Corporate Restructuring in Caterpillar Company - Essay Example

Corporate Restructuring: A Case Study of Caterpillar Company and Corporate Restructuring-A case study of Caterpillar Company Introduction The ever changing dynamics in the market and the increasing consumer demands requires that any business, which has already carved a market niche, to keep up with the dynamism, otherwise, the chances for completely going down are very high. With these changes in customer demands, a business with poor management and slow adaptation to changing trends is most likely to find its skills and structure being less attuned with the high market demands and expectations (Ahstrom and Bruton, 2009). This is the point where corporate restructuring becomes paramount and inevitable, especially if the business products have existed for a long time in a market. At such a point, the effectiveness of a company’s old structure (original structure) has reduced to an extent of not being able to cater for the output and the larger interests (which includes the future interests) of the company. Corporate restructuring is where a company restructures or changes one or several of its aspects. It has been defined as changes in ownership, changes in assets or even alliances in a bid to improve and increase the shareholders wealth, meet consumer demands among others (Aden, 2014). The restructuring may be in form of divisions and departments combinations, production focus laying back, asset restructuring, employee scale back among others (Arocena, Blasquez and Grifell, 2011). This work shall analyse on how corporate restructuring transformed the market, the productive and the financial performance of a named company. The named company (case study) shall be Caterpillar, a public limited company which survived a harsh economic climate, thanks to corporate restructuring. In the first part of the work, the company shall be introduced and its main competitors analysed. The market it operates on currently and on which it operated on in the early 80’s shall also be discussed. Thereafter, there shall be a discussion on how Caterpillar embraced and applied corporate restructuring and analysis on how successful this was. Case study-Caterpillar The main aims of restructuring include creating a decentralised approach, increasing the level of responsiveness and expanding the customer focus for matured markets. There are many businesses that have adopted corporate restructuring in order to maximize their profits and their chances of survival. Caterpillar, a public limited company is one such company that has a successful experience with the adoption of corporate restructuring (Vartan, 1987). It specialises in three operational segments which are power systems, construction industries and resource industries, and not forgetting financial products and services. This company has been labeled as one which has a positive drive towards change all over the world, further echoed by its foundation statement “making sustainable progress possible in our communities” (Neilson and Pasternack, 2005). The company recorded revenue of about $56 billion in 2013, but the situation was not the same in the early 1980 and 1990’s (McClatchy, 2014). This company almost went out of business in the 1980’s, especially during the depression crisis. Established in 1925, the company had enjoyed a period of profitable marketing and increasing sales, commanding a high marketing segment as opposed to its major competitors. The main competitors then (and who still are) include Komatsu, John Deere, AB Volvo, Fordson Company among other giants in the machinery industry (Cat.Com, 2013); Singh, 2013). Why did Caterpillar need to restructure? Before it restructured, Caterpillar had become a constant disappointment to its shareholders and investors with its constant losses in the industry. Since its inception, all the way to the late 1970’s, Caterpillar was a force to reckon with (Vartan, 1987; Hamer and Prahald, 1995). It had gradually grown and increased its brand products, attracting an increasing revenue and a loyal customer base. However, during the 1980’s, this company had continuously recorded huge minimal growth and big losses, and this was made even worse by the recession that hit the market then. Its competitors did not make the war any simpler as they continued to sell their products, especially at huge discounts to keep the loyalty of customers (Pomerleano and Shaw, 2005). One of the reason as to why Caterpillar recorded the huge losses was due to its inadequate strategies to compete with other companies. According to Porter’s five forces model, in order for a company to win in the industry, it must consider five main forces that competitors can use to wage a competition war with it (Kowalschek, 2013). The five forces are as represented diagrammatically below. Figure 1: Porters Five Forces model The model is important for a business owner to understand and identify any threats, any opportunities and advantages that a business can take. In the Caterpillar case, there are two factors that the company had neglected; Competitive rivalry and product and technology development. Komatsu Company was very determined to outdo Caterpillar, and as a result of its strategies, it did not suffer as much as the Caterpillar Plc did. In the area of product technology and development, the management of Caterpillar Plc was not keen on acquiring information regarding the changes in trends and preferences (what the dealers and the end customers wanted), or in the distribution changes in the market (Dentchev and Heene, 2004; International Council.Com, 2013). Market maturity and cyclical nature Caterpillar, as earlier mentioned did not pay enough consideration to the market forces and the dynamic changes that were taking places. Another thing that Caterpillars management team failed to consider was the cyclical nature and the market maturity of the environment where it was operating from (Das and Basu, 2004). There are a few notable characteristics of a mature market. First, there is increased competition among rival companies, which means that a company must work harder than before to maintain its customers and to attract new customers. Secondly, there is usually a fall in demand, and this means that all the rival businesses have to compete for the available customers. In addition, in such a market, some products are usually at their decline stages, and unless restructuring is done, some companies may actually fall out of the market (Glatter, 2010; Donaldson, 1994). This was the case with Caterpillar Company. It had enjoyed long periods of profit market and it did not pay consideration to the need to restructure its organization or its ways of operation. The product life cycle theory best explains what happened to the Caterpillar products. All new products (according to Raymond Vernon who introduced the product life cycle theory) follows an S curve as shown in the diagram. Figure 2: Product life cycle In the introduction stage, the product novelty grows slowly thus results to low sales volume and hence the curve is not steep (relatively flat). The product is slow picking a pace in the market. The second phase is the growth stage which is determined by whether the product is able to survive the market pressures in the introductory stage. The pace accelerates and the product becomes more popular among a wider variety of customers, and the curve slowly slopes upward. In the third phase (maturity), the business (owner of the product) enjoys much profit from the product as the market slowly saturates. This phase is later followed by the decline stage where the revenue generated from the product is mainly from the sales made to the currently existing customers (no new customers buy the product) hence the curve starts to slope downwards (Neilson, Martin and Powers, 2008; Kowalschek, 2013). For Caterpillar Company, its products had successfully gone through the first three stages of growth and were in the decline stage. The only way that a company can beat the decline is by improving the quality of their products, adding other services to the existing ones and/or offering an expanded product range. Replacement rates are a crucial matter here (Arocena, Blazquez and Grifeel, 2011; Neilson, Martin and Powers, 2008). Indeed, at such a point, the market is mature and is thus cyclical, which means that the volume fluctuates at a steady pattern in demand, the sales added value adopt a cyclical nature and the generation of cash shifts from a surplus to a deficit. This is similar to almost all products including cars. For such a case (cars), the companies have to keep upgrade the quality of the products or even engage new after sales services to maintain their customer loyalty. Caterpillar, therefore, should have carried out sufficient research in order to survive the harsh climatic conditions. The runaway inflation and the depression, industrial overcapacity and the fact that the company did not stay in touch with the changes in domestic and international market realities did not make things less tough for the Caterpillar Company. The value of the dollar and the then exchange rates were also other factors that possibly led to the declining revenue (Donaldson, 1994; Filipello, 1999). Need for organizational restructuring Before the losses started hitting Caterpillar, the company was managed through General Offices, an area where the company greatly failed. Each General Office was responsible for different operational functions such as advertising, pricing, manufacturing among others. Metrics and/or motivators did not tie the general offices and thus they did not have overall and harmonized goals, or a common purpose as a company. In addition, the responsibility, accountability and transparency in the general offices were wanting, and as a result, Caterpillar’s ability to harmonize the profits did not exist (Pormelleano and Shaw, 2005; Truitt, 2006). This was because data from each general office was received and largely regarded as a company, and this was a very monstrous mistake. Furthermore, with this structure, the prices, rather than being market oriented, were cost oriented since there were no measures to measure regional accountability. At such, if the budget for the following year was higher than the current year, the company simply increased the prices of the products to recover the increased difference (Donaldson, 1994). The restructured Caterpillar With the above description of the unstructured caterpillar, it is evident that there was a lot to be done if Caterpillar was to survive (and evidently it has). The then CEO, George Schaefer took upon himself to restructure the company. Restructuring in the past, according to Gaughan (2012) took place in different forms such as merger and acquisition, buy-outs and buy-ins by the management, sell-offs, leveraged buy-outs among many other traditional forms. However, lately, other forms such as management incentives, downsizing and other forms are being adopted by major companies in restructuring. Caterpillar adopted the traditional methods which were widely used then, and which suit its needs for restructuring. To begin with, the CEO knew that he and the entire company needed to unlearn the past if they were to survive in the future. To begin with, he decided to shelter the distribution systems of his company by continuously selling the company’s products to the dealers at a price that allowed them to make a profit, albeit small, on their sales (Heugens and Schenk, 2004; Neilson and Pasternack, 2005). He further launched PWAF (Plan With A future), a cost eccentric step which cost the company an estimate of about $1.8 billion in manufacturing (Vartan, 1987). Having done this, the CEO knew that this would only attract more competition pressure and he had to scale up his actions for the company, and thus he further replaced the General offices. This was one of the redefining changes in the company’s history, and which definitely brought a round-about in the performance of the company. The new business units gave room for more accountability and transparency. This new units were allowed the freedom and the power to build up on their own manufacturing processes, set their own production schedules and even set their own selling prices (Hamer and Prahald, 1995; Glatter, 2010). The effectiveness and performance for these new units would be based on the Return on Assets, and all the units which had an ROA of less than 15% would be eliminated (Heugens and Schenk, 2004). To the CEO, this was a profit center, and he would stop at nothing to see his company rise again. In addition, about 15,700 employees were deployed from 1985-1992, just a short while after the restructuring (Filipello, 1999). This was evidence of the positive outcomes of corporate restructuring as expressed in the Economic Perspective Theory. The actions of the CEO can be summarized under the value chain analysis which follows three basic steps. They are activity analysis, value analysis and evaluation and planning. The CEO took time to study the past of the company and realized the change in actions and activities needed, analysed how the action would affect and increase the value of the products and finally evaluated his plans and how worthy it was (Truitt, 2006; Aden, 2014). Conclusion After the restructuring, the Caterpillar Company registered a revenue of $2.4 billion in 1992, a trend which has considerably grown to its present $56 billion revenue (Donaldson, 1994; McClatchy, 2014). By 1999, the company had entered into about 40 mergers and established markets in Latin America, Asia among other places (Vance, 2009Dentchev and Heene, 2004). Presently, this company has managed to manufacture and produce products that can match with the dealers and end customers wants. The teams’ empowerment has increased and the company can even afford to spend about $950 billion on research (Singh, 2013, Cat.Com, 2014). This is important for the company to keep at par with the changing trends and preferences. Its product development cycle has reduced as compared to the period before restructuring. The company remains a giant force for the competitors to reckon with. 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