At Caterpillar, Strategy Starts With The Board
Lengthy tomes are written about how to conceive corporate strategy but few companies implement it as well as Caterpillar.
Perhaps because they operate in such a complex environment they have a greater incentive. Long-term trends like geopolitics, the environment, and the usual economic ups and downs, have a profound effect on Caterpillar’s here and now. The former CEO’s answer to these difficult questions is to set a strategy that leaves nothing to chance. This is from my interview with former Caterpillar CEO, Doug Oberhelman.
Doug Oberhelman, was Caterpillar’s most strategy minded CEO. He shared his pragmatic and highly focused perspective with me on how he developed strategy, succession, and culture at the board level during his tenure.
Oberhelman is a director of Eli Lilly and Co. and The Nature Conservancy.
Jeff Cunningham: What are the building blocks of great strategy?
Doug Oberhelman: It starts with the CEO, naturally, and so CEO succession planning is critical, and I would add, Caterpillar’s leadership development philosophy of promoting from within. Caterpillar has never had an outside CEO or chairman in the history of our company since 1929.
The board and I spent time throughout the year on succession planning from the bottom up. Every one of our officers sat down at least once a year with the management team, and then as a group, and talked through all of their people and assessed long-term potential.
By the time we get to the board, we had a good understanding of the highest-potential candidates out of the top 3,000 positions within our company. And over a period of years, we got to develop the people in these positions — whether they’re in China, Russia, the United States or anywhere — to be senior leaders.
Is diversity a factor?
We brought together a process that develops and places Asian leaders in Asia, European leaders in Europe, U.S. minorities and females for positions everywhere we do business. We talked a lot about developing diverse candidates to fill these roles across the board in all facets of having an inclusive leadership team.
Can you describe the strategy development process at Caterpillar?
We have a CEO tradition at Caterpillar that the first few months or year of a new CEO’s tenure is a time to think about strategy. In my succession, I headed the strategy group prior to taking on the full CEO role for a period of six months.
The way we do it is to appoint a group of 16 to our strategy group including our group presidents that report to me, and then 10 others from around the world — the most diverse group we could put together.
Then we ask, “What do we want to do with our company?”
We looked at all of the things we were doing and needed to do, we realized we needed to make some fairly deep cultural changes.
The strategy-planning group met for about six months and really dissected the company. We hired two outside advisors, one a professional consulting firm we had worked with and knew us very well, and one from HR to help us on the culture change.
Another thing that helps get strategy right is to make sure the language is as direct and as plain as possible. If you can’t explain at a higher officer or board level without too much detail, you won’t be able to explain it to your people. And that’s really an art to getting that right.
You took the reins during the recession. Did that help or hurt the process?
Caterpillar has a culture that is very, very deep and very, very strong, but hard to change. And while we did a lot of things very well, being in the thick of the recession provided a great sense of urgency and a great burning platform to really attack the way we looked at what we were going to be.
Was there a final step in the process?
Yes. We put it all on an 8 1/2- by-11 card. We explained one of the key roles of management is communicate, communicate and communicate.
In our case, it was back to the basics of Caterpillar: make great quality products; get everyone to want your brand, to be associated with it because they love your brand; make sure it offers the lowest owning and operating costs; if you’re a contractor, make sure he or she has the lowest owning and operating costs he or she can get; and when it comes time to resell that product, make sure it has the highest resale value. And when it comes time for service, it happens instantly.
We basically refurbished that strategy and realigned all kinds of things to do that. It’s not very different than the strategy back in the ’40s and ’50s. It wasn’t all that far off from “back to the basics.” In fact, we talked about naming it that.
As part of that, you decided that the culture had to change?
We decided we were going to shock the culture.
And one of the great cultural strengths of Caterpillar is it is a promote-from-within company. And one of the great cultural weaknesses was a sense of job entitlement. And it had gotten more and more ingrained with time, so we said, let’s get everyone’s attention.
We formed business units — we put the P&L leader in the executive office, and we essentially reduced 20 percent of the officer ranks. And that got immediate attention. Once that group was in place, we replaced another 17 percent of the next level down. Those two single moves got everybody sitting up in their chair talking about accountability and personal ownership for results.
Then we got into strategy implementation, which led up to our acquisitions of last year — we have spent almost $11 billion. That was a big change because we had not typically been an acquirer.
The strategy identified key industries where our customers make money, where we think we can make a lot of money and add value, and where people appreciate the Cat brand and what we can bring to it, and that are growing. So we identified oil and gas, mining and rail, electric power and a couple of others, but the big three as key to our future long term.
And again, you found communication was a key factor?
When we were in the throes of the Bucyrus acquisition, our board asked: “Why do you think coal mining is going to be so good when everybody hates coal mining?”
All we saw was everybody burning coal and electricity and so on. And it forced us to really dig into coal mining and what we’re going to have to do around clean coal. And that single piece forced us into deep thinking. We went back to customers, we went back to think tanks, we went back to NGOs to talk about coal.
And that single question really helped us because we had to understand and explain how we viewed the risks and where coal mining was going. It’s also made us a believer in clean coal and helping to find ways to improve its use.
How does the board help with strategy?
Like any global business, we’ve had ongoing challenges. Our board helps us with those, and, in our case, I’m a big fan of that outside perspective coming in to help us.
If you have a strong, diverse board, and we do — we have a member from Mexico, the U.K., we have retired CEOs, active CEOs — if you listen carefully, you’ll get lots of input and won’t become internally focused.
One of the pieces of feedback I got early on from the board was, “Let us have more time with you,” and, “Let us have more time by ourselves.”
Now we start with an hour-long executive session with me before the board meeting, where I review what I’ve been doing, the challenges I’ve worried about, the things we’re thinking about, maybe tee up a couple of subjects that are going to be tough for the board meeting.
Then at the end of the board meeting, I leave them alone, and then our presiding director will talk to me afterward about anything that would have come out of that.