The Cat That Came Back

Inside the Transformation

Caterpillar Inc. is one of the few companies anywhere that has successfully completed a revolutionary transformation. We believe that Caterpillar achieved this success because of its deliberate focus on a set of organizational guiding principles. Those principles enabled Cat’s dramatic, wholesale transformation in the early 1990s, and they continue to guide Cat’s response to changes in its competitive environment today.

George Schaefer

Don Fites

• Make businesses accountable for their bottom line. Cat’s stronger product lines no longer subsidize weak ones; business unit managers are held personally accountable for results.

• Use market-based transfer prices for the (many) transactions among business units. Transfer prices based on external markets are negotiated between businesses, so that performance issues show up in the business units that are uncompetitive, rather than farther downstream.

• Establish a “single-counted” bottom line. Accrue full costs to each business unit and give business unit managers access to the metrics needed to boost productivity and manage performance. Such cost accounting combined with transfer prices provides each business unit with a P&L for which its managers can be held accountable. The sum of all business unit P&Ls adds up to the P&L for Caterpillar as a whole.

• Expect business unit managers to maintain an enterprise-wide view of Cat as well as see to the strategic, operational, and financial performance of their particular business.

• Hold no business sacred. Product lines that persistently fail to deliver are sold.

Glen Barton

All four of Caterpillar’s CEOs since the reorganization have told us that it was the most significant event in the company’s history — and in their own professional lives. They each played an important role. George Schaefer instigated it. Don Fites carried it out, not opening the change up for debate, since he knew that would allow people to hold back and stall it out. Glen Barton and Jim Owens continued to institutionalize it, resisting any temptation they may have felt to change course just to show they were in charge. Their steadfastness means that Caterpillar has held to its fundamental principles through four generations of CEOs — a remarkable accomplishment that only a few great companies achieve.

Jim Owens

Many companies would respond to such challenges with wholesale change, throwing out their principles and downplaying their existing relationships. At Caterpillar, the choice of exactly how to adapt is likely to be made by the next generation of senior executives, who will be the first group running Cat without direct experience of the Schaefer and Fites era. They are, however, already operating on a global basis, and eager to keep the freedom and accountability that the principles have provided for more than a decade. We suspect that these new leaders are up to the challenge of adapting the organization within the framework of the original guiding principles, and when they succeed it will represent the continued natural evolution of Caterpillar’s transformation.

— Paul Branstad and Jan Miecznikowski

Paul Branstad is a senior vice president and Jan Miecznikowski is a vice president in Booz Allen Hamilton’s Chicago office.