Fiat/Chrysler

Case

Brief

Giorgio

Tomassetti

2/22/2011

Pledged

Despite their different background, the partnership between Fiat and Chrysler has the potential of beingsuccessful if the right mix of products is delivered in the different marketplaces and the resources aremanaged efficiently.Following the financial crisis on April 30, 2009, Chrysler filed for Chapter 11 bankruptcy and on June 1of the same year a U.S. bankruptcy court approved a plan according to which the Italian Fiat would own20% of the company. Under the terms of agreement Fiat, without having to invest any cash, would havethe opportunity to increase its ownership to 35% or even to become Chrysler’s majority owner (Smith,2009).Together with Ford and GM, Chrysler Group LLC is the smallest of the three big American players in thisindustry and it is number six in the U.S. market (Bennett & Boudette

2011).

Being a capital intensiveindustry with few competitors, the two companies should not worry about the threat of new entrants.Instead, they should focus on being able to outperform their competitors by creating sustainablecompetitive advantages. One of Fiat’s main competitive advantages is its “know-how”. In particular, theirR&D center (CRF) has developed some of the most innovative fuel-efficient engine technologies in theworld. Chrysler will now have access to these technologies and they should use them to successfullycompete in the U.S. market. Raising gasoline prices (from 2005 to 2010 the retail price of gasoline hasgrown 5.3% annually) and an increase in environmental consciousness are just a few of the environmentaltrends that are shifting consumers’ preferences towards smaller and fuel-efficient cars (IBISWorld, 2010).Moreover, Fiat can expand its sales by utilizing Chrysler’s market position. It is important to notice that agrowing number of dealerships does not necessarily translate in higher sales. Indeed, the dealerships willhave to deal with a different consumer base. Fiat and Chrysler should therefore concentrate their efforts intraining and marketing to ensure that the products are correctly positioned.In the past Chrysler has focused its production on pickups, minivans, and SUVs, but their market sharehas fallen from 11% to 5.1% from 2005 to 2010, while the Italian car manufacturer Fiat has been focusingmore on small and fuel efficient cars. According to the most current IBISWorld Industry Report (2010),the recession for the automotive sector will be over in 2011, and the increase in demand “will helpindustry revenue grow at an estimated rate of 5.5% annually to reach $99.0 billion through 2015” (p.4).The two companies should take advantage of the prospected growth in the market by taking strategicactions based on the growing trends in the industry. It is therefore very important to continuously researchthe market to spot these areas of potential growth.Regarding the management, both companies are now under the guidance of Sergio Marchionne, whoserves as CEO. Since his appointment in Fiat in 2004, Marchionne was able to return the company toprofit after 17 straight quarters of losses. The two companies should utilize this experience and make therequired changes in Chrysler that have previously been successful in Fiat. For instance, Marchionnesuccessfully implemented a more entrepreneurial organization in which each brand is a distinct businessunit responsible for profit and loss (Gumbel, 2009). Given the diversity of brands that the two companiescontrol, the executive management should develop an overall mission and strategy, but should also leaveenough freedom to each brand to grow on his own. The successful implementation of this strategy alsorequires a careful selection of human capital. Also, according to Fiat latest risk report, price competitionhas increased in the last couple of years in the auto industry. The two companies should make theiroperations as efficient as possible in order to reduce costs, but to meet this goal they should never reducesignificantly the quality of their products because it could be very damaging in terms of reputation andtechnical reliability.Finally, Fiat and Chrysler should seek to completely merge because this would give them more marketpower, making the company a truly global player and it would also reduce their operational costs. Indeed,they would be able to reach more favorable agreements with their suppliers and this is fundamental in thisindustry.