How Caterpillar's strategy led to unparalleled growth in the construction industry

Here’s what you’ll learn from Caterpillar's strategy study:

• How choosing where to compete dictates the rest of your strategy.
• How to detect the necessary internal changes that come with growth.
• How growth can be governed with clarity and alignment.

Caterpillar Inc. is a Fortune 100 corporation that designs, develops, manufactures, markets, and sells machinery, engines, and financial products and services. It is one of the world's largest construction and mining equipment manufacturers, and a leading producer of diesel and natural gas engines.

Institutional investors own Caterpillar, with the top ten owning over a third of it. Caterpillar’s current CEO and Chairman of the Board of Directors is D. James (Jim) Umpleby III.

Caterpillar's market share and key statistics:

• Revenue of $51.0 billion in 2021
• Total asset worth of $80.9 billion as of September 2022
• Market Capitalization of $122.03 billion as of December 2022
• Number of employees: 107,700

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Humble Beginnings: How was Caterpillar founded?

The company was founded in 1925 by Benjamin Holt and Clarence Leo Best.

Even though the formation of the company happened in 1925, the story of Caterpillar started a few decades before that. Back then, Benjamin Holt and Clarence Leo Best, both great inventors, were fierce competitors that tackled the same problem from different angles.

Let’s have a look at their story and how they ended up joining forces.

Caterpillar’s foundations: laying the tracks for the company’s birth

The story of the largest construction and equipment manufacturer in the world starts near the end of the Industrial Revolution with the fathers of its two founders.

Benjamin Holt’s father, Charles H. Holt, was building wooden wagons and parts. His business was going well and his sons carried on his heritage until they founded the Holt Manufacturing Company, which focused on the transformation of agricultural production. It led the change from animal to engine in farming. An inevitable change that companies had yet to find an effective way to bring about, a fact the Holt brothers took advantage of.

Clarence Leo Best’s father, Daniel Best, was always focused on inventing farming machines like the first portable grain cleaner and separator, and a combine harvester. He brought his inventions into the market through the Best Manufacturing Company. Daniel was impressed by the steam engine’s pulling capabilities and saw a great opportunity for the farming industry. So he entered the tractor-building business with the purchase of the Remington steam engine.

The two businesses were direct – and very fierce – competitors in California.

It was a constant race of innovation and design that each year crowned a different winner. Their battles extended outside of the market arena and into the courts. They spent millions of dollars over multiple patent infringements that were ultimately resolved by the acquisition of the Best business by the Holts. Each company had over 70 patents at the time. 

By then, Benjamin Holt was the head of the Holts company and C.L. Best head of the Best company. The merger didn’t go well because the Holt brothers were declining most of Best’s ideas, pushing him to resign two years after the acquisition and start a new company, the C. L. Best Gas Traction Company.

But Best wasn’t planning to start a new innovation race.

C.L. Best’s well-calculated strategy and the inevitable repartnering

C.L. Best decided to build wheel-type tractors while partnering with the Buffalo Gasoline Motor Company, while the Holts were focusing on developing track-type vehicles 

His strategy was brilliant and enabled him to grow his business, despite having significantly fewer resources. It focused on two key pillars:

1. Innovation would happen in-house. Best would design the tractors and focus on addressing the customer’s needs.
2. At the same time, he outsourced the manufacturing process of the engines to his partner, allowing him to focus his efforts and resources on the first pillar.

Manufacturing farming machines at the time was expensive, involved a lot of trial and error and the production time was long.

The Holt Brothers had an established and knowledgeable business. They had total control of the design and manufacturing of all parts of their machines, and Best knew he couldn’t compete with that. His strategy was brilliant because it delegated half of the manufacturing challenges – the powering of the machines – to experts while he focused on bringing his expertise and imagination into the game to pioneer.

His strategy worked. 

Best managed to fund his company by selling some initial designs until he finally had a breakthrough in 1912 with a tiller-wheel tractor (the C.L.B. 70 Tracklayer) that included a lot of technological innovations that his competitors lacked. That breakthrough helped him invest in his construction capabilities which increased his manufacturing output.

However, Benjamin Holt wasn’t easily defeated.

His company owned two of the largest and best-equipped factories in the industry. He quickly managed to close the gap and create a huge variety of much more powerful machinery. In the light of World War I, Holt’s inventions ended up on the front lines of Europe, keeping heavy artillery on a constant move and supply lines active over the worst imaginable conditions.

Alas, the two companies were both in great debt after the end of WWI, and merging them was the only way to keep them both alive.

The joint venture: the innovation that gave Caterpillar its name

The story of the two companies lays the foundation of Caterpillar’s culture and success.

The local competition between the two companies led to significant innovations and increased the production efficiency of the farmers. The unique conditions of the soil contributed to some of the most time-enduring innovations in moving huge machinery: the belted crawler track.

Here’s how the story goes.

While innovators were trying to make farming operations easier and more efficient through the use of machines, they faced two limiting challenges:

1. The machines were too heavy and sunk into the soft California soil rendering them immobile.
2. The machines couldn’t maneuver in small spaces rendering them useless for smaller or obstacle-filled fields.

Best and Holt tried various solutions to address these problems, but they always had to make trade-offs. They either had to make the machines too wide or too small to perform a task. The two challenges were conflicting.

Until one day, in 1904, Holt thought of a solution that would distribute the weight of the machine to a much wider surface without having to increase the width of the machine. He developed the first track-type tractor equipped with the belted crawler track. This new type of tractor used steel tracks rather than the traditional rubber tires, which provided better traction and allowed the tractor to operate on soft or uneven ground.

The genius of the invention was in its design. It got rid of the wheels, a huge design leap even by today’s standards, and replaced them with a long moving stripe-in-a-closed-loop on each side. The mechanism laid the stripes ahead and the vehicle would move on top of them. Since the stripes’ surface was much wider than a wheel’s, the weight was well-distributed and the machine never sunk.

In addition, it increased maneuverability tremendously because the vehicle could turn on the spot by blocking one side’s stripe and activating the other.

The invention, though extremely unpleasant and somewhat dangerous, is so effective in moving huge weights through any kind of terrain that it’s since become the standard for military combat vehicles and NASA’s missile crawler-transporters. The peculiar movement of the track-laying stripes made the vehicle appear crawling, like a caterpillar.

Hence the name of the company.

Key Takeaway #1: The arena you’re competing in dictates the rules of the game

The Holt-Best rivalry was initially an innovation race. Then an internal political or design dispute. Then a capabilities competition. Each time the players focused on their strengths and differentiators to get ahead.

This is the essence of strategy: managing your differentiation that generates your unique competitive advantage.

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Caterpillar’s global strategy: from an American manufacturer to an international synonym of safety and quality

Caterpillar’s international expansion was based on building a unique brand identity.

The company started to invest a huge amount in marketing, sponsoring tournaments and challenges, and introducing finance plans for large sales.

However, the most disruptive move was their decision to focus on safety.

Caterpillar was among the first to introduce safety procedures and training for its heavy machinery operators. They began investing in Risk Assessment and training, and they also instituted regular upgrades to the machines to improve their safety levels.

The company kept investing in the promotion of its brand. They designed models of all the machines they manufactured and gave them to operators who achieved the highest safety performance. Caterpillar also sponsored scientific conferences and introduced a number of awards for safe operations. As a result, the company’s machines and operation procedures became one of the safest in the world.

But that wasn’t the case. Until its international expansion, safety was more of a secondary concern.

Caterpillar’s expansion in Europe and Russia

Since its early days, Caterpillar has been conducting various business activities in Europe, but it officially established itself in the UK with the formation of its first overseas subsidiary: Caterpillar Tractor Co. Ltd.

By then, the company had already sold a lot of its machines through third-party dealers and participated in important construction projects, like the construction of the King Albert Canal in Belgium. In the following decades, the company steadily grew its business in Europe.

In 2004, its expansion strategy was focused on expanding its remanufacturing segment with two big acquisitions:

1. UK-based Wealdstone Engineering Ltd, one of Europe’s leading remanufacturers of gasoline and diesel engines.
2. France-based Eurenov S.A., a remanufacturer of automotive and industrial engines, transmissions, and components.

Remanufacturing has been of increasing focus for Caterpillar’s corporate strategy since it reduces costs and has a smaller environmental impact.

In Russia, too, the company had a presence long before it opened its first offices in 1973. Caterpillar took that decision because the Soviet Union wanted to deal directly with the manufacturer and not a third-party. Mikhail Gorbachev, the president of the Soviet Union at the time, wanted the company not only to sell products but also cooperate with the government in its infrastructure development projects.

So Caterpillar used its advantages of a credible brand, quality products, and a dedicated and talented workforce to expand its operations in the Soviet Union. The opportunities and projects were flowing endlessly and in a few years, operations exploded and have remained active ever since. The company developed an extensive dealer network and multiple facilities to serve local demand.

Caterpillar’s strategy to increase sales in Europe and Russia was focused on two pillars:

1. Strengthen its main product offering in order to capture a bigger market share. It does so by investing in research, development, and innovation.
2. Enhance its dealer network, a crucial marketing and sales channel of Caterpillar’s products. The company wants to make sure that every dealer possesses the necessary skills, knowledge, and resources to provide the highest quality of service and customer experience.

By 2018, Caterpillar had become a leading supplier of construction equipment, engines, and related services in the region.

Caterpillar’s expansion in China: strategy and challenges

The sheer size of the Chinese economy, its rich subsoil, and its huge and multiple construction projects over the years have made it a goldmine of opportunities for a company like Caterpillar.

Over the last 30 years, China has invested heavily in infrastructure, spending billions on constructing highways, airports, high-speed rail, mines, and many other projects.

Caterpillar had penetrated the Chinese market since the second half of the 20th century. As of 2010, the company had around 20,000 employees, tens of manufacturing, research and distribution centers and was investing in building numerous new facilities. Its strategy included acquiring businesses to expand its market share, like the Bucyrus purchase of over $8 billion.

However, it never managed to establish itself as a market leader due to manufacturing problems that were slowly costing the company its market share.

In an aggressive and controversial move to expand its operations and credibility in the Chinese market, Caterpillar acquired ERA Mining Machinery Ltd for $677 million in 2012. However, it turned out the Chinese company was deliberately hiding major long-standing accounting problems that forced Caterpillar to impair $580 million (86% of the deal) in goodwill. The controversy lies on whether Caterpillar knew about those “misconducts” and chose nonetheless to proceed and try to capitalize on the Chinese company’s reach, name, and customer base.

No matter the case, this example is a disturbing demonstration of how lucrative the Chinese market appears to foreign companies, luring them to take immense risks in order to take a large piece of it.

However, the company hasn’t stopped its operations in the Asia Pacific. And although it has faced a lot of challenges since the pandemic, the company saw a 9% increase in sales in China and is equipped to continue its upward trend in the next few years.

How Caterpillar scaled safety procedures with its six sigma framework

As the company grew, so did complexity and challenges.

With bigger projects, bigger products, and bigger goals, execution was slowing, productivity was decreasing, and safety incidents were hard to minimize.

Entering the new millennia, Caterpillar was, on average, performing poorly on safety and health measures compared to competitors. As a result, they were losing customers since safety was a serious concern. To address the matter, the company made safety a core trait of its strategy execution process.

The company aspired to change by implementing the six sigma framework – an excellent data-driven approach to continuous process improvement for manufacturing. It was a company-wide adoption attempt that took years to happen, but it succeeded.

The first step in their safety transformation was to analyze and understand the current state of the company’s safety procedures. They engaged multiple stakeholders with various tactics like running questionnaires on the perceived safety and effectiveness of procedures. Here’s what they discovered:

• Traditional health and safety KPIs were lagging, giving an accurate but outdated view of the company’s safety performance.
• Traditional metrics were building an incomplete image of performance.
• Leadership didn’t understand the impact of their communications on their team’s safety performance.
• The culture was one of fear and resentment.

The company decided to address these challenges methodically and sustainably. It implemented a modified version of a six sigma methodology called DTMR (Define, Train, Measure, and Recognize). The process yielded many valuable results. Here are the key initiatives the company defined from those results and implemented:

• It adopted a more holistic set of safety indicators that included leading and lagging KPIs. Leading KPIs are action-oriented and much more influenceable.
• It leveraged the experience of the front-line employees to develop new safety procedures and rules.
• It trained leaders and supervisors in effective communication practices. Supervisors started the day with a brief safety talk and were more aware of the priorities they were communicating.
• It established a rewarding system including recognition habits that highlighted workers who respected safety and health rules, took proactive actions, and displayed the desired behavior. Key traits of effective recognition are timeliness, specificity, and sincerity.

This resulted in a profound cultural transformation. It took the company from a demotivating, statistics-focused, and reactive culture to an empowering, people-focused, and proactive culture. Instead of measuring the absence of injuries, people were focusing on the presence of safety.

The transformation was so effective that it reduced recordable injuries to 0 and enabled Caterpillar to take the helm in developing the industry’s safety standards.

Key Takeaway #2: Leap on opportunities but be mindful of internal changes

Growth at all costs or putting financial metrics as North stars are recipes for failure in the lead to mid to long term.

Sudden and uncontrolled growth is dangerous. Two warning signs that an internal transformation becomes necessary are:

1. When the company triples its workforce but keeps communication processes the same.
2. When growth metrics spike but performance metrics suffer.

Caterpillar’s current business strategy and digital transformation initiatives

Caterpillar today is the largest manufacturer of construction equipment in the world. And its deadliest enemy is complacency. The best antidote against it is a well-executed strategy.

Since 2017, when Jim Umpleby’s tenure started, the company’s leadership has formulated a new strategy to carry Caterpillar into the future.

Their approach is remarkable. The company revisited its core principles, refined them, and kept them at the heart of its strategic and operational execution ever since. The reason it’s so remarkable is the consistency of its communication. The repeated principles and values work as a roadmap for its employees at all levels to make decisions aligned with its long-term aspirations.

Here’s what that looks like.

The core of Caterpillar’s corporate strategy and culture

The dedication to its core focuses is evident in the company’s consistent communication and disciplined execution.

Its approach goes beyond strategic planning and has a real impact on the company’s strategic execution. Their strategy revolves around what the company calls profitable growth. And it includes four Focus Areas:

1. Operational Excellence
2. Expanded Offerings
3. Services
4. Sustainability

The company separates its products and services into four big categories:

1. The construction industries
2. The resource industries
3. The energy & transportation industries
4. Financial products and other services

The Construction Industries is the first primary business segment of the company. It focuses on supporting customers using machinery in infrastructure, forestry, and the construction of buildings. The company adapts its approach based on the nature of demand in its operating country. For example, customers in developing economies are price sensitive, while customers in developed economies are more focused on productivity and performance. Thus, the company developed differentiated product offerings for the former.

The Resource Industries is the company’s second primary business segment. It focuses on supporting customers using machinery in mining and heavy construction, and quarry and aggregates. Since customers prioritize productivity, reliability, and the lowest total cost of ownership over the life of the equipment, the company retains its competitive advantage by controlling the integration and design of key machine components. Its R&D investments are focused here.

The Energy & Transportation Industries is the third primary business segment of the company. It focuses on supporting customers with power generation and marine, rail and industrial applications through a wide portfolio of products and services that include engines, generator sets, turbines and related services, and remanufacturing of Cat machines. Its main challenges are around compliance with increased and complex regulations regarding, but not limited to, emissions.

The Financial Products of Caterpillar is its final and only secondary business segment that operates through Cat Financials and its subsidiaries. Its primary function is financing customers and dealers for retail and wholesale Caterpillar products and services, i.e. giving customers paying choices. Due to its loaning, leasing, and other financial services, it is subject to local and governmental authorities affecting its operations. Its most important function, though, is that it provides invaluable knowledge on asset values, industry trends, financing structures, and customer needs rendering the company extremely sensitive to emerging opportunities and threats. 

Caterpillar distributes its products mainly through an international network of 160 dealers and some of its engines through its subsidiaries’ networks. The vast majority of dealers are independent, but in most cases, Caterpillar’s products and services are their main business.

There is a badge of success that very few companies boast of having: having the Dividend Aristocrat Status – this means it gives INCREASING dividends to its shareholders each year.

Caterpillar’s digital transformation strategy

Caterpillar is a very traditional company and its migration to the digital era is far from easy or straightforward.

It focuses on simplifying its solutions, connecting its systems, and increasing reusability. Caterpillar’s approach to digital transformation treats digital as an “enabler to its broader business, not a business itself.” With digital, the company aims to:

1. Increase operational efficiency
2. Deepen customer relationships and provide enhanced support 
3. Provide tailored solutions to customers that save money and time

For example, it partnered with Perficient, a leading global digital consultancy firm, and launched several programs and platforms:

• Cat Digital
  A digital marketplace which provides a range of services for the development of mobile apps that leverage Caterpillar’s connected Assets/Telemetry data.
• Cat Connect
  A Remote Asset Monitoring (RAM) service that helps customers find opportunities to control costs, improve performance and reduce risks associated with the company’s products.
• Cat MineStar Command
  An automation technology that equips miners with solutions like remote control of machinery, implementation of an autonomous fleet of haul trucks, and many other technologies that reduce costs, eliminate Lost Time Injuries, and boost overall productivity.

At the same time, Caterpillar equips its products, machines, and plants with more Industrial Internet of Things (IIoT) technologies to acquire insights from real-time data and increase its operational efficiency by improving critical production processes. The sensors it places on its machines give the company data on customer use that helps Caterpillar understand and improve its services and product offerings. 3D simulation, the kind that NVIDIA specializes in, is also a big cost-reducing driver for Caterpillar.

As of 2022, Caterpillar has over 1.2 million connected assets to its systems.

Caterpillar’s Environmental, social, and corporate Governance (ESG) strategy: a new strategic pillar

Caterpillar’s strategy didn’t always have four core pillars. Until 2021, it had only three. In 2022, Sustainability became the fourth pillar that drives a lot of strategic decisions.

A good sign the company is taking sustainability seriously in its strategic endeavors is that Julie A. Lagacy, the company’s Chief Strategy Officer, is also Caterpillar’s first Chief Sustainability Officer. But Caterpillar’s strong dedication to sustainability started back in 2006 with the commitment to an ambitious GHG emissions reduction goal. And it has been rapidly evolving over the last couple of years.

Here are its seven major sustainability goals for 2030:

1. Reduce absolute Greenhouse Gas (GHG) emissions of Scope 1 and 2 from its operations by 30% from 2018 to 2030. (Note: In 2020, the company exceeded its 2006 goal to “reduce its Scope 1 and 2 Greenhouse gas (GHG) emissions by 50%.” This is on top of that.)
2. Implement water management strategies at 100% of facilities located in water high-risk areas by 2030.
3. Reduce landfill intensity by 50% from 2018 to 2030.
4. Increase sales and revenues from remanufacturing offerings by 25% from 2018 to 2030.
5. Ensure that 100% of Caterpillar’s next-generation products are more sustainable than the previous ones.
6. Prevent all injuries and further its industry-leading safety results by reducing recordable injury frequency (RIF) by 50% from 2018 to 2030.
7. Raise awareness and train customer employees on the safe use of its products.

The company faces many challenges in achieving these goals. Environmental regulations increase each year and failure to comply results in penalties, clean-up costs, civil or criminal liability, and other harmful situations. This puts real pressure on the company, impacting its ability to conduct its operations and its financial condition.

In other words, the company has no other choice than to make sustainability a high priority and ensure its goals are achieved.

That’s why Caterpillar takes a wide-system approach to support this new strategic focus. Part of it is adjusting its governance structure:

• The company restructured its committees, creating the Sustainability and other Public Policy Committee (SPPC).
• It appointed its first Chief Sustainability Officer.
• It created its first Task Force on Climate-Related Financial Disclosures (TCFD) that will report and disclose the company's Scope 3 GHG emission estimates publicly starting in 2023.
• It committed to incorporating ESG performance into its 2022 incentive plan for Executive Officers.

Despite the mandatory nature of the focus on sustainability, the company goes beyond what is considered necessary or minimum action. And it has done so for several years in a row. Caterpillar has been part of the Dow Jones Sustainability World and North America Indices consistently since 2000.

(Note: The Dow Jones Sustainability Indices were launched in 1999 and are the longest-standing and most demanding set of sustainability indices.)

Key Takeaway #3: When you grow, increase clarity and alignment

The bigger the organization gets, the clearer the long-term vision must be. The more complex the organization gets, the more processes and tools it needs to align decision-making.

It’s not enough to come up with an ambitious corporate strategy, you need to ensure its execution. Here are three small tips that have a huge impact on strategy execution:

1. Clarify your top strategic priorities (no more than 3).
2. Align objectives, initiatives, projects, and KPIs on every level with your strategic priorities.
3. Force the first step with governance changes that create executional momentum.

Once you have achieved sufficient momentum, steer with laser-focused and real-time data reporting.

Why is Caterpillar so successful?

Caterpillar’s success stems from its commitment to providing quality products, outstanding customer service, and its dedication to finding ways to innovate and improve its products and services.

The company has one of the strongest brands in the world and, as a result, consistently ranks near the top of the Fortune 500 list. They have a diverse portfolio of products and services that cater to customers around the globe, from construction to mining and more. The company is also committed to sustainability initiatives and has been investing in research and development to create more efficient, sustainable products.

Caterpillar’s vision is at the heart of its success

Caterpillar’s vision is: 

To help our customers do the work that makes the planet a safer, more sustainable and better place to live.

And here’s how they’re making that vision a reality:

“We help the world’s doers construct the roads, bridges, seaports and runways that connect people to jobs, opportunities and one another. We help miners unearth materials found in everything from smartphone displays to batteries for electric vehicles. And we support our customers as they extract fuels to satisfy global energy demand.”

Caterpillar’s commitment to its five values guide its operations

Caterpillar has a Code of Conduct that defines what it stands for, documenting the uncompromisingly high ethical standards the company upholds. Here are its five values:

1. Integrity
2. Excellence
3. Teamwork
4. Commitment
5. Sustainability

Caterpillar has translated its Code of Conduct into 20 languages to make it accessible to all of its workforce.

Growth by numbers

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