Extrapolation is a besetting sin of economists and engineers.

[] Instead, we must take a more creative

approach, basing our actions not on what was, but on what could be.
Gran Lindahl, Chief Executive Officer,
ABB Asea Brown Boveri Ltd.

At the start of 1997 Gran Lindahl became CEO of ABB Asea Brown Boveri, one of the worlds
largest electrical engineering companies. He succeeded Percy Barnevik, ABBs first CEO. ABB had been
formed in 1987 after the merger between Swedens ASEA and Switzerlands Brown Boveri. Under
Lindahls predecessor, ABB had more than doubled its revenues to $34 billion in 1996 through more
than 160 acquisitions worldwide, and implemented a matrix organization with 4 global business
segments and over 5,000 profit centers in 140 countries. During this radical transformation ABB had
become one of the worlds most admired companies. In early 1997 Lindahl set a revenue goal of $50
billion by 2001, targeting emerging markets such as Southeast Asia, where ABB had massively
transferred manufacturing capacity from Western Europe and the US.
However, by the end of 1997, Asia was in disarray. A currency crisis in Thailand had precipitated
unprecedented financial turmoil in the whole region, which most experts predicted would take years to
resolve. As a result, projects such as Malaysias $5 billion Bakun dam project--the largest in ABBs
historywere indefinitely postponed. In early 1998 Lindahl admitted that ABB was unlikely to meet its
2001 revenue target. Moreover, profound changes in other key competitive factors suggested that a
much deeper transformation might be required in ABBs strategy and organization if the company was
to maintain its competitive edge in the new millennium.

A Difficult End of the Millennium for ABB

One of these changes concerned the very core business of ABB. During the 1988 to 1996 period,
Barnevik had clearly focused the companys efforts on electrical power generation and transmission. To
those who, already in 1988, had argued that increasing deregulation would swiftly turn these areas into
mature, commoditized businesses, Barnevik typically responded:
Remember: (1) You do not have to be in high-growth business to make big money (sometimes a
reverse correlation), (2) you can achieve good/high growth in worldwide mature business (product and
country niches, competitors disappearing, etc.), (3) to go against the mainstream is often profitable, and
(4) with the right strategy and properly implemented, a lot of money is to be made in the electrotechnical
industry.1

Based on these considerations, Barnevik had spent most of his time closing excess capacity in
ABBs core electrical power business, building a global managerial and financial structure and expanding
the companys reach outside Western Europe. Between 1991 and 1996 ABB cut 59,000 jobs in Europe
and the US, but simultaneously created 56,000 new jobs in Asia and Eastern Europe. During the same
period, Asia had represented over 50% of new orders of electrical power plants and equipment.
However, by the end of 1996 ABBs revenue growth had abruptly come to a standstill,
particularly affected by the financial crises in Asia and other emerging economies. At the same time,
deregulation of electricity markets continued to increase its pace in the European Union and the US,
creating new customers and market opportunities as traditional state-owned utilities were privatized
around the world.
Nevertheless, in early 1997 ABB still favored some conventional customer segments. For
example, in large markets such as Germany, ABB was involved in the district heating-technology
business which, as demonstrated in 1996, could unexpectedly become a source of trouble for the
company. That year, ABB was accused of forming a cartel together with other companies in the German
district heating-market. As a result of these allegations, the European Union imposed a fine of close to
$100 million on ABB, one of the largest ever.

Sweeping Technological Changes

By 1997, radical technological advances were also creating new markets where ABB had not
been seen as focusing enough effort during the 1988 to 1996 period. One example was the growing area
of industrial automation processes. Electrical engineering companies such as Siemens, General Electric
(GE) or ASEA had historically been involved in automating industrial processes for large customers that
built energy intensive plants, such as chemical or paper producers. However, starting in the late 1970s
and following continuous developments in software, the traditional electrical and mechanical
approaches to automation were radically improved, which created growing business opportunities.
In addition, market liberalization allowed for the introduction and rapid development of
technologies that country regulators had previously frowned on across the European Union and the US.
One of these technologies was distributed generation. An ABB senior executive observed in 1998:
Distributed generation is one of the most exciting developments [in the electrical power
industry]. It consists of technology that allows the generation of electricity from small units, no larger
than a kitchen table, fueled by gas and working at up to 10 megawatt in power. These units can be
comfortably placed in the basement of hotels, factories, hospitals and other similar electrical power
consumers. But the big advantage here is that this technology allows the consumer to entirely do away
with transportation and distribution costs. At current [early 1998] electricity prices, this gives consumers
savings of up to 50% vis--vis the conventional power generation, transmission and distribution
technologies.

Organizational Drawbacks
In 1997 the drawbacks of ABBs multi-domestic structure, introduced by Barnevik in 1988,
were becoming increasingly apparent. The much-admired matrix organization, under which three
regional chief executives shared responsibilities with the heads of ABBs four core business segments,
had been designed to promote decentralized, consensual and team-based management. However, over
time, local business managers found themselves reporting to two bosses, with important decisions often
being dragged into political conflicts, or into unfocused and mediocre compromise--as one former ABB
employee described it.
At the same time, ABB had maintained some poor-performing units throughout its 1988 to 1996
corporate transformation. Paramount amongst these was Adtranz, a 50/50 joint venture with DaimlerBenz AG3 to manufacture railway equipment. In the over-crowded railway manufacturing industry,
Adtranz had lost $239 million on revenues of $3.74 billion in 1997. More disturbingly, Adtranz had failed
to produce profits for years and, according to most financial analysts, its prospects of changing that
pattern looked bleak in the medium-term.

Faltering Performance
All these factors rapidly took a toll on ABB performance. Although the companys share price
had risen at an annual rate of 23% between 1988 and 1996, it substantially under-performed the market
in 1997. Swedens Wallenberg and Switzerlands Schmidheiny families, which had traditionally been the
two largest investors in ABB, started to reduce their protective stakes in 1997. A main beneficiary was
Martin Ebner, one of Switzerlands better-known raiders, who at that time became one of ABBs largest
shareholders.

Unprecedented Changes in ABBs Competitive Arena

Lindahl knew that the electrical power industry would never be the same after 1999. In February
of that year, European Union (EU) directives were expected to fully liberalize the distribution of
electricity to industrial consumers. In preparation for this, most EU countries had privatized and
massively deregulated their former state-owned electricity suppliers. The US electrical power industry
had experienced similar developments since the mid-1980s.
Following de-regulation, electricity markets were typically rationalized into three separate
businesses: generation, transmission and distribution, each of which underwent distinct competitive
developments. Power generation faced substantial overcapacity and had experienced technological

developments that favored relatively small, flexible entrants. Power transmission had been
concentrated and restructured, largely remaining in government hands in countries such as the UK. The
distribution of electrical power had been massively privatized, and the new competitors had embarked
on aggressive investment plans to gain share in their domestic markets as well as abroad, upgrade
technology and increase operational efficiency and productivity.
At the same time, technological developments were making possible a convergence of
telephony, data networking and cable TV over a single platform, which could be transported directly to
the customers homes via power lines. This could potentially allow electrical utilities to compete directly
against telephone companies, i.e., in Internet access or long-distance services. Companies such as
Siemens were very actively pursuing developments around this technology during the late 1990s.
Another area where power equipment suppliers had been traditionally involved was industrial
automation. During the 1990s manufacturers of robots and related automation equipment had seen
significant increases in volume and price reductions at the same time. Their traditional customers-industries such as chemicals or pulp and paper--were increasingly demanding software platforms that
could integrate automated manufacturing processes into management information systems. Leading
providers of these software platforms, such as Germanys SAP, were experiencing dramatic growth in
revenue and profitability.

Is more consolidation of power equipment suppliers

enough?
As might be expected, the fortunes of the power equipment industry have traditionally followed
those of the power industry. In most cases, the former were originally organized as national champions
to supply a countrys electrical power monopolies. During the late 1980s, significant overcapacity, as
well as economies of scale in R&D, marketing and manufacturing, had brought a first wave of
restructuring in the US and Europe. In 1987 Swedens Asea and Switzerlands Brown Boveri merged to
form ABB. GEC Alstom was created in 1989 by merging UKs General Electric Company (no relation to
US-based GE) power generation equipment unit with Frances Alstom. In the US, during the early 1990s,
Westinghouse dismantled most of its electrical power activitieslargely turning itself into a
broadcasting operation, while GE undertook a massive restructuring of its power equipment and
engineering businesses.
A decade later the economic crisis in Asia prompted another wave of consolidations, aggravated
by sudden financial turmoil in Russia. As mentioned, during the late 1980s and early 1990s, Asia had
accounted for more than half of the new orders of electrical power plants and related equipment.
During 1997 ABB had started to significantly reduce capacity, closing 13 factories and obtaining one of
the industrys highest capacity utilization rates. As a result, there were 12,000 job cuts in Europe and the
US. The company announced a massive investment plan in Asia in spite of the looming financial crisis.

Also in 1997 Siemens, a power equipment manufacturer heavily focused on the German market, bought
the remaining power generation divisions of US-based Westinghouse for $1.5 billion. During early 1998,
Alstom, a relatively strong competitor in the European power transmission and distribution equipment
market, had only half the sales of ABB, the worlds largest company in that sector.
ABBs main areas of activity were undergoing unprecedented change after the mid-1990s, and
company analysts and investors were increasingly impatient to see Lindahls strategic responses to these
challenges. With sales and share prices tumbling in 1997, many company observers took the opportunity
to highlight the excessive risks of ABBs strategy of rapid expansion in Asia and Eastern Europe during
the first half of the 1990s, as well as its having put too much emphasis on mature manufacturing
business, while global deregulation was rapidly tilting the scales in favor of more value-added and
service-based offerings to electrical utilities.

Questions
1. Do you think ABB made a mistake at Strategic Level or is it just a unfortunate turn of events?
Elaborate why.
2. What do you think should be the next step of Mr. Lindahl to revive the glory of the organization?