ABB in China :

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
ABB Mission and Goal Mission : ABB is a global leader in power and automation technology
that enable utility and industry consumers to improve their performance while lowering
environmental impact. ABB’s vision is to be the “Value Creator”. ABB always try to achieve and
maintain leadership with a focus on technology, reliability and safety in an environment of
honesty, transparency and fairness and contribute towards betterment of society. Goal:- ABB
always achieve a sustained Zero complaint in the product. Company always try to secure health
and safety of all the employees and customers.
The Problem ABB is multinational company and is the world leader in electrical engineering.
Like other companies, ABB does not want to miss the opportunity to expand its market to China
because China has good market potential such as its high population, its growing economy, and
its distinct economic trend compare with other Asian countries. In 1979, ABB decided to
establish its first permanent office as representative office in this country. Unfortunately, ABB
faces several problems when doing its business in China.
One of the problems is that the company's decision-making policy in its matrix organizational
structure, which is fully decentralized, is no longer efficient for ABB's business.
From the case we learned that, 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.

Analysis As a fully decentralized company, ABB represented by national companies in many

home market, which use profit center philosophy, to have full advantage of its economies of
scales. Profit centers (individual companies) are measured on its own performance and needs.
It is recognized that the profit centers are efficient for decentralization and that the
organization can act relatively fast to local market. But this profit center philosophy made
individual companies only think about its own objective, performance and benefit, not ABB
Company as a whole.
Because of every business action and policy could affect their performance, individual
companies face barriers in doing their business. For example, in internal transaction,
technology partner charge high cost to ABB local for components, because it has to make
profits after invested high R&D cost. ABB China had to close ABB School in Beijing, which was
used to transfer company culture to local employee, because the high training cost will affect
its financial performance.
Furthermore, if same problem occurred among individual companies, they won’t exchange
Information each other. If individual company suggests changes according to the problem to
licensor, the licensor will evaluate on the basis of benefit to itself because the licensor will
invest its own recourses. ABB has Business Area (BA) in its organizational structure, which is
responsible for Normalized market allocation and the development of a worldwide technical
strategy for specific product line. Other Bag’s responsibilities are to coordinate supplier and
deliverance, and to act as a referee in potential disagreement between companies Nothing ABB
group. Unfortunately, this function did not work well. ABB could not act as referee and solve
disagreeing between some China licensees and local subsidiary, because BA only looks at the
global business.
BA objectives sometimes are contradicted with ABB China objectives. This decentralization also
brings a problem to internal communication within ABB as whole. In transferring know-now
across borders, it was one-way communication from the technology partner, business area and
country level to the subsidiary. BAs also were not able to communicate ABB mission, vision,
objective and corporate ultra to every individual company.
The top-level management is seen to be so far away from daily life at the subsidiary level in
China.It seems like there is a broken chain in communication from top-level management to
lower-level management.
Recommendation Based on the above analysis, these are the following recommendation for
ABB to have more efficient organizational structure: The company should have more
coordination between profit centers and BAs to maintain globalization objective as a whole. It
means that the company should be more centralized in controlling profit centers business
activities and policies, only if they effects ABB business on a worldwide basis.
Headquarters level, which is represented by BAs, should perform its function better because
BAs hold the individual companies together in achieving ABB worldwide objective. Ere company
should increase the flow of two-way communication within the company. This communication
includes coordination between profit centers and BAs, top management and middle
management.
With good communication both in individual company and headquarters level; the company
can increase coordination, get the benefits of being global and being multi domestic with a high
degree of decentralization.
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:

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 compan
.

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.
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:

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 compan
.