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An Inside Look At CAT's Business Ingenuity

In recent years, Caterpillar had incredible performance and growth, the darling of financial analysts. But it wasn’t always so: In the 1980s, some observers wondered whether CAT could survive as it hemorrhaged financial losses.

This article originally appeared in the January/February 2014 print edition of IMPO. 
The construction and mining giant Caterpillar is the world’s largest manufacturer of construction and mining equipment, diesel, and natural gas engines. In recent years it’s had incredible performance and growth, the darling of financial analysts. But it wasn’t always so: In the 1980s, some observers wondered whether CAT could survive as it hemorrhaged financial losses.  
The Caterpillar Way: Lessons in Leadership, Growth, and Shareholder Value chronicles how the company bounced back, with a reorganization as seismic as it was productive. With original interviews with top execs, board members, union officials, investors, and Wall Street analysts, this is an inside look at how the company’s emphasis on core values edged up its margins even through difficult times.
The book, co-written by Craig Bouchard and James V. Koch, also theorizes that analysts have consistently undervalued the company, and looks at long-term trends in mining and global resources which offer an optimistic view for CAT’s future.
Bouchard is Founder and CEO of Shale-Inland, LLC, a leading industrial supplier of products used in the transportation of water, food, energy, and information. He spoke with IMPO about what every business can learn from CAT's success. 

IMPO: What would you say is the primary theme of the book?
Bouchard: The theme is maybe not what you think it is. We began the process not even thinking about Caterpillar. What we wanted to try to do was to write a book that was a modern follow-up to the themes of Good to Great. What does it mean in today’s mixed up world to be a well-managed company? A lot has changed. James Koch has been my mentor for my whole business career, and he has been my advisor on many things over the years. We started saying, ‘What does it mean to be a well managed company today? Let’s build a model.’ In the book, we list 25 variables. We looked at ten companies and assigned a weighted average score to each of those 25 variables — and CAT won easily. So we wanted to look at why that is.
Part of our idea was to write a book that Main Street could read, not Wall Street. Because for a lot of people, if they’re going to start a business, it would be nice to know what it takes to make a good business. Then you take the other half, who have their jobs but their 401Ks may have been slaughtered during the recession: they want to know what kinds of companies to invest their money in. The world has gotten away from picking stocks based on management because it’s so hard to evaluate the management of a big company. We’ve gotten away from saying, ‘I’m putting my money with the best management teams’ because you can’t figure out who they are. So we wanted to say in common sense words: what does it mean for these big, global companies to be well managed?’ Those were the principles for the start of the book. And once CAT said we could come in, we spent a year interviewing people – all the living CEOs, the directors, EVPs, factory people, analysts, union people – and we told their story.
IMPO: How did you find that CAT was really an ideal case study on business ingenuity once you started talking to these folks?
Bouchard: I’m the CEO of a company, and have been the CEO of a couple of companies. I tend to think from the management challenges side, so what happened with CAT is remarkable from my perspective. In a period of thirty years, they made five or six huge company-changing management decisions — things that just turned the whole place upside down each time. Those are risky things to do, and they’re often not well done. But CAT got them all right. This collection of decisions, which were interrelated to each other, allowed them to scale from $10 billion to $20 billion, and shatter the barrier where most companies can’t go any higher. What sets CAT apart is their incredible string of successes with huge risky decisions. I haven’t seen any company able to (successfully) make that many consecutive gigantic decisions.
IMPO: Do you believe that the average company has both the smarts to identify their fundamental flaws, and also the guts to change business models?
Bouchard: I think very few companies do. What does it mean to be a well-managed big company, which is very different from being a well-managed small company? I think we tend to get confused. We tend to look at the CEO and say that man or woman is a good CEO, or not. We make a decision on a person, and then we extrapolate that if that person is a good CEO, then the company is well managed. But it doesn’t work like that, and the bigger you get the more it doesn’t work like that. Management of companies is complex, and the bigger they get the more complex it is. So that’s why we looked at 25 factors in how we evaluated what a well-managed company is. It’s a very complex thing, and you’ve got to do well on almost all of those 25. But of course no one personally can do all that. There are people who manage supply chains, people who do branding and marketing, and handle financial risk, people that handle customers, and people who keep their fingers on the pulse of the ethics of a company. Some companies do that well, and some have no control, but it’s got nothing to do with the CEO — it’s the process inside a very large management group, inside of a company. My feeling is, to evaluate great-managed companies, we have to focus not so much on the CEO, but how the process of management is executed inside of the company. How do they plan? How do they execute? Are the systems good systems? Are they Lean?
IMPO: If you were looking for a takeaway as to how your business can better hone its leadership skills, what might be a few key points for how to get started?
Bouchard: The first thing to consider is how you scale as a company. You scale by having a good market niche, low cost, and good customers. Your management team needs to function as a collective group of people who can see forward, understand your customer base, and guide the activities of the employees to grow the company efficiently. If you don’t have a good strategic planning process, you’re going to fail. If you don’t have a continuous, ongoing Lean, Six Sigma environment in manufacturing, you’re not going to make it. You can exist as some state, but as you get bigger, the competitive forces will chew you up. 
In Caterpillar’s case, they do something that I found remarkable. A lot of people have trouble with really thinking through strategy, but Caterpillar not only does a remarkable strategic plan each year with total seriousness across the world, but they do another exercise each year they call ‘Planning for the Trough.’ They do this better than any company I’ve ever experienced. They make a plan every year that says: next year, if the economy goes down in a way we’re not expecting, here are the steps we will take to cut back, save our money, be efficient, and get through the unexpected recessionary period. As a result, Caterpillar has made its way through these tough business cycles better than most big businesses. They continue to grow their dividend each year in spite of the recession; their profits have gone down (in some periods of economic decline), but they have recovered very quickly. You have to plan efficiently – operationally and strategically – and you have to have a team of people that works together to pull it off. And they’ve got to be fully committed. It’s great to have a great CEO, but you’ve got to start thinking about the value of the company in, collectively, the much larger team of people that’s guiding it. 
IMPO: Did you get a feel for what’s in store for CAT in the long term?
Bouchard: The two chapters before the last are creating a bit of a buzz out there about the book. We took everything we learned from inside this company over a year and a half – which is a lot – and we predicted their revenue, their earnings, and their stock prices through 2020. We have a base case, a downside, and an upside. The base case basically has their stock growing to – if it’s in the middle of our base case – about $350-$400 from today’s $84. The reason is that CAT is so correlated to global GDP that they’re really everywhere. If you did a 3.5 percent GDP rate of growth in the world over this next seven years, Caterpillar stock is like a private equity investment — a 400 percent return. That’s a shocking thing to think about for that big of a company. The takeaway here is that, if the world recovers, Caterpillar is one of the best stocks anybody can buy. I’ve had fund managers read the book and write me letters to say they bought the stock.