Background

Caterpillar is currently the largest manufacturer of construction equipment in the world. It was
formed by the merger of Holt Manufacturing and C.L. Best Tractor companies in 1925. Its three
main lines of business all contributed to $18.9 billion in sales for 1997. Caterpillar employed
59,860 people in manufacturing facilities around the world. They are the Market leaders in every
country in which they did business with the exception of Japan. The world recession of the early
1980s severely affected Caterpillars bottom line. Their sales figures were down by 29% versus
the previous year. The company made a $180 million dollar loss that same year. In 1990, their
new CEO, Donald Fites launched a three-point campaign to bring Cat out of the slump. The
results were very favorable, as Caterpillar was able to make a profit in 1993. One of the biggest
reasons for Caterpillars success was its 197 worldwide dealers. Caterpillar also invested in an
ambitious project to maximize equipment uptime and minimize customers cost of service and
repairs. Their primary rival is Komatsu, but the other companies like Case, Volvo, etc. are also
competitors to be noted. Currently a big concern for Cat is that several of the companys major
competitors had become better focused, better managed, and financially larger while new
competitors were also emerging. At the same time, the exact shape and size of the industry
segments in which they compete are currently very hard to project since the construction
equipment industry is in the process of being both redefined and restructured.
Problem identification
1. Cats major competitors had become better focused, better managed, and more financially robust.
2. The exact shape and size of the industry segments in which they competed were currently very
hard to project.
3. The construction equipment industry is in the process of being both redefined and restructured,
and the rate of change in it has accelerated.
4. Exchange rate fluctuations.
5. Competition in the medium and small sized equipment has increased and demands for used, low
priced, equipments have been hampering the sales of new ones.
6. High labor cost and relative lack of flexibility of union workers positions CAT at a disadvantage
relative to its primary competitors like Komatsu.
7. 60% CAT workers will be retiring in the next 6 years.
8. Bad relationship with United Auto Workers (UAW) poses future threat to the company.
9. Weak market position in Asia.

Porters five forces

Threat of new entrants (LOW)

The construction equipment market in the world is very mature, with over two hundred companies
actively participating in the US alone. 42% of the industry was commanded by only 8 companies, the
largest of which, that is, 17.1%, was under CAT. A high rate of production volume is also critical in this
industry, which requires a very large starting capital by any new entrant. These make it very difficult for
any new company to enter this market favorably.
Threat of substitutes (HIGH)
There are other Full-range suppliers like Caterpillar who offer a broad line of equipment for the
construction industry around the world. Komatsu, which commands an 8.1% worldwide market share, is
one of them. The next few, which include Case, Deere, Hitachi, Ingersoll-Rand, Liebherr, and Volvo,
amount to 24.8% of the market. So the threat of substitutes is quite high.
Bargaining power of suppliers (LOW)
Caterpillar engaged in a series of cooperative agreements, acquisitions, and joint ventures for the design,
production, and supply of engines. They formed joint ventures with Mitsubishi to share technology,
production facilities, etc. And they also acquired producers of trucks, harvesters and rubber-belted
agricultural tractors, diesel engine, and diesel generator sets like Emerson FG Wilson Limited (UK),
Brown Group Holdings in the United Kingdom, Mak Maschinenbau GmbH, Claas KGaA, etc. Doing so,
they made the bargaining power of suppliers very low.
Bargaining power of buyers (HIGH)
Since there are many other substitute companies, like Komatsu, Case, etc. available in the construction
industry, buyers have a high bargaining power.
Industry rivalry (HIGH)
Competition in other similar industries, like that of medium- and small-sized equipment, has dramatically
increased. This is primarily due to the increasing number of equipment makers offering quality products.
New equipment also has to compete with used machinery that often sold at a 30% to 60% price discount.
Porters diamond analysis
Demand Condition
The heavy construction equipment industry is expected to continue its growth at about 4% per annum for
the next four years. Heavy construction equipment is being used all over the world for commercial and
industrial construction, mining, and many other applications. Demand growth in developing countries is
expected to exhibit an above-average rate and in developed nations, a stable growth throughout the next
decade. Demand in developing countries outpaced the supply of used equipment coming from developed
nations. The demand for new equipment is also likely to be affected positively as new credit, leasing, and
renting options became available in the emerging world.
Factor Condition
Caterpillar employs 59,860 people in manufacturing facilities around the world and in its numerous
distribution centers. They have a network of close to 200 dealers of which137 are located outside the U.S.
This network employs about 79,900 people as well. They have also had years of investment in automation
and cost reduction, and thus have a huge capital.
Firm strategy, structure, and rivalry

The company has decentralized top-down organizational structure and an empowered lower management;
The CEO has set clear return-on-assets target, tied to incentive compensation plans; and also reorganized
the company into 13 functionally independent profit centers and 4 service divisions (later 17 and 5), each
of which has its own budget and a before-tax return-on-assets target. Service operations and component
supply segments of CAT compete at market prices.
Also, Caterpillars manufacturing and distribution systems are designed so that any part, in anywhere in
the world, can be replaced in a maximum of 48 hours. The company also involves its dealers actively in
programs of product quality and cost reduction with their design engineers in order to respond to
problems faster.
Related and supporting industries
Cat outsources most of the manufacturing activities and focuses on design and final assembly. They are
also reducing the number of suppliers in order to simplify supplier networks and promote cooperation.
They have also made cooperative agreements through joint ventures designed to share production
facilities or as technology-sharing agreements. They also have 197 dealers who own 1,217 branch stores.
Parts supply and equipment service is another supporting industry in this case. It represents about onefourth of industry sales. They also need a strong service network to support the marketing effort of the
equipment maker and provide it with valuable market information.
BCG matrix
Star
Earthmoving equipments fall under this category as they command 50% of the earthmoving equipment
market. This product line earns the highest market share and has been achieving the highest amount of
market growth, as can be seen from their sale of machinery and engines worth $18.1 billion in 1997.
Cash Cow
Cats track-type tractors, motor graders, blade graders, and elevated graders fall under cash cow since
they had a high enough market share in the beginning for Cat to expand, but not enough market growth
for them to have a significant contribution in their revenue earnings.
Question mark
Engines and turbines fall here, as they provided Cat with the additional revenue growth, which is a
quarter of Cats net revenues, in 1997.
Dogs
Cats agricultural equipments fall under this category since they are not as flexible as their competitors in
this product line to achieve a considerable market share and market growth. For example, Deere has the
added advantage of not being exposed to foreign rivalry and foreign exchange fluctuations, while Cat has
to deal with Komatsu and tackle other rivals and exchange rate issues in this sector.