Caterpillar Inc Pestel Analysis
Based in Deerfield, Illinois, United States, Caterpillar Inc (NASDAQ: CAT) is the leading manufacturer of construction and mining equipment globally. The company sells its products across 192 countries through 161 independent dealers. The company has established a global distributor network that mainly includes independent distributors. 46 of its dealers are located inside the United States, which is also the largest market for Caterpillar products. The North American market alone accounts for more than 40% of the company’s net sales. In 2020, the company experienced a major drop in sales and revenue due to the Covid-19 pandemic. The pandemic drove end-user demand for Caterpillar products down resulting in 22% lower net sales in 2020 compared to 2019.
Caterpillar Inc was formed in 1925 after the merger of Holt Caterpillar Co. and C.L. Best Tractor Co. Its flagship brand is CAT. The company has expanded its product portfolio a lot since its foundation. It manufactures a large range of equipment and machinery that is used across industries including construction, resources, energy, and transportation industries.
The company is well known worldwide for its focus on product quality and innovation and is a pioneer in its industry sector. However, the company is also facing several challenges including declining growth in the North American market.
In this pestle analysis, we will discuss the impact of these forces on the business of Caterpillar and how the company deals with their positive or negative impact on its business.
The political forces have acquired a central role in the context of international business. The impact of these forces on international businesses and their growth has grown more highlighted in the recent decade as governments around the world have increased their control and oversight of large businesses operating in their territories.
Government regulation of specific industries and the local political environments have a deep and clear impact on international businesses. For example, if the political environment of a market is stable, the regional economy flourishes. On the other hand, if the political environment of a market region is marked by strife and irregularities, the result is that it has a negative impact on the economic environment and business performance.
In the case of Caterpillar Inc, the trade wars between the US and China had a negative impact on its performance. Caterpillar depends on the US market for a significant portion of its sales and revenue. Following the escalation of trade wars, Caterpillar faced several difficulties. Its profits were being squeezed due to the trade wars between China and the United States. There are a large number of US and China-based companies that have experienced a decline in sales and profits following the escalation of trade wars between the two countries.
In this way, the political factors can have a very deep impact on international businesses. Political instability in many cases leads to economic uncertainty and in turn, can give rise to big challenges before businesses including lower consumer confidence. Government policies in various markets related to specific industry sectors and tax structures of particular markets can also have a direct impact on businesses operating internationally.
For example, international businesses may find it highly complicated to do business in China since the government mainly encourages local businesses. Most international businesses trying to operate in China have to form partnerships with local Chinese firms to operate successfully. So, the complications in the local political environment also affect businesses. Considering this, businesses need to consider political factors and their impact when formulating their business strategies in order to succeed in any market.
Economic factors have always played a central role in the context of international business. The economic environment of a market region affects the sales and revenue of a company in that market. When the level of economic activity in the global economy is high, international businesses enjoy higher sales and revenue. On the other hand, a global slowdown can hurt large businesses financially.
The customers of Caterpillar are mostly large and medium-sized businesses involved in construction, mining, and other forms of industrial activities. In case of an economic slowdown, construction is one of the first industries to be negatively impacted resulting in lower sales of Caterpillar products.
North America is the largest geographical market for Caterpillar products. The US and Canada are its leading markets. However, due to the pandemic, and extended lockdowns construction activities remained shut in the United States and several other leading markets globally. As a result end-user demand fell and the company experienced a significant drop in sales and revenue.
Economic factors are directly related to the sales and revenue of Caterpillar Inc. It is because when economic activity falls, the purchasing power of consumers also falls. Even the big companies are not immune from economic fluctuations. Changes in currency rates also affect businesses like Caterpillar. A stronger dollar means lower income from overseas sales.
The pandemic induced a recession in the US market which led to lower sales of Caterpillar products. Its impact is expected to remain in 2021 as the construction industry is expected to pick up slowly in 2021. However, once the impact of the pandemic is brought under control and economic activity across various industries resumes, it can lead to higher sales and revenue for Caterpillar.
Sociocultural factors are also of special significance in the context of international business. Companies have to consider these factors while creating strategies for individual markets. Businesses operating across the globe in various markets have to consider how social factors affect their business. Social changes can have a significant impact on businesses and firms need to change their strategies accordingly to remain ahead of the curve.
Caterpillar operates its business across all continents including North America, Latin America, Europe, Middle East, Asia Pacific, and Africa. However, the company also has to maintain a good social image to operate successfully across all markets. For any large business operating globally, a good social image has become a must. Otherwise, companies that do not care about their social image risk their reputation and can end up hurting their own business worldwide.
As a result, companies like Caterpillar invest in socially beneficial projects or social responsibility. Investing in sustainability has also been found to boost the social image of businesses globally. Caterpillar has established a separate philanthropic arm named Caterpillar Foundation to take care of the company’s philanthropic activities and improve people’s lives in the communities where it operates. The caterpillar foundation was established in 1952. Since then, it has invested more than $770 million in improving people’s lives in the communities where it operates. The foundation also donated $10 million to support COVID-19 response activities globally.
Caterpillar’s social image has been boosted by these activities. The company has strengthened its social image a lot by focusing on social responsibility and sustainability. Society is an important stakeholder when it comes to international business. It is also the responsibility of large businesses to give back to society and invest in its development.
Technology and technological factors have become a major driving force industry-wide in the 21st century. For large businesses, technology has remained the leading driver of change driving almost all the growth and expansion across various sectors. The proliferation of digital technology and social media proved how technology has the potential to change our world. Apart from bringing higher operational efficiency for businesses and expanding their opportunities for growth, technology has also opened new vistas of growth for businesses across all industry sectors including construction and engineering.
Technology has also emerged as a major differentiator for businesses allowing them to differentiate their products from the rivals and gain market share. As in the case of Caterpillar, it is known as an innovative company. It has introduced a large range of products in the last several years to cater to the needs of the customers across various industry sectors. The company spent $1.4 billion on research and development in 2020, which was around $300 million less than the company’s R&D expenditure during 2019. However, while innovation is driving major changes around the world in the twenty-first century, the construction industry has remained relatively slower than the others in terms of adopting new technologies. Despite that, considering the pace at which the industry is evolving and how the pandemic has brought new shifts demanding modifications to the operating model and strategies of businesses like Caterpillar, the company must focus more on innovation to maintain its growth momentum and profitability.
In terms of marketing and other operational areas too, Caterpillar has gained through technological innovation. It also acquired a California-based robot and autonomy technology solutions company Marble Robot, Inc. in 2020. This acquisition was a part of the company’s focus on growing automation organization-wide and automating important processes for better output.
Environment and environmental factors have also acquired a central role in terms of international business. Now, the environment is a core part of the picture especially when the pandemic has led to higher environmental awareness worldwide. Governments worldwide have enacted environmental laws so that companies take care of their environmental impact and minimize it. From the automobile industry to the construction industry and several more industries that use heavy equipment, all of them are required to minimize their environmental impact to remain compliant. Apart from that, an important factor that has pushed large businesses towards adopting sustainability principles is because sustainability also affects their brand image. Customers have also become environmentally conscious and like to buy products from companies that are highly sustainable. As a result, sustainability has become a core part of the picture.
The sustainability vision of Caterpillar Inc is as follows:
“Our vision is a world in which all people’s basic needs – such as shelter, clean water, sanitation, food and reliable power – are fulfilled in an environmentally sustainable way and a company that improves the quality of the environment and the communities where we live and work.”
According to the 2020 sustainability report of Caterpillar Inc, the company’s sustainability strategy is based on three main principles that include preventing wastage, improving quality. and developing better and more sustainable systems. The company has set energy efficiency targets in our operations since 1998 and greenhouse gas emission (GHG) reduction targets since 2003. It is also investing in reducing water wastage in its operations. Caterpillar is also investing in alternative and renewable energy sources, implementing water conservation projects and managing waste through remanufacturing, rebuilding, reuse and recycling.
Legal compliance is of very high significance for businesses regardless of the market region in which they are operating. Globally, governments have grown their oversight of large businesses. Not just inside the US, but overseas also, Caterpillar is required to remain compliant with all the applicable laws including labor, product quality, environment, financial, and other laws. Non-compliance in most cases results in hefty fines for the company. Caterpillar is also involved in a bitter legal battle related to tax evasion. The case was discovered years ago and the federal agents raided Caterpillar offices back in 2017. If the case against Caterpillar is proved, the company may need to pay more than $2 billion in unpaid taxes. While the case has remained closed during the Trump government, it might be reopened by the Biden government.
Caterpillar has maintained a very good reputation as an ethical and responsible business. However, the mistakes of a few executives can become a question mark on the company’s reputation and social image and lead to public humiliation. In the case of large businesses like Caterpillar, remaining legally compliant is not just crucial, it is essential.