Using Supplier Networks to Learn Faster - Essay Example

Daimler Chrysler is loosing grounds as a leading car manufacturer, as evidenced in decreasing sales, loss of market shares and costly quality control issues. The marriage between the two companies has not, as was the intent, rescued' the ailing U.S., Detroit-based, automobile manufacturer but has, instead, adversely impacted Daimler's own market reputation and position. A critical analysis of Daimler Chrysler's performance, using Porter's Five Forces, indicates that the company's deteriorating market performance is partially consequent to its failure to acknowledge the inherently global nature of the industry by globalizing its operations. The automobile manufacturing industry is globalised by its very nature. Several industry analysts and marketing scholars have affirmed the aforementioned, arguing that with very few exceptions, car manufacturers look towards the global market, identify segments therein and seek to create a niche for themselves within that expansive, borderless market (Dickson-Simpson, 2007; Schweinsberg et al., 2007; Van Acker and Uludag, 2007). It is a globalised industry due to the universal nature of its product, the fact that not all countries have a domestic automobile manufacturing industry, and that variant and divergent consumer cost, design and quality requirements cannot be satisfied by a limited number of manufactures (Dickson-Simpson, 2007; Schweinsberg et al., 2007; Van Acker and Uludag, 2007). In other words, the very nature of the industry, product, market trends and consumer demands have determined this as a global and globalised industry. Consequently, being a global industry, the survival of firms within is dependant upon the accurate identification of the industry's threats and opportunities and the extent to which a company's operations are, themselves, globalised. The imperatives of Daimler Chrysler's evolving into a truly global automobile manufacturer may be established through a detailed industry analysis using Porter's Five Forces. Proceeding first with the factor of rivalry, one finds that within the context of this industry rivalry is extremely high and is intensifying as a direct outcome to the formation of horizontal alliances between budget and high-end manufacturers for the explicit purpose of cutting down on costs. Not only is rivalry intense but it is intensifying due to the emergence, not only of new industry players but of alliances which may be identified as a bid by smaller firms to become market leaders. For example, Fiat is allying itself with Tata, an Indian automobile manufacturer, fir the explicit purpose of supplying developing markets with the much demanded cheap/economy automobiles. Similarly, GM is forming an alliance with Daewoo for the production of an economic Chevrolet model in South Korea. The implication here is that even in the absence of direct mergers and takeovers, manufactures are teaming up for the design and manufacture of models as would expand their existing market shares in particular automobile market segments. As one looks towards Daimler, one finds that it has not, in its marriage with Chrysler, embraced the imperatives of globalisation for the purpose of maximising its competitive edge. Chrysler is not a manufacturer of budget automobiles and its production costs are high. It is, furthermore, just as the case with Daimler, centred in an industrialised market. This means that the aforementioned marriage has not expanded Daimler's global market presence and has certainly not allowed it to cut down on production costs and to venture into different segments of the automobile market. In other words, whereas competitors are forming alliances which facilitate the realisation of the latter mentioned goal, thereby giving them a competitive advantage over rivals, Daimler has not. Within the context of the stated, it falls short of being a global company, despite its presence in the global market place. As regards the second of Porter's Five Forces, the global nature of the industry has made the threat of substitutes a very real and serious one. Substitutes here refer to products which fulfil the same purpose and are of comparable quality. Prior to the marriage with Chrysler, an argument could very well be made for a low threat of substitutes insofar as Daimler was concerned. Following the marriage and the subsequent drainage of Daimler's resources, forcing the manufacturer to cut back somewhat on quality, it effectively lost its position within the parameters of the luxury car market to BMW. The implication here is, therefore, that the threat of substitutes is high and with the cross-company alliances which are constantly being formed for the purpose of venturing into particular segments of this expansive market, the threat of substitutes is become all the more intense. Buyer power, the third of Porter's Five Force's is, within the context of this industry, high. This is because companies depend on a few buyers in dozens of countries to buy their products. If these buyers decide that the needs of the market which they are serving are best addressed by another's products, this affects the market position of the company in question. Indeed, Daimler Chrysler personally experienced the adverse effects of buyer power as it lost market shares in both the European and the American markets. Supplier power, the fourth of porter's Five Forces, should be, in the wake of globalisation, weak. This is because companies have the option of moving part of their manufacturing operations to countries where labour and other raw material is significantly cheaper. Added to that, supplier power is further weakened by the fact of global competition, whereby suppliers are effectively trying to acquire a competitive edge over their rivals through the provision of quality goods/services at more attractive prices. Whereas several automobile manufacturers have sought the exploitation of weakening supplier power by globalising their manufacturing operations, neither Daimler nor Chrysler have. Indeed, the former has effectively undermined its ability to do so through its earlier provision of employment guarantees lasting until 2012 to its German workers. It has trapped itself within an expensive labour market and, by not going global, as in outsourcing parts of its manufacturing, has not exploited weakening supplier power. As regards the last of Porter's Five Forces, barriers to entry, one may safely determine that they are high. This is largely because of the cost of entry into the market. Global alliances, however, are gradually eroding the barriers to entering by reducing the cost involved, as seen through the emergence, not only of Chinese manufacturers but of alliances between the latter and Japanese manufacturers, through which strategy technology is supplied to new entrants while manufacturing costs are kept to a minimum. Added to the above stated, the application of Yip's globalisation framework indicates the imperatives of the named company's internationalising its operations. Cost drivers established the possibility of significantly decreasing cost of production through the internationalisation of its supplier network and its manufacturing base. At present, the cost of limiting either to the United States/Germany is unsustainable and ensures the company's inability to meet the demand for more competitively priced vehicles. Secondly, market drivers, as in the international market tendencies of the industry itself, agitate for the globalisation of strategy, just as competitive drivers identify the imperatives of the globalisation. Importantly, there are little if any government drivers as would function as an obstacle to the globalisation of DaimlerChrysler. Proceeding from the above mentioned, it is evident that the key to corporate performance in the post-globalisation automobile industry lies in companies globalising their operations. By doing so, they are able to exploit the industry's opportunities while minimising its threats. Daimler Chrysler, as this analysis has trued to illustrate, has been loosing ground because it is not going global. (2a) The literature on merger theory indicates that there are several motives for firms undertaking mergers with others. Mergers can be defensive, in the sense that firms enter into them in order to expand their size and reduce the risk of their being taken over themselves; they may be motivated by the imperatives of maximizing a firm's existing competitive advantage, as in the case of pre-emptive horizontal mergers; or they may be guided by the imperatives of expanding into a new market and engaging in diversification, as is the case with strategic mergers (Hviid and Prendergast, 1993; Holland, 2003). The aforementioned, by no means an exhaustive listing of the reasons for and types of mergers which firms undertake, indicates that they are invariably entered into for the maximization of competitive advantage and/or expansion into new markets/product lines. While the Daimler Chrysler merger can hardly be categorized as defensive, it may be identified as a pre-emptive horizontal merger. Daimler, the maker of luxury cars and Chrysler, the manufacturer of low-production cost, trucks (among others), were both feeling the effects of the Asian financial crisis, globalization and the intensification of rivalry and competition (Flint, 2005). While Daimler's market performance far exceeded Chrysler's which was, indeed, experiencing a crisis, its survival as a global player was contingent upon its expansion, as in market and range of vehicles. On the theoretical level, its acquisition of Chrysler gave it just that, even as it promised Chrysler market salvation. On the basis of figures and theory, the merger expanded Daimler, now Daimler Chrysler's range of vehicles, allowing it to cater to different segments of the market and allowed it a greater global presence and reach, with factories in thirty-four countries. On paper, this was an ideal marriage of equals, allowing both the advantages of pre-emptive horizontal merger as would sustain their market positions, defend them against possible acquisition considerations and maximize their competitive advantages to the extent where, not only could they survive post-globalization competition but, possibly, prosper. Proceeding from the above stated, therefore, the merger was theoretically justified and, on paper, seemed ideal. (2b) Short term strategic alliances have, increasingly, proven themselves integral to the capacity of large auto manufacturers to remain competitive and to their ability to penetrate into new markets. Several auto manufacturers are pursuing the short term strategic alliances designed to realize the stated objectives. Hence, GM is lending is badge to Daewoo and Ford and Fiat are working together for the manufacture of low cost cars designed for the low-end European market, to name but two examples. Insofar as the larger car manufacturers are concerned, these alliances allow them to penetrate into the larger global market for economic or low-cost cars. Daimler is, by virtue of its market position and branding, completely opposed to the formation of such alliances. It has positioned itself as a luxury, high quality car, renown for its design and engineering and, accordingly, is unwilling to enter into any such alliance as would undermine that image. Indeed, even following its merger with Chrysler, it distanced itself from the American car marker simply because of its refusal to have its image as the provider of high end luxury cars undermined. In other words, while the aforementioned alliance could have proven to have strategic benefits to Daimler, it did not engage in the formulation of a strategic partnership as would have allowed it the accrual of the expected benefits. Chrysler, on the other hand, is embarking upon such alliance. For example, seeking to reduce the cost of production, it is outsourcing the manufacturer of one of its models to a Chinese automaker. Added to that, parts of its Toledo plant is currently operated by Hyundai. The implication here is that Chrysler is embarking upon short term alliance as would reduce the cost of its operations and allow it entry into new markets. The argument, as presented in the above is that increasingly intense competition has placed the larger car manufacturers in a position where they have to engage in such alliances as would reduce cost of operations and facilitate their penetration into larger and more profitable markets. To a degree, Chrysler has embarked upon such alliances but Daimler has, thus far, neglected to. (2c) Irrespective of the fact that Daimler's acquisition of Chrysler did not produce the expected profits/market success or that the company is struggling to survive competition, the acquisition of Chrysler is an attractive prospect for numerous foreign and domestic/American manufacturers. For the Asian auto manufacturers, the acquisition of Chrysler represents an opportunity for deeper penetration into the US market. More importantly, it is penetration, not as a foreign auto manufacturer, such as could incite consumer resistance but as an American/domestic manufacturer. Acquisition would be especially opportune at this moment when Chrysler is looking towards the design and production of the mid-sized vehicles which the Asian manufacturers excel in. Similarly, Chrysler's sale represents an attractive prospect for American manufacturers, chief amongst which is long-time rival GM. Insofar as GM is concerned, Chrysler represents the purchase of a n attractive market share, a share which can be potentially lost to an Asian manufacturer, thereby giving the former a possible edge over GM. It further represents the purchase of technology, design, skill, sizeable plants, assembly lines and, importantly, a brand name which is as seeped in the history of America as is GM. Indeed, the acquisition would give GM dominance in the American market and the resources requisite for deeper penetration into the global market. None of the above disputes the fact that the acquisition does have its problems and that Chrysler comes with flagging sales, unsustainable overheads, and operating losses. Nevertheless, the benefits of such an acquisition can hardly be underestimated. (3) Several industry observers and analysts maintained that the Chrysler and Daimler merger represented a unique strategic opportunity for either company. Even following the failure of the said merger, these same analysts insist that were DaimlerChrysler to reassess their strategic management approach, success remains possible consequent to the competitive advantage held by the company. There are numerous sources for the said advantages, chief amongst which are product brand, market position, joint assets and technology (Design News, 1998; Dyer and Hatch, 2004; Leavitt, 2006). A chief source of DaimlerChrysler's competitive advantage lies in their respective product brands and position in both the European and the American markets, let alone the global one. Daimler represents virtually untouched technology, engineering and design such as which solidify its market position, irrespective of past mistakes, including the series of embarrassing technological ones it recently suffered. Within its particular market segment, its only real competitor is BMW. Similarly, Chrysler's advantage lies in its position in the American market, as established through product brand. The implication here is that DaimlerChrysler's competitive advantages lies in its brand, market position and history. Added to that, competitive advantages is further rooted in the fact that, as a merged entity, Daimler and Chrysler address different segments within the automobile market, thereby allowing them a more pronounced market position and level of visibility. The barriers to entry which characterize the identified industry represent another source of DaimlerChrysler's competitive advantage. As earlier noted, these barriers include access to technology and the size of the requisite investment. DaimlerChrysler has the technology and, insofar as Daimler is concerned, much coveted technology as which gives it a competitive advantage over its rivals. Added to that, the company has sizeable manufacturing bases in both sides of the Atlantic, implying that, to significantly cut into their joint market share, would be a highly costly venture whose outcome would be indeterminate. On the basis of the above stated, it is evident that the source of DaimlerChrysler's competitive advantage are that which the company represents: technology, manufacturing capabilities, brand and market position. The failure of the merger is a commentary on management and does not detract from the nature or scope of its competitive advantage. (4) A value chain references the process by which manufacturers obtain raw materials and exploit them as input, subsequent to which they add vale to them by subjecting them to several processes. With specific regards to Daimler, as to any auto manufacturer it refers to the purchase of the raw materials which enter into the production of automobiles, that is, the inputs to which the manufacturing process adds value through transformation into the automobile (output). In 2005, prior to Zetsche's leadership, Daimler experienced expansions up and down the value chain, producing cars such as Smart and the A-Class on one end and the Maybach, on the other. Some contributed to the entity's overall value and represented a source of profit and revenue, while others proved a drain on the corporation's financial resources, effectively undermining overall value. Within the context of a globalised world economy, signifying the globalisation of competition, more and more manufacturers are engaging in the parallel globalisation of their value chains through the formulation of international networks of operation across several countries (Levy, 1997; Meijboom, 1999). Doing so is not easy, with the first challenge being the configuration of value chain activities across an international network of factories and the second the management of value chain activities in such a way so as to meet demand, even as advantages are accumulated through the said international chain. Irrespective of the magnitude of these challenges, however, the internationalization/globalisation of the value chain is integral to the maintenance of competitive advantage and the cornerstone of manufacturers' capacity to provide the overall chain with added value (Fine et al., 2002). In direct relation to automobile manufacturers, increasing numbers are engaging in the internationalisation of their value chain for the specified purpose of reducing production costs and adding increased value to their output, thereby placing them in a more competitive market position and maximising their profits. Proceeding from the above stated, it is evident that DaimlerChrysler should engage in the internationalisation of its value chain but its capacity to do so successfully ultimately hinges upon its leadership. This last is emphasised by Prater et al (2001) in their contention that despite the inherent advantages of internationalising the value chain, leadership is confronted with imperatives of embracing diversity, cross-cultural, management paradigms, on the one hand, and in ensuring that the firm remain agile, in order to ensure flexibility of response to changing market trends and nascent consumer demands. Quite simply stated, and as asserted by several management scholars, organisational leadership should engage in the redesign of its management strategy for greater fit with the reality of the organisation's consisting of several units spread across different countries possibly regions and continents, as opposed to being centralised in a single area (Lambert et. al., 1998; Fine et al, 2002; Prater et al., 2001). Under Zetsche's leadership, Chrysler embarked upon the internationalisation of its value chain. In so doing, it farmed out the production of one of its models to a Chinese auto make for the purposes of benefiting from the much lower cost of production and further expanded the geographical parameters of its supply chain, thereby benefiting from more competitive raw material cost/prices, exploiting the globalisation induced decreased power of suppliers. Through the aforementioned strategy, involving aggressive decision-making, Zetsche pulled Chrysler from its failing and flailing market position, transforming it into the stronger partner in the Daimler-Chrysler merger. Conversely, by 2005 Daimler had become the weaker link in the merger. The seemingly indestructible German automobile manufacturer had witnessed the loss of market shares and ever decreasing profits, coupled with a persistent inability to effectively engage in the lowering of production costs without affecting the quality/value of its output. Having identified much of its losses as an outcome of its merger with Chrysler, with figures suggesting that the 9 year partnership had cost Daimler over 25 billion dollars, Daimler has determined to sell Chrysler, retaining under an under 20% stake in the company. According to Zetsche, the sale will allow Daimler to, not only cut its losses but, to focus on its core competencies which are the manufacture of "high value, technically advanced cars" (Kroger, 2007). Although the above stated decision represents a way out of its ailment, it only functions as a partial solution to the problems which Daimler currently confronts. Indeed, just as he did with Chrysler, Zetsche should maximise Daimler's competitive strength by internationalising its value chain. Needless to say, doing so would require that leadership/Zetsche deploy the same aggressive, cost-cutting management model he had pursued during his time at Chrysler and, in expanding the corporation's production and supply base beyond Germany, embrace a multi-cultural management model as would ensure that diversification of operations works for the company and not against it. References Anon (1998) Mergers fuel middle-management comeback. Design News, 54(16). Dickson-Simpson, J. 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