DaimlerChrysler: Corporate Governance Dynamics in a Global Company
Strategic Profile and Case Analysis Purpose
On May 6, 1998 it was announced that Daimler-Benz AG and Chrysler Corporation were going to merge. It came as a surprise to everyone in the industry. Both companies were very successful and had outstanding reputations. Chrysler was named company of the year in 1996 by Forbes, and Daimler-Benzs luxury car division called Mercedes-Benz was leading the industry. A board member of Daimler-Benz AG, Dieter Zetsche, said that they have had problems with high cost for new technologies because of their low volume, so this merger would help them with the technology because Chrysler was very advanced. During the first day of trading for DaimlerChrysler, the share rose about 30 percent. However, in the second quarter of 1999 the share failed to meet Wall Street expectations. That, along with the fact that the S&P 500 refused to add them, made the stock begin to fall. Chryslers market share fell from 16.2 percent in 1998 to just 13.5 percent in 2000.
Situation Analysis
General Environment Analysis
In a market such as the automobile industry, all six segments of the general environment are affected. Technology is obviously an enormous part of the industry, and very important to DaimlerChrysler. Technology was a large part of the reason why Daimler-Benz wanted to merge with Chrysler in the first place. They knew how big technology was in their industry and also knew that merging with Chrysler would help them tremendously. Technology can be anything from what is used to make the cars, to what the car is made of. If it wasnt for these advanced technologies, cars would not be made as fast as they are. Manufactures need to stay on top of technology because it affects every aspect of making a car. Being technologically advanced does not just speed up the process of making the cars, but it also will allow the cars to be made at a much cheaper price.
The demographic segment also plays a big role in the automobile industry. DaimlerChrysler needs to be aware if its target market. For example, young people just buying cars are not going to be looking at the Mercedes-Benz brand. They do a very good job of having a diverse selection of cars though because of their many brands. Right now there is a large group of people in the United States that close to retiring, so it would be a good idea that DaimlerChrysler understood this demographic so they can better market their vehicles toward those people. If they stay on top of demographic changes it could help them sell more cars because they would know who to market towards.
Economic changes affect the car industry because of the fact that cars are a global product. They are imported and exported to many different countries, so there will be things like taxes that companies need to be aware of. An example of the affect of the economy can be seen when we look at how interest rates have been steadily increasing these past few years which can become a liability for companies. Exchange rates are also big because now there is a big difference in currency rates and costs will be different when importing and exporting depending on the country.
The political roll played in car manufacturing is large because car manufactures play a big role in employment. We can see this when looking at employment of factories in American cities. Every time a plant closes it is big news because of the impact it has on so many people. Cities fight to keep plants open and car companies are sometimes welcomed with incentives. Other political and legal problems companies might see also include things such as antitrust enforcement from governments or tax policy changes.
The sociocultural and global segments are extremely important. Manufacturing automobiles uses a lot of energy and causes quite a bit of pollution. Firms need to stay on top of this and try to take care of the environment which in turn would make them look better to their customers and investors. Obviously with automobiles being a global business the global segment needs to be watched constantly. Changes in it can and most likely will affect a manufacture trying to export to another country. Currency exchange rates, free-trade agreements, and trade deficits are just some of the aspects that can hurt a manufacture.
Industry Analysis
Porters five-forces model can be a great way to analyze the automobile industry. For car companies such as DaimlerChrysler, the bargaining power of supplies and buyers is weak. Since there are so many buyers and suppliers, it is hard for them to make DaimlerChrysler change anything. A few people boycotting their prices wont make them change. Cars are very expensive and manufactures compete with each other to get people to buy theirs, which bring us to the next part: rivalry among competing firms. Since there arent many companies in the automobile industry as compared to other industries, every action is met with a reaction. If one manufacture were to drop prices dramatically, nearly all other manufactures would follow. Competition among car companies is arguably the most ruthless competitive out there. This tough competition is really the only thing that makes the automobile industry unattractive.
Substitute products are also an issue, but not a big one. Public transportation is the only other choice people have if they do not want or cannot afford to buy a car. There is nothing the automobile industry can do about this, other than compete with each other as to who will supply public transportation vehicles such as taxicabs. The threat of new entrants is relatively low due to the many barriers to entry in this industry. There are too many well established companies all ready that makes it nearly impossible to get in and do well. With all this being said, this industry is really moderately attractive. The main problems for a company seeking to join the industry are the barriers to entry. If they can somehow get in and began to produce well liked cars then they may have a chance, but only if they have the ability to fight the competition.
Competitor Analysis
Car competition is one of the largest, if not the largest, competition in the United States. You cant watch TV and not see a car commercial. Companies spend millions and millions of dollars on marketing research alone. A big example is a few years ago when the employee discount price war begin. One manufacture began selling their vehicles to normal people while giving them employee discounts. Within a week, other companies began the same thing. Competition is huge and every manufacture needs to be aware of their competition at all times. The Daimler-Benz and Chrysler merger, two already well off companies, shows how far companies are willing to go to succeed in the industry. With DaimlerChrysler, incentives for buyers reached $4,500 in 2003, which they hoped would bring people to buy more of their cars.
Internal Analysis
Strengths and Weaknesses
Every company has strengths and weaknesses, and DaimlerChrysler is no exception. An area of strength for DaimlerChrysler is the fact that it is extremely diversified. They have many different brands that are aimed toward different demographics. Their brands include popular names such as Mercedes-Benz, Dodge, and Jeep. Another strength was actually created when the merger happened. The technology of Daimler and the efficiency of Chrysler, when paired together, created a company that can be technologically advanced and efficient at producing automobiles. Finally, brand equity is a big strength. Most likely every car buyer has heard of Daimler-Chrysler or at least one of its many brands. Brand equity alone is a huge strength and that alone will lead people to buy their cars.
An area of weakness is actually the Chrysler name. As much as Americans love the name because of what it means to them, lately the news has been reporting that DaimlerChrysler is worth 40 percent more without the Chrysler name. If Chrysler is sold to a private equity buyer, or just dropped, DaimlerChrysler would return to being a growth company. Just upon hearing the news that Chrysler could be sold, the Daimler stock went up 40 percent. Numerous internal mistakes have led to the failure of Chrysler which has lead investors to push for the sale.
Opportunities and Threats
DaimlerChrysler needs to keep an eye out for opportunities that arise. This could be the chance to acquire or merge with a company, or maybe entering a new market at the right time. Just recently in the news they announced they will be expanding their presence in Japan by adding their Dodge brand. This is a great move on their park because they need to make a presence in Asia. One of the threats goes along with the opportunities, and that is the ever growing Asian market. New ideas need to be made to compete against them before they really begin hurting Daimler-Chrysler.
Corporate Governance
Chapter ten in our book talks about corporate governance. It is defined as the set of mechanisms used to manage the relationship among stakeholders that is used to determine and control the strategic direction and performance or organizations. It is concerned with finding ways to make sure that strategic decisions are made effectively. In other words, it is a way to make sure that what executives and directors are doing for the company will benefit stockholders.
According to their website, DaimlerChrysler supports ideas that intend to improve corporate governance. They are also interested in aligning the system internationally since the company is from both Germany and the USA. There are many differences between how the two systems work. For example, the United States makes the interests of the owners represented by the Board of Directors, whereas the German Supervisory Board is more about the interests of the owners and employees. As far as laws controlling corporate regulation are concerned, the United States has different laws for each state where Germany is governed under the Federal Government.
The external environment for corporate governance changed dramatically during the merger. Although DaimlerChrysler was technically a German company, it was traded on the New York Stock Exchange and therefore had to follow many rules and regulations including The Sarbanes-Oxley Act, U.S Securities and Exchange Commission, and The German Corporate Governance Code. The code is viewed as a way to evaluation control and management structures
The German system is different from the United States in that is has to create a two-tier system if the firm has more than 2,000 employees. It will be used for monitoring and controlling managerial decisions and actions. The German structure is said to prevent bad decisions by CEOs, but it is also criticized for the slow decision-making process. Also, the way the German system is set up makes it hard to restructure companies as quickly as it can be done under the United States system. This can be a problem when a company begins to fail and needs to change.
The board meetings in the German system are very large. Every meeting is attended by over 40 people and includes 20 members of the supervisory board, the board of management, and staff. Salaries are also a big difference as the difference between the lowest paid and highest paid was over 300,000. The last final difference between and German and American systems is the corporate law. The German corporate law was written to protect creditors which then allowed firms to create hidden reserves. On the other hand, American corporate laws are there to create transparency for shareholders which allow them to control management.
Many countries are changing their corporate governance system to model that of the United States. The competitive landscape is creating a more uniform governance structure that will be used by most firms throughout the world. This can be seen in both Europe and Asia already. Investors are becoming a bigger part of the companies. The merger of German and United States system was something new. There is no set of rules on how to go about doing it
Conclusion
Daimler-Chrysler was the product of a merger from two different companies in two different countries. This led to many differences in corporate systems that had to be adjusted. Alone, both systems work fine, but they needed to be combined. They created three different committees to help with this: Presidential Committee, Audit Committee, and Mediation Committee. The Chairmans Council and the International Advisory Board were also created. Although the company has adjusted well to the new system, there are still considerable risks because of them being a global company. One major risk, as mentioned earlier, is the change in exchange rates between the euro and United States dollar. Any large change in the exchange rate could have a serious impact on financial results. Technology is also something that was mentioned before. It was a large factor in the merger in that combining the technologies of both companies will help a lot. However, they need to remember that technology is always improving and they need to stay on top of changes. If they fail to do this, and other companies do not fail, then they will be at a major disadvantage. There are also many other risks, but one needs to remember that these risks affect nearly every company. As long as DaimlerChrysler stays in line with their competitors, they should have no problem. The merger between Daimler-Benz and Chrysler and the many enormous changes in the company was not perfect but it did work well enough for them to stay competitive in the market.