| | Global Business Term Paper | | Andy Stevens | 8/8/2014 |

MGMT 7600-01International BusinessSummer 2014Dr. Olu Ijose |

ABSTRACT
The purpose of paper is to assess the ability of Caterpillar Inc. to be competitive internationally in France. Caterpillar is already established in France, but has had its setbacks and challenges along the way. I am going to analyze Caterpillar’s products, industry context, and performance-to date and suggest how they can expand current manufacturing and distribution operations and the institutional challenges that lie ahead. I chose Caterpillar because they are an Illinois company that employs multiple family members of mine. I chose France because my wife is a French teacher and we have visited France multiple times.
INTRODUCTION
According to The World Factbook, France today is one of the most modern countries in the world and is a leader among European nations. It plays an influential global role as a permanent member of the United Nations Security Council, NATO, the G-8, the G-20, the EU and other multilateral organizations. France rejoined NATO's integrated military command structure in 2009, reversing DE GAULLE's 1966 decision to take French forces out of NATO. Since 1958, it has constructed a hybrid presidential-parliamentary governing system resistant to the instabilities experienced in earlier, more purely parliamentary administrations. In recent decades, its reconciliation and cooperation with Germany have proved central to the economic integration of Europe, including the introduction of a common currency, the euro, in January 1999.
Caterpillar was first exposed to France between 100 years ago between 1914 and 1918 during World War I. Benjamin Holt, one of the founding fathers of Holt Manufacturing Company (later to merge with C.L. Best Tractor Company and start Caterpillar Tractor Company which later became Caterpillar Inc. in 1925), exported 1,200 tractors oversees to England, France, and Russia for agricultural purposes. The French local government decided to send the tractors to the battlefront to haul artillery and supplies. The tractors inspired the British army’s tank design. Holt formed a strong alliance with the U.S. Army which called for “Caterpillar type” tractors only. Holt was forced to expand production due to the amount of tractors the government required, over 5,000 were produced to aid the U.S. and Allied governments during WWI (“History,” n.d.).
Between 1947 and 1985, Caterpillar machines helped construct various phases of the Rhone River Project in France. It is ironic that many of the projects that Caterpillar machines were being used for both domestically and internationally were to develop countries’ infrastructure. Caterpillar would use this infrastructure to transport their machines later. Caterpillar machines were also prevalent in France between 1955 and 1961 to help construct the Serre-Poncon Dam on the Durance River.
In 1961, Caterpillar France S.A.S was founded and based in Grenoble, France. Captive sourcing was used that set up the subsidiary so the work was being done in-house. This foreign direct investment was the best entry method. This helps keep control while gaining local knowledge. The Caterpillar subsidiary manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives. Cat kept its presence in France where they used their machines between 1966 and 1968 in Grenoble to prepare for the 1968 Winter Olympics. They reshaped mountain slopes, built and improved roads, and prepared building sites.
As technology advanced, so did Caterpillar. Between 1977 and 1983, more than 200 pieces of Caterpillar machinery aided in the construction in the first lines for the Ligne a Grande Vitesse, the high-speed train that then ran between Paris and Lyon. Later, more than 600 more Cat machines would be used to add additional lines to the Ligne a Grande Vitesse. Between 1980 and 1985, 70 machines were needed to help construct the Grand Maison Hydroelectric Project. They stayed busy abroad in France still between 1986 and 1993 when over 100 Cat machines were used to help construct the Chunnel between Paris and London (“History,” n.d.).
IMD WORLD COMPETITIVENESS DATA
One challenge that France has had over time is business efficiency. France started to focus their goals, much in line with Caterpillar’s. France committed to innovation and excellence. They strongly promoted growth in labor force through labor market reforms. Secure sustainability of public finances was focused to be through less public spending and growth-creating reforms. France is a country that Caterpillar needs to continue to expand within. France’s top 5 key attractiveness factors are a skilled workforce, reliable infrastructure, high educational level, a strong research & development culture, and policy stability & predictability. Year after year France continues to improve in cyber security, language skills, exports, and attitudes toward globalization. France ranks 13th in the world in tariff barriers (IMD International, 2013). These attitudes and improvements have shown as they continue to climb the ladder in business efficiency.

It is important that Caterpillar takes France’s socio-cultural views in effect. For example, in the United States, our yearly average working hours expected is 2,087. The average value in the world is 1,919. France, has a much lower working yearly average, at just less than 1,600 hours. Caterpillar must account for the shorter working hours, as to not upset their employees, who are unionized (World Competitiveness Online, 2014). Caterpillar, in order to be an effective global business, must be able to understand the distinctive aspects of a culture and how the aspects compare and contrast to other cultures (Ijose, 2014).
Economic performance strengths include exports of commercial services, where they rank 4th in the world. Caterpillar exports 90% of their products in the United States, so they are familiar with the logistics. France ranks 5th in logistics management that supports business development. They rank 6th in the world in exports of goods. Their government ranks 7th in the interest rate spread. They are number 2 in available qualified engineers. This is a downfall as well, as their unemployment rate sits at 10.8% (World Competitiveness Online, 2014).

ANALYSIS
Caterpillar has multiple products to offer. They are most well-known for designing, manufacturing, marketing and selling heavy equipment (bulldozers, excavators, haul trucks, etc.), machinery, and engines. It is the largest manufacturer in world of construction and mining equipment, diesel and natural gas engines and industrial turbines. It is less known for selling financial services to customers all over the world including financing, insurance, maintenance, and training.
Institutional based view is a global business perspective that Cat needs to use in France. It suggests that successes and failures are enabled or constrained by institutions (formal and informal). Socialism and the legal system are two formal institutions of France. Institutions reduce uncertainty by influencing the decision-making process. For example, the legal system reduces transaction costs and minimizes uncertainty (Ijose, 2014).
Caterpillar has become the third largest employer in the Isere region in France, with operations in Grenoble and Echirolles employing 2,200 person. Caterpillar’s mission statement is “We have the people, processes, tools, and investments to deliver the quality, reliability, and durability customer expect from Caterpillar in each new product introduction”. Caterpillar did go through a tough time in France. Their activity had declined 77% at one time, forcing Cat to cut back. This caused employees to hold managers hostage at one of their plants in France. This is an example of ethnocentrism, a self-centered mentality held by a group of people who perceive their own culture, ethics, and norms as natural, rational, and morally right. After this episode in France they had to motivate their staff as employee morale was at an all-time low. Regular staff meetings between their top executive and unions, agreements concerning the work of the disabled and seniors, cultural audits by experts, and action plans to forecast psychosocial risks were all implemented. Cat France’s biggest business in France is exports. Flexibility, diversification, and looking for bargains is what was implemented in Cat’s French factories for the markets they service in throughout Europe, Africa, and the middle east. These locals work with over 1000 suppliers, 300 of which are based in Rhone-Alps. These local business relationships ("Caterpillar France: le retour des beaux jours," n.d.).
A PESTEL analysis is one way that Caterpillar can evaluate and analyze political, economic, social, technological, environments, and legal factors. Political factors can have a large impact on a company is a main factor in operations within an organization. Different laws, regulations, and policies between countries must be researched. Economic factors include recessions, inflation, and growth in GDP and population. Social factors are essential to consider while outlining business strategy. Technological factors such as building and upgrading to state of the art facilities. Environmental factors are taken into play as Caterpillar works towards a sustainable development. Legal factors cannot be ignored, such as import/export laws and labor laws.
A SWOT analysis is also useful. This analyzes a firm’s strengths, weaknesses, opportunities, and threats. Strengths Caterpillar has are a global leader in manufacturing construction equipment, ranking within the stock market, strong financials, and a worldwide production network. Weaknesses include decreased sales, long term debt, and independent dealers with low confidence in Cat’s forecasting system. Opportunities include expanding in developed nations worldwide through joint ventures and acquisitions and population demanding more construction. Threats include competitors, rise in cost of material, increase in manufacturing cost, employee strikes, and GDP growth being uncertain (Hill, 2014).
Porter’s Five Forces can be used as a business strategy to show what affects abilities and capabilities. These five forces are threats of new entrants, intensity of competitive rivalry, threat of substitutes, bargaining power of customers, and bargaining power of suppliers, These five forces help an organization be aware of the outside environment and make decisions on business strategy correctly (Hill, 2014).
Caterpillar should look to open a factory near a busy port, and invest into the logistics aspect of their company. For example, Le Havre, and the Port of Le Havre, ranks 11th in total tonnage in Europe. Other countries are following in France’s footsteps after their development of their high speed train. Cat’s Grenoble factor produces the components for rail bearings. Using automation, the can produce them quicker and cheaper than the competitors. Cat’s Echirolles plant is also innovating, with two new assembly lines that were installed, replacing an outdated production system that was in place. This what a cultural change for operators who’s job now is accompanied by campaigns and training. 6% of Caterpillar France is invested in training ("Caterpillar France: le retour des beaux jours," n.d.).
Another challenge Caterpillar France has to battle is exchange rates. As a leading exporter, their fate is often tied with the value of the U.S. dollar. Komatsu, Caterpillar’s largest international competitor, gains the advantage when the Yen is weak, undercutting Caterpillar by as much as 30% in some years. Being prevalent in France, and being able to take advantage of the Euro, is one advantage they have gained with globalization, reducing the impact of fluctuations in the value of the dollar on its profits. Economic exposure state that international earning power is affected by these changes in the exchange rate. In the 1990s, the quick rise of the dollar hurt price competitiveness, where Cat saw their export volume decline. In 2009 when the dollar continued to decline, price competitiveness increased in the world. Opening subsidiaries in France, a strategy to reduce economic exposure, acts as a hedge against the possibility that a strong dollar will price Cat’s exports out of foreign markets. This proved useful in 2008 and 2009 (Hill, 2013).
The PPP theory predicts that exchange rates are arbitrary and determined by relative prices and changes in prices. For example, Cat and Komatsu are global leaders, as explained previously, in earthmoving equipment. These dominant enterprises may be have a degree of pricing power able to control distribution channels and limit the unauthorized resale of the products if purchased in another national market. They may be able to limit resale by differentiating identical products a month nations along some line of design or packaging. Countertrade is a barter like agreement where goods and service s are traded for other goods and services, where countries’ currencies are nonconvertible. For example, Cat sold Venezuela some heavy equipment that was traded for 350,000 ton of iron ore, which Cat then traded to Romania for Romanian farm products, which then could be sold on the international market for dollars. This practice is not as prevalent as it once was (Hill, 2013).
Caterpillar is also keeping to their values. The support activities of the value chain are impressive. Cat can get spare parts to any point in the world within 24 hours, minimizing downtime to their customers. In an industry where downtime is very expensive, this is very valuable to their customers, which increases the value associated with Caterpillar, allowing them to charge a premium for the products and services (Hill, 2013).
CONCLUSION
After Caterpillar was able to bounce back from the recession, where they were once losing $1 million a day and on the brink of extinction, they have proven to be a global powerhouse and with the suggestion in the analysis, can continue on that path. Strategic measures to cut costs and expand internationally just as important as diversifying products and reorganizing their structure. Use of the PESTEL analysis, SWOT analysis, and Porter’s Five Forces business strategy are vital in this success. Caterpillar continues to make and meet goals. Caterpillar has the competitive advantage internationally. Setbacks and challenges will always exist, they just need to be dealt with properly.

REFERENCES
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The World Factbook. (n.d.). Central Intelligence Agency. Retrieved August 4, 2014, from https://www.cia.gov/library/publications/the-world-factbook/geos/fr.html World Competitiveness Online. (n.d.). World Competitiveness Online. Retrieved August 4,
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