The company was founded in April 1925. It was formed as a merger of two companies which are Holt Manufacturing Company and C.L. Best Tractor Company. By then, the company was named Caterpillar Tractor Company only to be renamed Caterpillar Inc. in 1986 after reorganizing itself to be a Delaware corporation (Caterpillar, n.p). When the company was founded, it was only manufacturing tractors, five types of tractors which are the 2ton, 5ton, 10ton, caterpillar30, and caterpillar50.
The company originally targeted the agricultural and building and construction markets. The tractors produced were to be used in agricultural activities, that is, plowing the land and also in building and constructing houses. These markets have changed where better tractors which are more efficient have been manufactured (Caterpillar, n.p). Competitors in these markets have also increased from the way they were when the company was founded. The building and construction market has needed tractors not only to be used when building but also to be used in demolishing houses.
The company has changed its strategies to keep up with the growing markets. It has done so by coming up with efficient machinery that has a competitive edge in the market. It has also targeted other markets to increase its revenue. The company also offers complementary products that are used along with the tractors (Caterpillar, n.p).
The mission statement of Caterpillar Inc. is ‘to enable economic growth through infrastructure and energy development, and to provide solutions that support communities and protect the planet’ (Caterpillar, n.p). This statement shows that the company is interested in economic growth which it will achieve through energy and infrastructure development. Supporting communities and protecting the environment is a part of the company’s corporate social responsibility and not its major business (King, Case, and Premo, Pg.71). Therefore the mission does not indicate the real goals of the company which makes the statement unclear. It omits the brands that the company invests in, and it also does not account for technological innovation and excellence which are an important aspect of the company.
The company operates in three main industries which deal with construction machinery, energy, and transportation machinery and mining and resource equipment (Magnini, Goldsberry, and Brennan, Pg.1). The GDP growth has increased steadily, and it is expected to continue rising. Due to this, the demand for heavy machinery has increased as customers feel confident that they can invest in long-term capital. Production is being affected because of changes in the cost of raw materials. The expected increase in federal taxes in the United States has seen the price of steel and aluminum to go up which are two metals used in the production process in the three industries (Rosenberger, Lynch, Diaz, and Pan, Pg.3). Technology development in the three industries has focused on automation. Automation has not yet been achieved but the company to achieve automation is expected to acquire a major competitive edge in the market.
The macro environment of the environment has been changing. Some changes that have occurred include the increase in federal taxes that have increased the cost of production. This, in turn, will affect the profits of the company due to the increased costs (Rosenberger, Lynch, Diaz, and Pan, Pg.3). Another issue is the trade agreement changes that will see the introduction of tariffs when exporting to some countries such as Canada and Mexico. The company will have to use the prices to offset the tariffs, and this will reduce the competitiveness of the products or opt to maintain the price which will, in turn, reduce the profits.
The threat of new entrants in the industry of heavy machinery is low. This is because of the amount of capital needed to start a company in this industry. Brand loyalty, patents, and technological levels also act as other barriers to entry in the industry. The threat of substitution is moderate. Companies in the industry differentiate their products so that they can offer unique services (Magnini, Goldsberry, and Brennan, Pg.7). The threat of substitution from new entrants is low due to the capital needed, but the threat of substitution from competitors is a concern for every firm in the industry.
The industry has suppliers that have low power. This is because the industry depends on a wide range of suppliers. Therefore it difficult for a single supplier to put pressure in the industry as for every supplier other suppliers are providing the same input. The competitive rivalry in the industry is high. There are few companies in the industry, but the competition is intense as the companies strive at having a larger market share (Magnini, Goldsberry, and Brennan, Pg.7). Buyers in the industry have limited power, and it is caused by the imbalance between the number of buyers and the companies in the industry.
From Porter’s model, it is evident that the industry is profitable and it would attract investors. However, the industry needs high amounts of capital to join. The model also shows that innovation creates a competitive edge for the company that has done it. The intense competitive rivalry means that innovation is important in the industry and this means that every company is striving to be innovative. Innovation can be detected using the ratio between the research and development expenses and sales. In the industry, Caterpillar is leading with a ratio of 11.39% followed by Volvo with 4.81% (Rosenberger, Lynch, Diaz, and Pan, Pg.6). This shows that Caterpillar is the best placed in the industry to attain competitive advantage through their research and development department.
There are five life cycle stages of a product. They are start-up, growth, shakeout stage, maturity, and decline. The competitiveness of the industry makes the lifecycle of a product to be short. For a firm to remain competitive, it has to be innovative and differentiate its products.
The major competitors of Caterpillar are Komatsu, Cummins Inc., Volvo, and Hitachi Ltd. The competition between these companies is high (Magnini, Goldsberry, and Brennan, Pg.6). The gross margins of the companies can be used to show the competition and performance of the companies. Caterpillar reported a gross margin of 28% in 2017, which was second after Komatsu that reported a margin of 28.65% (Rosenberger, Lynch, Diaz, and Pan, Pg.5). Also, the operating cash flow to sales ratio in the industry ranked Caterpillar second at a ratio of 12.54% in 2017 after Komatsu with a ratio of 14.21% (Rosenberger, Lynch, Diaz, and Pan, Pg.6). Komatsu acts as Caterpillar’s major competitor. The company has been doing well in the industry, and it is continuing with the same trend. The company is investing in research and development to come up with various innovations that will give it a better competitive edge in the market.
CATERPILLAR. About Caterpillar. 2018. Retrieved from: https://www.caterpillar.com/en/company.html
King, Darwin L., Carl J. Case, and Kathleen M. Premo. “Current mission statement emphasis: be ethical and go global.” Academy of Strategic Management Journal 9.2 (2010): 71.
Magnini Nick, Goldsberry Sam, and Brennan Ryan. “Caterpillar Inc. (NYSE. CAT)” Heavy Machinery. Krause Fund Research. (2017): 1-14
Rosenberger Daniel, Lynch Charlie, Diaz Steve, and Pan Delun. “Caterpillar Inc. (NYSE. CAT)” Industrials. Krause Fund Research. (2018): 1-15