Caterpillar Tractor Co. KIA Strategic Analysis

Introduction to the KIA Framework

This report is a case summary and Key Issues Analysis (KIA) of Caterpillar Tractor Co. The KIA is a strategy development tool that helps assess a company's competitive position and supports the creation of a winning organizational plan. The information is presented from a customer's perspective, and the gathered data helps determine where Caterpillar stands relative to its competitors in the eyes of its customers.

Present Situation: Caterpillar's Competitive Position

From a customer perspective, Caterpillar currently operates three main business lines: Machinery, Engines, and Financial Products. The Fortune 100 company is by far the world's number one manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. The company has at times been hampered by challenges related to international business conduct — including navigating accepted local practices and governmental policies — yet it still maintains a solid record of meeting international and local environmental regulations. Caterpillar is known for creative developmental and manufacturing solutions, for addressing customers' financial and environmental challenges, and for advocating free trade within the global construction industry.

The company has consistently generated attractive returns for its shareholders and maintains an extensive product line, with many offerings serving as industry leaders. Unlike much of the rest of the industry, Caterpillar is well funded in research and development and is recognized for creative manufacturing and the continuous enhancement of product features. One particularly strong aspect of its business is replacement parts, which generates as much revenue as the sale of original equipment.

Globalization has increased the prospect of competition in construction, mining, and other industry-related markets as economic activity migrates into lesser-developed regions of the world. The global market introduces intensified competition, new financial challenges, expanded operational requirements, and new investment considerations in developing countries. Caterpillar no longer views its competition as solely International Harvester, John Deere, or other U.S.-based manufacturers. Today, competitors include foreign governments as well as private companies. The global economy has also created new approaches to the purchasing, leasing, and maintenance of equipment. Advances in technology will continually drive demand for improvements in efficiency and fuel consumption. Additional trends include a growing shift toward leasing and rentals, as a middleman industry gains momentum at the expense of direct purchasing decisions made by individual construction operations.

Desired Situation: Adapting to the Global Economy

The company must develop a better understanding of global trends and become more effectively integrated into the new world economy. Caterpillar has been slow to embrace partnering as a foundation for product distribution. The company relies heavily on a centralized, "run the entire operation from Peoria" philosophy — an approach that cannot take full advantage of regional or local experience, governmental tax incentives, cost relief opportunities, or other locally generated benefits.

Caterpillar's customer base is evolving, and the company should make a more intensive effort to recognize and respond to that change. For example, the company currently distributes its products through dealerships, a model that is increasingly outdated and ill-suited to competing in a global economy. Other necessary adjustments include adopting a more modern just-in-time manufacturing philosophy and eliminating the forty-eight-hour parts replacement policy. Construction and mining operations today cannot afford extended delays, as they increasingly rely on just-in-time scheduling themselves.

Conclusion

This report presented a case summary and Key Issues Analysis of Caterpillar Tractor Co. The purpose was to use the KIA framework to help develop strategy, assess Caterpillar's competitive position, and identify a path toward a winning organizational approach. The KIA process is an effective tool for determining where Caterpillar Tractor stands from a customer's point of view relative to its competitors, and the findings point clearly toward the need for greater global integration, decentralized management, and modernized distribution practices.