Caterpillar Case Analysis

2473 words - 10 pages

Executive Summary At the end of 1991, Caterpillar Incorporated, the world?s largest maker of heavy industrial engines and earth-moving equipment, faced mounting financial losses, poor labor relations, and a lackluster market. The previous decade saw the company post its first loss causing the chief executive officer (CEO) to admit, ?Almost overnight the world changed on us.? Ever since its foundation in 1925, Caterpillar has led the heavy industrial equipment through innovation and value-added services. It was the first company to introduce a diesel tractor. The 1970s saw the launch of the most technologically advanced tractor in the world featuring a design that reduced repair and down time by as much 80% than conventional models. Innovative designs and post-sales support commanded high premiums for Cat products and customers were willing to pay.In the early 1980s, several factors combined to undermine Caterpillar?s seemingly invincible market position. Commodity prices dramatically declined impacting Caterpillar?s primary market segment, the heavy equipment used in mining, forestry, and oil drilling. Secondly, the US dollar rose in value against the Japanese Yen, effectively presenting Cat?s largest competitor, Komatsu, a 40% price advantage. In addition to these economic factors, labor relations reached a crisis point culminating in a seven-month strike in 1982.Caterpillar management responded to the crisis by launching a giant restructuring program reducing its labor force and equity by forty and twenty-eight percent respectively. It also began to look to new markets, particularly the smaller construction contractors. To preserve market share in its core businesses, it slashed it prices- and profits to compete with Komatsu of Japan. Although losing eleven percent market share, it pricing strategy did prevent an almost certain larger loss of market share.The company returned to profitability in 1985, but management recognized that the company?s long-term prosperity was far from certain. To secure a long-term future for its core business, the firm embarked on a six-year $1.2 billion plant modernization program. As a result, costs at one plant were expected to drop by 19%. Streamlining of the organizational structure from a functional structure to a product orientated structure yielded reduction of 1,000 positions. All of these changes were intended to bring Caterpillar more closely in line with its customers needs.Yet, despite these massive changes, the company fell into the red again in 1991. Once again it fell prey to a volatile global economy and poor domestic labor relations. A global recession and economic turmoil in Brazil in particular led Cat to announce a $132 million loss for the first quarter of 1992. Coincidentally, the largest union, the United Auto Workers (UAW) disrupted production throughout the quarter.Caterpillar management, after having spent $1.2 billion on plant modernization, surviving a price war with its largest...

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