Engineering Conglomerate ABB - Strategic Management - Essay Example

? A report that reflects on learning from preparing and discussing two briefing papers Strategic Management: Theory and Cases Engineering conglomerate ABB was a well established and strong company in both northern Europe and the United States. After his nomination as the CEO of ABB, Percy Barnevik designed an acquisition-led strategy, as well as a novel structure in order to prepare ABB for competition in the global markets. The novel structure involved two dimensions, which included the products and regions. The products involved the power generation, transmission, distribution, industrial and building systems, and transportation, while the regions consisted of Asia Pacific, Europe and America (Haberberg and Rieple, 2008). For this reason, Bernavik was recognized for creating a fundamentally different model that could be used to organize and manage a large company. Before Bernavik handed over to Goran Lindahl, in 1997, ABB had continued to achieve spectacular results in which its profits had increased nearly four times, its turnover had doubled, and its return and capital employed had also increased from 12% to 20%, from 1988. However, five years later, after Goran took over the management, ABB started experiencing loses. According to Haberberg and Rieple (2008), the company had a debt of more than $4billion and had suffered a loss of about $691 million within five years: its survival was hanging in the balance. When Bernavik was the CEO, the company purchased about 200 companies, which were successful and formed the basis of global leadership positions. However, the main problem arose after the company decided to purchase an American Industrial boiler manufacture called the Combustion Engineering. As stated by Haberberg and Rieple (2008), after ABB had purchased the company, it was declared that Combustion Engineering insulated its product using asbestos. Hence, it was sued by people who claimed that they had suffered as a result of being exposed to asbestos. In 2005, the settlement was agreed at a cost of $1.43 billion, which was a massive blow to ABB. Moreover, the purchases of other companies such as Widmer and Ernst, and several companies in Europe proved problematic and affected ABB. Another issue that contributed to the problems of the company was the innovative structure of the company. According to Haberberg and Rieple (2008), minimal administration led to lack of standardization of products. The company had four headquarters and about six hundred spreadsheets were being used around the ABB, which made it difficult to share files. In addition, independence of the companies was extremely high. For instance, one factory decided to export transformers to Africa, which was not in its Charter. Moreover, CEO Lindahl contributed highly to the problems ABB was facing. First, he simplified the innovation structure to eight product based divisions, which dissolved the regional dimensions from the matrix. According to Haberberg and Rieple (2008), this caused unnecessary political debate and compromised solutions because the managers concentrated on reconciling the demands of the products and regional bosses. Additionally, Lindahl made a decision to exit the transportation and power generation businesses and closed eleven factories in Europe, which led to loss of about 10,000 jobs. Although this helped the company to make a profit, it affected the expansion and productivity of the company. In addition, other CEO’s who came after Lindahl did not do much to promote the growth of the ABB. For instance, Jurgen Dormann did not know much about the company and the problems it was experiencing by the time he was appointed the CEO. He set up pension funds for the former CEO’s Bernavik and Lindahl of $51 and $81 respectively, which affected the financial status of the company. According to Douglas and Wind (2010:568), success can only be obtained by developing marketing strategies and products that match the specific characteristics of the international markets. Adopting a uniform market strategy in the whole world is said to enable companies to take grab the available opportunities that arise from other countries’ operations, which gives them an advantage in the competitive global markets. However, ABB failed to develop a marketing strategy that would ensure its success. The move by the CEO Lindahl to exit the transportation and power generation businesses and closing of eleven factories in Europe ended its competitive advantage in the global market. For this reason, it was difficult for the company to develop marketing strategies that would promote its success. Moreover, the implementation of international market strategy requires consideration of many aspects of marketing and not the product-and-brand aspects alone. ABB Company focused only on the product-brand aspects of strategy and ignored other key strategy variables that are necessary for the success of any business. In addition, apart from global products and brands, there are other national and regional products and brands that can characterise the international operations of a firm. Thus, the ABB was unable to take advantage of these national and regional products, which affected its international operations and forced it to close some its firms in Europe. Additionally, Miller et al (2010:273), argues that to succeed in the global market, it is essential for the company to discover its hidden resources, also called asymmetries that include building on its own unique potentials, relationships, hard-to-copy assets, knowledge and experiences. When Bernavik was the CEO of ABB, the company managed to achieve its goals because it was able to discover its asymmetries, turned them into capabilities and found a profitable market for that valued it. However, the problems that the company faced were as a result of poor management by Lindahl. According to Miller et al (2010:274), Citibank and Shana Corp went through difficult times, but they managed to overcome them. The two firms managed to develop their own unique capabilities, which included valuable kinds of work that their rivals could not do as fast or better. This allowed the companies to exploit and extend their competitive advantage over other firms; thus, leading to success of the companies. Additionally, the managers of these companies were able to focus on what the companies was able at, reflected on it, developed and found clients that would benefit from its new capabilities. Therefore, these three imperatives of the inside-out strategy i.e. discovering of asymmetries and their potential, creating capability configurations by design, and pursuing market opportunities that build on and leverage capabilities, would be of outstanding significance if applied to develop future strategies by ABB. ABB would need first to discover its symmetries and potentials that make it unique, and this would serve as its starting point for creating advantages that are hard to copy. The organization design is also essential in enabling the managers to identify and develop valuable asymmetries and potential capabilities, create capability configurations, and leverage them across the appropriate market opportunities. Moreover, for ABB to succeed, it would need to develop a marketing strategy that would enable it to take advantage of the benefits of standardization and potential synergies by operating in the global production scale. Appendix The Myth of Globalisation Douglas and Wind (2010:568) argue that, in a world of increasing internationalisation, the key to success would be to focus on the development of standardised global products and brands. However, others claim that, due to numerous standardisation barriers, success can only be obtained by developing marketing strategies and products that match the specific characteristics of the international markets. This paper will examine the myth that the key to success in the international markets requires a focus on marketing strategies of global products and brands. Traditionally, the main topic of discussion on international markets revolved around adopting a uniform strategy globally verses using specific local market strategies (Douglas and Wind, 2010:568). Adopting a uniform market strategy in the whole world is said to enable companies to take grab the available opportunities that arise from other countries’ operations, which gives them a competitive advantage in the global markets. However, Douglas and Wind (2010:568), argue that adopting specific local market conditions is likely to cause division among countries in the global markets due to internal forces, which create pressure on the integration of market strategies across the states. According to Douglas and Wind (2010:569), there are three underlying assumptions about the global standardisation philosophy. First assumption states that the needs of customers and interests are becoming homogenous. Second, customers are willing to sacrifice their preferences of products for lower prices and high quality. Third, through supplying international markets, substantial economies of scale in marketing and production can be achieved. However, each of these assumptions has its own pitfalls. The implementation of international market strategy requires consideration of many aspects of marketing and not the product-and-brand aspects alone. There are certain conditions that are likely to provide a winning strategy in the global markets. These include the existence of an international market segment, efficient infrastructure and communication for distributing products to customers’ world-wide and potential synergies from standardization. These conditions can considerably increase the capacity to manage operations in the international markets and thus facilitate the implementation of global standardization strategy. However, the implementation of market strategies world-wide faces a number of difficulties and constraints both external and internal. The external constraints include trade regulations, competitions, governmental and institutional constraints, transportation costs and differences in customer demand among others. Internal factors are such as compatibility with existing global operations and lack of motivation from the local management (Douglas and Wind, 2010:573). Therefore, the development of an effective global strategy requires a thorough examination of global options with regards to standardisation and other systems open to the firm. Apart from global products and brands, there are other national and regional products and brands that can characterise the international operations of a firm. Hybrid strategies enable companies to take advantage of the benefits of standardisation and potential synergies by operating in the global production scale, and at the same time, gaining the benefits provided by the adoption of specific characteristics in local markets and consumer preferences (Douglas and Wind, 2010:575). Strategy from the Inside Out: Building Capability-Creating Organisations In 1991, Citibank went through a difficult time that pressured the CEO John Reed to try everything possibly to overcome the problems that Citibank was going through. Reed had two choices: either to try to strengthen Citibank’s presence in profitable markets like Japan and Germany by copying regional rivals like Deutsche Bank, or to try to offer new services and become more efficient (Miller, Eisenstat and Foote, 2010:273). This paper will examine how Citibank (Citigroup) and two dozen other firms have managed to escape this predicament to grow sustainable capabilities. According to Miller et al (2010:273) these firms began by discovering their hidden resources, also called asymmetries, which included building on their own unique potentials, relationships, hard-to-copy assets, knowledge and experiences. Over time, these firms were able to develop several organizational processes and designs in order to find these asymmetries, turn them into capabilities and gear them across the necessary market opportunities. As stated by Miller et al (2010:274), they asymmetries are hard-to-copy ways that create a difference between a firm and its rivals. For this reason, Reed discovered that his bank was different and developed ways to make that difference a valuable asymmetry that his rivals would not copy and later found a profitable market that valued it. Shana Corp, a private Canadian software company, exhibit a similar path to that of Citibank. Over time, the managers of Shana realized that the company had developed unique capabilities, which included valuable kinds of work that its rivals could not do as fast or better. This allowed the company to exploit and extend its competitive advantage over other firms. In short, the managers of Shana were able to focus on what the company was able at, reflected on it, developed and found clients that would benefit from its new capabilities (Miller et al (2010:274). There are three imperatives of inside-out strategy, which include discovering of asymmetries and their potential, creating capability configurations by design, and pursuing market opportunities that build on and leverage capabilities (Miller et al, 2010:275). It is difficult for firms to develop their hidden resources unless they have some potential edge. For this reason, firms need first to discover their asymmetries and potentials, which will serve as starting points for creating advantages as they are hard to copy. Thus, to find potential asymmetries, managers are required to do an outside and inside search. An outside search requires evaluation of the obvious external asymmetries while an inside search requires a thorough search of useful asymmetries that are buried deep within a company. To conclude, Miller et al (2010: 276) note that organization design enables the evolvement of sustainable core capabilities. It also builds and supports capabilities by embedding them in cohesive configurations that are energized by design through enhancing the capabilities. According to Miller et al (2010:281) it is essential for managers to learn to pursue and trade off opposites when pursuing a strategy from inside out. They must be able to balance reflection and action, selection and variation, and resources and opportunities, as well as make the organization design their competitive advantage. Moreover, organization processes and designs that are well-conceived enable managers to identify and develop valuable asymmetries and potential capabilities, create capability configurations and leverage them across the appropriate market opportunities (Miller et al, 2010:283). Bibliography Douglas, S., and Wind, Y. 2010, ‘The Myth of Globalisation’, in De Wit, B. and Meyer, R., Strategy: Process, Content, Context. An International Perspective. Cengage Learning EMEA, Hampshire, pp. 568- 574. Haberberg, A., and Rieple, A. (2008). ‘Strategic Management: Theory and Cases’, in Strategic Management: Theory and Application. Oxford Press, Oxford. Miller, D., Eisenstat, R., and Foote, N. (2010). ‘Strategy from the Inside Out: Building Capability-Creating Organisations’ in De Wit, B. and Meyer, R., Strategy: Process, Content, Context. An International Perspective, Cengage Learning EMEA, Hampshire. Read More