Caterpillar Company Analysis Using Porter’s 5 Forces Model

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Table of Contents

Introduction
Potential entrants
Threat of substitutes
Power of suppliers
Power of buyers
Rivalry
Appendix 1: Porter’s five forces analysis
References

Introduction

Porter’s five forces analysis is necessary for Caterpillar Company as it assists in comprehension of the market strengths and weaknesses.

Although the Caterpillar Company has been a household name in the global heavy machinery manufacturing industry, there are several players that have limited its competitive advantage in the industry.

The five forces determining the competitive advantage of companies operating within the heavy machinery manufacturing industry in the US are discussed below.

Potential entrants

Economies of scale

The current players in the heavy machinery manufacturing industry have been in existence for long and have very large production capacities. For instance, Caterpillar, Deere, Kubota Corporation, Komatsu Limited, and AGCO Corporation have diverse and very big manufacturing plants spread across the US.

Therefore, it is easy for these players to lower their prices as a competitive strategy since they directly benefit from economies of scale. Thus, a new entrant is disadvantaged in terms of pricing of its machineries since it will not benefit from economies of scale in the same magnitude as the current industry players (Wright, 2007).

Cost disadvantages from other than scale

The cost of putting up a single production unit is very expensive for a new entrant since the current players such as Caterpillar, Deere, Kubota Corporation, Komatsu Limited, and AGCO Corporation have breakeven and can easily manage the cost of production with clear market projections.

A new entrant will find itself in the mucky waters of trying to manage the cost of producing a single unit of machinery to compete the average industry cost, which may not be practical for a small player (Wright, 2007).

Product differentiation

Players in the industry such as Caterpillar, Deere, Kubota Corporation, Komatsu Limited, and AGCO Corporation have diversified their product as part of portfolio balance strategy.

For instance, each of the above players have diversified heavy machinery to serve construction, agriculture, and manufacturing sectors to boost the total revenues each year.

A new entrant may not be able to compete with these players since their diverse products and strong brand presence is almost impossible to challenge, especially when the new entrant plans to start small (Johnson, Whittington, & Scholes, 2011).

Capital requirements

The heavy machinery manufacturing industry is characterized by capital intensive ventures since most of the machines are very expensive to product, maintain, and replace. For instance, Caterpillar has a capital worth of 28 billion dollars.

It is very difficult for a new entrant to easily enter this market and breakeven within two to three years since such ventures require a lot of capital in putting up factories, hiring skilled workers, and producing affordable and quality machineries (Johnson, Whittington, & Scholes, 2011).

Switching cost

The cost of switching to different machinery at the production stage is very high since it requires complete overhaul of the previous plant.

This is not sustainable in the short run for new player with relatively limited capital (Johnson, Whittington, & Scholes, 2011). Within this aspect, switching cost for a new entrant may translate into closing down such a company.

Access to distribution channels

The players in the heavy machinery manufacturing industry have spread across the nation, opening numerous branches in all major cities and centers.

It would require massive capital for an aspiring investor to outperform their business prowess, in terms of established distribution channels (Wright, 2007). A new entrant will be in a disadvantaged position when attempting to penetrate this industry.

Government policy

There are stringent rules by the federal government that must be followed by any player in this industry.

As a legal requirement, each company in the industry is expected by the regulatory authorities to be tax compliant and meet the minimal threshold in terms of safety, environmental friendliness, labor laws, and other business requirements (Wright, 2007). The approval process is very long and expensive for a new entrant with limited capital.

From this analysis, it is apparent that the threat of a new entrant is very low since the switching cost and capital requirement are very high for a new player. Besides, the current players have high competitive advantage as a result of benefits from brand differentiation and economies of scale.

Threat of substitutes

Deere, Kubota Corporation, and AGCO pose the greatest threat to existence and business performance of Caterpillar and any other player in this industry. These companies have been in the industry for long period and are well established.

The Deere, Kubota Corporation, and AGCO have the same machineries and sometimes offer big discounts to customers. In the US heavy machinery manufacturing industry, loyalty to a brand plays an important role in customer behavior.

Therefore, Deere, Kubota Corporation, and AGCO have the ability to offer an alternative perfect substitute to customers who may be unsatisfied with machineries offered by Caterpillar and other players (Witcher & Chau, 2010).

Unsatisfied customers have other alternatives from where they can get heavy machinery. However, the threat of substitutes is moderate since changing a brand is very expensive for customers in terms of initial purchasing cost, maintenance, and further training of users.

Power of suppliers

Suppliers in the heavy machinery manufacturing industry have power owing to the existence of many players and high demand for different raw materials used in the heavy manufacturing plants.

As a matter of fact, suppliers may instigate market demand and supply variances since most of the raw materials used in this industry in the US are imported. All the players depend on the suppliers such as the steel companies and engine manufacturers directly for the delivery affordable machinery parts for assembly.

This leaves the suppliers with the power to dictate on proceedings in the industry such as the cost of these parts and their availability (Nexis, 2015).

However, through series of partnership agreements with independent manufacturers and vendors, the players in this industry have managed to curtail the power of the suppliers to moderate since there are series of jointly negotiated deals on the cost of these raw materials.

Power of buyers

Reflectively, the amount of output in terms of turn over sales depends on the buyers’ purchasing power. The higher the purchasing power, the better the turnover in total sales realized over a definite period of time.

The performances of Caterpillar, Deere, Kubota Corporation, and AGCO in the US heavy manufacturing industry depend highly on the power of the heavy machinery users. On the other hand, unreliable and weak purchasing power translates into losses and underperformance (Wright, 2007).

The players must therefore do everything within their means to ensure that service delivery and quality meets the expectations of customers since the power of the buyers is very high in this industry.

Rivalry

There are several players such as Caterpillar, Deere, Kubota Corporation, and AGCO operating in the same industry with virtually all of them dealing in a variety of machineries, which can perform similar functions.

With many customers looking for good value for their money, durability and affordability of the machineries have remained the main basis upon which customers make their final decision to purchase products in the volatile industry.

All the players in the industry are putting measures in place to ensure they attract more customers and therefore expand their market share (Johnson, Whittington, & Scholes, 2011).

In line with this, the Caterpillar factories are the biggest and busiest in the US. The influence of rivalry is very high due to existence of very many players with the same product brands.

Appendix 1: Porter’s five forces analysis

Competition Rivalry	Determinants of buyer power	Threat of Substitution	Determinants of supplier power	Threat of new entries
The Caterpillar Company faces rivalry from both the local companies and international companies. The influence of rivalry is very high in the industry.	Customer power is very high in the industry in which the Caterpillar and other heavy machinery companies operate in. The consumers may decide to shift if they feel unsatisfied with the cost, ease of usability, and perceived durability of the heavy machinery brands.	The threat of substitute products is moderate in the heavy machinery industry as the cost of switching products for the consumers is quite high since these machines are very expensive and requires specialized servicing teams from the manufacturer.	The supplier power in the industry is moderate. The players in the industry have negotiated standard prices of most of the imported materials used in the industry.	The threat of new entrants into the heavy machinery industry is very low. This industry is capital intensive and has very stringent government regulation policies that a small player may not survive in.

References

Johnson, G., Whittington, R., & Scholes, K. (2011). Exploring strategy (9th ed.). Alabama, Al: Prentice Hall.

Nexis, L. (2015). Business and management strategy. Chicago, Ch: Glo-Bus Spring.

Witcher, B., & Chau, V. (2010). Strategic Management: Principles and Practice, Alabama, Al: Cengage Learning.

Wright, P. (2007). A refinement of Porter’s strategies. Strategic Management Journal, 8(1), 93- 101.

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