Caterpillar Case Study
1. As one of America’s major exporters, Caterpillar has been under the microscope of the American dollar in terms of the company’s profitability. In the 1980s, Caterpillar suffered at the hands of Komatsu, a Japanese company who was able to undercut the American company’s prices. Because of the status of the U.S. dollar in the 1980s in comparison to the Japanese yen, Komatsu was able to capture the market share in the United States and the U.S.’s clients. The decline of Caterpillar’s competitive position was caused by their home country’s financial situation and an adverse labor union who opposed the job restructuring to create a more competitive advantage within the industry.
The view shifted in the 2000s however, as Caterpillar had condensed its reliance on the United States and developed foreign manufacturing locations in China, India, and Brazil. Because of the diversification, Caterpillar was able to recognize substantial gains as a result of the reduced operational costs, which exceeded the lowered impact of the strong dollar on earnings. In 2008, the dollar strengthened again, which caused the conversion of foreign currencies to rise during trade options with Caterpillar.
2.With the diversification of its operations, Caterpillar was able to significantly reduce the impact of the changing monetary rates in the industry. Because of the extended outreach of locations, Caterpillar was able to capitalize on the reduction of foreign exchange risk by allowing its subsidiaries to work in their local currencies instead of converting said monies from the American dollar.
The downside to this approach is that Caterpillar’s organization had become significantly more complex and required additional managerial staff to control the operations which spanned multiple continents. This allowed for inconsistency of final product across its production lines and for unbalanced management styles from an overall company perspective.
3. The difference between transaction exposure and translation exposure refers to the difference between a company’s earning power by way of an individual transaction level or on a company-wide scale in regards to international monetary exchange rates. Transaction exposure refers to the company’s income on a deal-by-deal basis, meaning the way that individual transactions will be influenced by foreign exchange rates. For example, Caterpillar’s purchases of materials from foreign sources will vary by transaction depending on the location of said sources.
Translation exposure, however, views the company’s organizational decisions and managerial moves as based upon the exchange rates. While the transactional level is an extremely important part of the way that the company operates and makes decisions, the translation exposure details the company’s forecasted revenues as a result of the location of business. To use the Caterpillar case study as a prime example, the decision to move a portion of operations out of the United States and into other countries and continents allowed for the expansion of the company and their ability to make profit from their transactions.