unknown-24.pdf

BAB041
Revised May 18, 2004

William F. Glavin Center for
Global Entrepreneurial Leadership

Dianne C. St. Jean prepared this case under the supervision of Professor Allan R. Cohen, Edward A. Madden
Distinguished Professor in Global Leadership, Babson College, as a basis for class discussion rather than to illustrate
either effective or ineffective handling of an administrative situation. Note: unless otherwise indicated, Tom
Stallkamp’s quotes are excerpted from interviews with Babson case writers.

Copyright © by Babson College 2000 and licensed for publication to Harvard School Publishing. To order copies or
request permission to reproduce materials, call (800) 545-7685 or write Harvard School Publishing, Boston, MA
02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any
form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of copyright
holders.

DaimlerChrysler Merger:
The Quest to Create “One Company”

Tom Stallkamp, Chrysler president and executive in charge of accelerating integration of
the recently merged Daimler and Chrysler companies, was feeling great frustration. Why
couldn’t he move the integration process along more rapidly? He could see clearly the amazing
potential for payoffs, but it just wasn’t happening. He wasn’t used to being unable to move the
organization, and he hated the feeling of being able to visualize great things without being able to
mobilize people to action. What else could he do? Maybe it was time to let the two cultures
duke it out, and allow the stronger one to win. That would be one kind of integration, though not
quite what he had been working for.

Background
At 4:00pm on November 12, 1998 as the final bell rang on the New York Stock

Exchange, U.S. automaker Chrysler Corporation and German automaker Daimler-Benz ceased to
exist. They emerged the next day as a new global conglomerate named DaimlerChrysler AG.
With combined revenues of $130 billion and a market capitalization of $92 billion,
DaimlerChrysler became the fifth largest automaker in the world in number of vehicles sold and
third largest in sales. The $40 billion stock deal was the largest ever in the industrial world. Upon
completion of the transaction Daimler stockholders owned 57 percent of the new
DaimlerChrysler and Chrysler stockholders the remaining 43 percent. After ten months of
discussions and negotiations between the two companies, the merger was billed as a marriage of
equals. It signaled new levels of consolidation within the automotive industry and was heralded
as the beginning of a new era where only truly global players would survive. At the May 7, 1998
London press conference officially announcing the merger, Daimler-Benz Chairman Jürgen
Schrempp declared,

“This is much more than a merger. Today we are creating the world’s leading
automotive company for the 21st Century – DaimlerChrysler AG. We are

For the exclusive use of H. Jiang, 2021.

This document is authorized for use only by Hong Jiang in ELC BUS 470A&B SP 2021 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2021 to Jul 2021.

DaimlerChrysler Merger BAB041

2

combining to merge the two most innovative car companies in the world. We are
committed to making DaimlerChrysler the most innovative competitor this
industry has ever seen, one that will set the pace in the automotive world in the
next Millennium. We are doing this merger because we share a common passion
for making great cars and trucks…..by combining and utilizing each other’s
strengths, we will have the pre-eminent strategic position in the global
marketplace, for the benefit of our customers. We will be able to exploit new
markets, and thereby improve return and value to our shareholders.”

Chrysler CEO Bob Eaton added,

“We are leading a new trend that we believe will change the future and the face
of this industry. As a result of being among the first, we had the ability to choose
our favorite partners.”

Schrempp was convinced the two auto companies could form a powerful partnership. He
recalled the first meeting with Eaton,

“I just presented the case and I was out again. The meeting lasted about 17
minutes. I don’t want to create the impression that he was surprised. When the
meeting was over, I said, “If you think I’m naïve, this is nonsense I’m talking just
tell me.” He smiled and said, “Just give me a chance. We have done some
evaluation as well and I will phone you in the next two weeks.” I think he phoned
me in a week or so.”1

This was not the first discussion Daimler-Benz had with a U.S. auto manufacturer nor
was it the first time Chrysler had thought of combining with another major automobile company.
In 1997 Chrysler and Daimler-Benz had studied the possibility of a joint venture to merge
international operations but the deal never came to fruition. Chrysler had studied various
combinations and recognized the need for global presence. The company was financially healthy
but industry overcapacity and huge prospective investment outlays created a risky environment
for global expansion on their own. Only a small number of automakers, like Toyota, Volkswagen,
Ford and GM had the capability to go global without major acquisitions. Eaton had gone so far as
to poll investment bankers on their ideas and spoke with executives from BMW on this topic. In
1998 Ford pitched a merger plan of its own to Daimler-Benz, unaware of the already ongoing
talks between the German automaker and Chrysler. Ford Chairman Alex Trotman acknowledged
the talks but then suggested the talks had not become very serious. But the Ford Chairman
reportedly briefed both his board of directors and the Ford family, which controlled 40 percent of
the automaker’s voting stock. It was the family’s unwillingness to give up control that apparently
ended the discussions, a key reason why merger talks between Ford and Fiat a few years prior
also collapsed.

Schrempp and Eaton believed the potential benefits from joint product design,
development of new technology to meet emissions and fuel economy requirements, efficient
manufacturing, combined purchasing, other economies of scale and brand expansion and

1Taylor III, A., “Gentlemen Start Your Engines”, Fortune, June 8, 1998, pp. 140

For the exclusive use of H. Jiang, 2021.

This document is authorized for use only by Hong Jiang in ELC BUS 470A&B SP 2021 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2021 to Jul 2021.

DaimlerChrysler Merger BAB041

3

diversification would position the combined entity as a powerful global player. In discussing the
possibility of a business combination between Daimler-Benz and Chrysler, they considered it
essential that their respective companies play a leading role in the process of expected industry
consolidation and in choosing a partner with optimal strategic fit. In this respect, both the timing
of the proposed business combination and the selection of the parties were considered highly
appropriate in order to secure and strengthen their respective market positions. Furthermore, since
the companies had virtually no product overlap there was little threat to immediate rationalization
of product offerings.

Before DaimlerChrysler could hope to unseat GM or Ford, however, it had to create a
single company, keeping the best of both former companies in the areas of innovation, cost
savings, supplier relationships, quality and brands. The integration of the two companies was no
small challenge. It required a blending of corporate and national cultures and operations. Former
Chrysler President Robert Lutz commented,

“I do think that managing the cultural issues will indeed be the toughest part of
making this marriage work. And the challenge, as always, will be getting the
cultures to really meld below the level of senior-most management.”2

The task of integrating the two car companies fell to Chrysler President Tom Stallkamp.
Stallkamp had become Chrysler president effective January 1, 1998 just days before Schrempp
visited Eaton to plant the seeds for the historic merger. Despite the powerful company the merger
created on paper, Stallkamp knew the track record for such large mergers, particularly cross
border ones, was not good. A global report by KPMG at the time indicated 83 percent of mergers
were unsuccessful in producing any business benefit with regard to shareholder value. Daimler-
Benz had conducted its own study of previous mergers and found that 70 percent had failed.3 The
world auto industry had already experienced culture clashes that ended various mergers and joint
ventures. Autolatina, the Ford Motor Co.-Volkswagen AG venture in Brazil and Argentina
collapsed in 1995, the victim of continued arguments over product plans between executives of
the two automakers. A proposed merger of Renault S.A. and Volvo AB also fell apart in 1995
due to extreme resistance and cultural friction within each company. Merging two large
successful companies, incorporated in different countries, with geographically dispersed
operations, and with different business cultures and compensation structures created challenges
that were quite different from absorbing a smaller acquired company into an existing structure.

The attention the merger garnered from the media, industry experts and Wall Street
created an environment of speculation. Everyone had an opinion about the merger and its
chances for success. Autoline Detroit, a weekly industry news show hosted a special one-hour
panel discussion on the merger. Csaba Csere, editor of Car and Driver magazine observed,” If
they really want to integrate they need to figure out how their two different systems can [blend].
Each side has a very proud history and each side thinks they know something/have unique
knowledge about how to do things.” Paul Ballew, chief economist at J.D. Power asserted, “The

2 Lutz, R. (1998),GUTS: The Seven s of that Made Chrysler the World’s Hottest Car Company, pp 98
3 “Jürgen Schrempp discusses the transition,” Detroit Free Press, January 8, 1999

For the exclusive use of H. Jiang, 2021.

This document is authorized for use only by Hong Jiang in ELC BUS 470A&B SP 2021 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2021 to Jul 2021.

DaimlerChrysler Merger BAB041

4

greatest challenge of any major merger is the culture. It probably will or should be the number
one topic on their agenda for the next 3-5 years.”4

Stallkamp thought that,

“The way you can make the merger work is to get people excited about finding
something new, rather than going back to defending their own turf. It’s human
nature to fall back on what’s familiar. We have to take away the fear of the
unknown by making it fun and exciting.”5

Both companies had a history of strong turnarounds and recent market success (see
Exhibit 1 for company histories), but all eyes were on DaimlerChrysler, as the price of failure for
the largest industrial merger in history would be immense.

Potential Benefits of the Merger
For Chrysler and Daimler-Benz there were high hopes about a number of gains to be

achieved through their merger. Daimler-Benz was stronger in Europe; Chrysler, in North
America. Daimler-Benz had a global distribution network. Daimler-Benz’s reputation for
engineering complemented Chrysler’s reputation for creative styling and product development.
Chrysler’s experience in dealing with US investors would help Daimler-Benz become a
pacesetter in bringing modern concepts of corporate governance and shareholder value to the
German economy. Chrysler’s freewheeling methods of vehicle development would kick-start the
more bureaucratic Mercedes-Benz. The combination with Chrysler helped reduce the risk
associated with Daimler-Benz’s dependence on the premium segment of the automobile market
by introducing brand diversity. Daimler-Benz’s financial clout and technical prowess would
bolster Chrysler in the auto wars. Moreover, the combined company had greater financial strength
with which to enter new markets. Exhibit 2 summarizes the potential advantages of the merger to
both.

Of particular importance was the need to improve Daimler’s development time and
reduce development costs and the need to improve Chrysler’s quality and engineering. Daimler-
Benz typically spent 5 percent on R&D, compared to Chrysler’s 3 percent. As an engineering
company Daimler-Benz had high development costs. Mercedes-Benz’s cost structure was
considered too high to make a reasonable return on cars below $20,000. Mercedes R&D cost was
over $2000 per vehicle compared to Chrysler’s $590 and it could take as long as 60 days to build
a vehicle in Germany (see Exhibit 3 for key performance comparison for the 1997 calendar year).
In addition the two companies had promised to deliver synergies totaling $1.4 billion in 1999 and
more than $3 billion by 2001. Commenting on the areas for integration and savings Stallkamp
explained,

“Some things will be integrated right away, like global purchasing. Sales and
marketing will be among the first, though the brands will remain separate. You
won’t sell Chrysler products at Mercedes dealerships or Mercedes products

4 Autoline Detroit Special, May 24, 1998
5 Eisenstein, P.A., “Making one and one add up to three”, Investor’s Daily, January 25, 1999, pp 3

For the exclusive use of H. Jiang, 2021.

This document is authorized for use only by Hong Jiang in ELC BUS 470A&B SP 2021 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2021 to Jul 2021.

DaimlerChrysler Merger BAB041

5

through Chrysler. The integration will occur behind the scenes. The next area is
engineering. This was the area I was most concerned about. But our technical
people have come in and said let’s find new ways of doing things. The last area
will be manufacturing, and that’s driven by product. We need more common
product. We’ll never share the same platforms (between Chrysler and Mercedes),
never the same vehicles, but maybe common components, like side-impact
protection devices. This could save enormous amounts of money.”6

Exhibit 4 indicates the areas where synergies were expected. Achieving these synergies
required a focused effort to quickly integrate the necessary functions. Stallkamp knew they had to
deliver on the promised synergies but the big savings would come from the combination of back
office functions and the streamlining of systems and processes. He envisioned separate marketing
and sales to ensure brand integrity. On the operational side he saw numerous opportunities for
significant savings. A more strategically focused R&D process would help drive technology
transition, the sharing of design expertise from Chrysler would keep DaimlerChrysler at the
forefront of innovation, a single manufacturing organization with separate plants would provide
for the transfer of key manufacturing process technologies and systems. DaimlerChrysler could
leverage its unit volume to achieve additional savings and streamline its systems. Bringing this
vision to reality however was a formidable challenge. Chrysler and Daimler-Benz had very
different ways of operating. Getting both sides to see the benefit of operating in a new way was
critical to the success of integration.

The Two Companies before the Merger
Recent Change and Structure at Chrysler

Reengineering expert Michael Hammer called Chrysler, “overwhelmingly the most
innovative auto company in the world.”7 Chrysler garnered this praise following company-wide
restructuring. Beginning in 1991, Chrysler’s management had bulldozed its traditional functional
organizational structure. It created platform teams for the whole organization, assigning all
functional employees to one of five teams, large car, small car, minivan, truck or Jeep (see
Exhibit 5 for platform team structure). Corporate staff was all but eliminated. The executive vice
presidents were co-located on one floor and were forced to work through issues together.
Chrysler established a matrix management structure for these senior managers. Many of the
traditional vice presidents were replaced with people who not only had functional expertise but
who were able to work together. Each vice president under the new structure had two jobs,
creating mutual dependence among them. In order for Tom Stallkamp, then vice president of
Procurement and Supply and general manager of Minivan Operations, to obtain good designs for
his minivans from Tom Gale, head of design, he needed to provide supply chain support to Gale.
Likewise for Gale to receive quality parts from procurement and supply he needed to provide
good designs for the platforms. This teamwork ethic applied to the highest levels within Chrysler.
CEO Bob Eaton was considered to be one of the more modest chief executives in the world, a
mild mannered and even- tempered man who believed in the power of teams. Eaton and former
Chrysler President Bob Lutz, a dynamic and outspoken man, had formed a balanced partnership

6 Eisenstein, P.A., “Making one and one add up to three”, Investor’s Daily, January 25, 1999, pp 4
7 Puris M (1999), Comeback: How Seven Straight Shooting CEOs Turned Around Troubled Companies, Random
House Inc NY pp 99

For the exclusive use of H. Jiang, 2021.

This document is authorized for use only by Hong Jiang in ELC BUS 470A&B SP 2021 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2021 to Jul 2021.

DaimlerChrysler Merger BAB041

6

in running the company. When Tom Stallkamp replaced Lutz as Chrysler president, it was
believed his self-effacing manner and ability to generate consensus would enable Chrysler to
continue on its successful path.

With the introduction of the platform teams, management focused on determining the
“what” — the specific goals, objectives, constraints, and resources — but the team would
determine the “how.” Teams were empowered to find the best way to deliver the results,
providing periodic progress reports to senior management. Chrysler soon began to reap the
benefits of its platform team concept and new structure; Chrysler became one of the most
profitable automakers in the world. Chrysler’s brushes with bankruptcy in 1979 and 1990 along
with its radical restructuring had forged a culture dedicated to teamwork, speedy product
development, lean operations, cost leadership and flashy design.

Eaton commented, “We’re trying to build a culture that is focused on continuous
improvement, setting tougher objectives and never being satisfied with where we’re at.”8

Upon taking the position as Chrysler president, Stallkamp commented,

“At Chrysler we’re all different personalities. What we’re trying to do is run the
company as a team like we’ve been doing. The speed in improving quality,
improving the company and the way we operate the business. Timing is very
important to us. We’re very flexible. We’re lean. The speed energizes the
people within Chrysler.”9

Chrysler’s management wanted to ensure that speed and adaptability to change remained
part of the company’s culture. Former Chrysler President Bob Lutz commented, “One of our
greatest challenges is to prevent our people from thinking everything is OK because Chrysler is
no longer on the ropes.”10 With respect to the use of platform teams, Chrysler’s Vice President
for Marketing “Bud” Liebler stated, “At this point there is no way we’d be able to even think of
managing without them. Nor would we want to.”11 Eaton summed up his thoughts,

“Perhaps the most important attribute of any company today is to anticipate
change, and to move quickly to capitalize on it. It’s all about speed and
flexibility. It’s about converting ideas into profits, and doing it faster than our
competitors. It’s about speed to market. Above all, we believe it’s about passion –
the passion for designing, developing and building the world’s greatest cars and
trucks…Everyone is truly passionate about what we’re trying to do.”12

8 Sorge, M. and McElroy, J., “Chrysler: Willing to Abandon Big Trucks, SUVs”, Automotive Industries, November
1997, pp 56
9 Autoline Detroit, Interview with Tom Stallkamp, January 18, 1998.
10 Autoline Detroit, Interview with Robert Lutz, February 8, 1998
11 Purvis, M. (1999), Comeback: How Seven Straight Shooting CEOs Turned Around Troubled Companies, Random
House Inc. NY, pp 96
12 May 7, 1998 Press conference, London, England

For the exclusive use of H. Jiang, 2021.

This document is authorized for use only by Hong Jiang in ELC BUS 470A&B SP 2021 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2021 to Jul 2021.

DaimlerChrysler Merger BAB041

7

Recent Change and Structure at Daimler-Benz
When Schrempp took over as chairman in May 1995, Daimler was in serious financial

trouble. Many of its 35 business units were making little or no profit. Its traditional slow
bureaucratic structure and amalgamation of disparate businesses created an unwieldy organization
focused on its past successes. Significant levels of streamlining and restructuring were needed.
Schrempp created a new Board of Management with many new members who would undertake
the fundamental changes to the inherited structure. The Board was determined to see the process
through and to keep the momentum going. They attached great importance at the outset to
organizing the change process so that there was a clear division of responsibilities with
predefined tasks and priorities and, to keep friction to a minimum, as few interfaces as possible.

The Board quickly carried out a streamlining of Daimler’s business portfolio trimming it
to 23 strategic business units (see Exhibit 6 for Daimler-Benz structure). The goal was to achieve
a strong market position in first or second place in the world market in each business. As part of
the restructuring of the auto business, Mercedes-Benz was merged with the Daimler-Benz group.
Helmut Werner, the head of Mercedes-Benz and the man credited with its success, was a vocal
opponent of the move. He resigned soon after the decision was made.

Profitability became a key measure for the company– once restructured, business units
were required to earn a 12% return on capital employed in order to remain part of the company’s
portfolio. In 1995, to improve financial transparency, Daimler-Benz began reporting results
externally based on US GAAP. In addition Schrempp and his new Board began preaching the
necessity for a strategy focused on “shareholder value.” This approach had not yet been expressly
formulated or followed in Germany. The issues surrounding quarterly reporting and focusing on
stock price triggered lively debate. One trade union representative expressed the opinion that
“the obsession with increasing shareholder value rides roughshod over the interests of employees,
the environment and society.”

The Board also undertook an aggressive cost cutting program, which included layoffs of
thousands of workers, something unprecedented in Germany. A restructuring of the headquarters
group was initiated to reduce the bureaucracy and improve planning and decision-making.
Although significant reductions were made Daimler-Benz still maintained a strong centralized
corporate staff. At a January 1997 announcement of the new group structure Schrempp
announced, “The new structure will make us fit for the next century. But we still need a culture
shock.”13 The new structure gave business unit managers more autonomy in running their
businesses and increased accountability for profits. Each business unit maintained its own staff.
By 1997 the restructure had borne its first fruit. For financial year 1997 Daimler-Benz reported
an operating profit of DM 4.3 billion, a 79 percent increase over 1996.

“Our strategy of orienting the group around units that are profitable and offer
good prospects for future growth has now borne its first fruit. We must also
point out however, that Daimler Benz has still only completed the first stage in
its effort to reach world best practice.”14

13 Topfer, Dr. A (1999) Daimler-Benz, Strategic Realignment – Pacemakers to Success (Case 2), pp. 1
14 Topfer, Dr. A (1999) Daimler-Benz, Strategic Realignment – Pacemakers to Success (Case 2), pp 9

For the exclusive use of H. Jiang, 2021.

This document is authorized for use only by Hong Jiang in ELC BUS 470A&B SP 2021 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2021 to Jul 2021.

DaimlerChrysler Merger BAB041

8

The significant changes at Daimler-Benz left many managers dazed by its rapid pace.
Many of the people working for the century-old company were unable to keep pace or keep track
of the changes going on around them. Schrempp, a driven and charismatic individual, earned a
reputation as a “Rambo,” partly due to the speed with which he demanded change and partly
because of his direct and sometimes severe nature. Schrempp responded, “If Rambo is someone
who acts quickly and decisively, the image is an appropriate one.”15

By the end of 1997 the new structure was fully in place. Schrempp reported,

“We had once again lashed the new organization down at a time when many in
the company thought that we were still in the change state. This meant that we
had already moved on to refreezing at a time when many thought that we were
still in the unfreezing and moving stage.”16

Daimler-Benz had forged a culture focused on (brand) image, quality, engineering,
profitability, and business unit autonomy.

Reflecting on the significant changes made at Daimler-Benz, Dieter Zetsche, head of
sales and marketing, concluded, “In many people’s minds Daimler-Benz is this traditional,
conservative company of managers wearing dark suits and moving ahead very slowly. I have to
say that there are very few companies in the automotive industry that have made as many rapid,
daring and basic changes as Daimler-Benz.”17

Initial Structure of Management and Integration Process
As a public limited company DaimlerChrysler like Daimler-Benz was required under

German law to have a Board of Management and a Supervisory Board. Based on the German Co-
Determination the Supervisory Board was comprised of ten shareholders’ representatives
and ten employees’ representatives. Five members from the Supervisory Board of Daimler-Benz
and five members of the Chrysler Board of Directors comprised the new Supervisory Board. In
order to assist the integration of the two companies, Hilmar Kopper, then chairman of the
Supervisory Board of Daimler-Benz, was named chairman of the Supervisory Board of
DaimlerChrysler for at least two years.

The Board of Management consisted of 18 members, eight from Daimler-Benz, eight
from Chrysler and two responsible for the Aerospace and Services divisions. Jürgen Schrempp
and Bob Eaton were to be co-chairmen and co-chief executive officers for a period of
approximately three years. Eaton announced at the outset of the merger that he would retire
within three years, causing considerable consternation at Chrysler, where he was seen as having
made himself a lame duck with considerable loss of power.18 DaimlerChrysler President Tom
Stallkamp was put in charge of the integration effort (see Exhibit 7 for profiles of Schrempp,
Eaton and Stallkamp). Chrysler also had employment continuation agreements in place with each
of its executive officers to cover a period of two years following the merger.

15 Topfer, Dr. A (1999), Daimler-Benz Strategic Realignment – Pacemakers to Success (Case 2), pp 10
16 Topfer, Dr. A (1999), Daimler-Benz Strategic Realignment – Pacemakers to Success (Case 3), pp 6
17 “Daimler-Chrysler Merger: Stuttgart reflects Daimler Benz image”, The Detroit News, September 27, 1998
18 Bill Vlasic and Bradley A. Stertz, Taken for a Ride, William Morrow, NY, 2000, pp. 247-8

For the exclusive use of H. Jiang, 2021.

This document is authorized for use only by Hong Jiang in ELC BUS 470A&B SP 2021 taught by Brandon Fleming, University of Washington – Tacoma from Mar 2021 to Jul 2021.

DaimlerChrysler Merger BAB041

9

The Board of Management formed a …