Caterpillar
... years, but in most developing countries, the machines were kept in service for longer periods of time, which created an extraordinary market for replacement parts. One of the most important needs, not surprisingly, was the industry’s need to achieve economies of scale. Optimal scale of operations was estimated at 90,000 units annually and the only way to profit from economies of scale was to secure a large market share. Competition between the industries leading firms multiplied as low volumes of global sales registered between 200,000 to 300,000 earthmoving equipment units per year. In addition to the need for large market share in order to secure economies of scale, this competitive industry also drove top firms to form many types of alliances. Caterpillar’s full-scale joint venture with Mitsubishi Heavy Industries was necessary for production dividends. Technology alliances were particularly important from two instances. For example, technology-sharing alliances between equipment manufacturers and engine makers ensured contact to the latest technology. Komatsu’s agreement with Cummins engine makers and Case Corporation’s deal with Cummins allowed this access. At the same time, technology-sharing alliances between local manufacturers and major global firms were equally beneficial. Local manufacturers were supplied with advanced technology while global firms were granted access to new markets. Such an alliance was formed between Caterpillar and Shanghai Diesel in China as well as Komatsu’s deal with BEML Company in India. Competitive advantage also resulted from successful marketing practices. Considering extensive distribution was critical for competing, manufacturers used worldwide arrangements of dealerships for everyday sales, operations, and customer service needs. Dealers were placed relative to equipment users as heavy machines worked in strenuous and rugged conditions, which required they be serviced frequently. This allowed Caterpillar to effectively and conveniently service and sell their products. LABOR In order to compete in the industry, Caterpillar desperately needed to mend its relations with the union. In 1979, an 80-day strike took place following the expiration of its collective bargaining agreement. Within three years, contract negotiations resulted in the longest company-wide industrial action in the UAW history, which lasted an extensive 205 days. In 1985, CEO George Schaefer came to the rescue and commanded the next two rounds of contract negotiations. Following a consensual leadership style, Schaefer encouraged the flow of ideas between officers, managers, and production workers, thereby promoting open communication on all levels of the company. In contrast to the former relationship with the union, Schaefer’s impeccable social skills successfully alleviated all ill relations with the UAW and not a single strike occurred during his tenure. Not only were bargains now settled peacefully, but the union also agreed to reduce the number of labor grades, which allowed occupations to become practically equal, thereby commanding the same rate of pay for a lot of employees. Also, new streamlined seniority provisions allowed for managerial flexibility regarding job assignments and cross utilization of employees. Most importantly, however, the improved labor associations instilled an employee improvement plan based on teamwork as well as a reengineering effort of plant modernization and automation. These two successful programs were a vital function of Caterpillar’s turnaround approach. Now that they had new support of the UAW, Caterpillar began a voluntary employee involvement program in 1986, referred to as the Employee Satisfaction Process (ESP). Members of ESP were arranged into work teams, which met every week with management to discuss and offer ideas regarding the manufacturing process. These ideas were critical for production management, workplace layout and quality enhancement of Caterpillar. Following the implementation of ESP in US plants, results showed steady productivity gains and quality improvements as well as increased employee satisfaction. This satisfaction resulted in less employee absenteeism as well as the abrupt decline of filed union grievances, which, in turn, saved Caterpillar nearly $10 million dollars over the course of a year. MARKET Distribution techniques were altered with the implication of Caterpillar’s new reorganization plan. Under Schaefer’s new open communication structure, dealers in search of assistance could directly contact any of the 17 product and service centers, which saved a lot of time and money. Interaction between Caterpillar’s managers and dealers became more frequent; therefore, practically everyone in the company had a connection with somebody in the dealer organization whom they were in contact with several times a week. The dealerships were scattered considerably across the world, with 63 dealerships in the US alone and 144 abroad. Dealership employees accounted for more than the total company workforce, exceeding this total by over 66%. The majority of Caterpillar dealerships were privately owned and operated, while only a few were public companies. Average annual sales in 1996 for the Caterpillar dealerships was estimated at $150 million while still some of the larger shops brought in numbers totaling $1 billion. Contract agreements held little importance to Caterpillar, in comparison to their informal relationships between dealers and the company. The casual agreements consisted of only a few pages with no expiration date and an undisclosed termination rule, which allowed either party to terminate the arrangement at any time following a 90-day notice. Considering the lenience of these agreements, turnover of dealerships was significantly low. General turnover of one dealership owner to the next was encouraged for a succession arrangement, as they tried to keep all business in the family by passing down the dealerships from one generation to the next. Caterpillar had strong ties to dealerships that even included money arrangements. In order to help a dealer, the company often offered discount prices on products, reduced costs, and even occasionally held a promotion campaign that emphasized lower lifetime cost of all machinery in comparison to the competition. Even through hard times, including the industry slump during 1991, Caterpillar helped struggling dealerships across the world by keeping them in the business and encouraging them to pre-purchase equipment at a discount before the upturn. During this time, Caterpillar conducted surveys through the dealerships in order to enhance customer service and parts delivery. Not surprisingly then, due to this research, Cat’s worldwide distribution was the company’s greatest advantage over its competitors. POLITICAL/LEGAL ENVIRONMENT AMT Alternative minimum tax is the prepayment of future taxes. Companies that are subject to AMT receive tax credits that have economic value and can be used to offset future tax liability. During the economic downturn from 1989 to 1991, corporate AMT strained cash-flows and threatened employment while the economy was in a weak position. As for individual tax payers, AMT is an additional tax that has to be paid on top of regular income tax. The original idea was to prevent people with very high incomes from using special tax benefits to paying little or not tax. AMT is reaching an increasingly number of people, those of which who don’t have very high income or special tax benefits. Subpart F The Subpart F exemption contends that American businesses competing overseas may defer federal taxes on their international income until the money is returned to the United States. Because foreign competitors did not pay taxes on their income, the deferment of taxes for US companies played a critical role in leveling the playing field with foreign competitors. ECONOMIC In the early 80s the US dollar was highly valued. Later, US monetary policy eased and led to a decline in inflation which eventually led to a reduction in interest rates. As these numbers fell, so did the value of the dollar. Foreign investors were no longer interested in trading their currencies for dollars to invest in US financial markets. As of year 2000, companies would be able to claim interest relief on certain loans that were linked to profits. These loan interest rates decrease as profits of the business increase and conversely increase as the business results decline. This change in interest rates gives companies easier access to the finance they need in order to grow. RAW MATERIALS As mentioned earlier, Caterpillar strategically decided to change their business model for service. Instead of building and selling products, then forgetting their products, manufacturers decided to start collecting old products and parts. These items could then be refurbished and used as raw materials for new products. This effective strategy would eventually save the company a substantial amount of money over time. The strategy of remanufacturing operations began back in 1972, with the opening of three remanufacturing facilities in Corinth, MS, and Prentiss, MS. Not all parts, however, are recoverable, and new parts have to be used when necessary. Nevertheless, what cannot be reused is sent to the foundry, located in Mapleton, IL, where they recycle aluminum alloy, cast iron, and steel. While original and refurbished materials are necessary for the production of Caterpillar products, it is also true that these final products are responsible for the mining and delivery of raw materials on every continent. SUBSTITUTES The construction industries’ technological advances have made the threat of substitutes almost obsolete. With the inventions of products like bulldozers, tractors, etc. the need for man-power and horse-power, which are both substitutes for Caterpillar products, has decreased significantly. Trucks and other vehicles are still considered substitutes but can hardly do the work that massive construction equipment is capable of doing. FINANCIAL ANALYSIS Caterpillars financial situation from 1994-2000 is rather sporadic at times, but is overall strong. Revenue growth was positive for all but one year in 1999 which provided CAT with the capital and resources to make new investments in inventory systems, R&D, and other capital expenditures which all help promote company growth. In ’97 CAT installed a just-in-time delivery system that enabled them to get rid of their inventory much faster then before, but it also took a couple of years to overcome the learning curve and other obstacles become profitable. This transition hurt several of Caterpillar’s financial ratios and market measures. Also in ‘CAT increased R&D and capital expenditures significantly which also had an impact on their financial situation. LIQUIDITY Current Ratio The current ratio is a measure of short-term liquidity. The computation is Current assets/Current liabilities Caterpillar’s liquidity situation was fairly stable over the six-year span. Their current assets increased at the same rate as their current liabilities. Their liquidity stand point never dropped below industry standards and was their most stable aspect of their financial situation from ’94-’00. Quick Ratio (Acid-Test) The computation for the quick ratio is the Current assets – inventory/Current liabilities. The quick ratio measures the company’s ability to pay current obligations with its most liquid assets. The ratio takes out inventories because they are not always easily converted to cash. CAT’s quick ratio is in the same category with the current ratio, in the fact that it stays fairly stable over the six-year span. One thing that affected the ratio is CAT’s just- in-time delivery system was implemented in ’97, which meant they had less inventory on their hands from ’97 on, causing the ratio to increase because inventory is not taking in account for in the quick ratio. LEVERAGE RATIOS Financial Leverage Financial leverage is the use of debt to magnify return on equity to shareholders. Financial leverage is a risky strategy for financing: If your firm is too leveraged (too much debt) and it experiences a downturn in sales, it may be unable to pay the interest on its debt. As a result, excessive financial leverage is regarded as increasing the default risk of a firm. CAT has always been fairly levered with their debt usage. They stayed consistent over the six-year span but as previously mentioned before, they began in ’97 to use more debt to finance operations, including their new just-in-time delivery system, which caused a slight increase i...