Rise of the Internet of ‘Big’ Things
Caterpillar, a leading manufacturer of construction and mining equipment, is experiencing tough times. Its year-end revenue dropped from $55B in 2014 to $47B in 2015, a 14% decrease . However, despite sluggish sales due to short-term macro-economic challenges, Caterpillar’s overall market is expected to grow over a long-term period, reaching $500B by 2020 . Therefore, it is more important than ever for Caterpillar to make smart investments that have a high likelihood of success. Caterpillar, like other players in its industry, has identified digital technology as the key investment opportunity that can create a long-term competitive advantage.
Digital technology offers huge benefits to global equipment manufacturers. Companies like Caterpillar can install telematics devices on their machines, enabling machines to transmit a constant stream of information on operating conditions and usage metrics. Manufacturers can then use this information to provide preventative maintenance recommendations or usage suggestions to machine operators. These recommendations will help operators reduce their equipment downtime, lower operating costs, and improve fuel economy. This leads to major cost savings for equipment customers, which in turn, creates customer loyalty and additional sales for manufacturers . Additionally, machine data can be used by manufacturers to enhance product designs. By analyzing information received from the field, engineers can identify opportunities for enhanced performance, and can redesign machines to enable these improvements .
If Caterpillar does not invest in digital technology, its competitors will gain an edge in the “Internet of ‘Big’ Things”, causing Caterpillar to lose market share and potentially its position as the industry leader . Additionally, if Caterpillar innovates and invests too slowly, it will see the rise of nimble, data-driven, tech companies that try to disrupt the industry. For instance, even today, General Electric is staking a claim in the industry via its new data partnership with one of Caterpillar’s primary competitors, Komatsu .
Caterpillar’s Current Commitment to Digital Innovation
So far, Caterpillar has demonstrated a strong commitment to digital innovation through investments in smaller digital players, changes to its organization structure, and machine enhancements. In March, 2015, Caterpillar invested in Uptake, a data analytics firm in Chicago, to increase its immediate access to top analytics talent. In April 2015, Caterpillar launched an in-house Analytics and Innovation division to embed an analytics and innovation mindset throughout the company and grow internal analytics talent. And in May 2015, Caterpillar invested in YardClub, a start-up that lets owners rent out inactive machinery to contractors. With the YardClub investment, Caterpillar may be attempting to hedge against an Uber-like, shared economy for big machines that would disrupt its industry and business model . Caterpillar has also established a fleet monitoring office at its Peoria, Illinois Headquarters to keep tabs on its 350,000 connected machines that are already deployed in the field. Over the next few years, Caterpillar plans to enhance telematics and data analytics capabilities across all its equipment; no small task given the fact that Caterpillar has 3,000,000 unconnected machines in the field today .
Bolder Moves for Caterpillar to Consider
Although these early investments begin to position Caterpillar well versus competitors, the company needs to make some bolder plays in order to become a dominant digital force. First, Caterpillar needs to continue transforming its talent strategy. As the importance of digital technology rises, Caterpillar will need to recruit top analytics talent away from other companies. It may struggle to do this if its Analytics and Innovation division continues to be located in the small, Midwest town of Peoria, Illinois. Caterpillar should consider relocating this division to Chicago, Illinois, where it is more likely to recruit and retain the talent that it need. Next, Caterpillar should reorient its design process so that it focuses on data output and software as key design objectives, instead of focusing purely on machine functionality. Machines must begin to be engineered in a way that seamlessly integrates software and hardware, providing Caterpillar with an ability to push software updates to customers on a regular basis . Finally, Caterpillar should consider ways in which it can provide analytics insights from new machine data to its broader supply chain. For instance, it can provide its dealer network with recommended machine configurations that reduce the risk of machine failure for certain geographies. If Caterpillar provides its dealer network with useful, data-driven insights, dealers will be more likely to push Caterpillar products to customers (instead of competitors’ products).
Caterpillar is already making smart, long-term investments in digital technology, even in challenging short-term economic conditions. If it continues these investments and makes a few more bold moves into the digital space, its position as the industry leader for construction and mining equipment will be cemented for a long time. (784 words)
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