As we have noted many times in this book, Caterpillar owes such impressive success to its ability to scale its own operations worldwide, create profit centers at the business unit level and a unique dealer network, undertake a series of well-designed acquisitions of other companies in growth industries and skillfully plan for tough times. As such, however, these factors are unremarkable and cannot serve as a concrete guide for those who would like to build another great firm. In addition to the choice of general directions, many specific strategic decisions were made that went a long way toward creating a gap between Caterpillar and similarly positioned firms.
The five most important strategic decisions made by Caterpillar in the preceding decades included (1) a judicious choice of products and manufacturing locations; (2) an emphasis on appointing executives from among its own employees, especially at the level of group company presidents and chairman/CEO; (3) creating a Caterpillar Financial structure; (4) implementing a “Southern strategy,” as the practice of locating CAT facilities within the United States is commonly called-though the term is not used or endorsed by the co.
Over the past twenty years (and the closer to today, the more pronounced the trend), Caterpillar has implemented an advanced program of acquiring firms that it believes meet three criteria: (1) the firms it acquires are closely tied to CAT’s core businesses; (2) they help the company gain significant market share; and (3) they begin generating profit as quickly as possible. In terms of profitability, the threshold rate of return acceptable to CAT is typically 17% before taxes (Thompson, 2018). Investments that do not guarantee this expected rate of return are usually rejected.
In 2017-2018 alone Caterpillar made eight significant acquisitions, including Electro-Motive Diesel (EMD) and Germany’s MWM, a maker of clean engines and power supplies. Its investments in 2011 culminated in the takeover of Bucyrus, a respected mining equipment manufacturer (Nomin, 2022). This allowed Caterpillar customers to have all their mining equipment purchases – for both surface and underground mining – in one place. Later, in 2019, CAT received formal approval from the Chinese government to take over ERA Mining Machinery. While some initially paled at the sums Caterpillar paid for its acquisitions (it spent $8.8 billion on Bucyrus, which probably isn’t worth that much today), the corporation has earned respect for the strategic nature of these acquisitions (Nomin, 2022). They allowed it to gain a profitable position in growing market segments (mining, locomotive building, clean engines, and power sources).
Union leaders are angry at Caterpillar’s increasingly apparent inclination to build small plants because they understand that this significantly reduces the influence of unions and workers while strengthening the company’s position (and not just at a particular plant). In addition, political and economic officials, who are trying their best to convince Caterpillar that it should build plants in their state, soon begin to look at the situation differently. In time they realize that it is much easier for the company to reduce production at a small plant or even close it down than in the case of a large plant that produces many different types of products and is probably a critical and irreplaceable link in Caterpillar’s overall production chain. Thus, non-small plants weaken the local and regional economic influence – both positive and negative – on Caterpillar. Great companies like Caterpillar value their flexibility. They do their best to avoid sole-source dependence, union problems, unexpected weather conditions, local politicians who can be challenging to deal with, and any other factors that limit their choices.
References
Nomin, A. (2022). Caterpillar SWOT Analysis 2022. Pestleanalysis.com. Web.
Thompson, A. (2018). Caterpillar Inc. Vision, Mission, Intensive Strategy, Five Forces, SWOT. Panmore Institute. Web.