Sustainable Resilience
Cat’s timing was fortuitous. In 1993–94, the effects of the reorganization began to kick in at the same time as the economy started to recover. “The world started getting good,” recalls Mr. Pfeffer. “People started making their business plans, started getting a lot of incentive compensation, and they stopped fighting the change. They said, ‘We did the right thing, I’m happy we’re doing this.’”
The turnaround in Caterpillar’s financial performance was spectacular — and sustained. After posting a $2.4 billion loss in 1992, the company returned to profitability in 1993, and has increased its earnings ever since, reaching a record $2 billion in profits in 2004. Cat’s revenues have nearly tripled since 1992, from $10.2 billion to $30.3 billion in 2004. The results also appear in operational indicators, including dramatic increases in productivity. Cat reduced its product development cycle to roughly 36 months (from 48 to 72 months before the reorganization). Because assets were tied back to product profitability, the businesses no longer sought massive capital investments to renew manufacturing operations for every product upgrade, so capital requirements fell as well.
At the same time, everyday behavior changed focus from internal process and budget to customer satisfaction and profitability. For example, Cat started developing products more in sync with what dealers and end customers wanted. Because each product business unit now had a full complement of functional talent in its new product introduction teams, and those teams were empowered to make all product development decisions without requiring approval from any other source, they could act more quickly and responsively with more complete information. In 1995, Caterpillar introduced an updated version of its D9 tractor after just three years of development. The model was so successful in North America that in only two years, Komatsu withdrew from the market completely in that category.
Another example of Cat’s responsiveness occurred in the early 1990s, when the company bid to supply 800 pieces of road maintenance equipment to the county governments in Vancouver, Canada. John Deere, one of Cat’s main competitors, had offered a big discount and appeared to be the favorite. But Caterpillar quickly assembled an attractive lease program, creating a better deal than Deere’s, and won the entire order.
Group President Stuart Levenick, who was the district manager in Vancouver at the time, remembers that such an approach would never have been possible in the old organization. “First of all, to do that, we had to do all kinds of creative marketing and merchandising programs, and bring in Cat Finance. It was a very comprehensive approach. Second, we had to be able to ship all that stuff in two months, so we essentially took the entire production capacity of the Decatur plant for two months and devoted it to this customer. That would never, ever have happened before the reorganization. Nobody at that level would have ever had the authority to do something like that. Even to propose it would have taken a year to work through the old pricing G.O., and then to get the capacity allocated to do something that was so strategic was impossible.”
There are other examples of formerly impossible feats. In 1997, Caterpillar launched a 40-ton excavator, the 345, with an unprecedented marketing campaign that involved retraining its entire sales force — and the company nearly doubled its percentage of industry sales within two years. A Cat plant in Mexico took excess steel that was formerly sold as scrap and cut it into two-inch-square blocks that could be used for parts in heavy machinery, and then sold those blocks to other Cat plants at half the regular price. In a tractor plant in East Peoria, a team of hourly welders on the production line figured out a way to produce welding lenses for nearby robots. These parts needed frequent replacement because sparks and molten pellets would bombard them; in-house fabrication cut the cost from $62 per lens to six cents.
