Caterpillar's Don Fites: Why He Didn't Blink

During the mid-April climax of the five-month United Auto Workers strike at Caterpillar Inc., there was no shortage of media coverage. If the morning news didn't feature strikers hurling epithets at workers crossing the picket lines, you could always count on the evening report. Union leaders shouted slogans; Caterpillar flacks responded from their own set of cue cards. When Cat finally--and remarkably--broke the mighty UAW with the threat of hiring replacement workers, the collapse registered on TV screens from coast to coast.

But throughout the strike, one face was notably absent from the spotlight: that of Caterpillar Chairman Donald V. Fites. Cat's top executive avoided press conferences and ducked interviews. He revealed nothing of himself or how far he was willing to push the union. By the time he delivered his threat to replace Cat's 11,000 striking workers, it caught the union flat-footed. "We never thought he'd actually go that far," says UAW Local 145 President John Paul Yarbrough.

GRITTY RESOLVE. They should have checked his resume. To the outside world, Fites, 58, had been an invisible member of Caterpillar's vast bureaucracy. But since the early 1970s, he has focused a gritty resolve on bending the company to his vision of what makes an industrial enterprise efficient. He revamped Cat's product development process in the mid-1970s and overhauled worldwide marketing during the late 1980s. Since assuming Caterpillar's helm in 1990, he has broken the $10 billion monolith into smaller, more manageable units. Says former Caterpillar Chairman Lee L. Morgan: "He's one of the most determined men I've ever met."

Staring down the union--if it came to that--was merely a logical extension of Fites's drive to remake Cat. Years spent overseas, particularly in Japan, convinced him that America's manufacturers are hog-tied by inefficiency, including labor relations. "In Japan," he says wistfully, "unions are deeply dedicated to the success of a company, and Japanese companies have been very successful." Cat railed on about wages during the strike, but the real clash was over power. In the face of the UAW's insistence on "pattern bargaining"--a process whereby all companies in an industry accept similar union contracts--Fites was bent on reasserting the company's "right to manage."

Of course, Fites's hard line runs the risk of alienating his union workers, rather than drawing them closer in some Japanese sense of corporate family. But once he dug in his heels, Fites wasn't going to budge. Friends say he wears stubbornness like an old pair of jeans. He first slipped them on while growing up poor on an Indiana corn farm. "When he makes up his mind, he isn't easily swayed," says farmer William W. Erwin, a lifelong friend. The UAW found that out the hard way. "I didn't begin negotiations intending to hire replacements," Fites says, "but I felt I had no choice."

Since becoming chairman of Caterpillar, Fites has done more to transform the stodgy heavy-equipment maker than any of his predecessors. "He has completely changed the culture," says industry consultant Frank Manfredi. The centerpiece has been a rugged restructuring of the organization chart--a plan instituted under his former boss, George A. Schaefer, but designed by Fites. He briskly sketched it out one day while sitting at his desk. "We talked to all the consultants," Fites says, "but who knows the business better than those who work there?"

The idea was to thin the bureaucracy and move responsibility for decisions--and profits--further down the line. While axing 2,000 salaried and 5,500 hourly workers, Fites broke Caterpillar into 14 profit centers, requiring each to post a sizzling 15% return on assets--or else. It was no idle threat. When the company's money-losing forklift division failed to measure up earlier this year, Fites dumped it into an 80-20 joint venture controlled by Mitsubishi Heavy Industries Ltd.

Fites's fervor for efficiency stems from his long career overseas. Since he joined Caterpillar's marketing department in 1956, straight out of Indiana's Valparaiso University, he has shuttled between U.S. headquarters and foreign outposts like a diplomat. He started as a district sales representative in South Africa, where he met a South African named Silvia Dempsey and married her. Caterpillar eventually shipped the couple to Germany and from there to Switzerland.

A WARNING. Fites returned to the U.S. in 1970, and Cat sent him to the Massachusetts Institute of Technology for an MBA. His thesis--Japan Inc.: Can U.S. Industry Compete?--warned of Japan's growing export prowess. It also earned him a 4 1/2-year stint as marketing director of Caterpillar's construction-equipment joint venture with Mitsubishi in Tokyo.

Globe-trotting taught Fites how stifling a large bureaucracy can be. While making sales calls in Africa, for instance, he often had pricing decisions forced upon him from headquarters that made little sense in the local market. "I was on the scene and knew what needed to be done," he recalls. "But someone back at General Office would make decisions that didn't fit the situation."

Fites also had plenty to learn. In Japan, where he got his first experience on the factory floor, he liked the way companies rotated their managers through operations, engineering, and sales, creating better-rounded leaders. He also admired labor relations in Japan, where each company has its own union and the workers tend to subsume their interests into those of the company.

Fites's Japanese counterparts, however, don't remember him as a particularly dynamic executive. "Compared to other Caterpillar people I met, he wasn't that outstanding," says Takechi Kondo, the joint venture's marketing director. He says the young American didn't truly understand the premium Japanese customers placed on product quality. "The Japanese were sensitive to that before us," Fites admits.

TOO FAT? As soon as he had the chance, Fites applied in Peoria what he had learned overseas. In 1975, he turned Cat's product development group on its head by taking the then-radical step of engineering with Japanese-style cross-functional teams. The teams included marketing, design, and manufacturing people, integrating the development process so plans wouldn't have to be passed back and forth among departments. Development time was cut in half.

Cat's worldwide marketing structure was Fites's next target. Recalling how distant and overbearing the central office seemed when he was a salesman, he was convinced Cat paid too little attention to its customers' needs. So when he rose to executive vice-president in 1985, he put more marketing staffers into the field and turned over authority for such market-sensitive matters as pricing to district offices. Then, believing the department was too fat, he cut 100 management jobs--a rare move in paternalistic Peoria headquarters.

Fites's Japanese experience resounded throughout his clash with the UAW. The most public issue was wages. During the strike, Caterpillar repeatedly asserted that it had a 25% disadvantage in hourly labor costs vs. Japanese rivals such as Komatsu Ltd. But that figure doesn't take into account the high productivity of Caterpillar's work force and is hotly disputed by the UAW, which says the cost differential is more like 6%. Most compensation experts agree that simply comparing wage-and-benefit programs between the two countries is virtually pointless; measuring productivity is essential. To do that, "unit labor costs" would have to be compared, and Cat won't reveal those figures. Fites insists the wage issue was crucial, but it seems unlikely that he would bet his company on something so ill-defined.

Rather, Fites talks today about another, less tangible, set of issues he labels "the right to manage." The UAW, he says, tried to commandeer Caterpillar by demanding that it accept what Deere & Co. granted in its 1991 contract--the old process of pattern bargaining. If it agreed to the terms Deere accepted, Caterpillar would have had to remain neutral if the union tried to organize the company's 2,000 nonunion factory employees, guarantee a specific number of UAW jobs, and give the union input on which jobs should be performed by outside suppliers. "We will never agree to these things," Fites says.

BIG STEPS. Maybe not. But the animosity Fites has created could easily turn his victory Pyrrhic. Since 1986, a teamwork system with labor has helped boost Cat's productivity 30%. Now, that collegial approach may be lost in rancor. Moreover, the UAW believes that the current fracas is only the first round of a long war. In initial talks, Fites demanded an end to companywide contracts in favor of agreements based on the needs of each of the 14 profit centers. The plan was eventually dropped, but the UAW, which sees the demand as truly threatening, expects to see it again.

Fites has staked his reputation on his ability to reorganize Cat and win labor peace without sacrificing productivity. That may take a lot more than a healthy dose of Midwestern stubbornness. Still, Fites has already done much to define the course of labor relations in the 1990s, steering it in management's favor. From here on out, it's unlikely that anybody will make the mistake of underestimating him again.

      Age: 58
      Born on a 90-acre farm in Bourbon, Ind.
      Valparaiso Univ., BA, 1956
      MIT Sloan School of Management, MBA, 1971
      Began at Cat after college. Spent total of 16 years bouncing around South 
      Africa, Europe, Brazil, and Japan between stints in Peoria. Wrote master's 
      thesis on Japanese manufacturing but rose through the Cat sales organization. 
      Named president in 1989. Architect of Chairman George Schaefer's vaunted 
      program to push down authority by breaking Cat into 14 separate profit centers
      Aerobics three times a week at a Peoria gym
      DATA: BW
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