Caterpillars International Strategy

Caterpillar’s International Strategy

The domain of international business theory contains an overwhelming array of perspectives and dimensions. International business (IB) definitions and assumptions are as diverse and ambiguous as their sources. Approaches to IB have established the fundamental perspectives as being global or organisational, but the content of these areas are immense. The development of the global approach, or more correctly labelled as ‘macro’ (Rugman and Hodgetts 2000. pp. 24), has recently evolved in the 1990’s as a result of the mixed organisational orientated approaches, otherwise labelled as ‘micro’. This discussion takes the form of analysing Caterpillar in the international business arena by highlighting issues and theories that relate initially to the wider macro environment, then specifically towards Caterpillar as an organisation.

The selected definition of IB for the basis of this discussion has been taken from an opening statement. This being ‘transactions taking place across national boarders’ (Rugman and Hodgetts 2000 pp. 5). This simple statement is considered sufficient to incorporate its entirety, however the recognition of the multi dimensional perspectives and their interrelatedness needs to be comprehended. The aim of this discussion is to explain the international strategy of Caterpillar by using its context as a platform for applying relevant literature.

Caterpillar history

For clarity reasons it is considered necessary to offer a brief introduction to Caterpillar. They have been established in the construction equipment industry for over 75 years and recorded $20.45 billion turnover in 2001 (annual report 2001). Their main products are divided as machinery with 58% of sales, engines with 33%, and financial products with 9%. The mission statement of Caterpillar is to ‘be the global leader in customer value’; this clearly indicates the attention to a high quality of service as being their competitive edge. This service is integrated through a sophisticated network of 1840 locations across all six continents, of these; Caterpillar has foreign direct investment (FDI) in 255 locations. The corporate strategy for the future is to bolster their leadership in the market through initiatives labelled by Data monitor (2003) and the annual report (2001) as being ‘profitable growth, championing continuous quality improvement, aggressively reducing costs, and developing an integrated e-business’. In attempting to understand the reality of Caterpillar’s strategy, theories are applied to offer explanations behind the corporate publishing’s. 
The critical success factors associated with Caterpillar are primarily their h3 brand; this is then supported by network and service capabilities that represent reliability and consistency. Caterpillar is also renowned for product innovation; they have continually innovated which has contributed to the brand and reputation. The international market responds to positive brand vales because the nature of the industry requires trust and relationships.

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The macro factors present are unlimited in the current dynamic world but the important perspectives are structured as political, economic, technological and social. The elements of these perspectives are selected according to the importance for Caterpillar; therefore they are discussed in this context with reference to relevant literature.

The political climate is continuously being developed and negotiated amongst the nationalities that exercise power. The current instabilities are dominated by the differences in opinion over the Palestine conflict and the Iraqi situation. As Caterpillar is active across the globe, its operations would need to be sensitively applied so that the local governments are appreciated. The situation of Caterpillar is slightly precarious due to the fact that in political terms, the Americans are seen as the bullying nation, which is a mentality that ideally Caterpillar would like to distance themselves from. On the other hand, the American political objective may provide an opportunity as reconstruction and other Caterpillar products may experience an increase in demand as a result of the speculated war (eg. tank engines and construction products). This circumstance for Caterpillar represents a relation’s nightmare because in the home country it would need to communicate support in line with the public opinion, and in the host countries it may benefit from addressing the local perspective. E.g. the activities in China would be adjusted as to address the sensitive issues to ensure sustainability, rather than inhibiting ill feelings from enforcing the ‘American way’. Global political situations are important to Caterpillar because they could gain first mover advantage by moving into recently opened markets such as China.

The extent that a region is privatised or Lasses-faire is of interest to Caterpillar because it would aid the process of negotiating a relationship. It would be beneficial for Caterpillar to tailor management to either foreign governments or foreign organisations.

IB massively influences the macroeconomic environment. The recent conception is that IB is predominately concentrated around three regions rather than integrating the world. This can be seen through the development of trade blocs that encourages IB amongst its members. The most significant research into this economic environment highlights the triad perspective as being dominant. The triad perspective as explained by Rugman (2001) states that the world economy and FDI is based around Europe, America and Japan, this also extends to FDI clusters, namely Eastern Europe, Latin America and the Pacific rim, that are supported by the dominant triad member. The evolution of this economic environment has matured into a three way economic power base that contributes significantly to the adopted international strategy. The conclusions drawn from Rugman’s (2001) research appear to dismiss the argument of a global strategy because an organisation like Caterpillar would only have to accommodate the triad perspectives as opposed to incorporating worldwide responsiveness.

The analysis of the macroeconomic environment also includes a consideration of the currency markets, and in particular the value of the US dollar against Caterpillars large foreign investments. Caterpillar’s largest FDI is in Japan; therefore the continual decline in the economy influenced the strategic decision to operate financially in the Japanese market instead of exposing themselves to exchange rate risk. In theoretical terms this strategic decision is known as ‘currency diversification’ (Rugman & Hogetts 2000 pp. 203). On the other hand Caterpillar has a favourable impact from the sales in other currencies, primarily trading with Euros and the Australian Dollar against the weaker US Dollar.

The macro social issues relevant to Caterpillar are identified as originating from the animosity felt by the east towards the west. These issues include the resistance of the east in adopting the ‘western way’, this then extends into the business sector where an international business strategy involves a high degree of managing through different social contexts. This is supported by Gesteland (1999 pp. 27) who demonstrates the concept of ‘deal first or relationship first’. A relevant example of this in terms of Caterpillar is highlighted by Peppas (2002. pp. 52), which suggests that ‘differences were found in terms of attitude towards a code of ethics’. Caterpillar places a heavy bias towards its ‘code of conduct’, but is this sufficient to address social issues in international business. At present these publications are not enough, as pointed out by Mokhiber and Weissman (2002 pp. 12). This opinion labelled Caterpillar as a ‘bad apple’ because its ‘D-9 bulldozer is used by Israeli military to carry out its programme of ‘home destruction’, this is directly inconsistent with the ‘code of conduct’ (2000 pp. 2) which states that it ‘uses our strength and resources to improve, and in some cases rebuild, the lives of our neighbours’.

Another important social issue involves the rate of investment into the developing world. The recent trend has been to transfer manufacturing to developing countries, which has stimulated construction and booming economies. This suggests that the international market place is dynamic and evolving, which should influence Caterpillar to adapt in emerging markets and control in mature ones. This idea is also interrelated with the triad perspective, it could be advised that Caterpillar enter the clusters with triad adapted strategies, then encourage segmented alterations in response to market conditions. With this idea incorporated within the strategy, it would combine the economies of scale benefits through behind the scenes standardisation, and benefit from local responsiveness by empowering each of the triad bases.

The technological environment is particularly significant for Caterpillar to consider. Not only does Caterpillar have to continually improve the current products but it would also be beneficial to innovate new products to overcome original construction problems. This is highlighting the need to be more advanced than the competition, when Caterpillar enters a market it must ensure that the product offerings are compatible with the geological and business needs. For example track driven vehicles are more appropriate than tyres for working on loose sand. Caterpillar must also undertake a broad view of technological developments in order to identify issues such as alternative power, through to advantages identified in the logistical operation. A recent technological innovation has been the Advanced Combustion Emission Reduction Technology (ACERT); in short this is a more environmentally friendly engine. Along with product development and product innovation, Caterpillar must also be aware of opportunities to diversify. The most recent example of this is where Caterpillar introduced financial products to encourage a struggling economy to buy Caterpillar products.

Caterpillar’s international strategy operates within an environment that is affected by the macro factors. These factors are recognised in a global context and are normally uncontrollable; therefore their management involves negotiations rather than influencing and controlling. The strategic decisions that affect the effectiveness of Caterpillar are mainly catered towards the micro level factors. Meaning the micro level factors are at work within wider macro issues. The discussion here extends to the most important micro factors that Caterpillar must consider when structuring their international strategy. The factors in brief are competition, structure and logistics, culture, and marketing. Each of these factors is discussed using relevant theories in the context of Caterpillar and its environment.

Competition within the construction equipment industry (CEI) can be described using the industry life cycle and the five forces analysis (Porter 1985). The CEI is arguably beginning to mature internationally because the competition has been shaken down to leave only 27 organisations that are considered major competitors across all product areas (Datamontior 2003 pp. 13). This information excludes the financial products because these are largely dependent on the machines and engines. Due to the maturing nature of the industry, it implies that the customers will be repeat customers as opposed to new. This increases the value of the relationship and importance of having a h3 brand. Caterpillar’s position is one of leadership through product quality and support servicing; this directly builds the good perception of Caterpillar in the minds of the customers.

The components of the five forces model (Porter 1985) illustrate the competitive environment of the CEI. The rivalry amongst existing firms reflects the increasingly internationalised nature of the market. The basis of competition is held in the ability to offer a broad range of equipment, and build confidence through meeting changing needs. The strategy employed by Caterpillar involves creating extra value by offering an extensive range with a supporting service that provides an excuse for premium prices. The main competitors for the heavy equipment market include Komatsu Ltd, Kubota Corporation and Mitsubishi Heavy Industries Ltd. These are the most powerful competitors whose strategy also includes creating value and charging premium prices. It is noted that two triad areas, namely Japan and the US, predominantly contest the makeup of this market. Although it is conceded that European competitors are significant in the industries architecture. To some extent, the internationalisation of the industry has provided a situation that can arguably be labelled as an oligopoly (Grant 2002 pp. 71), meaning there are a few organisations that are powerful enough to be deemed sustainable. Again this is more evidence that the industry is maturing, therefore influencing Caterpillars strategic decisions.

The other main product of Caterpillar is their engine. The main competitors within this industry are identified, amongst others, as Rolls Royce, Ford Motor Company and Hino Motors Ltd. These competitors are of similar size and employ a strategy of offering reliability and supporting services. However it is noted that Ford and Hino Motors do cut costs and charge cheaper prices, but they still maintain the view of being the leaders. Again the geographical base of these organisations supports the triad perspective introduced by Rugman (2001). The basis of competition is the development of quality in terms of reliability and consistency; it is also an advantageous position to offer a wide range in products. Caterpillar currently offers around twenty different kinds of engine (Caterpillar Product Line 2002), there are also many variances that can be offered within these product ranges. Caterpillar is also recognised for its detailed service; an example of this is that they had temporary power established at ground zero hours after the September 11 events.

Rugman (2001) demonstrates organisational structure theory as a series of alternative options. This approach offers a clear indication of strategies available, however it is implied that the alternatives are one-way avenues, when in fact a holistic view of organisational structure would include the facility of a hybrid approach. A significant limitation to Rugmans (2001) approach is that it failed to recognise the decision maker’s predisposition. Whether an organisation is categorised as either ethnocentric, polycentric, regiocentric, or geocentric (Pearlmutter 2001, Rugman 2001) would influence the extent to which it could execute a structure. Can a totally integrated transnational network structure be effective if extreme ethnocentric directors excessively control it? The majority Caterpillar’s board of directors are American, but the board’s predisposition is known only by evidence in the company’s structure. Caterpillars operations include a dealer network that is claimed to be an important competitive advantage, the dealer network comprises of relationships with local outlets totally integrated with private locations involving large amounts of FDI. This is arguably grouped as a ‘transnational network structure’, but it obviously operates to an extent with governance from the home country. To maximise efficiencies and quality of service then the structure may need to consider the triad perspective mentioned earlier. The strategy could involve different approaches relating to sensitivity, but also incorporate the logistical economies of scale and scope.

In addition to the ‘transnational network structure, Caterpillar is pursuing alliances, most recently with Ford. The aim for this partnership is to develop supply chain software based on their experience in the vehicle parts market. The American perspective dominates this strategic decision concerning the structure of Caterpillar; therefore if the alliance proves profitable then they are likely to integrate it universally. However this perspective may not be profitable in other cultures, which suggests that different locations are equipped to decide what to integrate and how.

Current research by Miller and O’Leary (2002) evaluated the performance of Caterpillar factories. The conclusions supported the argument of common manufacturing recommendations, these being the trend of computerisation, multi skilling, and the encouragement of an emergent approach. This new factory architecture represents the absence of control, this may be beneficial in the developed American labour market, but this would not be advisable in bureaucratic cultures such as the Chinese. Further American research is provided by Rao, Scheller-wolf, and Tayur (2000), here they intended to make recommendations for the development of a rapid response supply chain for the compact equipment. These recommendations included background theories such as the network theory, inventory theory and simulation theory, to reason their novel features like the ‘duel nodes of supply’, which is to benefit dealer replenishment and customer demand in terms of service speed. The point stressed from such articles is that they are only valid to the specific environment, in terms of structuring internationally then these issues would need to be addressed in each geographical location, and this would be unique in each case. Therefore the construction of an international structure is dependent on the location it chooses.

Internally Caterpillar has developed a universal approach of how to operate. They have labelled this 6 Sigma. ‘6 Sigma is about success – about being better than we’ve ever been. It’s about getting there faster’ (www.caterpillar.com/about), the fact that Caterpillar implement this universally suggests that there is an ethnocentric orientation towards the international management.

The micro factor of international culture is a consideration that involves negotiation in order for an organisation to be efficient. Organisational culture on the international stage can be viewed as an extension from the four primary attitudes outlined earlier (Perlmutter 2001, Rugman 2001), these attitudes govern the perceptions of how a company organises its activities. Rugman’s (2001) ideas outline the important issues of culture as being language, religion, values and attitudes, manners and customs, material elements, aesthetics, education and social institutions. Although the attitudes of the organisations decision makers are catered for, it is felt that this is the starting point when evaluating an international culture. The unconscious attitude of decision makers will directly affect the extent to which they can implement a strategy such as ‘polycentric’. For a pure international strategy, not only do the cultural differences need to be understood, but also the drivers that influence the culture. This opinion is supported by research undertaken by Gulbro and Herbig (1999), this conclusion states that ‘firms must be better prepared, must improve their knowledge of the other side and its culture’. This implies that cultural management is a process of negotiations rather than the encouragement of a ‘one best way’ approach. Gulbro and Herbig (1999) emphasised the need for organisations to learn from studies that show how different cultures are, therefore this would provide the resources to negotiate effectively the desired business activities. Research into Australian construction companies in Malaysia by McGrath-Champ and Carter (2001 pp. 20) found that ‘HR policies and corporate culture are used as marketing devices, not solely for management strategy’. The theory formed from this research highlighted the fact that IB in developing economies needs to provide better insights into the role of the domestic market. It is argued that international business ‘is not simply driven by cost or quality but the success the transactions it has within a host country’ (McGrath-Champ and Carter 2001 pp.). Caterpillar’s use of internal and external marketing attempts to communicate culturally consistent messages. Caterpillar regularly produces documents and articles such as the ‘code of conduct’, ‘corporate support programs’, a magazine, and network and product information. This is evidence that Caterpillar attempts to interact with stakeholders such as the communities, customers, dealers and employees.

Another suggestion that Caterpillar manages culture effectively is the resolution of the six-year strike with the United Auto Workers (UAW). However it must be highlighted that it wasn’t effective management that created the dispute, or dragged it along for six years, but since its settlement Caterpillar has recorded increasing profits year on year. However an argued reason for this maybe the weak dollar and h3 growth abroad, therefore these markets are in earlier in their life cycles which would suggests that problems may arise in the future. Hopefully experience shall instruct Caterpillar to observe the problems at an early stage. Ba Banutu-Gomez (2002) provides an indication of how to manage culture in developing countries. His recommendation implies that the management of international culture ‘requires a h3 commitment to a high standard of conduct. Managing in this kind of situation requires being able to design and implement a bottom up system, which involves a two-way exchange’. (Ba Banutu-Gomez 2002 pp.39).

Similar to Rugmans (2001) highlighted issues; Hofstede (1991) identified four dimensions of work related cultural differences, namely ‘power distance, uncertainty avoidance, individualismcollectivism, and masculinityfemininity’. This research is an extensive piece based on questionnaires; it provides validity in terms of its thoroughness and its aim is to ‘help managers to identify how to create global competitiveness from diversity’ (Hoeklin 1994).

Caterpillar’s cultural situation involves the problematic issue of combining the culturally diverse network into an efficient information sharing system. The documentation to signify cultural attention is at a thin level; the vast majority of the corporate marketing is of a very directive nature. For example ‘we are placing renewed emphasis on becoming a continual learning organisation at Caterpillar, using 6 sigma as the way we work’ (Annual Report 2001 pp. 5). The 6 sigma itself is a continuous improvement programme designed by Americans to implement internationally, this obviously does not recognise the needs to negotiate and exchange for maximum productivity and innovation, instead of enforcing a single way.

The microenvironment involving marketing tactics is fairly consistent throughout its international markets. The products that are offered are broadly the same apart from simple language adaptations and alike. The important international marketing issue is the content of the supporting service; this would need to communicate in a way that is consistent with local perceptions. The constant problem for Caterpillar is learning what to communicate and where, therefore it is obvious that it should adopt a ‘polycentric’ approach as identified earlier. For implementing such a strategy techniques such as Yip and Masden’s (1996) ‘Global account management’ have been proclaimed. Benefits associated with this technique include:

• Establishing links across regions that carry over time to build institutional relationships
• Good service leading to reputable benefits that can be transferred to new strategic regions or industries. (Yip and Marsden 1996 pp. 38)

There is evidence of this within Caterpillars strategy because firstly, they produce ‘supplier communications guidelines’. This maybe against cultural theory but nevertheless they are an attempt to establish a link within regions. The strength of the Caterpillar brand has been utilised by extending it to products associated with the core brand values, such as heavy footwear, clothing and watches. This strategy is confirmed with Chernatory, Halliburton, Bernath (1995 pp.20), where their approach ‘argued that international branding should be based on the core essence of the brand, in terms of its added values and positioning’. However it must be recognised that the associated values may need to be refined when marketing in more sensitive markets.

With the product being largely standardised and economies of scale being utilised, then the marketing and servicing operations need only to appreciate the local values, instead of marketing a differentiated product. Caterpillar largely promotes a consistent message of reliability, expertise and value for money; these are the underlying assumptions that are connected to the Caterpillar brand. Internal marketing could involve more negotiations through understanding local cultures, although this may unconsciously happen it does not get promoted through the documentation.

In summary Caterpillars international strategy has evolved within a market environment that demands reliability and dynamic customer requirements. Therefore their international strategy is a unique response that matches the capabilities with customer demands. The current direction of the strategy is to ‘recalibrate our focus’ (Annual Report 2001 pp.2), meaning to concentrate on successful products and either retain or achieve leadership. Caterpillar does, and should continue to innovate in terms of products and logistics to maintain opportunities for leadership. The brand values provide a critical advantage in supporting the services because the interrelated nature of this allows prosperity. Caterpillars brand management and marketing internationally is effective in communicating the values, but it has been hinted here that the fundamental values may be ideal for the American market, but not necessarily maximising in foreign markets. Caterpillar’s logistical network involves vast amounts of investment of money and time; therefore it poses as a significant barrier to entry. The critical aspects of this network are the working relationships. Caterpillar manages these by documenting the ideal personality of a networked company. However, it is concluded that Caterpillar has ethnocentric characteristics, which may be inefficient by suppressing the domestic firms. The structural design of Caterpillar resembles that of a transnational network company, this network covers a large proportion of the globe, but the development of the structure extends from a triad perspective due to early investments in Japan and Europe. A criticism of this suggestion is that Caterpillar have sufficient power to influence networked companies, therefore it could be argued that there is evidence so suggest that it undertakes a global area structure. This is based on the opinion that they have a bureaucratic nature, which works against the network structure fundamentals.

The competitive forces of the environment, namely the need for reliability and support service, would suggest that the network structure is more appropriate. Caterpillar’s ability to develop and produce products is a major advantage, but to create total dominance of the construction industry, their logistical network would need continual maintenance. The resulting recommendation is to encourage an emergent approach that encourages communication and business development within the network.