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Komatsu Construction, Mining and Utility Equipment Division

2011 11th Porter Prize Winner Earth-moving equipment
A strategy modeled on farming is employed throughout the value chain, from supplier management to after-sales services

Industry Background

The earth-moving equipment industry is led by Caterpillar and Komatsu. Caterpillar and Komatsu have the broadest product lines, the most extensive services, and global coverage.

The earth-moving equipment market consists of two segments. One is the mining machinery segment and the other is the construction machinery segment.

The global mining machinery segment is served predominantly by Caterpillar and Komatsu. This is because there are several global customers who require an extensive service network in addition to technological know-how.

The construction machinery segment is more fragmented. Its main players are Caterpillar (U.S.), Komatsu (Japan), Hitachi Construction Machinery (Japan), Doosan (South Korea), Volvo Construction Equipment (Sweden), Hyundai (South Korea), Kobelco (Japan), Case New Holland (the Netherlands), and Sumitomo Construction Machinery (Japan). In China, the number of local players is growing, and include companies like SANY.

Product-wise, earth-moving equipment includes seven major products: crawler-based hydraulic excavators, wheel-based hydraulic excavators, bulldozers, wheel loaders, motor graders, dump trucks, and articulated dump trucks.

Executive Summary

Komatsu's strategy is described as a "farming" model for the following two reasons. First, Komatsu has created a competitive strategy that prevents the commoditization of its products and generates profits throughout the entire product life cycle. Second, its implementation is supported by activities that involve the nurturing of capabilities and therefore require a patient investment.

Its unique activities include the in-house development and manufacturing of key components that are critical to product performance, the building of dynamic relationships with suppliers, the global standardization of products and components, the installation of the KOMTRAX (Komatsu Machine Tracking System) as a standard product feature, and the development of a dealer network from scratch (in China, among other countries). This unique combination of activities has resulted in technological leadership, low inventories, effective and efficient after-sales service, better control of accounts receivable, better utilization of the machinery, and an improvement in the machinery's resale value.

Komatsu, with consolidated net sales totaling 1,843 billion yen in 2010 ($22,206 million), is the second-largest manufacturer of earth-moving equipment after Caterpillar (company sales totaled $42,588 million in 2010).

Unique Value Proposition

Komatsu's products are almost as expensive as Caterpillar's and more expensive than those of other competitors. However, when the cost of ownership is compared, Komatsu's products are less expensive due to low downtime, low maintenance costs(※1), and the high resale price of used products.

Komatsu targets a broad range of customers. In the mining segment, its customers are large companies that develop natural resources around the world. In the construction segment, its customers are sometimes large construction companies, sometimes tiny companies, and sometimes even individuals, which is the most common case in China. The diversity of the customer portfolio implies a high cost. However, as earth-moving equipment requires maintenance, once Komatsu sells a machine to a customer, it can enjoy a long-term relationship with that customer. And Komatsu has many unique means for enhancing its relationship with customers.

Geographically, Komatsu has the largest market share in China and in Asia. Komatsu categorizes China, Asia, Oceania, Central and South America, the Middle East, Africa, and the former Soviet Union countries as "Strategic Markets," compared with the "Traditional Markets" of Japan, the U.S., and Europe. Sixty-seven percent of Komatsu's sales in 2010 came from Strategic Markets.

Komatsu provides its customers with: 1) environment-friendly products and operation; 2) safety; and 3) new services, supported by operational data made available through its proprietary ICT systems. Komatsu equips its construction machinery with the KOMTRAX (a remote equipment monitoring system) as a standard feature, not an optional one.(※2) The KOMTRAX uses a global positioning system (GPS), and can send data to Komatsu's data center through a satellite communication system. Komatsu and customers can learn where a particular machine is located and how many hours it has been working, and can determine when parts should be replaced. Komatsu and its dealers use this data to recommend maintenance services, control inventory, and advice customers on how to use the machine more effectively.

Komatsu provides such benefits to customers so that they will be unable to operate without Komatsu, and so that the customers will want to grow their businesses with Komatsu. One such example is the autonomous haulage system, which Komatsu was the first in the world to commercialize. A mining company in Chile, for example, could not operate without Komatsu.

(※1)The lifetime maintenance cost for a construction machine is several times larger than the purchase price of that machine.
(※2)Komatsu started to equip its machines with the KOMTRAX as a standard feature in 2001. As of September 2011, 240,000 machines in about 70 countries were equipped with the KOMTRAX. Now, the company is equipping some key components and mining machines with the KOMTRAX.

Unique Value Chain

Technology development
Komatsu's product development policy calls for DANTOTSU, which means being the best by far in some important performance features or specs. This makes it difficult for competitors to catch up, as it would take them several years, and at the same time helps to improve profitability significantly. The DANTOTSU product development approach prioritizes among performance features, and identifies places where it does not compete with its competitors, to make room for investment in the critical performance features.

It puts emphasis on: 1) environmental friendliness, 2) safety, and 3) ICT. As for environmental friendliness, the U.S., the EU, and Japan impose exhaust restrictions on construction machinery. Regarding safety, it is one of the most important factors for customers. With respect to ICT, Komatsu uses ICT to create value, which was explained above in the Value Proposition section.

Manufacturing operations
Komatsu concentrates the development and manufacturing of key components in Japan, while engaging in assembly at production facilities in local markets.

Komatsu assigns a "Mother Plant" for each product. Mother Plants have a product development function, in addition to taking responsibility for the improvement of operations at Child Plants.

Komatsu standardizes its products worldwide. It also standardizes its parts list among plants worldwide. This enables Komatsu to commence production of new products simultaneously at various plants around the world, or move the production of one product to another plant very easily. As a result, Komatsu can quickly move production from Plant A to Plant B to level out production volumes, minimize fluctuations in output, and absorb the impact of exchange rate fluctuations.

Procurement
Komatsu's policies toward suppliers are based on the "win-win" and the "same boat" approaches. Komatsu shares production plans with suppliers and allows them to participate in its internal human resource development programs. Japanese suppliers are organized into the Midori Kai, and they are encouraged to get to know each other well. At the same time, Komatsu has its suppliers compete with each other. For example, it awards orders to the company that has submitted the best proposal, and then sticks with that supplier until the next model change.

Supply chain management
Komatsu checks the sales figures of dealers worldwide on a real-time basis. This data is combined with other data related to production and inventories at plants, distributors and dealers to keep total inventory low. Accessing these figures in real time for all operations worldwide is possible for Komatsu because it has installed the KOMTRAX system in its construction machinery as a standard feature. Komatsu has already succeeded in reducing distributor inventory to zero in Japan, China, North America, India, Thailand, Indonesia, and Brazil.

Marketing and sales
Komatsu makes it a priority to provide various services to support customers throughout the lifecycle of its products. Such services include the supply of replacement parts and re-manufactured components, retail finance, equipment rental, and the sale of used equipment. By offering customers a wide range of services to choose from when they purchase new equipment, Komatsu achieves differentiation from its competitors and thus avoids pricing competition.

In China, Komatsu has developed its own sales network by recruiting local entrepreneurs. Although it takes time to develop a network of local dealers from scratch, these dealers tend to have better access to local information and business opportunities.

After-sales service
Komatsu positions the after-sales service (provided by dealers) as a system through which to keep new products selling.

Komatsu dealers provide customers with advice on how to improve the utilization of machines based on an analysis of the data obtained from the Komatsu machines through the KOMTRAX. Dealers also contact customers, recommending parts replacement and maintenance services based on the usage data obtained from each machine through the KOMTRAX.

Komatsu has been working to train service personnel in emerging countries, where sales are growing rapidly. Komatsu maintains support centers at its distributors around the world. At these overseas support centers, Japanese expatriates provide training and support to the service personnel at local distributors. In China, Komatsu develops service engineers through Shandoong Jiaotong University, with which the company has a partnership. In the Philippines, Komatsu has opened an educational center for service engineers (mainly for mining equipments). From this educational center Komatsu dispatches service representatives to various parts of the world. For the mining segment, Komatsu provides service 24 hours a day, 365 days a year.

Human resource management
In seven out of eleven countries outside of Japan, the top management positions at its manufacturing entities are staffed with local personnel, who have been working for Komatsu for more than ten or twenty years, and who share the core corporate values, known as "The KOMATSU Way." Komatsu considers leaders' actions, such as visits to the factory floor, crucial to the achievement of strong manufacturing capabilities, and has learned that changing employees' mindsets and behavior takes time.

Firm infrastructure
Komatsu employs Standard Variable Margin (SVM) as a way to control costs. This approach uses variable costs as a means of comparing the productivity of various plants.

Fit among Activities

At Komatsu, activities are selected and coordinated around: 1) customer relationship management that aims to enhance the customer relationship to the point where Komatsu becomes indispensable to the customers' operations; 2) product development activities that aim to develop DANTOTSU products and services; 3) flexible manufacturing; and 4) the visualization of information. These activities are supported by the sharing of The KOMATSU Way and activities that encourage teamwork. (Please refer to Komatsu's activity system map, which appears at the end of this report.)

Innovation that Enabled Strategy

  • The DANTOTSU policy
  • Made the KOMTRAX a standard feature for all its construction machinery.
  • Extensive use of ICT, such as the KOMTRAX, throughout its value chain.
  • The information obtained by the KOMTRAX is used not only to improve Komatsu's operations but also to improve the operations of its customers and business partners. Komatsu had this idea earlier and developed an access system specifically for customers.
  • Product innovation 1: the hybrid hydraulic excavator launched in 2008 (the first in the world).
  • Product innovation 2: the autonomous haulage system launched in 2008 (the first in the world).

Consistency of Strategy Over Time

The core components of Komatsu's strategy are the promotion of a "win-win" relationship with its business partners; a commitment to technological innovation and quality; and global expansion. These core components are supported by visualization efforts and an investment in people. Among these, "the commitment to technological innovation and quality," "global expansion," and "investment in people" have been stated in Komatsu's corporate philosophy since its foundation in 1921.

These have served as a foundation for global business development in the 1990s, when Komatsu began investing in China and other Asian countries, while undertaking M&As in the U.S. and Europe. In the latter half of the 1990s, Komatsu standardized its ICT system at the global level. It also streamlined its product mix. It developed a base for highly profitable operations by reducing the complexities of operation that result from global expansion. Finally, it connected its value chain and its business partners' value chain to create value by utilizing the KOMTRAX, which was first introduced in 2001.

Trade-offs

  • Does not accept conformity with products of merely acceptable quality. Aims to produce only
  • DANTOTSU products, featuring exceptional quality.
  • Does not increase its product mix in response to customer requests. Komatsu restructured its product mix in 2001, and halved the number of product development projects. Komatsu decided to focus on the areas in which it has a competitive advantage.
  • Does not have multiple brands for use in the introduction of low-end models or regional models.
  • Uses a standardized parts list worldwide, which allows it to conduct global operations efficiently.
  • Does not rely on head-hunting. It cultivates human resources internally.
  • Does not pursue market share. Does not discount just to increase sales. Does not push inventory to dealers to increase sales.
  • Does not diversify into other business areas where Komatsu is unable to differentiate itself with original technology.

Profitability

Both return on invested capital and return on sales exceed the industry average.

Note: The financial performance figures provided by Komatsu are the consolidated, corporate -level results, not the figures for individual business segmens. The Construction, Mining and Utility Equipment business segment accounts for 87.7% of total sales (2010), and has higher profitability than the other business segment. A comparison with the industry average was made with the company-level figures, which are less profitable than the figures at the business-segment level.

Return on invested capital (ROIC)   (Unit = percentage point)
Difference from industry averag
over 5 year period
Difference from industry average, by year
2006 2007 2008 2009 2010
7.8%P 6.7%P 13.4%P 2.2%P 7.8%P 9.9%P
Inter quartile range (IQR) = 6.7%P
Return on invested capital = Operating income / Average invested capital

Return on sales (ROS)   (Unit = percentage point)
Difference from industry average
over 5 year period
Difference from industry average, by year
2006 2007 2008 2009 2010
5.9%P 4.3%P 5.3%P 2.4%P 8.5%P 8.6%P
IQR = 7.2%P
Return on sales =Operating income / Net sales

Activity System Map

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