KOMATSU CASE ANALYSIS
Submitted BY: Seema Nagwani (110) Shraddha Ghag(117) Shreyansh Sharma( 118) Srividya Ganesh(119) Sirisha V. C .(121) 1
Contents Contents .................................................................................................................................................. 2 1.
Executive summary: ........................................................................................................................ 3
2.
Industry Analysis: ............................................................................................................................ 3
3.
Way towards success: ..................................................................................................................... 4 3.1 Background: .................................................................................................................................. 4 3.2 Operational perspective: .............................................................................................................. 5 3.3 Marketing Perspective: ................................................................................................................. 6 3.4 Financial Perspective: ................................................................................................................... 6
4.
Competitor Analysis ........................................................................................................................ 8
5.
Future Strategy/Recommendations: .............................................................................................. 9
1. Executive summary: This case examines the reasons which lead to Komatsu’s rise as the biggest rival to Caterpillar and a dominant EME player. In 1981, the EME industry dynamics began to change and Komatsu made full use of the available opportunities to defeat Caterpillar. Their strong intent backed by their superior operational effectiveness helped them rise as a global player and the biggest threat to Caterpillar which had been hitherto unchallenged in this industry yet. We have done the Industry analysis and competitor analysis to gain a better understanding of the case and individual strengths and weaknesses of both the major players prevailing in the industry. We have also analyzed whether Komatsu, ultimately has the capability to triumph over Caterpillar which is a giant organization in this industry with a vast legacy behind itself.
2. Industry Analysis: Industry Rivalry - High EME industry in 1980 was a mature industry with few players holding major market share. It was a consolidated industry with Komatsu being second largest player of market share of 60% in Japan and 25% worldwide. Caterpillar is the major competitor with a market share of 43%worldwide. It faced competition from other established global player like J.I Case, John Deere, Clark Equipment and Fiat Allis. This Kind of industry is capital intensive industry with huge expenses in R&D and Fixed cost. Instability in the economy causes the overcapacity in the industry and leads to a fierce competition which results in price wars and favourable terms for the buyers. Komatsu has focused on lower prices and higher quality of its products to maintain the competitive position in the market. Bargaining Power of Buyers – Medium Presence of a good number of domestic and international firms gives the customers quite a bit choice for purchasing the equipment but switching cost is high rendering the buyer power to be medium. Bargaining Power of Suppliers – Low There are global suppliers for the steel casting so the prices can be negotiated and in this kind of industry player are mostly vertically integrated just resulting in low bargaining power of suppliers. Threat of new entrants – Low EME business not only requires huge R&D and Capital Expenditure but the new brand must offer brand equity by differentiating its products from the other players in the industry. This poses huge entry barriers in EME industry, so threat of new entrants in this industry is low.
Threat of Substitute – Low Each product in this kind of industry has unique features. There isn’t any product that can perform the same functions at a comparable cost.
3. Way towards success: 3.1 Background: Komatsu, Japanese Company was established in 1921 as a specialized producer of mining equipment. Management stressed on two important perspectives: an “overseas orientation” and a “user orientation”. In the post war years the company reoriented itself towards industrial EME and bulldozer was in a great demand as Japan’s post war reconstruction started in earnest. The turning point came in 1963 when the Japanese Ministry of International Trade and Investment (MITI) decided to open the EME industry, Komatsu realized that in order to survive it had to attain global standards. It tried to block the Mitsubishi-Caterpillar deal and was partially successful. The MITI delayed the project for two years and Komatsu used the time to build up its resources and capabilities to compete globally. The following stages highlight how the company was able to transform itself from a domestic player to a successful global organization: 1960s (Focus on mere subsistence): The company focused on two goals: the acquisition of the necessary advanced technology from abroad and the improvement of product quality within the company. Licensing agreements with major U.S. EME manufacturers allowed it to upgrade its technology. Komatsu established its first R & D laboratory and also launched a quality upgrading program (TQC). The company also began Project A to achieve quality enhancements and cost reductions as a result of which durability of new products was twice that of the old ones and warranty claims decreased by 67%. 1970s (Focus on Expansion): The Company started its foray into the overseas market through the Eastern bloc countries like USSR and China. However by 1974, the company had entered the European, North American and many LDC and fast growing industrialization countries in Asia and Latin America. One major impediment it faced was that it was unable to develop exclusive dealership networks in many countries as they were already taken up by other large competitors. In order to counter this, Komatsu used its links with Japanese trading companies to learn about new projects, maintained extensive parts inventories, non exclusive dealers and used direct subsidiaries for sales in the absence of a dealer. Later in 1972 it launched a new project B which zeroed on the exports & company exported world class bulldozers through cost reductions and quality enhancements implemented in the
same manner as Project A. The idea was to attract dealers and hence, customers through superior products.
The Late 1970s (Improving competitiveness): The Company focused on cost reductions and accelerated product developments to enhance its competitiveness. When the yen became strong against the dollar, they started using narrower margins to get more cost reductions. It introduced the World’s first radio controlled bulldozer which helped the company to gain competitiveness in fierce competitive environment.
1980s: Komatsu’s narrow product line was an obstacle in becoming a dominant player in this industry. However, it had to end its licensing agreements in order to become a full line supplier. As the company broadened its range, it started heavily advertising in specialist trade magazines. The company started investing heavily in increasing its visibility abroad. The company also faced cost pressures as it diversified its products which needed to meet the local demands. Hence, they launched the EPOCHS scheme to standardize manufacturing. The company also started looking at other avenues outside the EME industry to offset the risks involved in this industry. By 1984, the company achieved a relatively high position in the industry. Komatsu’s spirit to seek out the root causes of issues, and always strive for innovation and future growth helped it achieve a dominant position. In addition, a long history of good labor relations, many quality-control programs that won premier awards, R&D innovation, profitability, overseas distribution channels growth, and dominant local market share all attest to Kawai’s excellent leadership. So company changed its focus from survival based on costs to market leadership based on costs and differentiation with a focus on R & D processes.
3.2 Operational perspective:
Recognizing that its dependence on licenses made it vulnerable, the company established its first R & D Laboratory to focus on the application of electrical engineering developments. Company also launched quality upgrading program: Total Quality Control (TQC) to ensure quality in every aspect of its operations. To ensure good service by the dealers it managed to maintain extensive part inventories. It chose its main export item (Bulldozer) for improvement to bring it to the world standards. Company’s “V-10 Campaign” aimed at improving product quality and also at value engineering specially focusing or redesigning products to gain economies in materials or manufacturing. It also aimed at rationalization of the manufacturing system. In 1981, /company launched a new product called “EPOCHS” (Efficient Production Oriented Choice Specifications) whose aim was to improve production efficiency without reducing the number of product specifications required by the market.
3.3 Marketing Perspective: With respect to the products, the company invested in extensive R&D to improve upon the quality of the products, variety in the product lines as well as cost reductions. They strived to achieve world class standards through these R&D initiatives.
Komatsu managed to price their products 30%-40% lower than those offered by Cat. They developed direct selling practices where they sold to government agencies and large companies. They also maintained liaison offices and regional centers for parts distribution and service.
3.4 Financial Perspective: From Exhibit 1 – It can be analysed that from the early 1970 to 1984, Caterpillar steadily been losing market share while Komatsu has been gaining market share, in 1984 it gained 25% of world market share as compared to caterpillar’s 43%. One key reason for this shift is that Komutsu was able to price their products 30% to 40% lower than similar Cat equipment. Komatsu was able gain this cost advantage due to its superior production techniques, lower cost of raw material like steel which cost up to 30% lower in Japan and also due to huge labour cost differential of more than 45% with respect to Cat. In 1977 due to foresighted of Komutsu regarding exchange rate fluctuation of US Dollar – Yen, the management adopted policy change, when yen started appreciating rapidly, where manufacturing was to achieve a cost structure that could be profitable even at a worst case scenario of yen/dollar exchange rate reaching 180. Key Issues - Yen had seen large fluctuations from 1971 to 1978, which created a huge obstacle for the export division. Recommendation - These fluctuations can serve as a huge risk as Komatsu is centrally sourced, thereby creating huge fluctuation in profitability. The problem occurs because of dollar denomination of products and services; however company can hedge itself with forward, future contracts and currency swap options to avoid currency fluctuation problem. Analysing Return on Capital Employed (Data taken from Exhibit 3) The EME industry in which Komatsu is operating is characterised by heavy capital investment, huge amount of fixed assets, depreciation of assets, etc. So from financial point of view, ratio indicators such as ROCE become an important parameter to study the company’s performance.
ROCE 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%
18% 16%
16%
14%
13% 10% 8%
1978
1979
1980
1981
1982
1983
ROCE
1984
The above graph shows varying trend in Komatsu’s Return on Capital employed, which is ratio of net income to capital employed over the years 1978-1984.Till 1981, when it saw business going to peak, ROCE was at 18%. But after 1981, net income consistently went on decreasing whereas Komatsu’s capital employed was increasing every year, showing negative growth in ROCE. Reasons for this could be
Cash outflow due to exit from licensing agreements and buying back it’s stake from IH (International Harvestor). Increasing R &D expenses. Investment in overseas distribution channels and marketing. Downturn in construction industry and thereby slump in demand. A financial analysis as shown above demonstrates that while the company has done well, it may not be in a position to topple Caterpillar yet.
In EME industry Caterpillar Inc was the largest player. Komatsu has successfully chased Caterpillar and they have successfully captured much of the market share from Caterpillar. This is evident as in the past 13 years Caterpillar’s market share has gone down from 56% in 1971 to 43% in 1984. While on the other hand Komatsu has established themselves as a dominant player in the EME industry with 25% market share in 1984.
4. Competitor Analysis In EME industry Caterpillar Inc was the largest player. Komatsu has successfully chased Caterpillar and they have successfully captured much of the market share from Caterpillar. This is evident as in the past 13 years Caterpillar’s market share has gone down from 56% in 1971 to 43% in 1984. While on the other hand Komatsu has established themselves as a dominant player in the EME industry with 25% market share in 1984. According to Michael Porter Competitor Analysis which is framework for analyzing the competitors is based on the following key aspects of the competitor:
Competitor’s Objectives Competitor’s Assumptions Competitor’s Strategy Competitor’s Capabilities
Objectives -To grow at 6%-7% a year throughout 80s. -Expansion of distribution network -Invest more and more in R&D
Strategies -Differentiation -Maintaiing high Inventory -Emphasis on After sales services
Assumptions -Optimistic outlook about EME industry -Higher expenditure on workers will help company to increase loyalty and productivity
Capabilities -Strong Distribution network -Flexibility to shift production plants -High Spending in sales and promotion
Considering the above matrix, the main thing Komatsu needed was to change its strategy from being International to localization, so that they can serve various markets. Also, Komatsu needed to expand its product line by being innovative and also cost effective. Komatsu’s strategy of focusing on operational effectiveness than on general strategies and the only way to get close to Caterpillar was to focus more on operational strategies.
Why Komatsu lag Caterpillar Caterpillar had already created its value in the market by offering differentiated products and also because of their sales and distribution network. Despite of the fact that Caterpillar was charging at least 10—15% high on its product and they also recurred losses in the three consecutive years, they were still in the control of the market with 43 % share. While Komatsu’s Maru C strategy still couldn’t caught up with Caterpillar and remained on 25 % market share. Although, Komatsu was also focussing on differentiation but they also had maintained costs. Therefore, value addition was not able to reach to the level of Caterpillar.
Caterpillar Product Differentiation
Value Gap
Komatsu
High to low cost
5. Future Strategy/Recommendations:
Down trend in American market and easing up of fuel prices in Middle East slowed the construction activities in both the markets. According to sales figures Asia and Oceania have grown significantly mainly because of the upsurge of many South East Asian countries. Because of the continuous uptrend expected Komatsu should focus in this market. Komatsu should increase its product line considering the fact that Caterpillar had more products in the offing than any other player in the market. Komatsu’s strategy of catching Caterpillar worked well. It also mainly clicked because construction industry was growing. Now, by this time in all major economies construction activities slowed down. Instead of continuing with that Komatsu should formulate a sustainable strategy which is built on the foundations of a dominant player of EME industry.
In August 1980, the National People's Congress (NPC) passed "Regulations for The Special Economy Zone of Guangdong Province" and officially designated a portion of Shenzhen as the Shenzhen Special Economy Zone. Also, in 1984 PRC further 14 more cities to overseas investment. This was the clear indication that where the future of construction activities will lie and which is the market Komatsu should focus for the future considering its location near to China. They can also use flanking strategy. They can enter the new market with the collaboration of partner in home market and then establish themselves as a dominant player in that market. Komatsu was exposed to currency fluctuations and protectionism threats, mainly because they were centralized in Japan. On the other hand Caterpillar had production facilities in other parts of the world also. Another thing which Komatsu should do is to control the R&D expenses. According to case during 1981 -1983 the R&D expense has jumped from 4.3% to 5.8%, while the industry average was around 1.7%.
References 1) Charles W.L Hill, Arun K Jain. International Business. Mc Graw Hill. 2) Dr. Cristopher Bartlett A, U, Srinivasa Rangan(1985).Komatsu Co. Harvard 3) Porter 4 corner Model Source - Strategic Management and Business Policy by Thomas L Wheelen, J David hunger