Crisis Management in the Chrysler & Fiat Merger - Case Study Example

Running Head: CHRYSLER & FIAT Crisis Management in the Chrysler & Fiat Merger {name} {course/instructor} Situation Analysis The Chrysler company, founded by Walter P. Chrysler in 1925, has had its share of success and hardship. At one time the second-largest automaker in the U.S. (WOOD-TV, 2009), Chrysler saw its fortunes decline to the extent that it was forced to seek a government bailout – at the time, an unprecedented move – in 1979. In 1998 Chrysler was absorbed by Germany’s Daimler, a brief and troubled relationship that only lasted until 2007, when most of Daimler’s share was offloaded to Cerberus Capital Management. By early 2008 the company was again in dire straits, and was obliged once again to obtain government emergency funding in early January 2009 to have enough cash to keep operating. (Reuters, 2009) A government-sponsored proposal to eliminate most of Chrysler’s $6.9 billion debt was rejected by some creditors, and as a consequence the company was forced into bankruptcy on April 30, 2009. (King & McCracken, 2009) Chrysler emerged from bankruptcy on June 10, having shed 789 of its nearly 3,200 U.S. dealerships, and with Italy’s Fiat SpA holding an initial 20% stake in the company. (Ritchey, 2009) Fiat will eventually own up to 35% of Chrysler, with the United Autoworkers’ Union owning a 55% stake, the U.S. government owning 8%, and the Canadian government 2%. (King & McCracken, 2009) Media Coverage of the Chrysler Crisis The media coverage of the Chrysler crisis had three phases, which approximately corresponded to the phases of the crisis life cycle. (Howell & Miller, 2006) In the first phase of the media cycle, the problems of Chrysler’s insolvency were revealed. In the second phase of the media cycle, which corresponded to the Probing and Containment phases of the crisis life cycle, the causes of the insolvency – over-capacity, unstable management, severe reduction in demand, and a lack of competitive products (Langfitt, 2009) – were explained. In the third phase of the media cycle, the bankruptcy process and the form of the reorganized company became the focus of the media. Several key points were raised throughout the coverage of Chrysler’s crisis. In the first two phases, the focus was on the ‘hopelessness’ of Chrysler’s situations and the unlikelihood of its being able to survive as an independent company. These points were raised repeatedly in news articles, with many quotes from industry and financial observers that offered the same opinions. (Langfitt, 2009, King & McCracken, 2009) The angle of the crisis’ impact on the larger economy also figured quite prominently in the media content, in two ways. Early in the news cycle, the threat posed to the lending industry and related businesses such as parts suppliers was the focus (Langfitt, 2009, King & McCracken, 2009), while later reports highlighted the implications of Chrysler’s plan to drop hundreds of dealers. (Kellogg, 2009) With the completion of the bankruptcy deal, the media focus has shifted somewhat as the crisis enters its Resolution phase. The most recent media reports now address the possible future outcomes and potential problems that Chrysler may face, such as the lengthy timeframe of getting new models made possible by Fiat technology into the U.S. market. (King & McCracken, 2009) Even though Chrysler’s saga occurred concurrently with that of General Motors, the media surprisingly offered few comparisons between the circumstances of the two companies. Where GM was mentioned in stories about Chrysler, it was within the context of the larger problems of the economy, and a simple acknowledgment that the two companies happened to be having problems at the same time. Analysis of Chrysler’s Management of the Crisis Of the five stages in the crisis life cycle (Signal Detection, Probing, Containment, Resolution, and Learning) the current situation at Chrysler can be said to be in the fourth, or Resolution stage. (James & Wooten, 2004, Howell & Miller, 2006) The divesture of Chrysler by Daimler in 2007 was the beginning of the crisis, and the point at which Chrysler joined the other American automakers in approaching the government for financial assistance probably represented the Probing phase. The negotiations leading to Chrysler’s filing for bankruptcy on April 30 represented the Containment phase of the crisis, with the plan for reorganization as part of the Fiat group emerging as the Resolution. The results of the Resolution, and how the company structure is changed to prevent the causes from recurring, would represent the Learning phase of the cycle. As reflected by the statement of Mr. James Press, Vice-Chairman and President of Chrysler LLC, to the U.S. Senate (United States Senate Committee on Commerce, Science and Transportation, June 3, 2009) Chrysler’s management of the crisis has in general been sound. The nature of the crisis and the causes for it were clearly identified. The company acknowledged responsibility for the actions it had taken that led to the crisis, and explained how the plan for recovery addressed the causes. The threat that is posed to the company now comes from legal questions about the bankruptcy settlement. One of the basic rules – commonly referred to as Section 1129 – of bankruptcy under American law states that all creditors must either be paid in full or consent to a settlement before a bankruptcy can be completed. In addition, it is standard practice for the bankruptcy court to conduct its own valuation of the company. Neither of these issues was addressed in the Chrysler bankruptcy, which means there is a strong possibility of the plan being rejected by an appellate court. (Roe & Skeel, 2009) If that were to happen, Chrysler would be back to square one, so to speak, and again facing the alternative solution to their financial crisis, which is simple liquidation. How Chrysler’s Strategy is a Good Example of Crisis Management Chrysler’s handling of its financial crisis and subsequent bankruptcy is an example of good crisis leadership. James and Wooten (2004) identify six competencies that define crisis leadership, as opposed to crisis management: Building Trust, Changing Corporate Mindset, Identifying Vulnerabilities, Wise and Rapid Decision-Making, Courageous Action, and Learning that Promotes Change. The difference between crisis management and crisis leadership is the difference between simply reacting to a crisis and taking proactive steps to solve it. (James & Wooten, 2004) In Chrysler’s case, immediately going into bankruptcy and liquidating the company would have been crisis management; entering the relationship with Fiat and undergoing a swift and comprehensive reorganization is an example of crisis leadership. So far in Chrysler’s saga, the company has exemplified each of the competencies in some way, except for the last one, Learning that Promotes Change, which can only be revealed after the results of their actions become known. Chrysler built trust by detailing the steps it would take to maintain its obligations to customer service, such as through warranties. (United States Senate Committee on Commerce, Science and Transportation, June 3, 2009) It changed the corporate mindset, first by joining with the Fiat Group, and then by granting majority ownership to the UAW, in effect giving employees control of the new company. It clearly identified its vulnerabilities and shortcomings, and chose practical and expedient steps to address those. Finally, the company took courageous action in dropping almost a fourth of its dealer network – an unpopular decision to say the least – focusing on the greater, long-term advantages to the whole company. If there is one criticism that can be made of Chrysler’s handling of the crisis, it may be in how they managed public perceptions of the company and the situation. It was unfortunate timing that Chrysler was obliged to face its crisis at the same time as the larger economy was in a meltdown, and more specifically, at the same time GM and Ford were also having very public financial difficulties. Chrysler could not help the timing, but its early handling of the crisis, in particular the initial appearance of former Chairman Nardelli before Congress with the heads of GM and Ford, prevented Chrysler from gaining a competitive advantage over its rivals or at the very least presenting its story as “Chrysler” alone, and not just “one of the failing automakers.” Conclusion Chrysler’s story may turn out to be one of the great success stories of the greater financial crisis. On the brink of extinction, the company turned to the government, its workers’ union, and Fiat for help in developing a rapid and comprehensive solution. The story is not over, however; how Chrysler fares in the near future as a result of its emergence from the crisis will be the real test of the effectiveness of the company’s actions. Other areas for further study could include the impact of Chrysler’s reorganization on the wider economy, and within its supply chain. Will Chrysler’s suppliers benefit or suffer as a result of the merger with Fiat? How does the merger benefit or harm Chrysler’s market for its vehicles? In addition, the unconventional legal means applied to Chrysler’s bankruptcy that permitted it to emerge from the process in only 42 days (Roe & Skeel, 2009), invites analysis not only of the Chrysler case, but US bankruptcy law in general. References Howell, G., and Miller, R. (2006). How the relationship between the crisis life cycle and mass media content can better inform crisis communication. PRism, 4(1). Available at: http://praxis.massey.ac.nz/prism_on-line_journ.html. James, E. H., and Wooten, L. P. (2004). Leadership in Turbulent Times: Competencies for Thriving Amidst Crisis. Darden Business School Working Paper No. 04-04. Available at SSRN: http://ssrn.com/abstract=555966. Kellogg, A. P. (2009, May 14). Minority Dealers Hit Hard by Auto Crisis. The Wall Street Journal. http://online.wsj.com/article/SB124225921180917429.html. King, Neil Jr., and McCracken, J. (2009, 1 May). Chrysler Pushed Into Fiat’s Arms. The Wall Street Journal. http://online.wsj.com/article/SB124109550079373043.html. Reuters. (2009, June 10). Timeline: Chrysler bankruptcy and beyond. Reuters India. http://in.reuters.com/article/businessNews/idINIndia-40228720090610?pageNumber=3&virtualBrandChannel=0&sp=true. Ritchey, J. (2009, June 11). Chrysler, Fiat Complete Merger Deal. Voice of America News. http://www.voanews.com/english/archive/2009-06/2009-06-11-voa55.cfm?CFID=259348784&CFTOKEN=41158833&jsessionid=de3016caa2294a04006c2627d412e36be595. Roe, M. J., and Skeel, D. A. (2009) Assessing the Chrysler Bankruptcy. U of Penn Law School, Public Law Research Paper No. 09-17; U of Penn, Inst for Law & Econ Research Paper No. 09-22. Available at SSRN: http://ssrn.com/abstract=1426530. United States Senate Committee on Commerce, Science and Transportation. (2009). Testimony of James Press, Vice-Chairman and President, Chrysler LLC. (Transcript, 2009, June 3) http://commerce.senate.gov/public/index.cfm?FuseAction=Hearings.Testimony&Hearing_ID=9716ac30-a07b-4a69-aec2-189ecaf1beee&Witness_ID=c7694122-2830-4c01-90bc-1ecf35c02ec4. WOOD-TV. (2009).The Chrysler Timeline. Grand Rapids, MI: WOOD Television. http://www.woodtv.com/dpp/your_money/auto_news/The_Chrysler_Timeline. Read More