- 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. 2.2. Daimler-Benzs’ motives..................................................................... 3 Chryslers’ motives ............................................................................. 5

3. The Post-Merger Integration Structure................................... 7
3.1. 3.2. 3.3. Preparations for the merger .............................................................. 7 Integration Structure of DaimlerChrysler......................................... 7 Expected Synergies ........................................................................... 8

4. Cultural Issues ......................................................................... 9
4.1. 4.2. 4.3. Daimler-Benz’s Culture...................................................................... 9 Chrysler’s Culture ............................................................................ 10 Key Integration Problems and Post-Merger Business Culture .... 11

5. Used Management Approaches to solve the problems ...... 13 Recommendations ...................................................................... 14 References ..................................................................................... ii

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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

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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 DaimlerBenz 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 POLITICAL
Taxation policy Foreign trade regulations

ECONOMICAL
Business Cycles Unemployment Disposable income

SOCIOCULTURAL
Lifestyle Income distribution

TECHNOLOGICAL
Rates of obsolescence Speed of technology transfer th Source: JOHNSON, G. / SCHOLES, K. (2002): Exploring Corporate Strategy. 6 Harlow: Prentice-Hall, p.100.

edition,

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 nichestrategies 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 Major and highly important suppliers have some power. Others dependent. COMPETITIVE RIVALRY GM, Ford, VW, Toyota, RenaultNissan, FIAT, … SUBSTITUTES Low-cost-airlines and railways are sometimes used on longer distances. BUYER’S POWER No switching costs. Differences between models are hardly notable. Services!

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.

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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 6 4 2 1 2 4 6 8 10 12 14 16 18 20% 30% Unit-costs

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 technological, engineering and quality strength premium, luxury brand with rich heritage German efficiency Economies of scale new distribution networks spread of R&D costs Lean Management Benchmarking OPPORTUNITIES THREATS competitors loose technological leadership WEAKNESSES hardly flexible limited growth potential

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.

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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&Dinvestments to stay competitive (see Figure 5). Figure 5: SWOT-Analysis - Chrysler INTERNAL
STRENGHS flexibility, creativity, selfresponsibility concept-cars, feeling for marketopportunities lowest production costs quality and engineering skills distribution into key markets high technology heritage OPPORTUNITIES THREATS WEAKNESSES less discipline hardly investments in R&D loss of Key Players no presence in key foreign markets competitors hostile take-over bankruptcy

EXTERNAL
Source: KOTLER, P. et al (1999): Principles of Marketing. 2nd European edition, New Jersey: Prentice-Hall, p.211.

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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.

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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 Expected Synergies Purchasing Integration/financial services Research and technology/platform technologies Sales/distribution infrastructure Higher sales TOTAL 8 1999 ($ bill.) 0.4 0.2 0.1 0.3 0.3 1.3 from 2001 ($ bill.) 1.3 0.4 0.4 0.3 0.6 3.0

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
Rich successful heritage, History of technical innovations, e.g. ABS and Diesel-Engines re-focused on corecompetences -

SYMBOLS
Executive assistants STAR as brand symbol

-

ROUTINES & RITUALS
Working late hours “Commands” to lower-levels, hence low communication Smoking, beer & pizza to the desks -

PARADIGM
„The foremost innovator of the automobile industry with a rich engineering and quality heritage building upscale cars.” -

POWER
Strong-willed chairman Schrempp and Board

-

CONTROL
Detailed positionpapers Bureaucracy (Almost) equal compensation for all board members, with a major fixed stake -

ORGANIZATION
Hierarchical and bureaucratic HoldingStructure 21 Businesses, strictly separated responsibilties – “CHIMNEYS”

-

Source: JOHNSON, G. / SCHOLES, K. (2002): Exploring Corporate Strategy. 6 Harlow: Prentice-Hall, p.230.

th

edition,

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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 “ChryslerSpirit”. 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.

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Figure 7: Chrysler’s Cultural Web

STORIES
Turn-around from near-bankruptcy Self-made company Creative, agile & flexible Bob Lutz -

SYMBOLS
No status symbols No convention Freed from bureaucracy

ROUTINES & RITUALS
Working around the clock on deadlines but not on weekends Initiatives & discussions with lower-levels

PARADIGM
„Trendsetter for new designs with sense for market opportunities, a lean production at a platform strategy, strict cost-management and shortest developmenttimes.” -

POWER
The more charismatic members of the managing board, e.g. Stallkamp.

-

CONTROL
Strict costmanagement in former times Auto-Boom too positive forecasted Huge compensation, e.g. 70m$ for Eaton

ORGANIZATION
Cross-functional structure, highly centralised Team-work Intuitive, selfresponsible platformstructure

-

-

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

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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
Third largest automotive company (in terms of sale) “Merger of Equals” -

SYMBOLS
Brand names and world known product range “Brand Bible”

-

-

ROUTINES & RITUALS
Weekly meetings in either Stuttgart or Auburn Hills German Engineering vs. Cowboy Culture

PARADIGM
„Global provider of automotive and transportation products and services, generating superior value for customers, employees and shareholders.” -

POWER
Schrempp and the German executives

-

CONTROL
Different compensation schemes Separate R&Ddepartments

ORGANIZATION
German legal structure with two tier board system No clear roles and 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-makingprocess”, 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.

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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.

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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.

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