ASEA BROWN BOVERI

In his Doom Speech, ABB Asea Brown Boveri CEO Percy Barnevik insist that two-thirds of Europes giant companies will fail in the wake of European economic integration. Hes determined that ABB will not be among them. In 1991, ABB booked $ 28.9 billion in revenue in 140 countries ($ 6 billion in North America). ABB competes in eight business segments: Power Plants, Power Transmission, Power Distribution, Industry (e.g. Metallurgy, Process Automation), Transportation, Environmental Control, Financial Services, and Various Activities (e.g. robotics, superchargers). It is a classic heavy-industrial behemoth. Or was, at least, until Barnevik began to concoct what may be the most novel industrial-firm structure since Alfred Sloan built modern GM in the 1920s. FIVE THOUSAND FEISTY PROFIT CENTERS At the top, ABB is broken into those eight major business segments. Next come 65 Business Areas, then 1,300 independently incorporated companies, and some 5,000 autonomous profit centers. At the bottom, the profit centers are beginning to reorganize into 10-person, multifunction High-Performance Teams. ABB employs about 215,000 people, so a company averages 200 people, a profit center about 50. Often as not, ABB is the biggest competitor in a business segment. However, that bigness frequently emerges from a combination of relatively small operations. (A small ABB transformer operation may be big in a different sense--i.e., the largest firm making a specialized component for certain kinds of transformers.) The spotlight belongs first on the 5,000 profit centers. During a conversation in 1991, Barnevik told us that if it were not for the blizzard of legal paperwork it would generate, hed consider incorporating each one. Why? Mostly to heighten the sense of ownership among each centers employees. As it is, almost all the centers have their own profit-and-loss statements and a balance sheet; they own assets; and they serve external customers directly. Each of these elements is important, but none more than the last. Everything changes when theres a real customer yelling at you from the other end of the phone connection, Barnevik said. Direct attachment to customers transforms the little unit into a real business. The average profit center is led by a management team of five--a chief and four colleagues--or, as Barnevik put it, the centers are run collectively by 5,000 profitresponsible individuals with teams of three or four. Suddenly, vast ABB seems a lot more manageable--which is precisely the point. (Barnevik was born in rural Uddevalla near Swedens west coast, where his father ran a small print shop. Barnevik often

2 contends that his operating philosophy is no more than a large-scale extension of printshop logic: Consider the 5,000 profit centers as 5,000 print shops.) Barnevik is the most insistent enemy of bureaucracy Ive met. Partial proof: The gargantuan operation, he explained, typically has just three layers of management! A 13member executive committee (including Barnevik) based in Zurich runs the show. Below it come 250 senior executives, including 100 country managers and most of the Business Area chiefs, then the 5,000 profit center managers with their management teams. Thats it--only two layers ordinarily between the big chiefs and the High-Performance Team members on the shop floor. HOLDING ABB TOGETHER Barnevik calls ABB a multidomestic corporation. Translation, still abstract: ABBs structure is designed to leverage core technologies and economies of scale without eroding local market presence. Further translation: ABB is a matrix structure, with countries and industries as the two dimensions. Individual profit centers, plants, and companies within a country structure constitute one dimension of the matrix. Business areas (e.g. Hydropower Plants, Electric Metering, Complete Rail Systems, Leasing and Financing) make up the other. Sixty-five Business Area chiefs have responsibility for the overall, global strategy of their businesses; they also ensure that their business stick by agreed-upon budgets. In practice, Business Area chiefs and their small staffs are roving itinerant preachers-cajoling, comparing unit and competitor results, arranging job shifts for key people so as to transfer--and leverage--knowledge gained from here to there. A Business Area boss is very powerful--and not so powerful; Suppose, for example, his analyses suggest a rationalization--reducing the number of factories producing similar components from five to two. Suppose those five factories are under the command of five different, equally powerful country presidents. Its up to the Business Area chief and the country bosses to sort out the economic and socio-political considerations and come to a decision. To be sure, there is a formal mechanism for conflict resolution. Each Business Area manager reports to one of the 13 members of the Executive Committee. So does each country manager, (Ordinarily they report to different Executive Committee members.) In instances of lingering impasse, the Business Area chief and country heads will buck their cases up to their Executive Committee members. But Barnevik made it clear that this should occur only rarely. If country managers and Business Area chiefs come repeatedly to Executive Committee members to resolve disputes, he told us, Well fire both of them. The Business Area concept is purposefully fluid. Consider process automation. The Business Area was originally headed by the president of one of ABBs process automation companies; the rest of his team consisted of the other four process automation company presidents. The Business Area was headquartered in Sweden--because the chief and his company were there. Later on, the headquarters moved to Germany, then

3 to the United States (after ABB acquired Americas Combustion Engineering, the Executive Committee decided that the most significant process automation opportunities were in the U.S.--hence the move). The current Business Area leader does not double as a company president; he performs the Business Area task full-time and is supported by a local, expert staff of seven.* Business Area teams range in size from one (or less, a part-time company president) to 10 or 15. Business Area chiefs occasionally complement their professional staffs with senior officers from various Business Area companies, gathered on short-lived project teams to assess a strategic issue (quality improvement, a new technology, etc.) Overall, though, its no exaggeration to say that Barnevik is obsessed--a word he regularly uses--with keeping Business Area staffs tiny and responsive to their units. A Matrix Thats Mostly Not Ive reiled against the matrix organization structure for years. Matrices become hopelessly complex bureaucracies and gut the emotional energy an ownership of those closest to the marketplace. I still believe that. Yet Barneviks unique format passes my high-energy/accountability test, though Im not confident that an ABB without Barnevik wouldnt deteriorate--his abiding hatred of bureaucracy is critical to making the ABB structure work. But as it stands today, ABBs Business Area idea in practice differs dramatically from the traditional matrix. For example: Staffs are tiny. Business Area teams are purposefully kept very small Period. They live where it makes sense, and move when it makes sense. In the traditional matrix, Business Area equivalents are typically berthed at mecca--i.e. corporate headquarters--and often win debates by mere proximity to top execs. There are no Business Area heads/teams at the Zurich headquarters, and neither grass nor excessive self-esteem grows readily under the feet or between the ears of Business Area staff members. Local profit center managers are accountable. Goals are agreed upon, and thats that--local managers are not beholden to numerous bosses, as in the traditional matrix. (The ABB ethos of accountability almost matches that of EDS. ABBs avowed approach is for top management to be an insider, not an invader. That is, the company has the utmost respect for local country operations. Business Area staffs do not promiscuously move production workers around in pursuit of short-term advantage--again, in sharp contrast to the silly shenanigans of many 1970s-style, headquarters-based matrix managers. Business Area chiefs live by persuasion. They are on the road and away from the political center almost all the time. They earn their spurs by being helpful and only seek higher-level conflict resolution assistance at their peril;

Rationalise but Dont Kill Competition

4 Despite Barneviks drive for decentralisation, ABB does openly seek some oldfashioned manufacturing scale economies. This seeming contradiction can mostly be explained by the atomised structure of European commerce. Upon putting the ABB pieces together, mostly by merger, Barnevik frequently ended up with a dozen plants in one industry producing the same low-volume, highly specialised component - each generating minuscule revenues. He attacked this massive overlap directly; today, instead of 10 plants performing the same small task, youll find 2 or 3. Moreover, any one plant (a $15 - to $30 - million operation) will be producing many fewer products than before. The Low-Voltage Apparatus Business Area is typical. The diagram opposite shows major products and plants. Three of nine key products (such as low-voltage breakers) are made at only one plant; two are made at two plants; two at three plants; and two at four plants. Looked at another way, each low-voltage apparatus factory makes between two and six products. Before rationalisation, almost every box on the chart would have been filled. On the other hand, despite the significant rationalisation, there is still internal competition in most cases. Changes in the modest-size Power Semiconductor Business Area (which provides components for several other ABB businesses) illuminate Barneviks thinking about scale and internal competition. In 1991, ABB closed a 200 person power semiconductor factory in Sweden, concentrating all production at the site of ABBs 150-person operation in Switzerland. Two full-blown factories for such a modest-size business made no sense, Barnevik insists. Despite closing the factory, however, ABB left Swedens power semiconductor design group intact. The Swedish designers had some special skills, and Barnevik didnt want to lose their energy or independence. Retaining the two design groups (which could economically have been folded into one) induces all-important brain competition, Barnevik claims. Internal competition in ABB is hot. The central information system makes timely information on the details of every operations performance widely available. Furthermore, Business Area managers are always on the trail of efficiencies. Suppose a Swedish plant is one of three ABB operations building a particular component, and as a result of a new management approach, like the T50 program described below, it dramatically outperforms the other two. In time, the Business Area manager may decide to move some - or all - of the other plants business to Sweden. But if the Swedish plant doesnt directly win business away from its sister plants, it will almost certainly be chosen as home for the Business Areas next generation of products (and product development). Overall, Barnevik works at keeping enough operations going in parallel production to maintain superheated internal competition - yet hes effectively countered the extreme fragmentation that is the heritage of the European industrial past.

ABB Business Area (Low Voltage Apparatus) Production Facilities Products

5 LV MCC Breakers B Heidelberg Germany Pelercern France SACE Italy NEBB Norway Dist./D Sweden Stromberg Finland Switches Disco nnect ors Cont actor s X X X X X X X X X X X X X X LEAN STAFF Percy Barnevik arrived as CEO at Swedens Asea in 1980, having just concluded a highly successful tour as chief of the U.S. arm of Swedens Sandvik (carbide cutting tools, etc.). He discovered a central staff of 2,000, gasped, and reduced it to 200. Barnevik flatly told HQ staffers that they had three months to find a job in one of the companys line operating units. You cant postpone tough decisions by studying them to death, Barnevik said in an interview in the Harvard Business Review. You cant permit a `honeymoon of small changes over a year or two. A long series of small changes just prolongs the pain...(Y)ou have to accept a fair share of mistakes, (but) Id rather be roughly right and fast than exactly right and slow. We apply these principles wherever we go. Indeed he has. When ABB acquired Finlands premier industrial firm, Stromberg, a headquarters of 880 greeted him. A couple of years later that number was 25! At the German ABB headquarters in Mannheim, Barnevik found a staff of 1,600 people in 1988. Now there are 100. (How do you get from 1,600 down to 100? About 400 got the boot. But most went to nearby profit centers, since the Mannheim headquarters was surrounded by numerous small ABB factories). X X X X Overload Relays X Star Moni Push ters tors buttons X X

Barnevik has gotten the business of reducing central staff down to a near-science. He insists the head count in any headquarters activity can be cut by 90 percent the first year: About 30 percent disappear through attrition and other layoffs; another 30 percent go to one of the 50-person profit centers; and 30 percent become members of freestanding service centres (often new companies) that perform real work on a competitive basis and bill operating units for it at market prices (e.g., ABB Marketing Services manages ad

6 campaigns for subsidiaries, but also has outside clients and is expected to turn a profit); about 10 percent remain at the corporate center. But thats just the start. By year three or four, Barnevik declares, the 30 percent in the freestanding service centres can be reduced by half; the 30 percent in the profit centers can be cut by a third; and the 10 percent in the corporate center should be further slashed by half. Add it up, and about 30 percent of the staff is eliminated in the first year, another 30 percent by year three or four - and after the second round of cuts, only 5 percent will remain in the corporate center. That is precisely what happened when Asea merged with Brown Boveri in 1987. Asea, of course, had already reduced its center to rubble; now Brown Boveri absorbed the sledgehammers bitter blow - a rapid cut of its pre-merger 4,000 - person central complement to 200 (95 percent!). to run the newly combined entity, Barnevik created a headquarters with a complement of 100 professionals and a clerical support team f 50. Among them, for example, theres a single human resources executive, Arne Olson, supported by a secretary and three other junior staffers. (Olson, Fortune reported in June 1992, spends most of his time on the road, giving seminars on management development to ABB subsidiaries). LEVERAGING KNOWLEDGE Staffs are lean (no intrusive bureaucrats). Local units (profit centers) are empowered and substantially autonomous. And the Business Areas evangelists are out and about preaching an overall scheme for their units. But theres still more to ABB; part of that more amounts to a whole new way of conceiving global and scale. It turns out that most Business Area teams are pursuing economies of scale, but mostly learning scale, not production scale. Consider the Power Transformers Business Area (part of the Power Transmission segment). With $1 billion in revenue, its four times the size of its next-largest competitor. Led by a Swede, Sune Karlsson, the business is headquartered in Mannheim, Germany, but owns 25 factories in 16 countries. We are not a global business, Karlsson told Harvard Business Review writer William Taylor. We are a collection of local businesses with intense global coordination. This makes us unique. He added that he wants local companies to think small, to worry about their home market and a handful of (assigned) export markets, and to learn to make money on smaller volumes. Its been tough, he noted, convincing local managers that they can run small operations more efficiently (than large ones), meet customer needs more flexibly - and make money. Karlssons factories, small by industry staneards, run from $10 million to $150 million in volume, and at least two-thirds of a typical factorys output goes to local markets. to be competitive, Karlsson has emphasized slashing delivery time, maximising design and production flexibility, and focusing on domestic customers - rather than attempting to achieve volume efficiencies. So what is the advantage in combining the 25 factories in on Business Area, or, for that matter, belonging to ABB? Karlsson dismisses hard advantages, such as the ability to make efficient purchases, that theoretically come from overall size. Its the soft stuff, emanating from effective global coordination, that makes the difference:

Our most important strength is that we have 25 factories around the world, each with its own president, design manager, marketing manager, and production manager. These people are working on the same problems and opportunities day after day, year after year, and learning a tremendous amount. We want to create a process of continuous expertise transfer. If we do, thats source of advantage none of our rivals can match. But learning to learn effectively in a dispersed organisation, many of whose members came from acquired companies (and different national cultures), is not easy. On the one hand, Taylor reports that Karlsson stirs internal competition by providing detailed monthly information on the performance of all 25 units. But Karlsson is also aware that such competition must be constructive; he insists, says Taylor, that the key task is creating a culture of trust and exchange. Taylor describes several mechanisms, or forums for exchange, that Karlsson has created to foster learning. A Business Area management board, for example, meets four to six times a year to chart global strategies. Then theres the Business Area staff - five veterans with special responsibility for areas such as R & D and purchasing, who travel constantly, confer with the managements of local units, and push the overall learning and coordination agenda forward. Functional coordination teams, made up of expert members from various operations, meet a couple of times a year to work on production, quality, marketing, and other issues. While the formal gatherings are important, most of the value comes, Taylor observes, from creating information exchange throughout the year. The system works when the quality manager in Sweden feels compelled to telephone or fax the quality manager in Brazil with a problem or an idea. Sharing of expertise does not happen automatically, Karlsson admitted. People need to spend time together, to get to know and understand each other ... People must also see a payoff for themselves. I never expect our operations to coordinate unless all sides get real benefits. We have to demonstrate that sharing pays - that contributing one idea gets you twenty-four in return. Creating value through the accumulation of knowledge across diverse, mainly locally focused business has other twists as well. Take Finlands ABB Stromberg. When ABB acquired Stromberg, it was - typical of small country European firms - trying to be all things to all people. Though Stromberg remains in many businesses today, it is capitalising on its special talent in electronic drives, where the company has long been a technology and manufacturing leader. Officially, Taylor reports, ABB Stromberg has been designated a Center of Excellence for Electronic Drives, with coordination responsibility in that specially for the rest of the ABB family. Such Centers of Excellence are springing up all over ABB. (The idea - and language - is strikingly similar to EDSs Centers of Service.) T50 : THE NEXT STEP

8 But theres more afoot. In fact, ABB Swedens T50 program may be the most dramatic learning spearhead of all. The Swedish arm of ABB has 46,000 employees in 150 independent companies in 200 locations; in 1990 it booked about $8 billion in revenues - and its T50 program is shaking the company to its roots. In short, ABB Sweden intends to cut total cycle time (order, design, engineering, manufacturing, shipping) for everything it produces by 50 percent by the end of 1993. If successful, T50 promises to add about half a billion dollars to ABB Swedens bottom line! T50 emerged from a 1989 corporate (Zurich) task force. The president of ABB Sweden, Bert-Olof Svanholm, chose to pick up the ball and run hard with it. Today ABB Swedens executive vice president Kenneth Synnersten (who characteristically doubles as a Business Area head for Materials) spends about half of his time on the project; he works with an ABB Sweden steering group and is supported by four staffers (who also, characteristically, are de facto salesmen - on the road touting the programs early successes to fense-sitters and laggards). The average ABB company in Sweden has 200 to 400 people. Many are still structured the traditional way, with functional departments - sales, design, production, distribution. the structural objective of T50 is to completely flip the primary axis of doing business, getting almost everyone - representing all functions - out of the specialist departments and into horizontal product divisions numbering 30 to 100 people. This is possible, Synnersten insists, even though most of the businesses are heavy industrial. The final step is to further decompose those 30- to 100- person product divisions into the 10-person, multifunction High-Performance Teams mentioned at the outset of this analysis. In the new structure, there may still be a head of sales reporting to the company president to provide sales advice. But in this advisory role, the sales chief will have no supporting functional staff. Moreover, the odds are high that he or she will double as general manager of one of the small, largely self-contained product divisions. Synnersten estimates that in a 200-person company, at least 160 people can be assigned to product division units, leaving no more than 40 in functional slots. ABB Controls, which reorganised on January 1, 1992, is a case in point. First, the 500-person company split into four units/divisions of 125 people each. (For example, the central 60-person design unit was split into four bits, each with a local office.) The outfit was further subdivided into about 50 High-Performance Teams. Approximately 25 staffers still have some central duties; but each one of them also has a line role in one of the four divisions. Singing the new tune of time-based competition experts (see the Learning to Hustle section), Synnersten claims that rejiggering manufacturing per se is a minor issue; its already a superhighway - all sorts of clever techniques have been applied to make it efficient, so much so that, as the diagram on the next page shows, it absorbs only 3 percent of total sales-to-delivery cycle time. On the other hand, very little emphasis had previously been placed on the integration of the other functions (sales, order entry, order coding, engineering, specification development, planning, delivery) into a well-oiled

9 whole. Focusing on these other activities - performing work holistically/horizontally/ in parallel - offers the lions share of T50s huge performance enhancement opportunity. After little more than a year (at the time of my visit), Swedens T50 gang could point to several extraordinary successes. Consider new product development in the Low Voltage Switchgear Division, part of ABB Distribution. A new-look, multifunctional product development team was formed in June 1990, just as the T50 process kicked off; it aimed to create a new generation of switchgear cabinets for use throughout Europe. The Eurocenter Switchgear Cabinet, incorporating new technologies and a computerised support system for generating customised specifications (to be hooked up to Pcs all over Europe), was introduced almost 10 months to the day after project launch; ordinarily, such an effort would have eaten up 4 years. Then theres the 10-person High-Performance Team in the $5-million safety switch business. The newfangled horizontal group began work in early 1991. In eight months, total cycle time (order to delivery) was reduced from between 15 and 33 days to 5 days. On-time deliveries shot up from 50 percent in January 1991 to 96 percent in September 1991. Switches produced per person per day (an overall productivity measure) increased by about 20 percent, from 144 in January 1991 to 169 in September. Absenteeism, a strategic problem for Sweden as whole, dropped from 20 percent to 8 percent. The team does its own planning, scheduling, purchasing, and overall customer satisfaction management. Some engineering tasks are still performed by a residual central staff, though many of these may be delegated to the teams as T50 progresses.

ABB Sweden: Functions as a Percentage of Total Sales-to-Delivery Cycle Time Manufacturing (3%)

Sales

order entry 10 20

order Coding 30

Enginee- Specifiring cation 40 50 60 70

Planning

Delivery 90 100 %

80

Synnersten has established a bare-bones T50 guidance structure for ABB Sweden as a whole: Each company has one member of senior management designated T50 Responsible. These managers oversee progress in their own units and serve as

10 liaisons with Synnerstens central T50 team; the T50 responsibles meet one day each quarter and swap experiences. Furthermore, T50 must be part of each Swedish companys strategic plan and annual budget. Its also permanently on the agenda at individual company board meetings. Synnersten expects that by the end of 1993, about two-thirds of ABB Swedens home-country employees will be actively involved in a T50 project. (In fact the overall steering group has set precise quantitative goals for its march to 50 percent overall cycletime reduction.) Theres no doubt that Synnerstens impatient. At the same time, however, he stresses the need for patience. Project managers, Synnersten told us, must allow individuals to buy into the process at their own rate. They must be willing to let people `reinvent the wheel in order to get buy-in. Synnerstens real cudgel is a growing catalog of success stories. Almost everyone was skeptical at first, he said. Only true believers were willing to join the T50 crusade. But now Synnersten can send skeptics to see for themselves the hard evidence. Bragging - and peer pressure - are the key motivations, he concluded with a smile. T50: More Than Speed As usual, its murky out. Raw speed is only part of the speed issue. It begs the speed for what question. Fashion means getting new products out the door faster. But it also means more clever products, and intertwining with customers in ever more intimate ways. So going faster, lots faster, and eliminating functional barriers are as much efforts to get dramatically closer to customers as they are to churn out orders or new products at a frantic pace. Any way you define it, though, ABB Sweden does not intend to be caught napping - and ABB chairman Barnevik does not intend for his enterprise to be one of the doomed giants of post - 1992 Europe.