How Corporate Restructuring Transformed Market and Productivity - Essay Example

How ‘corporate restructuring’ transformed market, productive and financial performance? Introduction The purpose of this research is to evaluate thedegree to which the corporate restructuring of Caterpillar Inc was influenced by market maturity. In view of that, discussion will be made regarding how corporate restructuring strategy transformed the market, productive and financial performance. It will be argued that obviously market maturity was majorly responsible for the company’s restructuring due to the increased level of competition as well as the necessity for bringing innovation in product that set forth the need to formulate an effective plan of action (Diamond and Rajan, 2001; Johnson, et al, 2000; Denis and McConnell, 2003). However it should also be noted that the excessively managed organization of the company was another reason that can be attributed to this chronic stage which led to the complete restructuring process (Denis and Kruse, 2000; Baek, Kang and Park, 2004; Bae, Kang and Kim, 2002). Given the fact that Caterpillar Inc realized consistent profits over the course of its operation, the internal issues that escalated within the organization itself were overlooked and the company started lagging behind in terms of gathering information regarding he external environment. Following this, Caterpillar Inc became completely out of touch from the market realities. Thereafter when the international economy came under recession, the flawed structure of the company was not able to mitigate the challenges of the external environment and consequently became an attractive target for many of its competitors. The arguments mentioned above will be set forth throughout the essay according to the following structure: In the beginning the insinuation of the market maturity for the company (Caterpillar Inc) will be determined through the Product Life Cycle theoretical framework. Thereafter, Michael Porter’s five forces analysis will be done in order to assess the level of competition that the company faces which might provide the researcher with a valuable insight about the forces that compelled the company to go through a complete restructuring phase. Following that an in-depth analysis of the company’s original structure will be conducted in order to develop an understanding of the internal problems that weakened the company’s opportunities to prosper. The restructuring process of the company will thereafter be studied in order to understand the impact of the process on the company’s performance in terms of market, production, finance and efficiency. Finally a generalized conclusion will be provided with the underlying objective of explaining how corporate restructuring transforms market, productive and financial performance. In addition, a conclusion will also be set forth that will highlight the fact that not only is a company’s restructuring process influenced by internal factors but external factors also play a pivotal role ensuring the same. Caterpillar Inc – Competitive Analysis Intensity of Competition – MODERATE As far as the international industry is concerned, Caterpillar Inc competes with a limited number of international rival companies. However, it has to be noted that, the intensity of the competition may amplify at any moment given the fact that the construction equipment manufacturers based in China such as Liugong Machinery and Sany Heavy Industries are expanding internationally and entering the global arena rapidly. Threat of New Entrants – LOW It is unlikely for relatively new entrants in the industry to achieve economies of scale and scope as well as winning orders like the way Caterpillar has achieved over the due course of the company’s lifetime. However, the scenario over here is same, where achieving the same is possible by construction equipment manufacturers based in China as has been witnessed over the last few years. Bargaining Power of Buyers – MODERATE Caterpillar Inc has a large global customer base that has sufficient buying power. However, the technology that is required in order to satisfy the demands can only be fulfilled by a limited number of heavy machinery manufacturers such as the company itself. Bargaining power of Suppliers – LOW The bargaining power of the suppliers is considerably low which is quite evident from the fact that Caterpillar Inc has cut its supplier base from 10,000 to less than 5,000 up until 2012. Threat of Substitute products – LOW The scale and type of products manufactured by Caterpillar requires state of the art technology. It is relatively difficult to develop such technologies and henceforth implement. Thus the threat of substitute products is considerably low. However, the application of manual labour in certain economies can be an option but that is no match to the efficiency level of Caterpillar Inc (The Ohio State University, 2012). The product life cycle theory The figure given below indicates that over time every new product follow an S-shaped curve. The products pass through number of phases of sales growth. At the initial stage, the novelty of the product will lead to slow growth rate and small sales volume (Kang, Lee and Na, 2004; Powers, 2005). The curve remains flat in this particular stage. If the product becomes a success in the market then it will immediately be followed by the growth stage and thereafter the sales curve drifts in the upward direction (Joh, 2003; Allayannis, Brown and Klapper, 2003). However, during the market saturation when the market maturity stage commences, no upward movement is detected in the sales curve. This is primarily because revenue at this stage is generated by selling products to existing customers rather than to new customers. This is the time when the product enters into the declining phase and is replaced b substitute products (Porter 2004). Figure 3: The product life cycle (Source: Conti, 2014) For the purpose of understanding the impact of restructuring process in the transformation of the market, productivity and financial performance, the most important factor to be taken into account is the movement of a product from the growth into the maturity phase. In this particular phase, extensive competition that focuses on attracting new customers is replaced by intensive competition that aims at delivering greater value for money to the customers. Thus, firms, in the mature market, compete with each other by improving the quality of the product, expanding their line of products and amalgamating their main products with different services (Yoo, 2010). According to Haslam, Neale and Johal (2000), a mature market can also be described as a cyclic\am market volume fluctuates according to a consistent pattern of demand. This affects the value added for sales which leads to cyclical movement of cash generation from surplus to deficit. The decline in the investment in the mature market of North America inflicted the first pain in Caterpillar Inc. The company was not able to surpass its previous sales rate as the demand for its products fell and the market became even more cyclical. The revenue generated by the company started to decline precisely because the market maturity was associated with the drastic reduction in the unit costs. This changing trend depicts the heightened difficulty that the company faced to cope up with the external environment as a result of market saturation. The recurring manufacturing mechanisms implemented in the industry were substantially affected by variations in sales volumes. The recovery of financial cost also became increasingly difficult as a result of diminishing product prices which was largely due to the fact that producing were offering their products at heavy discounts in order to survive in the competition (Froud, Haslam and Williams, 1998; Reich, 2010). Companies, in order to survive, started shifting their operations in regions where labour was available at a cheaper rate. Moreover, in the international market, the fulgurations in the exchange rate also impacted the profitability of the company when the value of dollar weakened. The revenue generated from exports decreased considerably. Thus, it can be said that, the competition following the market maturity stage developed to an international scale, as Caterpillar Inc came in front of unprecedented level of challenges facing competition from international organizations, especially from Japan based company, Komatsu. The need for a strategy The difficulties faced by Caterpillar Inc following market maturity set for the necessity for the company to expand its line of products and gain entry into relatively newer markets which would make it easier for them to attain actual growth and recover the financial cost. The threat posed by Komatsu highlighted an incentive for Caterpillar Inc to conduct a complete restructuring of the organization. The management realized that the strategy has to be formulated in such a way that it takes into account both the internal as well as external factors that may decrease the productivity of the organization (Pasternack and Nielson, 2005). Thus, the strategy must not only focus on the proper allocation of scant resources but also focus on pursuing better resource leverage that will ultimately enable to the company to overcome constraints related to resources (Prahalad and Hamel, 1994; La Porta, Lopez-de-Silanes and Shleifer, 2002). The following paragraph explains the restructuring process conducted in Caterpillar Inc and how it impacted the company’s productivity and financial performance and transformed the market. The restructuring process The management of Caterpillar Inc decided to defend the distribution system of the company by selling their products at a price that enabled them to generate small profits. Although it was cost-centric strategy but it failed to mitigate the negative factors that initially made the company slow and unresponsive. By doing a successful assessment of business environment, the management of Caterpillar Inc was able to realize that the competition is likely to increase which in turn will increase the pressure on the company (Pasternack and Nielson, 2005). Continuation of the current strategy will lead to inefficient productivity. In order to increase the profitability of the company, separate business units were formed which were supposed to be judged on the basis of divisional profitability. The units were bestowed with power and freedom so as to develop suitable manufacturing mechanism and schedules of their own and were also allowed to set prices on them. The performances of the units were judged on the basis ROA that they generated. Units which generated less than 15% ROA were eliminated. This suggests that the new model implemented by the company was centred on boosting the profitability (McKinley, et al, 2000). The implementation of the new model proved to be a huge success for the company generating significant profits over the last two decades. The revenues of Caterpillar Inc nearly tripled since 1992 and reached a value of $30.3 billion in the year 2004 (Pasternack and Nielson, 2005). The diversification strategy adopted by the company allowed it to maintain a stable financial performance even in the period of economic crunches. Caterpillar Inc started expanding its line of products and gained entry into relatively unexplored markets through various M&A deals (Cohen, 2001). The success of the restructuring strategy is also evident in drastic enhancement in the productivity achieved by the company. According to Grant (1991), the company has managed to implement and sustain its competitive strategy with such efficacy that it became almost inimitable. The company adopted a robust value chain strategy that enabled it to collect spare parts as well as distribute products and services to anywhere in the world within a time span of 24 hours. Additionally, Caterpillar Inc was also able to reduce its product development cycle to approximately 36 months (before the restructuring took place, it was 48 – 72 months) (Conti, 2014). Conclusion To conclude, it can be said that enhanced level of competition and declining demands leads to market maturity. It was noted that, organizations, at this stage, focus on ensuring the maintenance of product loyalty by improving their products rather than looking out for new clients. The underlying reason behind the effectiveness of market maturity in instigating the process of restructuring in Caterpillar Inc is the flawed internal structure of the company which was not able to adapt to any hostile external force. The study of the restructuring strategy that was implemented by the company revealed that the process led to significant improvement in the Caterpillar Inc’s financial performance. The foundation for this improvement was provided by a framework that augmented the responsiveness to the needs and demands of customers as well as to the global trends. This was largely possible due to the redeployment of the bureaucratic structure of the company that was highly decentralized and facilitated the movement of authority down the organizational hierarchy. Reference List Allayannis, G., Brown, G.W. and Klapper, L.F., 2003. Capital structure and financial risk: evidence from foreign debt use in East Asia. Journal of Finance, 58, pp. 2667-2709. Bae, K.H., Kang, J.K. and Kim, J.M., 2002. Tunneling or value added? Evidence from merger by Korean business groups. Journal of Finance, 57, pp. 2695-2740. Baek, J.S., Kang, J.K. and Park, K.S., 2004. 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