In the wake of their separate successes, both Daimler-Benz and Chrysler had ambitions to spread their business models globally. But when Daimler acquired Chrysler in 1998, the two companies encountered a difficult and unexpected hurdle: Their business models were so distinct that they could not readily be combined. Chrysler had cut costs to the bone; Daimler-Benz was willing to pay whatever was required to achieve its stated goal of unsurpassed luxury. Chrysler outsourced modules and some reliability engineering and systems engineering; the Mercedes engineers worked closely across functional boundaries, designing and building vehicles in which systems meshed seamlessly together to deliver their cars’ widely renowned quality of ride and durability. Chrysler relied on relatively autonomous suppliers to perform significant development work; Mercedes meticulously controlled the work of its supply base, tightly clustered around its Stuttgart operations. Chrysler pared its internal technical and innovation capabilities to a minimal core, relying more and more on supplier capability; Mercedes maintained a broad and deep technical infrastructure in pursuit of innovations to load into its cars ahead of its rivals.
Chrysler’s business model was not capable of building vehicles with the quality, reliability, and luxury typically associated with the Mercedes name. Nor was the Mercedes model able to develop new vehicles with the rapid development speeds and low costs typically linked with Chrysler. The result was organizational gridlock for several years as the gears of the two companies ground into each other, seeking a composite model that could successfully build on the capabilities of the very different partners. First Chrysler faltered, losing $5.8 billion in 2001. The division closed six plants and laid off more than 125,000 employees, but the losses returned in 2003. Then J.D. Power published a survey claiming a rise in quality problems in Mercedes cars. Meanwhile, the most prominent Chrysler-Mercedes joint project, the Crossfire Roadster, was rapidly branded (by Business Week, for example) as a one-of-a-kind anomaly. The Daimler truck business, which had been redesigned under DaimlerChrysler to benefit from cross-merger synergies, lost $960 million in two years. The proposed acquisition of the Mitsubishi Motors Corporation, intended to build further supply chain synergy, was rejected by the new company’s board in a move seen as a reaction to the failure of Daimler and Chrysler to integrate. By 2005, the Chrysler brand had regained some of its market share and profitability, but Mercedes was posting regular losses.
Lost in the din of press coverage about the DaimlerChrysler debacle is its most instructive point: In a business environment where there is little margin for error in the areas of cost, quality, and customer service, a key predictor of success is the fit between product and supply chain architectures. Alone, Chrysler was a hit because it used a modular vehicle development process with a modular supply chain. Mercedes succeeded with highly integral vehicles backed by a highly integral supply chain. But together, they foundered, because modular and integral architectures are like oil and water. They don’t mix.
In this context, the word architecture means the arrangement of components and the ways they interrelate. Modular architectures are flexible in structure, with highly standardized interoperability and standard connections for subsystems. A good example of a modular product is a speaker in a stereo sound system. Speakers are differentiated on the basis of their sound quality, which varies widely from one model to another, but they all sport identical connections for attaching to receivers and amplifiers. A modular product system can typically be upgraded by replacement of lesser components with better ones. Many modular systems are also open, meaning that the interfaces between components are not protected by intellectual property that is closely held by the patent holder. Any innovator can create a module for the product as long as it retains the standard interface.