Failed Merger of Daimlerchrysler

Executive Summary This case study is on the topic ‘DaimlerChrysler-Knowledge Management (KM) Strategy’ from the Harvard Business School case studies. Principally, this case is based on the merger of Daimler, a German automobile company and Chrysler of the USA. We will analyse the KM related issues faced by the company in the post-merger period. These issues include implementation of KM, mismanagement, cultural differences, individual people barriers, etc. Furthermore, there are solutions and also recommendations given as to what the management could have done to save the company from de-merging.

Introduction Knowledge Management (KM) is a field which is being accepted, taught and practiced in academic institutions as well as organisations. As this is the era of Globalisation, KM has gained importance and is being practiced by almost all successful companies. In fact, it is even offered as a core subject in educational institutions. So, what exactly is KM? “KM draws from existing resources that your organisation may already have in place-good information systems management, organisational change management, and human resource management practices. (Davenport and Prusak 1998) This definition is an integrated definition of KM and is focused on the integration of information systems and human resources. The case being studied is the merger of the United States automobile company Chrysler and Daimler of Germany. Merger, in general means the unification of two or more companies for certain agreed upon reasons. These two companies merged in 1998. Mr. Jurgen Schrempp was the CEO of German auto giant, Daimler Benz. Schrempp was the man who was the originator of the idea of Daimler’s merger with Chrysler in 1998.

He guided the company from massive losses in the mid 1990s to a successful company later. The merger was termed as the ‘merger of equals’ by Mr. Schrempp and also CEO of Chrysler, Mr. Bob Eaton. The reasons for the merger were different for both the companies. Eventually, it was a failure. Times Online gives the following reasons for the failure of the merger: (Times Online 2007) 1. The merger was never fully accomplished 2. DaimlerChrysler suffered a loss of $1. 5 billion in 2006 because of Chrysler alone. 3. The U. S. company did tie up with the European company, but, Chrysler did not globalise. 0% of its sales were still coming from the U. S. 4. Chrysler slowed down the process of its main products like minivans, SUVs and pickup trucks. These products made 70% of Chrysler’s output. Background of the merger Daimler-Benz was a very successful company is the early 90s. Apart from car manufacturing, they had ventured into electronics and aerospace in the 1980s. But, all of this ended when they induced a loss of DM5. 7 billion which was the biggest loss in German history. Competition was eating up Daimler-Benz’s market share and eventually, Daimler felt the pressure to merge. In spite of Chrysler’s record sales of 2. million units, Chrysler was still the smallest automobile manufacturer in the U. S. market. Soon, Chrysler’s position in the market was questioned and competition was getting stronger. Chrysler lacked depth in management and lack of products. Even Chrysler felt the pressure to merge and in June 1998, Daimler-Benz and Chrysler merged. They had formed the world’s 5th largest car company with a whooping $132 billion in the form of revenues and about 428,000 employees. The management anticipated that this merger is a perfect merger because it will bring together Chrysler’s innovative skills and Daimler’s engineering skills.

Also, Daimler had a strong prevalence in the markets of Asia, Europe and North America (segments in which Chrysler did not). Both the CEOs asserted that the merging would result in a saving of $1. 4 billion in its company’s 1st year itself. They also claimed that the assimilation would be complete within 2-3 years time. The merger agreement was signed on 6 May 1998 in London and the new company was named as DaimlerChrysler AG. (Shelton et al 2003: 313) It was the largest merger in the history of the automobile industry. Basically, the merger took place because both the companies needed to: Increase the market share ?Avoid consolidation due to the factor of global overcapacity ? Cope with new technology and new markets ?Maintain competitive prices by reducing production costs Daimler, too, felt the pressure to merge because it was ranked as only the 15th largest automaker (only above Volvo & Porsche). Chrysler lacked organisation skills, new products, and had small overseas market penetration. These two reasons were the primary motives which related to the creation of the merger. Issues and problems Mr. Schrempp and Mr.

Eaton painted a rosy picture by terming the merger as a ‘merger of equals’ and claiming many other things like savings, fast integration etc. But, DaimlerChrysler faced numerous issues after the merger in 1998. These issues were pertaining to: 1. Differences in organisational and national cultures of Daimler and Chrysler 2. Lack of cultural awareness within the management 3. Unsuccessful implementation of Strategic KM 4. Control of Intellectual Property with respect to KM 5. Persuading the employees, senior management and the executives to be open about knowledge sharing and being trustworthy . Ineffective Change Management 7. People barriers which cease knowledge sharing between the employees of Daimler and Chrysler 8. Appropriate use of KM to smooth the Post Merger Integration (PMI) process Analysis and Solutions The merger of Daimler-Benz and Chrysler was definitely a good proposal. But, there needed to be comprehensive planning and organising. There were a range of steps that DaimlerChrysler took to ensure of a good KM implementation. They formed DCU (DaimlerChrysler University) which was the base of its management networks.

DCU managed all divisions and business units associated with DaimlerChrysler like Mercedes-Benz cars for passengers, commercial vehicles, the Chrysler group, and DaimlerChrysler services. Apart from forming DCU, they also developed EBOK (Engineering Book of Knowledge) to capture and store new knowledge which was being generated in Tech Clubs-clubs that facilitated effective interaction between engineers and designers working on problems based on engineering, body, chassis, electrical energy management etc. EBOK facilitated members to contribute to a large knowledge base and also assisted in sharing it.

Other car automakers were adopting KM techniques and strategies very effectively. (Refer to Table) Analysis and grading of companies according to use of KM CompanySuccess Factors/Problems 1. Ford? Quantified results from KM (realised savings of $600 million in 1999) ? Used technology effectively to grow KM in the organisation ? Created global community of practice ?Reward system without financial incentives 2. Siemens? Strongly committed at corporate level ?Created a community for KM (helped to collaborate knowledge for different business units) 3. General Electric? Used globalisation to enhance KM activities ?

Setting up of best-practice matrix which allowed them to enter into learning relationships ? Use of technology and e-commerce 4. General Motors? Created GM university for learning KM ?Use of technology like internet to capture and share data ? A learning support person who would facilitate KM in vehicles developments across the world ? Emphasis on “learn from mistakes” and ‘best practices” 5. DaimlerChrysler? Became isolated over a period of time ?One of the most comprehensive KM in automobile industry, but, not necessarily the best ? Nurtured strategically important domains, buckets and uggets 6. Toyota? No formal KM but emphasis on continuous learning and improvement ? Toyota University and centralised information gathering ?Employee suggestion system (90% participation rate) All of the steps taken by DaimlerChrysler were not sufficient. As mentioned earlier, the merger was a failure. This was because of the various stated issues that were faced by employees and management of both the companies. They merger could have been managed appropriately and turned it into a success. The key issue which caused the de-merger was that of Organisational Culture differences.

Organisational Culture is a culture that expresses shared values and beliefs of the employees and it is also the social glue that binds an organisation together. (Trevino & Nelson 1999:207, Cited in Ross 2007a: 1) While implementing KM, the company’s engineers plotted out where knowledge existed within Chrysler and termed these locations as ‘buckets’. They wanted to know how to integrate these buckets and resolve culture differences. The integration of two different countries and cultures would be a daunting task. Different styles of communication, values, beliefs, attire, and manner of working caused a problem in the work environment.

This is because Daimler is a German company, while Chrysler is an American company. Chrysler was a pioneer at platform designing of the cars. This means that numerous cars were created on the same platform. Daimler-Benz did not follow this and resisted such a trend because they were more of the innovative kind. This lead to misunderstandings and miscommunications. German employees would be reluctant to share their knowledge with American employees and vice versa. It would be very difficult to acquaint all the employees with working in one specific organisational tradition.

Individual people barriers such as differences in cultural background, ethnic background and language existed. Cultural clashes occurred both, at the corporate and societal levels. The CEOs of both the companies should have considered this aspect before merging and planned necessary steps to solve these problems when they arise. Apart from the cultural differences, the merger failed because of different accounting practices, need to rationalise IT and also, patent ownerships (Gibney 1999) Key Drivers for KM 1. Technology- utilizing it as a tool, to the fullest extent for information sharing 2. Globalisation 3.

Culture Barriers to successful KM 1. Lack of long-term commitment 2. Isolation-isolated as a practice 3. Lack of acceptance and openness Solutions to overcome these barriers 1. Strategic and cultural foundation of organisation 2. Right environment, values and beliefs of organisation 3. Reward system and corporate audit change KM was definitely required in the merger. Effective implementation of a Strategic KM planing would generate better results. They should have viewed the merger from a balanced scorecard perspective. (Ross 2007a: 3) Balanced Scorecard Perspective is a part of Strategic planning in KM which Mr.

Schrempp and Mr. Eaton did not adopt. They did not consider all aspects and post-merger consequences. The three main constituents of a successful KM strategy are Vision, Resources and Culture. (Ross 2007a: 3) They definitely had a vision, the resources to go ahead with the merger but, what they could not resolve was the culture aspect of the strategy. This is the utmost important part in any organisation and culture was on top of the pinnacle of the issues faced by DaimlerChrysler merger. They could have solved this issue by providing more time for the employees to engage in knowledge sharing.

It was difficult for employees of both the companies to instantly share their knowledge. The German employees would obviously resist from sharing because of the fear that the employees of Chrysler may misuse their knowledge and take credit for it. (Ross 2007b: 3) Balanced Scorecard Perspective We can also highlight that the process of change was not effectively managed by the leader, Mr. Schrempp. The change that can be noticed here is ‘incremental’ change. (Ansoff and Mcdonell 1990) The association of weak leadership qualities with respect to change can also be pointed out. Mr.

Schrempp was a visionary. He had set a goal but failed to achieve it. Just because Chrysler was in losses, he thought it might be a good strategy to form a merger with a successful company and be back in the market. The efforts to employ strategic change in the company were not up to the mark as well. This can be because the employees resisted change for numerous reasons like job security, lack of trust and misunderstanding because of poor communication, a narrow outlook towards change and doubting the benefits of change. (Kotter and Schlesinger 1979) By change, we mean the merger in this case.

So, all of this could be overcome by proper communication by the management about the goals and benefits of the merger to the employees. Therefore, we can see that mismanagement, communication gap and cultural clashes led to failure of the merger. Recommendations The following steps are recommended to be carried out after any cross-cultural merger. These steps could have prevented the de-merger of DaimlerChrysler. 1. The merger was centred too much on sustaining core competencies at either Daimler or Chrysler. They needed to concentrate on the management of the ‘soft’ assets as well.

Both the companies should have adopted sustainability. 2. There should have been a proper understanding of barriers to KM strategy, communication should be clear and benefits of change should be notified. 3. A Balanced Scorecard Approach, I believe, should have been utilised by both the CEOs. 4. Employees of both the companies were needed to be trained with regards to sharing their knowledge which would help them to fill in the knowledge gaps and achieve their goals. (Ross 2007b: 3) 5. Due to the cross-cultural differences, the management should have dedicated more time in formal and informal settings so that the employees rom both the countries would get accustomed to one way of doing work and share knowledge effectively. (Ross 2007b: 3) 6. Effective Strategic planning could have made a vast difference. 7. Like Toyota, they could have developed Employees Suggestion System so that employees would participate more and not hoard their knowledge and ideas. 8. Set up a reward and recognition system to encourage employees to get together and share knowledge 9. Integration of organisational culture and knowledge bases of both the companies. Conclusion

This study is an attempt to present the various cultural issues faced at DaimlerChrysler. Whenever there is a cross-cultural merger, the management must be aware of the consequences and they need to be encompassed by cultural awareness. Mergers and Acquisitions take place regularly in today’s world. Merging is a very good management decision towards expansion. This is because one company covers the weakness of the other company, but, paramount importance should be given to the strategic plans and a detailed study regarding cultures should be undertaken.

There needs to be a carefully thought out post-merger plan. Time magazine quotes in one of its article on DaimlerChrysler that “Mergers often fail, and the big ones fail more often. ” (Gibney 1999) Be it domestic mergers or international mergers, the studies of diverse cultures and comparing their differences is imperative. What we can learn here is that the companies involved should plan everything from A-Z before entering into a merger. A SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis would prove to be very handy. It is very difficult to be globally successful in this era.

Proper execution of KM is the best that any company, big or small, can do. KM programs and strategies generate unbelievable results for companies if they are appropriately implied. (Ford, Siemens, and GE) As long as both companies are willing to make further efforts to make the merger work, they may find it most advantageous to merge and try to bathe in success after the merger. References Ansoff, I. H. & McDonnell, E. J. (1990) ‘Implementing Strategic Management’ in A. Jashapara (ed. ), Knowledge Management: An Integrated Approach, Harlow, Prentice-Hall, pg. 15 Davenport, T. H. & Prusak, L. (1998) Working Knowledge: How Organisations Manage What They Know, Boston, Harvard Business School Press Gersten, M. C. , Soderberg, A-M & Jens, E. T. (1998) Cutural Dimension of International Mergers and Acquisitions, Berlin, Walter De Gruyter Gibney, F. (1999) ‘Daimler-Benz and Chrysler merge to DaimlerChrysler’, Time Magazine, 24th May 1999 Kotter, J. P. & Schlesinger, L. A. (1979) ‘Choosing Strategies for Change’ in A. Jashapara (ed. ), Knowledge Management: An Integrated Approach, Harlow, Prentice-Hall, pg. 17 Ross, P. (2007a) Knowledge Management 7009IBA (Week 4, 16-17 August), GBS Seminar, Griffith University, pg. 1 Ross, P. (2007b) Knowledge Management 7009IBA (Week 10, 04-05 October), GBS Seminar, Griffith University, pg. 3 Shelton, C. D. , Hall, R. F. , & Darling, J. R. (2003) ‘When Cultures Collide: The Challenge of Global Integration’, European Business Review, 15(5): 313 Times Online (2007) ‘DaimlerChrysler Marriage on the Rocks’, Times Online, (15/02/2007), http://business. timesonline. co. uk/tol/business/columnists/article1386969. ece