Big Industrial Meets Digital — Rob Charter, Group President Caterpillar

The Industrialist’s Dilemma — 2/23/17

In our session last week we were fortunate to have Rob Charter, Group President of Caterpillar, share his perspectives on the impact of digital systems on Caterpillar’s business model. The class discussion was enlightening in ways that we had not expected — both in learning about the work that Caterpillar has done to date on enabling autonomous motion of their machines, and more importantly, how they look at the potential sources of disruption to their business. Rob presented a very cogent and long-term perspective of their company, and also the key things that are changing their business going forward.

Rob Charter shares how Caterpillar is pushing digital into its future

When Brand Is Critical, Leveraging External Relationships Can both Enhance and De-Risk Innovation

Rob shared that the company has been around for 92 years and is in a business where the ongoing relationships it has with its dealers and customers are built upon long-term interactions and extensive mutual understandings. As such the company needs to find a way both to protect these relationships (at almost any cost) but still find a path to take risks on new innovations.

He highlighted how Caterpillar spends time working with customers on how best to improve the performance of their sites (construction, mining, etc.) even though almost all of those locations will contain equipment both from Cat and its competition (e.g. Komatsu). Rob posited that Cat’s ability to be seen as being aligned for the long-term with customers is particularly critical when selling equipment that often is deployed in very dangerous locations and settings. He highlighted that if a customer becomes disenchanted enough to change suppliers, Cat can lose a relationship for a decade or two without a chance to re-engage.

Rob also shared how the firm’s relationship with Uptake has enabled Caterpillar to build a technology alliance that can both experiment on new business opportunities and also bring both new points of view and a different culture into Cat. This relationship has not only allowed Caterpillar to work with its customers on new products and services, but it also allowed Cat to be exposed to and learn from a different set of goals and operating models that can be used to serve its customer base.

Talking with Rob Charter of Caterpillar

Concentrated Channels Lead to Increased Collaboration

Caterpillar has around 175 independent dealers serving 190 countries worldwide. Many of these companies are multi-generational family businesses that have worked with Caterpillar for decades.

This highly concentrated sales channel has created some unique dynamics to Cat’s business. First, many of the dealers are quite savvy technically and in exploring ways to innovate to solve customer solutions. Given the large size of some, these channel partners have the resources to creatively engage with end users to solve very complex needs. For Caterpillar this has worked to its advantage, as best practices can be scaled up across the entire channel through Caterpillar itself where scale is required, but plenty of room remains for innovation for Cat’s channel partners to find ways to grow their own businesses.

Max, Aaron and I thought back about how this level of channel intimacy is quite different than many of the companies we have studied which have diffuse channel relationships. Whether it was Nest, Daimler, Ford or Visa, we have not seen such a close and symbiotic relationship at such scale. In many respects, these dealers have become an extension of Cat for customers in a way that is much more tightly correlated to Cat’s core business than in most channel partnerships. Caterpillar views its global dealer network as a strong strategic advantage. As such, new changes in digital disruption need to be rolled out closely through the value chain — Cat won’t be able to just “go direct” and cut out its dealers.

Perhaps most importantly, it has a strong incentive not to do so; rather, Cat must work tightly with its dealers to offer new capabilities and services into the field.

Predictable Competitors Are the Easiest to Fight

We had an interesting exchange about what keeps Rob and the Caterpillar team up at night. We expected much of our discussion in this area to come around the activities of Komatsu, Volvo, Hitachi, etc. But Rob made an interesting point — he doesn’t lose much sleep over these competitors because he knows what they are likely to do. The companies he mentioned that keep him up at night were surprising to us because he named firms that were not traditional Caterpillar competitors — and many of them can, will and are doing things that are unexpected and different in Cat’s traditional customer base.

For a moment during the class I saw similar parallels to my old industry — semiconductors. Not only does Caterpillar compete in a highly cyclical industry that sees great expansion and contractions on a regular basis and has high capital expenditures (similar to computer memories), but for a brief moment Rob seemed to be channeling my former boss, Andy Grove — after all, only the paranoid survive.

Cat seems to have strongly understood the type of disruption that has been thrust upon the payments and financial services industry from Patrick Collison and the team at Stripe. As you may recall, Patrick and his team gained incredible traction by getting deployment through software developers and making it easier to design payment systems into an eCommerce site. The CFO and financial functions were largely cut out of the decision making loop on how to bring a payments system into a company’s eCommerce website.

Rob and the team at Caterpillar seem appropriately concerned that they will continue to be under attack, but that it will be the unpredictable competitor who will be the most dangerous threat to their long-term success. This paranoia is entirely consistent with what we see in those firms confronting The Industrialist’s Dilemma — one doesn’t know from where — or when — the attack is coming.