“the Comeback of Caterpillar, 1985-2002.”

MGMT 479 - STRATEGIC MANAGEMENT

Case Study #1: “The Comeback of Caterpillar, 1985-2002.”

Synopsis:

In the early 1900’s the heavy steam tractors of farmers of the delta in the San Joaquin Valley, California, consistently sunk into the moist soil. Their attempts at bigger wheel to solve the problem proved futile. Benjamin Holt, a combine maker, replaced the tractor wheels with tracks, distributing the tractor’s weight more evenly over a broader surface that gave the tractors more traction. Additionally, he replaced the heavy steam engines with gasoline that made the tractors lighter and solved the problem of sinking into the soil. Holt nicknamed the tractors Caterpillar, acquired the trademark and incorporated it into several of the crawler-type machines that his companied had manufactured and sold. By 1915 his tractors were sold in over 20 countries. In 1925 the Holt Company merged with the Best Tractor Company to form Caterpillar (25-3).

The military was the first to use the crawler tractors outside of the agricultural industry. During the early 1930’s, Caterpillar discontinued the combine manufacturing and concentrated its efforts into the production road-building, construction, logging and pipe-laying equipment. During the postwar era of World War II there were great demand for Caterpillar prod for the reconstruction of Europe, the building of interstate highways in the US and the construction of infrastructure, dams, and airports throughout the world.

Caterpillar built a strong reputation by producing reliable, durable and high-quality equipment, offering quick after-sale service and prompt delivery of replacement parts that during the 1950’s and 1960’s they were the undisputed leader in the industry. Caterpillar also established international subsidiaries through independent dealers that distributed, sold and serviced the Caterpillar equipment.

Because of their leadership in the industry, Caterpillar was able to charge premium prices for their quality products, paid high wages and offered high rates of return to its shares holders. However, by 1982, after record years of sales and profits, due to a global recession, a costly strike and devaluing of the US dollar, Caterpillar was thrust into three consecutive years of loses totaling almost one billion dollars. Fierce competitors like Komatsu Ltd. From Japan, launched a massive campaign to dethrone Caterpillar’s leadership in the international market even determined to undermine their share of the US market. During this time of crisis, Caterpillar re-examined their past activities and realized the necessity for a drastic change in the way the did business. In 1985, Caterpillar hired George Schaefer, as the CEO of the company.

Under his leadership, Caterpillar devised and implemented several strategies that impacted many functions of the company including purchasing, manufacturing, marketing, personnel, and labor relations. These strategies he accomplished in the following ways:

1. Global Outsourcing: Schaefer replaced the company’s heavy reliance on in-house production with global outsourcing. Through its new policy of “shopping around the world”, Caterpillar