Asea Brown Boveri: A Brief Strategic Analysis

Asea Brown Boveri: A Brief Strategic Analysis The following is an analysis of Asea Brown Boveri (ABB), the merger of two European electrical equipment giants: Asea AB (Sweden) and BBC Brown Boveri (Switzerland). Currently, there are two main issues facing Percy Barnevik, ABB’s newly appointed CEO and President.1 Main Merger Concerns The first concern was the challenge of successfully creating a new company comprised of two former rivals. This issue was addressed by building a common platform, which enabled the establishing of common procedures2, creating common reporting systems,3 and constantly communicating with managers (giving them clearly defined goals and responsibilities). The more pertinent issue is managing the performance of this new global giant. After the integration process and the setting of new management principles and organizational structure, Barnevik had to ensure that these efforts functioned according to plan (that value creation begins). Barnevik saw this as a balancing act of three contradicting objectives: global & local; big & small; and decentralized with centralized reporting. However, as discussed below, these are not necessarily contradictions. Strengths ABB’s strengths lie not only in the combined competencies of Asea and BBC, but in the leveraging of these competencies to create new competitive advantages. Asea’s contributions to the merger were profit performance, management systems, and marketing capabilities. BBC’s were a large client base, 4 billion USD in liquidity, and technical expertise. ABB was also able to develop new advantages from the merger. To fill new managerial positions (due to a new matrix structure) ABB had a large pool of highly skilled managers who were familiar with both companies, allowing ABB to select the best managers for the available positions. Also, both companies operated in the same industry, allowing ABB to reap short-term cost benefits associated with eliminating duplicated efforts and leveraging economies of scope. Further, since this was a true merger, there were few due diligence problems with managers of the

1

The case takes place in 1989. The Policy Bible 3 The ABACUS System 2

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International Business Strategy University of Richmond

acquired firm being uncooperative; most managers seemed to be open to the new corporate culture and goals. Finally, ABB’s sheer size allows it to leverage deep economies of scale, as well as expansion strategies, such as acquisitions. Weaknesses At the same time, ABB’s main potential weakness comes from its size. Barnevik’s expectation of “no honeymoon period”, along with his overall agenda for ABB was very complex and challenging to say the least. This was compounded by the breadth and depth throughout which Barnevik’s message had to travel. His policy bible, for example, although communicated directly to 300 key managers, would have to be rapidly and correctly communicated to tens of thousands of employees, globally. The manual had to be translated, by ABB managers, into many languages (ABB operates in over 100 countries). Anything lost in translation would hinder Barnevik’s strategic efforts. Opportunities ABB also faced several opportunities. First, its newfound size put it in a position to consolidate large parts of the industry. Also, its aggressive acquisition program was based on the identification of two opportunities: rising global demand and a strong need for local identity. Further, the U.S. market may prove to be one of ABB’s biggest. Finally, with the recent fall of communism, it would seem that Eastern Europe would be an immense opportunity to establish market leadership. At this time, China is not a realistic short term consideration. Threats The biggest threat to ABB lies in competitor response to the merger. Beyond the merger of GEC and Alsthom, local governments might respond negatively to ABB, despite its longstanding relations with them. Thus, another threat may come from political instability and the degree to which ABB is considered a “foreign invader”. ABB Strategy As mentioned, being global and local, big and small, and radically decentralized with centralized reporting, are not necessarily impossible. These goals depend mainly on perceptions. From the top, ABB should be perceived as global (in the areas of strategy, reporting, and knowledge transfer). From the bottom, ABB subsidiaries should be seen as local (in local management responsibility and freedom) and decentralized (in financial reporting and accountability). To maximize global optimization while retaining a local feel, Barnevik adopted a matrix structure, based on regional company operations and business areas. Global optimization goals were the responsibility of each business area, while location-dependent goals were allocated to regional managers. These efforts are not sufficient to achieve ABB’s goals.

© April 2007, Jesse Kedy www.jessekedy.net

International Business Strategy University of Richmond

Recommendations To increase ABB’s ability to meet the above-mentioned objectives, Barnevik needs to adopt two guiding principles: 1. more operational depth and less breadth; 2. increased effort to create new value continuously. More Depth, Less Breadth 1. First, ABB should continue entering new markets, starting with Eastern Europe, perhaps focusing on new infrastructure development projects. 2. ABB should also begin a plan to have a presence in Asia and South America by 1999 (10 years). The preferred entry mode at first will be joint ventures (such as with local governments), and not greenfielding or acquisitions. 3. Rather than trying to compete in many industries, ABB should focus on developing local relationships in fewer industries; businesses not essential to ABB’s localization objectives should be sold off. New Value Creation 1. ABB’s goal should be to increase competitiveness, not just size. After selling non-essential businesses, ABB should continue to develop and acquire unique, cutting-edge competencies in its focal areas. 2. To increase its local feel, improve flexibility, reduce time-to-market, and hedge against political risk, ABB should seek several strategically-located manufacturing and sourcing sites. 3. ABB should also consider allowing local companies to source components locally.

In sum, ABB needs to realize that achieving these goals does not depend only on its size; size does not equal sustained, long term competitiveness. In fact, a leaner company may be the key to ABB’s future success4.

4

See Figure 1 below.

© April 2007, Jesse Kedy www.jessekedy.net

International Business Strategy University of Richmond

Figure 1: ABB Timeline

© April 2007, Jesse Kedy www.jessekedy.net

International Business Strategy University of Richmond

© April 2007, Jesse Kedy www.jessekedy.net

International Business Strategy University of Richmond

© April 2007, Jesse Kedy www.jessekedy.net

International Business Strategy University of Richmond