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Chapter 1: DO You Suffer from Competitor ObsessionYou see them wherever you go, anywhere on earth. Where there's a road going through, a dam going up, a cellar hole being dug, they're thereCaterpillar's big (and now even small) yellow construction machines.
For the last 75 years, Caterpillar has worked to establish its global dominance of the construction equipment industry. Today it is one of the most consistently successful companies in the world, despite recent challenges posed by the "Asian flu." The success is largely due to its distinctive product-driven strategy, anchored by a worldwide network of Cat dealers-a unique capability, unmatched and probably unmatchable by any of its competitors. With sales of over $20 billion, Caterpillar stock is the perennial leader in the heavy equipment category.
But things weren't always this good.
Facing the Global Challenge
Twenty years ago, after six decades of uninterrupted growth, Cat had a close brush with death. The company had been charging ahead, doing battle in the marketplace with its traditional American competitors International Harvester and several others. And, as usual, Caterpillar was winning. Then, without much warning, new offshore competitors entered the fray-most importantly, Komatsu, a Japanese maker of construction equipment. The entire market was caught by surprise.
As CEO Glen Barton, who was president of the Solar Turbines division at the time, describes it, "We had been under strong attack by Japanese companies, particularly Komatsu, and had lost a lot of money over a three-year span of time as we tried to come out of a global recession and defend the market positions we had against theJapanese at that time. Komatsu specifically had set out a global challenge to encircle Caterpillar, and overcome us in all market areas."
As then-CEO George Schaeffer put it, "For years Caterpillar was a rocket. We could do no wrong. Then our business underwent profound changes. We had 60 years, all very successful, in which we built what we said customers wanted and needed. Then suddenly, the whole ball game had changed."
Don Fites who was Cat's president then, and who retired as CEO in 1999, remembers, "By the late 1980s, we'd experienced a decade without any real shareholder value being created. We were concerned about our Japanese competitors. When I joined the company, all our competitors were American companies. And they were all put out of business by the Japanese and Europeans, who are fierce competitors. Survival was a word we talked about around here."
Caterpillar, for the first time in its six-decade history, was in serious trouble. Competitors such as Allis-Chalmers and International Harvester were sinking fast, with Caterpillar not far behind. It was indeed a grim period in Cat's history. Never having faced this particular type of challenge before, Caterpillar management struggled to come up with a plan to deal with it.
"The game Komatsu was playing was to come into these markets with very low prices," Barton recalls. "By pricing the equipment at 25 to 30 percent lower than ours, Komatsu was inviting people to try its equipment, to use it as an alternative. We had price competition from other U.S. manufacturers at the time, but their price differentials were typically 15 to 20 percent, not the 25 to 30 percent we were seeing from Komatsu. Also, the Komatsu product brought a better level of durability and reliability than the other competitive products. And because of the weak yen, Komatsu could do this and still be profitable."
But Cat wasn't going down without a fight. It took every action it could to stave off the losses, buying time until it could come up with a turnaround strategy.
"A lot of people had written us off as they had many Rust Belt American companies," Barton remembers. "We went through a period of time in which we closed a lot of factories and tried to become a low-cost source, not necessarily to compete on price, but to make a profit on the prices at which we were already selling our products. We wanted to concentrate on selling value; we still do that today. We believed, and still do, that our products have more value than competitors' offerings. With the combination of performance, reliability, resale value of the product, and the ultimate life of the product, I think we retain that distinct advantage today. But in order to compete we had to sell our products at a price where we couldn't make any margin, and obviously we couldn't do that forever."
As Komatsu systematically went after Caterpillar's business outside the United States, Cat managed to hold its ground. It wasn't until the company began to feel the pressure on home turf that Cat was forced to find a new approach to running its business or follow its U.S. competitors into oblivion.
"Komatsu had been making inroads outside the United States, not much inside the United States," says Barton. "When it started taking us on in the home market, we bit the bullet and decided that we had to maintain our market position regardless of circumstances, until we could get our own house in order, which we then embarked upon doing."
Aim Abundance of Advice
Cat's management went about the task of seeking the best advice it could find among America's top business minds. As Barton recalls, "We went through a number of different consultants who worked with us. Among several others we had the top strategy consultant at the time, Michael Porter, and Noel Tichy, a facilitator who had worked with General Electric on its breakout process. At the same time, we were in the process of visiting other corporations to see what they had done and what guidance they could provide us."
Said former CEO George Schaeffer, "We were floundering despite help from the top consultants available. We had too much good advice."
By some turn of luck, Cat executives came across DPI's strategic thinking process, which was then a new methodology for strategy creation, one that would leverage their knowledge, not that of a consultant.
"We were looking for help on how to develop strategy and create a new organizational structure. Somewhere or other we came across Michel Robert's name and the DPI process and invited him down to make a presentation to our group. We were all impressed by the simplicity of his approach. Rather than spending two or three years getting the background material that a traditional strategy consultant like Michael Porter might have wanted before he was ready to move forward, the DPI process offered us a much more straightforward approach. It was one we'd feel comfortable working with and get faster results, which at that time was important," Barton states.
"I will always remember a comment Mike Robert made to us at a meeting early on, that 90 percent of what we needed to know to restructure our business was already in the heads of the people in that room. And, I think, if we contrasted that with Porter's approach, he would have said that less than 5 percent of what we needed to know was in the heads of our people in the company. The real number is probably somewhere in between, but Mike's point hit home with us." This basic concept of the DPI process struck a resonant chord with Caterpillar executives, many of whom had been with the company for 30 years or more. They believed, and continue to believe today, that no consultant could acquire the knowledge base or credibility necessary to tell a unique company like Caterpillar how to run its business.
The group also knew that because of the dire nature of its situation, action was needed immediately and getting involved in protracted consulting studies would only bog Caterpillar down. "The idea of going out and doing a lot of surveys of individual market segments and collecting a lot of information about customer groupings and logical fits of customer groupings didn't appeal to us at all. We'd already done some of that and it didn't work all that well," says Barton. "Some of these projects never end; they just keep rolling along and become bigger and bigger, and longer and longer, and more involved. I think we all welcomed and still appreciate the fact that there's a finite course that you go through with DPI. In the last ten years, we have used it many times and when we undertake the strategic thinking process we know that there's an end. When we get to the end, there are decisions we're going to make and directions we're going to take and move on from that." Hard Truths Emerge
During the first sessions on strategic thinking, some hard truths began to emerge. As Schaeffer said at the time, "Mike and his process helped us sort everything out. We knew that we were moving in a more orderly and focused fashion. We saw it all-businesses entered without commensurate expertise, misunderstood market shares, and so on. It was priceless. Noses got bent out of shape, but when noses get bent out of shape you generally get better decisions."
Says Barton, "The thing that impressed us as we moved through DPI's process with Mike Robert was the fact that, first off, he became an excellent facilitator for us...