During the two decades following WWII, Caterpillar management focused on an aggressive growth strategy aimed at anchoring its position as a leading producer of construction machinery on a global scale. This strategy was directed by four underlying policies. (Exhibit 1) Caterpillar’s goal in competing in a global market was to seek new markets and increase its revenues. High R&D and high capital intensity of Caterpillar’s business, and homogenous customer needs favored the adoption of an aggregation strategy. Caterpillar had recognized that due to its industry focus and worldwide product standardization policies, there were significant potential savings through economies of scale and scope to be exploited by international expansion. Caterpillar’s cost and quality advantage would allow it to enjoy a leading position in the new markets that it entered and prevent local firms from growing into potential competitors. Initially, Caterpillar adapted an export strategy to supply its foreign markets. However, high tariffs and shortage of foreign exchange during this period made it very difficult for Caterpillar to fully penetrate many international markets through this strategy. Starting in 1950, Caterpillar changed its market entry mode from one that only relied on exports from the US, to building wholly owned plants in its international target markets. In 1964, non-US plants accounted for 15% of Caterpillar’s production capacity. Caterpillar ensured to maintain direct ownership of wholesale marketing and warehousing activities in those markets. This would allow it to stay a tuned to customer needs, provide better customer service, and protect the reputation of its brand. In 1960 Caterpillar management decided to enter the Japanese construction machinery market, which was worth $300-$350 million. Caterpillar knew that a major presence in the Japanese market was essential to its pre-emptive market occupation policy. However, due to high tariffs and foreign exchange rationing it was almost impossible for Caterpillar to serve the Japanese market with US exports. This caused Caterpillar to have to produce its products in Japan. Caterpillar was not interested in licensing its technology to local producers. The inferior production quality of Japanese heavy machinery manufacturers caused Caterpillar to be fearful of negative effects on its brands and leakage of its intellectual property. Further, government regulations prevented Caterpillar from establishing a fully owned manufacturing facility in Japan. Caterpillar’s management recognized that the best plan of action to penetrate the Japanese market was to create a JV with a partner with “local know-how”. In 1962 Caterpillar established a joint venture with Shin Mitsubishi Heavy Industries (MHI) called Caterpillar Mitsubishi Ltd (CML). Through this JV arrangement, CML produced a range of Caterpillar branded products, which Caterpillar deemed suitable for the Japanese market. This control over the product mix was in line with Caterpillar’s industry focus strategy. Also, since the machinery produced by the JV used the same design and technology as any other Caterpillar product, Caterpillar’s goal of worldwide product standardization was satisfied. CML allowed Caterpillar to enter a market with huge potential. However, through the licensing of its products, the sharing of all patents and process improvements developed by CML, presence of 30-40 Caterpillar advisors at the CML factories, and training of JV staff in Caterpillar’s US facilities, Caterpillar provided MHI with the tools to develop into a world class competitor. This goes completely against the pre-emptive market occupation strategy adapted by Caterpillar management. Also, it is unclear if Caterpillar maintained direct ownership of wholesale marketing and regional warehousing activities. CML agreement seems to clash with Caterpillar’s direct market presence strategy. * This answer...
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