Alternative Solutions To Komatsu Case Study

Busy stuffing itself on orders, the company grew enormously, becoming the biggest and best at what it did. Its sales rose as high as $9.2 billion in 1981. Something like 35 percent of all the earthmovers and other heavy equipment sold in the world bear its name.

Cat very much became Peoria, too. Not only the town's major employer, it has much to say about who is elected as state and U.S. representatives. Its moves affect property values. When Cat takes a vacation in July, the stores in Peoria also close down. The company seemed untouchable - that is, until about five years ago.

THE PROBLEMS: In the 1980's, Cat became a company in eclipse. A dreadful recession engulfed the world, throttling every industry that Cat served. The collapse was severest abroad, especially in debt-ridden developing countries, which had been the source of almost 60 percent of Cat's business. Highways, dams, sewers - fewer were built, and the need for Caterpillar's products shrank, perhaps forever.

Not only that, but the dollar began a giddy rise against foreign currencies, giving a cost advantage to Cat's foreign rivals, especially Komatsu Ltd., and awakening their interest in the American marketplace.

Cat people have come to know Komatsu well. Started in 1921 as a one-shop maker of motors and mining equipment in the small town of Komatsu, Japan, it now occupies futuristic quarters in downtown Tokyo; a giant bulldozer perches on the roof.

The world's No. 2 construction equipment company, Komatsu has assiduously striven to emulate Cat. Benefiting from cheaper labor and other lower costs, and from the dollar's strength against the yen, it is nibbling steadily at Caterpillar's lead, and has already gained 10 percent to 15 percent of the $6 billion American market for bulldozers and loaders, compared with Caterpillar's 50 percent. Komatsu is expanding its market share even more rapidly abroad, and there are people who think the Japanese company may one day overtake its Peoria foe worldwide.

The American market has taken on enhanced importance for Caterpillar, since the loss of foreign sales means that some 58 percent of Cat's business is now rung up domestically, compared with about 40 percent a few years ago.

But Fiat-Allis, John Deere and International Harvester are also scrambling in the shrunken market, causing sharp price discounting. Cat, which always enjoyed a premium, has found itself forced to mark down its machinery so that it now often matches its rivals' prices.

''Everybody runs after Cat,'' remarks Robert L. Green, the president of Fiat-Allis North America. ''They're at the top of the pile.''

In 1982, dismayed by the darkening picture suggested by the worldwide economic malaise, Caterpillar asked for contract concessions from the United Auto Workers, the principal union for its hourly workers.

The union would not buckle and on Oct. 1, 1982, 20,400 U.A.W. members struck 18 of Caterpillar's 23 American facilities. Days, weeks, months passed. Six months later, with the pickets still marching, it entered the history books as the longest walkout ever against a major American corporation.

In April 1983, agreement came on a 37- month contract and, after 204 days, the pickets came down. A worn-out Cat backed down on many of its demands - such as a total wage freeze. But it won some pivotal ones. A number of work rules were rewritten to stimulate productivity and the pact dropped the traditional annual 3 percent wage increase that had been granted on top of cost- of-living sweeteners; instead wages will rise strictly in line the cost of living. The strike ended,but relations between workers and management were left sorely strained.

In the midst of the strike, and with its markets declining precipitously, Cat was stung in 1982 by a $180 million loss, its first deficit in 50 years. Sales plunged 29 percent to $6.47 billion.

The blood-letting continued. In 1983, Cat lost $345 million and sales sagged to $5.42 billion. A small spark of a profit appeared in the second quarter of last year, but for all of 1984, the deficit was $428 million on sales of $6.58 billion.

SOLUTIONS: Cat has been shrinking. Over the last few years, production has been curtailed, workweeks shortened, workers laid off, salaries trimmed, and more components bought from cheaper foreign suppliers. Cat buys bearings from Japan, for instance, and Daewoo Heavy Industries of South Korea makes some of its lift trucks. Cat's workforce, which stood at a peak of 89,924 in 1979, has shrunk to about 60,000. Of its 75 facilities, five in the United States and one in the United Kingdom are being closed. Stubbornly showing that it would make cuts everywhere, Cat even reduced the number of pages and pictures in its annual report.

To preserve its reputation, Cat has continued to invest heavily in new products. But in 1983, management began a cost-cutting drive that sought, by 1986, to have outlays down by 22 percent from the 1981 level - a savings of $2 billion annually. In 1983, 7 percent was chopped off, and 7 percent more in 1984. Revising its original intent, Cat is now shooting for the final 8 percent in 1985.

Last October, Cat slashed its quarterly dividend to 12.5 cents from 37.5 cents. It recently said that it is eliminating the cost-of- living allowance for salaried workers. This year, it intends to consolidate production of truck-type loaders that are now made in Davenport, Iowa, and in Glasgow, Scotland, at Glasgow. Operations are to be curtailed at its Joliet, Ill., bulldozer and scraper plant. Next year, it plans to start production of its D6 tractor in Grenoble, France, rather than in Davenport, as originally planned. It said it is studying consolidations at plants in Aurora, East Peoria and Mossville, Ill.

More workers get grim news almost monthly. Last October, Cat announced the layoff of 2,450 workers. In December, it said that 1,360 employes would shortly be laid off or take early retirement. And last week, Cat said that 1,400 more jobs may be lost at plants in Iowa and Illinois in the next few years.

Last Friday, George A. Schaefer started a new job, as the chairman and chief executive officer of Caterpillar. He replaces Lee L. Morgan, who reached the mandatory retirement age of 65. Mr. Schaefer is 56. He got a degree in commerce from St. Louis University and joined Caterpillar in 1951 as an accounting trainee. He cut his teeth in a number of auditing and accounting positions before ascending the managerial ladder. He is said to be convivial, interested in people and in listening to new ideas, but also unmistakably tough.

Mr. Schaefer inherits a fistful of problems and an uncertain future. What should the new boss do? How can he keep Cat at the top of the pile?

UNION LEADER: Tony Green is president of Local 974 of the United Auto Workers. Based in Peoria, the local represents 9,800, or more than half, of Cat's currently employed hourly workers. Mr. Green is on leave as a product assembler at Cat. His advice to Mr. Schaefer:

''The No. 1 thing I hope he takes a strong look at is to put some pressure on Reagan to try to bring the value of the dollar down. A second thing is, Lee Morgan had recently been leaning toward trade protectionism. That's something that Caterpillar has always been against. Now Lee was saying, 'Hey, maybe it's not such a bad thing after all.' I don't like to use the expression 'we told you so,' but we have been for this ever since the layoffs began.

''This can't go on. If every Tom, Dick and Harry can export into the United States and the value of the dollar remains high, then the future for Caterpillar isn't so bright. I'm not going to say that Lee hasn't paid attention to this, but he hasn't taken it to heart. I hope Schaefer takes a more militant attitude.''

Mr. Green also thinks that if more layoffs are needed they should be concentrated among white collar workers. ''The company likes to point at labor costs. But here in the Peoria area there are more white collar workers than blue collar workers. There's a very strong rumor that right after he takes over, there will be a 20 percent reduction in the white collar workforce. I hate to see any workers laid off, but we have taken the brunt of the effects of the cost-cutting measures. The ax has hit us pretty hard. Companies are like a pyramid. You have your ruler at the top and your workers at the bottom. Cat has turned that pyramid upside down. In the East Peoria plant we counted, I think, 42 areas where each foreman had only four or five workers. In the good old days of 1979, a foreman was responsible for 40-odd people.

''The thing I don't want to see is more blue collar layoffs - because I know people who already have to walk 70 or 80 feet to get a piece part on an assembly line. That doesn't sound like much, but it is on one of those lines. Normally, when the assembly line was running good - with enough people - you'd have an area of only seven or eight feet one way or the other. . .

''I feel Cat will survive. Cat will come back. But Schaefer will have to make some tough decisions.''

THE PROFESSOR: Kathryn Harrigan, an associate professor of business at the Columbia University Graduate School of Business, has become an expert in declining industries. Having grown up on a Minnesota farm, the Caterpillar case naturally interests her. Her solution:

''Form a joint venture with Komatsu! I'm not kidding. What choices does a company in this position have? Komatsu is one company that must be giving Caterpillar a fit.

''There's too much capacity in the world. The normal reaction to too much capacity is somebody's got to bite the dust. Now, International Harvester is a logical candidate to bite the dust, but they've just got picked up by a sugar daddy, haven't they?'' Harvester recently sold its money-losing farm equipment business to Tenneco Inc.

''What I'm suggesting, unfortunately, is a continued downsizing of the company. If he's got to have a big company, then he'd better go look for something else to run, because the outlook just isn't very good for the construction equipment industry. He's got to adapt himself to the idea that it's got to be a smaller company. Not that it can't be just as profitable. But he has got to get over the idea of Caterpillar being a big company that will grow and grow and grow.

''How do you do it? I guess you could get some factory automation going, but it's probably cheaper to just take the plants and put them overseas someplace . . . You have to get into countries where the workers will bend your metal for you cheaper.''

She went on: ''I guess another alternative he has is to buy other companies' excess capacity.''

And do what with it?

''Pulverize it. Smash it and sell it to a scrap dealer. If people won't shut down capacity, someone can buy it. Knock off some plants.

''That's not happy news, but then I didn't say I was looking for friends.''

MARKET RESEARCHER: Frank Manfredi is president of his own market research company, Manfredi & Associates, in Los Altos, Calif. Its specialty is construction and mining machinery. For 10 years, Mr. Manfredi has had his eye on Caterpillar.

''I think over all the company is pretty much on the course that it intends to follow for the next couple of years - being very aggressive in the introduction of new products and upgrading the existing products. I think they've got to manufacture more and more of their products offshore. In fact, they have many of their American suppliers scared to death about it. My guess is that of their domestic products, 35 to 40 percent of the parts are built offshore now. It used to be 90 percent domestic sourcing. I think in the next three years that may drop to 20 percent. I think that's good for the company. I have my doubts whether that's good for the country.''

The strong dollar presents some unique problems, Mr. Manfredi said. ''A domestic Cat dealer can buy a hydraulic excavator from a European Caterpillar dealer or broker for 15 to 25 percent cheaper than he can from Caterpillar here. And so he's doing it. Cat gets the business, but it's not as profitable for the company when translated into dollars. In the last six months, it's become a problem of epidemic proportions. Schaefer needs to crack down on this.''

In fact, ''he's going to have to truly look at the business as a global business. . .He should be looking to other sourcing points - most likely Korea and Malaysia as the next major ones for, say, five years from now. I think even the Japanese are going to become disenchanted with the machinery business. There's so much production in Japan that they're all battling each other.''

Cat's president, Robert Gilmore, reaches retirement age in May. Mr. Manfredi thinks that Cat should search outside the company for a successor. ''If I had to say what one thing Schaefer could do to change Caterpillar's direction, I'd say hire a president from the outside and give him free rein to change the character of the company - and that includes being more aggressive with product planning and the dealers.''

SECURITIES ANALYST: John McGinty is an analyst at the First Boston Corporation. He has studied Caterpillar for 14 years.

''In my view Caterpillar is doing exactly what it is able to do - which is to spend heavily on new products. The bulk of the growth for Caterpillar over the last decade has come from new products, like the hydraulic excavator - and it must continue to spend on new products. This is crucial.

''The other aspect, which is equally crucial, is the cost-cutting program. The stronger the dollar is versus the yen, the worse Caterpillar's competitive position is going to be. There's nothing George Schaefer can do about that. Caterpillar is a victim of a unique economic cycle. It's domestically led and nothing's happening overseas. Everyone went into a recession. Normally, the U.S. would recover and the other countries would follow. Not this time. The U.S. has strengthened and Europe hasn't.

''My feeling is that people make a mistake in saying that Caterpillar has messed up. . .They're losing money because they're matching the competition's prices. They don't want inroads into the dealer network.''

He points out that Cat is still far and away the leader in its field, that it makes the best product, that the world will always need machines to move earth. ''Longer term, I think they're in fantastic shape. I expect them to make money for this year.''

CUSTOMER: Bill Murphy is the superintendent of equipment for Great Lakes Construction, which is based in Cleveland and builds highways, puts up dams, constructs power plants. To do the heavy work, it owns more than 50 Cat machines - scrapers, bulldozers, front-end loaders, graders, backhoes.

''I can say as a customer that they have probably had one of the best products going and one of the best parts back-up, so to improve on that, I don't see what they can do.''

Still, he thinks the dealers' attitude is not what it could and should be, that getting parts to a customer within 48 hours is not by itself enough. Sales used to just naturally come to Cat, and dealers were often content to be order-takers rather than salesmen.

''They've got people who have too much of a laid-back attitude. They don't approach business as the first thing in their life when they're at work. They are slow in reacting.

''They might be more aggressive. I suppose you might say that that starts with top management. . . What they have to do is get their dealer organization - how would you say it - more tightly wrapped, more responsive to their customer needs. Whenever you have a problem and call them, you should get an instant reaction, because no one's problem is more important than yours.''

But instead of action, customers hear excuses. ''They'll say, well, the computer is down, or we didn't get a chance to get it on the computer. They have to pump up the people in the organization.''

WORKER: George Cornwell runs a lathe at Cat's Mossville, Ill., plant. He makes gear blanks for truck and tractor engines. He works the third shift, stretching from 11:18 P.M. to 7:18 A.M. Now 31, he has spent the last 12 years of his life in a Cat factory.

''One of the major things I think he's got to do is some sort of gains for our people and stop taking all the jobs from our people and doing outsourcing and giving the jobs overseas.''

He feels that productivity gains are not exactly appreciated by Cat's management. ''They came to us once with a study that said our rods were costing $18 to make per piece. They asked us to get the price down to $9, the same as our competition, or we would lose the product. We did it. We took no pay cut and we brought the price down. They rebuilt the machinery on the line and we, as the hourly workers, went out and turned out double the production. But they still laid off our people.''

He continued: ''There's no communication to the ranks. We learn about things from reading about them in the paper or from rumor. Most of the rumors unfortunately are true. I'd say morale is bad. One guy out there, I asked him how he felt about something and he said 'feelings, I don't have any feelings anymore.' We don't know from one day to the next if we're going to have a job.

''If morale were better, it would be easier for the company to turn around. Our people could bring the price of things down. But Cat won't give us the chance. They want to take things out of the country. There are layoffs almost every month.''

Then he said: ''I think Lee Iacocca did the right thing when he went into Chrysler and took out all the overhead. Maybe that's what should be done at Cat.''

And: ''We hear Schaefer's an accountant. Accountants go out and make a budget and say stick to it. If he does that, I don't think it will benefit us one bit. He needs to be realistic and come see what's happening.

''We've always been the guys in the trenches. I think he needs to come down to the trenches and see what it's like. Walking around one day won't cut it.''

In his spare time, Mr. Cornwell is studying to be a firefighter. ''I figure if they're going to throw me out the door, I want to be able to do something else. I want to have a future. If I'm not going to be at Cat, I'll fight fires. I'll go fight fires.'' $

Continue reading the main story
Correction:

Sunday, Late City Final Edition A photograph that appeared with the article about the Caterpillar Corporation last Sunday was printed in error. It showed Len Kuchan, treasurer of the company, rather than George A. Schaefer, the president. Photos of the men appear below.T

 

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successful or unsuccessful. These cases typically do not include an obvious singleproblem or decision. Instead, the student must look at all that is relevant, good, bad or in-between and those outcomes must be evaluated to provide a clear assessment.

2.

Learning from Case AnalysisFrom the events

of a case, students can derive general principles, ideas, and theories.Sometimes these are famous frameworks, such as Porter's theory of generic strategies,Williamson's transaction cost theory, or the general principles of revenue recognition. Derivingor discovering a framework inductively from a real case helps you remember it and apply it toother business situations. That's because you've seen why it's needed, how to use it, and what itslimits are.

The role of the instructor

in a case-based class is to guide students through this discoveryprocess, to ask penetrating questions that refine and improve students' understanding, and toclarify the applicability of general concepts to other business settings.

3.

What might you be expected to do with a case?Discuss it.

Harvard professor David Garvin, an expert case teacher and writer, sometimes says,"A case is a literary form intended to be discussed." A case does not fully achieve its purposeuntil students talk about it, just as the script of a play realizes its purpose when performed onstage. You should come to class prepared to discuss a case-specifically, to say what you think thedecision should be, to articulate how the problem ought to be solved, and to defend your solutionthoroughly, insightfully, and persuasively using data from the case.

Write a report or essay about it.

The process of arriving at your recommendations for an examor a paper is similar to how you prepare to discuss a case in class. However, you have theadditional challenge of explaining your logic in written form, often within a limited number of pages or words. This limitation is especially pertinent on an exam.

Create a presentation.

The analysis you'll do for a presentation will be similar to how youprepare for a discussion, exam, or paper on a case. The difference is the need to createpresentation materials to help you explain your analysis and recommendations to a live audience.In short, you are the leader not merely a participant.

4.

Assignment QuestionsAssignment questions

are a good place to begin a case analysis. Usually your instructor willsupply these, but occasionally they are included within a case, typically at the end.

Some professors

provide many detailed assignment questions; others offer relatively few orless-detailed ones. Assignment questions and questions that come up in a class discussion usuallydon't match up precisely. In general, assignment questions require a deeper exploration of the

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