To what extent was market maturity the cause of Caterpillar’s restructuring? Critically examine the extent the new strategy transformed market, productive and financial performance.
During the late 1980s and the early 1990s Caterpillar Inc. (CAT), a $30 billion colossal in the earth-moving equipment (EME), engines and power systems, underwent a significant restructure. This was because in 1982 CAT posted its first annual lost of its 50-years history. The industry-wide downturn was partly the result of the cyclical nature of the construction equipment industry but also the consequence of an increased foreign competition fuelled by a strong dollar. The inflation and the market maturity ...view middle of the document...
It follows that firms like Caterpillar that constantly move from a market trajectory of real output expansion to one of stagnation and cyclicality experience a decrease in the generation of cash surplus (Haslam, Neale, and Johal, 2000). By looking at the history of Caterpillar, it is possible to see (See appendix - Fig. 1) how its first period after 1954 witnessed a sustained growth, in which downturns are only a small pause before a new growth. Nevertheless, it is also appears clear that a new era begun for CAT in 1973. The effects of this downturn started to be particularly visible in 1981 as the gains of the upturns since 1973 were not consolidated and the additional downturn in 1981 reduced sales by half to 1970 levels (Froud, et al., 1998). It can be therefore said that partially as a result of the cyclical nature of the construction equipment industry and also as a product of increased foreign competition fuelled by a strong dollar, Caterpillar revenues and profits felt. Market maturity should have been the reason for a restructuring, but, although it did bring improvements, CAT management actually did not realize that the reason for the decrease in sales was the market maturity. The firm had really opted for a restructuring because of the impression that “Komatsu had an advantage based on superior manufacturing practise” (Froud, et al., 1998: 699). Caterpillar, in fact, believed that it needed to decrease high labour costs as it increased outsourcing of non-core activities. The PWAF programme never admitted that the promise of cost reduction through improved flow, that did improved the general benefits of the workforce, really depended on the shifting market limitations (Froud, et al., 1998) and the fluctuating exchange rate.
The analysis of the market trajectory, in fact, becomes even more relevant when associated with the dynamics of advantage and competitor interaction. For this reason, it is worth looking into the threat that Komatsu imposed upon CAT. As seen, the process of restructuring was mainly initiated because Caterpillar management believed that Komatsu had a competitive advantage based on superior manufacturing practice. Nevertheless, the Caterpillar - Komatsu case highlights how the effects of factory improvement and productive reorganization in America and Japan were generally overwhelmed by the much stronger influence of exchange rate variation. The structural source of advantage and disadvantage results from movements in the exchange rate, limited the capacity of Caterpillar to actively manage competitor interaction through marketing or productive intervention as envisaged in management tasks (Froud, et al., 1998). In fact, the Yen-Dollar relationship can be actually taken into account as one of the main reasons for the shifting in advantage between the two manufacturers. The rate between the Yen and the Dollar was favourable for the Japanese Komatsu, but in 1985 the advantage brought by Komatsu’s low labour cost...
