Running head: Porter’s 5 Forces: Caterpillar Inc. 1
Porter’s 5 Forces: Caterpillar Inc.
Eric Risi
Courtney Fenwick
Carl Schachter
Brendan McCauley
Florida Atlantic University
Porter’s 5 Forces: Caterpillar Inc. 2
Table of Contents
Title Page ........................................................................................................................................1
Table of Contents ...........................................................................................................................2
Abstract ...........................................................................................................................................3
Threat of New Entrants: Low .......................................................................................................4
Investment Costs ..............................................................................................................................4
Economies of Scale Available to Existing Firms ............................................................................5
Regulatory and Legal Restrictions ...................................................................................................5
Product Differentiation ....................................................................................................................6
Access to Suppliers and Distribution Channels ...............................................................................6
Retaliation by Established Products.................................................................................................7
Bargaining Power of Suppliers: Low ...........................................................................................8
Uniqueness of Input Supplied ..........................................................................................................8
Number and Size of Firms Supplying the Resources ......................................................................9
Competition from Other Industries and Cost of Alternative Sources ..............................................9
Bargaining Power of Buyers: Low .............................................................................................10
Number of Customers and Their Order Size .................................................................................10
Number of Firms Supplying CAT Products ..................................................................................11
The Threat of Integrating Backwards ............................................................................................12
The Cost of Switching ...................................................................................................................12
Threat of Substitutes....................................................................................................................12
Degree of Competitive Rivalry: Moderate ................................................................................15
Number of Competitors in the Market ...........................................................................................15
Market Size and Growth Prospects ................................................................................................15
Product Differentiation and Brand Loyalty ...................................................................................18
Power of Buyers and the Availability of Substitutes .....................................................................19
Capacity Utilization .......................................................................................................................19
Cost Structure of the Industry ........................................................................................................21
Exit Barriers ...................................................................................................................................22
Going Forward ...............................................................................................................................22
Bibliography .................................................................................................................................25
Appendix .......................................................................................................................................27
Porter’s 5 Forces: Caterpillar Inc. 3
Abstract
This paper will examine Caterpillar Inc. (CAT) using Porter’s 5 Forces model as a guide.
The research will address the following areas of interest concerning Porter’s strategy when
assessing CAT’s place in its chosen industry and/or sector. Threat of New Entrants, Bargaining
Power of Suppliers, Bargaining Power of Buyers, Threat of Substitutes, and Degree of
Competitive Rivalry will be discussed in detail. CAT is large cap company tracked by the DJIA
index, operating in a mature and established industry. Having formed in 1925 when the C. L.
Best Tractor Company merged with Holt Manufacturing to form what is known today as CAT.
Since that time, CAT has become the industry leader in heavy industrial machinery
manufacturing. CAT has established a worldwide network for ancillary services such as
financing, parts, maintenance, and accessories.
Porter chose to focus on CAT in the 1980’s when he wrote his Five Generic Strategies
and outlined CAT’s success with product differentiation based on services surrounding the
product, instead of on the product itself. CAT has done this better than anyone else. With such
a mature industry within the U.S., CAT has sought out opportunities abroad in emerging markets
all over the globe and has been successful at penetrating every lucrative market it has found.
CAT faces many challenges in establishing itself in the South Pacific, India, China, and Africa.
The threat of new entrants into this mature industry is quite low due to the enormous costs
involved in establishing a global presence. Industry participation on CAT’s level requires years
of research, technology development, trial and error, and relationship building with suppliers and
customers to be competitive. Inversely, for an established company like CAT to exit the
industry, it would be financially devastating to the company and to any national economy in
which CAT operates. Concerning the heavy industrial machinery industry, CAT has three main
divisions within the company: construction and excavation, resources & mining, and engines &
power systems. CAT employs over one hundred thousand people worldwide and is a name
synonymous with quality, service, and support.
Porter’s 5 Forces: Caterpillar Inc. 4
THREAT OF NEW ENTRANTS: LOW
CAT has several large competitors in the heavy industrial equipment business. However,
the threat of new entrants is low. “Achieving scale and winning orders from global companies is
unlikely from a new entrant, though possible as being proven by some Chinese construction
equipment manufacturers” (Anderson, 2012)1. Though it may be possible for new companies to
enter the heavy equipment and engineering industry, there are numerous barriers to entry for
smaller companies. While the high capital requirement remains the biggest hurdle, other factors
include; absolute cost advantages, economies of scale, government policies, brand/product
differentiation, access to distribution/suppliers, expected retaliation from existing firms, patents
and proprietary knowledge, and switching costs. (*Reference Graph 1 in the Appendix.)
Investment Cost
The significant initial capital investment required to enter the heavy industrial equipment
and engineering industries are significant impediments to new entrants. The need to produce
cutting edge and environmentally friendly machinery requires “manufacturers of heavy
equipment to continue to invest large amounts of capital in technological advancements like
automation, fuel-efficiency, and enhanced mechanical precision” (Brauns et. al, 2013)2.
The chart below shows Caterpillar’s (CAT) operating costs for 2013, ranging in the
billions of dollars.
OPERATING COSTS (in millions): 2013:
Cost of goods sold ................................................................ 40,727
Selling, general and administrative expenses ....................... 5,547
Research and development expenses ................................... 2,046
Interest expense of Financial Products ................................. 727
Goodwill impairment charge ……………………………… —
Other operating (income) expenses ……………………….. 981
Total operating costs ............................................................ 50,028
1 Anderson, M. (2012, November 20). Caterpillar Inc. (CAT). . Retrieved July 12, 2014, from
http://fisher.osu.edu/supplements/10/9160/11.20.12%20Matthew%20Anderson%20Final%20Analyst%20Report%20-% 20Caterpillar%20Inc.pdf 2 Brauns, J., Cosse, S., Gao, J., & Russell, S. (2013, April 23). Caterpillar Inc. (NYSE: CAT). . Retrieved July 12, 2014, from
http://tippie.uiowa.edu/krause/spring2013/cat_s13.pdf
Porter’s 5 Forces: Caterpillar Inc. 5
Economies of Scale Available to Existing Firms
Large-scale infrastructure projects (i.e. mining, industrial, commercial, and residential
construction) requiring the use of heavy-equipment allow CAT to fully utilize economies of
scale. The magnitude of these projects has proven hard to reproduce by a new entrant from both
a time and cost efficiency standpoint. Over Caterpillar’s 80+ years in business, trial and error
have allowed the company to reach their Minimum Efficient Scale (MES). This is defined as
producing the least amount of a product while still taking advantage of the economy of scale on
their costs and supplies. Therefore, “the greater the difference between industry MES and entry
unit costs, the greater the barrier to entry. So industries with high MES deter entry of small, start-
up businesses” (Porter’s Five Forces, 2010)3. It is critical for CAT, “which generates some two-
thirds of its revenue outside of North America” (Munshi, 2013)4, to efficiently produce multiple
units to supply to various jobs at multiple sites.
Regulatory and Legal Restrictions
Government regulations focus heavily on environmental preservation. These include
legal restrictions on output emissions, energy consumption, and water management. As each
region varies in the amount of regulations enforced, “investments will depend on the local
Government coming out with a clear policy.” said Caterpillar India, China and Asian Country
Manager Kevin Thieneman (Caterpillar’s Concerns, 2011)5. In anticipation of such regulations,
CAT utilizes Environment, Health and Safety (EHS) Professionals to identify and mitigate such
risks.
CAT’s patents and proprietary knowledge have served as a key factor in keeping new
entrants out of the industry. “Only 20 to 30 percent of Caterpillar's worth is in the equipment
and factories that the company owns. The rest is intellectual capital” (Wiebusch, 2002)6. The
proprietary learning curve is huge for any company attempting to enter the industrial playing
field. Bill Berlinger, licensing manager for the Caterpillar corporate states that CAT has more
3 Porter's Five Forces: A Model For Industry Analysis. (2010, January 1). Porter's Five Forces. Retrieved July 12, 2014, from
http://www.quickmba.com/strategy/porter.shtml 4 Munshi, N. (2013, January 28). Caterpillar sees stronger China growth. . Retrieved July 12, 2014, from
http://search.proquest.com.ezproxy.fau.edu/docview/1282286776?pq-origsite=summon 5 Caterpillar's Concerns. (2001, January 1). . Retrieved July 12, 2014, from http://search.proquest.com.ezproxy.fau.edu/docview/837358715?pq-
origsite=summon 6 Wiebusch, B. (2002). Caterpillar opens its patent vaults. Design News, 57(11), 34. Retrieved from
http://ezproxy.fau.edu/login?url=http://search.proquest.com/docview/235261158?accountid=10902
Porter’s 5 Forces: Caterpillar Inc. 6
than seven thousand patents. He further relates that CAT identifies and correlates every business
relationship on the grounds of intellectual property. Licensing new technology will drastically
reduce the time and expense needed to launch new products. (Wiebusch, 2002)7
Product Differentiation
Caterpillar is one of the most recognizable names among its industrial and mining
equipment peer group. Through strong marketing efforts CAT has become a name synonymous
with quality and service, which significantly lowers the threat of new entrants. Marketing
campaigns have played a major role in increasing awareness of their company on a global scale.
This has generated larger market share, lowered employee turnover, and increased customer
retention. Campaigns put on by the company “focus on the ‘need to define for the world what
Caterpillar does,’ says Tim Elder director of corporate affairs. Executives want to showcase
achievements such as giving people access to clean water or providing electricity for Zambian
schools to counter perceptions of an uncreative, ‘rust belt’ company” (Arbel, 2006)8.
Access to Suppliers and Distribution Channels
Access to distribution and supply channels, along with geographical positioning, are key
factors in Caterpillars success. Consequently, if it is difficult for new entrants to gain access to
these channels, the threat of entry is much lower. CAT’s primary distribution channels are
independent dealers. Its dealers are all independently owned and uniformly provide added value
in the form of financial services, remanufacturing services, logistical services, and leasing and
rental services to the end customer according to Enterprise Strategy (Enterprise strategy, 2010)9.
This allows CAT to focus solely on each dealer, thereby increasing the value of each product and
service that is provided. Enterprise Strategy further states that CAT’s lifelong relationship with
some customers provides information critical to the company’s ability to sustain continuous
growth. CAT’s dealer network is more valuable than the company itself and provides a
competitive advantage for CAT’s products and services (Enterprise strategy, 2010)10.
7 (Wiebusch, 2002). 8 Arbel, T. (2006). Caterpillar. Sales and Marketing Management, 158(8), 17. Retrieved from
http://ezproxy.fau.edu/login?url=http://search.proquest.com/docview/211867189?accountid=10902 9 Enterprise Strategy. (2010, January 1). . Retrieved July 12, 2014, from http://library.corporate-
ir.net/library/92/924/92466/items/171600/Enterprise%20Strategy%20Booklet.pdf 10 (Enterprise Strategy, 2010)
Porter’s 5 Forces: Caterpillar Inc. 7
Through customer relationship management, CAT has been able to meet the needs of its
customers through expansion both horizontally and vertically. For example, Caterpillar provides
medium to high-speed diesel engines providing power for numerous types of vehicles such as
boats, trucks, ships, mining, and construction equipment. Enterprise states that CAT’s supply
chain is highly integrated and strategically positioned worldwide to provide value, flexibility,
and support unmatched by competitors. CAT has the lowest channel costs and best asset
utilization in the industry (Enterprise strategy, 2010)11.
Retaliation by Established Products
Should established competitors threaten Caterpillar, there are two options to retaliate.
The first option is price slashing on a temporary basis. This works due to economies of scale and
strong existing relationships. Secondly, a marketing campaign would be utilized to promote
their superior customer service and could prove to be extremely beneficial “as most products in
this industry are extremely capital intensive and require regular maintenance services over time”
(Brauns et. al, 2013)12.
For consumers switching from CAT, they must be willing to accept an extreme drop in
service and efficiency. Consumers may save on initial purchasing costs; however, they will lose
money in the long term from cost overruns due to repairs and maintenance. The advantages of
financing or renting used equipment must be considered. Caterpillar has achieved economies of
scale in production. They have enhanced their value proposition through an established
worldwide network of customer service and support. To replicate the same product value, the
initial cost of capital would be astronomically high, forcing new entrants to overcharge for the
same service. From a global industrial standpoint, “the weakening of the U.S. dollar makes
prices for Caterpillar products more attractive to overseas customers. The shift in exchange rates
gives Caterpillar an advantage over large, foreign-based competitors such as Komatsu”
(Caterpillar Inc., 2011)13.
11 (Enterprise Strategy, 2010) 12 Brauns, J., Cosse, S., Gao, J., & Russell, S. (2013, April 23). Caterpillar Inc. (NYSE: CAT). . Retrieved July 12, 2014, from
http://tippie.uiowa.edu/krause/spring2013/cat_s13.pdf 13 Caterpillar Inc. (2011, 01). Better Investing, 60, 20-22. Retrieved from
http://ezproxy.fau.edu/login?url=http://search.proquest.com/docview/822468237?accountid=10902
Porter’s 5 Forces: Caterpillar Inc. 8
Exit barriers in the Heavy Equipment and Engineering industry are proportionately
inverse in relationship to the extreme initial capital investment required to enter the heavy
industrial machinery business. Asset specificity, as Porter defines, is the extent to which the
firm's assets can be utilized to produce a different product (Porters Five Forces, 2010)14.
Caterpillar requires highly specialized technology, plants, and equipment. Potential entrants are
reluctant to commit to acquiring specialized assets that are highly illiquid if the venture were to
fail. As seen in graph 2 in the Appendix, the break-even point for capital investment is not
realized until long after the research and development stages. A large amount of capital is
needed to produce heavy-equipment industrial machinery. It is for this reason that Caterpillar
must remain highly competitive against current threats.
BARGAINING POWER OF SUPPLIERS: LOW
Caterpillar (CAT) is recognized as the leader in industrial equipment manufacturing. The
company is split into three industrial sectors: construction & excavation, resources & mining,
and engines & power systems. In order to spur equipment sales and rentals, CAT has also created
CAT Financial for consumer financing needs when dealing directly with suppliers. To continue
to be recognized as the global leader in its industry, CAT must focus on the functionality of its
supply chain and the continued development of supplier relations. CAT will be able to determine
exactly how much bargaining power the supplier based on examining factors such as; the
uniqueness of the input supplied, competition for supply input, and impacts of supplier size and
costs of switching to alternative sources.
Uniqueness of Input Supplied
Due to the ease of access to raw materials, CAT’s suppliers do not pose much risk
through attempts to increase their bargaining power. In the event of increased costs by a lone
supplier, CAT would have no issue finding a replacement. CAT’s supplier bargaining power is
relatively low as CAT produces its own equipment and parts. This allows the company to save a
substantial amount of money in the long term. This type of operation allows CAT to be both
vertically and horizontally integrated.
14 Porter's Five Forces: A Model For Industry Analysis. (2010, January 1). Porter's Five Forces. Retrieved July 12, 2014, from
http://www.quickmba.com/strategy/porter.shtml
Porter’s 5 Forces: Caterpillar Inc. 9
Another negative effect which impacts the supplier’s bargaining power is the reliance on
a high volume of product produced. CAT retails its products to dealers, which sell them to
construction and mining businesses. If dealer sales to mining and construction companies
decrease, CAT’s volume to their dealers will be reduced. When a producer like CAT threatens to
cut production volumes of equipment, the supplier’s potential profit is negatively affected as the
incentive to produce new lines of product will be decreased.
Number and Size of Firms Supplying the Resources
From a competitive standpoint, CAT’s market placement in various sectors is protected
due to the high expenses associated with entry. CAT’s three main competitor’s for market share
(John Deere, Komatsu, and Kubota) may offer similar products at a cheaper price, but aren’t able
to meet the level of quality CAT provides to larger consumers and entities like corporations and
governments. CAT is able to deliver on their promise of quality and efficiency to consumers by
constantly supporting their supply chain workflows. With competitors constantly searching for
new differentiation strategies that produce competitive advantages within the market place, CAT
must continue to reinforce established strengths. The recent development of the “new order-to-
delivery organization” will align production elements with consumer demand. This continues to
bolster CAT’s added value differentiation that makes them attractive to buyers. These procedures
add value toward CAT’s ancillary services that consumers would lose if they chose to work with
competitors.
Competition from Other Industries and Cost of Alternative Sources
CAT has become vertically integrated through the manufacturing of parts, accessories,
power systems, and by providing ancillary services. By streamlining its supply chain and
utilizing trusted sources for raw materials, CAT has effectively reduced its dependency on
suppliers and removed their ability to affect CAT’s bottom line. The global recession has
resulted in surpluses of raw materials world-wide which is beneficial to CAT by providing easy
access to the materials it needs to produce the goods and services it sells. “CAT has been actively
cutting its supplier base from a peak of 10,000 to below 5,000 as of 2012” (Anderson, 2012)15.
This reduced dependency on suppliers allows CAT to maximize its vertical in relation to the
15 (Anderson, 2012)
Porter’s 5 Forces: Caterpillar Inc. 10
value proposition it provides for its consumers. A secure supply chain helps remove uncertainties
in the production process, builds consumer confidence, and insulates CAT from minor price
fluctuations in the global commodities.
BARGAINING POWER OF BUYERS: LOW
Within the heavy equipment manufacturing industry that CAT services, influential
consumers consistently attempt to search for the lowest cost with the highest value and quality.
Consequently, CAT experiences reduced sales margins for its goods in the marketplace. The
various aspects that influence consumer bargaining power are the extent of customer orders,
number of customers, amount of alternative suppliers, threat of backward integration, and the
cost of switching products.
Number of Customers and Their Order Size
Over the past year CAT’s global sales in mining equipment have been on a steady
decrease that is associated with the falling price of raw materials utilized for production. This
increases the power of the buyer as CAT would have to compete in a price war within its peer
group. “In that environment, the buyer searches for readily available substitute materials that will
help keep supplier prices under control” (Johnson, 1987)16. CAT will need to increase their
product quality under lower margins to stay ahead of global competition. Dowlatshahi states that
a more competitive environment leads to more stress between buyers and suppliers. Multiple
supplier relationships are used by the buyer to push prices down and to further ensure supply
chain continuity. (Dowlatshahi, 1999)17
In the face of lower commodity prices various mining companies have cut spending and
decreased equipment purchases. This trend has spread to CAT’s markets across the Asia-Pacific,
Africa, Europe, the Middle East, Latin and North American regions. The biggest concern facing
CAT is the uncertainty of demand within their mining and construction divisions. CAT’s dealers
most likely will not increase their direct purchases of construction products as demand has
slacked in correlation with the global recession. CAT’s global consumers are large in scale and
16 Johnson, G. "Manufacturer-Retailer Relations: the Shifting Balance of Power." Business Strategy and Retailing. New York: John Wiley & Sons (1987): 47-51. 17 Dowlatshahi, S. (1999). Bargaining power in buyer-supplier relationships. Production and Inventory Management Journal, 40(1), 27-35. Retrieved from http://ezproxy.fau.edu/login?url=http://search.proquest.com/docview/199953472?accountid=10902
Porter’s 5 Forces: Caterpillar Inc. 11
traditionally hold a lower level of bargaining power. CAT retains leverage as they possess the
technology for heavy machinery, the spare capacity to produce it, and the ability to meet the
mining industry’s needs when demand increases. Trefis.com finds that mining companies work
new machines harder than older ones due to fewer breakdowns and repair costs than older
models. This helps the bottom line initially, but eventually new parts will need to be purchased
to prevent excessive downtime. Sales of parts and service of equipment will lend to the mining
sectors recovery (Caterpillars Lower End, 2014)18. With the rising costs of raw materials such as
coal, CAT will realize a greater amount of construction equipment orders from their mining
consumers. Their market share should grow proportionately as a result.
Number of Firms Supplying CAT Products
CAT sells its machinery and power systems in partnership with independently owned and
operated dealerships to meet consumer demand. Over time the acquisition, demand, and use of
industrial machinery has changed globally. Forbes relates that CAT’s distribution network was
originally for traditional customers, but has facilitated expansion through new customer
development. Rentals, operation across multiple territories, and marine clients operating on
global scales are forcing added cohesion between CAT and its service network. Dealer functions
are changing to meet the demands of the dynamic business environment (Catepillar Intensifies
Focus, 2014)19.
CAT is working with its network of distributors in response to the ever-changing
macroeconomic landscape associated with decreasing global sales. CAT has developed a
proposal called “Across the Table” in an effort to reduce inadequacies for large businesses that
deal with multiple CAT dealers in various countries. Additionally, a global rental business plan
is being discussed in response to changing demand of its bigger niche consumers. These types of
initiatives will enable CAT to stay ahead of competing firms that are smaller in nature.
18 Caterpillar’s Lower End User Sales Point to a Tough Second Quarter. (2014, June 27). Retrieved , from http://www.trefis.com/stock/cat/articles/244854/caterpillars-lower-end-user-sales-point-to-a-tough-second-quarter/2014-06-27 19 Caterpillar Intensifies Focus On Dealer Performance To Drive Results In A Tough Macro. (2014, March 11). Retrieved , from http://www.forbes.com/sites/greatspeculations/2014/03/11/caterpillar-intensifies-focus-on-dealer-performance-to-drive-results-in-a-tough-macro/
Porter’s 5 Forces: Caterpillar Inc. 12
The Threat of Integrating Backwards
CAT’s vertical integration removes the consumer’s need to integrate backwards.
Historically CAT has purchased maintenance and repair businesses to hedge operational costs.
Commodity prices are relatively low for purchasing entities due to wholesale purchasing.
Demand for mining and construction equipment is currently dwindling. This gives rise to
massive surpluses in raw materials globally. Consequently, this leads to lower prices resulting in
smaller margins for mining companies who, in turn, purchase less equipment. To counter the
decrease in mining demand, CAT’s acquisition of Bucyrus International should effectively buoy
profits and keep the mining subdivision’s overall expenses lower in the short-run until demand
increases. CAT demonstrated its use of vertical integration by acquiring Bucyrus’s production
portfolio in 2010 along with current and on-going contracts. This means additional profits are
generated to minimize the mining subdivision’s overall costs.
The Cost of Switching
CAT’s consumers face a double-sided dilemma associated with the cost of switching
products. Though CAT’s competitors may offer products at lower prices, they don’t account for
the value proposition provided. CAT supplies its consumers with superior customer service
value through technical support, maintenance, and repair parts.
THREAT OF SUBSTITUTES: LOW
CAT’s threat of substitute products is relatively low due to the expensive price of entry
for potential new competition. For the consumer, the price of switching to an alternative is too
costly in terms of quality. This is due to CAT’s supply chain acquisitions from previous years,
which have made CAT substantially more competitive. For example, CAT’s acquisition of
Bucyrus International, in 2010, allowed CAT to provide products and services to a much larger
portion of the mining industry. Overall, CAT has the lowest channel costs in the industry
coupled with impressive asset utilization. This means CAT places great emphasis on
optimization, whether it is for a product or a method of service provision.
The current production portfolio of CAT ranges from engine construction to product
maintenance, and support. CAT has three predominant sources of revenue: construction &
excavation, resources & mining, and engines & power systems. Through these revenue streams,
Porter’s 5 Forces: Caterpillar Inc. 13
CAT remains “locked-in” with the consumer for continued business through its ancillary
subdivisions. In doing so, CAT generates a strong relationship with the consumer, increasing
client retention and relationship management. Utilizing this methodology creates a strong sense
of consumer “loyalty” from the company’s point of view.
In addition to being the most convenient option for “all-in-one” service provision, the
consumer benefits from a “one-stop-shop” when looking for alternatives. Through several of
CAT’s previous acquisitions, the cost of service provision remains relatively low in comparison
to other industry competitors. CAT’s service method effectively creates a barrier to prevent new
entrants from competing due to the relatively expensive nature of the industry.
CAT’s threat of substitutes remains relatively low, due to the specialized nature of the
consumer’s needs. CAT’s optimization strategy has created multi-purpose equipment, which
mitigates and possibly eliminates the need for an alternative product. “Its objective is to identify,
track and mitigate anything that would prevent Caterpillar from achieving its long-term, strategic
objectives” (Driscoll, Torok, Walker, 2011)20. In doing so, CAT has generated an increase in
demand for its equipment by minimizing the client’s overhead costs. Therefore, CAT’s
equipment is clearly an efficient and cost effective substitute for manual labor.
The “going concern” for CAT’s foreseeable future should be to maintain their
optimization policies throughout its extensive product and service portfolio. “We argue that
attention needs to be directed to the ways in which “problems” and “solutions” are mutually and
reciprocally formed” (Miller & O'Leary, 2002)21. By utilizing their strategy of horizontal
integration, CAT eliminates additional consumer needs, pertaining to outside service vendors,
should an issue arise. CAT should remain the industry leader for the foreseeable future,
permitted they continue to utilize their optimization strategies. Their product range for industry
solutions is listed in the following table.
20 Driscoll, M., Torok, R., & Walker, P. (2011, November). The strategic advantage of ERM: integrating strategic planning with ERM at
Caterpillar. Risk Management, 58(9), 26+. Retrieved
fromhttp://go.galegroup.com/ps/i.do?id=GALE%7CA272432537&v=2.1&u=gale15691&it=r&p=AONE&sw=w&asid=f808937e7b4a61fab8f1aa
c71deb9b71 21 Miller, P., & O'Leary, T. (2002). Rethinking the Factory: Caterpillar Inc. Cultural Values, 6(1/2), 91-117. doi:10.1080/1362517022019766
Porter’s 5 Forces: Caterpillar Inc. 14
Table-1: Industry Solutions
Agriculture & Construction Landscaping Paving
Demolition & Scrap Marine Pipeline
Electric Power Generation Mining Power Plants
Forestry OEM Solutions Railway
Governmental & Defense Oil & Gas Technology & Solutions
Governmental / Local & State Trucking Waste
For industries such as construction and agriculture, large equipment is essential. CAT
systems minimize utility and labor expenses while simultaneously maintaining output
consistency. CAT has strategically placed itself within the “Industrials” sector by delivering
consistent quality, products and services that potentially overlap, rendering substitutes
incomparable. “The project has improved product availability, reducing the mean time for orders
with identified customers by 20 percent and reducing the standard deviation of product
availability for all orders by 50 percent” (Keene, Alberti, Henby, Brohinsky, & Tayur, 2006)22.
Another contributing factor for the low threat level regarding substitutes would be the continued
use of CAT’s products and services from previous successful contracts. CAT’s historical success
rate continues to generate recurring business, due to the fact that, “by-contract-clients” are highly
satisfied with CAT’s performance and the final result.
Additionally, CAT's customer service subdivision handles maintenance and repair
requests from the consumer while simultaneously providing rapid and efficient communication
between the appropriate departments. If CAT continues to follow through with their slogan
“Earthmoving solutions for today's challenges” and their service motto “24 Hours Part Service
Anywhere in the world or Caterpillar Pays” they should have no issue with retaining established
business. Overall, this architecture allows for easy communication amongst the parties involved,
leaving CAT as the "one-stop-shop" for leasing, purchases, and product maintenance.
22 Keene, S., Alberti, D., Henby, G., Brohinsky, A. J., & Tayur, S. (2006). Caterpillar's building construction products division
improves and stabilizes product availability. Interfaces, 36(4), 283-295,379-380. Retrieved from
http://ezproxy.fau.edu/login?url=http://search.proquest.com/docview/217099563?accountid=10902
Porter’s 5 Forces: Caterpillar Inc. 15
DEGREE OF COMPETITIVE RIVALRY: MODERATE
The Caterpillar Company (CAT) is a well-established, large market cap ($68.8B),
manufacturing and heavy equipment company operating in a mature industry. Established in the
1920’s, CAT is an experienced company which is both horizontally and vertically integrated.
CAT has had time to establish a world-wide service network and develop a solid brand with a
reputation for quality over its 80+ years in operation. CAT has become the quintessential leader
in the construction, mining, and heavy machinery market. Ranked first globally for heavy
equipment manufacturing, Cat has both horizontally and vertically integrated itself throughout
several sectors and industries. Mining, engines, and construction are their main revenue streams,
but CAT operates in many ancillary industries such as defense, electric power generation, and
marine oil and gas to name a few. To determine the degree of competitive rivalry to CAT in the
industrials sector, several key factors must be closely examined. Factors such as competition,
market size, product differentiation, and substitutes are major components of competitive rivalry.
Number of Competitors in the Market
CAT is the #1 manufacturer in the world for heavy machinery with few true competitors.
“However, intensity of competition may increase as Chinese construction equipment
manufacturers expand internationally and enter the global arena; namely Sany Heavy Industries
(China) and LiuGong (South Pacific)” (Anderson, 2012)23. Major global competition stems from
Deere &Co. ($32.2B), AB Volvo ($27.5B), Komatsu ($21.7B), CNH International ($12.6B), and
Joy Global Mining ($6B) according to Yahoo Finance, NASDQ.com, and Morningstar, 2014.
These companies influence CAT to a greater or lesser degree dependent upon the industrial
sector and geographic location.
Market Size and Growth Prospects
“CAT’s largest global competitors for construction and mining machinery are Komatsu,
Hitachi, Volvo Heavy Machinery, Sany Heavy for construction machinery and Joy Global for
mining machinery” (Anderson, 2012)24. “More than 70% of CAT’s sales occur outside of the
United States. The backlog at the end of 2011, 2010, and 2009 was approximately $29.8 billion,
23 (Anderson, 2012) 24 (Anderson, 2012)
Porter’s 5 Forces: Caterpillar Inc. 16
$18.7 billion and $9.6 billion respectively” (Caterpillar Inc. 4Q, 2014)25. International sales are
expected to be higher in the heavy machinery market for Original Equipment Manufacturers
(OEM) which account for $123 billion dollars annually.
With construction, mining, and engines being CAT’s top revenue streams many
opportunities clearly exist abroad in developing countries. With the U.S. mired in a stagnant
market, the Asian South Pacific region has been a focal point for CAT’s expansion efforts.
India, China, Japan, and Thailand are top markets for expansion right now. The share of the
Asian Pacific Market relative to the global market cap for OEM’s is $60 billion.
25 Caterpillar Inc. 4Q Earnings Release Reports Full-Year 2013 Results, Including Record Operating Cash Flow. (2014, January 27). Retrieved
July 12, 2014, from http://s7d2.scene7.com/is/content/Caterpillar/C10085836
Porter’s 5 Forces: Caterpillar Inc. 17
Anderson relates that China is the largest construction equipment using nation in the
world and the largest driver for construction equipment sales. CAT’s sales in China are only 5%
of its global sales. (Anderson, 2012)26
Domestically, congress passed the Highway and Infrastructure Bill of 2012 in the amount
of $105 billion; China announced a $158 billion dollar infrastructure bill of its own in September
of the same year. This helps illustrate the greater opportunity overseas for CAT. “The Bucyrus
mining company acquisition in 2010 has increased CAT’s revenues from the mining sector by
16.4% alone” (Anderson, 2012)27. Bucyrus international supplies mining equipment for
companies in Africa, Canada, Russia, and other nations across the south pacific.
Clearly more opportunity exists abroad than domestically for CAT. Another major source
of income that will continue to be lucrative in the years to come for CAT is its services and spare
parts. “Revenues fell 16 percent last year to hit $55.7 billion, and earnings fell 32 percent as
demand for mining equipment plummeted as companies cut spending. The sector accounts for at
least a third of Caterpillar's total business” (Caulderwood, 2014)28.
Ancillary income sources such as parts and maintenance will hedge against the global
recession and ensure a healthy net profit from those divisions. According to CAT’s 2014 10K,
the 4th Quarter, the financial services department accounted for a total revenue of $756 million
dollars (Catepillar Inc. 4Q, 2014)29. CAT also benefits from being a large cap company which
has allowed them to penetrate foreign markets more rapidly and with less resistance than other
U.S. based heavy equipment companies. Anderson found that the Asian Pacific market
represents the best expansion opportunity for CAT, but it is becoming increasingly competitive
as other major companies are beginning to penetrate the market. Asian Pacific region is
responsible for 48% of construction machinery sales for CAT (Anderson, 2012)30. Anderson
further relates that much of CAT’s growth is organic. CAT’s revenues are supported by high
margin aftermarket services which will sustain profits during downtimes and aid in slow sector
recovery. (Anderson, 2012)31
26 (Anderson, 2012) 27 (Anderson, 2012) 28 Caulderwood, K. (2014, April 23). Caterpillar Q1 2014 Earnings Preview: Modest Growth As Gains In Construction Offset Mining Slump.
International Business Times. Retrieved July 14, 2014, from http://www.ibtimes.com/caterpillar-q1-2014-earnings-preview-modest-growth-
gains-construction-offset-mining-slump-1574992 29 (Catepillar Inc. 4Q, 2014) 30 (Anderson, 2012) 31 (Anderson, 2012)
Porter’s 5 Forces: Caterpillar Inc. 18
Product Differentiation and Brand Loyalty
Given the maturity of the industry and the competitive nature of the heavy industrial
machinery market, it is becoming even more difficult to differentiate a product based on the
machines themselves. Aspects of heavy machinery are standard across the board due to the
expensive nature of the item. Therefore, brand loyalty is not as prevalent as it once was during
the industry’s infancy and subsequent growth stage. When dealing with governments and large
corporations, the client will usually hire the most cost effective option and the company that can
best justify each expense, thus making economics the key driver of choice instead of loyalty.
The consumer must consider the value proposition of the different brands and how they best fit
the consumer’s needs when making a choice. This differentiation is an aspect of Porters generic
strategies, which CAT has excelled at. In the 80’s CAT set out to achieve differentiation through
services, not product features or pricing. They were the first to do this in their industry and have
set the standard for every other company who wants to be competitive. CAT offers services such
as financing, insurance, maintenance, replacement parts, a world-wide network of qualified
mechanics and technicians. They further raised the bar by selling used equipment, renting
equipment, and selling accessories.
Through the strategic placement of supply distribution warehouses and mechanics all
over the world, CAT has a one day response time to any issue that could arise and keeps the
heavy machinery it sells operating at its peak capacity. Providing service and support to ensure
maximum machine operational capacity is of paramount importance to consumers. “CAT dealers
stock over 80% of parts needed and are able to fulfill around 98% of needs within 24 hours”
(Anderson, 2012)32. The leap forward in service has set CAT apart from every other competitor
since its inception and has left corporations like Deere & Co. scrambling to catch up. No
company has been able to come close to the level of service offered by CAT’s world-wide
network. When bidding on contracts in foreign nations the major obstacle is overcoming an
intrinsic instinct to go with a domestic company. Due to CAT’s amazing service and support,
they have been able to penetrate every lucrative market in the world.
32 (Anderson, 2012)
Porter’s 5 Forces: Caterpillar Inc. 19
Power of Buyers and the Availability of Substitutes
Due to the highly expensive nature of the heavy industrial machinery sector, buyers tend
to have plenty of money to spend, but not many options to choose from. There are only a few
companies globally that can provide the necessary heavy equipment for excavation, mining,
construction, etc… “Globally, CAT’s customers are generally large and have buying power, but
the technology required to meet customers’ needs’ can only be met by a limited number of
heavy machinery manufacturers” (Anderson, 2012)33. Consequently, this leads to a low threat of
available substitutes. It could be suggested that the use of manual labor would be a substitute for
CAT’s products, but this alternative is costly, inefficient, and time consuming. Avoiding costly
manual labor was the very reason for the inception of heavy machinery. CAT has successfully
established itself as the top quality product in the heavy industrial machinery sector and is highly
regarded as more expensive than some alternatives, but well worth the cost.
Capacity Utilization
Capacity Utilization is defined as a metric used to measure the rate at which potential
output levels are being met or used. Displayed as a percentage, capacity utilization levels give
insight into the overall slack that is in the economy or a firm at a given point in time. If a
company is running at a 70% capacity utilization rate, it has room to increase production up to a
100% utilization rate without incurring the expensive costs of building a new plant or
facility according to investopedia.com. This metric shows how much room there is for
competition to enter the market based on amount of production currently being utilized by an
industry. Global Industrial Capacity Utilization stood at 78.1% in 2013 (Capacity Utilization,
2014)34.
33 (Anderson, 2012) 34 Capacity Utilization: Total Industry. (2014, June 14). - FRED. Retrieved July 14, 2014, from
http://research.stlouisfed.org/fred2/series/TCU/
Porter’s 5 Forces: Caterpillar Inc. 20
*Graph above35
Many factors influence overall production and capacity utilization in an industry. From
the table above, metal mining capacity is down in comparison to other aspects of that sector.
This is due to large reductions in the cost of metals and raw materials because of slow downs of
production and construction globally. The wide availability of these resources currently sitting
on the market as surplus further discourages full mining capacity utilization. To CAT’s benefit,
any threat of new entrants to the industry are kept extremely low due to the high cost of the
equipment produced and the massive amount of capital it takes to get a business of that
magnitude up and running. Clearly the demand for these goods and resources are lagging and
CAT has the ability to ramp up production and fill the void as soon as demand returns. “Current
Capacity utilization is up to 79.1% so far in 2014” according to The Federal Reserve Bank of St.
Louis (Capacity Utilization, 2014)36.
Problems of low capacity utilization
Higher fixed costs per unit mean reduced profitability
Spare capacity can portray a negative image
Staff can become bored and demoralized during slow times
Fear of job loss
35 Graph Sourced from http://stks.co/bpmj 36 (Capacity Utilization, 2014)
Porter’s 5 Forces: Caterpillar Inc. 21
Benefits of low capacity utilization
Low capacity utilization is undesirable in the long term as the higher unit costs will make it
difficult to compete. However, possible short term benefits include:
A firm may have more time for maintenance and repairs and for staff training, to
prepare for an upturn in trade
There may be less stress and more time for employees to train and achieve
certifications
The firm can better cope with new order loads
Firms in expanding markets have low utilization while they build their shares in
emerging markets.
(Capacity Utilisation, 2014)37
Cost Structure of the Industry
The cost structure refers to the expenses a company must consider when manufacturing
products or providing services. There are many such costs to consider, transactional,
sunk, marginal, and fixed costs are all key aspects. The cost structure of the firm is the ratio of
fixed costs to variable costs. A weak cost structure means CAT’s costs are higher than their
competitors. CAT’s cost structure is quite high for the industry. That expense is going to
establish differentiation from the competition through adding value to the business from the
buyer’s perspective, mainly from a services standpoint. The service, parts, and accessories
divisions of CAT, which set it apart from other company in the industry, do generate substantial
income.
The cost of establishing and maintaining a world-wide network for parts and maintenance
are significant, however. This will result in lower margins and/or a higher price point for the
company’s goods and services. CAT uses several methods to help stream line its cost structure
and minimize the impact of the extra expenses it incurs to add value to its products. Marketing
& Product Support Division (MPSD), activity-based costing (ABC), and activity-based
management (ABM) are methodologies CAT utilizes to maintain affordability to its dealers and
other business units within its vast network. MPSD’s strict plans required a flexible cost
structure to remove the waste. MPSD applied ABC and 6 Sigma to its largest office processes
37 Capacity Utilisation. (2014, January 1). Capacity Utilisation. Retrieved July 14, 2014, from
http://www.tutor2u.net/business/production/capacity-utilisation.htm
Porter’s 5 Forces: Caterpillar Inc. 22
and services division to cut waste as well as increase efficiency. Vice Chairman and CEO of
CAT, Doug Oberhelman, states that CAT’s response to the ’08-’09 recession has been to change
the structure of CAT by reducing wasteful divisions and the number of managers. He further
states that complacency is the enemy and leadership within CAT must be accountable,
responsive, decisive, and significant. (Caterpillar Streamlines Corporate, 2014)38
*Reference graph 3 in the appendix.
Exit Barriers
In economics, barriers to exit are impediments to a firm that wants to leave a particular
market or industrial sector. These impediments are often time consuming, costly, and can restrict
a firm’s ability to exit so that it may be forced to continue operations, even if at a loss. Due to
extremely high asset valuations and cost structure for the industry, the barriers to exit are
immense for CAT financially. With highly illiquid assets, CAT, its bondholders, and its investors
would only receive 10-20% of the total value of the company. An exit from any sector would
take an inordinate amount of time as well as an extreme loss of capital.
Going Forward
According to Caterpillar’s 2014 Quarterly Financial Results, macro-economic and
political uncertainties are expected to decrease global GDP expansion. The mining industry is
anticipated to decline further, lowering the sales figures and capacity utilization for mining
equipment from its peak in 2012. Inversely, the construction industry’s utilization of heavy
machinery is expected to rise, increasing sales, parts, and maintenance revenues. Overseas,
uncertainty in China leaves CAT to guestimate projected sales and performance as “Chinese
leaders are in the midst of transitioning the world’s second largest economy to a longer-term,
more sustainable growth model while maintaining social stability” (Caterpillar Inc. 4Q, 2014)39.
CAT’s leaders however seem optimistic in comparison to competition so long as they remain
38 Caterpillar Streamlines Corporate Structure; Greater Emphasis on Agility, Cost Management and Meeting Customer Needs
Company reduces number of officers; Chief Financial Officer and General Counsel to report directly to Chairman and CEO. (2014, May 5). Caterpillar Streamlines Corporate Structure; Greater Emphasis on Agility, Cost Management and Meeting Customer.... Retrieved July 14, 2014, from http://www.prnewswire.com/news-releases/caterpillar-streamlines-corporate-structure-greater-emphasis-on-agility-cost-management-and-meeting-customer-needs-92902534.html 39 Caterpillar Inc. 4Q Earnings Release Reports Full-Year 2013 Results, Including Record Operating Cash Flow. (2014, January 27). Retrieved
July 12, 2014, from http://s7d2.scene7.com/is/content/Caterpillar/C10085836
Porter’s 5 Forces: Caterpillar Inc. 23
cautious of the negative affects of a declining mining industry where immediate actions may
need to be taken to increase revenue from that sector.
Going forward, the recommendation for CAT is to maintain its growth strategy in
emerging markets worldwide. In addition to CAT’s primary services (construction, mining,
power plants) a focus to improve ancillary services will help fortify their leadership position in
the heavy industrial machinery industry. These include improvements to infrastructure through
supply chain optimization and further streamlining of their internal processes. Financing, spare
parts, maintenance and repair, dealer networking, etc… will continue to hedge CATS’s revenues
against global downtrends. CAT has strategically laddered its contractual financial receivables
through 2018 to further hedge against global economic declines. Investors with an interest in
CAT should hold their current shares based upon CAT’s past performance and future potential.
Financial analysts note that even though intrinsic value and market value appear to be close, the
actual value of CAT’s worldwide network and ancillary services are not appropriately accounted
for. CAT’s presence in emerging markets, coupled with their 80+ years of R&D make its
intrinsic value much high than it appears initially. This helps to ensure that CAT still has much
upside left on its stock price in the future.
Porter’s 5 Forces: Caterpillar Inc. 24
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Porter’s 5 Forces: Caterpillar Inc. 27
Appendix:
GRAPH 1: (#6 - Dobbs, 2014)
GRAPH 2: (#3 - Chena, Keysb, 2009, May)
Porter’s 5 Forces: Caterpillar Inc. 28
GRAPH 3: (Photo taken from Getting Lean and Mean at CATERPILLAR with ABM: By David
G. DeFreitas, CPA; John W. Gillett, CPA; Ross L. Fink; and Whitney Cox, CPA). Pg. 28)
Porter’s 5 Forces: Caterpillar Inc. 29
GRAPH 4: Graph taken from:
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