FANTASTIC GROUP V

Caterpillar, Inc.
"Earthmoving solutions for today's challenges."

(Preliminary Report)





Strategic Management
MGT 235 (002)
Dr Sean Jasso

Aman Begliyev
Chang (Lavinia) Liu
Emill Melliz
Jia Jia
Paul Young
Ruosi (Rose) Huang
4/28/2009
Spring 2009, UC Riverside






















THREAT OF SUBSTITUTE PRODUCTS:
The threat of substitute products is minimal if non existent. There isnt any other product that
can perform the same functions at a comparable cost. Human labor is the only possible
substitute, but the cost and time required to perform the same functions as the construction
equipment would be prohibitive.


THREAT OF NEW ENTRANTS:
The threat of the entry of new competitors is minimal. There are existing barriers of entry into
this industry, which include but are not limited to large capital investment, brand equity and
economies of scale. There are no switching costs associated with changing from one
manufacturer to another, but the up front investment and time required to come up to speed with
the manufacturing of construction equipment are large barriers of entry.


COMPETITIVE RIVALRY:
The industry is highly competitive. There are approximately 700 companies, with the largest 50
companies holding more than 80 percent of the market. The total market size is estimated at 300
billion dollars. The biggest players in the market are Caterpillar, Hitachi, Komatsu, CNH Global
and construction divisions of heavy equipment manufacturers Terex, Deere and Volvo. The
industry grew by 5% from 2007 to 2008. The industry is prone to over capacity, especially when
there are economic downturns. The larger competitors, such a Hitachi, Komatsu, CNH Global,
Deere and Volvo are well diversified. In fact, these competitors are more diversified than
Caterpillar, having products, which cater to consumer electronics, military and industrial
industries. Competition is fierce when there economic downturns due to the excess capacity in
the industry. This leads to price wars and favorable terms for the customers.





Porters
5
Forces
BARGAINING POWER OF CUSTOMERS:
The bargaining power of the customer depends on the type of customer. Customers can be
broken down into several categories; countries, large corporations, medium sized corporations
and small businesses. A country can exert tremendous pressure on corporations to comply with
the countrys requirements and needs. Large corporations can have significant influence due to
their size and the amount of product they can potentially purchase from the manufacturer.
Medium and small corporations have little influence in terms of volume, but other factors can
give them an advantage during negotiations, such as little or no switching costs and the vast
number of competitors. Medium sized corporations and small business can incorporate the fact
that this industry is highly competitive to obtain favorable prices. A possible limitation to
customer bargaining influence is the number of competitive dealers in their region. Countries
and large corporations would not find this inconvenience to be as restricting as medium sized
corporations and small businesses. There is very little threat from customers integrating
backward. Most customers are in the construction industry and their expertise is in
infrastructure, not in equipment manufacturing.

BARGAINING POWER OF SUPPLIERS:
Caterpillar is for the most part vertically integrated. They rely on suppliers for raw materials,
such as steel, rubber and plastics. They manufacture their own engines and are for the most part
self sufficient. The suppliers have little influence due to large number of raw material suppliers
in the world. Raw material suppliers for steel, rubber and plastic are abundant. Suppliers to
Caterpillar would not integrate forward because their expertise is not is not in finished product.
It would be easy for Caterpillar to switch from one material supplier to another.


1P8LA1 Cl Su8S1l1u1L 8CuuC1S 1he LhreaL of subsLlLuLe producLs ls mlnlmal lf non exlsLenL 1here lsn'L any oLher producL LhaL can perform Lhe same funcLlons aL a
comparable cosL Puman labor ls Lhe only posslble subsLlLuLe buL cosL and Llme requlred Lo perform Lhe same funcLlons as Lhe consLrucLlon equlpmenL would be prohlblLlve
8A8CAlnlnC CWL8 Cl SuLlL8S
CaLerplllar ls for Lhe mosL parL verLlcally lnLegraLed 1hey rely on
suppllers for raw maLerlals such as sLeel rubber and plasLlcs 1hey
manufacLure Lhelr own englnes and are for Lhe mosL parL self
sufflclenL 1he suppllers have llLLle lnfluence due Lo large number
of raw maLerlal suppllers ln Lhe world 8aw maLerlal suppllers for
sLeel rubber and plasLlc are abundanL Suppllers Lo CaLerplllar
would noL lnLegraLe forward because Lhelr experLlse ls noL ls noL ln
flnlshed producL lL would be easy for CaLerplllar Lo swlLch from
one maLerlal suppller Lo anoLher

1P8LA1 Cl nLW Ln18An1S
1he LhreaL of Lhe enLry of new compeLlLors ls mlnlmal 1here are
exlsLlng barrlers of enLry lnLo Lhls lndusLry whlch lnclude buL are
noL llmlLed Lo large caplLal lnvesLmenL brand equlLy and economles
of scale 1here are no swlLchlng cosLs assoclaLed wlLh changlng
from one manufacLurer Lo anoLher buL Lhe up fronL lnvesLmenL
and Llme requlred Lo come up Lo speed wlLh Lhe manufacLurlng of
consLrucLlon equlpmenL are large barrlers of enLry
CCML1l1lvL 8lvAL8?1he lndusLry ls hlghly compeLlLlve 1here are approxlmaLely
700 companles wlLh Lhe largesL S0 companles holdlng more Lhan 80 percenL of Lhe
markeL 1he LoLal markeL slze ls esLlmaLed aL 300 bllllon dollars 1he blggesL players
ln Lhe markeL are CaLerplllar PlLachl komaLsu CnP Clobal and consLrucLlon
dlvlslons of heavy equlpmenL manufacLurers 1erex ueere and volvo 1he lndusLry
grew by S from 2007 Lo 2008 1he lndusLry ls prone Lo over capaclLy especlally
when Lhere are economlc downLurns 1he larger compeLlLors such as PlLachl
8A8CAlnlnC CWL8 Cl CuS1CML8S
1he bargalnlng power of Lhe cusLomer depends on Lhe Lype of
cusLomer CusLomers can be broken down lnLo several caLegorles
counLrles large corporaLlons medlum slzed corporaLlons and small
buslnesses A counLry can exerL Lremendous pressure on corporaLlons
Lo comply wlLh Lhe counLry's requlremenLs and needs Large
corporaLlons can have slgnlflcanL lnfluence due Lo Lhelr slze and Lhe
amounL of producL Lhey can poLenLlally purchase from Lhe
manufacLurer Medlum and small corporaLlons have llLLle lnfluence ln
Lerms of volume buL oLher facLors can glve Lhem an advanLage durlng
negoLlaLlons such as llLLle or no swlLchlng cosLs and Lhe vasL number
of compeLlLors Medlum slzed corporaLlons and small buslness can
lncorporaLe Lhe facL LhaL Lhls lndusLry ls hlghly compeLlLlve Lo obLaln
favorable prlces A posslble llmlLaLlon Lo cusLomer bargalnlng
lnfluence ls Lhe number of compeLlLlve dealers ln Lhelr reglon
CounLrles and large corporaLlons would noL flnd Lhls lnconvenlence Lo
be as resLrlcLlng as medlum slzed corporaLlons and small buslnesses
1here ls very llLLle LhreaL from cusLomers lnLegraLlng backward MosL
cusLomers are ln Lhe consLrucLlon lndusLry and Lhelr experLlse ls ln
lnfrasLrucLure noL ln equlpmenL manufacLurlng

komaLsu CnP Clobal ueere and volvo are
well dlverslfled ln facL Lhese compeLlLors
are more dlverslfled Lhan CaLerplllar havlng
producLs whlch caLer Lo consumer
elecLronlcs mlllLary and lndusLrlal
lndusLrles CompeLlLlon ls flerce when Lhere
economlc downLurns due Lo Lhe excess
capaclLy ln Lhe lndusLry 1hls leads Lo prlce
wars and favorable Lerms for Lhe cusLomers

PORTERS 5 FORCES

Caterpillar is the worlds largest manufacturer of earthmoving machinery and construction
and mining equipment and is a leading supplier of agricultural equipment. It also
manufactures diesel and natural gas engines, industrial gas turbines and logging and oil
industry equipment. It is a global leader in its sector and has a worldwide presence. However,
rising raw material costs can impact its profitability.

Strengths
Global market leader
Caterpillar is the worlds largest manufacturer of earthmoving machinery, as well as
construction and mining equipment, and is also a leading supplier of agricultural equipment.
It has the highest revenue generation ($48,044 million
[1]
) in this sector, while it also
generated about $3,280 million from financial products in 2008. It is a market leader in the
heavy construction machines with a market share of approximately 17% and it is among the
top 200 companies worldwide.

SWOT Analysis
Diversified geographical spread
The company generates revenues from most of the prominent markets in the world, not
relying heavily on a specific economy or geography. In 2003, over 60%
[3]
of its revenues
were generated from markets outside the US. Diversified operations provide resilience to the
revenue stream and also protect the company against slowdown in a particular economy. The
company maintains a strong presence in matured markets like Europe and the Middle East,
and is rapidly increasing its presence in emerging markets like China and India.
Mix of business reduces earnings volatility
As a result of its shift in mix from being simply a US-based construction equipment supplier
to being one of the most diversified machinery companies, Caterpillar has become much less
dependent on the sale of equipment. Accordingly, its earnings volatility has been lowered.
Strong dealer network
Caterpillar has an extensive network of dealers all around the world so wherever you go,
there's a Caterpillar dealer to talk to. The dealer network is Caterpillars most significant asset.
It is a key competitive differentiator and allows it to capture over 60% of the market
globally
[4]
.

Weaknesses
Falling sales in North America
Especially due to the downturn of US economy, Caterpillar has declined sales in North
America. The drop in sales has been brought on by sluggish of US economic conditions
which have led to a decrease in construction activity. The company generates 33.7% of its
revenues from US in 2008 comparing with 38.0% and 47.1% in 2007 and 2008 respectively
(calculated from Geography Sales date from Financial statement).
High debt structure
The companys long-term debts have been rising increasing sharply in the recent past. From
$47,249 million in 2007 it rose to $61,171 million in 2008. The debt to equity ratio has
deteriorated from 2.58 in 2007 to 4.65 in 2008. While the key profitability ratios havent
increased at the same time. The D-to-E ratios are expected to be increasing in 2009 also.

Opportunities
Opportunities in China and India
Developing economies like China and India are experiencing annual growth of 7-8% per
annum. Infrastructure development and construction activities are rising at a fast rate in these
countries. Asia continues to be a very large growth opportunity for Caterpillar, and it is an
area in which it is focused on increasing its presence.

Increasing construction activity due to growing population
Population rise will significantly impact the construction industry. The company has a strong
presence in the construction equipment market and is well positioned to take advantage of the
opportunity to grow in this segment.
Joint development and acquisition programs
Caterpillar has entered into joint development and acquisition programs for components and
purchased-finished material with certain competitors.

Threats
Rise in raw material prices
There has been a continuous rise in the prices for key raw materials of the company,
especially metals, and these prices are expected to rise further as the global economy
improves. The increase in raw material prices will increase the companys operating costs,
and would limit the magnitude of potential production increases and therefore incremental
earnings power.
Mining dependent on coal prices and global GDP
Demand for new equipment is highly cyclical and dependent on mineral prices. Although, the
demand for these minerals, which is largely determined by population growth and growth of
GDP, is expected to be stable or increase in the future, there remains an element of
uncertainty which will bring volatility risk for Caterpillars business.

Sources:
[1]
http://www.mergentonline.com/compdetail.asp?company=1502&type=financials&DataType=AsReported
&DataPeriod=Annuals&DataArea=PL&DataRange=3&Currency=AsRep&Scale=AsRep&Submit=Refresh
[2]
[3] http://www.wikinvest.com/stock/Caterpillar_(CAT)
[4] http://www.cat.com/cda/layout?m=41089&x=7
CATERPILLER, INC.


4 Corners Analysis
(Porters Components of Competitor Analysis)


1. What drives the competitor? Look for drivers at various levels and dimensions so
you can gain insights into future goals. Our largest international competitor is
Komatsu LTD. Komatsus drivers are to increase market share and profit.
Komatsu has diversified to include products for other industries, such as
electronics, communication equipment, metal forging and defense systems.
Komatsu may be looking to diversify further in order to minimize the impact of
economic downturns.

2. What is the competitor doing and what is the competitor capable of doing?
Komatsu has already established itself as the market leader in Japan, China,
Russia and the Middle East. Komatsu will continue to establishing itself in
developing nations and they offer a full range of products similar to Caterpillars.
Komatsu may be willing to close operations in developed nations and establish
itself further in developing nations.

3. What are the strengths and weaknesses of the competitor?

a. Strength Established in developing nations. Diversified their product
offerings beyond construction machinery manufacturing. This help the
company endure prolonged economic downturns.
b. Weakness Because Komatsu has diversified into other industries, their
complete focus may not in the growth of their construction machinery
business. Investments must be decided based on the different needs of
each product group (capital rationing). This can limit the amount of
investment into the construction machinery business. Komatsu is still
affected by economic downturns.

4. What assumptions are made by the competitors management team? Komatsus
management team may assume that Caterpillar is reluctant to enter developing
nations and that Caterpillar is unwilling to diversify or enter into partnerships with
companies who complement Caterpillars product offering. They may also feel
Caterpillar is unwilling to change or modify their current business model.
What Drives the Competitor What the Competitor is Doing and Can Do
ASSUMPTIONS CAPABILITIES
FUTURE GOALS
At all levels of management and
in multiple dimensions
CURRENT STRATEGY
How the business is currently
competing
Held about itself and the industry Both strengths and weaknesses
Future Goals

What drives the competitor?

Look for drivers at various levels and dimensions so
you can gain insights into future goals. Our largest in-
ternational competitor is Komatsu LTD. Komatsus
drivers are to increase market share and profit. Koma-
tsu has diversified to include products for other indus-
tries, such as electronics, communication equipment,
metal forging and defense systems. Komatsu may be
looking to diversify further in order to minimize the im-
pact of economic downturns.
Assumptions

What assumptions are made by the competitors man-
agement team?

Komatsus management team may assume that Cater-
pillar is reluctant to enter developing nations and that
Caterpillar is unwilling to diversify or enter into part-
nerships with companies who complement Caterpil-
lars product offering. They may also feel Caterpillar
is unwilling to change or modify their current busi-
ness model.
Current Strategy

What is the competitor doing and what is the com-
petitor capable of doing?

Komatsu has already established itself as the market
leader in Japan, China, Russia and the Middle East.
Komatsu will continue to establishing itself in de-
veloping nations and they offer a full range of prod-
ucts similar to Caterpillars. Komatsu may be will-
ing to close operations in developed nations and es-
tablish itself further in developing nations.
Capabilities

What are the strengths & weaknesses of the competi-
tor?

A.) Strength Established in developing nations. Di-
versified their product offerings beyond construction
machinery manufacturing. This help the company en-
dure prolonged economic downturns.
B.) Weakness Because Komatsu has diversified into
other industries, their complete focus may not in the
growth of their construction machinery business. In-
vestments must be decided based on the different needs
of each product group (capital rationing). This can
limit the amount of investment into the construction
machinery business. Komatsu is still affected by eco-
nomic downturns.
(COMPETITORS RESPONSE PROFILE)
4 Corners Analysis
Weighted
Internal Factors Weight Rating Score Comments
1 2 3 4 5
Strengths
Global market leader 0.20 4.1 0.902 Leader strength
Diversified geographic spread 0.15 3.8 0.684 Wide spread market
Mix of business 0.12 3.1 0.434 Hedge business risks
Strong dealer network 0.10 3.0 0.330 Distribution advantage

Weaknesses
Falling sales in North America 0.12 3.0 0.540 Decreasing market power in NA
High debt structure 0.18 3.0 0.510 Exposure of high risk
Total Score 1.00 3.40



Weighted

External Factors Weight Rating Score Comments
1 2 3 4 5
Opportunities
Opportunities in China and India 0.30 4.4 1.320 Key opportunities
Increasing construction activities 0.15 4.0 0.600 Due to growing population
Joint development and acquisitions programs 0.15 3.9 0.585 Company strategy

Threats
Rise in raw material price 0.25 3.1 0.775 Critical thread factors
Mining depend on coral price and global GDP 0.15 2.1 0.315 Global economy situation has impacts
Total Score 1.00 3.595
Internal Factor Analysis Summary (IFAS Table)
External Factor Analysis Summary (EFAS Table)