1.

General presentation of the case study (Structured summary)

ABB (ASEA BROWN BOVERI) group is a high-tech engineering MNC headquartered in Zurich,
Switzerland. The group was formed in 1988, when Asea AB of Västerås, Sweden and BBC Brown
Boveri Limited of Baden, Switzerland merged their operations, with each company holding 50
percent of the new entity.
Nevertheless, the merger was highly rated by the media because of Europe’s 1992 economic
integration.
ABB group has a history of over 115 years, dating back to the late 1800s.
On the one hand, Ludvig Fredholm founded, in 1883, Elektriska Aktiebolaget in Stockholm which
merged with Wenstroms and Granstroms Elektriska Kraftbolag to form ASEA.
On the other hand, Charles Brown and Walter Boveri founded BBC in Baden,Switzerland.
Throughout the years, both companies became famous for their transmission lines, transformers,
power plants and locomotives, having expanded their operations across Europe.
Under the tenure of Percy Barnevik, between 1993 and 2001, the company engaged in an
aggressive global expansion program due to increasing demand. ABB continued to expand in Europe,
Asia and Latin America by seeking acquisitions, alliances and joint ventures that helped the company
to consolidate its position in the global markets. The company was famous for its unique matrix
structure at the global level. These proved to be good choices for ABB as it became the global leader
in the areas of power and automation technologies in 2004.
However, Barnevik’s business actions or lack of reaction to the global changes led to huge financial
losses and important corporate organizational problems because of neglecting macroeconomic
issues such as the East Asian crisis, weaker demand from other parts of the world, the increasing
competition in the industry and emphasizing too much on designing and implanting the matrix
management structure.
In this regard, a new corporate strategy was needed for ABB’s global restructuring and recovery.
The new organizational model, promoted by Jurgen Dormann during 2002 and 2004, emphasized on
simplicity, rationalization, money-saving, avoidance of non-core business and redesigning the
company. Even if the asbestos issue was still a major setback and the heavy financial losses were
recent, ABB’s revenues surpassed $20.4 billion with a net profit of $108 million in 2003.

CONCRETE FACTS:

- ABB group has a history of over 115 years, dating back to the late 1800s. In 1998, it became
a major player in global automation market due to the acquisition of Elsag Bailey Process
Automation;
- ABB was in 2004 the global leader in the areas of power and automation technologies,
despite suffering heavy losses of $691 million, in 2001, and $161 million, in 2002;
- ABB group has operations in over 100 countries, 116,464 employees worldwide, is listed on
the most important stock exchanges in the world and has a market value of $12.12 billion
- ABB has a unique decentralized horizontal organizational system, which is based on lateral
communication across the company’s 1,000 entities around the globe
- ABB has allocated a significant fund of $1.2 billion to deal with asbestos-related liabilities
which represent one of the main threats to the company’s recovery
- Fred Kindle was announced as the future CEO back in 2004

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2. Identification of the problem(s), causes and negative effects
2.1 Identification (statement) of the problem(s).

The main problem was a major financial downfall that affected the company’s market
value, growth, and global operations.

2.2 Causes:
 Global diversification and organization issues – the company established hundreds
of subsidiaries (power/electrical equipment, gas, oil, automation, heavy industries)
and was famous for its unique matrix structure
 Leadership gaps and performance issues - ABB’s organizational structure and
control system started to show their negative side. ABB’s top management actively
sought decentralization while keeping its global matrix structure in many markets.
 East-Asian financial crisis - ABB started to see the impact of the East Asian crisis and
weaker demand from other parts of the world. The East Asian financial crisis was
triggered by China’s devaluation of the Yuan and later spread to other parts of East
Asia. ABB was one of the major beneficiaries of the Asian development. ABB, which
had extensive involvement in the region, was unable to deal with the changing
markets.
 Controversy over pension benefits – Barnevik (CEO of ABB) had received from ABB
pension benefits worth $87 million, while the company lost over $500 million during
the same period.
 Issues of asbestos-related liabilities - ABB was also hit hard by massive asbestos
claims because of the U.S. Combustion Engineering Unit that the company had
acquired in 1990
 Changing global competition - 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. But, global competition in the power plants and other heavy
industry has changed in the last ten years.

2.3 Negative effects:

 ABB became highly infatuated with global expansion that eventually brought losses
and corporate problems. The weaknesses of the matrix system were found in the
areas 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
 Major restructuring and changes in its top management – corporate retrenchment;
significant corporate changes that led to unloading the company’s financial services
and oil and gas divisions. The company’s performance turned into losses.
 Cancellations of projects that led to heavy losses and downsizing were the end
result. ABB could not recover from the East Asian crisis and saw its revenues dry up
in the region that led to a total loss of over $1 billion in 2001/2002.

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  CEO salaries and their exorbitant pension benefits have been severely criticized by
the media. This was major negative publicity for the company when it lost over $500
million during the same period.
 ABB allocated $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. The asbestos issue was a major setback to ABB’s global restructuring
and recovery.
 As of 2004, there tends to be more competition in the industry and some of the large
market opportunities have disappeared. Like other industries, power plants and
infrastructural industries were affected by factors that ABB could not control.

3. Identification of alternative solutions for each identified problem:

 Solution 1: the company should change the matrix organizational structure into a
strategic business unit structure.
Advantages: it offers equal importance between different products or product lines to
maximize potential; full decision decentralization, strong personnel specialization;
specific focus on target markets; large enough to maintain internal divisions such as
finance, HR etc.
Disadvantages: duplication of functions and managerial positions

 Solution 2: the company should keep the decentralization strategy, but incorporate
it using the strategic business unit structure.
Advantages: it offers equal importance between different products or product lines to
maximize potential; full decision decentralization, strong personnel specialization;
specific focus on target markets; large enough to maintain internal divisions such as
finance, HR etc.
Disadvantages: duplication of functions and managerial positions; difficulty with contact
with higher management

 Solution 3: the company should focus more on the regional market (Asian region)
than on the global market
Advantages: as this method focuses more on target markets, it would give a greater
attention to what happens in a specific market and the company would be able to adapt
its actions to the changes in the market
Disadvantages: the opportunities provided by larger markets will be diminished

 Solution 4: they should introduce a policy related to how they will deliver the
pension (according how they contributed to the wealth of the company) and another
policy related to employees rights (asbestos liabilities)
Advantage: they will remunerate each employee according to its implication; employees
will feel safe and protected; the image of the company will improve and will be a more
trustful entity;
Disadvantage: keep on doing so, will generate high losses; harm their image

4. Selection of the optimal solution:

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4.1 Identify and choose the optimal solution among those presented above

The optimal solution is solution 2. The company should keep the decentralization strategy,
incorporating it using a different corporate structure: strategic business unit structure.

4.2. Demonstrate that the chosen solution is the optimal one (comparing the effects of
optimal solution with the effects of each of the rest of alternative solutions)

Comparing to the first solution, the second solution is better because it incorporates also
decentralization, which can help to achieve their goal regarding regional growth which in
consequence will also improve the global growth.
Comparing to the third solution, the second solution is better because the strategic
business unit structure already includes a regional strategy. As long as the regional growth is
achieved, the global growth will also be sustained.
Comparing to the forth solution, the second solution is better because it takes into
account a wider perspective of the restructuring of the firm, including also some policies
that will regulate the problems created.

5. Implementation of the optimal solution:

5.1. The resources and specific actions that should be made in order to put into practice
the optimal solution (demonstrate the viability and feasibility of the optimal solution).

In order to implement the strategic business unit structure, the company should create
separate, specialized subsystems in the company, which will act as independent companies
at the regional level. Each regional level will be such as small businesses with a high
functional and decision-making autonomy, reporting back through headquarters about their
operational status. The answer is that profitability of the company and appeal within the
industry are directly tied together. The best resource that the company has is the CEO, who
already wants to change the structure in order to reformulate core competencies and seek
more regional strategies. He already started to pay more attention to their core
competencies, basing on rationalization, performance and growth.

5.2. Present/demonstrate how the disadvantages of the optimal solution are diminished
or eliminated.

The disadvantage related to the optimal solution can be minimized by engaging the
headquarter in a higher involvement in the decision-making process and the monitoring
process of each strategic business unit. Even though there may be a duplication of functions,
there will be strong prepared personnel regarding the characteristics of each regional
market. The second disadvantage will be minimized through the involvement of the
headquarter: they will constantly supervise each strategic business unit activity in order to
keep the interest of the whole company.