Return of the Cat

Volume 6 Letter 2

“Eyes that look are common. Eyes that see are rare.” – J. Oswald Sanders

Caterpillar tractor had delivered rock solid profits for nearly 60 years when suddenly the tracks fell off in the early 1980’s. Like the Detroit Auto manufactures, the heavy industrial equipment market was under attack from Asian competition. “Eat the Cat” was the battle cry of Komatsu, the Japanese heavy equipment manufacturer.

In 1982, after losing money for the first time in corporate history, Cat came back with a vengeance. It was at this point that CEO George Schaefer could have said his turnaround job was complete but he wasn’t so easily satisfied. He saw that the problems at Cat had deeper roots and he was determined to fix the core problems that plagued Caterpillar. To rebuild Cat’s strategy he formed a committee of bright minds – mostly gleaned from mid level managers who had no vested interest in the status quo.

Originally, Cat had a centralized organization meaning that every decision from pricing to manufacturing was made in the head office often by managers out of touch with the local market. They were too slow to react to market changes and no one seemed to be accountable to the customer or for bottom line results. Key findings included:

    • Missing or uncommunicated information meant that no one understood what the true product costs were for Cat or for their competitors’ products.


    • Incentives promoted the success of local or individual operations over the success of Caterpillar as a whole.


  • The central organizational structure of Caterpillar put too much importance on internal policies and procedures and not enough on the customer and the market place.

The conclusion of the team was that Caterpillar needed to be reorganized to be more market responsive and competitive. The CEO agreed that a structural change was needed and invited some key senior execs to the meetings to get their buy in. Their initial response was – “You can’t undo the entire structure of Cat”! But undo it they did.

On Jan 26, 1990, everything changed. Overnight, the bureaucratic centralized Caterpillar General Offices ceased to exist. In their place were business units that would be judged on product line profitability. Each product line could make its own marketing and manufacturing plans, pricing decisions and product design changes as they saw fit. But with this new autonomy came responsibility. Each product line division had to achieve a 15 percent or higher return on assets, if not, it could face elimination.

Cat decentralized all strategic decisions as far as possible down the organization so managers could solve their own business problems. They also instituted market based transfer pricing so that performance issues showed up in the underperforming business unit and not downstream. The result was that business units became bottom line accountable. Stronger product lines no longer subsidized weaker ones. Finally, Cat implemented a no business was sacred policy. Product lines that did not perform were sold.

A strategy that had served Caterpillar for 50 years clearly was not going to take them to the future so a new strategy was developed and implemented. The new strategy has Cat aligned with its customers and is proving very responsive to an ever changing market place. The Cat definitely is back, making loads of money and laying down cat tracks at constructions sites worldwide.

For the full story see:
1. Michel Robert, “The New Strategic Thinking”, McGraw Hill 2006
2. Gary L. Neilson and Bruce A. Pasternack “The Cat That Came Back” Booz Allen Strategy letter

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