– Thoughts on Strategy and Management

DaimlerChrysler finally without Chrysler – Some thoughts about the pro’s and con’s

The breaking news today is that DaimlerChrysler is going to sell about 80 % of Chrysler to private equity fund Cerberus. The price of 5.5 bn Euros is far less than what former Daimler Benz AG invested for its ‘merger among equals’ with Chrysler years ago. My first reaction to this news was some sort of relief: Thank god, it’s over now. They have finally found a solution for a major problem.

I took some time to read through all sorts of comments on this issue today – from German FAZ to more internationall FTD, including readers comments on their websites. Reactions were mostly positive. This corporate ‘divorce’ was mainly welcomed as a new starts for both companies – Daimler and Chrylser. However, there were some critical voices too. The longer I think this through from a strategic perspective (which is for me long-term by definition), the more I have some second thoughts too.

Again, I have to admit that I didn’t make up my mind finally. It is in the nature of strategic decisions that only time will tell if they were good or bad. For the moment, I have more questions than answers:

Why I think this was a good move:

  • First of all, any decision is better than no decision. Chrysler was a problem for DaimerChrysler most of the time. And most of the time they didn’t seem to have an idea what to do about this problem. I think cost cutting is boring. If a company faces a strategic crisis and management doesn’t have an answer they always start to cut costs. Cost cutting that is not accompanied with some other strategic measures often is an indicator for lack of real visions and solutions. Although this probably is too general, I often had the impression that they had no real strategic vision for both brands in one company. Target markets were fairly different and hence, synergies were limited.
  • That leads to the next points. Maybe these two brands simply are too different to be of more value as a whole than the sum of its parts. Chrysler is a mass market brand with its highest popularity in its North-American home market. Daimler is an up-market brand with a strong foothold in its German home market and an excellent reputation all over the world. In this situation it is very difficult to develop a common message for both brands. If you try to position Chrysler more up-market with the help of its sister-brand, you risk to dilute the Daimler brand image. To position Daimler closer to the mass market is no option at all. With this in mind, you can’t even exploit many technological synergies like joint platforms, joint parts and joint productions sites. Who wants to have a Mercedes Benz with Chrysler technology in it?
  • The problems between Daimler and Chrysler were so obvious that the whole business world was almost desperately waiting for a solution for a long time. Various rumors, recommendations and analyst opinions were present all the time. DaimlerChrysler is a listed company and stock markets demand a fast and decisive solution for problems.
  • After he first mentioned that DaimlerChrysler was considering the option to divest Chrysler at the beginning of this year, Mr. Zetsche had no way back. Obviously, stock markets liked this option and Mr. Zetsche had to follow the wish of his shareholders. In this situation, it was the best thing he could do to get a solution as quickly as possible. In my opinion, he did a great job with that. Months of untargeted actions with no real results would have been the worst that could have happened to the company and to its management.

That for the pro’s. But there are some downsides as well:

Did they really take enough time and enough strategic creativity to forge one great global car maker out of Daimler Benz and Chrysler?
Was the vision of the ‘Welt AG’, the global carmaker, really that wrong?

Sure, a diversified global company as Mr. Schrempp had in mind is some sort of fashion in strategic management. There is a time when it is en vogue to diversify. Reasons are synergies and to spread the risk between different businesses that have different business cycles. This leads to a point when all companies have diversified to a degree that they are hardly able to manage their collection of unrelated activities. Now comes the time for the idea of core competencies. It becomes en vogue to divest all the side activities and to focus solely on the very core competency of the business. In the end of the day, companies have outsourced so many activities that are not core but vital for their core business that they can’t properly control them. So thy start to in-source again and finally to dare a bit of diversification.

Former Daimler Benz probably stepped in this trap. However, the ‘Welt AG’ was not without strategic logic. The Daimler Benz car business in itself only serves a particular market niche (although this is a wide one). It sells its cars all over the world, but is not a truly global business. Without Chrysler they lack the size to play a role in the competitive game of the industry leaders. Moreover, they will be small enough to become a target for a hostile takeover. Some private equity funds already have the financial muscle to take over a company of the size of Daimler-without-Chrysler. Although the two market segments served by Daimler and Chrysler didn’t allow for many synergies, they surely allow to even out fluctuations in business cycles.

So it remains the question if this ‘wedding in heaven’ – as Mr. Schrempp once called the Daimler-Chrysler merger really was a strategic mistake or if it simply was poorly executed.

One more thing in the end. It will surely be interesting to see what a private equity group does with such a large care maker. However, the other player interested in Chrysler was Magna, a leading automotive supplier. As far as I know this would have been the first forward-integration activity of this magnitude in the automotive industry. And that would have been interesting to watch too!

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