The Restructuring of Daimler-Benz

In a 1996 address to stockholders and friends of Daimler-Benz, CEO Jurgen Schrempp reviewed the position of the diversified company. He started by saying "1995 was a dramatic year in the history of Daimler-Benz." It was also a year that the board of management made a major break with the past.

Daimler-Benz, with more than 300,000 employees worldwide, consisted of four major groups: The first, by far the biggest and most successful group, was Mercedes-Benz with about 200,000 employees. It is best known for its passenger cars and commercial vehicles. The second was the AEG Daimler-Benz industries in the business of rail systems, microelectronics, heavy diesel engines, energy systems technology, and automation.

The third was the Aerospace Group in the business of aircraft (the company has a more than one-third interest in the Airbus consortium), space systems, defense and civil systems, and propulsion systems. Finally, there was the Inter Services Group consisting of systemshaus, financial services, insurance brokerage, trading, marketing services, mobile communications services, and real estate management.

Daimler-Benz went through various development phases. From 1985 to 1990, it diversified into aerospace and electrical engineering. The aim was to become an integrated high-tech group. This diversification was further consolidated in the next phase that extended from 1990 to 1995. Under the leadership of Schrempp, the core business was redefined and the strategy refocused.

A 1995-96 portfolio review showed the need for refocusing on what the company could do best. Top management reevaluated its strategies and its core businesses based on economic criteria and the strategic fit of the various activities. It became clear that the company's strengths were in car manufacturing, the truck business, and the railroad sector.

Mercedes Benz, for example, had a strong competitive position with its cars and trucks in Europe, North America, and Latin America. Vans were also relatively strong in Europe, and buses had a good competitive position in Latin America. Based on this analysis, the strategies for potential growth were through globalization and the development of new product segments.

In 1996, top management reassessed the company's position and its 1995 unsatisfactory results from its operations. It was discovered that the company was exposed to currency fluctuations that affected profitability. The company's image was also blurred because of the ventures into many different kinds of industries. The management board decided to cut its losses and chart a new direction for the company, with greater emphasis on profitability. The organization structure was tightened and certain businesses were divested. In fact, policy decision from an earlier period were reversed.

The unprofitable AEG Group and the Dutch aircraft manufacturer Fokker did not receive financial support. Since both the Dutch government and Daimler-Benz withdrew support, Fokker filed for bankruptcy. Although these and other drastic decisions helped reduce the 1995 financial losses, the company's goal was not to emphasize maximizing short-term profitability but to work toward medium- and long-term profitability.

A number of other managerial decisions were made to achieve the ambitious goals of reducing costs and improving profitability. Employees close to the operations were empowered to make decisions necessary to carry out their tasks. The organization structure was simplified and decentralized so that organizational units could respond faster to environmental changes.

Moreover, the new organization structure was designed to promote an entrepreneurial spirit. Control was exercised through a goal-driven, performance-based reward system. At the same time, the new structure was designed to promote cooperation. In 1997, the board of management restructured and integrated the Mercedes-Benz Group into Daimler-Benz. Consequently, Mercedes-Benz's chief, Helmut Werner, who had been given credit for a successful model policy, resigned from the company.

Questions: 1) What is your assessment of Daimler-Benz's operations in many different fields? 2) Should the various groups operate autonomously? What kinds of activities should be centralized? 3) Daimler-Benz is best known for its Mercedes-Benz cars. Why do you think Daimler bought AEG in the first place and why did it venture into the Aerospace and Inter Services businesses? 4) Given the apparent mistakes in acquiring non-automotive businesses, what should Jurgen Schrempp do now?