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Case Brief 1
Giorgio Tomassetti 2/22/2011
Despite their different background, the partnership between Fiat and Chrysler has the potential of being successful if the right mix of products is delivered in the different marketplaces and the resources are managed 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 own 20% of the company. Under the terms of agreement Fiat, without having to invest any cash, would have the 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 this industry and it is number six in the U.S. market (Bennett & Boudette, 2011). Being a capital intensive industry 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 sustainable competitive advantages. One of Fiat’s main competitive advantages is its “know-how”. In particular, their R&D center (CRF) has developed some of the most innovative fuel-efficient engine technologies in the world. Chrysler will now have access to these technologies and they should use them to successfully compete in the U.S. market. Raising gasoline prices (from 2005 to 2010 the retail price of gasoline has grown 5.3% annually) and an increase in environmental consciousness are just a few of the environmental trends 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 a growing number of dealerships does not necessarily translate in higher sales. Indeed, the dealerships will have to deal with a different consumer base. Fiat and Chrysler should therefore concentrate their efforts in training 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 share has fallen from 11% to 5.1% from 2005 to 2010, while the Italian car manufacturer Fiat has been focusing more 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 help industry 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 strategic actions based on the growing trends in the industry. It is therefore very important to continuously research the market to spot these areas of potential growth. Regarding the management, both companies are now under the guidance of Sergio Marchionne, who serves as CEO. Since his appointment in Fiat in 2004, Marchionne was able to return the company to profit after 17 straight quarters of losses. The two companies should utilize this experience and make the required changes in Chrysler that have previously been successful in Fiat. For instance, Marchionne successfully implemented a more entrepreneurial organization in which each brand is a distinct business unit responsible for profit and loss (Gumbel, 2009). Given the diversity of brands that the two companies control, the executive management should develop an overall mission and strategy, but should also leave enough freedom to each brand to grow on his own. The successful implementation of this strategy also requires a careful selection of human capital. Also, according to Fiat latest risk report, price competition has increased in the last couple of years in the auto industry. The two companies should make their operations as efficient as possible in order to reduce costs, but to meet this goal they should never reduce significantly the quality of their products because it could be very damaging in terms of reputation and technical reliability. Finally, Fiat and Chrysler should seek to completely merge because this would give them more market power, 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 this industry.
References Bennett, J. & Boudette, N. E. (2011, January 31). Boss sweats details of Chrysler revival. Wall Street Journal. Retrieved from http://online.wsj.com/article/SB100014240527487032932045761064 72087401608.html Fiat Spa. (n.d.). Main risks and uncertainties related to Fiat Group’s activities. Retrieved February 20, 2011, http://www.fiatspa.com/en-US/investor_relations/risks/FiatDocuments/Risk%20factors _Fiat%20SpA%20post%20scissione_30dic10_ENG.pdf Gumbel, P. (2009, June 18). Chrysler's Sergio Marchionne: The turnaround artista. Retrieved February 20, 2011, http://www.time.com/time/magazine/article/0,9171,1905416,00.html IBISWorld. (2010, December). Car & automobile manufacturing in the U.S. Retrieved from IBISWorldIndustry Market Research database. Smith, A. (2009, June 1). Chrysler set to emerge from bankruptcy. Retrieved February 20, 2011, from http://money.cnn.com/2009/06/01/news/companies/chrysler_bankruptcy/index.htm?postversion= 2009060108