1

CHAPTER1:INTRODUCTION
1.1Introduction
Globalisation, competitive market pressures and increasing customer demands has lead
Companiestoconstantlyevaluatethebusinessenvironmentandimplementstrategiesinorderto
remain commercially competitive and successful. One of the available strategic options to a
Companyisformingastrategicalliancewithanotherfirmtojoinforcesandworktogetherin
ordertoaddressconcernssuchasresourceshortages,reduceproductdevelopmentcycles,adding
additionalproductionfacilitiesanddistributionchannels.

Fiatisoneofthelargestautomotivemanufacturersintheworld,cateringtomajorsegmentsof
the passenger and commercial vehicle market. The automotive industry is considered highly
competitiveduetothematurityofthemarket,similarproductsandnumberofmanufacturers.The
buyer is mainly influenced by price and product performance. Manufacturers are highly
concernedwithproductcostwhichisinfluencedbymanyexternalfactorssuchaslegislations,
raw material costs, currency exchange rates, energy costs and taxes as this affects the final
productpricing.Theaimistoattaincompetitivenesswhilesustainingprofitability.

Therecentglobalfinancialcrisishasaddedtothewoesoftheindustryandvehiclemanufacturersare
takinganumberofstrategicdecisionsinordertoremaincompetitive.Inthepastyeartheautomotive
industryhasseenanumberof bankruptcies,restructuringeffortsandconsolidations.Thebusiness

environmentisconstantlychanginganditisessentialthatanorganisationcontinuouslyevaluates
itspositionwithinthemarketandplanseffectivelyforthefuture.Thestrategyofabusinessis
developedtoachievetheorganisationalgoalsandisshapedbythestrengthsandweaknessesof
anorganisationandalsothemacroenvironmentthatitsurvivesinwhichhighlightsthethreats
andopportunities.

Latelyanumberoforganisationshaveenteredintostrategicallianceswithoneormorepartners.
Thisdissertationstudiesthereasonsandmotivesbehindsuchalliancesandtheopportunitiesan
allianceprovidestothecompanies.TherecentalliancebetweenFiatGroupandChryslerhas
beeninvestigatedtoobtainabetterunderstandingofstrategicalliances.Therecentfinancialcrisis
hasalsobeen studiedwithregardstoitseffectofactingasacatalystforallianceswithinthe
automotiveindustry.ThisexternalenvironmentanalysiscoupledwithanalysingFiatscurrent
marketpositioninghasresultedinanumberofrecommendationsforthefuturedirectionofFiats
strategy.

1.2Problemsetting
Carsareexpensivelypriceditems,whichmakesthempeculiarlyvulnerabletoanydownturnin
confidence,GDP,wealthandincome.(WarrenTheTelegraph,2009)
Theautomotiveindustryisahighlycompetitiveindustryandhasbeengreatlyaffectedbythe
recentfinancialcrisis.Thelackofavailabilityoffinanceandahamperedconsumerconfidence
hasleadtoadeclineindemandandasubstantialamountofovercapacitywithintheindustry.
Thisleadvehiclemanufacturertoreconsidertheirstrategiesinordertosustainthemselvesinthe
recessionandremaincompetitiveforthefuture.

In2009,FiatGroupformedaGlobalstrategicalliancewithChrysler.Fiatsdecisiontoforman
alliancewithChryslerneedstobestudiedandthecurrentindustryscenarioneedstobeanalysed
inordertoproviderecommendationsforFiattoremaincompetitive.Thereforetheproblemsthat
arisefromthiseventare:

1. WhatarethemotivesbehindtheFiatChrysleralliance?
2. WhatBenefitwouldtheallianceprovidetobothFiatandChrysler?
3. Howtherecentrecessionandotherexternalfactorsaffecttheautomotiveindustry?

4. WhatisthecurrentpositionofFiatintheautomotiveindustryandwhatstepsshouldit
taketoremaincompetitiveinthefuture?

1.3 AimandObjectives
TheaimofthisdissertationistoexaminetheneedfortheFiatChryslerallianceandweighthe
opportunitiesofferedbythealliance.Considerationwillbealsogiventothemacroandmicro
environmentinordertoproviderecommendationsforasustainablefutureforFiat.
TheobjectivesofthisDissertationare:
1.
2.
3.
4.

ToanalysetheneedfortheFiatChryslerAlliance.
ToanalyseFiatscurrentpositionintheGlobalAutomotiveMarketplace
ToanalysetheexternalandindustryenvironmentthatmightaffectFiat
ToproviderecommendationforFiattoremaincompetitiveinthefuture.

Thedissertationwillalsoprovideabackgroundintothetheoryofstrategic alliancesasa
strategicoption.Itwillalsoprovideinformationabout:

1. Whatisastrategicallianceandwhycompaniesformstrategicalliances.
2. Theopportunitiesanallianceprovidestoacompany.
3. TheeffectsoftheExternalfactorsandBusinessenvironmentonthestrategyofafirmand
howtoconsiderthesefactorswhenmakingstrategicrecommendationsanddecisions.

1.4 Limitations/Constraints
ThescopeofthedissertationislimitedtoFiatGroupsautomotivebusinessandtheFiatChrysler
Alliancethatwasformedin2009.
Also,inJuly2010,FiatGroupsboardapprovedtheplantoseparateitsindustrialandautomotive
businesses into two separate companies in order to create to a global automotive company in
collaborationwithChrysler(FiatGroup,2010).

TheissuesdiscussedandrecommendationsoutlinedinthisdissertationrevolvearoundFiats

automotivebusinessonlyandauthorisawarethatFiatGroupsfuturestrategicdecisionsmaybe
affectedbythestateofotherbusinessesandactivitiesoftheconglomerate.

CHAPTER2:LITERATUREREVIEW
2.1StrategicAlliance
AStrategicAlliancecanbedefinedasanagreementbetweenorganisationsinwhicheachentrusts
certainamountofresourcestoachieveasetofobjectives.Alliancescanbeformedwithawide
variety of Partners depending on the objectives of the partnership. The partnership may include
organisationsinthesupplychainsuchascustomersandsuppliers.Itmayevenincludecompetitorsor
OrganisationsexternaltothebusinesssuchasUniversitiesorGovernmentbodies.StrategicAlliances
provide Organisations with the opportunity to improve their competitive positioning, enter new
markets,buildoncorecompetencies,risksharingandresearchanddevelopmentcostssharing.(Bain
&Co,n.d.)

Hooleyetal.(2007)emphasisethatbuildingrelationshipswithothercompaniesisessentialto
competeeffectivelyasOrganisationsfaceanextraordinarysetofchallengesduetoconstantly
changing markets, rapidly evolving technologies, shortage of resources and skills and
increasinglydemandingcustomers.
AlternativelyThompson(2001)classifiesasallianceasadefensivemoveratherthanasagrowth
opportunitywiththeintentiontoincreasecompetitiveadvantagewithouthavingamergeroran
acquisition.
Regardlessofthereasonsforthealliance,itisessentialthatallpartiesworktogethercohesively.
LorangeandRoos(1993)statethattheallianceshouldbe structuredsothatitisthestrategicgoal
ofbothpartiesforittosucceed.Ontheotherhand,Ohmae(1989)arguedthattheallianceis
beneficialwheneachpartnerhasadifferentstrategicintent.Forexample,onepartnercanpursue
astrategyofglobalisationwhiletheotherpartnercantakeamorepassiveroleasatechnology

supplier(LorangeandRoos,1993).
Insummary,thegoalsandobjectivesofeachpartnercanbedifferentbuttheyshouldcompliment
eachotherandworktowardsachievingtheirobjectiveswithasuccessfulalliance.

Theneedforstrategicalliances
TheriseInternationalbusinessandincreasingcompetitivepressuresonfirmshasleadfirmstoa
needtocollaboratewithpartnersinordertoaddressconcernssuchasresourceshortages,reduce
productdevelopmentcyclesandadditionaldistributionchannels.
Eachinternationalmarketneedsaregionspecificstrategyandthisneedencouragesfirmstoform
alliances with local partners that understand the market well. The recent rapid developments in
technology pressurises firms to constantly adjust to customer demands and respond with shorter
productlifecycles.Thisrequiresacompetentandflexibleresourcebaseandhasleadfirmstojointly
pursueResearchandDevelopmentactivitiesthatprovideaflexibleandsufficientresourcebase.This
alsobringstogetherseveraldifferentcompetenciestoensureacommerciallysuccessfulstrategy.In
summary,eachpartnerputsforwarditsbestinordertoresultinasuccessfulproduct.(Lorangeand
Roos,1993) Companiesareinaverydynamicbusinessenvironmentandneedtorespondquickly

to any opportunities or threats. Alliances provide flexibility in operations and the ability to
changequicklyintermsofproductinnovation(Connell,1988).

Thompson(2001)furthersummarisesthereasonsforcompaniestoformalliances:

Cost of Joint Venture / Acquisition: The cost of joint ventures or taking over another
businessmayunaffordableforacompanyandthereforeitmaybefeasibletoformanalliance
inordertoworktowardsmutualgoals.

LegalConstraints:Certainlegislationmaypreventacompanyfromacquisitionsbutstill

the larger size is required to sustain in the industry. This forces companies to work
togetheraspartofallianceskeepingseparatebusinessesatthesametime.

Politicalorculturaldifferences:Thesedifferencespreventmergersandacquisitionsand
thereforeanallianceisusedasabetteralternativetoassistinintegrationofseparate
businesses.

Customer Demands: The increasing popularity of a total customer support packages

indicatesthatabusinesssassociationswithotherfirmscanhelpsecureinventory,mould
distribution channels and control costs. This also provides organisations with the
opportunitytospecialiseinthoseareaswheretheyaremorecompetent.

Protectionism: InternationalGovernmentprotectionistpoliciesmaymake itmandatory

forforeigncompaniestoformanallianceorjointventureswithalocalpartner.

2.1.1MotivesforStrategicAlliances

ThemotivesforCompaniestoenterstrategicallianceswoulddependonthestrategicpositionand
goals of each partner. Lorange and Roos (1998) explain that the strategic positions of each
partnerwilldefinethemotivesofthealliance:

MarketLeader
AMarketleaderwouldbehavingmajormarketshare,leadingtechnologyorbetterquality.

Defensive:Whenthestrategyofthestrategicallianceinlinewiththecorestrategyofthe
Parentfirmsoverallportfolioandthefirmenjoysarelativeleadershipintheindustry.
Theaimoftheorganisationmaybeaccesstonewmarketsortechnologyorevensecure
additionalresourcestomaintainanddefenditslead.

Remain:Afirmmayformastrategicalliancewithanotherfirmthatplaysarelatively

peripheralroleinitsoverallportfolioinordertomaintainitscompetitiveposition.

Follower
Afollowerthatisaspiringtoincreaseitsmarketshare:

Catchup:Thisstrategyisusedwhenthefirmismoreofafollowerintheindustry.Thefirm
mayformastrategicalliancewithanotherfirminordertoimproveitsproductofferingand
competitivepositioninginthemarket.

Restructure:Ifafirmismoreofafollowerinthemarketthanaleader,itmayforma
strategicallianceinordertorestructuretosecureitsbusinessandperformbetter.

Apart from the strategic positioning motives, the alliance will also have certain
operational motives and objectives that assist the company in achieving the strategic
goals.Zajac(1990)conductedastudyonthemotivesofalliancesandsummarisedfour
objectives(showinfigure1)thatmostcompanieshaveforstrategicalliancesthatwould
leadtoabettercompetitiveposition

Figure1:MotivesforStrategicAlliances
Motives for Strategic Alliances
(Zajac, 1990)
Overcome legal and regulatory
barriers, 20%
Acquiring means of distribution and
preempting competition, 35%

Obtain economies of scale, 20%

Gain acces to new technology &

diversify portfolio, 25%

Source:Zajac,1990

2.1.2TypesofStrategicAlliances
AdHocPool:Inthistypeofastrategicalliance,thepartnersinvestminimalresourcestypically
onaprovisionalbasisinordertocomplimentandsupporteachother.Theseresourcesarethen
drawnbackbytheparentcompanyattheendoftheprojectoralliance.Anexampleofthismay
beagreementsbetweenairlinestoshareaircraftandstaffforacertainperiod.(LorangeandRoos,
1993)

Consortium:Inthistypeofanarrangement,theamountofresourcesinvestedbypartnersismorethan
thatintheAdHocrelationship.Whatevervalueiscreatedbythisstrategicallianceisthendistributed
back to all the partners. This type of an alliance is usually seen during joint Research and

Developmentactivities.(LorangeandRoos,1993)

Project Based JointVenture: In a project based joint venture, thepartners create a common
organisationbyinvestingminimumresourcesinordertojointlyworktowardstheirstrategic
goals.Theresourcesgeneratedarenotdistributedbacktothepartners.Thefinancialresultssuch
as dividends and payments are distributed. An example of this would be a country specific
alliancebetweenfirms.(LorangeandRoos,1993)

Full Blown Joint Venture: In this type of an alliance, the partners invest large quantities of

resourcesinordertoachievetheirgoals.Thealliancesresourcesareretainedinthealliance
itself.(LorangeandRoos,1993)

2.1.3MainChallengesfacedbycompanies

Companiesneedtoensurethattheychoosetheiralliancepartnerscarefully.(Houghton,1990)
has summarised some of the main challenges faced by companies when forming strategic
alliances:

Compatibile strategy and Culture: It is essential for the firms to have a strategy that
complimentsoneanotherandhelpsinachievingtheendobjectives.Tohaveasuccessful
allianceitisalsoimportantforthefirmstounderstandandrespecteachpartnersworking
cultureandmodifytheirownculturetosuitthealliance.

Comparablecontribution:Theamountofresourcesinvestedbyeachpartnerneedstobe
agreedatthestartoftheagreementandthepartnersshouldbeequallycommittedin
ensuringtheplanneddemandsandtargetsaremet.

Compatiblestrengths:Toformasuccessfulalliance,acompanyshouldensurethatthe
chosenpartnerscompetitivestrengthscomplimentitsown.Thiswaybothcompaniescan
overcometheirownresourceandskillshortages.

10

Noconflictofinterest:Thereshouldnotbeanyconflictofinterest.Thisensuresthatall
firmsareworkingtowardsasuccessfulalliance.

Climateoftrustandmutualunderstanding:Itisessentialtohavetrustandunderstanding
andopencommunicationbetweenthepartnersinanalliance.Thisleadstobetterworking
relationshipsandsmootheroperationalperformancebetweenthecompanies.

2.2 AnalysingtheExternalandInternalEnvironment
InthewordsoftheGreekphilosopherHeraclitusTheonlyconstantischange.Thompson
(2001)statesthatsuccesscanbeshorttermforsomeorganisationsasthespeedofchangeinmost
industriesandmarketshasincreased.Thischangehasalsoresultedinshorterproductlifecycles.

There is also interdependency between different products, services and businesses. The
organisationisdependentonitssuppliersandcustomers.Competitionalsoplaysamajorrolein
shaping the impact on company. These industry players are also affected by wider macro
environmental forces such as Political, Environmental, Social, Legal and technological
(Thompson,2001).Thismeansthatanorganisationthatentersalliancesbasedonasetstrategy
andobjectivesalsoneedstocontinuouslymonitorandrespondtotheeverchangingexternal
environment. Its strategies, plans and values need to continuously adapt to the changing
environmentandmanageitsresourcestotakeadvantageofopportunitiesandcounterthreats.
(Thompson,2001)

Thisdissertationundertakestwoexternal(PESTLEAnalysisandPortersFiveForces)andone

11

internalanalysis(SWOTAnalysis).

2.2.1PESTLEAnalysis
Thisanalysestheexternalfactorsaffectingtheindustryandorganisation.PESTLEstandsfor
Political,Economic,Sociological,Technological,Legal,Environmental(CIPD,2008).

APESTLEanalysisisausefultoolforunderstandingtheexternalenvironmentinwhichan
organisation operates. It helps in understanding risks associated with the operations and
highlightstheposition,opportunitiesanddirectionforanorganisation.

ThePESTLEmodelurgescompaniestounderstandandconsiderthefollowingfactors:

PoliticalandLegal:Thesearethepoliticalandlegalfactorsthataffecttheenvironmentin
whichafirmoperates.Thisincludesareassuchastaxpolicy,employmentlaws,legislation,
environmentalregulations,traderestrictionsandreform,tariffsandpoliticalstability.These
politicalandlegalinfluenceshaveadirectimpactonthedaytodayrunningofacompany
andthereforeplayanimportantroleinshapingitsstrategy.(CIPD,2008)

Economic:Thesearethefactorsaffectingtheglobalandnational economiesthathavea
directorindirectimpactonanorganisation.Thedegreeoftheimpactwillvarydepending
onthebusiness.Considerationsincludehealthoftheglobaleconomy,levelofinterestrates,
exchangeratesinflation,labourrates,availabilityofcredit,costofliving,etc.(CIPD,
2008)

Social: These are the factors related to changing social trends that would affect an
organisation.Itisimportanttotakeintoaccountthecurrentlyoccurringsocialchangesin
the markets in which a firm operates. This includes factors like cultural norms and

12

expectations, population growth rate, age distribution, attitudes, importance of safety,

globalwarmingetcthatwouldaffectcustomerbehaviourandattitudestowardsaproductor
aservice.(CIPD,2008)

Technological: Technological changes can affect a firms business and competitive

position.Newtechnologiesarecontinuallybeingdevelopedandtherateofchangeitselfis
increasing and this impacts a Companys product or service offering. Technological
changesalsobringupbarrierstomarketentry.Companiesneedtocloselyfollowthese
changesinordertoensurethattheirofferingsremaincompetitive.(CIPD,2008)

Environmental: This covers the ecological and environmental aspects that impact the
operationsofanorganisation.Manyofthesefactorswillbeintertwinedwiththeeconomic
orsocialfactors.(CIPD,2008)
Thesevariousexternalfactorswillhaveamajorimpactonbusinessoperations.

2.2.2PortersFiveForces

MichaelPorterputforwardfiveforcesthatshapecompetitionatthebusinessunitlevelwithinthe
industry. Firms need to understand their industry environment and forecast the results of certain
strategiesinordertothoroughlytoplanfuturestrategies.Amethodicalanalysisoftheseforceshelps
organisationshighlightkeystocompetitivenessintheirparticularindustry(Hooleyetal.,2007).

PortersFiveForces

13

Thebargainingpowerofsuppliers

Thebalanceofpowerbetweensuppliersandindustrymemberscangreatlyaffectthelevelof
competition within the industry. The level of competitiveness increases when suppliers or
customersexertgreaterpowerontheorganisationsintheirindustry(Hooleyetal.,2007).
Hooleyetal.(2007)andThompson(2001)statethatthebargainingpowerofSuppliersdepends
on:
Supplierconcentration:Afewernumberofsuppliersmeansthatbuyershavelesschoiceand
thereforelessbargainingpower.Supplierswouldalsobehavingmorepowerintheindustrywhen
thebuyersarefragmentedandhaveloworirregularordersizes.

Switchingcosts:Ifasupplierisdeliveringcertainkeycomponentstoacustomerwhichcannotbe
sourcedeasilyfromanalternativesupplierwithoutincurringofhighinitialcosts(e.g.tooling
costs)thenthepowerofthecustomerdecreasesandsupplierpowerwillincrease.
Differentiationofsupplierofferings:Asupplierhavingadistinctproductorservicewhichcannot
bepurchasedfromelsewherecanhaveconsiderablebargainingpoweroveracustomer.

BargainingPowerofBuyers
Thebargainingpowerofbuyersalsoaffectsthedegreeofcompetitionwithinanindustry.Hooley
etal.(2007)statethathigherbuyerpowerincreasescompetitionwithintheindustry.Buyerpower
dependsonthefollowing:

Concentrationofbuyers:Asmallernumberofbuyersthansellersresultsinbuyershavinga
higherbargainingpower.
Alternativesourcesofsupplies:Buyerscaneasilythreatentoswitchsuppliersandthereforethe

14

supplierneedstobecompetitiveinordermaintaindemandforitsproducts.
Switchingcosts:Buyershavegreaterpowerwhentheswitchingcostsarelowastheycanobtain
goodsfromalternativesupplierstogetbetterdealswithoutincurringhighinitialcosts.

Threatofsubstitutes

Successfulproductsmaybecopiedorsubstituted.Newentrantsmayuseexistingtechnology
availableintheindustryortheymaytrytotransformtheindustrythroughinnovativesolutions
(Hooleyetal.,2007).Substitutesincreasecompetitionintheindustryby:
Making existing technologies obsolete: In todays world of rapid change, there is immense
competitionbetweenfirmstodevelopnewproductsanddifferentiateofferingsinordertoremain
marketleadersorenternewmarkets.
Product Improvements: Improvements in technologies also lead to an increase in industry
competitiveness.
Businessesneedtocontinuouslyimprovetheirproductsinordertomakethemcompetitiveand
protect their technologies in the form of patents and copyrights to ensure products are not
substitutedeasily.
2.2.3SWOTAnalysis
SWOTstandsforStrengths,Weaknesses,OpportunitiesandThreats.Theanalysisfocusesonthe
organisationinquestionandshowswhereitsinternalstrengthscanbematchedtomakethemost
oftheavailableopportunitiesandcombatanypotentialthreats.
SWOTAnalysis

15

It helps in identifying the most important factors (both internal and external) that affect the
Company and its markets. This information is then used in strategy formulation in which
StrengthsandWeaknessesarealignedwithopportunitiesandthreatstoensurethatitsstrengths
aredeployedinordertogainmostfromopportunities,atthesametimereducinganyrisksand
workingoneliminatingweaknesses.

Strengths:Thisinvolvesidentifyingwhatthefirmisgoodatrelativetoitscompetitors.

Opportunities:Theeverchangingbusinessenvironmentcreatesnewopportunitiesforafirm.To
capitaliseontheseopportunities,thefirmneedstoidentifythemwellinadvance.
Weaknesses:Thisinvolvesidentifyingwhatacompanyisbadatcomparedtoitscompetitors.

Threats:Thechangingbusinessenvironmentalsopresentsanorganisationwiththreatsandrisks
thatneedtobemonitoredandremovedorreducedeffectively.Theseexistingstrengthsneedtobe
exploitedinareasofopportunityandusedtocounterthreats.Weaknessesshouldbeworkedupon
andnewstrengthsshouldbebuilttotakeadvantageofnewopportunitiesandprepareforthreats.

16

CHAPTER 3: METHODOLOGY
3.1CaseStudy
Acasestudyanalysispresentsanaccountofpasteventsinabusinessorindustryandhighlightsthe
conditionsthatabusinesshadtodealwithoveraperiodoftime.Italsoincludesstudyingfactorssuch
as the changing external environment, the companys internal strengths and weaknesses and the
naturecompetitivenessintheindustryinordertomapoutafuturestrategyforthefirm.(Davies,n.d.)

17

3.2DataCollection
Thedataandinformationusedinthisdissertationissecondarydata.Secondarydataconsistsof
datathathasbeencollectedbysomeoneelseforanotherpurposeandisreadilyavailable.Itcan
beintheformofmarketresearchreports,governmentstatistics,Journalsetc.
TheFirstadvantageofusingsecondarydataisthattheresearcherdoesnothavetodevotetime
andresourcestocollectingthedataasitisreadilyavailable.Thesecondadvantageofusing
secondarydataistheextentofdataavailable.Fewresearcherswouldhavetheresourcestocollect
datafromalargesamplesize.Thethirdadvantageinusingsecondarydataisthatfrequentlythe
informationgatheringisconductedbyexpertsandprofessionalsandthatexpertisemaynotbe
availabletosmallerprojects.(CambridgeUniversityPress,n.d.)

Thedisadvantagetousingsecondarydataisthatitdoesnotanswerparticularquestionsthata
researcher may want to ask. A second major disadvantage of using secondary data the
methodologymaybequestionable.(CambridgeUniversityPress,n.d.)
The secondary data used in this dissertation are mostly from Fiats annual reports, Investor
presentationsandIndependentmarketresearchreports.DatahasalsobeentakenfromChryslers
websitetoobtainChryslersviewonthealliance.Additionaldatahasbeencollectedfromonline
journals,newsarticles,independentinsightreportsandpublishedarticles.Booksandacademic
journalshavealsobeenusedtoprovidebackgroundtheoreticalknowledge.

3.3ResearchProcedure
SubsequenttotheLiteratureReview,thefollowingstepsweretakentoanalysetheFiat
ChryslerAlliance.

3.3.1StudytheeffectoftherecessionontheAutomotiveIndustry
Therecessionhadanadverseimpactontheautomotiveindustryandleadtoalotofchanges

18

withinthesector.Itisimportanttounderstandhowtherecessionhasaffectedtheindustry
andthefactorsthatvehiclemanufacturersaredealingwithinordertodefinetheirfuture
strategies.Thispartalsostudieshowtherecessionactedasacatalystforconsolidationand
allianceswithintheindustry.

3.3.2StudytheFiatChryslerAlliance
ThebackgroundandreasonsbehindthedecisionforFiattoformanalliancewithChryslerare
analysed. The structure of the alliance is also studied to form a better understanding of the
possiblesynergiesandbenefitstobothparties.

3.2.3AnalysisofFiatsExternalEnvironment
The Macro environment is analysed by using a PESTEL Analysis and Porters Five Forces
analysis.Thesetoolsprovideanoverviewofthevariousexternalfactorsandindustryforcesthat
willaffectthecompanysdaytodayoperationsandeventuallyitspositioninthemarketplace
ThefactorsarethenclassifiedintoBusinessthreatsandopportunities.

3.2.4FiatsCurrentscenarioanalysis
Thecurrentstructure,marketpositioning,products,operationsandfinancialresultsofFiatare
analysedsoastogaugeitsstrengthsandweaknesses.Thesearethencombinedintheformofa
SWOTanalysiswiththethreatsandopportunitiesthatthecompanyisexposedto.Thisanalysis
assistsindraftingfuturestrategicrecommendationsforthebusiness.

CHAPTER4:COMPANYDESCRIPTIONFIAT
4.1History
Fiat is anacronym forFabricaItalianaAutomobiliTorino(ItalianCar FactoryofTurin). Itwas
establishedin1899byGiovanniAgnelliinTurin,Italy.Itisnowthelargestindustrialenterprisein
Italywithbusinessesspanninganumber ofsectors suchaspassengercars,commercialvehicles,

19
agricultural and construction equipment, engines, transmissions and components. (Fiatgroup.com,
n.d.)

KeyeventsinFiatsHistory(Fiat.com,n.d.):

1899:FiatisestablishedinTurin.

1903:Fiatislistedonthestockexchangeandmanufacturesitsfirsttruck.

1919:Producesitsfirsttractor.

1936:LaunchedTopolinowhichisthesmallesteconomycarintheworld.

1953:Thefirstdieselpoweredpassengercarsareintroduced.

1967:FiatacquiresMagnettiMarelliwhichisamanufacturerofautomotivecomponents
andsystems.

1975:FiatestablishedIvecoforcommercialvehiclesandFerrarijoinstheFiatgroup.

1978:LanciaautomobilesisacquiredandComauandTeksidaresetupthatspecialisein
productionsystems.

1984:AcuisitionofAlfaRomeo.

1999:NewHollandandCaseCorporationmergetoformanagriculturalgiant.

2004:SergioMarchionnejoinsasFiatsCEO.

2005:FiatGroupbackintoprofit.

2007:FiatLaunchestheFiat500carmodelandtheAbarthbrandisrevived.

2008:FiatGrouprecordshighestevertradingprofit.

4.2

2009:FiatagreestoaglobalstrategicalliancewithChrysler.(Fiatgroup.com,n.d.)

CurrentStatus

TheFiatGroupisItalyslargestindustrialventureandoneofthefoundersoftheautomotiveindustry.
It designs, produces and sells passenger cars, commercial vehicles, agricultural and construction

20
equipment, engines, transmissions and components. It believes in technological innovation and
environmentally friendly products. The Group carries out its operations and financial services
activitiesthroughcompanieslocatedinapproximately50countriesandispresentcommerciallyin
about190countries.Fiathasastrongresearchanddevelopmentcapabilityandconductsitsresearch
andinnovationactivitiesthroughtheCentroRicercheFiat(C.R.F.)whichconcentratesontechnology
developmentandElasiswhichconcentratesonproductionandprocessoptimizationincollaboration
withuniversitiesandcentersofexcellenceworldwide.(Fiatgroup.com,n.d.)

Thegroupoperatesanumberofbusinessesthatareshowninthefigure4below.
GroupStructure

4.3BrandsandProducts

21

Fiatdesigns,manufacturesandsellsautomobilesundervariousbrands.Fiat,Alfa
Romeo, Lancia and Abarth are the main brands. Commercial vehicles are also
manufacturedandsoldundertheFiatProfessionalbrand.Eachbrandbelowhasa
specific identity and pursues a separate sales and marketing strategy.
(Fiatgroup.com)
Fiat
TheFiatbrandcomprisesofanumberofmidbudgetpassengercars.Thebrandis
attributedtobePractical,versatileandresponsive.Itisfocussedoncustomers
whoareincreasinglyawareofenvironmentalissuesandtechnologicalinnovation.
The brand produces Italian styled models that are reasonably priced.
(Fiatgroup.com)

AlfaRomeo
AlfaRomeosproductofferingcomprisesofaestheticallypleasingdesignswithan
individualistic focus. The attributes of Sportiness, technology, comfort and
elegancearecombinedtocreatethedistinctiveproducts.(Fiatgroup.com)

Lancia
TheLanciabrandisfocussedonClassandexclusivityatareasonableprice.The
modelsarebasedonItalianstylingcoupledwithinnovativetechnologysuchasthe
ECOchicrange.(Fiatgroup.com)

Abarth

22

TheAbarthbrandwasrelaunchedin2007.Itprovidesamoderninterpretationof
allofitstraditionalproducts:suchastheGrandePuntoandthe500Abarth,which
haveaddedgadgetsandtheperformanceisinspiredbytheworldofmotorracing.
(Fiatgroup.com)

FiatProfessional
This brand covers a number of light commercial vehicles offering utility and
versatilitytocustomers.(Fiatgroup.com)

Maserati
Maserati has always produced appealing and technologically advanced saloons
derived from the racing world. It a luxury / performance car brand.
(Fiatgroup.com)

Ferrari
The Ferrari brand produces high performance sports and super cars that are
inspiredbyFormula1Racing.FiatdescribestheroadcarsproducedbyFerrarias
themostprestigiousexampleofItaliantechnologyandcraftsmanship:exclusive
carswithoutequal.(Fiatgroup.com)

FiatGroupCurrentProductMix
vsMarketCurrently,Fiathas
agoodmixofproductstocaterto
theminiandsmallcarsegments.
Thecompa
nyneedstofocusonintroducing
newmodelsfortheMedium,Large
andSUV
segmentsinordertoincreasetheir
marketshareandcompetewiththe
otherplayersintheindustry.

23

4.3GlobalAutomotiveMarket

Following a stable growth period, the automobiles industry fell into decline in 2008, which
furtherworsenedin2009.Theindustrygeneratedtotalrevenuesof$1,469.3billionin2009,
havingacompoundannualgrowthrate(CAGR)of0.8%for20052009.(Datamonitor,2010)
Observing closely, the European industry reduced with a compound annual rate of change
(CARC)of1%toreach$514.3billionin2009,whiletheAsiaPacificindustrygrewwitha
CAGRof3.8%over20052009,toreach$431.6billionin2009.(Datamonitor,2010)

Passenger car sales were the most profitable segment globally, generating total revenues of
$1,180billionin2009,whichis80.3%ofthetotalindustryvalue.Lighttrucksalesrevenues
were$201.1billionin2009,whichis13.7%oftotalindustryvalue.(Datamonitor,2010)
GlobalAutomotiveIndustryValue20052009

24

CHAPTER5:ALLIANCE
5.1EffectoftheFinancialCrisisontheAutomotiveIndustry
The financial crisis of 2008 greatly affected the global automotive industry. The lack of
availabilityofcheapfinancingandreducedconsumerconfidenceresultedinaglobalreductionin
vehiclesales.Figure13belowshowshowglobalvehiclesalesdroppedinAugust2008.Forthe
U.S. and Western European markets, the decline in sales was quite swift compared to the
emergingmarketsofAsiaandSouthAmerica.Thisdeclineinsalesleadtolargeamountsof
overcapacitywithintheindustry.(KPMG,2008)
GlobalSalesDeclinedintheRecession

5.1.1EffectoftheRecessiononFiat
Fiat1stQtr2009NetRevenues

Fiat sales were also affected by the financial crisis and this continued to show even in the

25

revenuesforthefirstquarter2009were5.6billion,ayearonyeardeclineof18%.ForQ12009,
Fiatsalesofpassengercarsandlightcommercialvehiclescombinedshowedadeclineof17.7%
comparedto2008.InWesternEurope,whichisFiatsmainmarket,deliveriesfell17.5%towith
decreasesinItalyby25.1%,Franceby8.2%,UKby30.1%.

st

However,FiatmanagedtomakegainsinMarketShare.In1 Quarter2009,theFiat
st

brandachieveda7.4%shareforWesternEuropewhichwas0.5%higherthan1 quarter2008.A
totalof65,800lightcommercialvehiclesweredeliveredduringthefirstquarter,representinga
yearoveryeardecreaseof37.5%.ForWesternEurope,deliveriesweredown50.3%to32,500
units.FiatGroupAutomobilesreporteda
st

tradinglossof30millionin1 quarter2009comparedwitha193milliontrading
st

profitforthefirstquarterof2008.(Fiat1 QuarterReport,2009)

5.2AllianceswithintheIndustry
This decline in sales affected the financial health and cash flow of companies and many
manufacturers turned towards the government for financial aid. This also resulted in some
companiessellingofftheirbusinessesandincreasedmergersandacquisitions.FiatgroupCEO,
SergioMarchionne,toldAutomotiveNewsEuropethatonlyfiveorsixglobalcarmakersmight
beleftbytheendof2010.Theovercapacityintheindustrycanbetackledbysharingfacilitiesto
improveutilisationandFiatsalliancewithChryslerreflectsthis.InarecentKPMGsurveyof
automotiveexecutives,71%oftherespondentsthinkthatMergers,acquisitionsandallianceswill
increasewithintheindustry.(KPMGInternational,2009)

5.3FiatChryslerStrategicAlliance
Subsequenttotherecentrecession,Chryslerbecamethefirstmajorcarmanufacturertofilefor
bankruptcyinearly2009.
Atthesametime,ChrysleragreedtoenterintoastrategicalliancewithFiatGroup.Thiswasto

26

protectitsfutureasacarmanufacturerandgainaccesstoFiatsfuelefficientpowertrainsand
smallercarexpertisewhichitlacks.ThealliancealsosavedthousandsofjobsatChrysler,its
suppliersanddealers.(TheTelegraph,2009).
ChryslerBackground

In 2008 it posted an $8bn loss, when US sales fell 30% to 1.45m vehicles as its
dependenceonhighpowered,highfuelconsumingcars,trucksandSUVsleftitunableto
faceincreaseinoilpricesandenvironmentalconcerns.(TheTelegraph,2009)

Keybrands:Chrysler,Dodge,Jeep.

Keyvehicles:DodgeRampickuptruck,DodgeCharger,JeepWrangler,DodgeCaravan
minivan,ChryslerTown&Countryminivan.

NorthAmericanplants:Chryslerhas30,including12assemblyplantsand18facilitiesfor
engines,transmissions,stampingandcasting.(TheTelegraph,2009;Chrysler,n.d.)

5.3.1FiatChryslerAlliance

ThedecisiontofileforbankruptcyalsogaveChrysleraccess$3.3bnoffinancingfrom
theUSgovernment,whichwasprovidedtomaintaincashflowandletChrysleroperate
asnormaltillitcameoutofbankruptcy.Afurther$4.7bninUSloanswasalsopromised
onceChryslerexitsbankruptcy.TheCanadianandOntariogovernmentswillprovidea
further$2.42bn.(Quinn,2009)

TheUSgovernmentwillalsocontrol8%ofChryslerwhileCanadianwillhavea2%of
theshares.ThestrategicallianceprovidedFiatwitha20%stakeinthenewcompany
withapossibilityofthatincreasingto35%oncealltheGovernmentloanshavebeenpaid
back.(Quinn,2009)

SergioMarchionne,FiatsCEOhaslongstatedthatFiatMillionvehiclesperyeartobenefitfrom
economiesofneedstobuildatleast5scaleremaincompetitivewithintheindustry.Fiatmakes

27

about2millioncarsannually,whileChryslermanufactured1.3millionlastyear.Thisalliance
willfurtherhelpFiatachievingitsplans.(Forden,2010)

5.3.2MotivesfortheAlliance
AsdiscussedintheLiteratureReviewsectionofthisdissertation,themotivesforacompanyto
enterintoastrategicalliancedependsonitspositionwithintheindustry.

BothFiatandChryslerarestilllaggingbehindthemarketleaders.Thereforetheycanbeclassed
asaFollowerwithtwomotiveswherestrategicmarketpositioningisconcerned:
StrategicPosition

Catchup:FiatisinabetterstatethanChryslerandistryingitsbesttocatchupand
competewithitsmainrivalssuchasToyota,FordandVolkswagen.

Restructure:Asexplainedinchapter3,whenafirmismoreofafollowerinthemarket
thanaleader,itmayformastrategicallianceinordertorestructuretosecureitsbusiness
andperformbetter.ChryslersmainmotiveistouseFiattorestructureitsoperationsfor
survivalwithintheindustry.

OperationalBenefits

AcquiringDistributionchannels:Theallianceprovidesbothcompaniesvaluablereadily
available distribution channels. Fiat has a poor network in the US and Chryslers
distributionnetworkwillbeusefulforthecompany.

Gainaccesstonewtechnology:BothFiatandChryslersproductportfoliocompliments
eachother.FiatisstrongisfuelefficientsmallcarswhileChryslerhasagoodlineupof
heavierpickuptrucksandlargesedans.Thisoffersboththeopportunitytodiversifytheir

28

portfoliowithoutincurringlargecostsofdevelopment.

Obtaineconomiesofscale:Theallianceprovidesthecompanieswithjointsourcingand
developmentopportunitieswhichwouldprovidebothwiththemuchneededpowerof
economiesofscale.(CamuffoandVolpato,2002)

Manufacturing Sharing: There can be higher plant capacity utilisation by sharing

manufacturingfacilitiesworldwide.(CamuffoandVolpato,2002)

Achieve cost savings in design, purchasing and manufacturing by sharing vehicle

platforms.(CamuffoandVolpato,2002)

Reducingtheriskassociatedwiththeenormousresourceandfinancialinputrequiredby
internationalstrategies,bysharingcostsandresources.(CamuffoandVolpato,2002)

5.3.3AdvantagestoChrysler

AccesstoFiat'senvironmentallyfriendlyvehicletechnologiesandcomponents.(BBC
News,2009)

Substantialcostsavingsopportunitiesthroughvehiclearchitecture,distribution,product
developmentsharing.

AccesstoFiat'sdistributionnetworkinEuropeandgrowingmarketsoutsidetheUSand
itsglobalsupplierbase(BBCNews,2009).

Chrysler will also benefit from Fiat's management expertise in business revival and
accesstoFiat'sinternationaldistributionnetworkwithfocussingonLatinAmericaand
Russia.(BBCNews,2009:Chrysler.com,2009)

ExampleoftechnologicalbenefitstoChrysler

29

5.3.4AdvantagestoFiat

AccesstoChrysler'sextensiveUSAdistributionnetworkandsuppliers.

A20%equitystakeinChryslerwithpotentialofincreasingitto35%.

TheagreementdoesnotcommitFiattofundingChryslerinfutureandChryslernowhasa
muchstrongerbalancesheetafterapplyingforbankruptcy.

CostandNegotiationadvantagesofEconomiesofscalebysharingproductsourcing.
(BBCNews,2009)

Sharingofvehiclearchitectures,componentsandsubsystems.

Commontechnologydevelopmentprogrammesespeciallyintheareaofalternative
propulsionsystems.

Bestpracticeandprocesssharing.

ObtainvaluablebrandssuchasJeepandDodge.

Theeconomicsynergiesduetothealliancearedetailedinthetablebelow.Fiatforecasts
aneconomicbenefitof1.5BnEurosasaresultoftheFiatChryslerAlliance(FiatGroup,
2010).

30

5.4SimilarAllianceswithintheIndustry
Competitivepressuresareleadingmorecompaniestocooperateandformsimilar
strategicalliancesandcollaborations(Frost&Sullivan,2010):
DaimlerNissanRenault

Daimleriscompetitiveintrucksandcommercialvehiclesandisweakwheresmallercars
areconcerned.

NissanandRenaultarestronginthesmallcarsegmentbutarenotcompetentinthe
commercialvehicle/truckssegment.

ThegoalofthisallianceistojoinhandsforProductDevelopment.(Frost&Sullivan,
2010)

TataFiat

TatahastheopportunitytosourceFiatscoveteddieselenginesandtransmissions.

FiatwilluseTatasextensivedistributionnetworkinIndiatochannelitsownproducts.
(Frost&Sullivan,2010)

SuzukiNissan

31

Suzuki has well established operation in India and will assemble diesel engines for
Nissan.

SuzukiwillalsobuildNissanvehiclesinIndia.

ThiswouldresultinbettercapacityutilisationbySuzukiandprovideNissaneaseofentry
intotheAsianmarketswithlowerentrycosts.(Frost&Sullivan,2010)

RenaultNissan

Renaulttoprovidedieselengines.

Nissantoprovideelectricpropulsiontechnology.

Sharedresearchanddevelopmentcosts.

Opportunityforvehiclearchitecture,supplierandplatformsharingtoreducecosts.(Frost
&Sullivan,2010)

FordMazda

Platformandcomponentsharingtoreducecosts.
Jointsourcingofcomponents.
Improved
capacity
utilisation
by
(Frost&Sullivan,2010)

sharing assembly

plants

32

CHAPTER6:ANALYSIS
6.1PESTELAnalysis

Political&LegislativeFactors:

Thegovernmenthasamajorimpactontheindustry.Firstofall,thegovernmentprovidesthe
frameworkfortheindustrytofunction.TheGovernmentsalsoestablishtheaccessibilityofpublic
transportandreduceorincreasedependenceoncars.Italsohastheauthoritytodecreaseor
increasedutiesandtaxes,whichdirectlyimpactsthedistributionandmanufacturingcostsofthe
vehicle.Forexample,therecentGovernmentdrivencarscrappageschemesinEuropeleadtoa
boostinsalesforthevehiclemanufacturers.IntheUK,thegovernmentofferedconsumersa
2,000discountonanewcarinreturnfortradinginonethatisatleast10yearsold(Armitstead,
2009). Many new innovations and product developments are driven by a need to meet
governmentlegislation.(Investopedia,n.d.)

EnvironmentalFactors.

Environmentalfactorsaffectboth,thecustomersandtheoperationsofacompany.Forexample,
theemphasisontheCorporateSocialresponsibilityofacompanyanditsimpactonthe

33

environmenthasleadmanufacturerstoconsiderhowitsmanufacturingwasteistreatedandhas
affectedoperationalcosts(Fiat,2009).Concernsaboutvehicleemissionshasleadtoanincrease
indemandforfuelefficientandenvironmentallyfriendlycarsandthismeansthattechnologyis
constantlyunderreviewandthereisthereforeaneedforconstantresearchanddevelopmentto
providegreenervehicles.

Social

TheaverageageofthepopulationsinWesternEurope,USA,JapanandRussia
isincreasingandcarmakerswillneedtoaddressthechangingdemandsofolderdriversinorder
toremaincompetitive.Oldercustomerswillvaluequality,price,andsafetyabovefueleconomy,
stylingorbrand.OEMswillneedtofocusonthedevelopmentofcheaperanduserfriendlycars.
Vehiclestargetedfortheolderdriverswillneedtobedesignedwithhumanfactorsinmind:
Easiervehicleentranceandexit,largerdisplaysetc.(Deloitte,2009).

Urbanisation too is another important demographic trend. Population in cities is growing

globally.Forexampleindevelopedcountriespopulationlivingincitiesiscurrently75%,whilein
thedevelopingworldcityresidentssignify45%ofthepopulation.However,by2020,those
statisticsareexpectedtoincreaseto78%and55%,respectively.Therewillalsobe24megacities
withpopulationsofatleast10millioneachby2020.(Deloitte,2009).Thismeansroadswillbe
morecongestedandpeoplemayprefersmallervehicles.Thisshowsthatsocialanddemographic
factorsplayakeyroleindeterminingthefinalproductofferingintheindustry

TechnologicalFactors

Technologicaladvancesaregenerallydrivenbychangesinlegislationrelatedtotheenvironment,
safety etc social factors such as luxury, image, sophistication or competition between
manufacturerstobetechnologicallysuperior.FrostandSullivan(2010)statesthatwhilstmuchof

34

theattentionhasfocusedonreducingemissionsandhenceadvancementswillbemadeinpower
train technology, an increasing area of focus in the future will be environmentally friendly
materialsforcars.Technologicalfactorsalsoofferameansofdifferentiationtomanufacturers.

Economic

Variouseconomicfactorssuchasinterestrates,minimumwage,stateoftheeconomyetcaffect
thecarindustry.Therecentrecessionaffectedtheinterestratesandeconomiesallovertheworld
andincreasedthecostofborrowingmoney.Thismadeitmoredifficultformanufacturerstoraise
capital.Thereducedavailabilityofcreditalsoaffectedcarsalesadverselyasthespendingpower
ofconsumerswasaffected.

CHAPTER7:CONCLUSION
A strategic alliance is a favourable strategic option in which the benefits are
dependentonthecooperationbetweenthepartnersandeffectivenessofthealliance.Itcanbe
intendedasadefensivestrategicmoveorasagrowthopportunity.Itisessentialthatall
partnershaveclearobjectivesfortheoutcomesoftheallianceandhaveaconcreteplanin
place to achieve them. These objectives and plans need to be continuously evaluated
throughoutthelifetimeofthealliance.
Itisalsoimportanttochoosetherightpartner.Thegoalsandobjectivesofeachpartnercan
bedifferentbuttheyshouldcomplementeachotherandworktowardsachievingtheirmutual
objectives.Allpartiesshouldbeequallycommittedandshouldensurethatthestructureof
theallianceisclearwithamountofresourcestobeinvestedbyeachagreedatthestartofthe
agreement.

Anallianceprovidesanumberofopportunitiestoallinvolvedpartiessuchas:

AdditionalDistributionChannelsandManufacturingcapability.

35

Accesstonewproductsandportfoliodiversification.

Obtainthebenefitseconomiesofscale.

Achievingcostsavingsindesign,purchasingandhigherfacilityutilisationbysharing
researchanddevelopmentcostsalongwithjointprocurement.

Inthepastyeartheautomotiveindustryhasseenanumberofbankruptcies,restructuring
effortsandconsolidationsduetotherecession.

In the case of Fiats alliance with Chrysler, the venture isa Global Strategic
Alliancebasedonsharingproductdevelopment,manufacturingfacilities,distributionnetworks
andmaterialssourcing.FiatiswellestablishedinEuropewithcorestrengthsinthesmallcar
segmenthavingfuelefficientpowertrains.Itisweakinthelargecarsegmentandhasapoor
distributionnetworkinUSA.Ontheotherhand,Chrysleriscompetitiveinthelargevehicle
segmentwithastrongUSAdistributionnetwork.ItisalsoimportanttonotethatFiatisina
recoveringfinancialconditionandthatsubsequenttofilingforbankruptcy,Chryslerhasastrong
balancesheet.FiatisnotrequiredtoinvestanycapitalinChryslerasthelatterhasaccessto
Governmentloans.AllthesefactorsmakeChryslerasuitablepartnerforFiat.

BothFiatandChryslerarelaggingbehindthemarketleaderssuchasToyota,Ford
andVolkswagen.ThereforetheycanbeclassedasaFollower.Fiatsmainstrategicmotiveforthe
alliancewouldbetoCatchupandcompeteequallywiththemarketleaderswhileChryslersmain
motiveistouseFiattorestructureitsoperationsforsurvivalwithintheindustryandtopreparefor
thefuture.

36

CHAPTER7:BIBLOGRAPHY

Book reference
Miles, D. and A. Scott (2004), Macroeconomics and the global business
environment
Johnson ,Mascarenhas, Economics Of Global Trade And Finance

Webliography:
www.mexico.org.cn
www.fiat.org.co.in
www.vectorstudy.com