The Extent to Which Market Maturity Causes Restructuring: A Case Study of Caterpillar
Businesses which resist shakeouts often face fresh challenges in the wake of stagnating
market growth. However, as their market matures, stability in total volumes is realized which is
largely contributed by replacement purchases rather than first-time purchases. Businesses
operating under a mature market, therefore, have the fundamental objective of holding their
existing clients by sustaining their satisfaction and maintaining their loyalty thereby gaining a
competitive advantage over their rivals (Mullins, 2012). Organizations often venture in
restructuring as means of increasing demands in mature/cyclic markets hoping of improving
product performance (Conrad, 2001). By critically examining its extent on performance
transformation, this essay advances the thesis that market maturity extensively contributed to
Caterpillar’s restructuring in the 1980s.
As stated earlier, organizations faced with a mature/cyclic market venture into
restructuring to enhance their performance. This may take various forms. Traditionally,
organizations would restructure by way of mergers and acquisitions through spin-offs and sell-
offs as well as buy-ins and buy-outs aimed at maximizing the wealth of shareholders. However,
MARKET MATURITY AND RESTRUCTURING 2
modern forms of restructuring include rightsizing (closures, downsizing and outsourcing), share-
related management incentive programmes and financial engineering (debt substitution and buy-
back of shares to ensure equity). Company mergers were a common means of restructuring up
until around 1995 due to their friendly value. Takeovers, on the other hand, were seen to benefit
only the acquired company’s shareholders by redistributing a company rather than increasing the
company’s efficiency (Bolley, 2013).
Later, economists defended restructuring on the basis of corporate finance. They shared
the common view that new management teams could be restructured to increase the productive
use of their assets thereby increasing returns and maximizing the wealth of shareholders. It was
also seen as a way of preventing managers from investing in unprofitable deals with the hope of
maintaining organizational efficiency. Debt was now regarded as a motivating factor for
managers to work hence a positive thing (Mullins, 2012). Restructuring also brought a sigh of
relief to frequent misunderstanding between business owners and managers with managers
gaining greater freedom of fulfilling their personal interests with respect to shareholders. As
such, restructuring helped shareholders reassert their control over companies. A macro-analysis
of restructuring indicates that it brought vas social benefits by relocating assets to managers who
could better invest to increase returns (Bolley, 2013).
The above discussion presents two distinct points of viewing restructuring. It would
therefore be important to take a case study of a firm which has operated under both mature and
cyclical market conditions. Caterpillar is one such company. As an old manufacturing company,
Caterpillar has three major departments: Machinery, Engines and Finance. After experiencing a
prolonged financial boom after the 1950s, the products of the company attained maturity and
experienced cyclical demands. Most of Caterpillar’s rivals, save for Japanese companies, were
MARKET MATURITY AND RESTRUCTURING 3
ready to accept very low returns during this period. As a result of the market maturity and the
inherent cyclical market of its products, Caterpillar was compelled to restructure in the 1980s.
This, it did, in the form of downsizing its business operations and the impacts can be analyzed
from different perspectives (Pederson, 2004).
Caterpillar is a dominant manufacturing company that would possibly enjoy premium
prices. However, it has not been able to easily regain from rapidly eroding margins coupled with
the recent US economic recession. Despite undertaking extensive restructuring as well as
consolidation by downsizing its business, Caterpillar has realized hardly any change since 1994.
The market for its products still remains mature and cyclical. Since then, the company has had to
reinforce its position in the market by numerous acquisitions (Pederson, 2004).The restructuring
resulted in deployment of nearly 39,000 staff between 1979 and 1992. The boom realized in the
1980s by the company was mostly led by consumers and the government never raised its
infrastructure expenditure thus the boom had little impact of Caterpillar. Competition from rivals
such as Komstua further pushed Caterpillar into downsizing its employees (Bolley, 2013).
Caterpillar enjoyed attractive value added as well as stock returns. However, this did not
imply good results following the low-wage entrants and fierce competition that strained renewal
rates. Despite Caterpillar’s restructuring stabilizing labor costs, it never created necessary cash
machines. Its implications mainly affected labor, the greatest component of costs, in which
winners retained their positions while losers forfeited their jobs. Downsizing of labor was aimed
at cutting costs. However, this was not the situation since it was soon realized that even after
deployment of laborers; their work still must be done. As such, the company was compelled to
outsource for the work. This did not bring any savings, as intended. Instead, the intended savings
MARKET MATURITY AND RESTRUCTURING 4
were spent by the company to outsource for particular services for which they deployed their
own workers (Pederson, 2004).
In conclusion, organizations seek to restructure to boost performance when their products
attain mature/cyclical market. Traditionally, they restructured through mergers and acquisitions
which were replaced by modern rightsizing as well as financial engineering. Economists have
viewed restructuring negatively whereas corporate finance presents a positive look. Caterpillar
presents a perfect case study of an organization that had to restructure to sustain labor costs in
the wake market maturity and fierce competition. While they downsized labor to cut costs, soon
the reality of outsourcing for the same labor dawned on them and no cost savings were ultimately
realized. All in all, it is evident that market maturity extensively contributed to Caterpillar’s
restructuring in the 1980s.
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References
Bolley, S.K. (2013). To what extent does mature and cyclical product market drive corporate
restructuring? A case study of Caterpillar, Transforms Market and Financial
Performance, [Online]
Conrad, G.B. (2001). Restructuring: ISDA Publishes Supplement to Credit Derivative
Definitions. Future and Derivative Law Report [Online]
Mullins, P.D. (2012). Marketing Strategies for Mature and Declining Market, McGraw Hill
Marketing Education, [Online]
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Pederson, J.P. (2004). Caterpillar Inc: Roots in Late 19th-Century Endeavors of Best and Holt:
International Directory of Company Histories 63. Farmington Hills, Michigan: St. James
Press.
