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 / Fall 2005 / Issue 40(originally published by Booz & Company)


The Cat That Came Back

How the world's largest heavy equipment manufacturer rebuilt its organizational DNA.

Illustration by Robert Goldstrom
How do you build a better organization? How do you reverse entropy and restore an organization to robust health and profitability? The ongoing research project that we call “organizational DNA” suggests an answer. To change an organization effectively, concentrate on the deliberate design of four key organizational building blocks:

Decision Rights: the rules and mechanics that govern who makes which decisions — and how.

Information: the metrics that measure performance, and the practices that transfer knowledge.

Motivators: the incentives, objectives, career alternatives, and other elements that drive people’s behavior.

Structure: the overall organizational model, including the “lines and boxes” of reporting relationships and job descriptions.

Just as an individual’s physical and intellectual qualities depend on his or her genetic code, the building blocks of organizational DNA determine how a firm looks and behaves, both internally and externally. These building blocks matter because they deeply influence everyone’s decisions — not just decisions made by people at the top of the hierarchy.

For example, if you work in middle management, which e-mails do you leave unanswered? What determines whether you offer a customer a discount to increase volume or hold the line to protect margins? How do you share information with someone in another business unit or region? These daily decisions, taken together, determine an organization’s ultimate success or failure. And they in turn are deeply affected by the decision rights people hold, the information they receive, the incentives and other motivators that reward them, and the organizational structure of formal positions and reporting relationships.

Fortunately, unlike human DNA, organizational DNA can be modified. The key to improving performance is not to blame individual performers, but to realign those building blocks to support decision making that’s more consistent with the overall strategy and performance objectives of the company.

That is exactly what happened during the late 1980s and early 1990s at Caterpillar Inc., a $30 billion global manufacturer of large construction and earth-moving equipment, engines, and power systems. “Cat,” as people call it, is a company that had enjoyed a long-standing record of profitability and market leadership until 1982, when it was almost put out of business by an unanticipated surge of competition. Caterpillar rebounded reasonably quickly and successfully at that time; it returned from near-bankruptcy to profitability in a few short years. But many companies can do that once. What distinguished Caterpillar was the moves it made afterward: The company reshaped its DNA on all four levels in a way that permanently changed the culture and capabilities of the enterprise.

“This was a revolution that became a renaissance,” says Chairman and CEO James (Jim) Owens, who was a midlevel manager at Caterpillar when the story began. “It was a spectacular transformation of a kind of sluggish company into one that actually has entrepreneurial zeal.”

Complacent to Resilient
Although it operates in many cyclical industries that have been hard-hit by recession over the last several years, Cat has delivered 12 straight years of profit, nearly tripling both its top and bottom lines since 1993. Its global markets reach from Peoria to Pretoria, with innovative products that routinely win quality awards and a dealer network that delivers some of the best customer service in the world. In 2003, its shareholder returns were the second-highest among companies in the Dow Jones Industrial Index, and the Financial Times placed Cat 27th in its list of most respected companies in the world. In 2005, Forbes listed Caterpillar as the best-managed industrial corporation in America.

We have our own term for corporations like Caterpillar: “resilient organizations.” These are highly tuned and capable organizations whose power derives from the fact that all four building blocks are well aligned with one another and with the corporation’s overall strategy. Caterpillar’s employees know the corporate objectives and how to reach them within their groups or functions; they are motivated to act, and they have the authority they need to make things happen. As a result, Cat can move decisively in its markets, establishing positions of leadership in most of them. These traits are undergirded by Cat’s organizational model, which has remained fundamentally unchanged for the last 15 years.

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  1. Gary L. Neilson and Bruce A. Pasternack, Results: Keep What’s Good, Fix What’s Wrong, and Unlock Great Performance (Crown Business, 2005): The first comprehensive guide to “organizational DNA.” Click here.
  2. M. Edgar Barrett, J. Kenneth, and Jeannette Seward Chair, “The Cat Recovers: Caterpillar, Inc. in the Late 1990s,” Thunderbird Garvin School of International Management, 1999: Detailed case study, putting the company’s much-reported-on labor union battles in context of transformation. Click here.
  3. Christopher A. Bartlett and Susan P. Ehrlich, “Caterpillar, Inc.: George Schaefer Takes Charge,” Harvard Business School Case Study no. 9-390-036, 1989, revised 1991: Definitive Harvard Case Study focuses on the decision to change. Click here.
  4. Gary L. Neilson, Bruce A. Pasternack, and Decio Mendes, “The Four Bases of Organizational DNA,” s+b, Winter 2003: Essential core of the organizational DNA theory. Click here.
  5. Gary L. Neilson, Bruce A. Pasternack, and Decio Mendes, “The 7 Types of Organizational DNA,” s+b, Summer 2004: The theory in practice; a preview of the organizational profiles in Results. Click here
  6. Robert N. Pripps and Andrew Morland, The Big Book of Caterpillar: The Complete History of Caterpillar Bulldozers and Tractors, Plus Collectibles, Sales Memorabilia, and Brochures (Voyageur Press, 2000): Coffee-table historical homage and context for “Cat buffs.”
  7. Booz Allen Hamilton Org DNA Profiler, online survey and results Web site: Identify your organization’s disposition and see what others have said. Click here.
  8. Caterpillar Worldwide 2004 Annual Report: Latest overview of the financials and strategic direction. Click here.
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