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- Lessons in Post-Merger Integration -
Jan Daniel Laufhütte
2304958
Individual Written Case Study Report in Strategic Management
IHS-3-422
London South Bank University
17/12/2003
Table of Contents
List of Figures................................................................................. i
Introduction ................................................................................... 1
1. The changing world automobile industry .............................. 1
2. Reasons for mergers and acquisitions .................................. 3
2.1. Daimler-Benzs’ motives..................................................................... 3
2.2. Chryslers’ motives ............................................................................. 5
3. The Post-Merger Integration Structure................................... 7
3.1. Preparations for the merger .............................................................. 7
3.2. Integration Structure of DaimlerChrysler......................................... 7
3.3. Expected Synergies ........................................................................... 8
4. Cultural Issues ......................................................................... 9
4.1. Daimler-Benz’s Culture...................................................................... 9
4.2. Chrysler’s Culture ............................................................................ 10
4.3. Key Integration Problems and Post-Merger Business Culture .... 11
5. Used Management Approaches to solve the problems ...... 13
Recommendations ...................................................................... 14
References ..................................................................................... ii
I
List of Figures
Figure 1: PEST-Analysis ............................................................... 1
Figure 2: 5 Forces.......................................................................... 2
Figure 3: Experience Curve Model ............................................... 3
Figure 4: SWOT-Analysis – Daimler-Benz ................................... 4
Figure 5: SWOT-Analysis - Chrysler ............................................ 5
Figure 6: Table of Expected Synergies ........................................ 8
Figure 6: Daimler-Benz’s Cultural Web........................................ 9
Figure 7: Chrysler’s Cultural Web .............................................. 11
Figure 8: DaimlerChrysler’s Cultural Web ................................. 12
i
Introduction
On May 7th 1998 the German Daimler-Benz AG and the American Chrysler
Company announced a “merger of equals”. Because of the worldwide industry
development, cultural differences and internal problems on the American side
the merger turned out not to be as successful as expected.
Part I – With reference to the alternative reasons for mergers
and acquisitions, outline and evaluate the motives for Daimler-
Benz and Chrysler in their 1998 merger, in the context of the
changing world automobile industry.
1. The changing world automobile industry
The automobile industry is dependent on the worldwide business climate and its
cycles. There was a Boom in the car industry through the 1990s, but due to the
Asian Crisis and the starting worldwide recession for the new millennium a
slight slump was forecasted.
Factors affecting the automobile sector can be seen in Figure 1:
Figure 1: PEST-Analysis
SOCIO- TECHNO-
POLITICAL ECONOMICAL
CULTURAL LOGICAL
Taxation policy Business Cycles Lifestyle Rates of
obsolescence
Foreign trade Unemployment Income
regulations distribution Speed of
Disposable
technology
income
transfer
th
Source: JOHNSON, G. / SCHOLES, K. (2002): Exploring Corporate Strategy. 6 edition,
Harlow: Prentice-Hall, p.100.
Different taxations throughout Europe lead to re-imports. Cars are purchased
abroad, re-imported to the home market and priced significantly below listed. In
times of economical downturns customers do not substitute their cars. So called
SUV – Sport Utility Vehicles – are common right now to express a new way of
1
Lifestyle. Technological innovations become quickly business standards and
product-life-cycles are shortened.
To cope with these environmental factors further consolidation of the industry is
expected. The Key Players fear less further entrants, because experience and
investments are essential. Therefore new manufacturers mainly follow niche-
strategies for a certain clientele. Also is the status of the car as main transport
vehicle undisputed in most of the developed countries, e.g. USA, Germany, etc.
(see Figure 2).
Figure 2: 5 Forces
POTENTIAL
ENTRANTS
High investments and
experiences are
required
SUPPLIER’S POWER COMPETITIVE BUYER’S POWER
Major and highly RIVALRY No switching costs.
important suppliers GM, Ford, VW, Differences between
have some power. Toyota, Renault- models are hardly
Others dependent. Nissan, FIAT, … notable. Services!
SUBSTITUTES
Low-cost-airlines and
railways are
sometimes used on
longer distances.
Source: JOHNSON, G. / SCHOLES, K. (2002): Exploring Corporate Strategy. 6th edition,
Harlow: Prentice-Hall, p.113.
More crucial are the relations to suppliers and buyers. In Germany, for example
Ford’s supplier for door-locks – KIECKERT - stopped its supply in order to force
Ford to pay higher prices and paralysed Ford’s production. Buyers change from
one manufacturer to another, often because the models do not differ in look and
other features. But additional services become more and more important.
2
2. Reasons for mergers and acquisitions
There are some reasons for companies to merge. Through a merger or
acquisition growth of market share or sales can be realised instantly. Very
important are economies of scale in mergers of companies within the same
industry (see Figure 3). A doubled output reduces the price-cleared unit-costs
by 20-30%.
Figure 3: Experience Curve Model
10
8
Unit-costs
6
20%
4
30%
2
1 2 4 6 8 10 12 14 16 18
Output
Source: MEFFERT, H. (2000): Marketing – Grundlagen marktorientierter Unternehmensführung,
th
Konzepte – Instrumente - Praxisbeispiele. 9 edition, Wiesebaden: Gabler-Verlag, p.254.
Faster technological changes and shortened product-life-cycles require higher
R&D-expenditures. Those can be spread over more unites after a merger.
Further on merging companies expect to acquire new competences and
capabilities, to enter a foreign market quicker and build up a global presence
and, important in phases of consolidation, to eliminate competitors.
2.1. Daimler-Benzs’ motives
Daimler-Benz researched 1997 the growth potential of its luxury brand
Mercedes. The result was that it would never be possible to sell more than 1
million cars a year. But Mercedes wanted to increase its revenues by 7%
annually to peak 50 million within 10 years.
3
The shortlist of potential acquisitions consisted of Honda, Suzuki, Volvo,
Renault and Chrysler. Suzuki’s’ and Volvos’ volume sales were too low. Honda
wanted to stay independent and Renault was strong in the same geographical
market. The company left, was Chrysler (LINDEN, 1998, p. 68).
The board saw the main purpose of a merger or an acquisition in maintaining
the company’s technological strength. They feared to loose their competitive
strengths, when the Mercedes brand reaches the limits and the suppliers would
no longer grant them the exclusive use of technological breakthroughs and
instead selling these to bigger producers as VW and GM (see Figure 4).
Figure 4: SWOT-Analysis – Daimler-Benz
INTERNAL
STRENGHS WEAKNESSES
technological, engineering and hardly flexible
quality strength
limited growth potential
premium, luxury brand with rich
heritage
German efficiency
Economies of scale competitors
new distribution networks loose technological leadership
spread of R&D costs
Lean Management
Benchmarking
OPPORTUNITIES THREATS
EXTERNAL
Source: KOTLER, P. et al (1999): Principles of Marketing. 2nd European edition, New Jersey:
Prentice-Hall, p.211.
Those technological, engineering and quality skills paired with German
efficiency positioned the brand at a premium luxury status and reasoned the
higher prices.
4
Further reasons for the merger were that opportunities for Economies of Scale
(see above Figure 3), access to a wider distribution network in the U.S. key
market and as the major benefit Benchmarking and adopting of Chrysler’s Lean
Management were expected.
More critical observers mentioned that Daimler used the opportunity. The
Mercedes brand boomed. With the Chrysler volume of 3 million units there was
the chance of savings in purchasing which would result in net-earnings of
Mercedes (LINDEN, 1998, p. 68).
2.2. Chryslers’ motives
Chrysler feared another hostile take-over approach by major shareholder Kirk
Kerkorian. The company had already passed its profit-peak and needed R&D-
investments to stay competitive (see Figure 5).
Figure 5: SWOT-Analysis - Chrysler
INTERNAL
STRENGHS WEAKNESSES
flexibility, creativity, self- less discipline
responsibility
hardly investments in R&D
concept-cars, feeling for market-
loss of Key Players
opportunities
no presence in key foreign markets
lowest production costs
quality and engineering skills competitors
distribution into key markets hostile take-over
high technology bankruptcy
heritage
OPPORTUNITIES THREATS
EXTERNAL
Source: KOTLER, P. et al (1999): Principles of Marketing. 2nd European edition, New Jersey:
Prentice-Hall, p.211.
5
Eaton knew that Chrysler would hardly survive another financial crisis like in the
early 80s and 90s. In comparison to Ford and GM Chrysler did not have enough
substance, its R&D-expenditures were with 3% under average and it was not
present on key foreign markets (SCHMITT / SCHOLTYS, 2001, p.63). On top
Bob Lutz – synonym for Chrysler’s spirit and increase in the 90s – and other
powerful executives would leave Chrysler.
Chrysler’s success in the 90s based on a strict cost management paired with
lean flexible management ways and challenging the market regularly with new
innovative design concepts.
In addition to the required R&D-investments and a strengthened financial
position, Chrysler benefit from Daimler’s heritage, its engineering and quality
skills and the given distribution network in the European market, where the
Chrysler brand is hardly present, e.g. 0.3% in Germany in 1997.
6
Part II – Making reference to the cultural web, what were the key
post merger integration problems that DaimlerChrysler had to
solve? How effective were the solutions?
3. The Post-Merger Integration Structure
First negotiations about a merger between both companies took place in 1995
but ended without any conclusion.
3.1. Preparations for the merger
As Daimler-Benz’s research in 1997 has shown the growth of Mercedes was
limited. On German side the main purpose for a merger was to secure the
company’s technological strength (see 2.1. – 2.2.). Chrysler feared another
hostile take-over approach by Kerkorian and not having the financial back-up to
survive intensified competition.
The key players in both companies were the CEOs, Schrempp and Eaton,
backed by their boards as companies power bases.
At opposite to 1995’s negotiations only a small number of confidential
executives were involved. Hence both parties found an agreement within a
couple of months.
3.2. Integration Structure of DaimlerChrysler
Because Daimler was the more powerful side, DaimlerChrysler became a
German “Aktiengesellschaft” with Stuttgart as headquarter. The first board,
headed by Schrempp and Eaton, had 10 Daimler members and 8 Chrysler
members, because of Daimlers’ 2 non-automotive businesses.
The real powerbase was the Integration Council led by the 2 CEOs, supported
by 4 Daimler and 2 Chrysler executives. Through an early retirement statement
Eaton made himself a “Lame Duck”.
The Integration Council was pyramid-principle-organised. On the second level
were 2 Integration Teams, then 100 Work Teams and finally 782 Sub Teams.
7
Key factors for a successful integration were (“This way, please”, LINDEN,
Frank A. in Manager Magazin 09/98, p. 68):
new organisational structure,
fast decisions and
process control.
Digital decisions on all operating levels were required to avoid a Strategic Drift.
The post-merger integration process had to be fast, but controlled.
By October 1999 the board got restructured. The result was a 8:4 majority for
Daimler, the 2 Co-Chairmen excluded.
3.3. Expected Synergies
Additional to synergies in Purchasing, R&D, Infrastructure etc. (see Table 1) the
complementary of brand portfolios and geographical markets was stressed out.
Chryslers’ cars are interesting designed and low priced. Technology and quality
meet minimum standards. Mercedes cars have the newest technological
features and highest quality. Chrysler was strong in North America, Daimler in
Western Europe.
Furthermore both should benefit from benchmarking and adapting skills from
each other (see before 2.1. – 2.2.). Chrysler was known for being lean, with
teams working - freed from bureaucracy – quick and efficiently around
platforms. Daimler was bureaucratic and self-disciplined, focused on
engineering and quality.
Figure 6: Table of Expected Synergies
1999 from 2001
Expected Synergies
($ bill.) ($ bill.)
Purchasing 0.4 1.3
Integration/financial services 0.2 0.4
Research and technology/platform technologies 0.1 0.4
Sales/distribution infrastructure 0.3 0.3
Higher sales 0.3 0.6
TOTAL 1.3 3.0
8
4. Cultural Issues
Cultural Issues are crucial in cross-boarder-mergers. The national cultures
influence attitudes to work, authority, equality etc. and hence the business
culture. In this merger the business cultures were crucial, which were different
in terms of organization, working styles and compensation.
4.1. Daimler-Benz’s Culture
Daimler saw itself as the foremost innovator of the automobile industry with a
rich engineering and quality heritage (see Figure 6).
Figure 6: Daimler-Benz’s Cultural Web
STORIES SYMBOLS
- Rich successful - Executive assistants
heritage, - STAR as brand
- History of technical symbol
innovations, e.g. ABS
and Diesel-Engines
- re-focused on core-
competences
ROUTINES & PARADIGM POWER
RITUALS „The foremost - Strong-willed
- Working late hours innovator of the chairman Schrempp
automobile industry and Board
- “Commands” to with a rich engineering
lower-levels, hence and quality heritage
low communication building upscale cars.”
- Smoking, beer &
pizza to the desks
CONTROL ORGANIZATION
- Detailed position- - Hierarchical and
papers bureaucratic Holding-
- Bureaucracy Structure
- (Almost) equal - 21 Businesses,
compensation for all strictly separated
board members, with responsibilties –
a major fixed stake “CHIMNEYS”
th
Source: JOHNSON, G. / SCHOLES, K. (2002): Exploring Corporate Strategy. 6 edition,
Harlow: Prentice-Hall, p.230.
9
Daimler’s story is full of engineering successes as Diesel-Engines or ABS.
Mercedes has got a luxury-status. The company was led in 1998 by a powerful,
strong-willed chairman who had it successfully restructured and focused on its
core-competences.
Daimler was then a Holding-Company with 21 business-units. Its organisation
was hierarchical and bureaucratic which why decisions took often a long time.
Responsibilities were strictly separated. The board-members had their own
assistants who prepared position papers which were discussed in the meetings.
All board-members got almost the equal compensation with a major stake fixed.
Part of the routines and rituals was to work late hours and at weekends, to
smoke and getting beer and pizza to the working desks.
4.2. Chrysler’s Culture
Chrysler was a trendsetter for new designs, short development times referring
to its organizational flexibility and a sense for market opportunities (see Figure
7).
Chrysler’s story included several near-bankruptcies. In the 90s a team of
“enthusiasts” around Bob Lutz took over and created the legendary “Chrysler-
Spirit”. These charismatic executives were the real power base of Chrysler and
made it to the most profitable car manufacturer in the world.
Chrysler was an upcoming company and challenged the established Ford and
GM. Chrysler was unconventional. There were no status symbols for the
executives. Chrysler was lean, through and through. It was cross-functional
organized; the board members were also responsible for a part of one business.
Teams were working self-responsible around platforms. Lower-levels were
encouraged to make own decisions, even without executive’s approval. There
was a strict cost-management at Chrysler. At opposite to Daimler executives
earned a lot more and worked on deadlines instead of working late hours.
10
Figure 7: Chrysler’s Cultural Web
STORIES SYMBOLS
- Turn-around from - No status symbols
near-bankruptcy - No convention
- Self-made company - Freed from
- Creative, agile & bureaucracy
flexible
- Bob Lutz
ROUTINES & PARADIGM POWER
RITUALS „Trendsetter for new - The more charismatic
- Working around the designs with sense for members of the
clock on deadlines market opportunities, a managing board, e.g.
but not on weekends lean production at a Stallkamp.
platform strategy, strict
- Initiatives & cost-management and
discussions with shortest development-
lower-levels times.”
CONTROL ORGANIZATION
- Strict cost- - Cross-functional
management in structure, highly
former times centralised
- Auto-Boom too - Team-work
positive forecasted - Intuitive, self-
- Huge compensation, responsible platform-
e.g. 70m$ for Eaton structure
Source: JOHNSON, G. / SCHOLES, K. (2002): Exploring Corporate Strategy. 6th edition,
Harlow: Prentice-Hall, p.230.
4.3. Key Integration Problems and Post-Merger Business Culture
Even both companies were aware of the cultural differences between “German
Engineering” and “Cowboy Independence”, they often compromised instead of
making digital decisions. When the positions were far away executives chose a
point in the middle and tried to merge. But “if you don’t manage your culture, it
just evolves to the dominant culture” (CERVONE).
As a result there were not clear roles and guidelines in the organization about
who had responsibility and who not. R&D-departments were still separated. and
11
a “Brand Bible” was made hence the Chrysler brands do not tarnish the luxury
Mercedes brand (see Figure 8).
Integration meetings wasted a lot of time. When Chrysler managers noticed that
they were only a business unit of the German DaimlerChrysler and Stallkamp,
the change agent, was fired, talented executives left and started working for
competitors.
Figure 8: DaimlerChrysler’s Cultural Web
STORIES SYMBOLS
- Third largest - Brand names and
automotive company world known product
(in terms of sale) range
- “Merger of Equals” - “Brand Bible”
ROUTINES & PARADIGM POWER
RITUALS „Global provider of - Schrempp and the
- Weekly meetings in automotive and German executives
either Stuttgart or transportation products
Auburn Hills and services,
generating superior
- German Engineering value for customers,
vs. Cowboy Culture employees and
shareholders.”
CONTROL ORGANIZATION
- Different - German legal
compensation structure with two tier
schemes board system
- Separate R&D- - No clear roles and
departments guidelines
- Holding with Chrysler
as new business
Source: JOHNSON, G. / SCHOLES, K. (2002): Exploring Corporate Strategy. 6th edition,
Harlow: Prentice-Hall, p.230.
The new company fulfilled just one of the critical key factors (see above 3.2.):
Everything had to happen fast! No digital decisions were made. Because it is
part of the German Business Culture to give “commands” instead of discussing
12
with lower-levels, the German managers decided in most cases. The
organisational structure emerged through the German “decision-making-
process”, but processes in the new Chrysler unit were not really controlled.
Therefore wrong management decisions kept undiscovered until Chrysler had
to report massive losses.
5. Used Management Approaches to solve the problems
The merger required a revolutionary transformational change in less time,
including a paradigm-change. Through Daimler’s dominance it was more
transformational for Chrysler. This and Eaton’s wrong management decisions
led to Chrysler’s Strategic Drift, from a lean and high profitable company to a
high-cost one.
The new board failed to manage this transformation by an interventional
approach with the supervising Integration Council and a change agent. Even
the merger was a technical success in the short-term, Stallkamp was seen as
too opportunistic and got sacked.
Communication was crucial. As explained (see before 2.1. – 2.2.), both sides
favoured totally different communication styles. In not encroaching on American
turf but forcing to adopt German decisions and finally firing Stallkamp without
reasoning Chryslers’ employees became dramatically insecure. The acceptance
on the American side disappeared and avoidable lags and departure of key
personnel followed.
To choose afterwards a directive approach effected the commitment, combined
with the new crisis, at Chrysler negatively.
DaimlerChrysler learnt one’s lesson and the new Chrysler CEO Zetsche
combines both approaches. A restructuring plan defines the goals Chrysler has
to fulfil clearly. Through chatting, queuing and eating together with employees
Zetsche communicates and promotes the plan effectively.
13
Recommendations
Communicate the “merger” as Daimler’s acquisition of Chrysler to avoid
further uncertainties.
Be aware of national differences which can affect the business culture.
Observing business cultures better and fail strict digital decisions.
Build a common R&D-department.
Take ‘Direction’ as management approach.
Chryslers’ strengths must be taken in account, e.g. Lean Management,
platform-strategy etc.
14
References
CERVONE, T. (2002): The DaimlerChrysler Experience.
HAWRANEK, D. (1999a): Daimler gegen Chrysler. In: Der Spiegel, 24/1999,
p.100.
HAWRANEK, D. (1999b): Das gibt Ärger. In: Der Spiegel, 39/1999, p.129.
JOHNSON, G. / SCHOLES, K. (2002): Exploring Corporate Strategy. 6th edition,
Harlow: Prentice-Hall
KOTLER, P. et al (1999): Principles of Marketing. 2nd European edition, New
Jersey: Prentice-Hall.
LINDEN, F.A. (1998): This way, please. In: Manager Magazin, 09/1998, p.68.
MEFFERT, H. (2000): Marketing – Grundlagen marktorientierter
Unternehmensführung, Konzepte – Instrumente – Praxisbeispiele. 9th
edition, Wiesbaden: Gabler-Verlag.
PAUL, H. (2000): Case Study - DaimlerChrysler: Lessons in Post-Merger
Integration.
ROTHER, F.W. (1999): Prinzip Schrempp. In: Wirtschaftswoche, 19/1999, p.56.
SCHMITT, J. / SCHOLTYS, F. (2001): Der Crash-Test. In: Manager Magazin,
03/2001, pp.60-71.
ii
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