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Lessons Learned: How Good Strategy Can Be Hurt by Poor Execution-Caterpillar Identifies an Attractive Market; but Outcome Hurts Bottom-Line

Denise Harrison

Strategic Planning Expert

By Denise Harrison, Executive Vice President & COO

“As part of Caterpillar’s strategy the company has identified the mining industry and improved support of its customers as one of Caterpillar’s key imperatives.” (Press release, 11/10/11)

What trends did Caterpillar see that made the mining industry attractive?  The trends that were identified included:

  • Current and future growth of developing nations and their increased reliance on energy to raise standards of living
  • China produces more than half of the world’s coal – a key source of energy for the developing world (Hence, why Caterpillar identified China as key to its mining imperative’s success.)
  • A recent upsurge in mining accidents in China resulting in increased scrutiny by regulators and enhanced safety standards
  • Increased safety standards escalate the demand for automation which has been shown to reduce the number of accidents causing injury or death
  • Labor rates are increasing in China and automation of mining functions would boost mining efficiency and increase profits for mining companies

In order to achieve its strategic imperative in the mining sector Caterpillar saw China as one of the keystones in its growth strategy. In order to capitalize on the opportunity quickly, Caterpillar decided that an acquisition would be the best way to gain traction in the market.  Caterpillar decided to buy ERA Mining Machinery, Ltd., a hydraulic roof support manufacturer.  Caterpillar purchased ERA for approximately $885 million.   The Caterpillar team expected to leverage ERA relationships and reputation to strengthen its position in the growing Chinese mining market.  Caterpillar also planned to leverage its global presence to sell ERA products world-wide.

The Result:

In spite of the fact that Caterpillar has operated in China for over 30 years, and has over 20 facilities in China, the company’s due diligence did not uncover significant accounting irregularities including inaccurate inventory data and revenue recognition issues.  This led to a write-off of $580 million in 2013.

Lesson learned:

Evaluating market attractiveness by analyzing future market trends is paramount for a good strategy.  However, a good strategy must go hand in glove with superior execution for a successful strategy. Often companies become so enamored with an acquisition and its possibilities that they overlook the weaknesses.  To learn more about what to look for when evaluating an acquisition, please  listen to our webinar: Acquisition: 8 Steps to Success.   Please click here.

Denise Harrison is Executive Vice President and COO of the Center for Simplified Strategic Planning, Inc.  She can be reached at  harrison@cssp.com.

© Copyright 2013 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution.