Daimler-Chrysler (DCX) Merger: A Cultural Mismatch
Daimler-Chrysler Merger that took place in 1998 is quite interesting to observe from a change standpoint. A detailed analysis on different aspects of the case is here under:
What went right or potential to success
i. In 1998 when the merger happened, it displayed powerful demonstration of the globalization of the world economy.
ii. Before the merger, Chrysler and Daimler-Benz were essentially regional producers — Chrysler with the third-largest market share in North America, Daimler-Benz controlling the luxury market in Europe.
iii. The size of the conglomeration was huge. Largest industrial company in Germany, and in Europe as a whole with one of the biggest American corporations, creating a transnational giant with a work force of 410,000 and an annual output of over $130 billion.
iv. The fifth largest automaker wrt the number of vehicles produced, ranking after GM, Ford, Toyota and Volkswagen.
v. If DaimlerChrysler were a country, it would rank 37th in the world in terms of Gross Domestic Product, just behind Austria, but well ahead of six other members of the European Union — Greece, Portugal, Norway, Denmark, Finland and Ireland.
vi. Daimler-Chrysler deal involved two highly profitable companies, with combined net earnings of $5.7 billion in 1997.
Thus from the aforementioned it is evident that the scope towards market domination definitely existed.
On the hind side, it is important to see what “did not” go well
i. Both the organisation’s had a different way operating from various perspective; highlighted here under. As per the case, a detailed analysis of these strikingly different styles was not studied beforehand.
ii. Both the groups i.e. Daimler and Chrysler were asked to maintain their own cultural identity. This was incorrect, a merger is about coming together of best talents of the two organisations under a common leadership which aims to have a common vision, shared culture and best practices. Though there were elements found of formation of an Post Merger Integration (PMI) team but purpose with which it were created was flimsy. A PMI team is not supposed to cajole or force fit the change instead their job is to analyse where integration problems that are encountered and solution from a collaborative approach. Though clarity about demographic of the PMI team is not mentioned but for best outcome generally the PMI teams should be diverse.
iii. The pay structure disparity (Americans being paid more vis. A vis. Germans) that was revoked and moved to a low basic to a high variable without a considerable thought through. This step by Daimler-Benz CEO had alienated the top talent of Chrysler. A point to
observe here is that this decision was taken in isolation and not in consensus. Daimler-Benz CEO has a history behind taking irrational decisions that result in employee agitation. Daimler-Benz CEO had spent a total of 11 years running the Daimler-Benz operations in South Africa under the apartheid regime. He also spent two years in Cleveland, Ohio, running a truck plant which the company had acquired, until he convinced top management that the plant was unprofitable and should be sold off. As soon as he became CEO in 1995, he sought a confrontation with the German autoworkers, unilaterally abrogating a longstanding policy on sick leave, which provoked a series of bitter strikes.
iv. The entire process of merger was completed in 12 months. Ideally a conglomeration of this size should have undergone a more robust due diligence which entails analyzing the Culture, communication pattern, work style, compare compensation (+ benefits) and analyse the difference in value , current and projected revenue, Leadership etc. A change cycle especially in merger and acquisitions has three important periods’ awareness, acceptance and adoption. In order to achieve all three levels seamlessly investment of time and effort plays highest importance.
v. Communication was erratic and imposing: Schrempp started issuing reams of organisational flow charts to the employees. Employee communication strategy was not in place. People were not given time to absorb the fast paced changing environment. The spine of any M&A rests on people adaption, the ideology is to constantly place “actors” in the system (reference metaphor — flux and transformation — Gareth Morgan) to move people to a steady space and assist them in the turbulence. Every change follows a pattern and needs to be identified to be addressed the right way.
vi. Attempts were being made from both the sides to understand the cultural difference in both the countries’ way of operating. There were examples in the case like Germans trying to dress casual at work, Americans given making attempts to speak less slang, German workers celebrating in American style etc, however these attempts were not substantial enough to bring the two sides together. For understanding any culture, it is important to understand the history behind it. Culture as an inference of history is an important aspect for its correct understanding. When you are aware of the background behind a culture you embrace it with respect rather than being comparative from your own culture. Change can never be understood in isolation.
vii. Two successive presidents (James Holding and Thomas Stalkamp) at Chrysler were fired consecutively and replaced by a German President Zatsche. At such dire times when the company needs a steady leadership to instil the confidence in system something like this is absolutely fatal. The incident of firing James holding was not enough, firing Thomas Stalkamp nailed people’s distrust in DCX. One of the most cherished virtues of an organisation is the trust of the employees in the organisation, its values, principals and most important fairness. To add to the agony of the situation a German president was made to be the new position holder, one who was supposedly an ally close to Schrempp. Successful mergers always ensure retention of key talent of the organisations. Successful adaptations never happen out of enforcement. Unless a common goal is arrived, each stakeholder will have a different goal to achieve (detailed later in this analysis) and the system succumbs to “bounded rationality”.
viii. No Chrysler presence in the board of management: it is the leadership of the two organisations coming together, that communicates, resonates a cohesive vision. By having a German dominated board of management the DCX failed to have a collaborative approach to induce an environment, which is conducive to change. Successful merger was “common property” that, both the organisations wanted however they could never implement. As the adaptation was becoming challenging, it can be assumed that each of them was practicing their own interim behaviors or practices thinking their actions will not hamper the overall setup thus falling in the trap of “tragedy of commons”.
ix. The outcome of the aforementioned had started showing by 2001 when mass lay-offs were done in order to sustain and meet the market position. When things were not working out despite the actions taken, it was fairly assumed that the Chrysler division was of no good to DCX as it was reduced to a mere administrative support to the whole organisation. The bad became worse and the good became better as German way of working was now made prevalent across the organisation. Finally in 2007 when the following news was reported: Mercedes-Benz maker, Daimler AG and the world’s second-largest maker of luxury vehicles reported profits in its fourth-quarter results for 2007. The good results came after selling the Chrysler division in the U.S. and cutting jobs at Mercedes-Benz Cars. Daimler finally sold Chrysler to private equity firm Cerberus Capital for £3.74 billion.
x. When the news of unsuccessful merger of DCX was out in the open; upon questioning by the Financial Times Schrempp mentioned that what was stated as “merger of equals” was actually an acquisition by Daimler-Benz. This statement has a strong element of the systems trap “Shifting burdens”. In order to justify the friction in DCX and the merger not going well Schrempp shifted the purpose to be acquisition instead of a merger.
Different stakeholders and their goals
There were temporary fixes that failed as there was an innate policy resistance being observed from all the involved stakeholders, which was due to lack of a common goal.
a The organisation had a goal of increased market capitalisation and profit.
b The leadership had the goal to quickly have the people comply with the merger and new style of working.
c Individually, Chrysler and Daimler wanted to its own organisation’s style to be encouraged and prevalent.
d Employees wanted security and comfort zone.
e Global economy dynamics also change when such large cross border mergers take place. Government of the two nations wanted the organisations to perform well and grow their market capitalisation, as it was one of the first cross border collaboration.
f Customer’s choices also change. They expected a hybrid model car that could have best features from both the organisations. However, this never happed as both continued producing the same style of cars (Daimler –Mercedes Benz, Chrysler — Economic cars and trucks).
g Schrempp wanted to control both the organisations.
h Suppliers and vendors wanted the organisations to continue with their business so that they supply chain continues or may be enhanced.
Looking at the situation from loops of change:
The input feedback to the balancing loop will be to cause “Discomfort” with the situation which will lead to creation of a common “vision”(what success looks like for DCX) ; with “first action steps” the organisations will move toward accomplishing “resistance to change” (DVFR)
Change takes place in a non-linear manner. Systems thinking helps us with the same understanding.
It will be correct to assume that when DCX was formed both the organisations wanted to succeed and enhance their market capitalisation. Definitely in order to avert the aftermath there are certain remedial actions which could have been taken proactively resulting into the desired goals.
Suggested solutions
· For assessing the top talent and leadership of DCX together; skill assessment for the companies could have been done to gauge the leadership competencies.
· A Compensation mapping / Job analysis could have been done to avert the undesired compensation restricting.
· Definitely more time should have been given to complete the merger (closed in 12 months only).
· The leadership communication should have been encouraging, aligned and reinforcing the responsibility of each member in the two organisations making it a collective win — win. This is one of the leverage point in the entire case. Communication as a leverage point could have been injected at any stage of the entire failing process so that the alignment and integration could have incepted, perhaps that as the main factor was missing. In dealing with the situation one can assume that when the temporary fixes of PMI and imposing organisational hierarchy failed, both the groups got trapped in “escalation” as both of them might have started to impose their work style in-order to show their superiority. A simple use of the leverage point could have turned the situation around.
· Joint research projects and exchange of components (leading to standardization).
· The joint project teams should be diverse and cross cultural so as to bring all prospective on the table.
· Dailmer-Benz could have bought small stake in Chrysler and slowly increase the stake post business going well
Concluding thoughts
· Two cultures must be brought together and blended to create a collaborative, high-performance new company.
· People, culture, and leadership are the game makers or breakers.
· Before a successful integration can begin, proper planning for that success needs to take place. Unfortunately, many integration initiatives fail from the start because the integration begins before any thought is given to the course that the integration will take.
· Planning for integration revolves around vision and communication.
· For all of these reasons, a clear vision and consistent communication are vital. “The new leadership team must move forward together, fully aligned, and ‘owning’ the strategic blueprint.
