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Submitted BY:

Seema Nagwani (110)

Shraddha Ghag(117)

Shreyansh Sharma( 118)

Srividya Ganesh(119)

Sirisha V. C .(121)

KOMATSU CASE ANALYSIS

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.

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.

14% 16%

16% 18%

13%

10% 8%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1978 1979 1980 1981 1982 1983 1984

ROCE

ROCE

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

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.

Objectives

-To grow at 6%-7% a year throughout 80s.

-Expansion of distribution network

-Invest more and more in R&D

Assumptions

-Optimistic outlook about EME industry

-Higher expenditure on workers will help company to increase loyalty and productivity

Strategies

-Differentiation

-Maintaiing high Inventory

-Emphasis on After sales services

Capabilities

-Strong Distribution network

-Flexibility to shift production plants

-High Spending in sales and promotion

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.

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.

Value Gap Komatsu

Caterpillar

High to low cost

Product

Differentiation

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