Business Essays | Caterpillars
International Strategy
Behind Caterpillars International
Strategy
The domain of international business theory contains an overwhelming
array of perspectives and dimensions. International business
(IB) definitions and assumptions are as diverse and ambiguous
as their sources. Approaches to IB have established the fundamental
perspectives as being global or organisational, but the content
of these areas are immense. The development of the global
approach, or more correctly labelled as ‘macro’
(Rugman and Hodgetts 2000. pp. 24) has recently evolved in
the 1990’s as a result of the mixed organisational orientated
approaches, otherwise labelled as ‘micro’. This
discussion takes the form of analysing Caterpillar in the
international business arena by highlighting issues and theories
that relate initially to the wider macro environment, then
specifically towards Caterpillar as an organisation.
The selected definition of IB for the basis of this discussion
has been taken from an opening statement. This being ‘transactions
taking place across national boarders’ (Rugman and Hodgetts
2000 pp. 5). This simple statement is considered sufficient
to incorporate its entirety, however the recognition of the
multi dimensional perspectives and their interrelatedness
needs to be comprehended. The aim of this discussion is to
explain the international strategy of Caterpillar by using
its context as a platform for applying relevant literature.
Caterpillar history
For clarity reasons it is considered necessary to offer a
brief introduction to Caterpillar. They have been established
in the construction equipment industry for over 75 years and
recorded $20.45 billion turnover in 2001 (annual report 2001).
Their main products are divided as machinery with 58% of sales,
engines with 33%, and financial products with 9%. The mission
statement of Caterpillar is to ‘be the global leader
in customer value’; this clearly indicates the attention
to a high quality of service as being their competitive edge.
This service is integrated through a sophisticated network
of 1840 locations across all six continents, of these; Caterpillar
has foreign direct investment (FDI) in 255 locations. The
corporate strategy for the future is to bolster their leadership
in the market through initiatives labelled by Datamonitor
(2003) and the annual report (2001) as being ‘profitable
growth, championing continuous quality improvement, aggressively
reducing costs, and developing an integrated e-business’.
In attempting to understand the reality of Caterpillar’s
strategy, theories are applied to offer explanations behind
the corporate publishing’s.
The critical success factors associated with Caterpillar are
primarily their strong brand; this is then supported by network
and service capabilities that represent reliability and consistency.
Caterpillar is also renowned for product innovation; they
have continually innovated which has contributed to the brand
andreputation. The international market responds to positive
brand vales because the nature of the industry requires trust
and relationships.
The macro factors present are unlimited in the current dynamic
world but the important perspectives are structured as political,
economic, technological and social. The elements of these
perspectives are selected according to the importance for
Caterpillar; therefore they are discussed in this context
with reference to relevant literature.
The political climate is continuously being developed and
negotiated amongst the nationalities that exercise power.
The current instabilities are dominated by the differences
in opinion over the Palestine conflict and the Iraqi situation.
As Caterpillar is active across the globe, its operations
would need to be sensitively applied so that the local governments
are appreciated. The situation of Caterpillar is slightly
precarious due to the fact that in political terms, the Americans
are seen as the bullying nation, which is a mentality that
ideally Caterpillar would like to distance themselves from.
On the other hand, the American political objective may provide
an opportunity as reconstruction and other Caterpillar products
may experience an increase in demand as a result of the speculated
war (eg. tank engines and construction products). This circumstance
for Caterpillar represents a relation’s nightmare because
in the home country it would need to communicate support in
line with the public opinion, and in the host countries it
may benefit from addressing the local perspective. E.g. the
activities in China would be adjusted as to address the sensitive
issues to ensure sustainability, rather than inhibiting ill
feelings from enforcing the ‘American way’. Global
political situations are important to Caterpillar because
they could gain first mover advantage by moving into recently
opened markets such as China.
The extent that a region is privatised or Lasses-faire is
of interest to Caterpillar because it would aid the process
of negotiating a relationship. It would be beneficial for
Caterpillar to tailor management to either foreign governments
or foreign organisations.
IB massively influences the macro economic environment. The
recent conception is that IB is predominately concentrated
around three regions rather than integrating the world. This
can be seen through the development of trade blocs that encourages
IB amongst its members. The most significant research into
this economic environment highlights the triad perspective
as being dominant. The triad perspective as explained by Rugman
(2001) states that the world economy and FDI is based around
Europe, America and Japan, this also extends to FDI clusters,
namely Eastern Europe, Latin America and the Pacific rim,
that are supported by the dominant triad member. The evolution
of this economic environment has matured into a three way
economic power base that contributes significantly to the
adopted international strategy. The conclusions drawn from
Rugman’s (2001) research appear to dismiss the argument
of a global strategy because an organisation like Caterpillar
would only have to accommodate the triad perspectives as opposed
to incorporating worldwide responsiveness.
The analysis of the macro economic environment also includes
a consideration of the currency markets, and in particular
the value of the US dollar against Caterpillars large foreign
investments. Caterpillar’s largest FDI is in Japan;
therefore the continual decline in the economy influenced
the strategic decision to operate financially in the Japanese
market instead of exposing themselves to exchange rate risk.
In theoretical terms this strategic decision is known as ‘currency
diversification’ (Rugman & Hogetts 2000 pp. 203).
On the other hand Caterpillar has a favourable impact from
the sales in other currencies, primarily trading with Euros
and the Australian Dollar against the weaker US Dollar.
The macro social issues relevant to Caterpillar are identified
as originating from the animosity felt by the east towards
the west. These issues include the resistance of the east
in adopting the ‘western way’, this then extends
into the business sector where an international business strategy
involves a high degree of managing through different social
contexts. This is supported by Gesteland (1999 pp. 27) who
demonstrates the concept of ‘deal first or relationship
first’. A relevant example of this in terms of Caterpillar
is highlighted by Peppas (2002. pp. 52), which suggests that
‘differences were found in terms of attitude towards
a code of ethics’. Caterpillar places a heavy bias towards
its ‘code of conduct’, but is this sufficient
to address social issues in international business. At present
these publications are not enough, as pointed out by Mokhiber
and Weissman (2002 pp. 12). This opinion labelled Caterpillar
as a ‘bad apple’ because its ‘D-9 bulldozer
is used by Israeli military to carry out its programme of
‘home destruction’, this is directly inconsistent
with the ‘code of conduct’ (2000 pp. 2) which
states that it ‘uses our strength and resources to improve,
and in some cases rebuild, the lives of our neighbours’.
Another important social issue involves the rate of investment
into the developing world. The recent trend has been to transfer
manufacturing to developing countries, which has stimulated
construction and booming economies. This suggests that the
international market place is dynamic and evolving, which
should influence Caterpillar to adapt in emerging markets
and control in mature ones. This idea is also interrelated
with the triad perspective, it could be advised that Caterpillar
enter the clusters with triad adapted strategies, then encourage
segmented alterations in response to market conditions. With
this idea incorporated within the strategy, it would combine
the economies of scale benefits through behind the scenes
standardisation, and benefit from local responsiveness by
empowering each of the triad bases.
The technological environment is particularly significant
for Caterpillar to consider.
Not only does Caterpillar have to continually improve the
current products but it would also be beneficial to innovate
new products to overcome original construction problems. This
is highlighting the need to be more advanced than the competition,
when Caterpillar enters a market it must ensure that the product
offerings are compatible with the geological and business
needs. For example track driven vehicles are more appropriate
than tyres for working on loose sand. Caterpillar must also
undertake a broad view of technological developments in order
to identify issues such as alternative power, through to advantages
identified in the logistical operation. A recent technological
innovation has been the Advanced Combustion Emission Reduction
Technology (ACERT); in short this is a more environmentally
friendly engine. Along with product development and product
innovation, Caterpillar must also be aware of opportunities
to diversify. The most recent example of this is where Caterpillar
introduced financial products to encourage a struggling economy
to buy Caterpillar products.
Caterpillar’s international strategy operates within
an environment that is affected by the macro factors. These
factors are recognised in a global context and are normally
uncontrollable; therefore their management involves negotiations
rather than influencing and controlling. The strategic decisions
that affect the effectiveness of Caterpillar are mainly catered
towards the micro level factors. Meaning the micro level factors
are at work within wider macro issues. The discussion here
extends to the most important micro factors that Caterpillar
must consider when structuring their international strategy.
The factors in brief are competition, structure and logistics,
culture, and marketing. Each of these factors is discussed
using relevant theories in the context of Caterpillar and
its environment.
Competition within the construction equipment industry (CEI)
can be described using the industry life cycle and the five
forces analysis (Porter 1985). The CEI is arguably beginning
to mature internationally because the competition has been
shaken down to leave only 27 organisations that are considered
major competitors across all product areas (Datamontior 2003
pp. 13). This information excludes the financial products
because these are largely dependant on the machines and engines.
Due to the maturing nature of the industry, it implies that
the customers will be repeat customers as opposed to new.
This increases the value of the relationship and importance
of having a strong brand. Caterpillar’s position is
one of leadership through product quality and support servicing;
this directly builds the good perception of Caterpillar in
the minds of the customers.
The components of the five forces model (Porter 1985) illustrate
the competitive environment of the CEI. The rivalry amongst
existing firms reflects the increasingly internationalised
nature of the market. The basis of competition is held in
the ability to offer a broad range of equipment, and build
confidence through meeting changing needs. The strategy employed
by Caterpillar involves creating extra value by offering an
extensive range with a supporting service that provides an
excuse for premium prices. The main competitors for the heavy
equipment market include Komatsu Ltd, Kubota Corporation and
Mitsubishi Heavy Industries Ltd. These are the most powerful
competitors whose strategy also includes creating value and
charging premium prices. It is noted that two triad areas,
namely Japan and the US, predominantly contest the make up
of this market. Although it is conceded that European competitors
are significant in the industries architecture. To some extent,
the internationalisation of the industry has provided a situation
that can arguably be labelled as an oligopoly (Grant 2002
pp. 71), meaning there are a few organisations that are powerful
enough to be deemed sustainable. Again this is more evidence
that the industry is maturing, therefore influencing Caterpillars
strategic decisions.
The other main product of Caterpillar is their engine. The
main competitors within this industry are identified, amongst
others, as Rolls Royce, Ford Motor Company and Hino Motors
Ltd. These competitors are of similar size and employ a strategy
of offering reliability and supporting services. However it
is noted that Ford and Hino Motors do cut costs and charge
cheaper prices, but they still maintain the view of being
the leaders. Again the geographical base of these organisations
supports the triad perspective introduced by Rugman (2001).
The basis of competition is the development of quality in
terms of reliability and consistency; it is also an advantageous
position to offer a wide range in products. Caterpillar currently
offers around twenty different kinds of engine (Caterpillar
Product Line 2002), there are also many variances that can
be offered within these product ranges. Caterpillar is also
recognised for its detailed service; an example of this is
that they had temporary power established at ground zero hours
after the September 11 events.
Rugman (2001) demonstrates organisational structure theory
as a series of alternative options. This approach offers a
clear indication of strategies available, however it is implied
that the alternatives are one-way avenues, when in fact a
holistic view of organisational structure would include the
facility of a hybrid approach. A significant limitation to
Rugmans (2001) approach is that it failed to recognise the
decision maker’s predisposition. Whether an organisation
is categorised as either ethnocentric, polycentric, regiocentric,
or geocentric (Pearlmutter 2001, Rugman 2001) would influence
the extent to which it could execute a structure. Can a totally
integrated transnational network structure be effective if
extreme ethnocentric directors excessively control it? The
majority Caterpillar’s board of directors are American,
but the board’s predisposition is known only by evidence
in the company’s structure. Caterpillars operations
include a dealer network that is claimed to be an important
competitive advantage, the dealer network comprises of relationships
with local outlets totally integrated with private locations
involving large amounts of FDI. This is arguably grouped as
a ‘transnational network structure’, but it obviously
operates to an extent with governance from the home country.
To maximise efficiencies and quality of service then the structure
may need to consider the triad perspective mentioned earlier.
The strategy could involve different approaches relating to
sensitivity, but also incorporate the logistical economies
of scale and scope.
In addition to the ‘transnational network structure,
Caterpillar is pursuing alliances, most recently with Ford.
The aim for this partnership is to develop supply chain software
based on their experience in the vehicle parts market. The
American perspective dominates this strategic decision concerning
the structure of Caterpillar; therefore if the alliance proves
profitable then they are likely to integrate it universally.
However this perspective may not be profitable in other cultures,
which suggests that different locations are equipped to decide
what to integrate and how.
Current research by Miller and O’Leary (2002) evaluated
the performance of Caterpillar factories. The conclusions
supported the argument of common manufacturing recommendations,
these being the trend of computerisation, multi skilling,
and the encouragement of an emergent approach. This new factory
architecture represents the absence of control, this may be
beneficial in the developed American labour market, but this
would not be advisable in bureaucratic cultures such as the
Chinese. Further American research is provided by Rao, Scheller-wolf,
and Tayur (2000), here they intended to make recommendations
for the development of a rapid response supply chain for the
compact equipment. These recommendations included background
theories such as the network theory, inventory theory and
simulation theory, to reason their novel features like the
‘duel nodes of supply’, which is to benefit dealer
replenishment and customer demand in terms of service speed.
The point stressed from such articles is that they are only
valid to the specific environment, in terms of structuring
internationally then these issues would need to be addressed
in each geographical location, and this would be unique in
each case. Therefore the construction of an international
structure is dependant on the location it chooses.
Internally Caterpillar has developed a universal approach
of how to operate. They have labelled this 6 Sigma. ‘6
Sigma is about success – about being better than we’ve
ever been. Its about getting there faster’ (www.caterpillar.com/about),
the fact that Caterpillar implement this universally suggests
that there is an ethnocentric orientation towards the international
management.
The micro factor of international culture is a consideration
that involves negotiation in order for an organisation to
be efficient. Organisational culture on the international
stage can be viewed as an extension from the four primary
attitudes outlined earlier (Perlmutter 2001, Rugman 2001),
these attitudes govern the perceptions of how a company organises
its activities. Rugman’s (2001) ideas outline the important
issues of culture as being language, religion, values and
attitudes, manners and customs, material elements, aesthetics,
education and social institutions. Although the attitudes
of the organisations decision makers are catered for, it is
felt that this is the starting point when evaluating an international
culture. The unconscious attitude of decision makers will
directly affect the extent to which they can implement a strategy
such as ‘polycentric’. For a pure international
strategy, not only do the cultural differences need to be
understood, but also the drivers that influence the culture.
This opinion is supported by research undertaken by Gulbro
and Herbig (1999), this conclusion states that ‘firms
must be better prepared, must improve their knowledge of the
other side and its culture’. This implies that cultural
management is a process of negotiations rather than the encouragement
of a ‘one best way’ approach. Gulbro and Herbig
(1999) emphasised the need for organisations to learn from
studies that show how different cultures are, therefore this
would provide the resources to negotiate effectively the desired
business activities. Research into Australian construction
companies in Malaysia by McGrath-Champ and Carter (2001 pp.
20) found that ‘HR policies and corporate culture are
used as marketing devices, not solely for management strategy’.
The theory formed from this research highlighted the fact
that IB in developing economies needs to provide better insights
into the role of the domestic market. It is argued that international
business ‘is not simply driven by cost or quality but
the success the transactions it has within a host country’
(McGrath-Champ and Carter 2001 pp. ). Caterpillar’s
use of internal and external marketing attempts to communicate
culturally consistent messages. Caterpillar regularly produces
documents and articles such as the ‘code of conduct’,
‘corporate support programs’, a magazine, and
network and product information. This is evidence that Caterpillar
attempts to interact with stakeholders such as the communities,
customers, dealers and employees.
Another suggestion that Caterpillar manages culture effectively
is the resolution of the six-year strike with the United Auto
Workers (UAW). However it must be highlighted that it wasn’t
effective management that created the dispute, or dragged
it along for six years, but since its settlement Caterpillar
has recorded increasing profits year on year. However an argued
reason for this maybe the weak dollar and strong growth abroad,
therefore these markets are in earlier in their life cycles
which would suggests that problems may arise in the future.
Hopefully experience shall instruct Caterpillar to observe
the problems at an early stage. Ba Banutu-Gomez (2002) provides
an indication of how to manage culture in developing countries.
His recommendation implies that the management of international
culture ‘requires a strong commitment to a high standard
of conduct. Managing in this kind of situation requires being
able to design and implement a bottom up system, which involves
a two-way exchange’. (Ba Banutu-Gomez 2002 pp.39).
Similar to Rugmans (2001) highlighted issues; Hofstede (1991)
identified four dimensions of work related cultural differences,
namely ‘power distance, uncertainty avoidance, individualism\collectivism,
and masculinity\femininity’. This research is an extensive
piece based on questionnaires; it provides validity in terms
of its thoroughness and its aim is to ‘help managers
to identify how to create global competitiveness from diversity’
(Hoeklin 1994).
Caterpillar’s cultural situation involves the problematic
issue of combining the culturally diverse network into an
efficient information sharing system. The documentation to
signify cultural attention is at a thin level; the vast majority
of the corporate marketing is of a very directive nature.
For example ‘we are placing renewed emphasis on becoming
a continual learning organisation at Caterpillar, using 6
sigma as the way we work’ (Annual Report 2001 pp. 5).
The 6 sigma itself is a continuous improvement programme designed
by Americans to implement internationally, this obviously
does not recognise the needs to negotiate and exchange for
maximum productivity and innovation, instead of enforcing
a single way.
The microenvironment involving marketing tactics is fairly
consistent throughout its international markets. The products
that are offered are broadly the same apart from simple language
adaptations and alike. The important international marketing
issue is the content of the supporting service; this would
need to communicate in a way that is consistent with local
perceptions. The constant problem for Caterpillar is learning
what to communicate and where, therefore it is obvious that
it should adopt a ‘polycentric’ approach as identified
earlier. For implementing such a strategy techniques such
as Yip and Masden’s (1996) ‘Global account management’
have been proclaimed. Benefits associated with this technique
include:
· Establishing links across regions that carry over
time to build institutional relationships;
· Good service leading to reputable benefits that can
be transferred to new strategic regions or industries.
(Yip and Marsden 1996 pp. 38)
There is evidence of this within Caterpillars strategy because
firstly, they produce ‘supplier communications guidelines’.
This maybe against cultural theory but nevertheless they are
an attempt to establish a link within regions. The strength
of the Caterpillar brand has been utilised by extending it
to products associated with the core brand values, such as
heavy footwear, clothing and watches. This strategy is confirmed
with Chernatory, Halliburton, Bernath (1995 pp.20), where
their approach ‘argued that international branding should
be based on the core essence of the brand, in terms of its
added values and positioning’. However it must be recognised
that the associated values may need to be refined when marketing
in more sensitive markets.
With the product being largely standardised and economies
of scale being utilised, then the marketing and servicing
operations need only to appreciate the local values, instead
of marketing a differentiated product. Caterpillar largely
promotes a consistent message of reliability, expertise and
value for money; these are the underlying assumptions that
are connected to the Caterpillar brand.
Internal marketing could involve more negotiations through
understanding local cultures, although this may unconsciously
happen it does not get promoted through the documentation.
In summary Caterpillars international strategy has evolved
within a market environment that demands reliability and dynamic
customer requirements. Therefore their international strategy
is a unique response that matches the capabilities with customer
demands. The current direction of the strategy is to ‘recalibrate
our focus’ (Annual Report 2001 pp.2), meaning to concentrate
on successful products and either retain or achieve leadership.
Caterpillar does, and should continue to innovate in terms
of products and logistics to maintain opportunities for leadership.
The brand values provide a critical advantage in supporting
the services because the interrelated nature of this allows
prosperity. Caterpillars brand management and marketing internationally
is effective in communicating the values, but it has been
hinted here that the fundamental values may be ideal for the
American market, but not necessarily maximising in foreign
markets. Caterpillar’s logistical network involves vast
amounts of investment of money and time; therefore it poses
as a significant barrier to entry. The critical aspects of
this network are the working relationships. Caterpillar manages
these by documenting the ideal personality of a networked
company. However, it is concluded that Caterpillar has ethnocentric
characteristics, which may be inefficient by suppressing the
domestic firms. The structural design of Caterpillar resembles
that of a transnational network company, this network covers
a large proportion of the globe, but the development of the
structure extends from a triad perspective due to early investments
in Japan and Europe. A criticism of this suggestion is that
Caterpillar have sufficient power to influence networked companies,
therefore it could be argued that there is evidence so suggest
that it undertakes a global area structure. This is based
on the opinion that they have a bureaucratic nature, which
works against the network structure fundamentals.
The competitive forces of the environment, namely the need
for reliability and support service, would suggest that the
network structure is more appropriate. Caterpillar’s
ability to develop and produce products is a major advantage,
but to create total dominance of the construction industry,
their logistical network would need continual maintenance.
The resulting recommendation is to encourage an emergent approach
that encourages communication and business development within
the network.
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