Controlling stability at Deere & Co

In the 1860s, John Deere a blacksmith in Vermont invented a plow that was able to turn the thick, rich soil of the vast and fertile Midwestern US prairies. Then in 1868, Deere formed a company to distribute his plows and stressed a philosophy of quality products and customer service. By 1911, that company had evolved into a full time manufacturer of farm equipment. In 1918, through its purchase of a Waterloo, lowa based gasoline engine, Deere became instrumental in the conversion of American agriculture from animal to machine power. Through diversification Deere has remained a viable concern, and today Deere stands as the largest producer of farm equipment in the world. In addition, Deere is a major supplier of construction machinery. Managers emphasize the globalization of Deere enterprise (including facilities in Mexico, Canada, Spain, France, Australia, and elsewhere) and stable leadership. Deere has had only four CEOs since 1928.

Although Deere has worked with GM on diesel engines and with NASA on developing metal alloys, agricultural equipment remains its core business. As of 1994, Deere held 35 percent of the farm tractor market and approximately half of the self propelled combine market.

During recent years, however, American agriculture has experienced ups and downs. In the United Sates, for instance, many farmers accrued overwhelming debt burdens in the late 1980s that compelled them to part with land that had belonged to their families for generations. Some of the land was consolidated into larger farms. Much of it was sold to housing developers.

Even when the industry began to pick up in the early 1990s few farmers rushed to buy new tractors, combines, or farming equipment. In fact, an article in the wall Street Journal in 1992 reported that the average tractor in the United States was 19 years old. This could be due, at least in part, to the expense of Deere products. Even a modest piece of farm equipment manufactured by Deere can cost as much a luxury automobile, while the latest, most sophisticated tractors retail for as much as $80,000. Deere’s fortunes therefore tend to rise and fall with those of the farmers. In 1990, for example, Deere posted earnings of $114 million – the best in the company’s history. In 1991 however, the company suffered a loss of $ 37 million. Then, the industry began to recover in 1992 and 1993, and Deere reported 1993 earnings of $184, million. Given such volatility, how does Deere keep going?

One of Deere’s strategies involves helping dealers offer incentives, such as price cuts, sales promotions, and low-interest financing through Deere’s credit subsidiary. Dealers, hoping to compensate for lost profit through future parts and service business, often end up selling equipment at near cost.

Price incentives and promotional campaigns help Deere create regular demand for its goods. Under ordinary circumstances, farm equipment sales are seasonal – high in the spring and summer but low during the rest of the year. If Deere were to ignore the seasonality of its products the company might be forced to lay workers off during the off-season or hire extra workers during the on-season. Instead, Deere attempts to even out demand through sales promotions and incentive programs. For example, to encourage year round sales, Deere offers incentive merchandise such as furniture and travel awards to dealers who surpass their goals.

When demand dips exceptionally low, as it did in 1991 and early 1992, Deere holds week long factory shutdowns in place of permanent layoffs. During the era of market downsizing explained Al Delattre of Andersen Consulting, the first thing done companies did was make wide cuts of factories and people without building in performance to allow them to respond to the change in the market. The temporary shutdowns, however, enabled Deere to keep production at a constant efficient rate, and still remain flexible to the demands of the cyclical market.

Careful control has thus enabled Deere not only to survive but to proper in a cyclical industry in which extremely narrow profit, margins are shared with dealers.