Chrysler's U.S. Market Share example essay topic

Global Business Management MBA Course International Management Globalization success story: Deutsche Post World Net Globalization failure story: The merger of Daimler-Benz and Chrysler by Ciara Gut i " erred and Karin Reisinger 24.10. 2003 Introduction Internationalization has become an important strategy for more and more German companies. Growing world markets offer them a chance to increase their revenues, especially since domestic German markets are often saturated. We have chosen two established, traditional German companies, Deutsche Post and Daimler-Benz, as examples for success and failure in aspects of their globalization strategies. Deutsche Post World Net: the world's largest logistics company (by Ciara Gutierrez) Deutsche Post's expansion strategy and its consolidation as a global company: Deutsche Post World Net is made up of Deutsche Post, DHL and Post bank. It is still majority owned by the government, but it will keep that monopoly only until 2007.

From 1990 to 2002, the company laid a solid foundation for the further expansion of what today is already an excellent market position. Within the space of twelve years, the loss-making national postal service was transformed into a profitable, global logistics service provider. The revenues were more than quadrupled during this period and Deutsche Post ranks eighth on the German share index DAX. Buoyed by the optimistic forecasts, Deutsche Post shares have climbed more than 50% since the beginning of 2003.

The company has a $39 billion turnover, 41% of that is foreign market. Over the past eight years, the Deutsche Post has spent $11 billion buying up logistics and delivery companies around the world, turning this way into the largest express delivery business in Europe and Asia. Until now, the European networks belonging to Deutsche Post Euro Express, Danza's and DHL have been operating independently. Their management will be coordinated in the future, first within individual countries and then throughout Europe. The goal is to develop an integrated European ground- and air-based distribution network, which will significantly improve pick-up and delivery processes. The company enters the U.S. market: Deutsche Post has just completed the acquisition of U.S. -based Airborne Inc., the nation's No. 3 express service.

This acquisition has increased the company's market share from 2% to 20% in the competitive U.S. market. The rest of the market (80%) is owned by UPS and FedEx, the leading transportation and logistics companies in the U.S.A. Problems derived from internationalization: The term internationalization stands for the process by which a company enters a foreign market, and that's exactly what Deutsche Post is doing in Europe, Asia and the U.S.A. for the time being. But becoming international isn't an easy process. Deutsche Post is having now many legal problems in the U.S. Federal law prohibits foreigners from owning over 25% of a U.S. airline or effectively controlling it.

The company contracts out flights to Astar Air Cargo, based in Miami, 90% of whose business is generated by Deutsche Post's DHL unit. Even though Deutsche Post doesn't own more than 25% of Astar stakes, UPS and FedEx, threatened by the intrusion of a successful foreign company in their U.S. market, argue that Deutsche Post controls Astar, violating U.S. law. Considering in advance that there are different laws in the countries you want to expand helps enterprises avoiding this kind of problems. Governmental support will soon be over: Another question arises when we think about what will happen to the company after 2007, when the monopoly is over. Many rivals gripe that Deutsche Post uses revenue from its monopoly on the letter-carrying business at home to finance its worldwide expansion. It's true that the mail division remains the core of the business, supplying 60% of operating profit last year, while the express and logistics division contributed only 17%.

Deutsche Post will have to continue with its current expansion policy in order to prepare for the future hard knock of having to fight in the domestic market to maintain their revenues without the help of the government. Application of the game theory to Deutsche Post's entry in the U.S. market: A fabricated model is now going to be used to apply the game theory to our example on the entry of Deutsche Post in the U.S. market. There are four different possible situations. On the one hand, Deutsche Post can select one of the following choices: either it buys Airborne or it doesn't. On the other hand, UPS and FedEx can either form a strategic alliance to face the entry of this new competitor or make separated strategies to fight Deutsche Post back. This chart illustrates the effects of each decision on each company ranging from very positive (+ +) to very negative (- -).

Deutsche Post Airborne Airborne Compe- tutors UPS + FedEx + / + + + / - - UPS + FedEx - - / + + 0 / 0 The Nash-equilibrium would happen if Deutsche Post bought Airborne and UPS and FedEx formed an alliance. None of the enterprises would achieve better results without harming the other and that's exactly what Nash-equilibrium defines. The merger of Daimler-Benz AG and Chrysler Corp. (by Karin Reisinger) In May 1998 the so far biggest industrial merger in history took place: Daimler-Benz, the German manufacturer of Mercedes-Benz luxury cars, carried out a $36 billion fusion with Chrysler Corp., the American maker of minivans and jeeps, at that time No. 3 of the U.S. automakers. With this merger, Daimler-Benz and Chrysler wanted to create the world's most profitable carmaker. The current situation of DaimlerChrysler: Five years after Daimler-Benz and Chrysler merged to DaimlerChrysler, this vision has not come true: The stock has lost over half of its value since 1998 and DaimlerChrysler's market capitalization of $38 billion is sharply lower than Daimler-Benz's $47 billion before the merger.

In addition, Chrysler's U.S. market share has dropped three percentage points to 13% and this August it lost its 53-year old position as America's No. 3 carmaker to Toyota. Chrysler is still suffering from major problems, mostly due to over capacities and the aggressive rebate policy in the U.S. auto market, but also caused by its inefficient production sites and unpopular models. It lost $1 billion dollar in the 2nd quarter of this year, wiping out its gains of 2002 and following the losses of $5.8 billion in 2001. The long-awaited turnaround is nowhere in sight and DaimlerChrysler still dominates and profits only where it did before, in the luxury-car sector of Mercedes-Benz.

Moreover, this August DaimlerChrysler had to pay $300 million to settle a lawsuit brought by Chrysler shareholders, who accuse Daimler of committing 'proxy fraud' by calling the fusion a 'merger of equals' and not a takeover and claim that Daimler-Benz underpaid for Chrysler Corp. What were Daimler-Benz's motivations for the merger? For Daimler-Benz, the main objective of the merger was to enter the middle-class car market and thereby gain some independency of the strong competition in the luxury-car sector. They were confident that Chrysler as No. 3 of the U.S. automakers would prove a strong partner and offer the possibility to obtain a larger share of the U.S. auto market. Daimler-Benz also expected huge savings through synergy effects like joint purchasing and technology sharing.

With the world-spanning company they created, they wanted to dominate the industry. So what did go wrong? Was entrance in the middle-class market the wrong strategy? In the saturated U.S. middle-class car market, since 2001 carmakers are fighting 'incentive wars', a relentless downward pressure on pricing to maintain share and cash flow, which have affected Chrysler especially hard because if its comparatively high production and assembly costs and drain its profits.

Moreover, the differences between the high-class cars of Daimler-Benz and Chrysler's mass-market autos are limiting the opportunities of synergies, since sharing parts and engineering only works efficiently for similar quality levels. The synergies of the merger were therefore far smaller than anticipated. For these reasons, experts argue that Daimler-Benz might have profited more from a merger with another high-class manufacturer, as its fusion with Mitsubishi shows. Overestimation of Chrysler - the problem of hidden characteristics: Moreover, Daimler-Benz had highly overestimated Chrysler's competitiveness in the U.S. market.

This is a typical principal-agent problem: In the merger, Daimler as principal had suffered from asymmetrical information since the agent Chrysler had hidden his negative characteristics. For instance, Daimler-Benz's management didn't know that several important Chrysler executives, who had been key factors of its success, had left the company in the years before the merger. Chrysler had lost drive and suffered from a weak leadership, which became a crucial problem in the post-merger integration phase. In addition, Chrysler's production turned out to be inefficient, inflexible, and cost-intensive and is not able to compete with Japanese factories in the U.S. This lack of knowledge led Daimler to adverse selection: they selected the 'lemon' Chrysler instead of a more promising partner for their globalisation strategy.

Thus more intensive screening would have been necessary in the pre-merger phase. Management problems: Cultural differences and hidden intentions: The principal-agent problem occurred also in the cooperation of Daimler-Benz's management, represented by Daimler's CEO Schrempp, and the Chrysler management: From the start, Chrysler executives, the agents, suspected hidden intentions of the Germans to obtain control and neglect Chrysler's interests. On the other side, Schrempp as principal feared hidden intentions and actions of Chrysler's managers. He assumed they would not act in the favour of DaimlerChrysler as a whole but of Chrysler only. In addition communication between the two parties, which is necessary to overcome these problems of asymmetric information, was complicated by cultural differences. Since Schrempp was aware of the differences in management and culture, he initially decided to form a polycentric-oriented firm by leaving Chrysler's management unchanged and to operate Chrysler and Mercedes as separate business units.

However, this diluted the benefits of a classic merger where combined operations provide synergies, and the clash of corporate cultures and Chrysler's weakened leadership still led to increasing cooperation problems. For instance, Ameri-cans felt overrun when Germans already presented detailed action plans whereas they wanted to work out solutions together. And Schrempp perceived Chrysler's management as timid, as they refused to support his ambitious further expansion projects out of fear of Chrysler's stability. When Chrysler performed badly in 2000, Schrempp therefore appointed the German Zetsche as Chrysler's Chief executive and the number of Americans on the supervisory board was reduced in favour of Germans. Since the approach of a polycentric company hadn't worked, he changed to an ethnocentric one and staffed the key-management with home-country nationals. Due to this, he gained more monitoring and screening power but he had to pay the price of demoralizing Chrysler's management and employees with this decision: Yet more important Chrysler executives left and the 'fear of the Germans' grew.

Cultural misunderstandings enhanced this problem. For example, Schrempp limited his appearances at Chrysler to avoid the impression of German domination. Chrysler's executives and employees however interpreted this as indifference to their problems. Outlook: To consolidate Chrysler, decisive cost-cutting measures have been taken and will be further pursued in the future. With new models, which are coming out over the next months, Chrysler hopes to reverse its slides in sales. To differentiate from its main competitors in the U.S. market, Chrysler plans to move up-market and become a more premium brand.

Analysts however are doubtful, if the core customers will accept this move of the brand and if the pursued cost-cutting measures are effective enough for Chrysler to make the turnaround..