Harvard Case - Asea Brown Boveri (Condensed)
"Asea Brown Boveri (Condensed)" Harvard business case study is written by Robert Simons. It deals with the challenges in the field of Accounting. The case study is 6 page(s) long and it was first published on : Nov 10, 1998
This case study solution recommends a comprehensive restructuring of Asea Brown Boveri (ABB) to address its declining profitability and competitive challenges. The recommendations focus on streamlining operations, improving financial performance, and enhancing corporate governance. These changes will require a significant shift in ABB's organizational culture and a commitment to transparency and accountability.
2. Background
Asea Brown Boveri (ABB) was a global conglomerate formed through the merger of ASEA of Sweden and Brown Boveri of Switzerland in 1988. The company faced significant challenges in the 1990s, including declining profitability, a complex organizational structure, and a lack of clear strategic direction. The case study focuses on ABB's efforts to improve its financial performance and regain its competitive edge.
The main protagonists of the case study are Percy Barnevik, the CEO of ABB, and the company's Board of Directors. Barnevik implemented a series of ambitious changes, including restructuring the organization, adopting a new financial reporting system, and implementing a new performance management system.
3. Analysis of the Case Study
The case study highlights several key issues facing ABB:
Strategic Issues:
- Lack of a clear strategic direction: ABB's sprawling portfolio of businesses lacked a cohesive strategy, leading to inefficient resource allocation and a lack of focus.
- Declining profitability: The company's financial performance was declining, with a significant portion of its businesses operating at a loss.
- Competitive pressures: ABB faced intense competition from both domestic and international players, particularly in its core markets of power generation and automation.
Financial Issues:
- Complex financial reporting: ABB's financial reporting system was complex and lacked transparency, making it difficult to assess the company's true financial performance.
- Inefficient cost allocation: The company's cost accounting system was outdated and did not accurately reflect the true costs of its various businesses.
- Lack of financial discipline: ABB's decentralized structure and lack of central control over spending led to significant inefficiencies and financial waste.
Organizational Issues:
- Complex organizational structure: ABB's organizational structure was highly complex and bureaucratic, hindering communication and decision-making.
- Lack of accountability: The company lacked a clear system of accountability for performance, leading to a culture of complacency and lack of ownership.
- Limited employee engagement: The company's rigid organizational structure and lack of clear career paths led to low employee morale and limited engagement.
Using Porter's Five Forces Framework:
- Threat of new entrants: High barriers to entry in the power generation and automation industries, but new entrants from emerging markets posed a threat.
- Bargaining power of buyers: High bargaining power for large customers in the power generation and automation industries.
- Bargaining power of suppliers: Moderate bargaining power for suppliers of key components and raw materials.
- Threat of substitute products: Moderate threat of substitute products, particularly in the power generation sector.
- Competitive rivalry: High competitive rivalry in the power generation and automation industries, with a large number of established players.
Financial Analysis:
- Declining profitability: ABB's net income declined significantly in the early 1990s, indicating a need for drastic action to improve financial performance.
- High debt levels: ABB had high levels of debt, which increased its financial risk and limited its ability to invest in growth.
- Inefficient capital allocation: ABB's capital allocation was inefficient, with investments in non-core businesses and a lack of focus on high-growth areas.
Using the Balanced Scorecard framework:
- Financial Perspective: Improve profitability, reduce debt, and increase shareholder value.
- Customer Perspective: Enhance customer satisfaction, improve service quality, and expand market share.
- Internal Processes Perspective: Streamline operations, improve efficiency, and reduce costs.
- Learning and Growth Perspective: Develop employee skills, foster innovation, and enhance organizational culture.
4. Recommendations
To address the challenges facing ABB, the following recommendations are proposed:
Strategic Restructuring:
- Focus on Core Businesses: Sell off non-core businesses and focus on ABB's core strengths in power generation, automation, and robotics. This will allow the company to allocate resources more effectively and achieve economies of scale.
- Develop a Clear Strategy: Develop a clear and concise strategy for each core business, outlining its target markets, competitive advantages, and growth plans. This will provide a roadmap for future investments and resource allocation.
- Expand into Emerging Markets: Invest in emerging markets, particularly in Asia and Latin America, where demand for power generation and automation is growing rapidly. This will provide new growth opportunities and diversify ABB's revenue streams.
Financial Performance Improvement:
- Implement Activity-Based Costing (ABC): Adopt ABC to accurately allocate costs to specific products and services. This will provide a more accurate picture of the true profitability of each business unit and enable better decision-making.
- Centralize Financial Control: Establish a centralized financial control function to ensure consistency in accounting procedures and policies, and to monitor spending across all business units.
- Improve Cash Flow Management: Implement a robust cash flow management system to optimize working capital and reduce reliance on debt financing.
Organizational Transformation:
- Streamline Organizational Structure: Simplify the organizational structure to improve communication, decision-making, and accountability.
- Empower Employees: Empower employees through delegation of authority and responsibility, and provide them with the tools and training they need to succeed.
- Develop a Performance Management System: Implement a performance management system that aligns with ABB's strategic goals and provides clear metrics for measuring progress.
- Foster a Culture of Transparency and Accountability: Create a culture of transparency and accountability by promoting open communication, ethical behavior, and a commitment to continuous improvement.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations focus on leveraging ABB's core competencies in power generation, automation, and robotics, and aligning with the company's mission to provide innovative solutions for a sustainable future.
- External customers and internal clients: The recommendations aim to improve customer satisfaction by providing high-quality products and services, and to enhance employee morale and engagement by creating a more rewarding and fulfilling work environment.
- Competitors: The recommendations address the competitive pressures facing ABB by focusing on core businesses, expanding into emerging markets, and improving operational efficiency.
- Attractiveness ' quantitative measures: The recommendations are expected to improve profitability, reduce debt levels, and increase shareholder value.
- Assumptions: These recommendations assume that ABB's management team is committed to implementing the necessary changes and that the company has the financial resources to support the restructuring process.
6. Conclusion
By implementing these recommendations, ABB can regain its competitive edge, improve its financial performance, and position itself for long-term growth. The company's success will depend on its ability to adapt to the changing market landscape, embrace innovation, and develop a culture of continuous improvement.
7. Discussion
Alternatives:
- Divesting the entire company: This option would have been more drastic and would have involved significant financial and operational risks.
- Continuing with the existing strategy: This option would have likely led to further decline in profitability and market share.
Risks and Key Assumptions:
- Implementation risks: Implementing these changes will require significant effort and commitment from ABB's management team and employees.
- Market risks: The global economy and the power generation and automation industries are subject to significant volatility, which could impact ABB's financial performance.
- Assumption of management commitment: The success of these recommendations hinges on the commitment of ABB's management team to implement the necessary changes.
8. Next Steps
To implement these recommendations, ABB should take the following steps:
- Develop a detailed implementation plan: This plan should outline the specific actions to be taken, the timeline for implementation, and the resources required.
- Communicate the plan to stakeholders: ABB should communicate the plan to its employees, investors, and other stakeholders to ensure their understanding and support.
- Monitor progress and make adjustments: ABB should continuously monitor the progress of the implementation and make adjustments as needed.
By taking these steps, ABB can transform itself into a more efficient, profitable, and sustainable company.
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Case Description
The merger of Asea AB and BBC Brown Boveri required a restructuring of operations and a change in organizational cultures. Competitive success also necessitated the benefits of scale while remaining local for political and customer-responsiveness reasons. The case describes these competitive pressures, which resulted in the decision to adopt a matrix organization. To be used with Asea Brown Boveri: The ABACUS System.
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