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The Caterpillar Company dominated the earth moving equipment industry from 1945 to 1984 (Bartlett & Ehrlich, 1989). The company had made significant infrastructure investments worldwide during this time. They had operated for 50 years without any significant competitor. This enabled them to increase prices ten percent per year from 1973 to 1983 and still control the market (Bartlett & Ehrlich, 1989). The corporate genetics included a corporate culture of promoting from the ranks, and a strong network of decision making in their Executive Office. The top management issued unquestioned decisions, did not allow failure, and instilled a strong fear of failure. The CEO had the final decision and the power to dictate company strategy.
The operating principles and management values are core the company's strategy. The manufacture of quality equipment that demanded premium prices and offered value to the customer is one of these principles. The ability of top management failing to recognize that holding on to the company's past performance would impede their competitive leverage. They failed to develop a strategic architecture designed to capture future opportunities and remain competitive within the industry.
The launch of denominator management by Caterpillar was in response to the establishment of Komatsu and its increasing market share to 25 percent by 1984 (Bartlett & Ehrlich, 1989). This reaction included: closure of six Caterpillar plants, close to 15 percent reduction in production areas, employees reduced 28 percent, and inventories cut by 50 percent (Bartlett & Ehrlich, 1989).
The new CEO, George Schaefer, took over in 1985 after three years of significant losses totaling close to $1 billion. The first order of business was to continue the denominator management to achieve a lean operation, and then rebuild the company based on a strategic architecture that would allow them to regain their competitive position. The results from his work during the Business Strategy Conference (BSC), the previous two years, would be the basis of Schaefer's strategic plan. Previous to the organization of the BSC project, policy was directed by top management without a long term strategic design. The results from the BSC project revealed that exploiting Caterpillar's core competencies would support a long term strategy. The management, however, opted to diversify products and services rather than support the slower growth of their core businesses. This short sightedness of top management and lack of a strategic architecture, regarding their competitive opportunities, inhibited them from effectively managing the company's competencies.
Key Management. George Schaefer's first order of business was to reduce the company's cost base, and develop a strategic architecture that would focus on their core competencies. The result of this design would rebuild the company based on long term capabilities that could revitalize its competitive position. The findings of the BSC presented initiatives that would create new avenues for development and growth. The company's core competencies include: manufacturing skills, technology expertise, leasing knowledge, marketing capabilities, established distribution channels, and product branding. The strategic architecture implemented would build upon these competencies and reveal the necessary capabilities for the various strategic business units (SBUs) and guide future market opportunities. This architecture will provide the blueprint of the company's links between its competencies and SBUs that can provide end products to their customers. The strategy will provide the logic for product development and its market differentiation by the exploitation of their current capabilities and the required acquisition of other competencies.
Schaefer's management style encouraged participation from management. He instituted a style that moved the decision making down through the organization. The organizational culture changed from people fearing failure, to managers that are more decisive and wiling to take the risks necessary to achieve successful outcomes.
Don Fites would become the new CEO in 1990 (Bartlett & Ehrlich, 1989). He convinced the Executive Office to authorize the development of a backhoe loader that would provide the necessary product to build a competitive advantage. This alternative approach of the company's capabilities resulted in the development of innovative results. Fites was instrumental in the negotiations creating a joint venture with Mitsubishi Heavy Industries to develop products for worldwide Caterpillar in Japan. The project shifted design control of the hydraulic excavator to the Japan center, and offer a learning experience for the U.S. engineers. This became a turning point for the hierarchical corporate culture.
Competitive Situation. The competitive environment posed no threat to Caterpillar for close to 50 years. The management became complacent with it's dominant competitive leadership, and they never developed the necessary long term strategies to protect their market position. The entry of Komatsu within the U.S. market caught Caterpillar by surprise. The company's failure to have a strategic architecture in place forced them to utilized denominator management tactics to cut their losses. Schaefer's restructuring of the company and its rebuilding towards competitive goals changed the corporate culture resulting a management team more responsive to the customer.
The company created three programs targeted at improving hourly employee relations. The biggest asset was the workers, and the consensus that they were not being heard or appreciated. The Employee Satisfaction Program (ESP) strived at improving the work environment, product quality, costs, and job satisfaction (Bartlett & Ehrlich, 1989). The group answered the challenge to reduce production costs and save jobs in the manufacture of connecting rods. There remained some reservations about the initiatives, and as a result only 25 percent of the workers were members of ESP teams (Bartlett & Ehrlich, 1989).
The history of significant layoffs and outsourcing of resources did not foster good relationships between employees and the management team. This top to bottom decision process sent a message that failure was not an option and suggestions would not be considered. This corporate culture set up a strong commitment to the hierarchical process. The management had failed to engage employees in the process of exploiting their capabilities and insights for competitive opportunities.
The Plant with a Future (PWAF) was the modernization program to convert plants to operate more efficiently and produce quality products. This initiative would have the potential to create future opportunity. The reengineering of the production areas would have significant cost savings for the company, but required new technical skills from the employees. There were still reservations from the workers concerning the many changes and their ability to adapt to them.
Business Environment. The failure of Caterpillar to recognize that the competitive environment was changing and they were losing their market position signaled the beginning of many changes. Schaefer recognized that the company's manufacturing was in need of reorganization. Due to the restructuring and closing of plants; the overseas production of small, less expensive parts, became an important strategy. They changed their traditional policy of manufacturing their own parts so they could control the quality and provide value to the customer; but discovered that many parts became more cost effective if out sourced, especially from global suppliers. The maximization of these global resources created a growth opportunity for the company and altered the strategic architecture of the distribution chain.
The preservation of Caterpillar's market share required changes in its pricing structure and marketing tactics. A flexible pricing policy was implemented in response to Komatsu entry of less expensive machinery. The discounting strategy shifted the management's focus to percent of industry sales (Bartlett & Ehrlich, 1989). The company adapted new policies that enabled it to enter previously closed markets in the Eastern bloc and developing nations. Caterpillar signed licensing agreements with several independent manufactures in other countries in an effort to maximize its global market access. These changes produced new channels for industry growth, and served as a marketing tool within the industry.
The establishment of The Caterpillar World Trading Corporation was designed to protect business through the marketing of its subsidiaries. The endorsement of the Caterpillar name allowed penetration into new markets. The Caterpillar Venture Capital Company's mission was to look for business opportunities from within or outside of the corporation. They looked for opportunities that would offer entrepreneurship options to supplement or expand core operations. This company was designed to spur the growth of new opportunities outside the stringent corporate operations of Caterpillar. The creation of these new business opportunities provided new marketing and advertizing channels having the potential to increase Caterpillar's leverage within the industry.
The implementation of the Business Strategy Conference (BSC) initiatives provided the strategic architecture of the company and marked the beginning of a new corporate code. This was the first time that management was forced to develop strategies that would direct the long term direction of the company. The project recommended initiatives that would exploit current core competencies. They provided links to the acquisition of new resources that would offer Caterpillar new growth opportunities. The investment in current employees' capabilities and their training of new technical processes supported the transformation to build corporate value. The focus on these competencies marked the end of denominator management, and the building of a corporate culture that could protect their competitive position within the industry.
The intent, heart, of the strategic architecture is what will capture the employees' attention of the plan (Hamel & Prahalad, 1994). The changing of a corporate code requires the companywide support from all the employees. The new strategic architecture initiatives are only attainable if there is full understanding by the workers. This requires a long term commitment to the business goals and a shared responsibility in the results. The company must empower the workers to be involved in the changing processes.
There were several new smaller machines introduced into the line in response to identified product gaps. This equipment offered dealers the opportunity to expand their customer base, and the company gained the technology it was lacking. The company developed alliances with other manufactures to further acquire competencies and increase its supply chain. These growth opportunities served to increase the company's market leverage.
Problem. The company has operated with a strong hierarchal management decision process. This has reinforced a corporate code that is inflexible to the changing earth moving industry. The company has just begun to develop a long term strategic architecture that will link competencies with customers. The strategic intent, or heart of the design, needs to be formulated and empowered by all employees for the future success of the company. This will require the management transformation of the corporate code.
Options. The first option would be to continue the transition of the company into a strategy focused corporation. This would include completing a strategic architecture and developing tactics to fulfill the BSC initiatives. The design of the architecture will provide the links between recourse and customers. The acquisition of the required competences and exploitation of current capabilities will enable the company to remain competitive within the market and retain its leverage.
The other option includes the development and implementation of the new architecture. The additional requirement is to formulate a strategic intent. The ability of a company to gain the support and dedication from all its employees will create an atmosphere of shared responsibilities. This strategic management process includes: devloping a winning goal, motivating the employees, allowing for worker or team contributions, and integrating intent into the operational changes (Hamel & Prahalad, 2005). The strategic intent will provide the employees a good reason for supporting the corporate transformation.
Recommendations. The recommendation is for Caterpillar to implement a strategic architecture and intent. The success of the long term design will be determined by the strategic intent of the entire process. The ability to gain the support and commitment of the company's biggest assets, the hourly employee, is important. The clear portrayal of the resource allocation and how it will impact the employees is necessary. The employees need to be offered challenges that will empower them to take a shared responsibility in the company outcomes. The management must motivate the employees by presenting clear communications, and producing a positive environment for their contributions. The spirit of winning is at the heart of this strategy and should be worthy of the employees' dedication. This companywide transition of change will serve to favorably alter the corporate code.