KOMATSU LIMITED

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January 1985, and Chairman Ryoichi Kawai of Komatsu Limited, the worlds second largest
earth-moving equipment (EME) company, was happy at the losses reported in the quarterly
financial results of Caterpillar Tractor Co. (Cat), its arch-rival. Kawai was not too sure if a
prolonged industrial dispute that had led to a bitter 204 day strike had something to do with
it. He was aware that Cat had cited a labor cost differential of 45% and a steel input cost
differential of 25% with its Japanese competition as the reason to contain costs.

The market for Earth Moving Equipment [EME] is a singular market. Demand depends
mainly on the general level of construction and mining activities, and both industries had
undergone considerable change during the 1970s. [There are also two distinct market
segments, the bidding market and the commercial market. The former relates mainly to
government expenditure in the developing countries and the latter to more sophisticated
demand]. For one, the future markets lay in the developing countries. And in these countries,
financing considerations played a significant part in buying decisions for all capital
equipment. Further, the state sector was often a significant buyer, and for EME, the buying
behavior typically stressed up-front bidding procedures that regularly included not only
machines but also spare parts for a period of two years or more.

In 1983 Komatsu Limited, the Osaka-based Japanese company with its headquarters in
Tokyo, had consolidated net sales of $3.2 billion, with 81% of the sales emanating from the
EME sector and the balance from a diversified base of manufactures, such as diesel engines,
presses, machine tools, industrial robots, solar batteries, and steel castings. Yet, only two
decades earlier, Komatsu had been just one of many small local equipment manufacturers
living in the shadow of Cat.

Komatsu was established in 1921 as a specialized producer of mining equipment. The
companys basic philosophy since its earliest days emphasized the need to export. The
founder of the company, Mr. Takeuchi, had stressed in his management goals statement as
early as 1921 the requirement for management to have two important perspectives-an
overseas orientation and a user orientation. A year later Komatsu acquired an electric
furnace and started producing steel castings. In 1931 the company successfully produced a
two-ton crawler type of agricultural tractor, the first in Japan. During the Second World War
Komatsu became an important producer of bulldozers, tanks, howitzers, and so forth.

In the postwar years the company reoriented itself toward industrial EME. The companys
bulldozer was much in demand in the late 1950s as Japans postwar reconstruction started in
earnest. Due to policy restrictions there was little competitive pressure on Komatsu either to
augment its product line or to improve the quality of products. Thus, despite the booming
demand and the tariff-sheltered market, by 1963, Komatsu remained a puny, $168 million
manufacturer of a limited line of EME, lacking technical know-how to produce sophisticated
machines.

The turning point came in 1963, when the Japanese Ministry of International Trade and
Investment (MITI) decided to open the EME industry to foreign capital investment. Cat
decided to take advantage of the opportunity, and Komatsu was suddenly faced with a
formidable competitor in its own backyard. Komatsu opposed the proposed Mitsubishi-Cat
joint venture, but MITI was only willing to delay the project for two years.

The 1960s : In his single-minded drive for survival, Kawai set two goals; the acquisition of
the necessary advanced technology from abroad and the improvement of product quality
within the company. The company entered licensing arrangements with two major EME
manufacturers in the United States - International Harvester and Bycyrus-Erie. The former

1
Condensed from an HBS case 9-385-277 by Christopher A Bartlett and U Srinivasa Ragavan. This case has been prepared for
class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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was well known for its wheel-loader technology, and the latter was a world leader in
excavator technology. Komatsu also concluded a licensing and technology collaboration
agreement with Cummins Engine in the United States, which led the world in diesel engine
development. Komatsu paid a substantial price for this technological access, not only in
financial payments but also in restrictions on exports that it had to agree to as part of the
arrangements. Recognizing that its dependence on these licensees lift it vulnerable, the
company established its first R&D laboratory in 1966 to focus on the application of electrical
engineering developments.

Komatsu also launched a quality upgrading program in its factories. The program, on the first
to reflect the Total Quality control (TQC) concept, was an adaptation and extension of the
well-known Japanese Quality-Control-circles system in manufacturing operations. Komatsu
management was proud of receiving the highly coveted 1964 Deming Prize for quality control
within three years of launching TQC.

In 1964 the company also began Project A. The project aimed to upgrade the quality of the
small and medium-sized bulldozers, Komatsus primary domestic market product. A top
manager recalled, The president commanded the staff to ignore the costs and produce
world-standard products. The first batch of upgraded products reached the market in 1966
and produced spectacular results.

At this stage the company launched the second phase of Project A as cost reductions took
precedence. Every aspect of design, production facilities, parts assembly, assembly-line
systems, and the operation processes was subjected to thorough scrutiny, and costs were
pared down. Between 1965 and 1970 the company increased its domestic market share from
50% to 65% despite the advent of the Mitsubishi-Caterpillar joint venture in Japan.

The Early 1970s: By the early 1970s Komatsus management sensed the need for
aggressive expansion abroad. The company had achieved dominance within Japan. With
domestic construction activity leveling off, however, it appeared as if the EME market was
reaching maturity with little prospect of substantial growth. Meanwhile, management was
aware of the rise of natural resources activities throughout the world, and particularly the
construction boom in the Middle East in the post-1974 period.

In the mid-1960s the company turned its attention to Western Europe. Large-scale
shipments to Italy were followed by exports to other countries. In 1967 Komatsu Europe was
established as a European marketing subsidiary to achieve better sales and service
coordination. In the same year the first Komatsu machines were exported to the United
States. In 1970 Komatsu America was established to develop business in the huge North
American market. In most of these markets Komatsu concentrated on selling a limited
product line, typically crawler-tractors and crawler-loaders, which were the most common
equipment on construction sites. By pricing 30% to 40% below similar Cat equipment, the
company soon established a foothold in most target markets. Again to ensure good service,
Komatsu maintained extensive parts inventories in each country - a deliberate overkill,
according to one dealer.

In 1972 Komatsu launched a new project called Project B. This time the focus was on the
exports. The large bulldozer, the companys main export item, was chosen for improvement.
The aim was similar to Project As : to upgrade the quality and reliability of its large bulldozer
models and bring them up to world standards, then work on cost reductions. Once these
aims were realized, the company planned to launch similar efforts for the other lines of
export products such as power shovel. Although Project Bs main objective was to develop
the companys overseas markets, the new machines were also offered in Japan and further
reinforced Komatsus domestic position.

The mid-1970s also saw the beginnings of efforts to penetrate the markets of LDCs, and in
particular the fast-growing industrializing countries in Asia and Latin America. In 1974 the
company established a new presale service department that provided assistance from the
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earliest stage of planned development projects in LDCs. The services that the department
made available to LDCs free of cost included advice on issues such as site investigation,
feasibility studies, planning of projects, selections of machines, training of operators, and so
on. Dealer network, never a strong point with Komatsu, was strengthened. With all these
efforts, Komatsus ratio of exports to total sales grew from 20% in 1973 to 41% in 1974 and
to 55% in 1975.

During the early 1970s the companys R&D efforts continued apace with some attention to
basic research as well as product development. The efforts, however focused on the needs of
the domestic market since the licensing arrangements constrained exports efforts in some
important new product areas. New excavator models were brought onto the market in this
period, as were completely new products such as pipe layers, large dump trucks, and hydro
shift vehicles.

The Late 1970s : By 1976 the Japanese market was highly concentrated, with Komatsu
taking a 60% share and the Mitsubishi-Cat joint venture left with slightly over 30%.
However, there was no indication of much market growth in the near future, since worldwide
demand for construction equipment was slowing. Komatsu management decided to focus on
improving the competitiveness of its products.

A four-part cost-reduction plan was initiated the first part being dubbed the V-10
campaign. The V-10 goal was to reduce the cost by 10% while maintaining or improving
product quality. The second part of the overall plan called for reducing the number of parts
by over 20%. The third, was aimed at value engineering, specifically focusing on redesigning
the products to gain economies in materials/ manufacturing. The fourth, was a rationalization
of the manufacturing system. By the end of the decade Komatsu was well on its way to
achieving all these goals.

As Komatsu planned this ambitious cost-reduction plan, an unexpected development
occurred that required immediate management attention. In the fall of 1977 the Japanese
yen began appreciating rapidly against most major currencies. For example, the yen/dollar
exchange rate went from 293 at the end of 1976 to 240 a year later. Management responded
by adopting a policy of using a pessimistic internal yen/dollar exchange rate of 180 for
planning purposes. Manufacturing was responsible for achieving a cost structure that could
be profitable even at this worst-scenario rate. After trading at a high of Y179 to the dollar
in mid-1978, the yen weakened considerably against the dollar and most other currencies in
1979.

During the late 1970s Komatsu also accelerated its product development program. Between
1976 and 1981 the number of models offered in the five basic categories of EME (bulldozers,
excavators, dump trucks, loaders, and graders) increased from 46 to 77. When Komatsu
introduced its off-highway dump trucks and hydraulic excavators earlier than Cat,
management proudly hailed the companys new leadership in technical development and
innovation. We are not content to produce the same type of equipment year after year, said
one technical manager, but are always looking at the latest technical developments and are
trying to see how we can adapt them to our products. An example of this approach was the
application of electronic technology to all types of machinery. Komatsu had the distinction of
introducing the worlds first radio-controlled bulldozer, amphibious bulldozer, and remote-
controlled underwater bulldozer, for special uses such as toxic dump sites and underwater
mining.

The 1980s : Until 1980 Komatsu was impeded by the narrow product line it offered abroad.
Any company that aspired to become a global competitor needed to gain a strong foothold in
the commercial market. and to do so, it was almost a competitive necessity to be a full-line
manufacturer with an extensive sales and service network.

The decision to become a full-line supplier, however, meant that Komatsu had to reevaluate
its licensing relationships with technology suppliers. The original agreement had been
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restrictive, not allowing Komatsu to enter into distinctly specified market segments, and the
licensees were not willing to sell the contract. Komatsu appealed to Japans fair trade
commission. After appropriate deliberations, the government agency agreed with Komatsu
that it was a restrictive business practice that impaired competition. This finding allowed
Komatsu to buy its way out of the contract, paying Bucyrus $13.6 million to get the data it
wanted and another $6 million for royalties on the balance of the contract in May 1981. In
early 1982 Komatsu had an opportunity to buy out of its obligations to International
Harvester. When financially strapped Harvester was looking for cash, Komatsu bought back
IHs half interest in its loader business for $52 million. Freed of the constraints of the
licensing agreements, Komatsu could sell hydraulic excavators and wheel loaders to world
markets. The company emerged as a full-line competitor.

Komatsu celebrated its sixtieth anniversary in 1981. That year it launched a new project
called EPOCHS, which stood for Efficient Production-Oriented Choice Specifications. The
projects theme was reconciliation of two contradictory demands. The aim was to improve
production efficiency without reducing the number of product specifications required by the
market. The overseas expansion in the 1970s taught management that customer
requirements varied widely by market and by application. For example, in Australia prospects
were excellent in coal and iron-ore mining, but the tough operating requirements surpassed
the capabilities of machines designed for Japanese construction applications. Komatsu
responded by designing bulldozers, power shovels, and dump trucks adapted to mining
conditions in Australia. To better its competition, it sent field engineers to survey Australian
miners and elicited their comments and complaints about the equipment which were then
incorporated into its products.

As its export market increased, the company faced demands to adapt its products to suit the
user requirements in different countries and diverse applications. These requirements varied
with each countrys environmental conditions and legal requirements. Such adaptations,
however, were costly in terms of production efficiency, parts inventory, and field service
management. The purpose of the EPOCHS projects was to allow the company to respond to
the diverse market needs without compromising its cost position.

Komatsu meanwhile continued on its investments in R&D. The culmination of its successes
came when at a International Fair [ Conexpo81 ] Komatsu displayed its 1,000 hp bulldozer
bigger than Cats top-of-the-line 700 hp machine. According to Komatsu managers, the most
interested observers at their exhibit were Cat technicians. On Komatsu manager reportedly
photographed four Cat managers examining and measuring the companys equipment at the
exposition. Ten years ago, he smiled, we would have been the ones caught doing that.

Nonetheless, concern persisted about the depressed state of the construction industry
worldwide, and Komatsu managers began talking increasingly about other business
opportunities. In 1979 top management launched a companywide project called F and F.
The abbreviation stood for Future and Frontiers, and its objective was to develop new
products and new businesses. The project encouraged suggestions from all employees,
asking them to consider both the needs of society and the technical know-how of the
company. Some of the 3,500 suggestions included diverse new products as arc-welding
robots, heat pumps, an excavating system for deep sea sand, and amorphous silicon
materials for efficient exploitation of solar energy.

By 1984 Komatsus managers had good reason to be proud of their companys record of
previous two decades It still held a 60% market share in Japan, helped in part by sales to its
fully owned construction and real estate subsidiaries. The companys domestic sales & service
network was acknowledged to be the most extensive and efficient in Japan.

Exports expanded so that they represented well over half of Komatsus total sales in 1983.
The company continued to strengthen its relationships with the Eastern bloc and had a
backlog of orders for equipment for the Siberian natural resource project. The Reagan
administrations embargo in December 1981 on the sale of Cat pipe-laying equipment to
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Russia handed the total contract to the Japanese company. Komatsu also signed a contract
with the Soviets to develop a scraper based on a Russian design, using Japanese
components, and was collaborating with the Russians on a big crawler-dozer and dump
truck. Komatsus sales to the Soviet Union were soon expected to overtake Cats.

Despite competitors suggestions to the contrary, Komatsu dealers generally denied that they
were still competing mainly on price. A U.S. dealer commented: When you are selling
against number one, you need some price advantage. But we tell contractors we can give
them 10% more machine for 10% less money. Thats not selling price in my book

Pondering the Future : It was quite in character for Ryoichi Kawai, the chairman of
Komatsu, to ponder the future direction for the company that he had headed since 1964,
succeeding his father, Yashinari Kawai. Kawai greatly admired Cat and often spoke of
modeling his company after it. This spirit of competition with Cat pervaded the entire
company. Komatsus in-house slogan was Maru-C, which roughly translated meant
Encircle Caterpillar. Reportedly, the company continuously monitored events in Peoria, and
one of the main jobs of Komatsus executives in the United States was to keep tabs on any
and all relevant press reports. Cats monthly in-house letter to its employees, which featured
new product introductions and other company-related news, was required reading for all
Komatsu executives, and copies were sent by express mail to Tokyo for analysis at the
corporate headquarters.

As Kawai continued to think about the possible changes in Komatsus competitive strategy,
he kept reminding himself that complacency is one vice his company had to guard against.
Eternal vigilance is not the price of liberty alone. It is also the price of prosperity.




Questions :
[1] Evaluate Komatsus strategy of Internationalization, [2] How much of this success can be
traced to formulation or implementation of strategy, [3] What is Komatsus basis of
Sustainable Competitive Advantage.


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Strategy/ Additional Data on Komatsu


Table A : Cost Structure of a large Bulldozer
[ equl. to Cat D-6 ]
Component Percent of cost
Labor 35%
Components and subassemblies 12.4
Overhead 18.4
Assembly 4.6
Purchased material and components 49.6
Overheads 15.4
Source B C G


Table B : Steel Price Comparison
Product US J apan J apan/ US
HR coil 494 359 73%
HR Steel Plate 635 445 70%
Source B C G : assumed at $1 = Yen 220


Table C : Market Share for Major EME Producers
Producer 1971 1980 1984
Cat 55 53 43
Komatsu 10 15 25
J J Case 7 10 10
Fiat-Allias 4 6 4
Deere 6 7 7
Int. Harvester 11 5 3
Clark 6 4 4
Total 100 100 100
Source : Form 20F reports


Table D : Komatsus sales by Geographic Region
Region 1977 1980 1983
Japan 58 56 46
Asia & Oceania 11 18 30
America, north &
south
18 12 7
Europe, Middle east
and Africa
12 13 16
Total 100 100 100
Source : Form 20F reports