Asea Brown Boveri: A Brief Strategic Analysis

The following is an analysis of Asea Brown Boveri (ABB), the merger of two European electrical equipment

giants: Asea AB (Sweden) and BBC Brown Boveri (Switzerland). Currently, there are two main issues facing Percy

Barnevik, ABB’s newly appointed CEO and President.1

Main Merger Concerns

The first concern was the challenge of successfully creating a new company comprised of two former rivals.

This issue was addressed by building a common platform, which enabled the establishing of common procedures2,

creating common reporting systems,3 and constantly communicating with managers (giving them clearly defined goals

and responsibilities).

The more pertinent issue is managing the performance of this new global giant. After the integration process

and the setting of new management principles and organizational structure, Barnevik had to ensure that these efforts

functioned according to plan (that value creation begins). Barnevik saw this as a balancing act of three contradicting

objectives: global & local; big & small; and decentralized with centralized reporting. However, as discussed below,

these are not necessarily contradictions.

Strengths

ABB’s strengths lie not only in the combined competencies of Asea and BBC, but in the leveraging of these

competencies to create new competitive advantages. Asea’s contributions to the merger were profit performance,

management systems, and marketing capabilities. BBC’s were a large client base, 4 billion USD in liquidity, and

technical expertise.

ABB was also able to develop new advantages from the merger. To fill new managerial positions (due to a

new matrix structure) ABB had a large pool of highly skilled managers who were familiar with both companies,

allowing ABB to select the best managers for the available positions. Also, both companies operated in the same

industry, allowing ABB to reap short-term cost benefits associated with eliminating duplicated efforts and leveraging

economies of scope. Further, since this was a true merger, there were few due diligence problems with managers of the

1
The case takes place in 1989.
2
The Policy Bible
3
The ABACUS System
© April 2007, Jesse Kedy International Business Strategy
www.jessekedy.net University of Richmond
acquired firm being uncooperative; most managers seemed to be open to the new corporate culture and goals. Finally,

ABB’s sheer size allows it to leverage deep economies of scale, as well as expansion strategies, such as acquisitions.

Weaknesses

At the same time, ABB’s main potential weakness comes from its size. Barnevik’s expectation of “no

honeymoon period”, along with his overall agenda for ABB was very complex and challenging to say the least. This

was compounded by the breadth and depth throughout which Barnevik’s message had to travel. His policy bible, for

example, although communicated directly to 300 key managers, would have to be rapidly and correctly communicated

to tens of thousands of employees, globally. The manual had to be translated, by ABB managers, into many languages

(ABB operates in over 100 countries). Anything lost in translation would hinder Barnevik’s strategic efforts.

Opportunities

ABB also faced several opportunities. First, its newfound size put it in a position to consolidate large parts of

the industry. Also, its aggressive acquisition program was based on the identification of two opportunities: rising

global demand and a strong need for local identity. Further, the U.S. market may prove to be one of ABB’s biggest.

Finally, with the recent fall of communism, it would seem that Eastern Europe would be an immense opportunity to

establish market leadership. At this time, China is not a realistic short term consideration.

Threats

The biggest threat to ABB lies in competitor response to the merger. Beyond the merger of GEC and Alsthom,

local governments might respond negatively to ABB, despite its longstanding relations with them. Thus, another threat

may come from political instability and the degree to which ABB is considered a “foreign invader”.

ABB Strategy

As mentioned, being global and local, big and small, and radically decentralized with centralized reporting, are

not necessarily impossible. These goals depend mainly on perceptions. From the top, ABB should be perceived as

global (in the areas of strategy, reporting, and knowledge transfer). From the bottom, ABB subsidiaries should be seen

as local (in local management responsibility and freedom) and decentralized (in financial reporting and accountability).

To maximize global optimization while retaining a local feel, Barnevik adopted a matrix structure, based on regional

company operations and business areas. Global optimization goals were the responsibility of each business area, while

location-dependent goals were allocated to regional managers. These efforts are not sufficient to achieve ABB’s goals.

© April 2007, Jesse Kedy International Business Strategy

www.jessekedy.net University of Richmond
Recommendations

To increase ABB’s ability to meet the above-mentioned objectives, Barnevik needs to adopt two guiding

principles: 1. more operational depth and less breadth; 2. increased effort to create new value continuously.

More Depth, Less Breadth

1. First, ABB should continue entering new markets, starting with Eastern Europe, perhaps focusing on new

infrastructure development projects.

2. ABB should also begin a plan to have a presence in Asia and South America by 1999 (10 years). The preferred

entry mode at first will be joint ventures (such as with local governments), and not greenfielding or acquisitions.

3. Rather than trying to compete in many industries, ABB should focus on developing local relationships in fewer

industries; businesses not essential to ABB’s localization objectives should be sold off.

New Value Creation

1. ABB’s goal should be to increase competitiveness, not just size. After selling non-essential businesses, ABB

should continue to develop and acquire unique, cutting-edge competencies in its focal areas.

2. To increase its local feel, improve flexibility, reduce time-to-market, and hedge against political risk, ABB

should seek several strategically-located manufacturing and sourcing sites.

3. ABB should also consider allowing local companies to source components locally.

In sum, ABB needs to realize that achieving these goals does not depend only on its size; size does not equal sustained,

long term competitiveness. In fact, a leaner company may be the key to ABB’s future success4.

4
See Figure 1 below.
© April 2007, Jesse Kedy International Business Strategy
www.jessekedy.net University of Richmond
Figure 1: ABB Timeline

© April 2007, Jesse Kedy International Business Strategy

www.jessekedy.net University of Richmond
© April 2007, Jesse Kedy International Business Strategy
www.jessekedy.net University of Richmond
© April 2007, Jesse Kedy International Business Strategy
www.jessekedy.net University of Richmond