Daimler Chrysler: Blatant Misrepresentation, Case Study Example

Problem Statement

The Chrysler Corporation has traditionally been one of the major players in the automobile industry. In the 1980’s and early 1990’s the company evolved into the country’s  smallest but most efficient car manufacturer with the  highest profit margins in the industry. This was attributable both to its innovative range of products and the progressive leadership of Lee Iacocca.  In the late 1990s the company entered into merger negotiations with the Germanbased automobile group Daimler the manufacturers of the Mercedes Benz.

The merger between Chrysler and Daimler was finalized in 1998 andmade waves in the global automobile industry. Both companies were major players in their respective automobile segments and between them commanded a considerable segment of the global automobile market. While Benz was a leader in the luxury automobile market Chrysler had established competitive advantage in the minivan, jeeps and pickup trucks segments. The merger between the two was intended to combine their individual capabilities and turn it into a formidable force in the automobile market

However the intended merger did not progress as anticipated by its American counterparts. The German company had never regarded the amalgamation agreement as a merger of equals.They instead viewed it as an acquisition which would give the firm an access to the North American markets. Top ranking Chrysler executives were soon fired from the organization and replaced by German counterparts. The company’s organizational culture which had been based on fostering creativity and innovation now became hierarchal in nature. The new management put into place new policies which resulted in surplus inventory. To get rid of the surplus the company had to lower prices even on its best selling products resulting in lower profit marginsand huge losses. To cut costs and streamline processes the management set into motion another series of layoffs and started negotiating reduced rates with suppliers. This only served to further antagonize old and trusted suppliers resulting in more problems for the company. The merger never resulted in the efficiencies and economies of scale that it had been meant to achieve. Instead it led to huge financial losses and proved to be quite disastrous at least initially for boththe organizations.

To ensure that the Daimler Corporation had executive and sole control over Chrysler one of the first moves that Schrempp made was to fire Chrysler’s top executives. I feel this was not a very wise move because some of these executives had been with the company for years and had helped it achieve its present status. They had all been groomed under the leadership of Lee Iacocca and had been instrumental in formulating the companies strategies, building its innovative culture and enhancing the technical capabilities it needed to secure competitive advantage. The focus that Chrysler management put on innovation and technical excellence resulted in the company increasing its market share from 12.2 percent in 1991 to 15.8 percent in 1997. (Table 19.2) Schrempp’s decision to fire top Chrysler executives resulted in the company loosing talented experienced and committed managers who were well acquainted with the domestic market. Without these managers, Schrempp who did not know much about the American market made decisions which resulted in inventory pile ups and massivefinancial losses for the company. The loss of these executives also resulted in low morale in the organization and impacted the implementation of existing plans and strategies

Chrysler boss Robert Eaton saw the merger as a way of combining the talent and resources of two major players in the automobile industry. He anticipated that the merger would result in economies of scale, cost savings and synergies for both the companies. However in his eagerness to effect the merger he was misled by Schrempp into believing that this was a merger of equals and not an acquisition. There was a deliberate deception by Schremmp and Eaton did display naiveté in not anticipating and detecting the German’s intentions. To saveguard his position in the company he should have inserted clauses in the merger agreement which would have guaranteed that he and the rest of the senior executives maintain their respective positions in the company for a stipulated period after the merger. This would have prevented a lot of the problems from occurring and perhaps would have resulted in some of the goals of the merger being accomplished.

Cannibalization occurs when one model of thecompany’s product erodes the sales and profit margins of the other one. In 2000 DaimlerChrysler faced an extreme situation of cannibalization. Due to an erroneous management decision both the new and old models simultaneously flooded the market. Since the new model was not very different in terms of attributes from the old, customers did not express significant preference for the newer version of the product. To make inventory move the company had to offer significant rebates on the old model and offer price reductions on the new one. This endeavor eroded the company’s profit margins resulting in significant loss. To avoid this extreme situation from occurring it is advisable that a firm reduce production of the old model before the new model is launched in the market. Thus when there is a limited number of old models in the market customers will automatically be compelled to buy the newer model at the higher price. The hike in the price of the newer model should be justified in the form of differentiated and advanced features and capabilities. A customer would be willing to pay a higher price to buy a new model over the old one only when it is better than the previous version.

Since the merger involved interaction of two specific cultural backgrounds, a culture clash was inevitable. However the culture differences and barriers could have been negotiated through cultural diversity training programs. Culture diversity classes aim to acquaint people from different ethnic and cultural backgrounds about the complexities of another culture. The American employees could have received training about the German culture and vice versa. The Chrysler employees could also have been taught about the organizational specific culture at Daimler and how it has helped the company in achieving its objectives and attaining growth. The Daimler employees on the other hand could have learned how the corporate culture at Chrysler has helped foster creativity and innovation at the company and should be cherished instead of being banished. By understanding cultural changes both at the corporate and personal level employees of both corporations would have learned to accept them better resulting in fewer conflicts and confusion.

The sales and Marketing function governs how the product is sold and how it is promoted to the consumer. Firing the heads of both functions in a single day was quite a radical decision. It was meant to convey the message that the German bosses were not happy with companies existing sales and marketing strategies and that these endeavors needed to undergo a significant change. This decision would lead to a re-evaluation and re-implementation of existing strategies employed by the sales teams in car showrooms across the country.. It would impact current marketing campaigns and promotions launched by the team and also any future promotions planned. For the consumer market analysts and competitors this decision spelled a probable shift in the company’s future sales and marketing endeavors and perhaps this is the message that Zetsche intended to convey all along. However the decision could have the negative impactof confusing target customers who may have become used to a particular kind of promotional strategy and planned their next purchase to avail specific promotional campaigns or marketing gimmicks.   A radical shift in the company’s promotional strategies might serve to antagonize customers and succeed in driving them to competing brands. The sales and marketing function influences brand perception. Changes in the way a brand is sold and marketed also changes the way it is perceived in the market and impacts its market share. Previous sales and marketing strategies were geared towards promoting the Chryslers concentration on innovation and technological excellence. Chrysler cars particularly its mini vans, four wheel drives and pickup trucks had attained increased market share in the early to mid nineties on the basis of innovative design and technological superiority.  A shift in the sales and marketing strategy therefore has to keep the product positioning in mindand has to be careful in catering to the preferences of the target market segment. For the new strategies to be successful they have to be able to communicate how the products satisfy the needs and wants of the target market.

Rebates markdowns and price reductions all are designed to give customer a lower price advantage. Rebates works on the premise that the manufacturer will offer a part of the purchase price back to the customer. In comparison to mark downs and reductions they are offered by the manufacturer directly and not the dealer. Rebates tend to appeal to  customers who place more faith in the manufacturer and believe that these price reductions are more genuine than the ones offered by dealers. They also appeal to dealers who buy the product on rebate and then sell it to their customers at market price making profit in the process.

I personally think that the prestige of the Mercedes brand doesnot only come from its parts, it comes from its design, technological superiority andthe overall driving experience that the product offers. Therefore I feel that using Mercedes parts in other vehicles doesnot erode the prestige associated with the vehicle but it does add to the prestige of the new Chrysler vehicle that these parts are used in. I think that the addition of Mercedes parts is a Chrysler vehicle will add to the technological superiority of the product and add to its competitive advantage. It will also be a new innovative measure that will combine Mercedes technical excellence with Chrysler’s innovative designing and create a new product that the market has been anticipating ever since the merger of the two entities was announced. The Chrysler Daimler Corporation would definitely benefit from the introduction of such a product but to be successful in the long run the product has to offer more than Mercedes spare parts, it has to deliver on both quality and be priced competitively in the market. If the car utilizing Mercedes parts is sold as a Chrysler product it should be priced lower than a Mercedes for it to be successful. If it is priced at the same level customers would not benefit from a cost advantage and would prefer to buy the Mercedes instead of the Chrysler utilizing Mercedes parts.

The automobile industry is cyclical in nature. It is characterized by period of slump, followed by an era ofboom. I think that both the slum and boom periods in the industry are highly dependent on the price of gas, the economic conditions of the country the disposable income of the consumer and political developments such as laws limiting monoxide emissions in the environment. Therefore, neither of these periods are permanent and fluctuate in accordance to other factors outside the control of the industry. However manufacturers in the industry can anticipate these periods and plan their strategies in accordance to forecasted trends. Effective decision making in the automobile industry thus lies around making decisions that seek to maximize the companies potential in both the slump and boom periods and employ strategies that focus on minimizing the impact of factors outside the industry’s control.

Hands on Exercises

After receiving notice of my termination one of my first actions would be to try and negotiate a deal with the German management to not fire any more of the top executives. I would try to convince them that such a move would not only destroy company morale it would be disastrous for the company’s future .I would also try to make them understand that they need the expertise, talent and experience of the current staff to run the company and that firing key staff could impact the company’s operations in a negative manner.

I would also approach a Corporate regulation agency governing merger and acquisition activity and register a formal complain about Schrempp misrepresenting his intentions during the merger negotiations. The complain would be registered on behalf of the company’s shareholders and would call for legal action against Daimler in deceiving the management  and shareholders to believe that this was a merger of equals and not an acquisition

Finally I would call an emergency meeting of the shareholders and warn them that if the German managementcontinues to fire key executives the company would seen be in dire straits. I would ask the shareholders to initiate legal action against Daimler for misrepresenting their intentions about an equal merger and sue the company for malicious intent. I would also consult a lawyer about suing Daimler for wrongful termination and re-instating my employment with the company.