Case Study Catapillar

Topics: Decision making, Strategic management, Corporation Pages: 9 (1789 words) Published: May 21, 2014


A case study of Caterpillar and it’s response to bad business decisions

Management of all companies are faced with a rapidly changing business environment and unexpected events. Companies that have been dominant in their industries can see their fortunes turn for reasons of their own making or reasons totally out of their control. If a company fails due to reasons out of their control history may judge them as victims. If a company fails due to their own bad decision history will judge them as fools. Critical and strategic decisions must be well thought out. Often the results of a bad decision manifests itself sometime after the decision has been made. Caterpillar Inc. found itself in just such a position in the 1980’s. Caterpillar has a long history of being the leader in their industry. The company has been manufacturing heavy industrial equipment since the early 1900’s. Since 1905 Caterpillar products have been involved in many major construction projects around the world. Caterpillar helped build the America that entered World War I and then its factories built many machines that help win the war. The worldwide demand for Caterpillar products kept its factories building even during the Great Depression. “In 1929 Caterpillar sold The Soviet Grain Trust 1,300 Caterpillar tractors and 750 Holt Caterpillar combined harvesters for use on its large farm cooperatives.”(1) Caterpillar is one of the first American companies to look to be a global player. During and after World War II the company continued to grow and find more international markets for its products. The company was profitable and the market leader up to the late 1970’s and early 1980’s. Caterpillar faced a different global economic environment in the 1980’s. “Between 1980 and 1985, as Caterpillar slid into an uncompetitive position against its toughest competitor, Komatsu (Japanese Corporation), the dollar appreciated by about 50 percent against the Japanese yen, deutsche mark and the British pound.”(2) This made Caterpillar products more expensive in the global marketplace. In 1982 the company lost $180 million, in 1983 the company lost $345 million and $428 million in 1984. Caterpillar was in serious trouble. There were many inside the company and on Wall street that suggested Caterpillar was on a path to Bankruptcy. At this time many similarly large companies had failed, “International Harvester, Allis-Chalmers, Bethlehem Steel, LTV, Polaroid and Owens Corning were some of the companies that would fall by the wayside via bankruptcies or forced restructuring.”(2) The current company management was reaping the pain of bad business decisions made by its prior management teams. What were these bad decisions? The company was faced with major issues of decision rights, information flow and incentives. Caterpillar’s previous management had structured the company in “silos”. The organization was set up “on a hierarchical, functional basis.”(3) Each function had its own division, i.e. Manufacturing Division, Engineering Division. These silos created a multitude of issues in regards to decision rights. This was the antithesis of a flat organization. “It might be necessary for a lower-level manager in the field to obtain approvals from as many as a half dozen upper-level managers, including someone at the GO (General Office).”(3) Caterpillar had developed into a giant bureaucracy. The GO’s at the head of the silos did not communicate well which also led to major miscommunication or no communication at all. In this corporate structure the “incentives to innovate were largely absent, and there was no internal transfer pricing mechanism that encouraged managers to use the company’s limited resources wisely.”(4) The business decisions to run Caterpillar in this way may have worked in an earlier time, but in the highly competitive times of the 1980’s it was not effective and it was the main reason Caterpillar was losing market share and was...

Bibliography: (1) http://www.caterpillar.com/en/company/history.html
(2) p.27,The Caterpillar Way, Bouchard and Koch, McGraw-Hill, 2014
(3) p.24, The Caterpillar Way, Bouchard and Koch, McGraw-Hill, 2014
(4) p.31, The Caterpillar Way, Bouchard and Koch, McGraw-Hill, 2014
(5) The Secrets to Successful Strategy Execution, Gary L. Neilson, Karla L. Martin, and Elizabeth Powers, Harvard Business Press, 2008
(6) p.32, The Caterpillar Way, Bouchard and Koch, McGraw-Hill, 2014
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