Tom Morrison-Jones Student Number: 759481
The Corporate Level Strategy of Fiat SpA
MBA Dissertation: 21stJuly 2006 Word Count: 18,437 1
Acknowledgements I would like to express thanks to my supervisor, Nick Potter, for his support, time, efforts guidance and advice during the time taken to prepare for and complete this dissertation.
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Table of Contents Page Acknowledgements……………………………………………………………………..…2 List of Figures…………………………………………………………………………..…7 List of Exhibits……………………………………………………………………….…....8 List of Tables……………………………………………………………………….……..9 List of Abbreviations…………………………………………………………………….10 1.0
Synopsis………………………………………………………………………….11
2.0
Assumptions & Limitations……………………………………………………13
3.0
An Introduction to Fiat SpA….………………………………………………..14
4.0
Literature Review………………………………………………………………19 4.1
4.2
Conglomerates…………………………………………………………...19 4.1.1
Theory versus Reality…………………………………………....19
4.1.2
Diversity & Performance………………………………………...20
4.1.3
Dominant Logic………………………………………………….22
4.1.4
The Context of Time……………………………………………..23
4.1.5
Emerging Economies…………………………………………….24
4.1.6
Contingent Diversification……………………………………….25
Alliances…………………………………………………………………26 4.2.1
To Make, Buy or Ally?..................................................................26
4.2.2
The Rise of Alliances………………………………………….…26
4.2.3
Learning Alliances……………………………………………….28
4.2.4
Collaborative & Competitive Learning…………………………..30
4.2.5
Strategic & Cultural Fit…………………………………………..32 4.2.5.A Strategic Fit…………………………………………….34 4.2.5.B Cultural Fit……………………………………………..36
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5.0
6.0
The Global Automotive Industry: External Audit…………………………...40 5.1
Industry Segmentation…………………………………………………...40
5.2
Macro-Environmental Influences………………………………………..40
5.3
Segment Attractiveness…………………………………………………..41
5.4
Critical Success Factors………………………………………………….41 5.4.1
Integration, Outsourcing & Resource Sharing…………………...41
5.4.2
Industry Evidence………………………………………………..43
Fiat SpA: Internal Audit……………………………………………………….46 6.1
Fiat the Conglomerate……………………………………………………46
6.2
Resources………………………………………………………………...48
6.3
6.2.1
Automobile Sector Brands, Product Portfolio & Quality………..48
6.2.2
Manufacturing Infrastructure…………………………………….49
6.2.3
Management & Workforce………………………………………49
6.2.4
Financial Performance & Resources……………………………..50
Capabilities & the Automotive Value Chain…………………………….53 6.3.1
Design……………………………………………………………53
6.3.2
Product Development…………………………………………….54 6.3.2.A Alliances & Collaborations…………………………….56 6.3.2.B Technology…………………………………………….57
6.4
6.3.3
Distribution & Sales Performance……………………………….57
6.3.4
Brand Management………………………………………………60
6.3.5
Retail & Aftersales Network……………………………………..61
S.W.O.T. Analysis……………………………………………………….62
7.0
The Future of Fiat as a Conglomerate……………………………………...…64
8.0
Corporate Level Growth Methodology Options……………………………...67 8.1
Organic Growth………………………………………………………….67
8.2
Disposal…………………………………………………………………..67
8.3
Acquisition or Merger……………………………………………………68
8.4
Collaborative Alliances…………………………………………………..69
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9.0
PSA Peugeot Citroen: Fiat’s Next Major Collaborative Partner?..................70 9.1
Strategic Fit………………………………………………………………70 9.1.1
Size & Strength………………………………………………......70
9.1.2
Global Infrastructure……………………………………………..72 9.1.2.A Manufacturing & Assembly Operations……………….72 9.1.2.B Distribution & Sales……………………………………73
9.1.3
Brands, Product Portfolio & Quality…………………………….74 9.1.3.A Brands………………………………………………….74 9.1.3.B Product Portfolio……………………………………….76 9.1.3.C Quality………………………………………………….76
9.2
9.1.4
Alliances & Collaborations……………………………………....76
9.1.5
Technology………………………………………………………77
Cultural Fit……………………………………………………………….78 9.2.1
Organisational Culture…………………………………………...78
9.2.2
National Culture………………………………………………….79
10.0
Conclusions & Recommendations……………………………………………..81
11.0
Appendices………………………………………………………………………84 11.1
Appendix 1: Overview of key macro-environmental factors…………….84 influencing the mainstream segment and their likely impact on Fiat.
11.2
Appendix 2:
Segmental Attractiveness Analysis………………………86
11.3
Appendix 3:
Segmental Key Success Factors………………………….88
11.4: Appendix 4:
A.T. Kearney’s Virtual Car Company ‘Indego’………....89
11.5
Appendix 5:
Fiat SpA Product Range Images…………………………90
11.6: Appendix 6:
Comparative Model Ranges of Fiat & Toyota by………..94 Segment.
11.7: Appendix 7:
Spoof Advertisements by ‘sniffpetrol.com’……………...95
11.8: Appendix 8:
Main Fiat Auto Plants in the World……………………...96
11.9: Appendix 9:
Fiat Workforce by Sector & Region 2004……………….98
11.10: Appendix 10: Recent Financial Performance of Fiat SpA………………99 11.11: Appendix 11: Alliances & Collaborations Since the Dissolution……...101 of the GM Relationship. 5
11.12: Appendix 12: Fiat Auto Sales Performance Analysis………………….103 11.13: Appendix 13: Current Peugeot & Citroen Model Range Images……...106 11.14: Appendix 14: Comparative Model Ranges of Fiat & Peugeot………...108 Citroen by Segment. 12.0
Bibliography & References.………………………………………………......109
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List of Figures Page Figure 2.0:
Strategy Continuum……………………………………………………...13
Figure 3.0:
Time-Line of Fiat’s Automotive Acquisitions…………………………...15
Figure 4.0:
Diversity & Performance…………………………..………………….....21
Figure 4.1:
The Make, Buy or Ally Matrix…………………………………………..26
Figure 4.2:
Organisational Forms……………………………….……………………28
Figure 4.3:
Types of Cooperative Strategies…………………………………………29
Figure 4.4:
Determinants of Learning in & from Alliances………………………….30
Figure 4.5:
‘Bow-Tie’ Relationship Management Structure…………………………31
Figure 4.6:
‘Diamond’ Relationship Management Structure………………………...31
Figure 4.7:
Collaborative & Competitive Learning…………………………………..32
Figure 4.8:
Strategic & Cultural Fit Matrix…………………..………………………34
Figure 4.9:
The Cultural Web…………………………………………………...……37
Figure 4.10:
Human Thinking and Behaviour…………………………………………39
Figure 5.0:
Segmental Positioning: Product Range v Brand Perception…………......40
Figure 5.1:
Segmental Key Success Factors………………….………………………41
Figure 5.2:
Forward Integration in the Automotive Industry………………………...42
Figure 6.0:
Fiat Group S.W.O.T. Analysis…………………………………………...63
Figure 9.0:
Fiat & PSA Group Brands: Global Footprints…………………………...75
Figure 9.1:
Fiat & PSA Group Brands: Brand Perceptions…………………………..75
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List of Exhibits Page Exhibit 3.0:
Fiat Topolino and Original Fiat 500……………………………………..14
Exhibit 3.1:
Gianni Agnelli & Paolo Fresco…………………………………………..15
Exhibit 3.2:
The Fiat Uno & Original Fiat Punto……………………………………..16
Exhibit 3.3:
Luca di Montezemolo & Sergio Marchionne……………………………17
Exhibit 3.4:
The New Fiat Grande Punto……………………………………………..18
Exhibit 5.0:
The Mini Visa Card……………………………………………………...42
Exhibit 5.1:
‘Mercedes-Benz World,’ Brooklands, Surrey: Under Construction……..45
Exhibit 6.0:
Fiat S.p.A. Corporate Structure…………………………………………..46
Exhibit 6.1:
Luca DeMeo & Karl-Heinz Kalfbell…………………………………….49
Exhibit 6.2:
Frank Stephenson & The Original Fiat Stilo ……………………………53
Exhibit 6.3:
The Original Fiat Multipla: ‘One of the Ugliest Cars Ever Built’……….54
Exhibit 6.4:
Fiat 500 Concept Car……………………………….……………………54
Exhibit 6.5:
The Original Alfasud, New Alfasud and Alfa 8C Competizione………..55
Exhibit 6.6:
The Alfa Romeo ‘Kamal’ SUV Concept………………………………...55
Exhibit 6.7:
The Original & New Lancia Deltas and Fulvias…..……………………..56
Exhibit 6.8:
Microsoft Windows for Fiat……………………………………………...57
Exhibit 6.9:
New Peugeot 207, GM Corsa, Renault Clio & Toyota Yaris……………60
Exhibit 7.0:
‘In Search of Fiat’s Soul’ (Economist, 1/6/2000)…………….………….64
Exhibit 9.0:
Sales Flops: Peugeot 605, 607 and Citroen C6…………………………..76
Exhibit 9.1:
Mitsubishi Outlander Platform for 2007…………………………………77
Exhibit 9.2:
Thierry Peugeot & Jean Martin Folz……………………………………..78
Exhibit 11.0: The Peugeot Boxer, Citroen Jumper & Fiat Ducato Collaboration…….102 Exhibit 11.1: The Fiat Scudo Citroen Jumpy & Peugeot Expert Collaboration………102 Exhibit 11.2: The Fiat Ulysee, Citroen C8 & Peugeot 807 Collaboration……………102
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List of Tables Page Table 4.0:
National Culture Differences.………………………………..…………..38
Table 5.0:
Examples of Production Outsourcing Arrangements…………………….44
Table 6.0:
Turnover, Trading Profit & Return on Sales by Sector………………….47
Table 6.1:
Fiat Group Global Workforce 2000-2004………………………………..50
Table 6.2:
Fiat Group Consolidated Income Statements 2004-2005……..…………50
Table 6.3:
Fiat Group Change in Net Industrial Debt 2005…………………………51
Table 6.4:
Gross Margins……………………………………………………………52
Table 6.5:
West European Passenger Car Registrations (in millions)………………58
Table 6.6:
Major Global Automotive Manufacturers by Volume …………………..59
Table 6.7:
Vehicle Sales in 2004 versus 2009 (millions of cars & pick-ups)……….59
Table 9.0:
Manufacturer Volumes: Pre & Post Fiat-PSA Alliance Formation……...71
Table 9.1:
Fiat & PSA Global Manufacturing & Assembly Infrastructures………...72
Table 11.0:
Fiat Group Segmented Net Revenues 2004-2005………………………..99
Table 11.1
Fiat Group Segmented Trading Profits 2004-2005……………………..100
Table 11.2
Western European Automotive Market Shares 2002-2004…………….103
Table 11.3
Fiat Automobile & LCV geographical sales 2002-2004……………….104
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List of Abbreviations AGM
Annual General Meeting
ASEAN
Association of South East Asian Nations
AWD
All-Wheel Drive
CEO
Chief Executive Officer
COO
Chief Operating Office
CUV
Cross-over Utility Vehicle
EU
European Union
FIAT
Fabbrica Italiana Automobili Torino
GM
General Motors
GSP
Global Strategic Partnership
IJV
International Joint Venture
LCV
Light Commercial Vehicle
MBA
Master in Business Administration
MPV
Multi-Person Vehicle
NAC
Nanjing Automobile Corporation
OEM
Original Equipment Manufacturer
PAG
Premier Automotive Group
PSA
Peugeot Societe Anonyme
PwC
PricewaterhouseCooper
R&D
Research & Development
RoS
Return on Sales
SAIC
Shanghai Automotive Industry Corporation
SMMT
Society of Motor Manufacturers & Traders
SpA
Societa per Azioni (Joint stock Company)
SUV
Sports Utility Vehicle
VBO
Vehicle Brand Owner
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1.0: Synopsis In fulfilment of a previous MBA strategy assignment, the subject of Fiat Group’s corporate and business level strategy was investigated and considered at a high level in January 2006. This work suggested, with limited justification, that Fiat Group should consider spinning-off a multitude of businesses and form a comprehensive strategic alliance with PSA Peugeot-Citroen of France. This dissertation focuses, purely and in greater detail, upon the corporate level strategy of this famous Italian automotive company. It is based on evidence gathered from a variety of secondary academic sources, in addition to other respected and relevant secondary sources from within and external to the automotive industry. After establishing some primary assumptions and limitations, chapter 3 provides an introduction and historical background for Fiat SpA. Chapter 4 then reviews the key literature in the case for and against diversified conglomerates and in the area of alliance formation and fit. Following this, chapter 5 undertakes an external audit of the global automotive industry, before diagnosing and then testing a series of industry critical success factors. Chapter 6 contains a comprehensive internal audit of Fiat, both at a general level in respect of the Group and at a detailed level specifically relating to its automobile division. In view of these resources and capabilities, and in the context of the industry critical success factors highlighted, chapter 7 provides a discussion on the likely future appropriateness of Fiat SpA as a highly diversified conglomerate. Given this assessment, chapter 8 considers the feasibility, suitability and acceptability of various alternative corporate level growth methodology options; and suggests that the industry’s infatuation with collaborative alliances represents the most logical route for the company in the current environment. Chapter 9, attempts to provide an extensive consideration as to the compatibility of Fiat and PSA Peugeot Citroen as major global collaborative partners; specifically by analysing their potential strategic and cultural fit. The dissertation concludes in chapter 10, with an attempt to synthesise these findings and considerations, into a possible corporate level strategy for Fiat SpA going forward. Overall, this dissertation largely reinforces the suggestions of the previous work referred to; albeit with far greater foundation. It asserts that Fiat SpA has diversified beyond its 11
optimal level and thus requires refocusing activity; and that in the current environment the Group’s automotive operations cannot survive on an independent and stand alone basis. Assuming a lack of appetite for mergers and acquisitions, the need for a strategic alliance is therefore obvious yet the landscape appears bereft of the perfect partner. It is concluded that whilst PSA may represent the closest fit partner available, the match is far from perfect, and there are serious reasons to suppose that PSA would be unwilling to commit its future fate to that of Fiat (Kanter, 2004). Thus a hybrid corporate level strategy seems the most realistic option for the company; where a series of specific and distinct alliances are formed for various defined activities; which negates the need for either party to connect the future of both firms together. Such an approach would also prevent Fiat from once again becoming over-reliant on a single strategic partner.
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2.0: Assumptions & Limitations In attempting to formulate a corporate level strategy, Fiat SpA could adopt an over-riding approach anywhere along the proposed continuum in figure 2.0. Figure 2.0: Strategy Continuum:
Exit loss-making car manufacture; focusing upon currently profitable activities (e.g. CNH & Iveco)
Focus on core car manufacturing activities; divesting other operations to support their turnaround
This report takes the perspective that Fiat is first and foremost a car company; and for this reason confines its attention to possible strategic recommendations on this basis. The justification for this is both historical, in the sense that the Agnelli’s always made divesting Autos off-limits (even when Fresco was appointed from GE); and current in the sense that CEO Marchionne has gone on record as saying: “all our strategic choices for the Group are of no value unless we can fix the car business” (Economist 1/12/05). Questioning the wisdom of this over-riding strategic intent is therefore beyond the scope of this dissertation. Additionally, in view of the secondary nature of the research conducted, a significant limitation of this dissertation lies in the area of cultural fit assessments between the prospective alliance partners.
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3.0: An Introduction to Fiat SpA: “Turin-based Fiat is a vast industrial conglomerate that has interests in everything from farming equipment and department stores, to newspapers and football, but the company has always been most famous for its cars.” (Marketing Week, 2005)
Fiat was a pioneer of the automotive industry, producing its first automobile in 1899 and quickly gaining a reputation for making small cars that people wanted to buy (such as the Tolopino and Fiat 500 shown in exhibit 3.0). Exhibit 3.0: Fiat Topolino and Original Fiat 500: Fiat Topolino
Fiat 500
In addition to dominating its domestic Italian market, the company enjoyed considerable international expansion, manufacturing vehicles under license in America before the First World War and becoming one of the first companies to build factories in Soviet controlled territories, through a venture with the Russian government known as AutoVAZ (or Lada) and in Tychy, Poland known as FSO. It was also one of the first European manufacturers to introduce Taylorist production principles. One of the founding members, Giovanni Agnelli, led the company to his death in 1945, with his son Gianni Agnelli (see exhibit 3.1), eventually taking the helm in 1966. From the late 1960s the company began expanding its automotive brand portfolio (see figure 3.0), by acquiring Autobianchi in 1967 and then Citroen in 1968. Although Citroen was subsequently divested in 1976, this move created the world’s third largest carmaker behind GM and Ford; significantly reducing dependence upon the Italian market (Economist, 30/1/2003). By this time sales exceeded Germany’s Volkswagen at one million units per annum, with turnover at $1.7bn; leading Newsweek to proclaim that Fiat 14
was “the most dynamic automaker in Europe and may come closest to challenging the worldwide supremacy of Detroit,” (bluebird-electric.net). Further acquisitions were duly made with Ferrari and Lancia in 1969, Alfa Romeo in 1986 and finally Maserati in 1993. Figure 3.0: Time-Line of Fiat’s Automotive Acquisitions:
Source: en.wikipedia.org During this period Gianni Agnelli attempted to reduce the company’s reliance on automobiles by investing in public transport. This deprived the core business of the capital it required and resulted in debts that threatened the very future of the company. Salvation came in the mid-80s in the form of the Fiat Uno (see exhibit 3.2), which restored profitability to $1.8bn in 1987 and facilitated the elimination of much debt. However, Gianni Agnelli continued to diversify (with similar consequences) and Fiat became a sprawling conglomerate ranging from telecoms to newspapers to pharmaceuticals, (Economist 30/1/03). Exhibit 3.1: Gianni Agnelli & Paolo Fresco: Gianni Agnelli
Paolo Fresco
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Saved again in the 1990s by the Punto (see exhibit 3.2), Gianni Agnelli hired Paolo Fresco (see exhibit 3.1) from General Electric as Chairman. Fresco proceeded to implement a strategy that would endeavour to make Fiat the ‘GE of Europe,’ thus ensuring the automotive division continued to be deprived of much needed capital investment. During the period 1995-2001 the Group invested a paltry $4.5bn on automotive research and development, compared with Volkswagen’s $20bn, (Economist 30/1/03); and Toyota’s £4.5bn sterling investment into this area intended for 2006. This contrasted starkly with the €6bn spent in 1999 alone on diversification, including the $4.3bn acquisition of CASE to create Case New Holland and the $350m acquisition of Pico (Progressive Tools and Industries) which merged with Comau. This was followed in 2000 by the acquisition of 500 Midas quick auto-servicing outlets to be integrated within the Magneti Marelli subsidiary, (Economist, 1/6/2000). And in 2001 Fiat was part of the Italenergia consortium which acquired the Montedison agro-energy conglomerate for $4.3bn. In December 2001 Roberto Testore resigned as head of Fiat Auto making way for Giancarlo Boschetti’s internal promotion. Exhibit 3.2: The Fiat Uno & Original Fiat Punto: Fiat Uno
Fiat Punto
Not only did this consistent lack of investment result in gaping holes in the product range; it was also instrumental in damaging the firm’s reputation for quality. In many English speaking markets the brand become synonymous with “Fix It Again Tony,” leading to the withdrawal of Fiat and Lancia from the U.S. in 1984 and from Australia in 1989. Alfa Romeo duly departed the U.S. in 1995. In German speaking markets the brand earned the reputation as “Fehler In Allen Teilen” (defects in every part) and “Fur Italien Ausreichende Technik” (sufficient technology for Italy). In 2000 General Motors bought a 20% stake in Fiat for $2.4bn, fearing that it would be left behind in a wave of mergers and alliances sweeping across the industry. Such was 16
Gianni Agnelli’s determination to retain control, he turned down GM’s $11bn offer for the whole firm at the time. By 2002 GM, facing its own problems, refused to provide further financing and Fiat was forced to sell its 6% stake in GM for $1.6bn, a 34% stake in Ferrari to Mediobanca SpA for €775m; and to issue convertible bank loans to the value of €3bn, (Economist, 18/2/05). Further divestments took place in 2003, most notably the sale of its insurance services subsidiary Toro Assicurazioni SpA to De Agostini Group for €2.4bn; Fiat Avio its aerospace arm to the Carlyle Group for $1.7bn; Fraikin truck rental to Eurazeo for €805m; 51% of its retail financing arm Fidis for €370m; and 56% of its real estate company IPI SpA, for €267m. In the same year a share issue was also announced to raise a further €1.8bn (Economist, 26/6/03). Fresco resigned following the death of the man who appointed him in 2003, to make way for Umberto Agnelli, who duly appointed Guiseppe Morchio as CEO (becoming the fifth person to hold that position in 8 months). Boschetti was then replaced by Herbert Demel from Volkswagen in November 2003, who himself was second choice after Martin Leach from Ford. Luca di Montezemolo (see exhibit 3.3) became Chairman in May 2004 following the death of Umberto Agnelli (the third family member to succumb to cancer in 7 years); a development which caused Morchio to resign from CEO at the same time. In February 2005, Demel was shown the door to be replaced by Canadian-Italian Sergio Marchionne as CEO (see exhibit 3.3). In October 2005 another family death was narrowly avoided when Giovanni Agnelli’s grandson, hier and Fiat executive Lapo Elkann was resuscitated having overdosed at the apartment of a transsexual prostitute. Exhibit 3.3: Luca di Montezemolo & Sergio Marchionne: Luca di Montezemolo
Sergio Marchionne
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Marchionne, raised in Toronto by Italian parents is qualified as a solicitor, barrister, accountant and tax specialist, as well as studying in business; and impressed the Agnellis by turning around Swiss quality assurance service company SGS. Furthermore he is starting to impress investors with his ability to hit financial targets, (Economist, 1/12/05). The Agnelli family still retains ownership of the Group with a 30% controlling interest via IFIL Investments; but following the death of Umberto in 2004 Montezemolo and Marchionne appear to be left with greater freedom than any of their predecessors to fix Fiat’s problems. Just as the Uno saved the company in the eighties and the Punto in the nineties, salvation appears to have arrived in the form of the Grande Punto in the naughties (see exhibit 3.4). Their key challenge is to ensure this salvation is not squandered again, because ever-shortening product lifecycles will prevent the Group from succeeding as a ‘one trick pony’ (Economist, 30/1/03) once every decade. Exhibit 3.4: The New Fiat Grande Punto:
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4.0: Literature Review 4.1: Conglomerates Conglomerate: “A group or corporation of merged firms” Conglomerating: “Collect into a coherent mass” (Oxford English Dictionary, 1992)
4.1.1: Theory versus Reality The theoretical advantages of conglomerates are varied and numerous; including better economies of scope, improved coordination; and greater access to captive pools of skill, information, experience, expertise and fiscal resources. Such advantages emanate from the diversified firm’s ability to exploit excess firm-specific assets (e.g. brands, managerial skills and technological innovations); which cannot be traded without incurring transaction costs due to market imperfections (Markides, 1992). It has even been suggested by Williamson (1975) that such organisations can offer lower agency costs as corporate management are in a better and more readily informed position to hold divisional management to account and allocate resources efficiently on behalf its shareholders. However, large diversified corporations are, as the name suggests, large; and large can often conjure up perceptions of unwieldiness, inflexibility, slowness and bureaucracy. Thus the reality can be that efficient external markets enable more effective monitoring of agency costs and that investors are better placed to diversify risk for themselves; “often more cheaply than a corporation because they can buy shares at the market price and avoid hefty acquisition premiums,” (Porter, 1987, pp.46). Additionally, through the use of networks, the reality is that skills and expertise are widely available without the need for formal integration. The theory might therefore suggest that global economies should be densely populated with conglomerates; whereas the reality might suggest that none should exist at all. In practice conglomerates do exist and some have been more successful than others, suggesting their relative merits might be the subject of considerable ambiguity.
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4.1.2: Diversity and Performance The presence of conglomerates and the dichotomy between their fortunes (take for example Hanson and General Electric), has stimulated extensive debate surrounding the virtues of diversified firms; principally surrounding the relationship between the relatedness of diversification and firm performance. Interestingly, the use of the word ‘coherent’ by the Oxford English Dictionary when defining the word conglomerating; would certainly seem to imply a degree of relatedness beyond the notion of mere ownership. Some of the earliest studies in this area were conducted by Rumelt (1974, 1977), who was able to demonstrate a linkage between diversification and financial performance (Montgomery, 1982), leading him to contend that managers should look for diversification opportunities in closely related areas rather than straying too far from the base business (Bettis, 1981). Bettis (1981) himself found that related diversification strategies outperformed other diversification strategies. By contrast an unrelated diversification strategy was found to be one of the lowest performing diversification strategies. On average related diversified firms outperformed unrelated diversified firms by about one to three percentage points of return on assets and were able to achieve higher returns on research and development. By the eighties, such was the mass of evidence against un-relatedness that Peters and Waterman (1982, pp.294) suggested “virtually every academic study has concluded that un-channelled diversification is a losing proposition.” This observation provided the basis for one of their ‘Golden Rules of Excellence’ which advised firms to ‘Stick to the Knitting’ (Grant, 2005). As noted by Khanna and Palepu (1999), it no doubt also fuelled the apparently obvious arguments for restructuring conglomerates, in that selling off assets can quickly reduce huge debts, reduce gross inefficiencies and promote greater entrepreneurship. Palich, Cardinal and Miller (2000) continued this strand by synthesising the findings of research from the preceding three decades, finding the existence of a curvilinear relationship which demonstrated that performance increases as firms shift from single20
business strategies to related diversification, but that performance decreases as firms change from related to unrelated diversification. However, the authors qualified this finding in the sense that related diversification ad infinitum could not be assured to continually improve performance. Instead, their tests indicated that moderate levels of related diversification yielded higher levels of performance than either limited or extensive related diversification (see figure 4.0). Figure 4.0: Diversity and Performance:
Source: Johnson et al, (2005, pp.290) The existence of this curvilinear relationship was also supported in findings by Hoskisson and Hitt (1990) and by Markides’ (1992, pp.399) study of 45 firms. Markides concluded there must be a limit to the extent a firm can diversify, because “were this not the case, the world would be dominated by a single mega-firm;” implying that “the relationship between diversification and its marginal benefits is a decreasing function.” Despite these seemingly consistent findings, research in the eighties also provided contradictory propositions, leading Grant to state that “the lack of clear performance differences between related and unrelated diversification is troubling,” (2005, pp. 463). Christensen and Montgomery (1981) for example, pointed to the role of risk and industry influences as alternative explanations for the superiority of related diversifiers. Furthermore, Michel and Shaked (1984) concluded that firms diversifying into unrelated areas had generated superior performance compared with those characterised by 21
predominantly related businesses! This proposition was based upon a study of 51 firms indicating that unrelated diversification generates superior risk-return profiles than related diversification. They found that whilst unrelated diversification was unlikely to deliver operating synergies, this was outweighed by the benefits accrued from spreading income stream risks (e.g. the risk to earnings streams of earlier than expected technical obsolescence of a particular production technology). Such findings would seem to support a portfolio style of corporate management, despite Porter’s (1987, pp.52) view that “portfolio management is no way to conduct corporate strategy” following his findings that the average divestment rate of unrelated acquisitions was a startling 74%. In attempting to try and reconcile such diametrically opposed findings a number of themes have emerged, including references to dominant logic, time and emerging economies. 4.1.3: Dominant Logic “The bottom line is that each top management team at a given point in time has an inbuilt limit to the extent of diversity it can manage….top managers are less likely to respond appropriately to situations where the dominant logic is different, as well as not respond quickly enough.” Prahalad & Bettis (1986, pp.497)
It is conceivable that the disagreement surrounding the relationship between the degree of related diversification, it’s extent and firm performance, stems from differing base perceptions concerning the definition of relatedness. Just as related for one firm may be unrelated for another, so too can one researcher’s view of what constitutes relatedness vary from anothers. The example of Honda, a firm largely regarded as a creator of shareholder value, can be used to demonstrate this point in that one researcher could view the firm as an unrelated diversifier involved in the manufacturer of automobiles and hedge trimmers; or as a related diversifier whose core competence is manufacturing engines; 5m of which go into boats/lawnmowers/hedge-trimmers, 4m into motorcycles and 3.4m into autos (Economist, 3/8/00). Hence Prahalad and Bettis (1986) proposed the concept of dominant logic (or world view) as the new linkage between diversity and performance; whereby managerial ability to run a diversified firm is limited by their experiences and difficult to change dominant 22
mindset. In this respect, they argue, “solutions based on past experience, or solution by analogy, may be inappropriate,” (1986, pp.493). Whilst a firm’s dominant logic clearly places limitations and constraints with regard to diversity it can also be seen to alter perceptions concerning relatedness. Johnson et al (2005) point out that many businesses under the domain of Berkshire Hathaway could be considered to possess limited degrees of relatedness. The firm’s success therefore seems to support the notion that un-relatedness can lead to superior performance as advocated by Michel and Shaked (1984). However, if considered from the perspective that the firm is exploiting its dominant logic by focusing upon mature and understandable industries with trustworthy managers, then relatedness can be established. 4.1.4: The Context of Time The issue of time has also been referred to in explanations surrounding disagreements between the degree of related diversification, its extent and firm performance. The post-war ‘baby boom’ years largely bore witness to both stability and growth. Within this environment the over-riding pursuit of growth and the infatuation with the science of management were conducive to the development of highly diversified conglomerate businesses. However, the more turbulent economic environment from the late 1970’s, placed an emphasis on the creation of shareholder value over absolute growth, requiring the demonstration of actual rather than perceived synergies. Shifts in management thinking towards the resource based view also created pressure for conglomerates to focus resources on their core capabilities. Fuelled through information technology, markets became more sophisticated and efficient; investors became more empowered and the concept of virtual networks became a reality, making skills and expertise more readily available than ever. This transitional period has required large diversified companies to reconcile their theoretical benefits with the practical requirements to be flexible, agile and dynamic; in an uncertain and ever-changing environment. During this time numerous conglomerates (e.g. Seagram, ITT and Hanson) have succumbed to investor calls for break-up. Others 23
(most notably General Electric) have successfully evolved, managing to reconcile the benefits of the multi-business corporation with those of smaller more flexible entities. Nonetheless, such has been the negative connotation of conglomerates; even successful evolvers have preferred to re-brand themselves as multi-businesses, in their attempts to avoid the seemingly inevitable ‘conglomerate discount’. Grant (2005) suggests this growing turbulence of the business environment may have increased the costs of managing complex, diversified corporations. A possible explanation for the differing findings of various researchers could therefore merely reflect this changing relationship between diversification and performance over time. Expanding on this theme, Markides (1992, pp.401) observed that economic globalisation and increased environmental uncertainty and volatility have increased costs such as information and control loss problems associated with the steep hierarchies of diversified firms. Furthermore, he posited that over time, increasingly sophisticated and deregulated capital markets have served to undermine a conglomerate’s ability to provide a more efficient internal market. Such developments, he argued, “imply that the optimal diversification levels of firms are now lower, so that even firms that were optimally diversified 20 years ago are now over-diversified.” Pursuing a slightly different angle, Johnson et al (2005, pp.291), considered that the changing relationship between diversification and performance over time might be related to the eventual passing of the founding top management. 4.1.5: Emerging Economies The explanation of emerging economies is of course related to the issue of time, as over time emerging economies cease to be ‘emerging’ and become ‘emerged’ or fully developed. The principal tenant relating to emerging economies is that highly diversified conglomerates may have a particularly significant role to play in such countries where capital and managerial skill markets are less efficient. Johnson et al (2005, pp.402) specifically refer to India, Russia and South America as locations where this holds true,
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highlighting that in such economies “holding companies can add value by making up for the failings of external markets.” Supportive research in Chile, India and South Korea by Khanna and Palepu (1999) demonstrated that it takes longer than a decade to build the kind of institutions that can support well-functioning external markets and that refocusing conglomerates (such as the chaebol in Korea or TATA Group in India), would serve to detriment the competitiveness of those firms and their wider national economies. 4.1.6: Contingent Diversification It is therefore apparent that disagreement exists over the appropriateness of highly diversified conglomerates. However, the balance of evidence would appear to favour those who suggest their relevance has diminished in the current environment, particularly if beyond the realms of dominant logic; but with the exception of emerging economies. However, rather than seeking to find a definitive conclusion as to the appropriateness of conglomerates, perhaps it is more meaningful, as Markides (1992) alludes, to consider diversification as contingent upon a variety of factors. Thus, he concludes that, every firm has a different limit (or optimal point) depending on its resources, external environment, type of diversification, management team, capacity to learn from past diversification moves and so forth. Such an approach would successfully explain the continued existence of certain conglomerates, even in developed economies (such as General Electric); against a backdrop where many others within developed economies (such as Seagram, ITT and Hanson), have succumbed to the conglomerate discount and calls for break-up in recent times. With such a contingent approach towards diversification in mind, firms can draw upon Porter’s (1987) ‘attractiveness’, ‘cost of entry’ and ‘better-off’ tests, for guidance as to whether their own diversification creates shareholder value. However, in an efficient developed economy ultimately the markets will make this judgement. In fact the Economist once reported that the only reason GE remained a conglomerate was because the market allowed it to.
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4.2: Alliances Alliance: “Union or agreement to cooperate.” Oxford English Dictionary, 1992.
4.2.1: To Make, Buy or Ally? In pursuit of their strategic objectives firms can choose between making, buying or allying when it comes to a particular activity in the value chain. As Child et al (2005) explain, all firms have limited resources and should therefore ensure these finite resources are optimally deployed according to the strategic importance of activities and the ability of the firm to carry those activities out. Thus an activity which is of limited strategic importance and which the firm has limited competence to execute should clearly be contracted out. Where the opposite is true, the activity should be completed in house; and for intermediate situations it may be more appropriate to form an alliance. Figure 4.1: The Make, Buy or Ally Matrix:
H
Ally
Make
Make
Strategic Importance M of Activity
Ally
Ally
Make
L
Buy
Buy
Buy
M
H
L
Relative Competence Level
Adapted from Child et al (2005, pp.100) 4.2.2: The Rise of Alliances Geringer (1991) highlighted that more joint ventures and other collaborative arrangements have been announced since 1981 than in all prior years combined (Anderson 1990). Whilst interestingly, data presented by Gatignon and Kimberly (2004), found the vast majority of over 1,800 such agreements since 1976, could be found in the
26
five sectors of automobiles, aerospace, telecoms, computers and electrical goods. Perlmutter and Heenan (1986) referred to this ‘frantic search’ for the best set of corporate colleagues as ‘hectic partnering’. This apparent growing acceptance regarding the potential of cooperative alliances in response to an ever-changing and uncertain global market has been fuelled by a multiplicity of internal and external factors. Child et al (2005) point to the five factors of globalising markets, rapidly changing technologies, shortening product lifecycles, high investment requirements and limited resources / core competencies; all of which are clearly pertinent in the context of the five sectors highlighted by Gatignon and Kimberly (2004) above. Lei and Slocum (1991, pp.51-2) explain that the costs and risks of developing successive generations of new products have become too onerous for a single firm to bear. That simultaneously meeting the demands for high variety and low cost is too much for many companies to manage on their own; and that the escalating costs and risks inherent in many technology-intensive projects are making simultaneous partners out of competitors. Ulrich (1983) pointed to resource scarcity, the information explosion, increased complexity and foreign competition as the four key environmental changes requiring organisations to adapt from competitive to cooperative corporate strategies. Thus, he posited that in adopting cooperative strategies firms might overcome resource scarcity by sharing new product development costs and might moderate the information explosion by sharing the risk and sense-making required to enter new markets. Aiken and Hage (1968) also suggest that organisations go into joint ventures because of the need for resources; whilst Kogut (1988) highlighted the ability of joint ventures to provide the most cost effective means of improving a firm’s strategic position whilst also facilitating organisational learning. Contractor and Lorange (1988) refer to seven different motivations including risk reduction, scale economies, technological exchange, blocking competition, overcoming trade and investment barriers, facilitating international expansion; and achieving vertical quasi-integration advantages throughout the value chain. 27
In the context of this new cooperative landscape, Perlmutter and Heenan (1986, pp.152) duly suggested that biologist Lewis Thomas “expressed it best when he argued that survival of the fittest does not mean that nature is red in the tooth and claw – as nineteenth century evolutionary theory argued. Nor does it mean that only the strongest, shrewdest, and most dominating will win. The fittest – those who survive – Thomas suggested, are those who cooperate best with other living things.” These same authors go on to say that few companies will achieve international leadership in the world economy without ‘global strategic partnerships’ (GSP’s). They point to the attractiveness of GSP’s in allowing firms to join together in specific products or markets whilst retaining autonomy in others, as a further explanation for their increasing popularity; because those companies involved are not required to sacrifice their national or ideological identities. A further motivating alliance factor, substandard performance, was identified by Bolton (1993) during his research across 74 high technology firms in the United States. His study found that substandard performers were more likely to be early joiners of research and development consortia, than more risk-averse high performing firms; because “necessity is the mother of innovation,” (1993, pp.61). 4.2.3: Learning Alliances: In choosing to cooperate firms may position themselves at any one of the many levels of integration between market and hierarchical forms of organisation (see figure 4.2). Figure 4.2: Organisational Forms:
Hierarchy Strategic alliance Degree of Integration
Licensing agreement Hub-subcontractors “Keiretsu” Loose co-operative network Established supplier and distributor network Markets
Source: Child et al (2005, pp.107-110) 28
Strategic alliances are said to differ from almost all other forms of cooperation in that the motivation for their formation stems from the desire to learn from the ally rather than to merely instigate a skills substitution arrangement. Figure 4.3 visualises this distinction. Figure 4.3: Types of Cooperative Strategies:
Adapted from: Child et al (2005, pp.110) According to Child et al (2005), a skills substitution arrangement is less risky as proprietary information is less likely to be given away and if the arrangement founders partners merely need to find another partner. However, due to the absence of learning they contend that such arrangements are destined to be more limited in their scope. Kanter (1994, pp.97) verbalises this same theme by stating “alliances that both partners ultimately deem successful, involve collaboration (creating new value together) rather than mere exchange (getting something back for what you put in).” As such many alliances can be considered as vehicles for learning. Various contributors have attempted to provide a taxonomy of learning alliances from ‘joint ventures, collaborations and consortia’ (Child et al 2005), to ‘x and y alliances’ (Ghemawat et al, 1986), ‘diagonal alliances’ (Bronder and Pritzl, 1992); and ‘complimentary / shared supply / quasi concentration alliances between competing firms,’ (Dussauge and Garrette, 1999). Further terminology has been provided by Dussauge et al (2004) who refer to ‘link and scale alliances’; and by Lei and Slocum (1991) with their ‘specialisation and shared value-adding’ ventures; where under specialisation each partner contributes a distinctive competency, whereas under shared value-adding ventures both partners perform a competency jointly.
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4.2.4: Collaborative & Competitive Learning: “Unlike most assets, organisational knowledge can actually grow when shared.” Inkpen (1998, pp.75)
Child et al (2005) outlined their three determinants of learning as intent, capacity and conversion ability (see figure 4.4), within which positive learning intent can be either collaborative or competitive in nature. Figure 4.4: Determinants of Learning In & From Alliances:
Source: Child et al (2005, pp.283) Competitive learning refers to a relationship where each partner intends to learn as much as possible from the other partner in as short a timeframe as possible, for their own gain and usually to the eventual detriment of the other partner. Collaborative learning on the other hand refers to a relationship where both parties intend to promote an atmosphere of mutual learning for the benefit of both partners. In the former scenario, both organisations are likely to share knowledge defensively, for fear of permitting information leakages or overspills; similar to a bow-tie structure of relationship management (see figure 4.5). The latter scenario meanwhile, is likely to be characterised by more open information exchanges and broader functional interactions, similar to a diamond structure of relationship management (see figure 4.6). A number of different perspectives exist on the relative merits of each type of learning intent. Gary Hamel (1991) for example advocated the need for partners to outlearn each other in the ‘competition for competence’ and to trade information whilst protecting ones 30
own bargaining power. Whilst Child et al (2005) promote the benefits of an integrative win/win approach as a means for achieving a higher, third order or ‘duetero’ level of learning. Figure 4.5: ‘Bow-Tie’ Relationship Management Structure:
Sales & Marketing Production Accounting Logistics Finance R&D
Partner B
Partner A Information
Gatekeeper
Gatekeeper Exchange
Sales & Marketing Production Accounting Logistics Finance R&D
Figure 4.6: ‘Diamond’ Relationship Management Structure: Partner A
Gatekeeper
Sales & Marketing Production Accounting Logistics Finance R&D
Partner B Sales & Marketing Production Accounting Logistics Finance R&D
Gatekeeper
Irrespective of which viewpoint is adopted it is largely accepted that a competitive stance is likely to result in a predatory and unstable alliance, as both sides succumb to the prisoner’s dilemma temptation to defect (see figure 4.7). Inkpen’s (1998) observations of an anonymous joint venture between a Japanese and American firm (referred to as HitoAlpha), certainly support this contention. Having ensured the ventures headquarters were separated from other Japanese facilities, restricted the access of joint venture personnel and insisted on an external general management appointment; Hito successfully completed its learning intentions, eventually buying out its American partner. Interestingly, in the context of the global automotive industry, Dussuage et al (2004) found that amongst competing firms, link alliances lead to more volatile asymmetric 31
outcomes than scale alliances. Their analysis focused upon the changes in relative market share that occurred following 135 collaborative alliances among competing firms from 1966 to 1995. They also concluded that partners tended to reorganise or take over link alliances earlier and more often than scale alliances. This led them to liken link alliances with Trojan Horses because the less that partner contributions overlap the more profitably the partners can internalise skills acquired through competitive inter-partner learning. Scale alliances on the other hand were more likened to coalitions as most learning is confined to joint learning which extends the alliance’s common knowledge base in the given area of similar contributions. Figure 4.7: Collaborative & Competitive Learning:
High
Dynamic
Unstable
Dissolve
Predatory
Collaborative
Low
Low
Competitive
High
Source: Child et al (2005) Suffice it to say that the suitability of each type of learning intent is likely to be contingent upon a variety of internal and external factors. Whilst the stance adopted will undoubtedly have a bearing on alliance performance, it cannot alone provide the determinant of success. Thus, if the alliance is characterised by questionable strategic and (often over-looked) cultural fit in terms of partner selection, then the suitability of learning intent is unlikely to paper over the cracks for long. 4.2.5: Strategic and Cultural Fit Alliance formation rests largely on the hopes, dreams and optimistic ambitions of their creators. Selective perceptions reinforce the dreams, not the dangers. Leaders see in the other partner what they want to see and believe what they want to believe, often realising 32
only later that infatuation blinded them to the early warning signs, (Kanter, 2004). Kanter went on to liken the process of alliance formation to that of personal courtship, where factors such as chemistry and rapport precede criteria such as cultural compatibility. It could also be argued that some alliances are formed in response to ‘industry shocks’ (Andrade et al, 2001), such as deregulation, foreign competition, technological innovations and rising raw material prices. Whilst Andrade et al highlighted these shocks in the context of explaining merger activity, parallels can certainly be drawn as underlying reasons for alliance formation in the automotive industry. This, combined with the potential of competitor alliance formations to act as ‘information cascades’ (Bikchandani et al, 1992); may serve to explain alliance activity by cluster. For example the merger of Daimler-Benz and Chrysler in 1998 sparked sudden ‘frantic searches’ and ‘hectic partnering’ (Perlmutter and Heenan 1986) within the automotive industry cluster. Given the subsequent performance of some of these alliances, it is possible that a ‘metoo’ syndrome played proportionally too prominent a role in the decision-making process, as industry participants feared the consequences of not forming an alliance to a greater extent than of forming an inappropriate alliance. Little wonder then that an estimated 37-70% of international joint ventures are reported to suffer from performance problems leading to costly failures (Deliotte, Haskins & Sells International 1989; Harrigan 1985); or that Chowdhury (1989) argued a lack or erosion of complimentarity is the most important factor undermining effectiveness of the international joint venture process. Thus “the choice of a partner has to be more than just a good idea: It is imperative that, when evaluating potential partners, companies must consider the reasons why the partner would itself wish to enter into an alliance and how it could enhance the partner’s strategic position,” Bleackley (1991, pp.49). In other words there must be ‘fit’. The concept of fit can be broken down into strategic and cultural. Figure 4.8 demonstrates that for optimal performance both forms are necessary and that irrespective of high cultural fit there is little point forming an alliance without strategic fit. This prerequisite to avoid ‘relationship traps’ of limited strategic basis (Child et al 2005), might
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explain why strategic fit is often given priority; resulting in the ‘many start here’ quadrant. Figure 4.8: Strategic & Cultural Fit Matrix:
High
Many start here
Optimal
No Point
Where’s the sustainable competitive advantage?
Strategic Fit
Low
Low
Cultural Fit
High
Source: Child et al (2005, pp.102) 4.2.5.A: Strategic Fit The concept of strategic fit is to ensure that sufficiently complementary partner assets and synergies can be realised for competitive advantage, as a result of combining their value chains (Child et al, 2005). The authors hypothesise that good strategic fit is likely to involve partners with: Similar size or strength, to avoid one-sided dependency. Complementary resources, skills or other assets. Potential synergies for competitive advantage.
Congruency of objectives, whilst noting they don’t have to be identical in order to avoid conflict.
In respect of this last point, Kanter (2004) suggested that such congruency should include a willingness to connect the fate of the two companies together. With particular reference to size and strength Child et al (2005) noted that partners of equal weakness does not satisfy this requirement as two weak companies leads to a vulnerable alliance. Daniels (1971) equally underscored the importance of similarly sized partners so each could be “assured that the two firms placed the joint venture in about the same importance. Furthermore, the two firms were then in more nearly equal power 34
positions for bargaining” (1971, pp.60). Whilst Dussauge et al (2004, pp.9) found that the more equal the partner’s relative competitive position at the time of alliance foundation, the less market shares changed in the short-to-mid term; suggesting that “equal partners can protect themselves against partners taking advantage of them.” Porter and Fuller (1986) proffered the following criteria for judging the strategic fit of potential partners: 1. Possession by partner of desired form of competitive advantage (e.g. scale, technology, market access). 2. Complementary and balanced contribution from partner (i.e. partnership of equals). 3. Compatible view of international strategy. 4. Low risk of partner becoming a competitor. 5.
Partner has pre-emptive value in relation to its rivals (i.e. prevention of competitor alliance formation with prospective partner).
Other authors have shied away from attempting to provide a comprehensive list of criteria to diagnose strategic fit. Indeed, Killing (1983) suggested that since international joint ventures vary according to their specific contexts, attempting to identify a universal list of criteria which firms should employ when seeking a “complementary” partner would be futile. Nonetheless, a useful number of additional factors to those above can be extracted for partnering firms to consider against their particular context. These include ‘managing the trade-offs’, one of which being the ability of the firm to manage a finite number of alliance relationships before the demands and investment requirements begin to outweigh the perceived benefits (Kanter 2004, pp.108). Other external relationships were also identified by Kanter (2004) as influencing strategic fit, in that an alliance with one party may preclude the formation of an additional alliance with a partner’s fierce rival, albeit that other factors made the alliance logical, for fear of loss of proprietary information. It is therefore evident that a variety of factors should be considered according to the partners specific contexts when attempting to diagnose the suitability of alliance partners to undertake a particular activity(s) in the value chain. 35
4.2.5.B: Cultural Fit ‘Potential partners must find compatibility in legacy, philosophy and desires, because specific opportunities are often short-lived and won’t sustain a long-term relationship. This compatibility should include common experiences, values, principles, hopes for the future and comfortable personal relationships between senior executives.’ (Kanter, 2004, pp.101)
The term culture has been described as a fuzzy and intangible concept, which influences what people think and how they behave; for which Hofstede (1991, pp.5) offered the following definition: “the collective programming of the mind which distinguishes the members of one human group from another.” Cartwright and Cooper (1993) simply refer to culture as social glue. The fact that it is fuzzy and intangible may help explain why some of the most successful joint ventures are those that have extended courtship periods (Lei and Slocum, 1991); and why in Tomlinson’s (1970) study of the joint venture partner selection process in India and Pakistan cited favourable past association as the single most important criterion. Culture can be both unifying and divisive. On the one hand it has been said that culture can kill alliances and that diverse backgrounds and cultures serve to make corporate collaboration more difficult to achieve (Perlmutter and Heenan, 1986). Indeed a survey by Hewitt Associates discovered that 70% of respondents found cultural integration took 18 months or longer (Child et al, 2005). Culture has also been referred to as a factor often responsible for the breakdown of alliances (Pothukuchi et al 2002). Yet on the other hand, differences in culture are said to create opportunities for learning and to create a third, or common culture, between the two partners that is causally ambiguous; hence satisfying Barney’s (1991) VRIN* tests for sustainable competitive advantage. There would therefore appear to be a linkage between the issue of culture and alliance performance, supported by Cartwright and Cooper (1993, pp.60) who suggested “the degree of cultural fit that exists between combining organisations is likely to be correlated to the success of the combination.” Given this apparent linkage, it could be assumed that assessments of cultural fit between prospective partners would be high on * Barney stated that for resources to facilitate sustained competitive advantage they must be valuable, rare, inimitable and non-appropriable. 36
the agenda at the stage of partner selection. However, according to Cartwright and Cooper (1993, pp.57), this factor is surprisingly often overlooked: “selection decisions are generally driven by financial and strategic considerations, yet many organisational alliances fail to meet expectations because the cultures of partners are incompatible.” In referring to culture a distinction is made between organisational and national cultural differences. Organisational culture refers to the web of soft and hard aspects that contrive to form a firm’s paradigm of taken-for-grantedness (Johnson et al, 2005), as illustrated in figure 4.9. Child et al (2005) recommend preparing a cultural web for each of the proposed alliance partners to reveal any possible sources of future conflict. Figure 4.9: The Cultural Web:
Soft Stories
Rituals & Routines
Symbols
Paradigm ‘taken-for-grantedness’
Control Systems
Power Structures
Organisational Structures Hard
Adapted from Johnson et al, (2005, pp.202) National culture refers to the values and behaviours of a group arising from their upbringing in a particular nation’s society; and the potential differences arising from
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different national cultures have most famously been categorised by Trompenaars (1993) and Hofstede (1996); summarised below in table 4.0. Table 4.0: National Culture Differences: 1. 2. 3. 4. 5. 6. 7.
Trompenaars (1993) Universalism v Particularism Individualism v Collectivism Neutral v Emotional Specific v Diffuse Achievement v Ascription Time Orientation Attitude Towards Environment
1. 2. 3. 4. 5.
Hofstede (1996) Time Orientation Masculinity v Femininity Uncertainty Avoidance Individualism v Collectivism Power Distance
Nonaka and Takeuchi (1995) capture the potential paradox of national culture and alliance performance by noting on the one hand the ability of different social identities and cultural distance to create learning opportunities, whilst also raising learning barriers due to reduced transparency, transferability and interpretation. Which is the most important determinant, organisational or national, for alliance performance is not clear. Analysis of cases such as Wil-Mor Technologies (Inkpen, 1999), provide testament to the scale of the challenge represented by the differing national cultures of American and Japanese partners for example. However, studies by Pothukuchi et al (2002), between Indian firms and partners from other countries, found that the presumed negative effect from cultural distance on international joint venture performance, originates more from differences in organisational culture than from differences in national culture. They went on to suggest that while national culture distance more significantly affects the efficiency and competitiveness measures of IJV performance, organisational culture distance is a better predictor of the satisfaction measure. It would therefore seem reasonable to assume that both aspects have an important role to play. It should therefore come as some comfort that the notion of culture is understood to be a phenomenon which is learnt rather than inherited. Figure 4.10 visualises this notion, with the implication that unlike human nature for example, culture can be unlearnt, adapted and modified (Child et al, 2005).
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Figure 4.10: Human Thinking and Behaviour: Individual
Group Universal
Inherited & Leaned Personality Learned
Culture Human Nature
Inherited
Source: Child et al, (2005, pp.329). However, it has been suggested that the possibility to unlearn, adapt and modify organisational culture is relatively easier than national culture as the former will not have been engrained upon the mind of the group from childhood (Child et al, 2005). The fact that Pothukuchi et al (2002) found this easier to change dimension of culture more responsible for the presumed negative effects of cultural distance is therefore surprising. Irrespective of which is deemed more important and easier to adapt than the other, the implication appears clear: ignore cultural fit at your peril.
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5.0: The Global Automotive Industry: External Audit 5.1: Industry Segmentation Figure 5.0 plots the competitive segmental positioning of Fiat’s automotive brands, in terms of product range and brand perception. The matrix demonstrates that the company’s key brands are positioned unfavourably amongst the mainstream volume producers in the competitive industry heartland; and will thus be affected by macro and micro influences in this context. Figure 5.0: Segmental Positioning: Product Range v Brand Perception:
B r a n d P e r c e p t i o n
Rolls Royce Ferrari Mercedes-Benz Porsche BMW Aston Martin Jaguar Maserati Land Rover Audi Lexus Volvo Saab Alfa Romeo Toyota Volkswagen Mazda Honda
High TVR Morgan
Medium
Low
Mitsubishi GM Ford Peugeot Nissan Renault Skoda Citroen Seat Infiniti Acura Fiat Lancia Hyundai Kia
LTi Lada
Ssangyong Proton SAIC
Zastava Dacia Mahindra Tata
Functional
Differentiated
Luxury
Product Range
5.2: Macro-Environmental Influences An overview of the key macro factors and how they are likely to affect this segment (and specifically Fiat) can be found in appendix 1. In summary, it is contended this segment is more sensitive to a myriad of external factors (e.g. fuel prices, economic confidence and buyer power) versus segments characterised by higher brand perceptions and more differentiated products.
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5.3: Segment Attractiveness These forces manifest themselves in a variety of ways, generally resulting in a microenvironment that is not considered attractive, both for potential entrants and the majority of those currently occupying a presence. Appendix 2 provides a more detailed analysis in support of this proposition. 5.4: Critical Success Factors In view of the segments hyper-competitive nature a number of critical success factors for today’s mainstream manufacturer, as identified by Potter (2005), logically follow. These are graphically illustrated in figure 5.1 and elaborated upon in appendix 3. Figure 5.1: Segmental Key Success Factors:
Financial Resources
Competitive Cost Base
Brands & Designs
Product Quality
Technology Innovation
Manufacturing Flexibility
Segment Coverage
5.4.1: Integration, Outsourcing & Resource Sharing: As a means of achieving these success factors Accenture noted, the growing trend of forward vertical integration amongst OEMs, including outsourcing non value-adding activities, resource sharing and concentration upon value-adding areas such as brand management, distribution, finance, insurance and service (see figure 5.2).
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Figure 5.2: Forward Integration in the Automotive Industry:
Source: Accenture Auto 2010 Report This view is shared by numerous other contributors. Dannenberg & Kleinhans (2004) suggest that by 2015, automotive suppliers will represent close to 80% of total value creation in light vehicle engineering and production, effectively becoming ‘little automakers’ (2004, pp.90). The key to this activity, as Randolph Barbara of Accenture states, is to work cooperatively with these suppliers, thus avoiding duplication and ‘shadow engineering’ as achieved in the aerospace industry, (Economist 21/2/02). OEMs, on the other hand, will increasingly focus on brand-specific elements such as concept and design, the customer experience from advertising through to the physical dealership, and related services (see exhibit 5.0: Mini Credit Card) downstream of the factory gate. OEMs, therefore, will need to adopt new business designs that rely far more on cooperative ventures with suppliers and other players, even with firms currently considered competitors; which the authors estimate could produce cost savings of €6001,000 per vehicle (Dannenberg & Kleinhans, 2004, pp.92). Exhibit 5.0: The Mini Visa Card:
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Their justification for these predictions, are threefold (2004, pp.89): 1. The high level of international production standards and the fast rate of technical obsolescence allow less room for product differentiation, raising the importance of brand differentiation – and contact with customers is critical to supporting and enhancing a brand. 2. Investments in downstream sales and service require less capital than investments in production equipment, while holding the promise of significantly higher returns. 3. The 800m vehicles already on the road represent an enormous base of untapped opportunities. J Ferron of PwC concurs, predicting that todays metal bashers will disappear. In their place will be vehicle brand owners (VBOs). They will do only the core tasks of designing, engineering and marketing vehicles. Everything else, including even final assembly, may be done by the parts suppliers, (Economist 21/2/02). 5.4.2: Industry Evidence Aside from A.T.Kearney’s virtual car company called ‘Indego’ (see Appendix 4), there have been numerous examples of attempted industry structure changes in recent years’ aimed at sharing resources, achieving synergies and focusing on added-value activities. In 1998 Daimler-Benz effectively took over Chrysler. In 1995 BMW acquired Rover Group for £800m and has since retained Mini and purchased Rolls-Royce. Volkswagen Group has purchased Seat, Skoda, Audi, Bentley, Bugatti and Lamborghini. Ford has made investments in Mazda, Volvo, Jaguar, Land Rover and Aston Martin. Whilst General Motors has taken stakes in Isuzu, Daewoo, Subaru, Suzuki and Saab during this period. Link and scale alliances (Dussauge et al, 2004) during this time have included DaimlerChrysler’s €2.1bn investment for 34% in Mitsubishi and a short collaboration with Hyundai-Kia. Renault invested in a 44% controlling stake of Nissan in 1999, with Nissan subsequently investing in a 15% stake in Renault; an alliance which arguably remains the most successful to date. General Motors and Toyota have cooperated in the production 43
and distribution of small vehicles for America, through their NUMMI joint venture. Ford and Volkswagen have collaborated on European MPVs, through their Auto-Europa alliance. Peugeot, Renault and Volvo have jointly produced V6 engines, BMW and Daimler-Chrysler have jointly developed small petrol engines in Brasil, whilst Volkswagen and Renault have worked together in the area of automatic transmissions for Europe. Porsche and Volkswagen have collaborated on SUV’s, followed by Porsche recently taking a stake in that manufacturer. Nissan and Suzuki already supply each other with vehicles and components for specific territories and are expected to announce joint manufacturing operations in India shortly. Peugeot-Citroen is currently investigating joint platform development and component sourcing alliances with Malaysia’s Proton. And Kirk Kerkorian (a 10% shareholder in General Motors), has pressurised CEO Rick Wagoner into discussing a tri-partite parts procurement and R&D alliance with Carlos Ghosn, CEO of Renault and Nissan; which might include a $3bn cash infusion for up to 20% of GM. At the same time, multiple examples of spin-offs and outsourcing have been evident. Both Ford and General Motors have off-loaded their component firms Visteon and Delphi over recent years. Volvo has recently outsourced its four-wheel drive engineering and production activities to Dana/Getrag, Porsche has outsourced production of the Boxster to Valmet in Finland; and table 5.0 shows details of a raft of similar production outsourcing arrangements amongst other firms. Table 5.0: Examples of Production Outsourcing Arrangements: Magna Steyr (Austria) Mercedes E-Class Mercedes G-Class Jeep Grand Cherokee Chrysler Voyager Chrysler 300C BMW X3 Saab 9-3 Convertible
Karmann (Germany) Audi A4 Convertible Mercedes CLK Convertible Chrysler Crossfire
Pininfarina (Italy) Ford Streetka Alfa Romeo Brera Renault Espace Volvo CC Mitsubishi Pajero Mitsubishi Pinin
In terms of concentrating upon value-adding areas such as brand management, distribution, finance, insurance and service many manufacturers are forward integrating into retail outlet ownership in key urban areas throughout Europe. In truth, this is a reaction to a number of developments including the lifting of Block Exemption, the 44
shifting balance of power in favour of consolidating dealer groups (e.g. Pendragon Plc now controls over 5% of the total UK market and over 40% of Jaguar’s UK sales); and the marginal feasibility of dealer operations in high property value key urban locations. Nonetheless, longer term motivations surely reflect the growing acceptance that dealer facility ownership with their lucrative finance, insurance and aftersales service activities offer more appealing and less capital intensive returns. Mercedes-Benz provides the strongest indication to date of the lengths OEMs are prepared to go to in this area of brand management. This manufacturer is due to showcase the ‘Mercedes-Benz World’ brand experience concept at the historic Brooklands site in Surrey in October 2006 (see exhibit 5.1). Facilities will include an enormous showroom capable of displaying every car in the range in every colour, including the Smart and Maybach brands. Other aspects will include a handling circuit, skidpan, 10-acre off road experience course, infotainment ride simulating the Mercedes manufacturing process, interactive Kids Zone, movie theatre, boutique, restaurant and café, hotel, conference and exhibition facility, museum, gallery and park. Exhibit 5.1: ‘Mercedes-Benz World,’ Brooklands, Surrey: Under Construction:
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6.0: Fiat S.p.A: Internal Audit With these critical success factors and over-arching trends in mind, an internal audit of Fiat will now be undertaken. The audit will portray the current extent of diversification within the conglomerate, before considering the adequacy of the resources and capabilities of the group generally, but its core automobile sector specifically; utilising Accentures value chain as a guiding framework. 6.1: Fiat the Conglomerate Following the extensive divestitures made in 2002 and 2003, today the Group is structured into six sectors (see exhibit 6.0). Its automobile sector includes the famous brands of Fiat passenger cars, Fiat LCVs, Alfa Romeo and Lancia (collectively known as Fiat Auto); in addition to Ferrari and Maserati. Case New Holland constitutes its agricultural and construction equipment division, with Iveco separated distinctly from Fiat LCVs. Appendix 5 provides product range images for each of these businesses. Powertrain Technologies has been removed from automobiles in 2006 and now sits in the components and production division with Magneti Marelli (automotive components), Teksid (metallurgical products) and Comau (production systems). Exhibit 6.0: Fiat S.p.A. Corporate Structure:
Source fiatgroup.com 46
Table 6.0 provides an overview of the relative importance of each activity in terms of turnover and profitability. From this it is evident that in 2005 automobiles easily represented the core business representing nearly half of all turnover, however it was also one of the least profitable activities. CNH and Iveco are clearly the most lucrative businesses and the group is heavily reliant on these sectors for a positive consolidated result. Table 6.0: Turnover, Trading Profit & Return on Sales by Sector: Sector Automobiles CNH Iveco Components & Production Others Eliminations Total Group
2005 €m Turnover % 21,729 46.7% 10,212 21.9% 9,489 20.4% 6,642 14.3% 1,618 3.5% -3,146 -6.8% 46,544 100.0%
2005 €m Trading Profit % -183 -18.3% 698 69.8% 415 41.5% 249 24.9% -179 -17.9% 1,000 100.0%
2005 RoS -0.8% 6.8% 4.4% 3.7% -11.1% 0.0% 2.1%
Source: fiatgroup.com The Business Solutions unit comprises a wide, comprehensive and diversified range of services and consultancy including Human Resource Services, IKS Consulting, Isvor Training & Consultancy, Ingest Facility Management, Gesco Business Solutions, Fast Buyer Procurement, KeyG Consulting, Sadi Customs Services, Servicio Titoli, BT Albacom Telecommunications, Espin Information Technology and Global Value Consulting and Solutions. The Itedi unit includes publishing and communications activities related to La Stampa daily newspaper and the Publikompass Advertising Agency; whilst RCS Media Group spans a host of businesses involved in newspapers, books, magazines, advertising, distribution, internet and sports promotion. The Group’s 1.8% share in Mediobanca (currently valued at €230m) is expected to be exchanged later this year as part of a strategic deal to re-purchase 29% of the 34% Ferrari stake sold to the bank as part of its 2002 debt restructuring. In addition to this €230m, Fiat is likely to have pay an additional €620m for the 29% stake, a move which could prejudice its chances of a future debt rating upgrade according to analysts.
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A number of other businesses are also known to be controlled by Fiat, however it is not clear where these sit within the structure shown. Elasis (an automotive engineering research and development company in Southern Italy) and Juventus Football Club being two cases in point. Furthermore, companies which should be considered instrumental to Fiat’s future success, also exist outside of Fiat S.p.A.; notably Fiat Finance S.p.A which currently contains the company’s remaining 49% stake in retail finance arm Fidis. 6.2: Resources 6.2.1: Automobile Sector Brands, Product Portfolio & Quality Ferrari, Maserati, Alfa Romeo: “Between them these premium brands, if managed properly, could help save Fiat Auto” Economist (17/2/2005)
The Ferrari and Maserati brands combined account for annual volumes of 10,500 units. The vast majority of volume is therefore derived from Fiat, Alfa Romeo and Lancia (Fiat Auto). For comparative purposes, appendix 6 contrasts Fiat Auto’s product range by segment with that of industry benchmark Toyota. It demonstrates that Fiat possesses a broad range and multiple sector coverage, although it is absent from the lucrative SUV segment. Whilst this schematic is largely positive for Fiat, it fails to demonstrate the weak consumer relevance of its products and their poor reputation for quality and reliability*. In this sense Fiat has failed to demonstrate a customer focused and integrative approach between design, marketing and engineering. The current Fiat Stilo for example has only captured 3.3% of the European C-segment, leading to the company’s own admission that the car lacks proper design and functionality (Kelly, 2005). The company has thus become the butt of industry jokes, typified by the collection of spoof advertisements at ‘sniffpetrol.com’, shown in appendix 7.
* In the 2006 UK JD Power / What Car? Customer Satisfaction Survey the Fiat brand, tied with Peugeot to score 764 out of 1,000. The worst score was Citroen at 759 compared to the chart topping Lexus at 873 points. The industry average score was 791. Meanwhile, Autocar Magazine (12/7/06) reported that the Alfa Romeo brand managed to retain only 22% of its customers last year. 48
6.2.2: Manufacturing Infrastructure Appendix 8 provides details of Fiat’s existing global manufacturing facilities. Combined, the global production network is capable of producing over 2m units. However, in view of the Groups declining sales, many plants have been idled several times over recent months and are currently operating at only 80% capacity (Kelly, 2005). The vast majority of production volume still emanates from Italy. However, of key future importance could be the company’s manufacturing presence in markets such as China, India, Turkey, Poland and Latam; which are recognised as possessing attributes such as proximity to high growth potential markets, high skills and competitive labour costs. 6.2.3: Management and Workforce Following much upheaval alluded to in section 3.0, 2005 represented the first year of relative stability for some time. The current top management team which combines Marchionne’s multi-disciplinary background with DeMeo’s and Kalfbell’s product evangelism, appears harmonious (see exhibit 6.1). Also reassuring, has been the recent willingness of the company to look beyond the Agnelli family, internal promotions and Italian industrial circles generally; to inject fresh blood and talent: suggesting a lessinwardly looking culture so regularly a criticism previously levelled at the company. Exhibit 6.1: Luca DeMeo & Karl-Heinz Kalfbell: Luca DeMeo (Fiat)
Karl-Heinz Kalfbell (Alfa Romeo)
This management team are noted as having axed the bloated management bureaucracy and changed the tone from paternalistic engineering to an Anglo-American focus on 49
markets and profits (Economist, 1/12/05). They are also expected to continue to address the commercial realities of further adjustments to manpower, which stood at 161,000 in 2004, in line with company requirements; with or without government assistance. Appendix 9 provides a breakdown of these employees by sector and region. Table 6.1: Fiat Group Global Workforce 2000-2004
Group Employees
2000 224,000
2001 199,000
2002 186,000
2003 162,000
2004 161,000
Source: fiatgroup.com 6.2.4: Financial Performance & Resources The Group reported a trading profit of €1bn for 2005, translating to a €2.965bn improvement in ‘group interest in net results’ over the previous year (see table 6.2). Table 6.2: Fiat Group Consolidated Income Statements 2004-2005: CONSOLIDATED INCOME STATEMENT: Net Revenues Trading Profit Gains (losses) on disposal of equity investments Restructuring costs Other unusual income (expenses) Operating result Financial income (expenses) Unusual financial income Result of equity investments Result before taxes Income taxes Result of continued operations Minority interest Group interest in net result
2,005 €m 46,544 1,000
2,004 €m 45,637 50
905 -502 812 2,215 -843 858 34
150 -542 -243 -585 -1,179
2,264 -844
-1,629 50
135
1,420 -1,579 -89 -55 1,331 -1,634 Source: fiatgroup.com
The company also stated it successfully increased its cash position from €6bn to €7bn for 2005, reducing net industrial debt by €6.2bn (see table 6.3).
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Table 6.3: Fiat Group Change in Net Industrial Debt 2005: CHANGE IN NET INDUSTRIAL DEBT:
2,005 €m -9,447 3,359 -2,636 409
Net industrial debt at period-start Cash flow from operating activities Investments (net of vehicles buy-backs sold) Changes in financing receivables Changes in investments, scope of activity & other 2,285 Net industrial cashflow 3,417 Capital increase/dividends 2,971 Currency exchange differences -160 Change in net industrial debt 6,228 Net industrial debt at periodend -3,219 Source: fiatgroup.com These results represent significant improvements over recent years, although appendix 10 provides a more detailed consideration of recent financial performance. In the context of 2005 itself, a number of exceptional items are noteworthy: February: €1.55bn divorce-settlement received from GM, cancelling the put option agreed five years previously. March: 9 real estate assets divested for €204m. April: Debt reduced by €3bn as Group announced it would not repay banks maturing convertible debt. September: 24.6% Italenergia stake divested, facilitating €1.8bn debt reduction and booking of €850m net operating gains. These exceptional items were largely responsible for reducing net debt by two thirds. Whilst these measures will deliver subsequent reductions in debt servicing costs, they resulted in the Financial Times commenting that whilst “Marchionne has ensured Fiat Group’s immediate survival..….the trouble with one off measures is that, by definition, they are tough to repeat” (Lex Column, 31 January 2006). Beyond the actions taken in 2005 the company continued to enjoy access to extensive cash reserves (€7bn) and other Group assets. Further divestments have been made in 2006 as part of a stated strategy to offload non-strategic assets and focus on core 51
automotive activities. As a minimum, the following divestments will need to be considered when putting the eventual 2006 consolidated results into perspective: June: Sale of 100% capital stock of Banca Unione di Credito (BUC) of Lugano for €260m. June: Sale of remaining 10% stake in real estate firm IPI, for €26m. June: Sale of Sestriere, Turin ski resort for €30m. Such actions will continue to buy the company time to address its weaknesses, however clearly without a more marked and sustained recovery in the core Auto division, these resources risk being depleted as ‘exceptional’ restructuring costs recur (€500m in both 2004 and 2005). Keller (2005) believes that “Fiat is another company not long for the world…..becoming irrelevant to car buyers around the world, including its home market….Fiat might get some billions from GM to ransom its put, but that money can’t last long and it can’t fix Fiats problems. The idea that Fiat will be turned around in 2007 is, to be charitable, unrealistic…. It’s difficult to predict when Fiat will follow the Daewoo path, but follow it they will.” The challenge of proving Keller wrong becomes all the more daunting considering the core Fiat brand not only operates in the most competitive mainstream segment, but its most popular models are small cars (such as the Panda and Punto), which possess small absolute margins. This no doubt contributes to Fiat possessing low industry gross margins (see table 6.4). Table 6.4: Gross Margins: Company Ford BMW Toyota Mercedes Renault GM Mitsubishi Volkswagen Fiat
Gross Margin 23.0% 22.5% 21.0% 20.5% 19.9% 18.0% 15.0% 14.0% 13.0% Source: PricewaterhouseCoopers (Potter, 2005)
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6.3: Capabilities & the Automotive Value Chain 6.3.1: Design Design has historically been a distinctive feature of Fiat, a capability largely derived from external design houses such as Guigaro, Ital, Bertone and Pininfarina. However, in an industry where increasingly stringent pedestrian crash performance legislation is constraining design individuality, and where other product attributes such as reliability and quality are becoming hygiene factors, the company appears to have identified this area as a key source of differentiation. As such, Marchionne has decided that in future ‘design must have strong influence, as much as engineering, because design sells’ (Kelly, 2005); and that every Fiat car must be the epitome of Italian style and recognisable from a distance (Economist, 1/12/05). In April 2005 the company secured the services of Frank Stephenson (designer of BMW’s Mini, see exhibit 6.2), strengthening the company’s capabilities in this area and suggesting a reduced future reliance on external design houses. Stephenson is expected to take no prisoners having openly stated that “today’s Stilo is underdone, the design wasn’t finished and it simply looks half-baked,” (Autocar, 19/6/06). Exhibit 6.2: Frank Stephenson & The Original Fiat Stilo: Frank Stephenson
Fiat Stilo
Whilst such bold words are perplexing given the company must continue to attempt marketing the Stilo (see exhibit 6.2) for some months, it nonetheless underlines a much greater willingness to adopt a less inward looking view for which it should be commended. Any other stance would be self-denial in view of comments such as those in Exhibit 6.3 below. 53
Exhibit 6.3: The Original Fiat Multipla: ‘One of the Ugliest Cars Ever Built’: ‘Fiat has a reputation for producing dull and unreliable cars…such as the stylistically challenged Stilo and the bugeyed Multipla, which combines the worst elements from a lavatory cistern, a banjo and a dead poodle; and is one of the ugliest cars ever built.’ Source: Economist (26/6/03)
6.3.2: Product Development In attempting to address its product shortcomings the division intends to invest €10bn over the period 2005-2008 to bring out 20 new models, including facelifts (Economist, 1/12/05). This process commenced with the launch of the Croma in summer 2005, followed by the Grande Punto that autumn. The C-segment Stilo is due to be replaced in 2007 and will spawn numerous variants, including an MPV; to be followed by the £5,000 sub-A segment Fiat 500 at the beginning of 2008, making it one of the cheapest new cars available in the market (see exhibit 6.4). Exhibit 6.4: Fiat 500 Concept Car:
The Alfa GT and 159 were introduced in 2005, the Brera and Spyder followed in the first half of 2006 and a replacement 166 is due in 2007. Rumours of a re-born baby Alfasud (see exhibit 6.5) also circulate, to be developed from the Grande Punto platform, with a preview expected at this years Paris Motor Show in October. Feasibility studies are also believed to be underway concerning a brand-building €150,000 Alfa 8C Competizione 54
(see exhibit 6.5), based on Maserati underpinnings. The Kamal concept car (see exhibit 6.6) of 2005 also provided the strongest indication yet that the Group intends to address it absence from the SUV segment, firstly with an Alfa and possibly with a Maserati to compete with Porsche’s Cayenne. Exhibit 6.5: The Original Alfasud, New Alfasud and Alfa 8C Competizione: Original Alfasud
New Alfasud: Artist Impression
Alfa 8C Competizione: Artist Impression
Exhibit 6.6: The Alfa Romeo ‘Kamal’ SUV Concept:
Product development plans for the Lancia brand are less clear, but are rumoured to include a reincarnation of the iconic Delta and Fulvia models in 2008 (see exhibit 6.7), using the underpinnings of the next Fiat Stilo. With the cost of converting a model from left hand drive estimated at €6m, it is possible this investment will be made for distribution to right hand drive markets through Alfa Romeo dealerships. As ever, concepts and artist impressions are a cost effective means of shoring up positive publicity, but timely market delivery is quite something else. In this respect, the company has recognised it does not possess the capability to engineer the new Stilo, within a selfimposed development period of 18 months. Accordingly, this project has been outsourced
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to Magna Steyr (Austria). As product replacement cycles continue to compress, this development could represent the beginning of the trend at Fiat predicted by Accenture. Exhibit 6.7: The Original & New Lancia Deltas and Fulvias: Original Delta
New Lancia Delta: Artist Impression
Original Fulvia
New Lancia Fulvia: Artist Impression
6.3.2.A: Alliances & Collaborations The company’s relationship with GM is now confined to limited cooperation for certain power-trains. This previously far-reaching alliance was recognition by both companies of the need to pool product development and production resources and capabilities. A number of Fiat’s recent products benefited from GM architecture, including the Grande Punto, Croma, 159 and Brera. Whilst the wisdom of a continued reliance on GM may have been questionable (given that automakers problems), new and quickly successful partnerships are now essential to maintain a rapid rate of new model development. The Group has therefore been frantically implementing a strategy of targeted alliances and collaborations to generate product development and production synergies, details of which are provided in appendix 11.
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6.3.2.B: Technology Fiat possesses key technological capabilities in the area of diesel power-trains, with its multijet products. This strength provides the company with opportunities to sell to third parties (e.g. Suzuki and Ford*), a source of bargaining power in potential collaborative projects, as well as ensuring that its own vehicles are competitive in this area. Whilst the company does possess petrol hybrid power capabilities, Japanese automakers are recognised as market leaders in this area. In areas where the company is deficient in technology expertise, it has demonstrated a willingness to source these capabilities externally, exemplified by its acquisition of Elasis (renowned for its virtual product development capabilities) and its agreement with Microsoft’s Automotive Business Unit for the development and provision of vehicle telematics (see exhibit 6.8). Exhibit 6.8: Microsoft Windows for Fiat:
Source: Financial Times, 8/3/06 6.3.3: Distribution & Sales Performance Appendix 12 provides an insight regarding the company’s recent sales performances, demonstrating that despite some overseas successes, Fiat is predominantly a Western European manufacturer; with declining sales and a continued reliance on its domestic
* Suzuki is to build 100,000 units per annum under license at its Maruti Udyog subsidiary in India, whilst by 2008 over 100,000 engines and transmissions will be supplied to Ford Europe as part of the replacement Ka model to be manufactured by Fiat in Poland. 57
market. This is concerning when considered in the context of relatively flat forecasted West European growth (see table 6.5). Furthermore, despite this flat growth, competition for market share is expected to intensify, reflecting the continued ambitions of Japanese and Korean manufacturers; not to mention the inevitable prospects of significant Chinese imports from 2010. Table 6.5: West European Passenger Car Registrations (in millions): Country
Austria Belgium Denmark Finland France Germany Greece Iceland Ireland Italy Luxembourg Netherlands Norway Portugal Spain Sweden Switzerland United Kingdom Western Europe
2004
2005
2006
06 v '05 % Actual Actual Forecast change 0.3113 0.3074 0.3122 1.6% 0.4848 0.4801 0.4885 1.7% 0.1215 0.1472 0.1607 9.2% 0.1424 0.1482 0.154 3.9% 2.0137 2.0678 2.1324 3.1% 3.2268 3.3192 3.4609 4.3% 0.2897 0.2697 0.2649 -1.8% 0.012 0.0177 0.0191 7.9% 0.1541 0.1717 0.1863 8.5% 2.2647 2.2342 2.3141 3.6% 0.0482 0.0486 0.05 2.9% 0.4837 0.4651 0.4776 2.7% 0.1156 0.1099 0.1054 -4.1% 0.1976 0.2034 0.2088 2.7% 1.5173 1.5288 1.5063 -1.5% 0.2642 0.2742 0.2798 2.0% 0.2694 0.2597 0.2641 1.7% 2.5673 2.4397 2.2993 -5.8% 14.5244 14.4926 14.6844 1.3% Source: CSM Worldwide / Just-auto.com
The company has largely failed to expand to become global and its annual volumes are in stark contrast to the world’s largest automakers at circa 8.4m units (see table 6.6). In 1995 Alfa retreated from the U.S, confining Group revenues from the largest market in the world to 47 Ferrari and Maserati dealers and other non-Auto divisions. A return to America for Alfa is expected by 2010 by which time the 166 will have been replaced and much architecture will be shared with Maserati, helping the amortisation of investment requirements for federal homologation compliance. This could conceivably create an infrastructure which paves the way for Fiat’s return to the States as that market becomes increasingly relevant for European manufacturers of smaller, more efficient vehicles. 58
Forays into some emerging markets, notably India and China have been met with limited success; although it is hoped that a recent distribution and service agreement with Tata will facilitate greater penetration of the Indian market. Table 6.6: Major Global Automotive Manufacturers by Volume: Ranking 1 2 3 4 5 6 7 8 9 10 11
Group General Motors Toyota Motor Ford Motor Renault-Nissan Volkswagen Group DaimlerChrysler Hyundai-Kia PSA Peugeot-Citroen Honda Fiat SpA BMW Group
2005 Production Country of Origin 8,381,805 US 8,120,000 Japan 6,208,700 US 6,131,176 France/Japan 5,242,793 Germany 4,854,700 Germany/US 3,715,095 Korea 3,390,000 France 3,365,000 Japan 1,700,000 Italy 1,300,000 Germany Source: American Auto Press & OEM Websites
The significance of the company’s absence from the U.S. and limited success in China and India is starkly illustrated by the absolute market size of the former and the projected growth figures of the latter two (see table 6.7). Table 6.7: Vehicle Sales in 2004 versus 2009 (millions of cars & pick-ups): Country United States Western Europe China Japan Eastern Europe India South Korea
2004 17.9 16.1 4.9 5.8 3.0 1.2 1.6
2009 18.6 16.9 7.9 6.0 3.6 2.1 2.1
% Increase 4.0% 5.0% 61.0% 5.0% 22.0% 74.0% 36.0% Source: Ernst & Young
In addition to the company’s geographical reliance, the sales mix is heavily skewed towards Fiat, of which almost 40% can be attributed to the Punto. This portfolio imbalance and model over-reliance serves to explain the company’s recent performance as the Punto came to the end of its lifecycle, followed by its recent uplift in fortunes with the introduction of its replacement. This remains concerning, as the Grande Punto will
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face much stiffer competition from the second half of 2006, with the introduction of a new GM Corsa, Peugeot 207, Renault Clio and Toyota Yaris (see exhibit 6.9). Exhibit 6.9: New Peugeot 207, GM Corsa, Renault Clio & Toyota Yaris: New Peugeot 207
New Opel/Vauxhall Corsa
New Renault Clio
New Toyota Yaris
6.3.4: Brand Management “Whether you ask a member of the public or a marketer, I think they would find it very difficult to tell you what the Fiat brand is about.” (Chris Wood of Corporate Edge, Marketing Week, 2005)
Figure 5.0 demonstrated Fiat’s brands are characterised by an unfavourable perception. Furthermore, the degree of differentiation between them is limited, particularly in Italy where they compete against one another in many segments. Traditionally the Fiat brand has been renowned for small, functional, stylish and good value vehicles. However, in recent years this reputation has weakened as the brand became unfocused; to the point where Mike Moran (formerly Toyota) believes the brand has been subjected to “appalling marketing” and has “no allure whatsoever,” (Marketing week, 2005). Alfa Romeo has traditionally stood for a more involving and dynamic experience, with Lancia representing an Italian luxury proposition.
However, the three brands have
converged, been compromised and are under-differentiated by a lack of investment. The company now describes Alfa Romeo as representing ‘Italian pizzazz, German quality, French prices,’ which seems a little contrived for a brand which many believe represents the Groups greatest source of potential margin. Whilst the Lancia range now represents a 60
‘ho-hum’ line-up of Europe’s weirdest looking cars which suffer a ‘fuzzy image’ as a result of ‘developing rebadged versions of Fiat econo-models,’ (just-auto.com, 2005). Despite the theoretical benefits of a portfolio of brands in contributing towards platform scale economies, a key brand management challenge of the company’s recovery remains to overcome the inverse industry correlation between the number of brands an automotive firm possesses and its profitability. It has been reported that GM has the largest number of brands, twice the number of even Ford, yet lost $10.6bn in 2005. Conversely Toyota, the industry’s profitability champion, has only three brands (Toyota, Lexus and Daihatsu) and few model platforms; but a huge range of variants off each of them. Its market capitalisation at $150bn is greater than that of GM, Ford and DaimlerChrysler combined (Economist, 8/9/05). Toyota’s profits rose by 17% in 2005 to £6.7bn and its sales have increased by 500,000 units for each of the last 5 years. In 2006, it expects to manufacture 8.45m units, rising to 10.3m units by 2010 (Autocar, 11/5/06). Interestingly a third of Toyota’s profits come from the U.S. market where Fiat is absent. 6.3.5: Retail & Aftersales Network FIAT FURY AT GOOD SERVICE FIASCO “Fiat UK has moved swiftly this week to punish one of its dealers who was repeatedly found guilty of offering good service. Bella Fiat of Frotting in Wiltshire has been accused of a number of unacceptable practises including completing major services on time, ordering the correct parts for customers' cars, returning interested car buyers' calls and employing salesmen who actually know something about the models they sell. "This just won't do," spluttered Fiat spokesman Ridley Quack. "We pride ourselves on giving the most inept service of any mainstream brand in the UK, fighting off very competitive incompetence from Peugeot, Renault and Rover. When someone lets the side down like this we have to take action." Sources say the last straw came when an unnamed Bella employee happily agreed to lend a customer a courtesy car after a standard cock-up in a regional warehouse meant the garage received the wrong parts for his car, resulting in a delay in repairs. As yet it is unclear what action Fiat will take against the dealer. Apparently they had ordered some appropriate action direct from Italy but when it arrived it turned out to be for a lefthand-drive market. Then the second one was scratched, and then there was a strike in Turin, then it turns out that someone had forgotten to order the clip assembly for the action and then……” (sniffpetrol.com, Issue 21)
In line with geographical sales, the majority of Fiat’s dealer network (1,894 outlets) can be found in Western Europe, of which 446 are in Italy. Marchionne knows he must revive the dealer network outside Italy and the search is urgent because the benefits of new 61
products are limited without an adequate sales network. In recognition of the adverse chances of finding enough entrepreneurs to invest, the CEO has indicated that “if we do not find them in strategic metropolitan areas we will open factory-owned dealerships, such as in Paris where our territory coverage is terrible” (Automotive News, 1/5/06). However, the ability of the company to forward integrate and establish its own quality outlets is surely compromised, given the need to focus resources on new model development. In many markets its current dealerships have become synonymous with poor service, inadequate technical training and low facility investment, provoking the above tongue-incheek comments by ‘sniffpetrol.com’ and Mike Moran’s description of Fiat UK dealers as ‘shambolic.’ Major revamp investments are therefore required but with limited prospects until attractive products with sustainable dealer margins are provided. Reports in Automotive News (12/6/06) that Fiat dealers will be allowed to use IKEA furniture to reduce franchise standard compliance costs appear to completely miss the target. Despite the allure of Alfa Romeo, the scale of the challenge to improve this brand’s distribution infrastructure is arguably greater in view of its more discerning target market audience. In view of the new model introductions the brand has recently enjoyed, the continued decline of Alfa sales in the UK reported by the SMMT in June (down 3.6%) is testament to this observation. 6.4: S.W.O.T. Analysis Having considered the external environment and undertaken an internal audit, it is therefore possible to summarise the challenges and opportunities for the company in figure 6.0. On the strength of this audit and resultant SWOT, it is therefore contended that a Fiat automotive division, operating on a standalone basis, is not tenable in an increasingly hyper-competitive environment.
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Figure 6.0: Fiat Group S.W.O.T. Analysis: Strengths
I N T E R N A L
- ‘Pioneer’ experience (since 1899) in auto production - Portfolio of 5 historic brands (esp. Alfa Romeo) - Market leaders (Italy, Poland, Turkey, Brasil) - Recognised small car capabilities (Fiat) - Traditionally differentiated design - Diesel powertrain technology - PSA commercial vehicle & MPV alliance - Strong top management team - €7bn positive cash - Other Group assets & profitable units - Extensive manufacturing infrastructure
Opportunities
E X T E R N A L
- Formative alliances (Ford, TATA, Suzuki) for scale, shared capabilities & resources
- Advanced telematics with Microsoft - Developed market absence (e.g. U.S) - Emerging markets (e.g. India, China) - Ambitious forward product plan - Additional OEM customers for Powertain products
Weaknesses
- Financial performance of Auto division - Over-reliance on certain markets, divisions, models & sales channels - Poor scale economies - Structural problems (20% excess capacity, social & legacy costs, lack of investment) - Poor quality / reliability reputation - Inward culture (lack of marketing / engineering integration, poor customer focus, inferior product relevance). - Dealer network quality (service & facilities) - Absence from SUV segment - Brand mismanagement & under-investment - Focus on low margin, small car segments - Disposal of key assets (e.g. FRI finance arm) Threats - Strategic reliance on alliances (sub-optimal control) - W.European economic stagnation / contraction (esp. Italian economy) - Sensitivity to increasing raw material prices - Currency fluctuations (exposure to €) - Strength of Japanese / Korean competition, with key capabilities in small car mainstream segments, in both developed & emerging markets.
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7.0: The Future of Fiat as a Conglomerate Section 4.1 noted that the relative merits of conglomerates might be the subject of considerable ambiguity. This view is considered likely as causal ambiguity is a recognised source of sustainable competitive advantage and can help explain why firms trying to replicate a particular conglomerate’s successful strategy may in turn find it an unsuccessful strategy for their own contextual position. In this sense, parallels can be drawn with Fiat’s attempt to replicate a strategy that was successful for GE, to the extent that it even hired their COO Paolo Fresco, but which evidently was inappropriate for their contextual position. This led the Economist to run an article in June 2000 entitled ‘In Search of Fiat’s Soul’ (see exhibit 7.0). Exhibit 7.0: ‘In Search of Fiat’s Soul’ (Economist, 1/6/2000):
The reasons why such a strategy may have been unsuitable for Fiat can be deliberated extensively. For example, there is little evidence to suggest that the demise of the founding top management (Johnson et al, 2005) was responsible; given that it was precisely the founding top management which diversified so unsuccessfully. However, could it have been because GE was better able to exploit a single brand name, whereas Fiat was attempting to achieve synergies between a conglomeration of multiple brands? Could it have simply been down to managerial skill? Could it have been the better achievement of balance between diversity and performance by GE? Could it have been a clearer dominant logic by GE, coupled with a better understanding of the extent of diversification its management team was able to effectively manage? Could it have simply been a question of timing? For example, the post-war Italian economic miracle, of which Fiat was a primary driver, may have been akin to an 64
emerging economy, providing a conducive environment for diversification, until such time that external markets operated efficiently. Could it have been explained by national and organisational cultural differences? Perhaps Italian national culture characterises firms with steep hierarchies, lower accountability and empowerment, greater formality and higher levels of bureaucracy than American culture; thus making them less adept at reconciling the need for flexibility, outward looking perspectives, and responsiveness with scope economies? Perhaps the military background of the Agnelli’s compounded this formalised culture, contrasted with the hatred for formality of, say, Jack Welch’s GE? Certainly, the stark differences in culture were manifested by Fresco’s struggle to impose an informal management style and a Welch like emphasis on performance upon the Italian unions (Wikipedia.com). The truth is however, that the reasons, like most sustainable forms of competitive advantage are ambiguous. As Markides (1992) concluded, every firm has its own optimal point of diversification depending upon a variety of internal and external factors. Whilst Fiat may have satisfied itself over the years that it had fulfilled Porters (1987) ‘better off’ tests for value creation, the reality is that the markets have consistently and for some time attached the conglomerate discount to its stock price. For as long as this remains the case it is suggested this be the most reliable indication available that Fiat has gone beyond the point of its optimal level of diversification. Given Fiat’s stated commitment to the core automotive business, it is therefore likely that it will be required to ‘stick to this knitting’ (Grant, 2005) to a greater extent than is currently the case. Whilst some synergies may exist between car distribution and publishing, they appear tenuous. Whilst there are clearer synergies between agricultural equipment, trucks and car production, it could be argued that Fiat SpA derives greater benefit from Iveco than vice versa; rather than a truly synergistic relationship creating greater overall value. It is therefore considered inevitable that further divestments must be considered, creating a heightened focus on core automobile activities and raising further funds for investment into their turnaround. The most obvious immediate candidates for divestiture include Mediobanca, RCS Mediagroup, Itedi and Business Solutions. However consideration 65
should also be extended to Magneti Marelli, Teksid and Comau which would also ensure those companies were exposed to competitive forces, ultimately delivering procurement benefits for Fiat; whilst simultaneously assisting its forward integration along the value chain. It is also proposed that divestment consideration be extended to CNH and Iveco, the attractiveness of both ensuring that considerable funds would be realised, whilst forcing management to restore the competitiveness of remaining core activities, rather than relying on other sources of Group profits. These divestment considerations could take the form of part sales/flotations as opposed to complete sales, thus retaining options on these businesses for the future; in recognition that diversification may be contingent with time. The company’s 90% ownership stake of CNH and 100% in Iveco, provide plenty of scope in this respect. Such a model has already been demonstrated in 2002 with the sale of only 34% in Ferrari to Mediobanca, which the company is currently negotiating to repurchase.
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8.0: Corporate Level Growth Methodology Options: Fiat: “Too big for Italy, but too small for the world” Gianni Agnelli, 1999
8.1: Organic Growth: To end the dissertation at this point would be to suppose that divestitures to raise funds for corporate refocusing might be sufficient for Fiat to address those weaknesses and threats highlighted in section 6.4 via a strategy of organic growth. In reality this is considered unlikely to be the case, given that it typically requires investment of circa £1bn to deliver a single new model platform, and that copies of circa 500,000 units per platform are considered necessary for optimal scale economies (Economist, 8/9/05); all against a backdrop of an increasingly fragmenting market. Thus, even with extensive divestment, Fiat is not considered to possess sufficient resources and capabilities to meet the industry critical success factors identified in section 5.4. For these reasons alone it is suggested that alternative growth methods for Fiat Auto must be considered. In turn, these theoretical options include disposal, an acquisition or merger or collaboration. 8.2: Disposal: It has already been established that disposal of the automotive sector remains off-limits, despite the passing of Umberto Agnelli in 2004. However, even if this stance were to change, there appears to be very limited options in this respect; given Mercedes’ one time abandonment of such a plan and GM’s payment to avoid the famous put option. The current lack of appetite for further takeover activity in the industry reflects the relative lack of success of recent acquisitions, combined with the slim pickings that remain for potential acquirers to consider. Potential liabilities such as pensions, healthcare, lay-off pay and near bankrupt suppliers mean that “once the vary fact that brands with the glamour of Ferrari, Alfa Romeo and Maserati were available would have produced a scramble among potential buyers. Fiats financial difficulties would have been regarded as an opportunity for the predator, not a threat. Today no-one wants to take them on,” (Economist, 8/9/05). 67
Although Autocar magazine (2/2/05) predicted that SAIC might be ideally placed to take on the assets and liabilities of Lancia after that brand was provisionally axed by Herbert Demel; “the very fact that both SAIC and NAC sniffed at the remains of MG Rover and then backed away, shows that they (the Chinese) are for from ready to take on a living enterprise,” (Economist, 8/9/05). 8.3: Acquisition or Merger: Recognising its vulnerability as a regional rather than global manufacturer, Fiat has attempted on a number of occasions, to acquire or merge with a target that could take it back into the American market. In 1990 a merger with Chrysler was expected, before Fiat abandoned the deal at the eleventh hour after due diligence found the existence of a $2.5bn pension liability. The Italians held on to the prospect that one day this deal could be revived, but the carpet was ripped from under their feet with the Daimler-Chrysler merger of 1998. Other targets to be considered were the entire Volvo Group, which was judged not to be worth the $13bn asking price; and then BMW Group whose owning Quandt family eventually rebuffed the Italians (Economist 9/7/98). However, the ability of Fiat to make an acquisition to alter the hyper-competitive industry forces now seems implausible given its circumstances. In any event there is little evidence to demonstrate that takeovers or friendly mergers have been effective in this sector.
Ford has squandered billions on Jaguar and Daimler-Benz has destroyed
shareholder value in attempting to digest Chrysler* (Economist, 27/1/05). Whilst both of these industry structure changes remain, the BMW takeover of Rover Group lasted only 6 years before its vociferous dissolution. Whilst, in many cases such consolidation may make sense on paper, study after study of past mergers have shown that two out of every three deals have failed; with the only * Economist, 30/3/2006: Following the 1998 takeover, Daimler-Chrysler’s share price fell from peak $108 January 1999 to $38 by November 2000. The combined group was worth barely the value of Daimler Benz before the merger. Today the price is still only half the level reached in the post deal euphoria. The marriage made in heaven soon turned into the hitch up from hell, as billions of dollars of shareholder value was destroyed. 68
winners being the shareholders of the acquired firm, who sell their company for more than it is really worth, (Economist 7/1/99). More often than not the blame for failure is laid squarely at the door of culture, thus undermining the notion that mergers and acquisitions are preferable to alliances because they allow the dominant party greater license to restructure and integrate. 8.4: Collaborative Alliances: Thus, almost by a process of elimination, collaborative alliances represent the remaining strategic development method choice. Whilst such arrangements are seen in some quarters as sub-optimal, because they fail to sufficiently rationalise assets (Economist, 16/8/01), they provide the potential to respect the identity of each partner; and the national, organisational, and in some cases family-ownership pride, that characterises many OEMs. The need to preserve identity sits comfortably with the critical success factor to find means by which brands can be differentiated. Indeed, Carlos Ghosn has attributed much of the success of the Renault-Nissan alliance, on the ability “to manage the contradiction between synergy and identity….Too much synergy and you lose identity…...Identity matters…..because it is the basis of motivation, and motivation is the fuel that companies run on….Renault people identify with their company and brand, as do Nissan people with theirs. That is an important thing to hold on to,” (Economist 16/8/01). This view appears to coincide entirely with Perlmutter and Heenan’s (1986) explanation of the attractiveness of GSPs, highlighted in section 4.2.2. This process of elimination, coupled with the desire to preserve identity, has seemingly led Marchionne to similar conclusions regarding the appropriateness of a strategy majoring on collaboration. This following section therefore focuses on the fit of one potential candidate, PSA Peugeot Citroen, in becoming Fiat’s next major collaborative partner following its divorce with GM.
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9.0: PSA Peugeot Citroen: Fiat’s Next Major Collaborative Partner? As highlighted in section 4.2.5: “The choice of a partner has to be more than just a good idea: It is imperative that, when evaluating potential partners, companies must consider the reasons why the partner would itself wish to enter into an alliance and how it could enhance the partner’s strategic position,” Bleackley (1991, pp.49). In other words there must be ‘fit’.
As part of the study undertaken in January 2006, a number of factors contributed to the ‘good idea’ that PSA Peugeot Citroen be recommended as Fiat’s next major collaborative partner. However, this recommendation clearly supposed a willingness on the side of PSA, undoubtedly falling short of Bleackley’s ‘fit’ assessment requirement above. The following section therefore attempts to address this shortcoming by assessing partner complimentarity from the perspective of both parties, according to the strategic and cultural fit criteria referred to in sections 4.2.5.A and 4.2.5.B. 9.1: Strategic Fit: “A good strategic fit is likely to involve partners of similar size and/or strength, with a similar degree of mutual resource or skill need, and with congruent or at least not overtly conflicting objectives, possessing such complementary assets and potential mutual synergies as are likely to enable them to achieve and retain competitive advantage through optimal use of their joint value chains over at least the medium term.” Child et al, (2005, pp.104)
9.1.1: Size & Strength: Table 9.0 demonstrates that PSA is currently almost double the size of Fiat in volume terms, suggesting a dissimilar size and strength would characterise such an alliance. However, both companies feature in similar proximity to one another in the current global volume league table, with PSA 8th and Fiat 10th. An alliance would therefore represent a relative partnership of equals, compared with other partner choices; particularly as a previous approach by Fiat was rejected by BMW Group. It should also be noted that a partnership of two equally weak companies may lead to a vulnerable alliance (Child et al, 2005). Thus selecting BMW Group as a partner due to its 70
comparable size alone may not necessarily be preferable. An alliance involving these two partners would still leave both companies at the bottom of the top 10 table with 3.0m units combined. For PSA, an alliance with Honda or Hyundai-Kia would represent a relationship of more equal standing in terms of scale alone. Thus, in the case of a Fiat-PSA alliance, the Italian partner may have to overcome the issue of dissimilar size by bringing more to the party to increase its bargaining power / raise PSA’s dependency on terms other than straightforward scale. Table 9.0 also demonstrates that combined PSA-Fiat volumes would equate to 5.1m units, taking the partnership well within sight of dislodging Volkswagen Group as Europe’s largest and the world’s 5th largest OEM. Clearly both companies would enjoy benefits in the areas of component procurement economies and the amortisation of development costs as a result of this enlarged scale. Interestingly, PSA has for some time declared a medium-term objective to achieve global volumes of 4m units by 2004. The company remains well short of this target with no realistic prospect for such growth levels in 2006. Indeed, sales growth in unit terms for 2005 was a paltry 0.4% or 14,700 units. A major alliance would therefore deliver such scale well in advance of continued organic growth. Table 9.0: Manufacturer Volumes: Pre & Post Fiat-PSA Alliance Formation: Pre-Alliance #
Group
1 2 3 4 5 6 7 8 9 10 11
General Motors Toyota Motor Ford Motor Renault-Nissan Volkswagen Group DaimlerChrysler Hyundai-Kia PSA Peugeot-Citroen Honda Fiat SpA BMW Group
Post-Alliance 2005 # Group 2005 Volume Volume 8,381,805 1 General Motors 8,381,805 8,120,000 2 Toyota Motor 8,120,000 6,208,700 3 Ford Motor 6,208,700 6,131,176 4 Renault-Nissan 6,131,176 5,242,793 5 Volkswagen Group 5,242,793 4,854,700 6 Fiat-PSA 5,090,000 3,715,095 7 DaimlerChrysler 4,854,700 3,390,000 8 Hyundai-Kia 3,715,095 3,365,000 9 Honda 3,365,000 1,700,000 10 BMW Group 1,300,000 1,300,000 Source: American Auto Press & OEM Websites
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In terms of financial strength and resources PSA is inherently more profitable than Fiat. Whilst Fiat has accumulated pre-tax losses of €8bn since 2001 (Economist, 13/10/05), PSA boasts some of the best total shareholder returns of any big European car company (Economist, 4/4/02), returning profits of €1.65bn and €1.03bn in 2004 and 2005 respectively. PSA does however possess a similar level of cash and cash equivalents in its 2005 Annual Report at just under €6.8bn. 9.1.2: Global Infrastructure: 9.1.2.A: Manufacturing & Assembly Operations: Table 9.1 compares and contrasts the global manufacturing and assembly capability of the two companies. Table 9.1: Fiat & PSA Global Manufacturing & Assembly Infrastructures: Region / Country NORTH AMERICA: WESTERN EUROPE: - Italy - France - Spain - Portugal EASTERN EUROPE: - Poland - Slovakia - Czech Republic ASIA: - China - India - Vietnam LATIN AMERICA: - Brazil - Argentina MIDDLE EAST & AFRICA: - South Africa - Turkey - Iran - Morocco - Egypt - Nigeria KEY: WO = Wholly Owned JV = Joint Venture LA = Licensed Assembly
Fiat SpA -
PSA Peugeot Citroen -
WO JV (PSA MPVs/LCVs) -
JV (Fiat LCVs) WO WO WO
WO -
WO JV (Toyota)
JV (Nanjing) WO LA
JV (Donfeng) -
WO WO
WO WO
LA (Nissan) JV (Tofas) -
JV (Tofas) LA LA LA LA
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At first glance there appears to be limited strategic fit in that both infrastructures largely mirror one another’s presence in any given region. Whilst it is conceivable that Fiat’s presence in India may be of future interest to PSA, given the projected growth of that market; the most obvious point to note is the absence of both companies from the enormous North American market. Less obvious however, is the matter of capacity utilisation. The PSA infrastructure (with the temporary exception of Ryton, Coventry which is being wound up by April 2007), is currently running on three shifts and 112% capacity utilisation. Fiat on the other hand, is known to be running at nearer 80% with government support in the form of temporary layoff initiatives in its domestic market. Theoretically, this excess capacity could represent an opportunity for PSA, and may have been instrumental in the decision to assemble PSA gearboxes at Fiat’s Buenos Aires facility, despite their own operations in the Argentine market. 9.1.2.B: Distribution & Sales: As with their manufacturing and assembly operations, the two companies’ distribution infrastructures largely mirror one another, in that both are predominantly West European regional concerns. Both manufacturers rely on circa 30% shares of their domestic markets, whilst Western Europe as a whole is the source of 65% of Fiat’s and 70% of PSA’s sales respectively. Clearly, both have recognised the need to expand globally and both have pointed to their capability to deliver this in Latam, Eastern Europe and Asia; whilst both remain more cautious on their current capability to expand in North America. The strength of Fiat’s commitment in this respect has been their statement that Alfa Romeo will return to the U.S by 2010. For PSA, who quit America in the late 1980s, Jean Martin Folz proferred that this market “is difficult now and won’t be any more so in five years, so I can wait,” (Economist 9/3/00). However, more than five years have passed since that time and the U.S. has undoubtedly become more difficult and competitive, with the Japanese and Korean producers stealing the march on the Europeans to firstly establish themselves as credible compact model providers, followed by an increasingly positive reputation for luxury, SUV and pick-up models. Yet there is still no roadmap for PSA’s return, with 73
Chairman Thierry Peugeot stating at the recent AGM, there are “no plans to expand in Japan or the United States…..the return of PSA to the US market is a very big challenge…but I hope we can take that on in the not too distant future,” (Automotive News, 29/5/06). Whilst it might be logical for both companies to seek a partner with established distribution infrastructures that might expedite their North American market access, the options appear limited in that any such partner stands little to gain from the largely European infrastructures that PSA or Fiat could reciprocally offer. Furthermore, even if such a partner were to exist and a ‘link alliance’ created, this might be more likely to result in volatility and competitive learning compared to a ‘scale alliance,’ as advocated by Dussauge et al (2004). A scale alliance between PSA and Fiat by contrast might promote collaborative learning, whilst facilitating the shared risk-taking and sense-making (Ulrich, 1983) of a full-blown market entry. Figure 9.0 demonstrates that Fiat could bring more to the party in this respect, with their knowledge and experience gained from an infrastructure of 47 Ferrari/Maserati distribution points, which is already the declared stepping stone for Alfa Romeo. This contribution from Fiat could also provide a potential counterbalance to the inequality in global volumes of scale and financial strength referred to in section 9.1.1. 9.1.3: Brands, Product Portfolio & Quality: 9.1.3.A: Brands: Figure 9.1 demonstrates that whilst the main volume brands of the proposed alliance compete in the middle heartland of the industry, Fiat possesses the premium Ferrari and Maserati brands and the upper medium pretender Alfa Romeo. PSA’s premium attempts with the Peugeot 605 and 607 have both flopped outside of France and Citroen’s new C6 seems destined for a similar fate (see exhibit 9.0). Ferrari, Maserati and Alfa could therefore have the potential to satisfy PSA’s craving for a premium market presence, providing the alliance with a division to rival Ford’s PAG. This represents another opportunity for Fiat to redress the balance in terms of scale and financial strength. 74
Figure 9.0: PSA & Fiat Group Brands: Global Footprints: G e o g r a p h i c a l S p r e a d
Global
Regional
Domestic
Niche
Narrow
Broad
Product Range
Figure 9.1: PSA & Fiat Group Brands: Brand Perceptions:
B r a n d P e r c e p t i o n
High
Medium
Low
Functional
Differentiated
Luxury
Product Range
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Exhibit 9.0: Sales Flops: Peugeot 605, 607 and Citroen C6: Peugeot 605
Peugeot 607
Citroen C6
9.1.3.B: Product Portfolio: Appendix 13 provides product range images for the Peugeot and Citroen brands. Although chequered, both companies have a history of producing relatively cheep, cheerful and attractive small cars. The majority of the two company’s current products demonstrate comparable segmental presence (see appendix 14), with Fiat Group’s coverage being broader on paper as a result of it’s more extensive portfolio of brands. Again, cooperation between the two companies would therefore logically result in a scale rather than link alliance. That said, Fiat evidently also has AWD capabilities, dating back to Lancia’s rallying successes in the 1970s/80s with the Stratos and Delta models and manifested today in its current CUV products and intended Kamal concept. This capability could in theory represent an area valued by PSA and facilitate joint development of CUVs and SUVs. 9.1.3.C: Quality: Sadly both companies feature close to bottom of the quality survey rankings, (see footnote, pp.48). Specifically, in this pre-requisite ‘right to compete’ area, there is therefore little evidence to suggest these partners represent a perfect strategic fit; aside from the fact that they must both embrace quality improvement objectives with similar strategic importance and vigour. 9.1.4: Alliances & Collaborations: In addition to their current joint-collaborations for LCVs and MPVs, both companies have a series of further alliances spanning other activities. Whilst Fiat’s other collaborations have been described in appendix 11, PSA boasts additional ventures with Renault for V6 engines and automatic transmissions, with Ford for diesel engines, with BMW for small petrol engines and with Toyota for the manufacture of compact entry level vehicles in the Czech Republic. Most recently the company has also announced a 76
deal for Mitsubishi to supply 30,000 Japanese built SUVs per annum from 2007, based off the new Outlander platform (see exhibit 9.1). Thus, in addition to already cooperating with each other, both companies share a partner in Ford Motor Company. Exhibit 9.1: Mitsubishi Outlander Platform for 2007:
With the possible exception of collaborations with Mitsubishi and Suzuki in the area of CUVs and SUVs, there would therefore appear to be no major conflicts of interest preventing an alliance formation, emanating from their current relationship networks. 9.1.5: Technology: PSA is “widely regarded as the best maker of diesel engines for small cars anywhere in the world,” (Economist, 9/3/00). Fiat also possesses key capabilities in this area which from some quarters could result in a sub-optimal alliance due to likely failure to sufficiently rationalise assets (Economist, 16/8/01). However, with the potential of diesel hybrid technology to render petrol hybrids obsolete*, a shared-risk alliance between two diesel experts could compress the time to market for this technology, ensuring delivery ahead of PSA’s stated aim of 2010. Conversely Fiat, despite its diesel expertise, is well advanced in the development and production of petrol hybrids where PSA is deficient. This combination provides both companies with options on the future market direction of hybrid technology.
* PSA recently unveiled a diesel hybrid prototype in conjunction with Ricardo and QinetiQ called the ‘Efficient-C’. This marries the C02 emission benefits of petrol hybrids with the fuel efficiency of diesels. PSA claims this is a genuine improvement over petrol hybrids which ‘are no more economical than diesels.’ 77
9.2: Cultural Fit: “Selection decisions are generally driven by financial and strategic considerations, yet many organisational alliances fail to meet expectations because the cultures of partners are incompatible” Cartwright & Cooper (1993, pp.57)
In recognition of the above statement the following section considers the cultural compatibility between Fiat and PSA, to the extent this is possible given the secondary nature of research for this dissertation. It is therefore stressed that further primary research would be required to test these observations and predictions. 9.2.1: Organisational Culture: There is much superficial evidence to suggest the existence of organisational cultural compatibility between these prospective partners. For example, both companies are 30% family-founder controlled and both families have repeatedly demonstrated their intent to remain independent and retain ownership. Furthermore, both families have demonstrated an open-mindedness to draft in CEOs from outside the industry at critical junctures in their development, compared with the typically inward looking and incestuous nature of the automotive industry (Volkswagen being a case in point). The Peugeot family evidenced this by promoting Jean Martin Folz to the position of CEO, having originated from a background in sugar and aluminium (see exhibit 9.2). Exhibit 9.2: Thierry Peugeot & Jean Martin Folz: Thierry Peugeot (Chairman)
Jean Martin Folz (CEO)
Parallels can also be drawn between the legacies, philosophies and shared experiences of both companies. Both were founding European members of the industry, both have typically enjoyed substantial government assistance, but both are now facing the reality that this can no longer be assured. Similarly, both companies are facing the challenge of continued Japanese and Korean onslaughts upon the stagnant European market and both 78
anticipate a further undermining of their positions from Chinese imports in the future. Whilst both companies have a rich heritage, it is also the case that with these legacies come costs (such as pensions and healthcare); which serve as further mutual challenges in countering this Asian expansion. As a result, both companies share an acute awareness (even if Peugeot does not admit this publicly), of the need to secure a presence in North America and the global scale associated with it. Both, however, are equally mindful of risks attached with re-entry into this market, largely as a result of the mistakes they have both made there before. Both companies have a reputation, at various points in their heritage for producing relatively cheep, cheerful and attractive small cars; and both are conscious that such segments, whilst margins are trim, represent key growth areas in both emerging economies and saturated markets where down-sizing continues its relentless path. Both companies have the common experiences derived from Fiat’s one time ownership of Citroen to their current collaborative activities surrounding MPVs and LCVs. The fact that LCV cooperation has been broadened and extended until 2017, suggests these common experiences have met mutual expectations. This well established process of cultural assimilation might suggest that a foundation of trust, respect and mutual understanding could characterise a more far reaching alliance reducing the necessity of an extended courtship period (Lei and Slocum, 1991). Last but not least, both companies appear to be characterised by comfortable personal relationships between their senior executives (Kanter, 2004), Marchionne and Folz. This is emphasised by Marchionne’s publicly declared admiration for PSA’s turnaround by his counterpart since he succeeded Monsieur Calvert in 1997; at which point the company was bottom of the league tables in terms of return on capital (Economist, 4/4/02). 9.2.2: National Culture: Again, superficially, it could also be argued that a positive correlation between national cultures would be a characteristic of such an alliance. At a very high level, both are West European, although this in itself is of course no guarantee of compatibility.
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The work undertaken in this area by Hofstede (1991) supports this potential compatibility. In terms of time orientation Hofstede found that long term orientation is mostly found in East Asian countries. Masculinity was found to be high in Japan and some European countries (e.g. Germany, Austria and Switzerland), moderately high in Anglo countries, low in Nordic countries and the Netherlands; and moderately low in some Latin and Asian countries including France, Spain and Thailand. In terms of uncertainty avoidance, this was found to be higher in Latin, Japanese and in German speaking countries, whilst lower in Anglo, Nordic, and Chinese culture countries. Individualism was found to prevail in developed and Western countries, whereas collectivism was found to prevail in less developed and Eastern countries. Finally, he suggested that power distance (the extent to which less powerful members of organisations accept and expect that power is distributed unequally), is higher in France and Italy that in say Germanic or Asian countries. Thus, Hofstede reported that all Latin countries (which he termed as those speaking a Romance language like Spanish, Portuguese, French or Italian), score relatively highly on both power distance and uncertainty avoidance. This he suggests, emanates from their roots in the Roman empire with its central authority and legal system applicable to all citizens, which fostered large power distance and strong uncertainty avoidance. There is clearly therefore evidence to support the contention that these two cultures are compatible. However, if cultural differences (such as East versus West) create learning opportunities and the chance to create a causally ambiguous third culture, then the potential of a Franco-Italian alliance is clearly diminished in this regard.
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10.0: Conclusions & Recommendations “Partners to share costs will be critical, alliances are key to survival, a standalone Fiat is not viable and there is a need to search for a new cooperation network” Global Insight, 2005
It has therefore been suggested that Fiat SpA remains diversified beyond its optimal point and further divestments to refocus its core automotive activities are envisaged as being necessary. Furthermore, it has been argued that given the firm’s resources and capabilities, in the context of the current and forecasted industry environment; a standalone Fiat automotive company is not a viable proposition. Almost, by a process of elimination, collaborative activity has duly been identified as the most appropriate development method for corporate growth. A possible collaborative partner candidate, to replace the essentially defunct GM relationship, is PSA Peugeot Citroen. An assessment of the potential fit between these two entities has demonstrated that a case could be constructed for the formation of a major global scale alliance between them. For example, whilst their relative size and strength may not make them perfectly compatible, they could represent the best options available to each other, assuming Fiat uses counterbalances such as its premium brands, limited North American presence and AWD capability. Their respective manufacturing and assembly operations may not make them perfectly compatible, but once again they could represent the best options available to each other, with Fiat providing PSA with easy access to excess capacity utilisation. In terms of their distribution and sales infrastructures, these may also not represent the perfect fit, but again they could represent the best options available to each other, with a shared risk and sense-making approach towards U.S. market re-entry via Fiat’s limited infrastructure. Similarly, they may have little to learn from one another in the area of quality improvements, but it is clear that both must share this objective with equal importance. And whilst there may be apparent duplication in their technical specialisms, the opportunity to collaborate in the area of hybrid power technology, and possibly CUV/SUV development, is considered an attractive proposition for both parties. 81
With respect to cultural fit, based on secondary research, there appears to be significant compatibility in that both are family owned and intent on remaining independent. Both are bonded by shared legacies, experiences, challenges and hopes for the future, including their international strategy aspirations; as required for enduring relationships beyond short-lived specific opportunities (Kanter, 2004). Both appear to have very positive prior experiences of one another, (the most important factor according to Tomlinson, 1970), and comfortable senior executive relations (Kanter, 2004). In the area of national culture, similarities suggest mutual compatibility on the one hand, but with possible missed cultural learning opportunities on the other; potentially striking a workable balance between the paradox highlighted by Nonaka and Takeuchi (1995). All these points, combined with Dussauge et al’s (2004) findings that scale alliances are less volatile than link alliances in the automotive industry, serve to suggest these compatibilities might provide the foundations of a longer lasting alliance compared to GM. However, there is little reason to suppose that the GM alliance would have been dissolved had it not been for the precarious financial position of Fiat, brought about in part by its historical corporate level strategy. Clearly, this was of the company’s own making, which leads to the obvious point ~ who would want to replace GM by connecting their future fate with that of Fiat, instead of entering into more narrowly defined collaborative arrangements for specific activities where warranted? Indeed, the major motivating factor behind GM’s decision to invest in Fiat in the first place was believed to be its pre-emptive value against collaborative activity between Fiat and Daimler-Chrysler. Today Fiat’s pre-emptive value seems highly questionable. PSA certainly doesn’t seem like a candidate prepared to take this risk on, given their stated strategic objective to instigate selective and sustainable collaborations with other independents as a means of surpassing the 4m unit level. This strategy has so far been implemented via a series of alliances over the last 7 years, covering off small and large petrol engines, automatic transmissions, large diesel engines, SUVs and of course LCVs/MPVs. Like PSA, many other major OEMs can be considered to already have the partners they need to cover off these bases. Furthermore, the fact that PSA is now 82
discussing a major alliance with Proton of Malaysia, arguably a weaker 43% state owned company than Fiat, provides further evidence of bet-spreading, suggesting they may feel enough eggs are in the Fiat basket for the time being. From Fiat’s perspective, whilst a major collaborative partner to replace GM would seem the most obvious solution given its current circumstances, there is a school of thought that suggests, due to recent experiences, the firm could also be forgiven for being reluctant to intertwine its future destiny with a single strategic partner given the exposure that can arise from alliance failure. Marchionne’s hybrid strategy of securing a series of alliances since the GM divorce is said to have drawn inspiration from its success at PSA. What is not clear is whether Fiat is pursuing such a route through choice, because it is reluctant to become over-reliant on a single partner; or through necessity, because it cannot find a partner which is prepared to connect their future fate with Fiat. The latter seems suspiciously more probable. The development of a more extensive cooperation network is therefore recommended given that the firms current web of alliances are characterised by a partner suffering severe financial problems of their own (e.g. Ford), a partner which is weaker in terms of technological capability (e.g. TATA), and expressions of future intent rather than substantial short and medium term deliverables (e.g. TATA) . Thus, in Marchionne’s own words: “we have undoubtedly managed to survive the threat of extinction, but the real work has only just begun,” (Automotive News, 29/5/06).
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