Case Study 3 Asea Brown Boveri (ABB), Sweden, 2004: What went wrong?

1. General presentation
The history of ABB Group started over 115 years ago. In 1988, Asea AB (Sweden) and BBC Brown Boveri
Limited (Switzerland) fused, forming ABB (Asea Brown Boveri) Limited, with its headquarters in
Switzerland.
In 1890, Elektriska Aktiebolaget (Stockholm), formed by Ludvig Fredholm, merged with Wenstroms and
Granstroms Elektriska Kraftbolag, creating Asea. It turned, from an unknown company, into an international
one with subsidiaries in Great Britain, Denmark, Finland and Spain. It was well-known for its transmission
lines, generators, transformers, locomotives and motors.
In 1891, Chearles Brown and Walter Bovari founded BBC. It performed operations in Austria, Germany,
Italy and Norway and it handled with manufacturing industrial products, such as power plants, turbines,
transformers, hydroelectric power stations and locomotives.
ABB launched a program for expansion due to the increasing demand, in East Asia and Eastern Europe. It
experienced a continuing growth in Europe, Asia and Latin American, looking for opportunities for
acquisitions, joint ventures and alliances, thus helping the company strengthen its position in world
markets. In 1998, the company acquired Elsag Bailey Process Automation, making it an important player in
the global automation market.
In 2001, both the chairman, Percy Barnevik, and the chief executive, Goeran Lindahl, quitted the company.
They were condemned by the media because of the pension payments they received after leaving the
company (i.e. Barnevik reveived more than $87 million). During that year, the company lost $691 million.
Additionally, the companys subsidiary in US was sued for asbestos liabilities.
In 2002, Jrgen Dormann ran on the company and made significant improvements regarding its structure
in order to avoid bankruptcy. In 2001 and 2002, ABB lost $691 million, respectively $161 million. However,
in the following year, it had a net profit of $108 million and revenues of more than $20.4 billion.
ABB portrays itself through a unique organizational structure, a consistent growth pattern and extensive
worldwide operations. It had an impressive growth and highly sophisticated management. The company
was well-known because of its decentralized horizontal organizational system and global networking, based
on lateral communication between the companys entities worldwide.

In 2004, the company still retained the global leadership in domains regarding power and automation
technologies, even though its reputation was affected by the losses experienced in 2001 and 2002. In
2003, the companys market value was around $12.12 billion.
Beginning with 2004, the ABB Group had operations in more than 100 countries, 116464 employees all
around the world and was listed on the stock exchange in Zurich, Stockholm, London, Frankfurt and New
York. The changing markets and lower demand hindered the company to achieve this type of growth and
expansion in the next years.
ABB was heavily affected by the East Asian crisis currency depreciation, weaker economies, leading to
immense lowering of the revenues of the company. Moreover, its corporate blunders, complex
organizational structure and modernization of the top management had a negative impact on the company,
influencing the companys market value, growth and global operations.
Global diversifications and internationalization issues, leadership gaps and performance issues, the East
Asian financial crisis, the controversy over pension benefits, issue of asbestos-related liabilities and the
changing global competition led to a decrease in the image of the company and loss in market share.
After 2001, the company changed its top leadership and its organizational structure. After 3 years, it
appointed Fred Kindle as CEO. The company focused more on its regional growth. It seemed more realistic
in its core operations and dealt with the financial problems, rather than with its non-core assets (i.e. oil, gas,
petrochemicals). It cut approximatively 12000 jobs worldwide. Its poor performance and pension scandals
determined the management of the company to work on its regional operations, thus it redesigned its
organizational structure and control system.

2. Identification of problem, causes and negative effects

Identification of problem: Failure in adapting the organizational structure of the company to the
international environment
Causes:

The complexity of the organizational structure, the corporate blunders and the fact that the company
expanded internationally at a very fast pace without being able to adapt its organizational structure
based on the geographical area of its numerous subsidiaries;

The companys control system, ineffective management style, widespread subsidiaries and seeking
decentralization while keeping the same matrix structure at a global level, disregarding important
issues such as strong competition;

The East Asian crisis, the weaker demand from other parts of the world and the companys inability to
deal with the changing markets;

All the causes mentioned above had a negative impact on the company.
Negative effects:

Difficulties in the lines of control, which tend to become ambiguous, confusing and stressful,
determining conflicts between each other and causing difficulties in materializing the goals of the
company at a worldwide level;

Poor performance, elimination of projects;

Massive financial downfall - major lowering of the companys revenue, losses in market share;

Revenue losses and a setback for the improvement of the company (due to the asbestos related
liabilities);

Spoiled company image (effects of the enormous pension benefits);

3. Identification of alternative solutions

The alternative solutions our team has come up with in order to resolve the issues met by ABB while
following the internationalization process are: Global Product Division Structure and Global Area
Division Structure. We consider that, unlike the Matrix Structure employed by the company, these two
solutions are highly efficient, as each division is optimized for its market and its work is coordinated, they
allow more control. They would also be more benefic as the lines of communication and the locus of control
are relatively far in the case of ABB.
Global Product Division Structure
Advantages
1. Fast response to the global competitive

Disadvantages
1. Destructive duplication of management, sales

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3.
4.
5.

pressures against specific product lines;

descriptions and plant capacity utilization
Builds the conditions for growth and
within regions;
diversification;
2. No formal means by which a product division
Clear focus on market segment, thus meeting
can learn from another international expertise;
customers needs;
3. May generate conflicts between divisions
Grants the companies to add new products
regarding the resource allocation;
without disturbing the rest of organization;
The managerial focus relies on product level
and product line; the responsibility for the profit
is moved at the level of the division.

Global Area Division Structure

Advantages
1. Favorable circumstances for economies of
scale;
2. Local managers could identify rapidly better
solutions to solve local problems.

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2.

3.
4.

Disadvantages
Duplication of functional and product
specialists among the regions;
Lack of interest of area divisions to promote
new products realized at headquarter or in
another regional department;
Generation of possible conflicts between
different divisions and geographical groups;
Possible problems in coordinating the efforts in
R&D and production.

4. Selection of optimal solutions

Taking into consideration all the advantages and disadvantages of the two alternative solutions proposed
above, we think that the best option for the company ABB is to implement the Global Product Division
Structure. Even with all the benefits of making use of the Global Area Division Structure, such as a change
to reach economies of scale and coming up with various solutions in a more rapid way, we truly believe that
meeting the customers needs and having opportunities of growth and recovery, while also being able to
face competitors better would represent a greater opportunity for ABB. The fact that this type of structure
makes it possible for the company to diversify its products portfolio is a true advantage. Surely, this
structure has disadvantages too, but we consider that they can be surmounted.
5. Implementation of the optimal solution

We believe that the first step when implementing this new organizational structure should presented in a
way in order for the employees to understand its necessity to manage to solve the issues the company
ABB is facing.
Adopting the Global Product Division Structure has many advantages, such as the ability to react more
quickly against competitors, to emphasize on the customers, improvement, diversity regarding the products
portfolio, etc.
Still, there are a few disadvantages that need to be overcame. By creating opportunities, like training
gatherings, employees could help each other regarding some issues. Some of these sessions could be
held abroad in order for various employees to benefit from others international expertise. Because
discussions and conflicts may arise between several departments, we could solve that by creating better
communication channels or by using different algorithms for resource allocation.