But Cat hasn’t always been so well designed for success. During a 50-year period of uninterrupted profits that began in the 1930s, Cat’s DNA had become so badly misaligned that its very existence was ultimately threatened. Its highly centralized decision-making process, manifested in a hierarchical central bureaucracy, resulted in a slow, inward-focused organization that was increasingly out of touch with the market. The company was organized in strong functional divisions called General Offices, or “G.O.s,” each responsible for a piece of Cat’s overall business process — engineering, manufacturing, pricing, marketing, etc. — and each with its own executive vice president reporting to the company president. Over time, the G.O.s became extremely powerful and made all the important decisions in the company. George Schaefer, the CEO of Caterpillar from 1985 to 1990, referred to the G.O.s in retrospect as “the kingpins of decisions.” Everything revolved around them, and they rarely communicated with one another. “It took a long time to get decisions going up and down the functional silos,” recalls Steve Wunning, then in logistics and currently a group president of Caterpillar. “And they weren’t always good business decisions; they were more functional decisions.”
The General Offices also were not tied together through metrics or motivators to keep them pulling in the same direction. For example, if a sales rep in Botswana wanted to give a discount on a tractor, the decision was made by the pricing G.O. at company headquarters in Peoria, Ill., frequently by relatively low-level staffers who had no accountability for market share or volume. Moreover, Cat had no visibility into its profitability by product or country; like everyone else, the pricing G.O. staff received data only on the profitability of the company as a whole. If the projections for the coming year were too low, they would simply raise prices to try to make up the difference.
Don Fites, Cat chairman and CEO from 1990 to 1999, explains that “those of us who were actually in the marketplace, who were trying to sell against Komatsu when Cat’s prices were already at a 20 percent premium — we knew we weren’t going to sell much. Pricing was always a great frustration.” He recalls the perspective of those who worked in sales: “You spent most of your time trying to get special pricing. There were forms you had to fill out and justify, and sometimes these things took weeks to turn around. And on a big deal, rather than being out there trying to sell the quality of your product, all the marketing and sales people spent a great deal of time trying to get exceptions to list prices. It came to a point where [the centrally controlled pricing] was almost self-defeating.”
This was only one example of Caterpillar’s basic problem. The four building blocks of its DNA — its centralized decision rights, missing or siloed information about such important issues as competitive position and internal profitability, weak incentives that promoted local instead of global success, and its function-dominated organizational structure — reinforced one another’s weaknesses and undermined the company’s competitiveness. But these organizational flaws and frustrations never got much attention within Cat because its product and dealer strength could effectively overwhelm any competitive threat. And, frankly, most people in the organization were pretty comfortable. “It was a lot easier for a lot of people,” says Gérard Vittecoq, then a junior marketing manager and currently a group president of Caterpillar, “because accountability was just doing what Peoria was telling them. No initiative, no risk.”
Then, in the early 1980s, the global recession and runaway inflation combined to turn Cat’s formerly cozy markets into attractive new opportunities for several competitors, key among them Japan’s Komatsu. Caterpillar posted the first annual loss of its 50-year history in 1982.
