Case Discussion and Internet Exploration Questions

Closing Case Caterpillar Inc.

Website — http://www.caterpillar.com

Case Discussion Questions

To what extent is the competitive position of Caterpillar against Komatsu dependent on the dollar/yen exchange rate? Between mid-1996 and early 1998, the dollar appreciated by over 40 percent against the yen. How do you think this would have affected the relatively competitive position of Caterpillar and Komatsu?
If you were the CEO of Caterpillar, what actions would you take now to make sure there is no repeat of the early 1980s experience?
What potential impact can the actions of the IMF and World Bank have on Caterpillar's business? Is there anything Cat can do to influence the actions of the IMF and World Bank?
As the CEO of Caterpillar, would you prefer a fixed exchange rate regime or a continuation of the current managed-float regime? Why?

Internet Exploration Question

This case focuses on the bumpy ride that Caterpillar Tractor has experienced in international markets over the past twenty years. Caterpillar Inc. (Cat) is the world's largest manufacturer of heavy earthmoving equipment. In 1980, Caterpillar was widely considered one of the premier manufacturing and exporting companies in the U.S. In 1981, 57 percent of its sales were outside the U.S. Unfortunately, the next three years were disastrous. As a result of emerging competition from Komatsu (a Japanese heavy equipment manufacturer), a sharp rise in the dollar against other currencies, and the Third World debt crisis, Cat found itself losing market share and profitability. The biggest problem was the unprecedented rise in the value of the dollar. In the period of 1980 to 1987, the dollar rose an average of 87 percent against major currencies. The strong dollar substantially increased the dollar price of Cat's machines, which made them unattractive to overseas buyers. Cat scrambled to respond to this challenge by cutting costs and investing in flexible manufacturing technologies to increase quality. The company also lobbied hard to decrease the value of the dollar against other currencies. Fortunately for Cat, things began to take a change for the better in early 1985. The U.S. government met with representatives of Japan, Germany, France, and Great Britain at the Plaza Hotel in New York. The resulting "Plaza Accord" put forces in motion that eventually brought the value of the dollar back to its 1980 level. The retreat of the dollar enabled Cat to regain momentum in global markets. Today, the company is competitive again, and has regained market share from Komatsu.

One thing that helped Caterpillar during the bleakest days of the early 1980s was a decision by the International Monetary Fund (IMF). In response to the Third World debt crisis, the IMF stepped in and provided loans to Third World countries that were heavily in debt. This action by the IMF helped restore the financial integrity of many of these countries, which has put them in a position to be Cat customers again today. The IMF maintains a very substantive website at {http://www.imf.org/}, and continues to take action to provide stability in world currency and financial markets. Spend some time navigating the IMF's website and then answer the following questions. What is the mission of the IMF (or why does it exist)? Based on the information contained in the website, what are some of the major actions that the IMF is capable of undertaking? What effects can these actions have on the long-term competitiveness of U.S. exporters (think broadly). Explain your answer.

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