International Business Strategy

Group Members :

Zhiling Liang

Minting Shen

Karen Flor

Gulifeiruzi Aikeremu

Chrysler In Trouble
1) Identify and analyze the reasons for the financial problems faced by Chrysler over this
turbulent period.

According to the case article, the main reasons for Chrysler's financial problems are its poor
business strategy, lack of innovation, and the global financial crisis.

Firstly, from a business strategy perspective, in the 1970s, the automotive market faced many
challenges from environmental pollution and rising petrol prices. During this period,
American customers became attracted to smaller, more fuel-efficient cars from Japan, which
outperformed American-made cars and were more competitive in price. Hence many foreign
car manufacturers, such as Honda and Toyota, took a piece of the market share. Instead of
adapting its business strategy to new customer needs, Chrysler stayed with trucks and SUVs,
which led to a drop in sales.

Secondly, Chrysler was not innovative and even though it came up with some innovative
products in the early 1980s, problems related to quality tarnished the brand image of its cars.
Also, later they did not have enough investment from Cerberus on research and development
due to the decline of sales. Thus leading to their continuously weakening innovation
capability.

Thirdly, From a macro perspective, the global financial crisis in 2008 was also a significant
factor in the financial problems. It worsened the situation further, Chrysler found it
increasingly difficult to continue its operations. It was difficult for car buyers to obtain loans
because of the tight credit situation. Stock market problems, rising unemployment and falling
incomes began to affect consumer spending, this is certainly a shock to the entire car market.

2) Study the reasons behind the poor business performance of Chrysler in recent years and
also historically. What are the specific factors that led to Chapter 11 bankruptcy being filed
on this occasion?

Historically, large cars consumed more fuel, but after the energy crisis, soaring oil prices
overwhelmed the public, and environmental consciousness increased, the government began
to regulate fuel emissions, so consumers stopped obsessing over luxurious large passenger
cars and began to pay attention to small, non-fuel-consuming, and inexpensive small
passenger cars from Japanese automakers. Iacocca successfully led Chrysler back from its
first bankruptcy crisis, but there was a deeper message behind it: if oil prices spiked again or
consumer purchasing power declined, another Chrysler bankruptcy crisis would soon
detonate.

The three specific factors that led to Chapter 11 bankruptcy are the global financial crisis,
poor strategy and lack of innovation in 2008. The recession triggered by the financial
turmoil led to a decline in consumer purchasing power, and automobiles were gradually
replaced by other mass transit vehicles. While consumers' purchasing preference has shifted
toward low-cost, energy-efficient vehicles, Chrysler is still developing high-priced,
fuel-efficient, big-engine products, which is ostensibly the main reason for its second
bankruptcy crisis. However, another hidden reason was the excessive financialization of the
U.S. auto industry. When the credit crunch caused by the financial turmoil, many consumers
were discouraged from buying cars because they could not easily get loans to buy cars, which
then burst the illusion that low-interest car loans had created a glorious scene in the U.S. auto
market, however, Chrysler is in heavy debt, and the bubble is so delicate that can easily create
real problem for the company.

High cost, in the competitive auto market, the salary system and overly dense sales outlets of
U.S. auto companies made the cost of products much higher, making it difficult for the price
of products to form strong competition in the market on the one hand, and making the
proportion of Chrysler's capital spent on R&D less than that of Japanese competitors such as
Toyota on the other. Not to mention the deteriorating market environment, rising oil
prices, declining sales, financial crisis, shrinking market etc., as described above. Fierce
competition was another factor that led to the Chapter 11 bankruptcy, a mismatch between
market demand and Chrysler's response to the market. On the one hand, in pursuit of high
short-term profits, and the initiative to abandon the small cars that can earn profits in the long
term. On the other hand, in terms of environmentally friendly cars, the market was gradually
occupied by economical and fuel-efficient Japanese and Korean cars, and Chrysler's market
share continued to decline.

3) Offer an evaluation of what went wrong with the merger between Daimler and Chrysler.

In 1998, a “merger of equals”, happened between Chrysler Corporation and Daimler-Benz

AG meaning the fusion of two different companies from two different countries: one from the
US and the other, from Germany. As a result, DaimlerChrysler AG was created.
At the beginning, the different management styles from two totally different cultural
backgrounds were taken into consideration. Under this conception, the Chrysler Group, led
by an American manager, kept manufacturing mass-market passenger cars while Daimler, led
by a German manager, focused on manufacturing Mercedes, their luxury marquee. However,
the decline of the share value of Chrysler resulted in the firing of two US managers, who
knew the company, their employees, and their way of working, in a lapse of 19 months. After
this situation, a German manager was appointed to the US company and no representative of
Chrysler was on the management board.

This situation can be considered as one of the key points of the failure of DaimlerChrysler
AG. The Chrysler Group needed someone with the full knowledge about the company, its
sector, philosophy, values and what the targeted market is like. By appointing a German
manager to be the head of a US company, the different management styles were on display
causing greater problems such as cultural differences, disparities in elements such as pay
package lead to the failure of the merger, the loss of the market share ending in a new sale of
the US company.

In conclusion, what went wrong was not considering the cultural elements from different
managerial styles when Chrysler was already facing problems. The demotivation from the
employees of the US company is a great example of what went wrong in Chrysler at the
internal level as a result of how the head of the company was promoting a foreign cultural
style.

4) Offer an evaluation of the alliance between Chrysler and Fiat and examine its potential
synergies and sustainability.

We think the alliance between Chrysler and Fiat is an overall favorable strategy for Chrysler,
especially that they are in a life-and-death moment with a severe financial crisis going on.
Undoubtedly, there will be synergies to help Chrysler grow stronger. However, there are
many concerns about their alliance. We evaluate the advantages and disadvantages of this
alliance through the synergies and concerns as follows.

The synergies can be concluded in four main areas that are creating value to Chrysler:
 ● Product portfolio: the access to Fiat’s entire product portfolio will expand the
product availability in the market and sales revenue.
● Technological innovation: such as powertrain, 40 mpg and “fuel efficient engine
family” will expand the manufacturing capability of Chrysler and bring innovation to
increase their competitiveness.
● Cross-selling integration: the access to Fiat’s worldwide distribution capabilities and
the access to each other’s market will maximize the sales integration within these two
companies.
● Economies of scale: synergized purchasing and engineering can reduce cost of
supply chain and operation etc.

The concerns of this alliance can be concluded in four areas that could decide if these two
companies will grow together or drag each other down.
● First, lack of appealing and innovative models. Selling Fiat’s popular models could be
a problem as the environmental regulation will stand in the way.
● Second, small cars are not easy for Americans to accept. Even if they do, it is still
hard to outstand other competitors who are already selling small cars.
● Third, this alliance is interrelated to many entities, making it hard to coordinate and
make decisions.
● Lastly, they have a different company culture which can generate severe managerial
problems and executive efficiency.

In regard to sustainability, it will be enhanced by a more global strategic alliance and

partnership. As previously Chrysler failed because of poor business strategy, lack of
innovation, and financial crisis, now with the alliance helping to address or reduce these
shortcomings, the company will be able to grow sustainably. Plus that the micro environment
is assumed to be better for their sales as the industry is being stabilized and the economy is
recovering.

5) What are the key future challenges for Chrysler, and what do you feel the future holds for
the company given its new ownership, debt restructuring and choice of partner?

​At first glance, the prospect of a merger between Chrysler and Fiat seems promising, but
from a historical perspective, both companies have failed to merge in the past, making this
merger a hidden crisis and challenge. Even after the alliance with Fiat, Chrysler still faces the
problem of a lack of attractive and innovative car models, Chrysler's model portfolio will
remain filled with inefficient, underperforming models, and its U.S. market share will
continue to decline until the right models are produced. The new company will face the
challenge of making small cars profitable in North America, regardless of sales volume,
small cars usually have lower net profits. However, it's not just Chrysler that wants to launch
a new popular small car to capture market share, there are many other car companies and the
small car market is highly competitive, especially where other automakers also have a key
first-mover advantage. The complex ownership relationship will cause different voices and
arguments when it comes to making business decisions. Since Chrysler is jointly owned by
different entities, stakeholders need to work together to make the most informed decisions.
Despite Obama's promise that the U.S. government will guarantee Chrysler's products after
the sale, consumers will still choose to buy models from companies that have the ability to
settle their debts compared to the government's unspecified guarantee. Chrysler is still being
threatened by other car companies such as Ford. After the merger, Chrysler and Fiat not only
faced the risk of not being able to integrate the culture of the multinational organization,
i.e., the constant friction between the corporate culture of the U.S. and Italian companies, but
also the risk that Fiat, which is relatively small in size, would like to take 35% of the shares
and obtain the management control of the company, and it is not easy to manage the company
because of the rapid expansion of the organization. The ability to manage such a large
organization is also a major management challenge.