Organizational structures and control systems [611315]

Organizational structures and control systems

1

ASEA BROWN BOVERI (ABB), SWEDEN, 2004:
WHAT WENT WRONG?1

Since its inception, Asea Brown Boveri (hereafter called ABB) has always attracted the business and academic
community because of its unique organizational structure , consistent growth pattern, and extensive worldwide
operations. After the merger of Asea and Brown, Boveri and Cie (BBC), ABB had an excellent international
expansion. Academics and business practitioners studying multinational corporations (MNCs) and global
companies often admired ABB because of its outstanding growth, highly sophisticated management, and peculiar
corporate structure. ABB particularly became famous for its unique decentralized horizontal organizational system
and global networking, which was based on lateral communi cation across the company’s 1, 000 entitie s around the
globe. The phrase “think global, act local” became synonymous wi th ABB and its former chairman, Percy
Barnevik, w ho aggressively advocated and practiced the concept in the company. In 2004, ABB continue s to be
global leader in the areas of power and automation te chnologies although the company’ s corporate image has been
affected because of heavy losses in 2001 and 2002. In 2003, ABB’ s revenues surpassed $20.4 billion and made a
profit of $108 million.
During t he same period, the company’ s market value stood at $12.12 billion. On the ot her hand, in 2000, the
Groups’ market capitalization exceeded $40 billion. As of 2004, the ABB Group has operations in over 100
countries, employs 116,464 people worldwide, and is listed on the stock exchanges of Zurich , Stockholm, London,
Frankfurt, and New York . In the last f ive years, ABB has not been able to achieve t he same growth and expansion
because of chang ing markets and slow demand.
The ABB Group has over 115 years of rich history dating b ack to the late 1800 s. The Group was formed in 1988
when Asea AB of Västerås, Sweden and BBC Brown Boveri Limited of Baden, Switzerland merged t heir
operations and formed ABB (Asea Brown Boveri) Limited. Each company held 50 percen t of the new entity and
was head quarter ed in Zurich. Switzerland. The merger w as highly rated by the media because of Europe ’s 1992
economic integrat ion. In 1883, Ludvig Fredholm founded Elektriska Aktieb olaget in Stockholm that in 1 890
merged with Wenst roms and Granst roms Elektriska Kraftbolag to form Asea (Allmanna Svenska Elektrisk a
Aktiebolaget ). In the next fifty years, Asea grew from an unknown company to an in ternational entity having
subsidiaries in Great Britain , Denmark , Finland , and Spain. The co mpany became famous for its t ransmission lines,
generators, transformers, locomotives, and motors.
BBC was founded by Charle s E. L. Brown and Walt er Boveri in Baden , Switz erland in 18 91. By the early 1900,
BBC had its operations in Austria , Germany, Italy, and Norway. Like Asea, BBC manufactured power plants,
turbines, transformers, hydroelectric power st ations, locomotives , and other industrial products. The company
invented many new technologies and set the pace for the power generation industry. Before m erging with Asea,
BBC was operating globally and employed 97,000 workers worldwide . Under the leadership of its forme r chairman
Percy Barnevik, the company launched a massive global expansion program because of growing demand, especially
in East Asia and E astern Europe. Between 1993 and 199 8, ABB continued to grow in Europe, Asia and Latin
America by see king acqu isition s, alliances and joint vent ures that helped the company to consolidate its position in

1 Written exclusively for this book (Deresky H., “ International Management: Managing Across Borders and Cultures ”, 5th
Edition, International Edition, Pearson Education International, 2006, pp. 304 -307) by S yed Tarik Anwar, May 2004, Copyright
© Syed Tarik Anwar.

Organizational structures and control systems

2 world markets. The year 1998 was particularly importa nt for ABB when it acquired Elsag Bailey Process
Automation. The acquisition made ABB a major player in the global automation market.
ABB’ s current history and corporate profile are incomplete without di scussing its two former high -ranking officers,
Percy Barnevik (chairman) and Goeran Lindahl (chief executive ), wh o left the company in 2001. Both were
criticized by the world media o ver their gen erous pension payments received from ABB after departing th e
company . Barnevik alone received over $87 million in pension be nefits. I nterestingly, during the same year, ABB
lost $691 million. In addition, the com pany’ s U.S. subsidiary was sued for asbestos liabilities. Since Barnevik
coordinated the merger between Asea and Brown Boveri , he was highly admired b y the analysts because of his
corporate foresight and making ABB one of th e best global companies in the world. In the late nineties, Barnevik
was known as anothe r Jack Welch (former CEO of General Electric) because of his leadership, star image and
global vision. Jürgen Dormann, the current CEO (2004) who worked for Aventis, took over the company in
September 2002 and has brought a multi tude of structural changes to avoid bankruptcy . Although ABB lost $691
million in 20 01 and $16 1 million in 2002, it earned a net profit o f $108 million in 2 003.

WHAT WENT WRONG WITH ABB'S ORGANIZATIONAL STRUCTURE?
Global companies formulate their organizational stru ctures on the b asis of location, market coverage, competi tion,
and product lines. Like other companie s, ABB was sever ely impacted by t he East Asian crisis. The r egion’ s
currency depre ciations and weaker economies had an ad verse affect that brought massive reductions in t he
company’ s revenu es. In addition to the East Asi an crisis, ABB’ s own corporate blunders, complex org anizational
structure , and reshuff ling of the t op management added miseries to the company. T he net resul t was a major
finan cial dow nfall that affected the company’ s market value, growth, and global operations. ABB’ s organizational
problems and miss teps that led to th e negative image, lost market share an d corpor ate retrenchm ent are as follows:
1. Global diversifications and internationalization issues: In the nineties, ABB expanded operations and sought
internationalization at very fast pace. The company e stablished hundreds of subsidiaries worldwide that included
power/electrical equipment, oil, gas and petrochemicals, automation technologies, and other heavy industries.
During the tenure of Barnevik, ABB became highly infatuated with global expansion that eventually brought losses
and corporate problems. ABB was famous for its unique matrix structure at the global level. In the seventies and the
eighties, many companies capitalized on the matrix structure that was thought to be highly efficient at the
multidimensional and global levels. In the initial stages, companies benefited because of the matrix’ s economies of
scale, innovative operations, lateral personal communications and transfer of resources. The weaknesses of the
matrix system were found in the a reas of authority and chain of command that led to ambiguity and increased costs.
Likewise, ABB encountered problems in its matrix structure and had difficulty materializing its goals at the global
level (see Figure 1 ).
2. Leadership gaps und performance i ssues: In 2002, ABB started to see the impact of the East Asian crisis and
weaker demand from oth er parts of the world . In addi tion, ABB’ s organizational structure and control system made
things even worse. This resulted in major restructur ing and changes in its top manag ement. From 2000 to 2003, the
Group undertook significant corporate changes that led to unloading the company’ s financial services and oil an d
gas divisions. As o f 2004, ABB has somewhat re covered by restructuring its power and automation technology
divisions. Barnevik did an excellent job in the nineties regarding interna tionalizing ABB. After a period of rapid
growth, Barnevik’ s leadership and management style became ineffective and controversial because of ABB’ s far-
flung operations, comp lex organizational structure and widespread international subsidiaries. During Barnevik’ s
long tenure wit h ABB, the company had no plan of succession. In addit ion, ABB ’s top management actively sought
decentral ization while keeping its global matrix struct ure in many market s. This impacted the com pany’ s
performance eventually leading t o losses.

Organizational structures and control systems

3 3. East-Asian financial crisis : The East Asian finan cial crisis was triggered by China’ s devaluation of the Yuan and
later spread t o other parts of East Asia. In the ninet ies, East As ia’s economic health was solid and the region had
started a variety of infrastructural projects. ABB was one of the major beneficiaries of the Asian de velopment. After
the crisis, large industrial conglomerates like ABB with extens ive involveme nt in the region were unable to deal
with the changing markets. Cancellations of projects t hat led to heavy losses and downsiz ing were the end result.
ABB could no t recover from the East Asian crisis and saw its revenues dry up in the region that led to a total l oss of
over $ 1 billion in 2001/2002.
4. Controversy over pension benefits : In the last few years, CEO salaries and their exorbi tant pension benefits have
been severely criticized by the media . Company executives from Enron , World Com ., ImClone , and ot hers have
been sent to j ails f or mishandling the company money and their unethical behaviour . In 2002, Barnevik became part
of the controversy when it w as discovered that he had received f rom ABB pension benefits worth $87 million. This
was major n egative publicity for t he compa ny when it lost over $ 500 million during the same period.
5. Issues of asbestos -related liabilities : Like other companies , ABB was also hit ha rd by massive asbestos claims
because of the U.S. Co mbustion Engineering Unit that the company had acquired in 1990 . In 2 003, ABB al locat ed
$1.2 billion to deal with these claims. In 2003 , in the U.S. alone , 90.000 new asbestos claims were filed raising the
corporate liability to U.S. plaintiffs about $200 billion. According to a survey published b y Rand Institute of Civil
Justice, in the coming years, there could be another 2.4 million workers affected by the asbestos -related crisis,
makin g new claims o f $200 billion. ABB has allocated a significant contingen cy fund to deal with the curr ent and
future asbestos claims. The asbestos issue w as a major setback to ABB’ s global restructuring and recovery .
6. Changing glob al competition : Global competit ion in the power plants an d other he avy indust ry has changed in
the last t en years. At the time of the Asea and BBC merger, markets were booming in the Asian region. For a long
time, ABB maintained a strong presence in the industry because of its unique organizational structure and
worldwide operations. As of 2004, there tends to be more competitio n in the indust ry and some of the large market
opportunit ies have disappeared. Like ot her in dustrie s, power plants and infrastru ctural industries were affected by
factors that ABB could not control.

WHAT LIES AHEAD?
After 2001, ABB made changes in its to p leadership as well as organi zational structure . In 2004, ABB an nounced
the appointment of Fred Kindle as its future CEO. The company conducted a thorough evaluation of its global
operations and core compet encies . In 2004, ABB cont inues to re-fetch its global growth by being more proactive in
its regional growth. For example, the company seems more realistic in its core operations and non-core assets such
as oil, gas and petrochemicals have been unloaded to deal with current financial problems. ABB h as cut over 12.000
jobs worldwide to streamline the operations and continues lo deal with its asbestos-related liabilities. ABB’ s poor
performance and pension scandals forced the management to concentrate on its regional operations. The company
has started t o re design its complex organi zational structure and control system based on rationalization ,
performance and growth (see Figure 1). On the basis of past events, it is expect ed that the company will continue to
reorganize its global operations. ABB’ s top manage ment has devised a major restructuring plan that proposes
selling it s oil, gas and petrochemical division f or $925 million . In 2003, the company proposed a $2.5 billion rights
issue, seeking a three -year $l billion credit facility and future $750 million b ond issue. In the coming years, the
company will c ontinue to reformulate its core competencies and more corporate changes are expected. Additional
corporate ration alization and organizational streamlin ing is possible if ABB sees recovery in its global mark ets.
In conclusio n, AB B is an interesting case study in the areas of organizational structure and control sys tems. Right
from its inception (after the merger in 198 8), ABB has been the first -mover company and a market leader in the
power and oi l and gas in dustry. Led by its former visionary chairman Barnevik, ABB was highly pragmatic and
entrepreneurial in its early growth and global expansion. Regarding organizational structure and control systems,

Organizational structures and control systems

4 the ABB case is rele vant from t wo areas. First, market lea ders may not maintain a strong competitive edge forever .
Organi zational structures and control systems must conform to t he markets and com petition. Besides this, the
design of the global organiza tional structure must fit the strategy and the environment. S econd, very few MNCs
exploit ne w mar kets by applying the same organizational structures. In the coming years, it will be interesting to see
if ABB can maintain worldwide growth by following its newly devise d plan or just keep shedding operations and
other subsidiaries.

Figure 1: ABB’s old versus new corporate strategy and organizational models during the tenures of CEOs Percy Barnevik
(1988 -2001) and Jürgen Dormann (2002 -2004)

Source : Business Week ; The E conomist ; Financial Times ; The W all Street Journal (various issues). Old Corporate Strategy/Organizational Model
(Percy Barnevik, 1 988-2001) :
 Create a powerful global corporation
 Seek aggressive global expansion
 Design and implant matrix management structure
 Encourage entrepreneurship, decentralization, and
multiculturalism in overseas subsidiaries
 Seek internal benchmarking and corporate parenting
 Keep local corporate identities whil e seeking
globalization
 Seek cosmopolitan conglomerates
 Seek Pan European and Global Strategies
 Concentrate on Asian markets .
New Corporate Strategy/Organizational Model
(Jürgen Dormann, 2002 -2004) :
 Revise core competencies
 Sell-off non -core businesses
 Seek corporate restructuring
 Improve financial health of company
 Seek more regional strategies
 Resolve old disputes such as asbestos liabilities
 Simply ABB’s global structure: create two divisions
(power technology and automation)
 Seek cost cutting; seek dow nsizing
 Unload unproductive units
 Improve credit rating . Net Output :
 Global corp.
 Matrix structure
 Networking
 Horizontal structure .
Net Output :
 Rationalization
 Simplicity
 Avoid non -core
businesses
 Downsizing
 Save money
 Redesign the
company .