strategic alliances - fiat_chrysler alliance_pranav sharma
DESCRIPTION
Strategic MgtTRANSCRIPT
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance i
SUMMARY
Organisations are increasingly forming strategic alliances with other firms in order
to improve their competitiveness. This dissertation provides an insight into
strategic alliances, examining the motives behind alliances and highlights the
beneficial opportunities offered by an alliance.
The recent Fiat-Chrysler alliance has been investigated to provide a better
understanding of strategic alliances and a case study analysis of Fiat has been
conducted to provide recommendations for its future strategy. The effect of the
global financial crisis on the automotive industry and its role in instigating
alliances between companies has also been studied. The analysis illustrated that
Fiat is a strong performer having a good product offering. It is operating within a
highly competitive industry and is affected by various external factors such as
legislation, environmental concerns and global economic condition.
It is concluded that a strategic alliance offers a number of advantages to
companies provided that right partners are selected. It is important to work
cohesively to achieve mutual objectives. The Fiat-Chrysler alliance has the
potential to offer several benefits to both parties. It provides the critical mass
required to reap benefits of economies of scale within the industry. It also reduces
product development cycles, makes available ready to use distribution channels
and increases product portfolio. Fiat can accomplish its potential by having an
efficient alliance with Chrysler and develop to be a market leader in its industry.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance ii
ACKNOWLEDGEMENTS
I would like to thank my project supervisor, Professor David Walker for the
support and guidance imparted throughout the course of this dissertation.
Especially for being flexible with the project meeting schedules and patiently
answering all my e-mails and telephone calls. Your knowledge and advice has
been invaluable.
I am also thankful to Dr. Andrew Tobias for his constant support and advice
throughout the MSc course always encouraging us to think from a new
perspective and to perform to the best of our ability. Many thanks to Janet Morris
for patiently and efficiently answering numerous queries and concerns.
I am grateful to David Nuttall, my former head of department at LDV Group Ltd,
for endorsing my application for this course and also for being an excellent
mentor. I am also grateful to Ian Bugby and Mark Hopkins, former project
managers at LDV, for assisting me with my workload whenever I was away from
work for course lectures and exams - it really did make life a lot easier.
I would like to thank my family for their constant affection, advice and
motivation.
Thanks to all my friends and classmates for their help, support (and much needed
distraction!) You all have really made this course a truly enjoyable and
memorable experience.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance iii
CONTENTS
CHAPTER 1: INTRODUCTION ..................................................................... 1
1.1 INTRODUCTION ........................................................................................... 1
1.2 PROBLEM SETTING ...................................................................................... 2
1.3 AIM AND OBJECTIVES ................................................................................. 3
1.4 LIMITATIONS / CONSTRAINTS ...................................................................... 4
1.5 ASSUMPTIONS ............................................................................................. 5
1.6 DISSERTATION STRUCTURE ......................................................................... 5
CHAPTER 2: LITERATURE REVIEW .......................................................... 7
2.1 STRATEGIC ALLIANCE ................................................................................. 7
2.1.1 Motives for Strategic Alliances .......................................................... 10
2.1.2 Types of Strategic Alliances ............................................................... 12
2.1.3 Main Challenges faced by companies ................................................ 14
2.2 ANALYSING THE EXTERNAL AND INTERNAL ENVIRONMENT ....................... 15
2.2.1 PESTLE Analysis .............................................................................. 16
2.2.2 Porters Five Forces ......................................................................... 18
2.2.3 SWOT Analysis .................................................................................. 23
CHAPTER 3: METHODOLOGY .................................................................. 25
3.1 CASE STUDY ............................................................................................. 25
3.2 DATA COLLECTION ................................................................................... 25
3.3 RESEARCH PROCEDURE ............................................................................. 26
CHAPTER 4: COMPANY DESCRIPTION- FIAT ...................................... 28
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance iv
4.1 HISTORY ................................................................................................... 28
4.2 CURRENT STATUS ..................................................................................... 29
4.3 BRANDS AND PRODUCTS ........................................................................... 31
4.3 GLOBAL AUTOMOTIVE MARKET ................................................................ 34
4.3.1 Fiat Automobiles Performance .......................................................... 35
4.4 FIAT GROUP 2009 PERFORMANCE AND FINANCIAL ANALYSIS .................... 38
CHAPTER 5: ALLIANCE .............................................................................. 42
5.1 EFFECT OF THE FINANCIAL CRISIS ON THE AUTOMOTIVE INDUSTRY ........... 42
5.1.1 Effect of the Recession on Fiat ........................................................... 44
5.2 ALLIANCES WITHIN THE INDUSTRY ............................................................ 45
5.3 FIAT CHRYSLER STRATEGIC ALLIANCE ................................................... 45
5.3.1 Fiat Chrysler Alliance ..................................................................... 46
5.3.2 Motives for the Alliance ..................................................................... 47
5.3.3 Advantages to Chrysler ..................................................................... 49
5.3.4 Advantages to Fiat ............................................................................ 50
5.4 SIMILAR ALLIANCES WITHIN THE INDUSTRY .............................................. 52
CHAPTER 6: ANALYSIS AND DISCUSSION ............................................. 58
6.1 PESTEL ANALYSIS .................................................................................. 58
6.2 PORTERS 5 FORCES ANALYSIS .................................................................. 65
6.3 SWOT ANALYSIS ..................................................................................... 69
CHAPTER 7: CONCLUSION & RECOMMENDATIONS ........... ............... 75
7.1 CONCLUSION ............................................................................................ 75
7.2 RECOMMENDATIONS ................................................................................. 78
REFERENCES ................................................................................................ 80
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance v
APPENDIX 1 ................................................................................................... 84
APPENDIX 2 ................................................................................................... 88
Table of Figures FIGURE 1: MOTIVES FOR STRATEGIC ALLIANCES ................................................. 12
FIGURE 2: PORTERS FIVE FORCES ...................................................................... 18
FIGURE 3: SWOT ANALYSIS ............................................................................... 23
FIGURE 4: GROUP STRUCTURE ............................................................................ 30
FIGURE 5: FIAT GROUP CURRENT PRODUCT MIX VS MARKET .............................. 33
FIGURE 6: GLOBAL AUTOMOTIVE INDUSTRY VALUE 2005-2009 .......................... 34
FIGURE 7: FIAT 2009 SALES PERFORMANCE ........................................................ 35
FIGURE 8: 2009 SALES SPLIT BY BRAND.............................................................. 35
FIGURE 9: FIAT CHRYSLER COMBINED MARKET SHARE .................................... 36
FIGURE 10: FIAT GROUP PERFORMANCE SNAPSHOT ........................................... 38
FIGURE 11:FIAT AUTOMOBILES PERFORMANCE (INCL. MASERATI AND FERRARI) . 40
FIGURE 12: TRADING PROFIT MARGIN ................................................................ 40
FIGURE 13: GLOBAL SALES DECLINED IN THE RECESSION .................................... 42
FIGURE 14: SALES DECLINED IN USA ................................................................. 43
FIGURE 15:SALES DECLINED IN WESTERN EUROPE .............................................. 43
FIGURE 16: FIAT 1ST QTR 2009 NET REVENUES .................................................. 44
FIGURE 17: EXAMPLE OF TECHNOLOGICAL BENEFITS TO CHRYSLER ..................... 49
FIGURE 18: FORECAST OF FIAT-CHRYSLER SYNERGIES ........................................ 50
FIGURE 19: VEHICLE ARCHITECTURE SHARING OPPORTUNITIES WITH CHRYSLER . 51
FIGURE 20: GLOBAL INDUSTRY VALUE FORECAST 2009-2014 ............................. 56
FIGURE 21: GLOBAL LIGHT VEHICLE SALES BY VOLUME ..................................... 57
FIGURE 22: GLOBAL OEM SALES FORECAST 2008-2015 ..................................... 57
FIGURE 23: ECONOMY AND AUTO INDUSTRY ....................................................... 62
FIGURE 24: NUMBER OF CARS PER 1000 PEOPLE IN 2008 ..................................... 62
FIGURE 25: IMPORTANCE OF ISSUES RATED BY AUTOMOTIVE EXECUTIVES ........... 64
FIGURE 26: PORTERS FIVE FORCES ANALYSIS..................................................... 65
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 1
CHAPTER 1: INTRODUCTION
1.1 Introduction
Globalisation, competitive market pressures and increasing customer demands has
lead Companies to constantly evaluate the business environment and implement
strategies in order to remain commercially competitive and successful. One of the
available strategic options to a Company is forming a strategic alliance with
another firm to join forces and work together in order to address concerns such as
resource shortages, reduce product development cycles, adding additional
production facilities and distribution channels.
Fiat is one of the largest automotive manufacturers in the world, catering to major
segments of the passenger and commercial vehicle market. The automotive
industry is considered highly competitive due to the maturity of the market,
similar products and number of manufacturers. The buyer is mainly influenced by
price and product performance. Manufacturers are highly concerned with product
cost which is influenced by many external factors such as legislations, raw
material costs, currency exchange rates, energy costs and taxes as this affects the
final product pricing. The aim is to attain competitiveness while sustaining
profitability.
The recent global financial crisis has added to the woes of the industry and vehicle
manufacturers are taking a number of strategic decisions in order to remain
competitive. In the past year the automotive industry has seen a number of
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 2
bankruptcies, restructuring efforts and consolidations. The business environment
is constantly changing and it is essential that an organisation continuously
evaluates its position within the market and plans effectively for the future. The
strategy of a business is developed to achieve the organisational goals and is
shaped by the strengths and weaknesses of an organisation and also the macro-
environment that it survives in which highlights the threats and opportunities.
Lately a number of organisations have entered into strategic alliances with one or
more partners. This dissertation studies the reasons and motives behind such
alliances and the opportunities an alliance provides to the companies. The recent
alliance between Fiat Group and Chrysler has been investigated to obtain a better
understanding of strategic alliances. The recent financial crisis has also been
studied with regards to its effect of acting as a catalyst for alliances within the
automotive industry. This external environment analysis coupled with analysing
Fiats current market positioning has resulted in a number of recommendations for
the future direction of Fiats strategy.
1.2 Problem setting
Cars are expensively priced items, which makes them peculiarly vulnerable to
any downturn in confidence, GDP, wealth and income. (Warren - The Telegraph,
2009)
The automotive industry is a highly competitive industry and has been greatly
affected by the recent financial crisis. The lack of availability of finance and a
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 3
hampered consumer confidence has lead to a decline in demand and a substantial
amount of overcapacity within the industry. This lead vehicle manufacturers to re-
consider their strategies in order to sustain themselves in the recession and remain
competitive for the future.
In 2009, Fiat Group formed a Global strategic alliance with Chrysler. Fiats
decision to form an alliance with Chrysler needs to be studied and the current
industry scenario needs to be analysed in order to provide recommendations for
Fiat to remain competitive. Therefore the problems that arise from this event are:
1. What are the motives behind the Fiat-Chrysler alliance?
2. What Benefit would the alliance provide to both Fiat and Chrysler?
3. How the recent recession and other external factors affect the automotive
industry?
4. What is the current position of Fiat in the automotive industry and what
steps should it take to remain competitive in the future?
1.3 Aim and Objectives
The aim of this dissertation is to examine the need for the Fiat-Chrysler alliance
and weigh the opportunities offered by the alliance. Consideration will be also
given to the macro and micro environment in order to provide recommendations
for a sustainable future for Fiat.
The objectives of this Dissertation are:
1. To analyse the need for the Fiat-Chrysler Alliance.
2. To analyse Fiats current position in the Global Automotive Marketplace
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 4
3. To analyse the external and industry environment that might affect Fiat
4. To provide recommendation for Fiat to remain competitive in the future.
The dissertation will also provide a background into the theory of strategic
alliances as a strategic option. It will also provide information about:
1. What is a strategic alliance and why companies form strategic alliances.
2. The opportunities an alliance provides to a company.
3. The effects of the External factors and Business environment on the
strategy of a firm and how to consider these factors when making strategic
recommendations and decisions.
1.4 Limitations / Constraints
The scope of the dissertation is limited to Fiat Groups automotive business and
the Fiat-Chrysler Alliance that was formed in 2009.
Also, in July 2010, Fiat Groups board approved the plan to separate its industrial
and automotive businesses into two separate companies in order to create to a
global automotive company in collaboration with Chrysler (Fiat Group, 2010).
The issues discussed and recommendations outlined in this dissertation revolve
around Fiats automotive business only and author is aware that Fiat Groups
future strategic decisions may be affected by the state of other businesses and
activities of the conglomerate.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 5
1.5 Assumptions
The automotive market is still recovering from the recession.
The alliance will be a long term partnership.
Fiat will remain in a stable financial condition.
1.6 Dissertation Structure
The dissertation comprises of 7 Chapters:
Chapter 1 Introduction
This chapter explains the background to the project and introduces the problem,
aims and objectives.
Chapter 2 Literature review
This chapter discusses the theory of strategic alliances, the motives for alliances
and the benefits provided by an alliance. It also discusses the importance of
considering the external and internal environment during strategy formulation.
Chapter 3 Methodology
This chapter explains the research method followed in this dissertation.
Chapter 4 Company Description
This chapter provides information about Fiat Group, Its history, current status,
products, sales and financial performance are discussed.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 6
Chapter 5 Alliance
This chapter provides background on the effect of the recession on the automotive
industry and how it lead to an increase in restructuring and alliances within the
industry. The Fiat-Chrysler alliance is explained and the benefits and
opportunities to both firms are highlighted.
Chapter 6 Analysis and Discussion
In this chapter, a PESTEL Analysis, Porters Five forces Analysis and a SWOT
analysis is conducted to assess the external and internal factors that would shape
Fiats future strategy.
Chapter 7 Conclusion and Recommendation
In this chapter, the results of this dissertation are concluded and recommendations
have been made for Fiats future strategy.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 7
CHAPTER 2: LITERATURE REVIEW
2.1 Strategic Alliance
A Strategic Alliance can be defined as an agreement between organisations in
which each entrusts certain amount of resources to achieve a set of objectives.
Alliances can be formed with a wide variety of Partners depending on the
objectives of the partnership. The partnership may include organisations in the
supply chain such as customers and suppliers. It may even include competitors or
Organisations external to the business such as Universities or Government bodies.
Strategic Alliances provide Organisations with the opportunity to improve their
competitive positioning, enter new markets, build on core competencies, risk
sharing and research and development costs sharing .(Bain & Co, n.d.)
Hooley et al. (2007) emphasise that building relationships with other companies is
essential to compete effectively as Organisations face an extraordinary set of
challenges due to constantly changing markets, rapidly evolving technologies,
shortage of resources and skills and increasingly demanding customers.
Alternatively Thompson (2001) classifies as alliance as a defensive move rather
than as a growth opportunity with the intention to increase competitive advantage
without having a merger or an acquisition.
Regardless of the reasons for the alliance, it is essential that all parties work
together cohesively. Lorange and Roos (1993) state that the alliance should be
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 8
structured so that it is the strategic goal of both parties for it to succeed. On the
other hand, Ohmae (1989) argued that the alliance is beneficial when each partner
has a different strategic intent. For example, one partner can pursue a strategy of
globalisation while the other partner can take a more passive role as a technology
supplier (Lorange and Roos, 1993).
In summary, the goals and objectives of each partner can be different but they
should compliment each other and work towards achieving their objectives with a
successful alliance.
The need for strategic alliances
The rise International business and increasing competitive pressures on firms has
lead firms to a need to collaborate with partners in order to address concerns such
as resource shortages, reduce product development cycles and additional
distribution channels.
Each international market needs a region specific strategy and this need
encourages firms to form alliances with local partners that understand the market
well. The recent rapid developments in technology pressurises firms to constantly
adjust to customer demands and respond with shorter product life cycles. This
requires a competent and flexible resource base and has lead firms to jointly
pursue Research and Development activities that provide a flexible and sufficient
resource base. This also brings together several different competencies to ensure a
commercially successful strategy. In summary, each partner puts forward its best
in order to result in a successful product. (Lorange and Roos, 1993)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 9
Companies are in a very dynamic business environment and need to respond
quickly to any opportunities or threats. Alliances provide flexibility in operations
and the ability to change quickly in terms of product innovation (Connell, 1988).
Thompson (2001) further summarises the reasons for companies to form alliances:
Cost of Joint Venture / Acquisition: The cost of joint ventures or taking
over another business may unaffordable for a company and therefore it
may be feasible to form an alliance in order to work towards mutual goals.
Legal Constraints: Certain legislation may prevent a company from
acquisitions but still the larger size is required to sustain in the industry.
This forces companies to work together as part of alliances keeping
separate businesses at the same time.
Political or cultural differences: These differences prevent mergers and
acquisitions and therefore an alliance is used as a better alternative to assist
in integration of separate businesses.
Customer Demands: The increasing popularity of a total customer
support packages indicates that a businesss associations with other firms
can help secure inventory, mould distribution channels and control costs.
This also provides organisations with the opportunity to specialise in those
areas where they are more competent.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 10
Protectionism: International Government protectionist policies may make
it mandatory for foreign companies to form an alliance or joint ventures
with a local partner.
2.1.1 Motives for Strategic Alliances
The motives for Companies to enter strategic alliances would depend on the
strategic position and goals of each partner. Lorange and Roos (1998) explain that
the strategic positions of each partner will define the motives of the alliance:
Market Leader
A Market leader would be having major market share, leading technology or
better quality.
Defensive: When the strategy of the strategic alliance in line with the core
strategy of the Parent firms overall portfolio and the firm enjoys a relative
leadership in the industry. The aim of the organisation may be access to
new markets or technology or even secure additional resources to maintain
and defend its lead.
Remain: A firm may form a strategic alliance with another firm that plays
a relatively peripheral role in its overall portfolio in order to maintain its
competitive position.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 11
Follower
A follower that is aspiring to increase its market share:
Catch up: This strategy is used when the firm is more of a follower in the
industry. The firm may form a strategic alliance with another firm in order
to improve its product offering and competitive positioning in the market.
Restructure: If a firm is more of a follower in the market than a leader, it
may form a strategic alliance in order to restructure to secure its business
and perform better.
Apart from the strategic positioning motives, the alliance will also have certain
operational motives and objectives that assist the company in achieving the
strategic goals. Zajac (1990) conducted a study on the motives of alliances and
summarised four objectives (show in figure 1) that most companies have for
strategic alliances that would lead to a better competitive position.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 12
Figure 1: Motives for Strategic Alliances
Motives for Strategic Alliances
(Zajac, 1990)
Acquiring means of distribution and
preempting competition, 35%
Obtain economies of scale, 20%
Overcome legal and regulatory barriers, 20%
Gain acces to new technology &
diversify portfolio, 25%
Source: Zajac, 1990
2.1.2 Types of Strategic Alliances
Ad-Hoc Pool: In this type of a strategic alliance, the partners invest minimal
resources typically on a provisional basis in order to compliment and support each
other. These resources are then drawn back by the parent company at the end of
the project or alliance. An example of this may be agreements between airlines to
share aircraft and staff for a certain period. (Lorange and Roos, 1993)
Consortium: In this type of an arrangement, the amount of resources invested by
partners is more than that in the Ad-Hoc relationship. Whatever value is created
by this strategic alliance is then distributed back to all the partners. This type of an
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 13
alliance is usually seen during joint Research and Development activities.
(Lorange and Roos, 1993 )
Project Based Joint Venture: In a project based joint venture, the partners create a
common organisation by investing minimum resources in order to jointly work
towards their strategic goals. The resources generated are not distributed back to
the partners. The financial results such as dividends and payments are distributed.
An example of this would be a country specific alliance between firms. (Lorange
and Roos, 1993 )
Full Blown Joint Venture: In this type of an alliance, the partners invest large
quantities of resources in order to achieve their goals. The alliances resources are
retained in the alliance itself. (Lorange and Roos, 1993 )
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 14
2.1.3 Main Challenges faced by companies
Companies need to ensure that they choose their alliance partners carefully.
(Houghton, 1990) has summarised some of the main challenges faced by
companies when forming strategic alliances:
Compatibile strategy and Culture: It is essential for the firms to have a
strategy that compliments one another and helps in achieving the end
objectives. To have a successful alliance it is also important for the firms
to understand and respect each partners working culture and modify their
own culture to suit the alliance.
Comparable contribution: The amount of resources invested by each
partner needs to be agreed at the start of the agreement and the partners
should be equally committed in ensuring the planned demands and targets
are met.
Compatible strengths: To form a successful alliance, a company should
ensure that the chosen partners competitive strengths compliment its own.
This way both companies can overcome their own resource and skill
shortages.
No conflict of interest: There should not be any conflict of interest. This
ensures that all firms are working towards a successful alliance.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 15
Climate of trust and mutual understanding: It is essential to have trust and
understanding and open communication between the partners in an
alliance. This leads to better working relationships and smoother
operational performance between the companies.
2.2 Analysing the External and Internal Environment
In the words of the Greek philosopher Heraclitus The only constant is change.
Thompson (2001) states that success can be short-term for some organisations as
the speed of change in most industries and markets has increased. This change has
also resulted in shorter product lifecycles.
There is also interdependency between different products, services and businesses.
The organisation is dependent on its suppliers and customers. Competition also
plays a major role in shaping the impact on company. These industry players are
also affected by wider macro environmental forces such as Political,
Environmental, Social, Legal and technological (Thompson, 2001). This means
that an organisation that enters alliances based on a set strategy and objectives also
needs to continuously monitor and respond to the ever changing external
environment. Its strategies, plans and values need to continuously adapt to the
changing environment and manage its resources to take advantage of opportunities
and counter threats. (Thompson, 2001)
This dissertation undertakes two external (PESTLE Analysis and Porters Five
Forces) and one internal analysis (SWOT Analysis).
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 16
2.2.1 PESTLE Analysis
This analyses the external factors affecting the industry and organisation.
PESTLE stands for - Political, Economic, Sociological, Technological, Legal,
Environmental (CIPD, 2008).
A PESTLE analysis is a useful tool for understanding the external environment in
which an organisation operates. It helps in understanding risks associated with the
operations and highlights the position, opportunities and direction for an
organisation.
The PESTLE model urges companies to understand and consider the following
factors:
Political and Legal: These are the political and legal factors that affect the
environment in which a firm operates. This includes areas such as tax
policy, employment laws, legislation, environmental regulations, trade
restrictions and reform, tariffs and political stability. These political and
legal influences have a direct impact on the day to day running of a
company and therefore play an important role in shaping its strategy. (CIPD,
2008)
Economic: These are the factors affecting the global and national
economies that have a direct or indirect impact on an organisation. The
degree of the impact will vary depending on the business. Considerations
include health of the global economy, level of interest rates, exchange rates
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 17
inflation, labour rates, availability of credit, cost of living, etc. (CIPD,
2008)
Social: These are the factors related to changing social trends that would
affect an organisation. It is important to take into account the currently
occurring social changes in the markets in which a firm operates. This
includes factors like cultural norms and expectations, population growth
rate, age distribution, attitudes, importance of safety, global warming etc
that would affect customer behaviour and attitudes towards a product or a
service. (CIPD, 2008)
Technological: Technological changes can affect a firms business and
competitive position. New technologies are continually being developed and
the rate of change itself is increasing and this impacts a Companys product
or service offering. Technological changes also bring up barriers to market
entry. Companies need to closely follow these changes in order to ensure
that their offerings remain competitive. (CIPD, 2008)
Environmental: This covers the ecological and environmental aspects that
impact the operations of an organisation. Many of these factors will be
intertwined with the economic or social factors. (CIPD, 2008)
These various external factors will have a major impact on business operations.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 18
2.2.2 Porters Five Forces
Michael Porter put forward five forces that shape competition at the business unit
level within the industry. Firms need to understand their industry environment and
forecast the results of certain strategies in order to thoroughly to plan future
strategies. A methodical analysis of these forces helps organisations highlight
keys to competitiveness in their particular industry (Hooley et al., 2007).
Figure 2: Porters Five Forces
Source: www.vectorstudy.com
The bargaining power of suppliers
The balance of power between suppliers and industry members can greatly affect
the level of competition within the industry. The level of competitiveness
increases when suppliers or customers exert greater power on the organisations in
their industry (Hooley et al., 2007).
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 19
Hooley et al. (2007) and Thompson (2001) state that the bargaining power of
Suppliers depends on:
Supplier concentration: A fewer number of suppliers means that buyers have less
choice and therefore less bargaining power. Suppliers would also be having more
power in the industry when the buyers are fragmented and have low or irregular
order sizes.
Switching costs: If a supplier is delivering certain key components to a customer
which cannot be sourced easily from an alternative supplier without incurring of
high initial costs (e.g. tooling costs) then the power of the customer decreases and
supplier power will increase.
Differentiation of supplier offerings: A supplier having a distinct product or
service which cannot be purchased from elsewhere can have considerable
bargaining power over a customer.
Bargaining Power of Buyers
The bargaining power of buyers also affects the degree of competition within an
industry. Hooley et al. (2007) state that higher buyer power increases competition
within the industry. Buyer power depends on the following:
Concentration of buyers: A smaller number of buyers than sellers results in buyers
having a higher bargaining power.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 20
Alternative sources of supplies: Buyers can easily threaten to switch suppliers and
therefore the supplier needs to be competitive in order maintain demand for its
products.
Switching costs: Buyers have greater power when the switching costs are low as
they can obtain goods from alternative suppliers to get better deals without
incurring high initial costs.
Threat of substitutes
Successful products may be copied or substituted. New entrants may use existing
technology available in the industry or they may try to transform the industry
through innovative solutions (Hooley et al., 2007). Substitutes increase
competition in the industry by:
Making existing technologies obsolete: In todays world of rapid change, there is
immense competition between firms to develop new products and differentiate
offerings in order to remain market leaders or enter new markets.
Product Improvements: Improvements in technologies also lead to an increase in
industry competitiveness.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 21
Businesses need to continuously improve their products in order to make them
competitive and protect their technologies in the form of patents and copyrights to
ensure products are not substituted easily.
Threat of new entrants:
Organisation must also consider the potential threat of new entrants joining the
industry. New entrants increase the number of products on offer to customers and
reduce market share of existing industry leaders thus increasing the competition
within the industry. Hooley et al. (2007) states the following conditions that make
it easier for newcomers to enter markets:
Low costs / ease of entry
Existing or new distribution channels are open to use
Less Retaliation by competitors
Low product differentiation
Gaps within the market
Competitive rivalry within the industry
This involves assessing the rivalry between the existing players of the industry.
This is dependent on a number of conditions. Hooley et al. (2007) and Thompson
(2001) state the following factors:
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 22
Size and market share: Competitors who have a similar market share compete
fiercely to increase their share. This is normally seen by increased advertising,
promotion and technological innovation to attract the customer.
Market growth rate: At the maturity and decline stages of the product life cycle,
the market size for a product starts to contract and sales growth is attained at the
expense of competitors. This results in increase in rivalry.
High exit barriers: If an industry has high exit barriers, firm compete hard to
maintain their positions and remain successful.
Low product differentiation: Low differentiation in product or service offering
leads to increased competition over factors such as service and price. This is also
due to low switching costs for customers.
High fixed costs: When fixed costs are higher in relation to variable costs,
companies require to continuously increase sales in order to cover the investment.
This boosts rivalry within the industry.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 23
2.2.3 SWOT Analysis
SWOT stands for Strengths, Weaknesses, Opportunities and Threats. The analysis
focuses on the organisation in question and shows where its internal strengths can
be matched to make the most of the available opportunities and combat any
potential threats.
Figure 3: SWOT Analysis
Source: www.exelsia.ch
It helps in identifying the most important factors (both internal and external) that
affect the Company and its markets. This information is then used in strategy
formulation in which Strengths and Weaknesses are aligned with opportunities
and threats to ensure that its strengths are deployed in order to gain most from
opportunities, at the same time reducing any risks and working on eliminating
weaknesses.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 24
Strengths: This involves identifying what the firm is good at relative to its
competitors.
Opportunities: The ever changing business environment creates new opportunities
for a firm. To capitalise on these opportunities, the firm needs to identify them
well in advance.
Weaknesses: This involves identifying what a company is bad at compared to its
competitors.
Threats: The changing business environment also presents an organisation with
threats and risks that need to be monitored and removed or reduced effectively.
These existing strengths need to be exploited in areas of opportunity and used to
counter threats. Weaknesses should be worked upon and new strengths should be
built to take advantage of new opportunities and prepare for threats.
(Thompson, 2001; Hooley et al., 2007)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 25
CHAPTER 3: METHODOLOGY
3.1 Case Study
A case study analysis presents an account of past events in a business or industry
and highlights the conditions that a business had to deal with over a period of
time. It also includes studying factors such as the changing external environment,
the companys internal strengths and weaknesses and the nature competitiveness
in the industry in order to map out a future strategy for the firm. (Davies, n.d.)
3.2 Data Collection
The data and information used in this dissertation is secondary data. Secondary
data consists of data that has been collected by someone else for another purpose
and is readily available. It can be in the form of market research reports,
government statistics, Journals etc.
The First advantage of using secondary data is that the researcher does not have to
devote time and resources to collecting the data as it is readily available. The
second advantage of using secondary data is the extent of data available. Few
researchers would have the resources to collect data from a large sample size. The
third advantage in using secondary data is that frequently the information
gathering is conducted by experts and professionals and that expertise may not be
available to smaller projects. (Cambridge University Press, n.d.)
The disadvantage to using secondary data is that it does not answer particular
questions that a researcher may want to ask. A second major disadvantage of
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 26
using secondary data the methodology may be questionable. (Cambridge
University Press, n.d.)
The secondary data used in this dissertation are mostly from Fiats annual reports,
Investor presentations and Independent market research reports. Data has also
been taken from Chryslers website to obtain Chryslers view on the alliance.
Additional data has been collected from online journals, news articles,
independent insight reports and published articles. Books and academic journals
have also been used to provide background theoretical knowledge.
3.3 Research Procedure
Subsequent to the Literature Review, the following steps were taken to
analyse the Fiat-Chrysler Alliance.
3.3.1 Study the effect of the recession on the Automotive Industry
The recession had an adverse impact on the automotive industry and lead to a
lot of changes within the sector. It is important to understand how the
recession has affected the industry and the factors that vehicle manufacturers
are dealing with in order to define their future strategies. This part also
studies how the recession acted as a catalyst for consolidation and alliances
within the industry.
3.3.2 Study the Fiat-Chrysler Alliance
The background and reasons behind the decision for Fiat to form an alliance
with Chrysler are analysed. The structure of the alliance is also studied to
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 27
form a better understanding of the possible synergies and benefits to both
parties.
3.2.3 Analysis of Fiats External Environment
The Macro environment is analysed by using a PESTEL Analysis and
Porters Five Forces analysis. These tools provide an overview of the various
external factors and industry forces that will affect the companys day to day
operations and eventually its position in the marketplace The factors are then
classified into Business threats and opportunities.
3.2.4 Fiats Current scenario analysis
The current structure, market positioning, products, operations and financial
results of Fiat are analysed so as to gauge its strengths and weaknesses. These
are then combined in the form of a SWOT analysis with the threats and
opportunities that the company is exposed to. This analysis assists in drafting
future strategic recommendations for the business.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 28
CHAPTER 4: COMPANY DESCRIPTION- FIAT
4.1 History
Fiat is an acronym for Fabrica Italiana Automobili Torino (Italian Car Factory of
Turin). It was established in 1899 by Giovanni Agnelli in Turin, Italy. It is now
the largest industrial enterprise in Italy with businesses spanning a number of
sectors such as passenger cars, commercial vehicles, agricultural and construction
equipment, engines, transmissions and components. (Fiatgroup.com, n.d.)
Key events in Fiats History (Fiat.com, n.d.):
1899: Fiat is established in Turin.
1903: Fiat is listed on the stock exchange and manufactures its first truck.
1919: Produces its first tractor.
1936: Launched Topolino which is the smallest economy car in the
world.
1953: The first diesel powered passenger cars are introduced.
1967: Fiat acquires Magnetti Marelli which is a manufacturer of
automotive components and systems.
1975: Fiat established Iveco for commercial vehicles and Ferrari joins the
Fiat group.
1978: Lancia automobiles is acquired and Comau and Teksid are setup that
specialise in production systems.
1984: Acuisition of Alfa Romeo.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 29
1993: Maserati is added to the groups automobile business.
1999: New Holland and Case Corporation merge to form an agricultural
giant.
2004: Sergio Marchionne joins as Fiats CEO.
2005: Fiat Group back into profit.
2007: Fiat Launches the Fiat 500 car model and the Abarth brand is
revived.
2008: Fiat Group records highest ever trading profit.
2009: Fiat agrees to a global strategic alliance with Chrysler.
(Fiatgroup.com, n.d.)
4.2 Current Status
The Fiat Group is Italys largest industrial venture and one of the founders of the
automotive industry. It designs, produces and sells passenger cars, commercial
vehicles, agricultural and construction equipment, engines, transmissions and
components. It believes in technological innovation and environmentally friendly
products. The Group carries out its operations and financial services activities
through companies located in approximately 50 countries and is present
commercially in about 190 countries. Fiat has a strong research and development
capability and conducts its research and innovation activities through the Centro
Ricerche Fiat (C.R.F.) which concentrates on technology development and Elasis
which concentrates on production and process optimization in collaboration with
universities and centers of excellence worldwide. (Fiatgroup.com, n.d.)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 30
The group operates a number of businesses that are shown in the figure 4 below.
Figure 4: Group Structure
Source: Fiat.com, n.d.
This dissertation focuses on Fiats Automobile business which comprises of Fiat
Grop Automobiles (FGA), Maserati and Ferrari.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 31
4.3 Brands and Products
Fiat designs, manufactures and sells automobiles under various brands. Fiat, Alfa
Romeo, Lancia and Abarth are the main brands. Commercial vehicles are also
manufactured and sold under the Fiat Professional brand. Each brand below has a
specific identity and pursues a separate sales and marketing strategy.
(Fiatgroup.com)
Fiat
The Fiat brand comprises of a number of mid-budget passenger cars. The brand is
attributed to be Practical, versatile and responsive. It is focussed on customers
who are increasingly aware of environmental issues and technological innovation.
The brand produces Italian styled models that are reasonably priced.
(Fiatgroup.com)
Alfa Romeo
Alfa Romeos product offering comprises of aesthetically pleasing designs with an
individualistic focus. The attributes of Sportiness, technology, comfort and
elegance are combined to create the distinctive products. (Fiatgroup.com)
Lancia
The Lancia brand is focussed on Class and exclusivity at a reasonable price. The
models are based on Italian styling coupled with innovative technology such as
the ECOchic range. (Fiatgroup.com)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 32
Abarth
The Abarth brand was re-launched in 2007. It provides a modern interpretation of
all of its traditional products: such as the Grande Punto and the 500 Abarth, which
have added gadgets and the performance is inspired by the world of motor racing.
(Fiatgroup.com)
Fiat Professional
This brand covers a number of light commercial vehicles offering utility and
versatility to customers. (Fiatgroup.com)
Maserati
Maserati has always produced appealing and technologically advanced saloons
derived from the racing world. It a luxury / performance car brand.
(Fiatgroup.com)
Ferrari
The Ferrari brand produces high performance sports and super cars that are
inspired by Formula 1 Racing. Fiat describes the road cars produced by Ferrari as
the most prestigious example of Italian technology and craftsmanship: exclusive
cars without equal. (Fiatgroup.com)
-
Str
ateg
ic A
llian
ces:
Ana
lysi
s of
the
Fia
t-C
hrys
ler
Str
ateg
ic A
llian
ce
33
Fig
ure
5: F
iat G
roup
Cur
rent
Pro
duct
Mix
vs
Mar
ket
Cur
rent
ly, F
iat h
as a
goo
d m
ix o
f pro
duct
s to
cat
er to
the
min
i and
sm
all c
ar s
egm
ents
. T
he c
ompa
ny n
eeds
to fo
cus
on in
trod
ucin
g ne
w m
odel
s fo
r th
e M
ediu
m, L
arge
and
S
UV
seg
men
ts in
ord
er to
in
crea
se th
eir
mar
ket s
hare
an
d co
mpe
te w
ith th
e ot
her
play
ers
in th
e in
dust
ry.
(Sou
rce:
FG
A-
A r
evie
w o
f
our
Pas
t, 20
10)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 34
4.3 Global Automotive Market
Following a stable growth period, the automobiles industry fell into decline in 2008,
which further worsened in 2009. The industry generated total revenues of $1,469.3
billion in 2009, having a compound annual growth rate (CAGR) of 0.8% for 2005-
2009. (Datamonitor, 2010)
Observing closely, the European industry reduced with a compound annual rate of
change (CARC) of -1% to reach $514.3 billion in 2009, while the Asia-Pacific
industry grew with a CAGR of 3.8% over 2005-2009, to reach $431.6 billion in 2009.
(Datamonitor, 2010)
Passenger car sales were the most profitable segment globally, generating total
revenues of $1,180 billion in 2009, which is 80.3% of the total industry value. Light
truck sales revenues were $201.1 billion in 2009, which is 13.7% of total industry
value. (Datamonitor, 2010)
Figure 6: Global Automotive Industry Value 2005-2009
Source: Datamonitor, 2010
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 35
4.3.1 Fiat Automobiles Performance
Figure 7: Fiat 2009 Sales Performance
Source: Fiat Annual Report 2009.
The table in Figure 7 above details the Sales performance for the years 2008 & 2009.
The total demand for vehicles increased by 2.2% in 2009 but there also have been
substantial drops in sales in certain European markets. Analysing this closely, it is
seen that the passenger car market performed satisfactorily, mainly due to the
government incentives and scrappage schemes in parts of Europe. The commercial
vehicle market showed a sharp decline in sales due to decrease in demand from
businesses affected by the financial crisis. (Fiat Annual Report, 2009)
Figure 8: 2009 Sales Split by Brand
Source: Fiat: A review of our past 2010
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 36
Figure 8 above shows that passenger car sales provided the bulk of the total
automotive sales for Fiat.
Western Europe and Asia are Fiats main markets and demand in these countries was
affected greatly by the financial crisis of 2008. The first half of 2009 showed poor
performance. Scrapping incentives introduced by various European governments
increased sales during the second half of the year leading to a gradual recovery in
demand for vehicles. In Germany the demand increased by 23.2% due to the
scrappage scheme. Substantial gains were also seen in other European countries. In
both the UK and Spain the scrappage incentives were introduced by the second half of
the year, and therefore demand declined by 6.4% and 17.9%, respectively. (Fiat
Annual Report, 2009)
Figure 9: Fiat Chrysler combined Market Share
Source: Deloitte, 2009
Fiat has a good mix of environmentally friendly cars. Combined market share with
Chrysler is about 6.4%.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 37
Where commercial vehicles are concerned, the 2009 LCV market in Western Europe
declined by 27.4% compared to 2008. Demand fell in all major markets such as
France declined by18.8%, Italy by 21.4%, Germany by 24.8% and the UK by 35.5%.
Fiat Professionals market share for light commercial vehicles in Italy was 39.9%, a
reduction of 3.4% compared to 2008.
In Brazil Fiat achieved an overall share of 24.5% in 2009 which was similar to 2008.
This comprised of a share for passenger cars of 24.6% and light commercial vehicle
market share of 24.1%.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 38
4.4 Fiat Group 2009 Performance and Financial Analysis
This part of the report analysis Fiats performance based on the 2009 Annual Report.
The report had balance sheets for the whole Industrial Group and therefore this section
compares the entire Fiat Groups performance with that of the industry.
Figure 10: FIAT Group Performance Snapshot
Source: Fiat Annual Report, 2009
2009 Fiat Group revenues totalled 50,102 million. This was a decrease of 15.9%
compared to 2008 and the decline was credited to the financial crisis.
Fiats automobile business is the main contributor to the Industrial Groups revenues.
In 2009 automotive revenue was 56.2% of the total revenue. The majority of business
is coming from Western Europe. South America is another upcoming and promising
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 39
market for Fiat. The company has limited market share in North America which is a
weakness as USA is a major automotive market.
Table 1 below shows a summary of the main financial ratios from the 2009 annual
report compared to that of the industry.
Table 1: Financial Ratios
Financial Condition Fiat Industry
Debt/Equity Ratio 2.83 2.28
Current Ratio 2.2 1.3
Quick Ratio 1.7 1
Inves tment Re turns % Fiat Industry
Return On Equity -1.8 1.4
Return On Assets -0.2 0.3
Return On Capital -0.4 0.1
Management Efficiency Fiat Industry
Income/Employee -874 2617
Revenue/Employee 281101 380337
Inventory Turnover 4.6 5.4
Asset Turnover 0.8 0.6
Profit Margins % Fiat Industry
Gross Margin 14.6 17.5
Pre-Tax Margin 1 1.8
Net Profit Margin -0.3 0.3
Source: Fiat Annual Report 2009, Reuters, MSN Money)
The tables above show that Fiats 2009 performance was satisfactory compared to
industry average. The Groups investment returns for 2009 are below average such as
the return on capital is negative at -0.4% and so is the return on assets at -0.2%.
However the current ratio and quick ratio are better than the industry average and this
indicates that the company has adequate assets to pay back liabilities if required. The
quick ratio of 1.7 is much lower than the current ratio of 2.2. This means that Fiat
holds a substantial amount of inventory. Overall the group performance is reasonable
compared to the industry and it needs to work on improving its revenue and efficiency
in order to improve its profit margins.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 40
Automobiles Business Financial Performance
Figure 11: Fiat Automobiles Performance (Including Maserati and Ferrari)
29,380
28,351
1,102
719
0 10,000 20,000 30,000 40,000
2008
2009
Year
Euro Mn
Tradingprofit/(loss)
Netrevenues
Source: Fiat Annual Report, 2009
The Automobiles businesses reported trading profit of 719 million for 2009, down
383 million over the 1,102 million figure for 2008. All Sectors contributed
positively, although profit levels were lower than 2008. Trading margin was 2.4%
compared with 3.8% for 2008 and 1.5% for 2006. (Fiat Annual Report, 2009)
Figure 12 below shows that trading profit margin was good compared to competitors
(Toy=Toyota, PSA = Peugeot, Dai=Daimler, Nis=Nissan, VW=Volkswagen).
Figure 12: Trading Profit Margin
Source: Fiat Group: And the Journey goes on, 2010
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 41
Fiat Group Automobiles trading profit for 2009 was 470 million with a trading
margin of 1.8%, compared to the 691 million figure for 2008 (2.6% margin). The
decrease was mostly due to reduced demand for light commercial vehicles in the
global markets. Maserati had a 2009 trading profit of 11 million compared to 72
million for 2008. Ferraris 2009 trading profit was 238 million, compared to 339
million for 2008. The year-on-year decrease was attributed to adverse currency
fluctuations and also the impact of declining sales volumes due to the recession. (Fiat
Annual Report, 2009)
2010 1st Quarter Performance Update
Automobiles revenues increased by 20% to 7.3bn. Demand was maintained
due to the remainder of the scrappage schemes in several Western Europe
markets. (Fiat Group Investor Reports, 2010)
Automobiles Trading profit was 196mn with FGA at 153mn , Ferrari at
39mn and Maserati at 4mn. Please refer to Appendix 2 for more details.
(Fiat Group Investor Reports, 2010)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 42
CHAPTER 5: ALLIANCE
5.1 Effect of the Financial Crisis on the Automotive Industry The financial crisis of 2008 greatly affected the global automotive industry. The lack
of availability of cheap financing and reduced consumer confidence resulted in a
global reduction in vehicle sales. Figure 13 below shows how global vehicle sales
dropped in August 2008. For the U.S. and Western European markets, the decline in
sales was quite swift compared to the emerging markets of Asia and South America.
This decline in sales lead to large amounts of overcapacity within the industry.
(KPMG, 2008)
Figure 13: Global Sales Declined in the Recession
Source: KPMG International, 2008
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 43
United States of America & Western Europe
Car sales in the US showed a decline of 27% Year on Year in September 2008.
Figure 14: Sales Declined in USA
Source: KPMG International, 2008
Figure 15:Sales Declined in Western Europe
Source: KPMG International, 2008
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 44
5.1.1 Effect of the Recession on Fiat
Figure 16: Fiat 1st Qtr 2009 Net Revenues
Source: Fiat 1St Quarter Report, 2009
Fiat sales were also affected by the financial crisis and this continued to show even in
the revenues for the first quarter 2009 were 5.6 billion, a year-on-year decline of
18%. For Q1 2009, Fiat sales of passenger cars and light commercial vehicles
combined showed a decline of 17.7% compared to 2008. In Western Europe, which is
Fiats main market, deliveries fell 17.5% to with decreases in Italy by 25.1%, France
by 8.2%, UK by 30.1%.
However, Fiat managed to make gains in Market Share. In 1st Quarter 2009, the Fiat
brand achieved a 7.4% share for Western Europe which was 0.5% higher than 1st
quarter 2008. A total of 65,800 light commercial vehicles were delivered during the
first quarter, representing a year-over-year decrease of 37.5%. For Western Europe,
deliveries were down 50.3% to 32,500 units. Fiat Group Automobiles reported a
trading loss of 30 million in 1st quarter 2009 compared with a 193 million trading
profit for the first quarter of 2008. (Fiat 1st Quarter Report, 2009)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 45
5.2 Alliances within the Industry
This decline in sales affected the financial health and cash flow of companies and
many manufacturers turned towards the government for financial aid. This also
resulted in some companies selling off their businesses and increased mergers and
acquisitions. Fiat group CEO, Sergio Marchionne, told Automotive News Europe that
only five or six global carmakers might be left by the end of 2010. The overcapacity
in the industry can be tackled by sharing facilities to improve utilisation and Fiats
alliance with Chrysler reflects this. In a recent KPMG survey of automotive
executives, 71% of the respondents think that Mergers, acquisitions and alliances will
increase within the industry. (KPMG International, 2009)
5.3 Fiat Chrysler Strategic Alliance
Subsequent to the recent recession, Chrysler became the first major car manufacturer
to file for bankruptcy in early 2009.
At the same time, Chrysler agreed to enter into a strategic alliance with Fiat Group.
This was to protect its future as a car manufacturer and gain access to Fiats fuel-
efficient power trains and smaller car expertise which it lacks. The alliance also saved
thousands of jobs at Chrysler, its suppliers and dealers. (The Telegraph, 2009)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 46
Chrysler Background
In 2008 it posted an $8bn loss, when US sales fell 30% to 1.45m vehicles as its
dependence on high-powered, high fuel consuming cars, trucks and SUVs left
it unable to face increase in oil prices and environmental concerns. (The
Telegraph, 2009)
Key brands: Chrysler, Dodge, Jeep.
Key vehicles: Dodge Ram pickup truck, Dodge Charger, Jeep Wrangler,
Dodge Caravan minivan, Chrysler Town & Country minivan.
North American plants: Chrysler has 30, including 12 assembly plants and 18
facilities for engines, transmissions, stamping and casting. (The Telegraph,
2009 ; Chrysler, n.d.)
5.3.1 Fiat Chrysler Alliance
The decision to file for bankruptcy also gave Chrysler access $3.3bn of financing from
the US government, which was provided to maintain cash flow and let Chrysler
operate as normal till it came out of bankruptcy. A further $4.7bn in US loans was
also promised once Chrysler exits bankruptcy. The Canadian and Ontario
governments will provide a further $2.42bn. (Quinn, 2009)
The US government will also control 8% of Chrysler while Canadian will have a 2%
of the shares. The strategic alliance provided Fiat with a 20% stake in the new
company with a possibility of that increasing to 35% once all the Government loans
have been paid back. (Quinn, 2009)
Sergio Marchionne, Fiats CEO has long stated that Fiat needs to build at least 5
Million vehicles per year to benefit from economies of scale remain competitive
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 47
within the industry. Fiat makes about 2 million cars annually, while Chrysler
manufactured 1.3 million last year. This alliance will further help Fiat achieving its
plans. (Forden, 2010)
5.3.2 Motives for the Alliance
As discussed in the Literature Review section of this dissertation, the motives for a
company to enter into a strategic alliance depends on its position within the industry.
Both Fiat and Chrysler are still lagging behind the market leaders. Therefore they can
be classed as a Follower with two motives where strategic market positioning is
concerned:
Strategic Position
Catch-up: Fiat is in a better state than Chrysler and is trying its best to catch-up
and compete with its main rivals such as Toyota, Ford and Volkswagen.
Restructure: As explained in chapter 3, when a firm is more of a follower in
the market than a leader, it may form a strategic alliance in order to restructure
to secure its business and perform better. Chryslers main motive is to use Fiat
to restructure its operations for survival within the industry.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 48
Operational Benefits
Acquiring Distribution channels: The alliance provides both companies
valuable readily available distribution channels. Fiat has a poor network in the
US and Chryslers distribution network will be useful for the company.
Gain access to new technology: Both Fiat and Chryslers product portfolio
compliments each other. Fiat is strong is fuel efficient small cars while
Chrysler has a good line-up of heavier pickup trucks and large sedans. This
offers both the opportunity to diversify their portfolio without incurring large
costs of development.
Obtain economies of scale: The alliance provides the companies with joint
sourcing and development opportunities which would provide both with the
much needed power of economies of scale. (Camuffo and Volpato, 2002)
Manufacturing Sharing: There can be higher plant capacity utilisation by
sharing manufacturing facilities worldwide. (Camuffo and Volpato, 2002)
Achieve cost savings in design, purchasing and manufacturing by sharing
vehicle platforms. (Camuffo and Volpato, 2002)
Reducing the risk associated with the enormous resource and financial input
required by international strategies, by sharing costs and resources. (Camuffo
and Volpato, 2002)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 49
5.3.3 Advantages to Chrysler
Access to Fiats environmentally friendly vehicle technologies and
components. (BBC News, 2009)
Substantial cost savings opportunities through vehicle architecture,
distribution, product development sharing.
Access to Fiats distribution network in Europe and growing markets outside
the US and its global supplier base (BBC News, 2009).
Chrysler will also benefit from Fiats management expertise in business revival
and access to Fiats international distribution network with focussing on Latin
America and Russia. (BBC News, 2009 : Chrysler.com, 2009)
Figure 17: Example of technological benefits to Chrysler
Source: www.trucktrend.com
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 50
5.3.4 Advantages to Fiat
Access to Chryslers extensive USA distribution network and suppliers.
A 20% equity stake in Chrysler with potential of increasing it to 35%.
The agreement does not commit Fiat to funding Chrysler in future and
Chrysler now has a much stronger balance sheet after applying for bankruptcy.
Cost and Negotiation advantages of Economies of scale by sharing product
sourcing. (BBC News, 2009)
Sharing of vehicle architectures, components and subsystems.
Common technology development programmes especially in the area of
alternative propulsion systems.
Best practice and process sharing.
Obtain valuable brands such as Jeep and Dodge.
The economic synergies due to the alliance are detailed in the table below. Fiat
forecasts an economic benefit of 1.5Bn Euros as a result of the Fiat-Chrysler
Alliance (Fiat Group, 2010).
Figure 18: Forecast of Fiat-Chrysler Synergies
Source: Fiat Group, 2010
-
Str
ateg
ic A
llian
ces:
Ana
lysi
s of
the
Fia
t-C
hrys
ler
Str
ateg
ic A
llian
ce
51
Fig
ure
19: V
ehic
le A
rchi
tect
ure
shar
ing
oppo
rtun
ities
with
Chr
ysle
r
(S
ourc
e F
iat G
roup
, 20
10)
B
oth
com
pani
es w
ill b
enef
it fr
om s
harin
g ve
hicl
e pl
atfo
rms
and
save
on
Eng
inee
ring,
pro
cure
men
t and
Re
sear
ch a
nd D
evel
opm
ent c
osts
.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 52
5.4 Similar Alliances within the Industry
Competitive pressures are leading more companies to cooperate and form similar
strategic alliances and collaborations (Frost & Sullivan, 2010):
Daimler-Nissan-Renault
Daimler is competitive in trucks and commercial vehicles and is weak
where smaller cars are concerned.
Nissan and Renault are strong in the small car segment but are not
competent in the commercial vehicle / trucks segment.
The goal of this alliance is to join hands for Product Development. (Frost
& Sullivan, 2010)
Tata-Fiat
Tata has the opportunity to source Fiats coveted diesel engines and
transmissions.
Fiat will use Tatas extensive distribution network in India to channel its
own products. (Frost & Sullivan, 2010)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 53
Suzuki Nissan
Suzuki has well established operation in India and will assemble diesel
engines for Nissan.
Suzuki will also build Nissan vehicles in India.
This would result in better capacity utilisation by Suzuki and provide
Nissan ease of entry into the Asian markets with lower entry costs. (Frost
& Sullivan, 2010)
Renault-Nissan
Renault to provide diesel engines.
Nissan to provide electric propulsion technology.
Shared research and development costs.
Opportunity for vehicle architecture, supplier and platform sharing to
reduce costs. (Frost & Sullivan, 2010)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 54
Ford Mazda
Platform and component sharing to reduce costs.
Joint sourcing of components.
Improved capacity utilisation by sharing assembly plants
(Frost & Sullivan, 2010)
-
Str
ateg
ic A
llian
ces:
Ana
lysi
s of
the
Fia
t-C
hrys
ler
Str
ateg
ic A
llian
ce
55
5.5
Fut
ure
Mar
ket F
orec
ast
The
au
tom
otiv
e m
arke
t is
still
re
cove
ring
from
th
e
dow
ntur
n an
d gr
owth
is
expe
cted
to
be s
low
. F
rost
and
Sul
livan
(20
10)
expe
ct
the
mar
ket
to
reac
h ye
ar
2006
vo
lum
e le
vels
by
2012
.
(Fro
st &
Sul
livan
, 201
0)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 56
By 2014, the global automobiles industry is forecast to have a value of $2,526.6
billion, an increase of 72% since 2009. The compound annual growth rate of the
industry in the period 200914 is predicted to be 11.5 %.(Datamonitor, 2010)
Table 2: Global Industry value Forecast 2009-2014
Source: Datamonitor, 2010
Figure 20: Global Industry Value Forecast 2009-2014
Source: Datamonitor, 2010
The performance of the industry is predicted to improve, with an anticipated
CAGR of 11.5% for the period of 2009-2014, which is expected to steer the
industry to a value of $2,526.6 billion by the end of 2014. The European and
Asia-Pacific industries are forecasted tp grow with CAGRs of 6.6% and 5.8%
respectively, over the same period, to reach respective values of $706.8 billion
and $573.1 billion in 2014. (Datamonitor, 2010)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 57
In 2014, the global automobiles industry is forecast to have a volume of 96.5
million vehicles, an increase of 48.5% since 2009. The compound annual growth
rate of the industry in the period 200914 is predicted to be 8.2%.(Datamonitor,
2010)
Figure 21: Global light Vehicle Sales by Volume
Source: Datamonitor, 2010
Frost and Sullivan (2010) predicts that Fiat-Chrysler would have one of the
highest CAGR of 12.2% between 2008-2015 period reaching sales in excess of 5
Million vehicles by 2015.
Figure 22: Global OEM Sales Forecast 2008-2015
Source: Frost & Sullivan 2010
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 58
CHAPTER 6: ANALYSIS AND DISCUSSION
6.1 PESTEL Analysis
Political & Legislative Factors:
The government has a major impact on the industry. First of all, the government
provides the framework for the industry to function. The Governments also
establish the accessibility of public transport and reduce or increase dependence
on cars. It also has the authority to decrease or increase duties and taxes, which
directly impacts the distribution and manufacturing costs of the vehicle. For
example, the recent Government driven car scrappage schemes in Europe lead to a
boost in sales for the vehicle manufacturers. In the UK, the government offered
consumers a 2,000 discount on a new car in return for trading in one that is at
least 10 years old (Armitstead, 2009). Many new innovations and product
developments are driven by a need to meet government legislation. (Investopedia,
n.d.)
Environmental Factors.
Environmental factors affect both, the customers and the operations of a company.
For example, the emphasis on the Corporate Social responsibility of a company
and its impact on the environment has lead manufacturers to consider how its
manufacturing waste is treated and has affected operational costs (Fiat, 2009).
Concerns about vehicle emissions has lead to an increase in demand for fuel
efficient and environmentally friendly cars and this means that technology is
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 59
constantly under review and there is therefore a need for constant research and
development to provide greener vehicles.
Social
The average age of the populations in Western Europe, USA, Japan and Russia
is increasing and car makers will need to address the changing demands of older
drivers in order to remain competitive. Older customers will value quality, price,
and safety above fuel economy, styling or brand. OEMs will need to focus on the
development of cheaper and user-friendly cars. Vehicles targeted for the older
drivers will need to be designed with human factors in mind: Easier vehicle
entrance and exit, larger displays etc. (Deloitte, 2009).
Urbanisation too is another important demographic trend. Population in cities is
growing globally. For example in developed countries population living in cities is
currently 75%, while in the developing world city residents signify 45% of the
population. However, by 2020, those statistics are expected to increase to 78%
and 55%, respectively. There will also be 24 mega cities with populations of at
least 10 million each by 2020. (Deloitte, 2009). This means roads will be more
congested and people may prefer smaller vehicles. This shows that social and
demographic factors play a key role in determining the final product offering in
the industry
Technological Factors
Technological advances are generally driven by changes in legislation related to
the environment, safety etc social factors such as luxury, image, sophistication or
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 60
competition between manufacturers to be technologically superior. Frost and
Sullivan (2010) states that whilst much of the attention has focused on reducing
emissions and hence advancements will be made in powertrain technology, an
increasing area of focus in the future will be environmentally friendly materials
for cars. Technological factors also offer a means of differentiation to
manufacturers.
Source: Frost and Sullivan, 2010
A report by Deloitte (2009) lists the main technological trends affecting the
industry include
1. Powertrain technology and the move to electric: Greener and more fuel
efficient powertrains such as hybrids, alternative fuels and electric cars.
2. The shift from mechanics to electronics: Cars are increasingly becoming
electronic. The German market provides a good example: In 2007,
electronic content in passenger cars was estimated at 20 to 30 percent of
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 61
production costs. By 2010, the proportion is expected to rise to 40 percent
and by 2020, the number will likely reach 50 percent.
3. Cheap and basic mobility: In emerging markets, while personal income
levels are rising, disposable income remains low. Most of the population
will not be able to afford full size or even standard compact passenger cars
that are currently offered by OEMs. The cars that will sell best to first-time
and lower income buyers in these regions are the lower priced ones. In
some cases, this means removing extra features and options from a
vehicle.
Economic
Various economic factors such as interest rates, minimum wage, state of the
economy etc affect the car industry. The recent recession affected the interest rates
and economies all over the world and increased the cost of borrowing money. This
made it more difficult for manufacturers to raise capital. The reduced availability
of credit also affected car sales adversely as the spending power of consumers was
affected. (Fiat Annual Report 2009: KPMG, 2009)
In 2009, the more than 85% of automotive executives rated the Global Economy
as a key factor affecting the Automotive Industry.
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 62
Figure 23: Economy and Auto industry
Source: KPMG Global Automotive Executives Survey 2009
An increase in economic strength also increases the spending power of consumers.
The demand for vehicles will mainly come from the emerging markets. Figure 24
below shows the number of cars per 1000 people in 2008 and highlights the
potential of the markets of the BRIC nations.
Figure 24: Number of Cars per 1000 People in 2008
Deloitte, 2009
The Economist Intelligence Unit forecasts an increase in car ownership in the
developing world and states that by 2020, the main segment will be of first time
consumers who will be value conscious (Economist Intelligence Unit, 2009). The
growth of wealth in emerging markets will also mean an increase in the number of
high-net-worth individuals which will create a demand for luxury brands. A recent
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 63
Deloitte Consulting LLP survey indicated that individuals with high levels of
disposable income, will seek luxury brands with performance features as well as
additional luxury options, such as heated leather seats, sunroofs etc. (Deloitte,
2009)
This PESTEL analysis indicates how each of these factors influences the industry
and market. Furthermore, figure 25 shows how executives from the automotive
industry have rated the factors as being relevant in shaping the industry.
-
Str
ateg
ic A
llian
ces:
Ana
lysi
s of
the
Fia
t-C
hrys
ler
Str
ateg
ic A
llian
ce
64
How
impo
rtan
t are
the
follo
win
g is
sues
to th
e gl
oba
l aut
o in
dust
ry?
P
erce
ntag
e of
com
pani
es r
atin
g is
sues
as
impo
rtan
t
Fig
ure
25: I
mpo
rtan
ce o
f iss
ues
rate
d by
Aut
omot
ive E
xecu
tives
S
ourc
e: K
PM
G A
utom
otiv
e E
xecu
tives
Sur
vey
2010
.
C
ompa
nies
are
shi
fting
from
qua
lity
impr
ovem
ents
to n
ew p
rodu
cts
T
otal
affo
rdab
ility
and
pric
e se
en a
s le
ss im
port
ant t
han
inno
vatio
n (K
PM
G, 2
010)
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 65
6.2 Porters 5 Forces Analysis
Figure 26: Porters Five Forces Analysis
!!"
Power of Suppliers | Medium
Vehicle manufacturers consume many materials such as steel, aluminium,
components, and also incur costs of distribution, shipping and energy usage. Suppliers
of raw materials usually provide materials to a range of sectors reducing their
dependence on the automotive companies. On the other hand, Component
manufacturers and Tier 1 Suppliers are more dependent on vehicle manufacturers for
revenue and companies like Fiat can exhibit a considerable amount of negotiating
power due to this dependence and the large order sizes. Quality standards demanded
by vehicle manufacturers have lead to a select few suppliers that a company like Fiat
may source from. Switching over to an alternative supplier might be a problem due to
the high switching costs involved in tooling investments and also the difficulties
concerned with controlling the quality of the parts. This is a stage where the existing
supplier can apply negotiating power. Manufacturers usually have a variety of
suppliers for most of their input parts, for example Toyota and Honda guarantee that
-
Strategic Alliances: Analysis of the Fiat-Chrysler Strategic Alliance 66
no single supplier accounts for more than 5% of purchases of major inputs hence
reducing the risks and maintaining negotiating power. Therefore the level of supplier
power is classed as medium. (Investopedia, n.d.,: Datamonitor , 2010, Fiat, n.d.)
Power of buyers | Medium
The buyers in this industry are the dealers, corporate buyers and the final end
customer. The dealers and corporate buyers usually exercise substantial financial
strength and buy in large quantities putting pressure on vehicle manufacturers to