Organizational structures and control systems ASEA BROWN BOVERI (ABB), SWEDEN, 2004: WHAT WENT WRONG?1 Since its inception, Asea Brown Boveri (hereafter called ABB) has always attracted the business and academic community because of its unique organizational structure, consistent growth pattern, and extensive worldwide operations. After the merger of Asea and Brown, Boveri and Cie (BBC), ABB had an excellent international expansion. Academics and business practitioners studying multinational corporations (MNCs) and global companies often admired ABB because of its outstanding growth, highly sophisticated management, and peculiar corporate structure. ABB particularly became famous for its unique decentralized horizontal organizational system and global networking, which was based on lateral communication across the company’s 1,000 entities around the globe. The phrase “think global, act local” became synonymous with ABB and its former chairman, Percy Barnevik, who aggressively advocated and practiced the concept in the company. In 2004, ABB continues to be global leader in the areas of power and automation technologies although the company’s corporate image has been affected because of heavy losses in 2001 and 2002. In 2003, ABB’s revenues surpassed $20.4 billion and made a profit of $108 million. During the same period, the company’s market value stood at $12.12 billion. On the other hand, in 2000, the Groups’ market capitalization exceeded $40 billion. As of 2004, the ABB Group has operations in over 100 countries, employs 116,464 people worldwide, and is listed on the stock exchanges of Zurich, Stockholm, London, Frankfurt, and New York. In the last five years, ABB has not been able to achieve the same growth and expansion because of changing markets and slow demand. The ABB Group has over 115 years of rich history dating back to the late 1800s. The Group was formed in 1988 when Asea AB of Västerås, Sweden and BBC Brown Boveri Limited of Baden, Switzerland merged their operations and formed ABB (Asea Brown Boveri) Limited. Each company held 50 percent of the new entity and was headquartered in Zurich. Switzerland. The merger was highly rated by the media because of Europe’s 1992 economic integration. In 1883, Ludvig Fredholm founded Elektriska Aktiebolaget in Stockholm that in 1890 merged with Wenstroms and Granstroms Elektriska Kraftbolag to form Asea (Allmanna Svenska Elektriska Aktiebolaget). In the next fifty years, Asea grew from an unknown company to an international entity having subsidiaries in Great Britain, Denmark, Finland, and Spain. The company became famous for its transmission lines, generators, transformers, locomotives, and motors. BBC was founded by Charles E. L. Brown and Walter Boveri in Baden, Switzerland in 1891. By the early 1900, BBC had its operations in Austria, Germany, Italy, and Norway. Like Asea, BBC manufactured power plants, turbines, transformers, hydroelectric power stations, locomotives, and other industrial products. The company invented many new technologies and set the pace for the power generation industry. Before merging with Asea, BBC was operating globally and employed 97,000 workers worldwide. Under the leadership of its former chairman Percy Barnevik, the company launched a massive global expansion program because of growing demand, especially in East Asia and Eastern Europe. Between 1993 and 1998, ABB continued to grow in Europe, Asia and Latin America by seeking acquisitions, alliances and joint ventures that helped the company to consolidate its position in 1 Written exclusively for this book (Deresky H., “International Management: Managing Across Borders and Cultures”, 5th Edition, International Edition, Pearson Education International, 2006, pp. 304-307) by Syed Tarik Anwar, May 2004, Copyright © Syed Tarik Anwar. 1 Organizational structures and control systems world markets. The year 1998 was particularly important for ABB when it acquired Elsag Bailey Process Automation. The acquisition made ABB a major player in the global automation market. ABB’s current history and corporate profile are incomplete without discussing its two former high-ranking officers, Percy Barnevik (chairman) and Goeran Lindahl (chief executive), who left the company in 2001. Both were criticized by the world media over their generous pension payments received from ABB after departing the company. Barnevik alone received over $87 million in pension benefits. Interestingly, during the same year, ABB lost $691 million. In addition, the company’s U.S. subsidiary was sued for asbestos liabilities. Since Barnevik coordinated the merger between Asea and Brown Boveri, he was highly admired by the analysts because of his corporate foresight and making ABB one of the best global companies in the world. In the late nineties, Barnevik was known as another Jack Welch (former CEO of General Electric) because of his leadership, star image and global vision. Jürgen Dormann, the current CEO (2004) who worked for Aventis, took over the company in September 2002 and has brought a multitude of structural changes to avoid bankruptcy. Although ABB lost $691 million in 2001 and $161 million in 2002, it earned a net profit of $108 million in 2003. WHAT WENT WRONG WITH ABB'S ORGANIZATIONAL STRUCTURE? Global companies formulate their organizational structures on the basis of location, market coverage, competition, and product lines. Like other companies, ABB was severely impacted by the East Asian crisis. The region’s currency depreciations and weaker economies had an adverse affect that brought massive reductions in the company’s revenues. In addition to the East Asian crisis, ABB’s own corporate blunders, complex organizational structure, and reshuffling of the top management added miseries to the company. The net result was a major financial downfall that affected the company’s market value, growth, and global operations. ABB’s organizational problems and missteps that led to the negative image, lost market share and corporate retrenchment are as follows: 1. Global diversifications and internationalization issues: In the nineties, ABB expanded operations and sought internationalization at very fast pace. The company established hundreds of subsidiaries worldwide that included power/electrical equipment, oil, gas and petrochemicals, automation technologies, and other heavy industries. During the tenure of Barnevik, ABB became highly infatuated with global expansion that eventually brought losses and corporate problems. ABB was famous for its unique matrix structure at the global level. In the seventies and the eighties, many companies capitalized on the matrix structure that was thought to be highly efficient at the multidimensional and global levels. In the initial stages, companies benefited because of the matrix’s economies of scale, innovative operations, lateral personal communications and transfer of resources. 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 (see Figure 1). 2. Leadership gaps und performance issues: In 2002, ABB started to see the impact of the East Asian crisis and weaker demand from other parts of the world. In addition, ABB’s organizational structure and control system made things even worse. This resulted in major restructuring and changes in its top management. From 2000 to 2003, the Group undertook significant corporate changes that led to unloading the company’s financial services and oil and gas divisions. As of 2004, ABB has somewhat recovered by restructuring its power and automation technology divisions. Barnevik did an excellent job in the nineties regarding internationalizing ABB. After a period of rapid growth, Barnevik’s leadership and management style became ineffective and controversial because of ABB’s far- flung operations, complex organizational structure and widespread international subsidiaries. During Barnevik’s long tenure with ABB, the company had no plan of succession. In addition, ABB’s top management actively sought decentralization while keeping its global matrix structure in many markets. This impacted the company’s performance eventually leading to losses. 2 Organizational structures and control systems 3. East-Asian financial crisis: The East Asian financial crisis was triggered by China’s devaluation of the Yuan and later spread to other parts of East Asia. In the nineties, East Asia’s economic health was solid and the region had started a variety of infrastructural projects. ABB was one of the major beneficiaries of the Asian development. After the crisis, large industrial conglomerates like ABB with extensive involvement in the region were unable to deal with the changing markets. 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. 4. Controversy over pension benefits: In the last few years, CEO salaries and their exorbitant pension benefits have been severely criticized by the media. Company executives from Enron, World Com., ImClone, and others have been sent to jails for mishandling the company money and their unethical behaviour. In 2002, Barnevik became part of the controversy when it was discovered that he had received from ABB pension benefits worth $87 million. This