External and Internal Environment-Caterpillar Inc. External and Essay

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EXTERNAL AND INTERNAL ENVIRONMENT-CATERPILLAR INC.

External and Internal Environment

Caterpillar: General Environment

Economic

Political

Competition forces

Supplier power: Medium

Buyer power: High

Addressing the competitive forces

Supplier power

Buyer power

External threats and opportunities

Resources, capabilities, and core competencies

How Caterpillar leverages resources

Vlaue chain analysis for improvement

The external and internal environment of an organization significantly impacts the firm's performance and its ability to compete within the respective industry to which it belongs. Whereas internal environment is important in context of enhancing firm's performance, it is the external environment that impacts the firm's ability to stay competitive in the industry. This paper is aimed at describing the internal as well as external environment of a corporation and position within its own industry sector. Themes such as how the specific firm anticipates threats in external environment and how it leverages upon internal capabilities will also be highlighted. Resource materials will be accessed from the website of Securities and Exchange Commission (SEC) through its corporate data web-portal EDGAR database. Respective company's corporate website will also be used to access materials along with scholarly materials to explain management related issues.

Caterpillar Inc. has been shortlisted as the corporate firm whose external and internal environment as well ability to manage threats and opportunities will be discussed in this paper. Caterpillar Inc., having the stock symbol of CAT at New York Stock Exchange NYSE (Bloomberg, 2013) is an American corporation engaged in manufacturing, sales, marketing, and overhauling of diesel and gas engines and machinery (Caterpillar Inc., n.d.).

Industry: Caterpillar Inc. belongs to the Heavy Equipment and Engines Industry. The company also has operations in the financial services industry but this is not the main concern of the company. Financial services segment is only operated to aid the main business of the company.

Products: The main products of the company are Haul Trucks, Diesel and Gas Engines, Wheel Loaders, Earth Moving machinery, Excavators, and Bulldozers. The company also provides services of machinery maintenance and training for equipment handling. This paper will only be concerned with the main product portfolio of CAT whereby the paper will be written in the following parts.

Format of paper: Part II of this paper will highlight the two most critical segments of Caterpillar's general environment. Part III will discuss the two main competitive forces within the competitive five forces model. This part will also carry an illustration as to how Caterpillar plans to manage these two competitive forces. Part IV of this paper will focus on the threats and opportunities present for the company in the external environment. Part V will highlight the main resources and capabilities of Caterpillar along with a description as to how CAT manages its value chain in order to leverage upon the aforementioned resources and capabilities. The paper will be concluded in part VI by restating the main findings and presenting a few recommendations for the firm's management to leverage the internal capabilities to offset the threats in external environment.

II- Caterpillar: General Environment

Caterpillar Inc. belongs to the heavy equipments and machinery manufacturing industry. The industry is capital intense and despite having high profitability, operations in this industry are vulnerable to several macro-environment factors. PEST (Political, Economic, Social, and Technological) model provides an appropriate framework for assessing the general environment in which CAT operates. Only economic and political segments of the general environment will be discussed as these two factors are the most pertinent and influential that impacts firm performance in this heavy equipment and machinery manufacturing industry.

Economic

Caterpillar Inc. reported having annual sales of $$65.875 billion in the fiscal year FY 2012 (CAT Form 10-K, 2012). The firm remained the leading construction and mining equipment manufacturing company of the world with largest number of dealerships in the whole world. Nonetheless, the same factor of being large enough and exposed to macro-economics of all the countries in the world. The company in its 2013 SEC filing of form 10-k reported that economic and political forces are the main risk factors faced by the company. Caterpillar machinery is capital intense for the company to manufacture and the customers to purchase and lease. Therefore, global economic conditions and growth prospects of mining, construction, and minerals industry largely dictates profitability of Caterpillar. The conditions in capital markets also impact significantly. Whenever macroeconomic indicators display a weakening prospect of labor markets, consumer spending, and lower corporate earnings, the business sales of CAT also go downside. Demand for CAT's products is directly dependent on the output and demand of coal, iron ore, oil, copper, and natural gas. Thus, any disturbance in demand side of the aforementioned industries directly translates to an impact on Caterpillar's financial performance (CAT Form 10-K, 2012).

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Political

After the macro-economic condition of countries world over, the second most influential factor in the general environment of Caterpillar is the political factor. Since each government drafts its economic and business policy with respect to the prevalent political agenda, monetary and fiscal policies are vulnerable for abrupt changes. Any change in monetary and fiscal policy of governments may negatively impact firm's performance in short or long-term. The decision to change the currency exchange rates is also political at times; therefore such changes may negatively impact the firm. Similarly, the commodity or components prices also impact firm's performance as the company relies on these components to be used as materials in their machinery.

III- Competition forces

Supplier power: Medium

Supplier concentration: Supplier concentration in CAT's industry segment is low. The number of suppliers is not large enough to ensure uninterrupted supply of components and materials in case of business issues between supplier and the buyer or disruption of supply chain.

Availability of substitute inputs: Availability of substitute inputs is also not high enough to provide Caterpillar and other industry firms to provide competitive advantage over the suppliers. Metal and iron raw materials can be provided in form of specific components by a limited number of suppliers that makes it difficult for Caterpillar to quickly substitute input materials in case of higher prices or non-availability.

Importance of industry to suppliers: The industry is significantly important for the suppliers to sell their products and services in form of components and training services. This advantage of the industry over the suppliers offsets the previously mentioned handicaps of Caterpillar and other industry firms.

Buyer power: High

Number of buyers relative to sellers: The number of buyers of heavy equipments machinery relative to the number of sellers is not high enough to offer significant competitive advantage to Caterpillar. Only Business-to-business (B2B) buyers purchase Caterpillar products. Therefore, the company is obliged to maintain exceptional customer relationship along with offering complementary services such as maintenance and financial products.

Product differentiation: Caterpillar does enjoy significant advantage over industry firms in offering differentiated products and services to its machinery customers, although the differentiation is not high. The company offers one of the largest earth moving machinery and equipment to mining firms.

Buyer's threat of backward integration: There is little threat of backward integration from the buyer's of machinery and equipment. This is why the company maintains a leading position since several decades.

Importance of product to the buyer: Caterpillar products are critical for the projects of buyers in mining and construction industry.

Buyer's volume: Buyer volume for the company's products is different in different countries. For instance, in high growth economies such as China, India, and Australia, buyer volume is high whereas in developed and recessionary economies such as the U.S., Europe, and Japan, the buyer volume has got low.

Overall the buyer power is high due to the prevalent economic conditions. Therefore, CAT is obliged to maintain healthy long-term relationships with buyers.

Addressing the competitive forces

Supplier power

To address the issue of a relatively medium level of supplier power, Caterpillar Inc. has managed its relationship with the suppliers through long-term contracts for supplying materials and components. The company relies on the steel and steel component suppliers to deliver it with high quality components. The company has diversified its supplier base by enlisting multiple supplier bases in Asia Pacific, Europe, and Latin America.

Buyer power

To mitigate the threat of high buyer power, Caterpillar Inc. has developed twofold strategy. For instance, the company has also developed 'financial services' subsidiary of the company to offer loans and finance for the buyers to buy the machinery on lease agreements. Each earthmoving machinery of CAT costs above $0.5 million, thus the benefit of acquiring financing service from the same company makes the buyers attracted to maintain long-term relationship with their machinery supplier and financer. Secondly, Caterpillar has developed largest distribution and service center network as compared to its competitors. This provides the customers to remain saved from 'downtime' of machinery that may otherwise cost them thousands of dollars each day the machinery is down.

IV- External threats and opportunities

Threats: The main external threats for Caterpillar are related to the economic outlook and political decisions in each of the country where the company operates. The global economic conditions such….....

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