The rise and fall of DaimlerChrysler AG Brief history Chrysler was founded in 1925 by Walter Chrysler in USA. Great value luxury vehicles. By the mid-1990’s, the Chrysler corporation was the most profitable automaker in the world. However, environmental activism, shifting market dynamics, and changing taste of consumers threatened the future of Chrysler. Bob Eaton, Chrysler’s CEO, describes this as “the perfect storm” and believed that the only way to survive the storm was to avoid being in its path in the first place. Also, he believed that whatever came next, Chrysler couldn’t face it alone, and that automakers would have to work together to sidestep the oncoming storm and to find a way to strive in the new marketplace. Daimler-Benz was founded in 1926 by Karl Benz in Germany. The flagship of Daimler-Benz was the Mercedes car. Emil Jellinek, the creator of the Mercedes, stated “I don’t want a car for today or tomorrow, it will be the car of the day after tomorrow.” Daimler-Benz was recognized as a brand of luxury performance and dependable German engineering. Affordability was not a priority. The company introduced many innovations to the market such as the security cabin in 1951 and the airbag in 1981. However, its profit margins were thin and by the mid 1990’s sales slowed down, and market share was aggressively taken by Lexus and BMW. Merger of equals In 1998, Daimler-Benz merged with Chrysler Corporation to form DaimlerChrysler AG. Daimler-Benz bought Chrysler in form of shares for $ 37 billion. This strategic move was intended to maintain and reinforce the long-term competitiveness of DaimlerChrysler AG. Daimler-Benz CEO Jurgen Shrimp famously declared the merger a “merger of equals, a merger of growth and a merger of unprecedented strength”. Daimler-Benz’s motives were to access the US market, reduce the cost of production, and remain competitive. Chrysler Corporation’s main motive was to access the European market. The honeymoon The merger started well and in 1998, revenues increased by 12%, income increased by 29%, operating profits were up by 38%, and 19,000 new jobs were created. The resulting corporation was outstanding. Jurgen Schrempp, the Daimler’s CEO, called it a “wedding made in heaven”. The new giant corporation in auto industry seemed to be taking advantage of synergy effects from two complementary merging companies. The clash of cultures The honeymoon lasted for six months only. Daimler-Benz’s culture consisted of innovation with a rich engineering and quality heritage. Chrysler’s culture comprised trendsetting for new designs, short development times, organizational flexibility and a sense of market opportunity. Combining these two different cultures started to create problems. The “Us vs. Them Mentality” posed serious challenges. The Americans were seen by the Germans as uncultured while the Americans saw their counterparts as holier-than-thou. Cultural sensitivity workshops were offered to employees to maintain peace and foster a better sense of cultural understanding. The working methods of Americans and Germans were very different from each other. The Americans were more risk taking and more individualistic. By comparison, the Germans were more risk averse and less emphasis on the individual contribution and more on the collective team. For Americans, how the job gets done didn’t matter as much as the job getting done at all. For Germans, how to get the job done matters. Germans were very organized and relied on detailed planning to reach their goal while Americans reached their objective through trial-and-error. The Germans prepared and wrote extensive reports to justify their decisions while Americans prepared reports based on the minimum necessary. For Germans, the process of reaching the objective was as important as reaching the objective; Americans focused on reaching the objective regardless of the method used. Moreover, American hierarchies were flat, while German hierarchies were more layered, which caused incomprehension among the Germans that are known for their top-down-management. The strategic design, the compensation policies and politics can shed a light on why the merger didn’t succeed. Strategic design After the merger, Chrysler group was incorporated in the new organization at the same level of Mercedes Car group, the leading car maker group of Daimler-Benz. The organization chart below shows the structure of DaimlerChrysler after the merger. Therefore, Chrysler was simply added to the organization but not merged with the existing groups. Each of Mercedes and Chrysler maintained their own product lines. Moreover, the company maintained two headquarters after the merger: the first in Stuttgart (Germany) and the second in Auburn Hills, Michigan (USA). These where the historical headquarters of Daimler-Benz and Chrysler respectively. Consequently, the geographical and structural separations allowed two distinct cultures to co-exist, and undermined the emergence of a single company culture. Compensation & Rewards Within DaimlerChrysler, two different compensation structures co-existed and led to internal clashes. For example, the American top executives were compensated with higher packages than those of their German counterparts. This was particularly problematic when an American executive was transferred to Germany and earned much more than his new supervisor. Conversely, lower level German executives were paid more than their American counterparts. The management tried to bridge the gap between the compensation structures by increasing the salary of top German executives to American levels, and by fixing low base salaries associated with high performance-based incentives for lower level executives. Power and Politics After the merger, the corporate structure and the legal form of DaimlerChrysler were viewed as biased toward the Daimler side. The objective of the merger was for both parties to gain a competitive advantage by creating synergies and by sharing one goal. However, the promised “merger of equals” didn’t take place. Even though the co-management of DaimlerChrysler by Jurgen Schrempp (former CEO of Daimler-Benz) and Robert Eaton (former CEO of Chrysler) suggested that the merger of the two car manufacturers was one of equals, differences in the organizational cultures involved posed great difficulties. Moreover, Schrempp and Eaton did not seem to agree about where to lead to the joined company. Juergen Schrempp later declared that “The Merger of Equals statement was necessary to earn the support of Chrysler’s workers and the American public, but it was never reality”. In practice, Chrysler was neither acquired by Daimler-Benz, nor was it guaranteed equal status to its German partner. At the beginning, DaimlerChrysler’s management allowed Chrysler to continue to do business as usual, while hoping that Daimler-Benz would simply take advantage of Chrysler’s efficiency. However, within the first two years of the merger, DaimlerChrysler lost 20% of its top executives, especially from the Chrysler side, and remaining employees were demoralized and demotivated. Due to these problems, the German management took over the whole company’s management by replacing top American executives with Germans. It became obvious that the merger could no longer be considered a ‘merger of equals’. As a consequence, instead of strengthening one another and creating synergies, the merger drove Chrysler into chaos. During the third quarter of 2000, Chrysler lost $512 million and the share price dropped dramatically from $108 in January 1999 to $40. In 2007, the Chrysler division was sold to Cerberus Capital Management. Conclusion From a strategic point of view, DaimlerChrysler merger made sense as synergies were expected from the combination of two successful automakers. However, the structural design of the new organization didn’t create the environment for an annealing process that unifies the company culture. Difference in compensation and rewards structures created further frictions within the company and contribute to the “Us vs. Them” mentality. Also, who maintains power in the new organization played a major role in the strategic decisions as Daimler-Benz tried to administer the Chrysler division as a German company by replacing American executives by Germans. Reflecting on this case, cultural differences must be considered carefully in a merger and acquisition. To reach a successful outcome, it is critical to create a unique company culture that leverages the existing cultural elements, to group employees around one organization with a sense on unity, and to reward them equitably. References DaimlerChrysler: A Case Study of a Cross-Border Merger. Kuhlmann, T. / Dowling, P. J. The DaimlerChrysler Merger – A Cultural Mismatch? Julia Hollmann , Aletéia de Moura Carpes, Thiago Antonio Beuron Daimler AG. (2017, December 15). In Wikipedia, The Free Encyclopedia. https://en.wikipedia.org/w/index.php?title=Daimler_AG&oldid=815527014 Company History”World Corp.” vision: the merger between Daimler-Benz and Chrysler (1995 – 2007) The DaimlerChrysler emulsion, The Economist, Jul 27, 2000. DaimlerChrysler: What went wrong?, CNN Money, December 27, 2000.