978-0077720599 Case 19 Deere Co Part 1

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TEACHING NOTE

CASE 19

Deere & Company in 2014

Overview

In 2014, with its world headquarters in Moline, Illinois, Deere & Company (Deere) remained the largest

agricultural equipment and machinery manufacturer in the world, with operations in more than 26 countries.

Despite a slowdown in the global construction industry, Deere had its best-ever year in fiscal 2013 with record

net income for the third consecutive year. The company’s sales and earnings of $37.8 billion and $3.54 billion,

respectively, resulted from the success of its global strategy keyed to product innovation and quality, operating

excellence, cost reduction, and best-in-industry customer service. The company built or acquired new plant

capacity in Brazil, Germany, and China in 2013 and planned seven new factories in international markets in 2014.

Deere’s prospects for even stronger financial performance appeared favorable, as the global demand for agricultural

products was forecasted to double by 2050. International markets such as China, Brazil, and Russia already

accounted for more than 35 percent of the company’s revenues in 2013, and these emerging markets would likely

make up a much larger percentage of sales in the long term as living standards in emerging markets improved.

The company’s primary challenge in 2014 was how to best defend against the competitive pressures stemming

from its chief rivals in the agricultural and construction equipment industry—Caterpillar, CNH Industrial

N.V., and AGCO Corporation—who were anticipating rapidly expanding industry growth. Deere’s chief rivals

recognized similar trends in the macro-environment and the same opportunities for growth in revenues and

profits. Deere nevertheless planned to advance operations and increase its market share across six key markets:

the United States and Canada, Brazil, China, Russia, India, and the European Union.

There’s ample detail in the case for students to evaluate:

n Deere’s international strategy.

n How sustainable Deere’s position is as leader in in the agricultural and construction equipment industries in

light of environmental forces, competitive dynamics, and its current situation.

n The company’s financial performance in comparison to that of its chief rivals.

Suggestions for Using the Case

The case pairs particularly well with the coverage of strategies for: (1) strengthening a company’s competitive

position in Chapter 6, (2) competing in international markets in Chapter 7, and (3) diversification in Chapter 8.

It can also be useful to review: (1) the interactions between a business and forces in its external environment, in

particular the five forces driving profitability in an industry, covered in Chapter 3 and (2) the financial ratios and

internal resources and capabilities covered in Chapter 4.

*This teaching note reflects the thinking and analysis of Professor Armand Gilinsky, Sonoma State University. We are most grateful

for his insight, analysis and contributions to how the case can be taught successfully.

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Video for Use with the Deere & Company in 2014 case. There is a 4:50 video entitled “Deere: Smart

Tech Coming to Big Farms” that would be best viewed after students have read the case and become familiar

with the industry. You may prefer to have students watch the video on their own. It can be accessed at http://

www.youtube.com/watch?v=B2PJHf6_SN0.

The Connect-based Exercise for the Deere & Company Case. We developed an exercise for Deere

& Company for inclusion in the publisher’s Connect™ Management web-based assignment and assessment

platform because:

n Most if not all of the topics in this case bear directly on the material in Chapters 3 through 8.

n One of the purposes of the case exercises is to drill students in applying the core concepts and analytical

tools discussed in the chapters to the circumstances posed in the cases.

This particular Connect-based exercise focuses on concerns the following five questions:

1. How strong are the competitive forces confronting Deere in the global market for agricultural and construction

equipment?

2. How have Deere’s business strategy choices strengthened or weakened its competitive position in the

agricultural and construction equipment industry?

3. Is Deere’s international strategy best characterized as a multi-domestic strategy, global strategy, or

transnational strategy? What are the pros and cons of each approach?

4. Is Deere’s business strategy producing good financial results?

5. How do Deere’s financial results measure up to those of its direct rivals in the agricultural and construction

equipment industry?

It should take class members roughly 30 minutes to complete the exercise, assuming they have done a

conscientious job of reading the case and absorbing the information it contains. All of the questions are

automatically graded, and the grades are automatically recorded in your Connect grade book, which makes it

easy for you to evaluate each class member’s ability to apply many of the concepts and analytical methods in

Chapters 3–5.

What to Tell Students in Preparing the Deere & Company Case for Class. To give students guidance

in what to do and think about in preparing the Deere case for class discussion, we strongly recommend two

things:

1. Have class members complete the Connect-based exercise for the Deere case in the event you have adopted

the Connect software for your course.

2. Provide class members with assignment questions and insist that they prepare good notes/answers to

these questions before coming to class. Our recommended assignment questions for the Deere case are

To facilitate your use of assignment questions and making them available to students, we have posted a file of

the Assignment Questions contained in this teaching note on the instructor resources section of the Connect

Library. In all instances, these assignment questions correspond to the assignment questions in the teaching

note for the case.

In our experience, it is quite difficult to have an insightful and constructive class discussion of an assigned case

unless students have conscientiously have made use of pertinent core concepts and analytical tools in preparing

Case 19 Teaching Note Deere & Company in 2014

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team presentations and written case assignments—in addition to whatever directive question(s) you supply for

these assignments. Hence, we urge that you provide students with assignment questions—either those we have

Utilizing the Guide to Case Analysis. If this is your first assigned case, you may find it beneficial to have

class members read the Guide to Case Analysis that immediately follows Case 31 in the text. The content of this

Suggested Assignment Questions for an Oral Team Presentation or Written Case Analysis. We

believe the Deere & Company case is quite well-suited for written assignments and/or oral team presentations.

Our suggested assignment questions are as follows:

■ Deere’s management has employed you as a consultant to assess the company’s overall situation and

recommend a set of actions to improve the company’s competitive position in the international markets

for agricultural and construction equipment. Please prepare a report that includes: (1) an evaluation

of competitive forces in the markets for agricultural and construction equipment, (2) an assessment of

■ Prepare a brief report to Deere’s management outlining the 3–4 top priority issues that management needs

to address and the actions you believe it must initiate to address these issues. Your report should contain

detailed and convincing reasons in support of each one of your recommendations. It is imperative that the

Assignment Questions

1. How strong are the competitive forces confronting Deere in the global market for agricultural and construction

equipment? Do a five-forces analysis and identify the key driving forces and key success factors to support

your answer.

2. How have Deere’s business strategy choices strengthened or weakened its competitive position in the

agricultural and construction equipment industry? Discuss how the company’s senior management has

chosen to increase the horizontal or vertical scope of the firm.

3. Has Deere’s increase in scope also been a part of its international strategy? Is the international strategy best

characterized as a multi-domestic strategy, global strategy, or transnational strategy? Explain.

4. Is Deere’s business strategy producing good financial results? Use the financial ratios in Table 4.1 in the text

as a guide.

5. How do Deere’s financial results measure up to those of its direct rivals—Caterpillar, AGCO, and CNH—in

the top tier of the agricultural and construction equipment industry?

6. What business strategy recommendations would you make to Deere’s management? Should the company

consider divesting assets or acquiring new assets? Are there other potential strategic options that should be

under consideration? Please justify your recommendations by outlining the pros and cons of each.

Case 19 Teaching Note Deere & Company in 2014

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Teaching Outline and Analysis

1. How strong are the competitive forces confronting Deere in the global market for

agricultural and construction equipment? Do a ﬁve-forces analysis and identify the

key driving forces and key success factors to support your answer.

Suppliers of

Materials and

Components

Used in the

Rivalry among

Competing Sellers

of Agricultural

and Construction

Equipment

Competitive pressures coming

Substitutes for

Potential New Entrants

into the Agricultural

Buyers of

Agricultural and

Competitive

pressures

stemming

from

Competitive

pressures

stemming

Overview

Industry sales in 2013 reached a record $41.6 billion, with an average profit margin of 6.2%.

The industry grew at a rate of 3.9% in the five-year period between 2009 and 2013.

n Competitive pressures associated with the bargaining power of buyers of agricultural and construction

equipment—a weak to moderate competitive force

The rise of corporate agriculture has concentrated the number of buyers, but at simultaneously increased

the importance of brand loyalty and aftermarket sales-service as mechanized farming and construction

Case 19 Teaching Note Deere & Company in 2014

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equipment represent “a big ticket item” and long-term investment for the purchaser. Due to the need

for aftermarket service, switching costs for consumers are moderately high, particularly if equipment

n Competitive pressures associated with substitutes for agricultural and construction equipment—a

weak competitive force

n Competitive pressures associated with the threat of new entry into the market for agricultural and

construction equipment—a low to moderate competitive force

Although the case states that entry threats are moderate, the industry is capital intensive, requires access

to or the ability to develop increasingly complex process as well as product technology, and has a

n Competitive pressures associated with the bargaining power of suppliers to producers of agricultural

and construction equipment—a weak competitive force

Although the major component cost to manufacture equipment—steel—has recently risen in price,

producers are passing on the price hikes to customers, who are typically not price-sensitive. Technology

n Rivalry among competing producers of agricultural and construction equipment—a strong

competitive force

There is no single low cost leader in this industry, so rivals are forced to compete on differentiation features

such as reliability, quality, integrity, and reputation, rather than on price. It is a purely competitive market.

Domestic competition in North America (U.S. Canada, and Mexico is essentially dominated by the

duopoly of Caterpillar (market share leader) and Deere. Canada and Mexico combined represent 42%

of agricultural and construction equipment exports, so are vitally important markets. Competition in the

Competition among U.S. producers in global markets is keen as exports from the U.S. exceeded imports

by $1.0 billion in 2013.

Global competition is essentially dominated by the four-firm oligopoly of Deere, Caterpillar, CNH,

and AGCO. All four producers operate and have dealer networks among most of the developed and

developing nations. Rivals are all jockeying for market share and profitable growth and are focusing

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In sum, the industry is fairly attractive, offering sustainable growth and profit potential to incumbents

due to the low threat of substitutes, low power of buyers and suppliers, and a moderate–low threat of

new entrants. Rivalry is intense, and will continue to intensify, as the industry matures and consolidates

further.

Key drivers in the agricultural and construction equipment industry include:

• Social/Demographic. Global population growth and increasing urbanization, accompanied by

rising standards of living

• Economic. Doubling of agricultural output in emerging economies, some of which are located in the

Southern Hemisphere, offsetting the inherent seasonality of the industry

Key success factors for rivals competing in the agricultural and construction equipment industry

include:

• Trusted brand

• Value

2. How have Deere’s business strategy choices strengthened or weakened its competitive

position in the agricultural and construction equipment industry? Discuss how the

company’s senior management has chosen to increase the horizontal or vertical scope

of the ﬁrm.

Key aspects of Deere’s strategy are as follows:

n Ensure stellar quality, reliability, support, and integrity across all aspects of the business

n Act on global market opportunities via greenfield development of overseas production facilities—6 in

Europe, 3 in China, 2 in Brazil, 2 in Mexico, and one in Argentina, Russia, and India, respectively

n Leverage its global scale via world-class distribution networks and after-sales service

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Deere’s stated objectives are to:

n Reach $50 billion in global revenues and a 12% profit margin (or $6 billion in net income) by 2018:

• To attain these goals, revenues would need to grow at a five-year Compound Annual Growth Rate

(CAGR) of 6% (recent revenue growth rates, year-on-year, have ranged from 5%–13%) and profits

n Leverage its world-class innovation and distribution capabilities.

Deere’s ability to achieving and sustaining a competitive advantage in the agricultural and construction

equipment industry may well be confounded by the following factors:

n Heavy reliance on debt leverage to finance asset expansion

n Moderately high labor intensity

n High proportion of fixed to variable costs, and fixed costs are resource-specific

n Dependence on low interest rates and weak U.S. dollar in international currency markets

n Large capital requirements for property, plant, equipment, access to distribution in global markets, and

technological prowess to compete with the four top tier providers is a major deterrent to new entrants

n Global production in lower wage countries reduces labor costs

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On balance, due to the above factors, to achieve a competitive advantage, a producer of agricultural

and construction equipment must compete via achieving economies of both scale (vertically) and scope

(horizontally).

Vertical scale refers to the ability of a firm like Deere to capture higher value added across activities such

as investing in research and development (R&D) to improve product innovation and design; providing

Horizontal scope refers to the range of product and service segments that a firm like Deere serves within

its focal market, which is considerable due to its presence in nearly every sector of agricultural and

construction machinery. Increasing a company’s horizontal scope can strengthen its business and increase

TABLE 1. Appraising Deere’s Horizontal Diversiﬁcation Strategies

Strategic intent Plusses Minuses

Leverage global scale economies to

improve efficiency

Reduced transport costs, increased

effectiveness of dealerships &

aftermarket support, retailing-

ﬁnancing division accounts for

>90% of sales across 40 countries

Highly dependent on favorable

balances of trade, weak U.S. dollar,

government subsidies & interest

rates

Heighten product differentiation via

Integrity & quality

Fundamental to strategy & to protect

global market leadership position;

5-time winner among Fortune’s

“Most Admired Companies”

Unclear if culture & values will be

shared & implemented by operators

of manufacturing facilities in

emerging markets such as China,

South America, and Russia

3. Has Deere’s increase in scope also been a part of its international strategy? Is the

international strategy best characterized as a multi-domestic strategy, global strategy,

or transnational strategy? Explain.

Any business contemplating globalization must make decisions regarding: