Scanning the Environment
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End of Chapter SUMMARY Every day, about 17 truckloads of used diesel engines and other parts are dumped at a receiving facility at Caterpillar’s remanufacturing plant in Corinth, Mississippi. The filthy iron engines are then broken down by two workers, who manually hammer and drill for half a day until they have taken every bolt off the engine and put each component into its own bin. The engines are then cleaned and remade at half of the cost of a new engine and sold for a tidy profit. This system works at Caterpillar because, as a general rule, 70% of the cost to build something new is in the materials and 30% is in the labor. Remanufactur- ing simply starts the manufacturing process over again with materials that are essentially free and which already contain most of the energy costs needed to make them. The would- be discards become fodder for the next product, eliminating waste, and cutting costs. Caterpillar’s management was so impressed by the remanufacturing operation that they made the business a separate division in 2005. The unit earned more than US$1 billion in sales in 2005 and by 2012 employed more than 8500 workers in 16 countries.
Caterpillar’s remanufacturing unit was successful not only because of its ability to wring productivity out of materials and labor, but also because it designed its prod- ucts for reuse. Before they are built new, remanufactured products must be designed for disassembly. In order to achieve this, Caterpillar asks its designers to check a “Reman” box on Caterpillar’s product development checklist. The company also needs to know where its products are being used in order to take them back—known as the art of reverse logistics. This is achieved by Caterpillar’s excellent relationship with its dealers throughout the world, as well as through financial incentives. For example, when a customer orders a crankshaft, that customer is offered a remanu- factured one for half the cost of a new one—assuming the customer turns in the old crankshaft to Caterpillar. The products also should be built for performance with little regard for changing fashion. Because diesel engines change little from year to year, a remanufactured engine is very similar to a new engine and might perform even better.
Monitoring the external environment is only one part of environmental scanning. Strategists also need to scan a corporation’s internal environment to identify its resources, capabilities, and competencies. What are its strengths and weaknesses? At Caterpillar, management clearly noted that the environment was changing in a way to make its remanu- factured product more desirable. It took advantage of its strengths in manufacturing and distribution to offer a recycling service for its current customers and a low-cost alternative product for those who could not afford a new Caterpillar engine. It also happened to be an environmentally friendly, sustainable business model. Caterpillar’s management felt that remanufacturing thus provided them with a strategic advantage over competitors who don’t remanufacture. This is an example of a company using its capabilities in key functional areas to expand its business by moving into a new profitable position on its value chain.87
brand (p. 149) business model (p. 138) capabilities (p. 134) capital budgeting (p. 150)
competency (p. 134) conglomerate structure (p. 145) a core competency (p. 135) corporate culture (p. 145)
corporate reputation (p. 150) distinctive competencies (p. 135) divisional structure (p. 144) economies of scale (p. 154)
K E Y T E R M S