Cat’s senior management recognized that one of their company’s most important competitive assets was its distribution system, and that whatever happened, that distribution system had to be protected. So they decided to continue selling to dealers at a price that allowed the dealers to make a small profit. Although Caterpillar did not lose a single dealer, the policy was expensive. In 1983 and 1984, Cat lost a million dollars a day, seven days a week. It was “almost like hitting a wall,” recalls Group President Gerry Shaheen, who was an area manager in North America at the time. “New entrants had come into our competitive space and had changed the rules of engagement. The bad news is, it happened. The good news is, it was a wakeup call.”
The crisis brought front-and-center the fact that costs were too high. So Cat launched a massive $1.8 billion manufacturing modernization program called Plant With A Future (PWAF) that dramatically reduced manufacturing costs. In 1985, the same year that Mr. Schaefer became CEO, the rising tide of a recovering global economy lifted a lot of boats, including Caterpillar’s, and the company returned to profitability. By 1988, Cat had surpassed its then-record 1981 profit levels, and much of the organization felt relieved and perhaps a bit smug at having survived the most threatening period in its history. But some in senior management still had nagging concerns: PWAF had done little to solve the problems that made Cat internally focused, slow, and unresponsive to customers.
Upsetting the Applecart
As CEO, George Schaefer was determined that Cat would not be caught flat-footed again, at least not on his watch. He understood that the competitive pressure on Cat was likely to increase, and that others in the company needed to feel more of that pressure directly. He began informally, by inviting a rotating group of middle managers to breakfast once a week. The attendees understood Caterpillar’s weaknesses and were willing to talk about them. By contrast, as in many centralized organizations where authority is held by a small number of very senior executives, Cat’s senior management had too much vested in the current organization to be expected to share their most serious concerns with the chairman.
In 1987, Mr. Schaefer asked each of his senior managers to provide a list of their best and brightest subordinates. When all the lists were combined, “we had about 40 names, but there were one or two that I [added] because they were real renegades — they were clear thinkers, they would ‘upset the applecart.’” In the end, he chose eight young managers to form Caterpillar’s first-ever Strategic Planning Committee, or SPC, to help him chart Caterpillar’s future. Meeting for half a day each week, the SPC was charged with taking everything back to basics, figuring out where the company stood and where it was going. Everything was on the table, and the debate ranged widely for the first few meetings. Glen Barton, who was on the committee, and who would later become chairman and CEO of Caterpillar, credits Mr. Schaefer with being tolerant enough to allow this kind of free-swinging, unguarded discussion. “He wasn’t defensive,” says Mr. Barton. “He didn’t come out and say, ‘Well, you can’t do that’ or ‘That’s not what we’re here for.’ He was more receptive to hearing what people had to say and what their frustrations were than trying to give specific direction as to where we might go.”
Mr. Schaefer announced that he was meeting regularly with a team of “breakthrough thinkers.” The rest of the organization didn’t expect much to come of it, but it became increasingly clear to the SPC that a major reorganization was needed. As Mr. Barton later recalled, Cat was “just not getting the job done in terms of the final customer. We were too long to react, too long to get a price change. And we did not have clear accountability. If we were more optimally organized, we would be more responsive, more effective as an organization, more competitive.”
