A.S.E.

; International Business and Economics

ABB Facing Turbulent Times

International Management Project
Brujban Andreea; Calugaru Cosmin; Ilea Maria; Ilisei Andreea; Trufea Teodora

Group 956; Series D; Year III

1. Introduction
ABB Organizational Rise, Decline and Renewal BBC Brown Boveri was established in 1891. Because of the limitations of the Swiss domestic market, Brown Boveri established subsidiaries throughout Europe relatively early in its history, and at times had difficulty maintaining managerial control over some of its larger operating units. The merger with ASEA was expected to help Brown Boveri reorganize and reassert control over its vast international network. In August 1987 ASEA and Brown Boveri announced their intent to merge their assets for shares in a new company, ABB Asea Brown Boveri Ltd., to be owned equally by each parent company and to be headquartered in Zurich. The integration of the giant was the new management's first task. CEO Barnevik had been applauded for his excellent job of rationalization at ASEA. Percy Bareneviks initial goal for the company was to do business in each major part of the world. These parts included Europe, North America and Asia. For ABB to become successful, Barnevik established ideals for the company to follow that were to be followed by all managers local and global. ABB began to expand more cautiously in Asia, laying the groundwork for $1 billion in investments there by the mid-1990s. 1993 is the year when ABB carried out major restructuring. These ones involved the reorganizing of the company's global operations into three geographic regions: Europe (including the Middle East and Africa), the Americas, and Asia. For the financial year 2001, Zurich, Switzerland-based Asea Brown Boveri Limited (ABB), one of the worlds leading multinational companies, but, unexpectedly, for the financial year 2002, ABB reported a bigger loss of $787 million representing a 14% increase in losses compared to 2001. Analysts felt that poor strategic decisions taken by the top management of ABB and HR-related problems arising due to frequent changes in the organization structure were some of the reasons for the poor financial performance of ABB. They also felt that the frequent changes in the leadership of ABB during the late 1990s and early 2000s made matters worse for the company.

2.1 Identification of the Problems

ASEA Brown Bovery has been facing, at the beginning of the twenty first century, a wide range of issues, caused broadly by the changing global economic environment. Since 2004, significant modification plans were launched in the same time with the intervention of the future CEO : Fred Kindle. ABBs main challenges at that point were represented by solving the following problems: 1. The Need of a Fit global organizational strategy Performance Issues Seeking decentralization and the Matrix Structure formed a highly successful global strategy at the time when Percy Barnevik, chairman of ABB, adopted it and helped to a fast, impressive internationalization. Still, up to this point, several flaws were found in this structure, in terms of authority, chain of command. The Matrix Structure is an organizational design that groups employees by both function and product, therefore workers have two leaders: a functional manager and a project manager. This situation requires more resources so that information is distributed between members, and the flat hierarchy is often a cause of conflict (different stakeholders may pursue different goals). 2. Financial Losses, as result of both disputes and new challenges. Before 2004, ABB had three consecutive years of significant losses. This situation is a setback to the companys attempt of recovery and global restructuring. Management was forced to cut jobs worldwide and cancel projects and their plan of selling unproductive units in not seen as a long term method to support global growth. 3. Necessity of a simplified business: leadership must focus on core-operations and disconnect from the off core branches. Off-core activities managed by ABB across the world are not as successful as they were during the intensive expansion. Not having sufficient control over them increases financial risks and this is a possible damage that ABBs leadership cannot control at this point. The changes on the Asian market together with increased competition generated low productivity within several subsidiaries of ABB; this represents another reason for management to consider a 2-division activity (Power Technology and Automation) as the best plan to avoid further loss and diminish risks.

2.2 Identification of the causes that led to these specific problems

1. Why the old organizational structure does not fit anymore?

First, the Matrix Structure has several flaws, especially in this global context of turbulence and change. It lacks the effectiveness of beaurocracy: the chain of command is not that well established; workers move from a task and a team to different ones, so they need regular adaptation and costly communication channels. Second, this decentralized administrative strategy deprives central management of full control. This has been the reason why the company encountered conflicts they could not control, as well as financial loss. The final result is represented by leadership gaps. 2. ABB was on the verge on bankruptcy in the early 2000, despite the high growth level maintained for years. There are multiple causes that brought ABB in this situation: The most significant one is the asbestos-related liability. It occurred after buying US Combustion Engineering Unit. During 2003 ABB had to allocate $1.2 billion to deal with the asbestos crisis there and according to a survey another 2.4 million workers will be affected by this. Undoubtedly, these claims represent a major setback to the companys restructuring process. The pension controversy was a factor that diminished severely the budget of ABB. This conflict was generated by the media and due to bad publicity the company had losses of approximately $500 000 million. A macroeconomic factor that had a great financial impact on ABB is the Asian Crisis which determined the closure of projects in Asian countries. The result was a total loss of approximately $1 billion, as the opportunity of a large market diminished considerably. Increased competition in the industry worldwide determined a decrease in the level of sales. The same did global diversification, as it was not handled by ABB through a proper structural adaption. How did ABB end up being, from an expansionary force worldwide, a rational company that unloads operations and subsidiaries?

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Two obvious causes led to the decision that Fred Kindle took with respect to simplifying their business and reducing the activity they undertake to core-activities (Power Technology and Automation) : - Increase and change of global competition, which in Asia was combined with a decrease in the large initial market opportunity;

- Buying foreign businesses which are off their core of activity meant a great deal of risks and responsibilities. On the other hand, focusing on the activities they have been specialized in helps them find the best strategies to avoid loss. 2.3 What happens if the Identified problems are not solved? Unless Fred Kindle does not pursue restructuring of ABB fast and efficient, these issues could have a rapid ascension that would harm the companys performance and financial stability. Further profit losses means a severe threat of bankruptcy for ABB. The unsolved conflicts as well as inability to face competition internationally would generate a further struggle to maintain a financial balance which may end up in collapse. If performance remains low and ABB continues to have leadership gaps, management will lose control over their subsidiaries and, as a consequence, there would be severe decrease in productivity. Unfortunately ABB needs to stop expansion and, even more, to renounce at their foreign activities that are not included in the basic fields of the company; otherwise they may lose sight of the firms purposes and leaders will find it extremely hard to handle such subsidiaries.

3. Identification of alternative solutions for each problem

1. The Need of a Fit global organizational strategy Performance Issues Despite the fact that the Matrix structure which was implemented by Percy Barnevik had a great success for ABB , the current representative must reinforce authority regarding the fierce competition and their decrease in productivity. The Matrix Structure has flaws in leadership control and communication area, thus we present the following alternatives that include the features needed to overcome managerial difficulties: a) Functional Organizational Structure A functional structure is one in which type of work is performed in a different department. For instance, all the companys accountants work in Accounting, Accounts Receivable or Accounts payable, whereas all the marketers work in Marketing. Each product line or geographic region then makes use of these centralized resources as if the other department were a different company.
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Advantages: This structure allows the company to benefit from having very standardized processes for each of its functions, and from having economies of scale such as being able to place a single, centralized order for a commonly used widget that it can then distribute worldwide. Disadvantages: It can be challenging and inefficient to shepherd a single product through all the steps and departments it needs to go through. These firms focus on specialization of job skills, and are more centralized. b) Divisional Organizational Structure Companies with divisional structures assign small groups of each type of function to a single division, making each self-sufficient. They may be divided by product line, such as the Shoe division, the Shirt division, and the Hat division. Or they might be divided geographically, such as the European or Asian divisions, or even further into France or Thailand divisions. Alternatively, they may be divided by customer group, such as Consumers, Small Business, and Government. In most cases, every division will have its own accounting, marketing, product development, manufacturing and executive staffs. Advantages: This structure allows each specialty to become intimately familiar with the product or market the division serves, and reduces inter-departmental delays. Disadvantages: The down side is that each division may be duplicating the efforts of several other divisions, or may be unknowingly working at cross purposes. These companies are concerned with specialization of products or markets, and are more decentralized.

2.Financial Losses, as result of both disputes and new challenges. a) Replacing asbestos with substitutes. Due to the fact that asbestos is a highly toxic material and causes very serious illnesses, it is more than necessary to replace it with substitutes. The most common substitutes for asbestos are polyurethane foam, amorphous silica fabric; thermo set plastic flour, flour fillers and cellulose fiber. Advantage: Replacing asbestos with alternatives will avoid future lawsuits, thus will help the firm to regain its former financial position Disadvantages: Although the alternatives are less toxic, they are also less efficient than asbestos and this will lead to higher costs.

b) Establish a rational plan for salaries and pension benefits Advantages: By creating a plan for controlling costs related to salaries and pension benefits, the company will be better off as no big discrepancies will occur between the amounts paid to employees and the costs would be cut. Disadvantages: Creating such a plan may create a disadvantage for the former leaders of the company.

3. Necessity of a simplified business: leadership must focus on core operations and disconnect from the off core branches. a) Leadership/Professional Development Program Written leadership plan is the vehicle through which you: Articulate your vision Define specific annual goals Commit to specific action steps to be achieved within a set time period Advantage: Leadership is the key to organizational growth, change, and renewal. Great leaders take advantage of their natural talents and take the time to learn the skills theyll need to effectively manage others. Disadvantage: Unfortunately, staff-development, professional training, and leadership instruction programs and initiatives often prove ineffective because they are created out of thin air, in the abstract. they have great difficulty sustaining results in the long run. b) Investment in developing core-operations Advantages: Further investment and research in the core industries will lead to a higher productivity. Keeping up with technological changes and coming up with new solutions to help clients needs will make ABB more competitive and will bring more market share and pr ofits. Disadvantages: Investment is all about spending more money, but currently ABB is struggling due to a losses in profits 3 years in a row and a loss in market share due to economic conditions. c) Developing partnerships with firms in the manufacturing and process industries Advantages: By partnering with different companies from manufacturing and process industries, ABB will be able to share knowledge and help creating new products, in industries in which they would not have otherwise access. From agricultural, food, textile and even automotive

industries, they all use automation in creating new products and services, as robots are used in almost every step on the production process. ABB should take advantage of is leading position in this segment, which will only bring more business and more profits. Disadvantages: The disadvantage would consist in losing the companys identity, as well as control over the entire process of production.

5. The optimum solutions

1. The Need of a Fit global organizational strategy Performance Issues Solution: Divisional Organizational Structure A divisional organizational structure gives a larger business enterprise the ability to segregate large sections of the company's business into semi-autonomous groups. These groups are mostly self-managed and focused upon a narrow aspect of the company's products or services. As ABB is in the position of strongly needing a focus on core activities, this strategy can help top management to orient employees towards specific activity fields, so that their purpose and attributions are very clear. Divisions work well because they allow a team to focus upon a single product or service, with a leadership structure that supports its major strategic objectives. Having its own president or vice president makes it more likely the division will receive the resources it needs from the company. Also, a division's focus allows it to build a common culture and esprit de corps that contributes both to higher morale and a better knowledge of the division's portfolio. This is far preferable to having its product or service dispersed among multiple departments through the organization. The most important argument for choosing it is that this divisional approach can easily be handled in an unstable business environment. Since each division is product based and selfreliant, it can respond extremely fast to external changes. It is the most suitable structure for a company that activates on various foreign markets. 2. Financial Losses, as result of both disputes and new challenges In order to solve this problem, we will choose both solutions as optimum : Replacing asbestos with substitutes is highly necessary as this has already caused a huge financial loss and needs to be implemented immediately. The decision of using alternatives will not only be eco friendly but it will also avoid future claims and lawsuits. The second solution, establish a rational plan for salaries and pension benefits, is also very important to take into account, due to the big discrepancies in the companys financial losses and pension benefits given to certain former employees.

3. Necessity of a simplified business: leadership must focus on core operations and disconnect from the off core branches. The best solution for this problem is to focus on developing core-operations. Off-core activities managed by ABB across the world are not as successful as they were during the intensive expansion. Not having sufficient control over them increases financial risks. The changes on the Asian market together with increased competition generated low productivity within several subsidiaries of ABB; this represents another reason for management to consider a 2-division activity (Power Technology and Automation) as the best plan to avoid further loss.

4. Implementation of the optimum solutions

1. Finding the Right Organizational Global Structure Divisional Structure As the decentralized system proves to be inefficient in the turbulent international market conditions and, in the same time, flexibility in strategies must be maintained we decided that the optimal solution is a Divisional Organizational Structure. Such a structure usually consists of several parallel teams focusing on a single product or service line. To be successful, divisions must be well managed. Executive leadership is the single most important determinant of success for a company using a divisional structure. The top leaders need to understand what each division is doing and provide leadership to the division chiefs on how to accommodate new strategic directions or more effectively partner across divisions. In addition, the executives should have a solid grasp of resource use. This would represent the major step towards restructuring the chain of control, as division ensures a greater ability of leaders to implement and survey and also a better communication and faster feedback. The Divisional structure is highly suitable for large companies with more than one field of activity. ABBs focus must be on enforcing authority in the two main divisions: Power Technology and Automation therefore separate attention for each is the best approach to be adopted. Such a strategy provides a clear accountability, showing correlation between expense and profits for both core activities and it contributes to broader skill development through collaboration between individual production processes.

Three major areas to consider and assess as you move forward with implementing a new organizational global structure: The Business Itself-What are your customers needs and wants? What is the competition doing? What are the industry trends? What are marketplace changes? What are your organizations overall strengths and weaknesses? Company Values-What does your company stand for? What are your values? What is your vision? What organizational culture do you want to cultivate? How congruent are you with your stated values and your informal cultural norms and behaviors? Major Processes-What are your most critical processes? How would you rate the effectiveness of these processes? Are your standards what they need to be? The importance of data cannot be over-emphasized-both on your current organizational effectiveness and the future organization you want to become. To get to this first level of assessment, be thoughtful, uncompromising, and thorough. Your answers to these questions

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need to drive both your ultimate design and the process you use to get there. If your methods do not reflect your stated values, you will have difficulty gaining the commitment needed to successfully implement any organizational changes. The authors experience suggests that the most successful organizational design processes have three things in common:

Focus on Excellence-start with a clean slate. Draw the organization that will respond to customer needs today and in the near future; that will create a competitive advantage and will both reflect and encourage the values and culture you desire. Even if cost-cutting is part of what is driving your change, do not start with cost-cutting as an objective. Start with organizational effectiveness as your objective and begin with a blank page. The People in the Organization Drive the Process, not the Organizational Design Consultant-clarifying roles at the beginning of the process is essential. Now is the time to apply what we stated in our introduction-organizational design needs to be created by the human beings responsible for the organizations success. Consultants need to create a partnership where expertise is shared freely, but where those who know their own business drive the process. Involve and Communicate-we have found that the more people become involved in the process, the more effective the outcome. Involve as many people at as many levels as early in the process as possible. Take a multiple team approach. The authors are not blind to the sensitivities involved in any redesign effort, such as potential layoffs, etc. These issues seem to emerge in stages. They need to be addressed as you work through the organizational design process so that you can continue to include those who know the work the best.

2. Financial Losses, as result of both disputes and new challenges Replacing asbestos with substitutes This solution requires a quite substantial financial investment. This refers to purchasing the alternative products and offering training programs for the workers to learn how to operate with the new materials. The replacing of asbestos means not only to work with substitutes from now on, but also to redo the old manufactured articles containing this raw material. This solution requires a very significant allocation of money and time, so that the desired result can be achieved, but the cost will not be as big as the possible future lawsuits.

Establish a rational plan for salaries and pension benefits The implementation of this solution needs first of all a meeting between the CEO of the company and the head of the human resources departments. In this meeting it will be reviewed

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the type of retirement plan that the company has and a new plan, covered by the U.S. Department of Labour, will be chosen, having the companys best interest at heart.

3. Necessity of a simplified business: leadership must focus on core operations and disconnect from the off core branches. Focus on developing core-operations This strategy consists in focusing only on the Power Technology and Automation industry and retire from the other non-core operations that they currently have. Their main goal is to find other means to stay competitive. Among these, the ability to respond rapidly to changing customer needs to stand out. Quick customer response, the need for mass customization, short lead times and low inventories favor the location of manufacturing facilities close to the customer. Recent advances in automation enable this change. Modern factory automation systems are flexible and allow manufacturers to respond quickly to changes in market demand without sacrificing quality or consistency, with fewer, more skilled workers. Further, integration of automation systems and fast communication mean that supply chains can be kept lean despite the variety of products. Furthermore, manufacturers can increase productivity and profitability by means of recent advances in automation, such as collaborative production management (CPM). This refers to the set of software solutions that sit above the manufacturing automation layer and below the enterprise software. CPM creates a collaborative production process where business, operations and maintenanceand their information systemswork together to provide a complete and comprehensive view of the whole manufacturing cycle, resulting in a more efficient and integrated operation. This breaks down traditional manufacturing silos and improves efficiency, agility and productivity in a modern manufacturing environment.

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