Case Analysis in “ABB: Building Quality & Operational Excellence”

I. INTRODUCTION

ABB is a world leading supplier of innovative, safe and resource efficient products,
systems and services that help customers increase productivity while lowering
environmental impact. It is an industry leader in energy efficiency, use of low-carbon
fuels and renewable energy. They cut greenhouse gas emissions and reduce its
energy use by 20% by 2020.

According to ABB’s 2017 annual report, they streamlined and strengthened the
corporation in 2017 in accordance with their Next Level strategy, further executing on
the plan that began in 2014. Now, they have four market-leading divisions.
Combining their traditional offering with their ABB Ability™ digital solutions, they
have an innovative and truly digital portfolio for customers in utilities, industry and
transport & infrastructure that are based on two clear value propositions: bringing
electricity from any power plant to any plug; and automating industries from natural
resources to finished products.

KEY FIGURES

• Total orders were steady with base orders up 5 percent (comparable) and 6
percent in US dollars.
• Revenues were up 1 percent to $34.3 billion.
• Operational EBITA margin was 12.1 percent, impacted 30 basis points due to
charges related to the EPC businesses. These EPC charges were recorded in
Q4.
• Operational earnings per share were 1 percent lower in constant currency terms.
• Cash flow from operating activities was steady compared with 2016 at $3,799
million.

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1.1 Past Corporate Performance Indexes

Highlights in 2017

(a) Transition year delivers streamlined and strengthened portfolio and operations:
 B&R, KEYMILE acquisitions completed
 GE Industrial Solutions acquisition signed
 High-voltage cables and cables accessories divested, two joint ventures
signed for EPC activities
 Business model change for EPC in Power Grids, Robotics and Motion
and Industrial Automation under way
(b) Four consecutive quarters of increasing base-order growth (3); the momentum
built in 2017 positions ABB for profitable growth as the global markets are
improving
(c) Continued momentum in operational excellence through successful cost savings
program and strong net working capital management
(d) ABB Ability™ drives growth across all divisions with more than 210 solutions
launched in 2017
(e) Net income increases 17 percent in 2017 to $2,213 million; Basic earnings per
share(1) also increases 17 percent to $1.04
(f) Board proposes ninth consecutive dividend increase to CHF 0.78 per share

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ABB FINANCIAL KEY DATA 2013-2017

($ in millions) 2017 2016 2015 2014

Orders 33,387 33,379 36,429 41,515
Revenues 34,312 33,828 35,481 39,830
Income from operations 3,434 2,987 3,049 4,178
% revenues 10.0% 8.8% 8.6% 10.5%
Operational EBITA 4,130 4,191 4,209 4,534
% operational revenues 12.1% 12.4% 11.9% 11.3%
Net income (attributable to ABB) 2,213 1,899 1,933 2,594
Basic EPS ($) 1.04 0.88 0.87 1.13
Dividend per share (CHF)1) 0.78 0.76 0.74 0.72
Cash flow from operating activities 3,799 3,843 3820 3,845
Free cash flow 2,926 3,065 3,019 2,857
% of net income 132% 161% 156% 110%
Cash return on invested capital 12.4% 13.8% 13.4% 12.7%
Employees (000s) 134,8 132,3 135,8 140,4

1.2 Strategic Posture

Goal
By 2020 and beyond, ABB will be recognized as a leading contributor to a more
sustainable world through our unique business offering and sustainable business
practices. These help us capitalize on market opportunities and reduce safety,
security and environmental risks to create value for our customers, employees
and other stakeholders.

Current Mission

Improve performance: ABB helps customers improve their operating

performance, grid reliability and productivity whilst saving energy and lowering
environmental impact.

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Drive innovation: Innovation and quality are key characteristics of our product,
systems and service offering.

Attract talent: ABB is committed to attracting and retaining dedicated and skilled
people and offering employees an attractive, global work environment.

Act responsibly: Sustainability, lowering environmental impact and business

ethics are at the core of our market offering and our own operations.

Current Vision
As one of the world’s leading engineering companies, we help our customers to
use electrical power efficiently, to increase industrial productivity and to lower
environmental impact in a sustainable way. “Power and productivity for a better
world”.

Current Objectives

ABB’S NINE SUSTAINABILITY OBJECTIVES 2014-2020

A. Pioneering technology
1. Products and services for a better world
ABB is a world leading supplier of innovative, safe and resource efficient
products, systems and services that help customers increase productivity
while lowering environmental impact.

B. Responsible Operations
2. Safe and secure operations
Safety is a core value. All ABB operations have an excellent health,
safety and security culture embedded in its day-to-day business, targeting
zero incidents.

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 3. Energy efficiency and climate change
ABB is an industry leader in energy efficiency, use of low-carbon fuels
and renewable energy. We cut greenhouse gas emissions. ABB to
reduce its energy use by 20% by 2020.

4. Responsible sourcing
Social and environmental risks and impacts of sourcing practices are well
understood and managed.

C. Right Resources
5. Right materials
We aim for materials that are sustainable. Hazardous substances are
used in closed loops or not at all.

6. Resource efficiency
Materials and water use is optimized. Facilities in water stressed regions
to reduce water use by 25% by 2020. We target zero waste.

D. Responsible relationships
7. Integrity
ABB has a strong and consistent reputation as a world leader in integrity
and ethical business practices.

8. Human Rights
Human rights issues are well understood and managed in all ABB
operations along the value chain.

9. People and society

ABB attracts, retains and develops dedicated and skilled people from
diverse backgrounds, and engages with a wide range of stakeholders,
including communities, to maximize benefits for our business and society.

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Current Strategies

A. ABB: Next stage of unlocking value

1. Shaping four focused, market-leading, entrepreneurial divisions:
 Electrification Products
 Robotics and Motion
 Industrial Automation
 Power Grids

2. Continued Power Grids transformation under ABB ownership:

 “Power Up” program aiming at growth, lower risk, earnings accretion
 De-risked EPC business model
 Partnership with Fluor for substations
 Partnership with Aibel for offshore wind
 Divesture of cable business expected in Q1 2017
 Raised margin target corridor 200bps to 10-14%, effective 2018

3. Realizing full potential as digital champion:

 “ABB Ability”: fully integrated digital offering across customer
segments; cements ABB’s leadership in the Fourth Industrial
Revolution
 Far-reaching partnership with Microsoft to develop next-generation
digital solutions

4. Strengthening global ABB brand

 Consolidation of 1000+ brands under the ABB master brand
 Prerequisite for full value creation of digital offering
 Writes ABB’s heritage as a pioneering technology leader into the
future

5. White-collar productivity target increased by 30% to $1.3bn; timeline and

costs unchanged.

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 6. All other financial targets confirmed.

7. Second share buyback program of $3bn planned 2017 through 2019;

capital allocation priorities unchanged.

B. ABB and Microsoft partner to drive digital industrial transformation.

C. ABB and Fluor partner to deliver power substation projects globally.

Current Policies
As a global leader in power and automation technologies, we believe in
creating value for our stake holders. Our health and safety, environment and
quality policies set out what can be expected from us, and what we expect
from our business partners.

A. Occupational health and safety policy

ABB is committed to providing a safe and healthy work environment for all
employees, contractors, customers and visitors.

B. Environment policy
ABB aspires to create value for our stakeholders by meeting the needs of
our customers, employees and the communities where we undertake
business.

C. Quality Policy
There are many dimensions in which ABB can compete, but none of
these are meaningful for our customers without a foundation of quality.
The responsibility for quality is something that must be owned by every
person, every business, and every location that ABB in Singapore calls
home.

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II. Corporate Governance

2.1 Board of Directors

2.2 Top Management

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III. External Environment (EFAS)

Opportunities

a. Government initiatives in the infrastructure space will augment overall

demand for power industry.

b. It is financially strong with huge cash flows which will help in acquisitions,
buybacks and dividends

c. Increase in demand for smart grids increase demand for any companies
that manufacture, supply or build smart grid infrastructure.

d. New trends in the consumer behavior can open up new market for the
ABB. It provides a great opportunity for the organization to build new revenue
streams and diversify into new product categories too.

e. The new technology provides an opportunity to ABB to practices

differentiated pricing strategy in the new market. It will enable the firm to
maintain its loyal customers with great service and lure new customers
through other value oriented propositions.

f. New environmental policies

The new opportunities will create a level playing field for all the players in the
industry. It represent a great opportunity for ABB to drive home its advantage
in new technology and gain market share in the new product category.

g. New customers from online channel

Over the past few years the company has invested vast sum of money into
the online platform. This investment has opened new sales channel for ABB.
In the next few years the company can leverage this opportunity by knowing
its customer better and serving their needs using big data analytics.

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 h. Stable free cash flow provides opportunities to invest in adjacent
product segments. With more cash in bank the company can invest in new
technologies as well as in new products segments. This should open a
window of opportunity for ABB in other product categories.

Threats

a. Growing strengths of local distributors also presents a threat in some

markets as the competition is paying higher margins to the local distributors.

b. The demand of the highly profitable products is seasonal in nature and

any unlikely event during the peak season may impact the profitability of the
company in short to medium term.

c. Shortage of skilled workforce in certain global market represents a threat

to steady growth of profits for ABB in those markets.

d. As the company is operating in numerous countries it is exposed to

currency fluctuations especially given the volatile political climate in number
of markets across the world.

e. Imitation of the counterfeit and low quality product is also a threat to

ABB’s product especially in the emerging markets and low income markets.

f. Increasing trend toward isolationism in the American economy can lead

to similar reaction from other government thus negatively impacting the
international sales.

g. Rising pay level especially movements such as $15 an hour and increasing
prices in the China can lead to serious pressure on profitability of ABB.

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IV. Internal Environment (IFAS)

Strengths

a. Global Footprint
ABB enjoys a dominant position in several markets that it serves. The company
is one of the leading power and automation engineering companies in the world
with operations in around 100 countries across Europe, Asia, Middle East and
Africa (AMEA), and the Americas. ABB, one of the largest manufacturers of
electric motors and drives, serves these markets through a global production,
engineering and service base. The company’s strong positions in these markets
are well backed by its local R & D and product development capabilities, which
enable it to match and even exceed local competitors in terms of speed of
product development and deployment. In the time ahead, with the maximum
demand for infrastructure projects to come from developing countries, ABB is
well placed to exploit that in the long run.

b. Long-term contracts
With the long-term nature of the contract in the infrastructure projects, a stable
and constant revenue is ensured to ABB. Also, with the development and
expansion of local service base, a long term relationship with clients with the
potential of repeat orders is ensured.

c. Diverse product portfolio

ABB is highly focused on technological development to help drive its
competitiveness in the marketplace. It invests hugely in R&D, which in turn
develop new and innovative products as well as strengthen its existing product
portfolio.

d. Superior brand value has helped it in cross selling and gave a lot of
aftermarket sale opportunities

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e. Superb Performance in New Markets
ABB has built expertise at entering new markets and making success of them.
The expansion has helped the organization to build new revenue stream and
diversify the economic cycle risk in the markets it operates in.

f. Successful track record of developing new products – product innovation.

g. Strong Free Cash Flow

ABB has strong free cash flows that provide resources in the hand of the
company to expand into new projects.

h. Successful track record of integrating complimentary firms through

mergers & acquisition. It has successfully integrated number of technology
companies in the past few years to streamline its operations and to build a
reliable supply chain.

i. Reliable suppliers
It has a strong base of reliable supplier of raw material thus enabling the
company to overcome any supply chain bottlenecks.

j. Good Returns on Capital Expenditure

ABB is relatively successful at execution of new projects and generated good
returns on capital expenditure by building new revenue streams.

k. Strong dealer community

It has built a culture among distributor & dealers where the dealers not only
promote company’s products but also invest in training the sales team to explain
to the customer how he/she can extract the maximum benefits out of the
products.

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Weaknesses

a. Involvement in anti-competitive practices

ABB has been involved in various antitrust activities. In 2014, the EU
Commission took the decision regarding its investigation f anticompetitive
practices in the cables industry. In 2013, the company and Brazillian Antitrust
Authority (CADE) agreed to settle its ongoing investigation into ABB’s
involvement in anticompetitive practices in the cables industry. Company’s
cables business remains under investigation for alleged anticompetitive practices
in certain other jurisdictions. ABB’s brand image is adversely affected by its
frequent involvement in these investigations.

b. The company has not being able to tackle the challenges present by the
new entrants in the segment and has lost small market share in the niche
categories. ABB has to build internal feedback mechanism directly from sales
team on ground to counter these challenges.

c. Not very good at product demand forecasting leading to higher rate of missed
opportunities compare to its competitors. One of the reasons why the day’s
inventory is high compare to its competitors is that ABB is not very good at
demand forecasting thus end up keeping higher inventory both in-house and in
channel.

d. Financial planning is not done properly and efficiently. The current asset
ratio and liquid asset ratios suggest that the company can use the cash more
efficiently than what it is doing at present.

e. The marketing of the products left a lot to be desired. Even though the
product is a success in terms of sale but its positioning and unique selling
proposition is not clearly defined which can lead to the attacks in this segment
from the competitors.

f. Need more investment in new technologies. Given the scale of expansion and
different geographies the company is planning to expand into, ABB needs to put

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 more money in technology to integrate the processes across the board. Right
now the investment in technologies is not at par with the vision of the company.

4.1 Corporate Structure

ABB is organized into four divisions according to the customers and industries
we serve.

1. Power Grids
The Power Grids division offers power and automation products, systems,
service and software solutions across the generation, transmission and
distribution value chain. Its portfolio includes grid integration, transmission,
distribution and automation solutions and a complete range of high voltage
products and transformers.

2. Electrification Products
Technology across the full electrical value chain from substation to the point
of consumption, enabling safer and more reliable power. A range of digital
and connected innovations for low- and medium-voltage, including EV
infrastructure, solar inverters, modular substations, distribution automation,
power protection, wiring accessories, switchgear, enclosures, cabling,
sensing and control.

3. Industrial Automation
Products, systems and services designed to optimize the productivity of
industrial processes. Solutions include turnkey engineering, control systems,
measurement products, life cycle services, outsourced maintenance and
industry specific products (eg, electric propulsion for ships, mine hoists,
turbochargers and pulp testing equipment).

4. Robotics and Motion

Motors, generators, drives, mechanical power transmission, robotics, wind
and traction converters.

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V. Problem Ideation

5.1 Statement of the Problem

ABB faces challenges in delighting its customers with products and services they
provide. In order to overcome these, the corporation launched their global
Operational Excellence (OPEX) program which aims to transform improvement
ideas into business reality; train on tools and techniques to build improvement
competencies and coach improvement projects to turn real business issues into
real business results. However, since the corporation operates globally, it faces
further challenge in implementing this program throughout their global
organization.

5.2 Causes and Indicators of the Problem

ABB would like to equip their employees with the skills and ability to generate
process improvements to ensure On-Time, On-Cost and On-Quality delivery.

5.3 Impact of the Problem (Short term/ Long term)

ABB invests so much in this program because if they will not do so the
organization could not sustain in delivering to the customer the products and
services that meet their expectations of quality, they cannot sustain their
profitable growth and they could not maintain their long-term marketplace
competitiveness.

VI. Decision Criteria and Alternative Solutions

6.1 Strategic Alternatives
1. Provide a common approach to problem solving based on the ABB 4Q
Methodology.
2. Provide common structure to facilitate participation by all employees
regardless of location and function.
3. Provide training materials, instructions and coaching to assure a quick start
and transition to local ownership.

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VII. Recommendation
1. Conduct a series of mobilization workshops with the senior management
team in order to help establish the necessary foundations and supporting
infrastructure for a global programme of this nature.
2. Assess and validate the suitability of potential trainers and coaches against a
specific criteria of key competences
3. Identify the individual’s learning needs to be addressed and provided
guidance on their development requirements as a programme trainer and
coach
4. Develop internal trainers and coaches
5. Develop quality and continuous improvement training material.

VIII. Implementation
1. In implementing the program, the qualified trainers and coaches should follow
religiously the program infrastructure.
2. Trainers and coaches should follow the standardized assessment process.
3. Qualified trainers and coaches are distributed across the entire organizational
footprint and are supporting all divisions and regions in ABB.
4. The employees should be provided with advanced workshop material which
serves as a platform to deliver advanced projects with improvements on-time,
on-cost and on-quality delivery.

IX. Evaluation and Control

ABB Quality Policy states that it aims to grow continual improvement competencies
and culture on a global scale. These competencies help to eliminate waste, reduce
variation and enable people to work in a safe and efficient manner; therefore, the
organization should formulate a tool that would specifically evaluate these areas.
Also, the organization should recognize their employees who make an invaluable
‘contribution to the company’s success.

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