What do bulldozers and businesses have in common? Their fate depends on whoever is sitting in the driver's seat. No one understands this better than the management at Caterpillar Inc. (CAT), the world's leading manufacturer of heavy machinery, whose trademark yellow machines — bulldozers included — can be found everywhere from construction sites in the U.S. to mining excavations in China. Over the past several decades, CAT has achieved a level of efficiency and profitability unmatched by any of its competitors, and it's done so with the help of a few great leaders.
While Caterpillar is No. 1 in its industry, its story is not without trials and losses. In the 1980s, CAT lost $1 million a day for three consecutive years, bringing the company's very existence into question. But with a "change-or-die" approach to restructuring and a series of astute management decisions, CAT's leaders were able to bring the nearly 100-year-old company back to life.
The tough decisions faced by CAT's leadership in the 1980s and the company's subsequent rise to greatness are well documented in Craig Bouchard and James Koch's new book, "The Caterpillar Way: Lessons in Leadership, Growth, and Shareholder Value" (McGraw Hill, September 2013). The lessons learned at CAT provide valuable insight into how to run a business that can stand the test of time.
In an email interview with BusinessNewsDaily, Bouchard explains how any business can follow in CAT's footsteps, achieving greatness by employing tested management strategies and putting a great driver in the seat of power.
BusinessNewsDaily: Does greatness always correlate with "bigness?" Or can small companies achieve greatness, too?
Craig Bouchard: You can be great at any level of scale. In fact, it's very easy to be great when you are small. It becomes progressively more difficult as you grow. To "scale" efficiently past the level of $20 billion of annual revenue is rare.
BND: What's the relationship between good investment and good leadership?Craig Bouchard
C.B.: They are different activities or processes, but there is a very strong correlation.
The best-managed companies are those that allocate capital to the most important initiatives, those where return on investment will be maximized (i.e. investing in those activities that strengthen the core business and allow the firm to grow efficiently and become more profitable).
Too often, a company will spend its precious capital on things that really don't matter. This is perhaps the most important and frequent mistake I see in business. A good leader won't allow this to happen
BND: The "Bouchard-Koch Scale Efficiency Model" uses 25 criteria to qualify scale efficiency. First of all, how do you define scale efficiency?
C.B.: Simply stated: growing in a way that makes the company of higher quality as it gets bigger. This can be measured in terms of profit margins, product quality, customer loyalty, employee satisfaction, efficiency of supply chain or physical facilities, or most importantly, the return to shareholders. Most companies don't improve in these categories as they get very large. But the great companies improve.
BND: And secondly, one of the criteria you measure is a company's use of "branding as a weapon." What does this mean and what are some examples of companies that successfully fulfill this criteria?
C.B.: Branding as a weapon refers to those situations where the brand creates customer loyalty — bringing customers in the direction of its products and, by definition, away from the competition.
If you show someone a logo, and they can name it right away with nothing but this visual prompt, [the company is] winning the brand war. Think Apple, Coke, CAT, 3M, McDonalds.
BND: You make the point that many successful companies take the road less traveled. What are some ways that originality is rewarded in the business world?
C.B.: If you get there first and win the loyalty of the customer — enter the blood stream — this dependence can create a franchise which overcomes the competitors for a long period of time. Think Apple.
BND: You write that "good moral fiber wins more customers than it loses." How has Caterpillar proven this philosophy to be correct?
C.B.: In foreign markets — particularly in developing markets — it's a common practice to offer bribes to gain entrance. In the U.S., this led to the "Foreign Corrupt Practices Act" to curb such abuses by American companies doing business abroad. CAT has never experienced a material problem of this sort. It might well stand alone on this plateau (read the recent problems of JP Morgan in China or Walmart in Mexico for but two big examples).
Yet, 70 percent of CAT's revenue is generated outside the U.S. If there is one U.S. company that can claim victory on the moral fiber topic it would be CAT.
BND: What are some ways to avoid "lazy culture" in the workplace?
C.B.: Continually infuse fresh talent. Promote creative and disruptive managers. Pay top performers well, poor performers as deserved and cull the bottom 10 percent every year.
BND: You point out that CAT has been led by many different types of people, but that each has proven to be an effective leader. What leadership qualities have these various CEOs possessed?
C.B.: Each possessed the skills required to take the company to its next stage of growth. [George] Schaefer improved the physical plants and introduced computers to get CAT competitive again with Komatsu and others.
[Donald] Fites was tough. He got rid of a poor global organizational structure and took on the unions. [Glen] Barton made the company lean, improved product quality and demanded instant change in order to allow Six Sigma to succeed (the tsunami of change).
And [Douglas] Oberhelman [the current CEO of CAT] has changed the product mix — making CAT number one in mining, strong in energy and has focused the company on eventually becoming number one in China. All of these guys took career risks in making big decisions.
Originally published on BusinessNewsDaily.