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Caterpillar is taking one from the playbook of IBM, building the service side of its business

As global competition heats up, heavy equipment giant Caterpillar is shifting its business strategy from making and selling machines to increasingly servicing them, taking a cue from IBM’s switch from hardware to services.

Caterpillar’s top executive for Latin America, *Jose C. Brousett,* outlined the plans at the April 9 meeting of WorldCity’s CEO Club, where discussions about the multinational proved a case study in the world economy itself.

Brousett said Caterpillar posted $32.4 billion in revenues last year, down from $51 billion in 2008, with about half of its sales outside the United States. The company laid off about 30 percent of its workforce, or about 30,000 people, to adjust and remain profitable despite the global downturn, the Peru-born executive said.

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ED&F Man’s Raimundo Varela, president of the Americas, asked whether it made more sense to compete on price with manufacturing.

This year, Caterpillar hopes for sales between $35 billion and $40 billion, still far from its pre-recession peak. And competition is rising from manufacturers based in China and elsewhere, prompting a search for new sources of revenues and a new strategy toward activities with higher profit margins, Brousett said.

“As a company, we need to transform ourselves to become more services-oriented, more solutions-oriented,” Brousett told some three dozen people gathered for the CEO Club meeting.

Caterpillar aims to grow in such areas as maintaining heavy equipment for mines and construction, leasing it by the hour, moving equipment between jobs and selecting appropriate fleets for projects, among other services.

But as Pittsburgh, Detroit and other manufacturing-oriented cities have found, it’s no simple shift from factories and distribution of goods to a focus on services. Challenges include devising ways to split profits with long-time equipment dealers, who may not bring proprietary knowledge to the offering of services, Brousset said.

Commodities trader Raimundo Varela, president for the Americas of ED&F Man, asked if it wouldn’t be easier simply to shift manufacturing to lower-cost sites like China and compete head-to-head with emerging rivals.

Brousett said Caterpillar wants to differentiate itself as a premium player, “not a me-too.” It’s seeking help with its strategy shift from IBM, GE and other companies now more reliant on services, he said.

Success will depend partly on educating and training sales staff and dealers to offer new services, said *Mel Rea Maguire,* associate dean for external affairs at the University of Miami School of Business, one of the event series sponsors.

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Novartis’ Carlos Garcia asked about diversity in the Caterpillar work force.

To sell a machine, Brousett said, you may need to know product specifications and a bit about mining or building. To sell services, you likely need to know more about how your client’s business works and their strategy. Making a sale may take longer and require sales staff with different skills, he added.

At the same time, Caterpillar must cope with other workforce challenges. *Carlos Garcia,* president for Latin America for Novartis Pharmaceutical Corp., asked about moves to boost diversity for women and non-U.S. staff.

“You’d think from the outside it must be a male-dominated company,” Garcia said.

Brousett said Caterpillar is developing talent from around the world. But in Latin American operations, about 90 percent of marketing managers still come from the United States – a costly proposition, participants said.

Expanding to doing business in so many countries at different levels of development also presents challenges, said *Carlos Ordonez,* general manager for Aeronautic Investments. He asked about opportunities in Africa.

Brousett said Caterpillar sells in Africa, but has yet to set up factories there. Infrastructure in many areas remains weak, and a lack of free-trade agreements makes it tough to sell between neighboring nations, he said.

Brazil, meanwhile, is emerging as a top market. Caterpillar aims to triple sales in Brazil in the next five years, helping supply what some analysts estimate will be $140 billion in infrastructure investment there, Brousett said.

“The giant has awakened,” said Brousett. “The World Cup and Olympics are really the icing on the cake.”

The CEO Club, one of six event series hosted by WorldCity, is sponsored by telecom heavyweight Telefonica, the Diaz Reus law firm and the University of Miami School of Business Administration. The next meeting is May 7.