is another big contributory factor to the success of Caterpillar. (www.bplans.com) According to Daniels, a strategic planning group, a mature company, like Caterpillar, is placed in a situation where there is very sales growth resulting to stagnant, decreasing or even break even sales. Since there are many competitors to fill the needs of only a few markets, then the selling prices will most likely not increase. Companies in the mature market economy like Caterpillar are mostly using more aggressive price, service and quality that is in tune with the customers' wishes. Since the market is tight, there is lesser elbow room to move up in terms of sales and quality services. For mature companies like Caterpillar(Sussland,2000) to grow more, growth opportunities have to be continuously discovered and implemented. This can be done thru surveys, and research and development. Another strategy is to develop an organizational structure that will fit the ever changing marketing environment. This means that there will be a ready flexible support team that Caterpillar is well known for in order to help the Caterpillar clients in every problem situation. Another strategy is revise the internal costing procedures in order to minimize costs and expenses. When expenses are lessened, then net income will increase. Still another strategy that Caterpillar can do in the tight mature market environment is to identify new sales and marketing approaches that will increase sales and profits.(www.thedanielgroup.com) The income statement of Caterpillar in their mature market situation generated the following financial data: Total Revenue increased from $22,763,000,000 for the year ended Dec 31, 2003 to $30,251,000,000 as of Dec 31, 2004 and finally $36,339,000,000 As of Dec 31, 2005, the Gross sales, which is net of cost of revenue ( or sales), is $ 5,818,000,000 as of Dec 31, 2003 to $7,831,000,000 as of Dec 31, 2004 and again finally $9,781,000,000 as of Dec 31, 2005. This shows that Caterpillar has done well with the running of its worldwide operations. This increase in sales despite the tight mature market environment is mainly due to the continuously excellent after sales services and the high quality construction equipments and spare parts that Caterpillar is known for. Another major factor that caused the increasing annual sales from the year 2003 to 2005 is the research and development cost that Caterpillar has instituted for many years. The research and development investments for the year 2003 is $669,000,000 and for the year 2004, the research and development investment is $928,000,000.For the last year 2005, the research and development expense is pegged at $1,084,000,000. Based on the stock market(Bolten, 2000) data, The competitors of Caterpillar that are listed in the stock exchange are United Technologies Corp., Mitsubishi Heavy Industries, MAN, Deere & Co., ABB & Co., Illinois Took Works and CNH Global NV. The company with the highest price earnings ratio is surprisingly $35.05. This is followed by another company named ABB Ltd with a price earning ratio $ 32.31. The third placer is the company named United Technologies Corp. with a price earnings ratio of $ 18.98. The fourth company in terms of price earnings ratio is CATERPILLAR with a price earnings ratio of $17.66 only. The fifth company in terms of price earnings ratio is Illinois Tool Works with a price earnings ratio of only $17.29. The last company in the group has a price earnings ratio of $12.41. Based on the market forces, the stock market prices of the Related companies below state that Caterpillar has a stock market price of only $71.4. This stock market price is went down by 1.38. This is what stock market analysts say is a lose position. All the companies listed(Baumol,1965) in Exhibit C below had a lose situation in relation to comparison between the stock market price of the present and prior year. The company United Technologies also had a stock market price per share of $57.4 which is .76 percent lower than the prior day's stock market price. The chart based on the most recent Stock Market data shown in Exhibit D below shows that Caterpillar has an increasing trend. This is a very good indicator of how Caterpillar has exquisitely managed(Campbell,1998) itself in the tight mature machineries market. Caterpillar has already reached the $70,000,000 mark as of Jan 6, 2006. When investors see this graph, they will be surely enticed to invest their hard earned money in the business. The investors will sleep soundly at night knowing that when they wake up, their money will earn because there is a very high probability that the stock market price of each stock of Caterpillar sold in the stock exchange will increase. The stockholder of Caterpillar can earn by selling the Caterpillar stocks that they had bought the previous day or days at a higher amount. This will result to gain when actual selling of the Caterpillar stocks is done. The Income statement is also a very good indicator that the business of Caterpillar is going smoothly. Investors, upon seeing the income statement, will be encouraged to invest in Caterpillar because of the high probability that tomorrow's stock market price will increase. The benchmark of any investor is will the company earn or money If yes, then such is a good investment decision. BIBLIOGRAPHY Moschis, G., Marketing Strategies for the Mature Market, Quorum Books, Westport, CT, 1994 Munkirs, J., The Transformation of American Capitalism: From Competitive Market Structures to Centralized Private Sector Planning, M.E. Sharpe, Armonk, NY, 1985. Meyer, J., Market Reforms in Health Care: Current Issues, New Directions, Strategic Decisions, American Enterprise Institute, Washington, DC, 1983. Baumol, W., The Stock Market and Economic Efficiency, Fordham University Press, New York, 1965 Bolten, S., Stock Market Cycles: A Practical Explanation, Quorum Books, Westport, CT, 2000. Economics, Samuelson, P., Economics, McGraw-Hill, London,1973 Harrington & Niehaus, Risk Management & Insurance, Irwin McGraw-Hill, London,1999 Campbell & Luchs, Strategic Synergy, Thompson, London, 1998 Sussland, W., Connected -A Global Approach to Managing Complexity, Thompson, London, 2000 Nelson, C., International Business, Thompson, London, 1999 Website researched march 9, 2006: The Danielgroup.com (http://www.thedanielgroup.com/maturecompany.html) Finance.yahoo.com(http://finance.yahoo.com/q/iss=CAT&annual)) Finance.yahoo.com(http://finance.yahoo.com/q/cos=CAT) Bplans.com (http://www.bplans.com/spv/3279/4.cfm#). Exhibit A Machineries Chart. (http://www.thedanielgroup.com/maturecompany.html) Exhibit B. Caterpillar (Income Statement) PERIOD ENDING 31-Dec-05 31-Dec-04 31-Dec-03 Total Revenue 36,339,000 30,251,000 22,763,000 Cost of Revenue 26,558,000 22,420,000 16,945,000 Gross Profit 9,781,000 7,831,000 5,818,000 Operating Expenses Research Development 1,084,000 928,000 669,000 Selling General and Administrative 4,145,000 3,650,000 2,991,000 Non Recurring - - - Others - - - Total Operating Expenses - - - Operating Income or Loss 4,552,000 3,253,000 2,158,000 (http://finance.yahoo.com/q/iss=CAT&annual)) Exhibit C. Competitors Company Symbol Price Change Market Cap P/E United Technologies Corp. UTX 57.40 -0.76% 58.29B 18.98 Caterpillar Inc. CAT 71.40 -1.38% 47.90B 17.66 Mitsubishi Heavy Industries, Ltd. Private - View Profile MAN Aktiengesellschaft Private - View Profile Deere & Co. DE 74.50 -0.59% 17.48B 12.41 ABB Ltd. ABB 11.63 0.00% 23.47B 32.31 Illinois Tool Works Inc. ITW 89.84 -0.01% 25.24B 17.29 CNH Global NV CNH 24.36 -0.65% 3.28B 35.05 KMTUY.PK 66.05 1.30% N/A N/A Parker-Hannifin Corp. PH (http://finance.yahoo.com/q/cos=CAT) Caterpillar Chart Exhibit D (http://finance.yahoo.com/q/tas=CAT) Style: Harvard Language Style: English (U.S.) Grade: n/a Pages: 5 Sources: 11 Read More