From Knowledge at Wharton
The toughest leadership task for Dieter Zetsche, chairman of the board of management of Daimler AG and head of Mercedes-Benz Cars, was engineering last year's breakup of Daimler and Chrysler.
Zetsche lived in Detroit for five years while trying to spearhead a turnaround at Chrysler -- an effort that included appearances in Chrysler's humorous "Ask Dr. Z" television commercials, where his signature walrus mustache made him a minor celebrity.
Then, in 2006, after he became CEO of the German parent company, he faced a new set of leadership responsibilities. "My five years as CEO of Chrysler were personally among the very best of my life, but I still had to put my feelings aside and view the situation objectively from a business perspective," says Zetsche.
In 1998, Chrysler and Daimler announced they would join forces in a $37 billion stock swap, creating a new company that had 442,000 employees and a market capitalization of nearly $100 billion. While the deal was touted as a "merger of equals," two years later Daimler installed a German management team. Within 12 months, the company's market capitalization had sunk to $44 billion.
Zetsche says that while the companies had made strides with some new products, the market had changed for the worse in 2005 and 2006. "More had to be done -- and quickly. There was also mutual recognition on both sides of the Atlantic that we had maximized the synergies of Chrysler and Daimler, given that the level of cooperation was less than we originally expected it would be." In retrospect, the companies had overestimated the potential for passing leading-edge technology from Mercedes-Benz to Chrysler.
Meanwhile, Zetsche notes, Chrysler's pension and health benefit obligations had soared to $50 billion and, he learned, could hit $100 billion in a worst-case scenario. The Chrysler benefits "posed a significant threat to the entire company." Without Chrysler, Daimler would experience less volatility and could focus on the premium market it knew best.
During the height of the private equity boom last summer, he was able to sell 80 percent of Daimler AG's equity in the U.S. automaker to Cerberus Capital Group. "Although it was a tremendously difficult decision to make, I'm confident we found the solution," he said. In the fourth quarter of 2007, Daimler's profit jumped to 1.7 billion euros from a net loss of 12 million euros in the same quarter a year earlier, before the breakup.
The Chrysler sale illustrates the importance of making opportune decisions, according to Zetsche. Indeed, when Cerberus had trouble selling $20 billion in debt to finance the deal, Wall Street recognized the beginning of the current credit crisis. "We have an obligation to make the right decision -- not the convenient one or the one we would like to make. These decisions need to be made on the best possible information in a timely manner."
Today's wealth of analytical tools makes it easy to fall into a trap of endless meetings that he labeled "analysis paralysis." Just as too little information can hurt you, "too much information can, too. There is such a thing as information overload. Keep in mind that no decision is also a decision. A delay may result in an undesirable decision."
Zetsche says the Chrysler divestment could not have been financed if it had occurred one or two weeks later. "I didn't see the credit crisis, but once we made the decision, my gut told me we had to move forward with all deliberate speed."
His most difficult period at Chrysler was spring 2003. He had arrived in Detroit in November 2000 and begun a major restructuring. The company was meeting milestones, but after the September 11, 2001, terrorist attacks in the United States, automakers initiated marketing incentives that drove down margins for the entire industry.
"Things got really bad in the first quarter, and by the second quarter, we were going to show significant losses," says Zetsche. Earlier in the restructuring, he could blame problems on prior management. This time, the losses were coming on his watch.
"That was not my plan and it was not what I was used to," he continues. Zetsche had to step up and face Wall Street analysts. "I explained what happened and what we would do to recover. For a time, I lost credibility. But by just (being upfront) and explaining how we would dig ourselves out, I think we recovered pretty fast. ... I have to say that personally, in five years at Chrysler, this was my most important quarter. The toughest thing is to see your convictions fail. That's when you really have to deal with your personality and grow as a person. Those are the cases that are more important than the successes you have."
Zetsche identifies three traits of leadership he feels are most important: competence, responsibility and authenticity. Referring to competence, he emphasized that "if your people sense you are not prepared or don't have the right stuff to get the job done, you're in trouble. Even if they don't like your personality, they will respect your ability."
Successful leaders must then build on competence to create a sense of common purpose. He describes a three-year initiative at Mercedes-Benz to reduce costs and improve quality. A massive undertaking like that at any company is likely to trigger some backlash, Zetsche notes. Some employees may complain that the goals are sound but the approach is wrong. Others will grumble about added administrative reporting. Still others will dismiss the initiative as a problem they believe will go away if they ignore it long enough.
"As a leader, you have to be consistent in implementing the program and making very clear that sitting out is not an option," says Zetsche. Good leaders make change and common goals part of the corporate culture. "The key for any leader is to make sure everyone on the team is on the same page and understands where he or she is going," he says, although he acknowledged that "dealing with a highly diverse global organization is easier said than done."
