Organizations need to evolve to survive. This was the case for ABB Ltd. (ABB), a Swedish-Swiss multinational corporation headquartered in Zurich, Switzerland. Their first CEO, Percy Barnevik, established a revolutionary structure and culture that resulted in ABB becoming a fast-moving global organization admired for its speed and agility. He embraced a natural systems perspective and trusted in the tacit knowledge of his local leaders in 150 countries. Barnevik did not believe in having a large corporate staff, and he gave unprecedented autonomy to his local leaders. While this structure allowed ABB to be responsive to local needs, the lack of coordination led to overlaps in processes, products, and people. These inefficiencies and extra costs associated with a lack of coordination eventually led to poor financial results.
Barnevik trusted in the tacit knowledge of his local leaders Click To TweetThe CEOs that followed Barnevik addressed this issue by embracing a rational perspective for the organization. They built up the corporate office to increase coordination and eliminate overlaps. They moved authority from local leaders to the corporate staff. Local leaders were stripped of autonomy, and compliance replaced speed as a company value. This rational, top-down approach frustrated many long-standing, experienced employees, many of whom left the company to work for competitors. Company leaders took their rational efforts too far and alienated key employees who should have been an asset to help the company.
This paper reviews the organizational evolution of ABB from a natural to a rational perspective to review what company leaders could have done differently to embrace both the speed of the original structure and the coordination of the current structure. This examination also examines the problem of employees who go from being an asset to a liability when companies evolve. This hero-to-zero problem is as old as time, as demonstrated by the Old Testament story of Elijah in the time of King Ahab.
The Evolution of ABB
ABB was founded in 1988 when ASEA, a leading Swedish heavy industrial company based in Västerås, merged with their Swiss competitor Brown, Boveri & Company (BBC). Percy Barnevik, the Swedish businessman who orchestrated the merger, became the CEO of the combined companies. It was the largest merger in industrial history (Barham & Heimer, 1998). Barnevik was a legendary, hard-charging CEO. He had a bias towards action and hated bureaucracy. He was decisive, action-orientated and expected the same from his employees. The company culture after the merger reflected his personality, there was a high level of local autonomy, a bias toward action, and decisions were pushed to the lowest level. During this time, Barnevik described what he expected from his employees. He said, “The best thing you can do in my organization is to make the right decision. The next best thing is to make the wrong decision. What gets you fired is to make no decision” (Barnevik, 2014, p. 71).
The company culture after the merger reflected his personality, there was a high level of local autonomy, a bias toward action, and decisions were pushed to the lowest level. Click To TweetBarnevik built a unique organizational structure in the years after the merger. He believed ABB’s corporate office should be small and the company should not be heavily bureaucratic. During this time, ABB had 200,000 employees globally and less than 100 in the head office (Barnevik, 2014). Barnevik felt corporate leaders should focus primarily on strategy and coordination rather than directing day-to-day operations. Barnevik wanted the role of the headquarters staff to be focused on the overall direction of the company, the establishment of goals and objectives, and a source of guidance and support to local business units (Barham & Heimer, 1998). Scott and Davis (2007) describe ABB’s structure during this time as a “federation of 1,300 local companies linked into a global matrix, seeking to be both ‘small’ and ‘large’ at the same time” (p. 295).
Barnevik created this distributed organizational structure to allow ABB to be a global company focused on local market needs. Leaders in local business units had significant autonomy to make rapid decisions to respond to customer and market demands. This structure resulted in a fast-moving organization admired for its speed and agility. In the 1990s, ABB was often called the “dancing giant” (Barham & Heimer, 1998).
This structure resulted in a fast-moving organization admired for its speed and agility. Click To TweetThe author was a local business leader during this time and loved being a part of Barnevik’s fast-moving, highly distributed organization. Local leaders were responsible for profitably growing their businesses and had the freedom to decide how to accomplish that goal. Each of the 1,300 local business leaders felt like an entrepreneur backed by a large global company. Barnevik valued leadership and accountability during this time because of the light touch coming out of the corporate office. It was a period when ABB corporate bosses respected their local leaders and trusted them to make the best decisions for their local markets. One local business leader from Finland described ABB’s approach to managing local businesses during this period as an “action recipe” emphasizing “time consciousness and a small business approach” (Barham & Heimer, 1998, p. 111).
While this structure was innovative and led to ABB becoming a fast-moving and agile organization, there was a fundamental problem. Giving local leaders full autonomy meant that each business unit made independent decisions with little coordination with other units. This lack of coordination eventually resulted in overlapping systems, products, processes, personnel, and ultimately inefficiencies and extra costs. The light touch from corporate increased speed but created inefficiencies over time. By 2001, operating earnings at ABB were down 21 percent, and in July of that year, ABB announced a plan to cut 12,000 employees over 18 months (Olson, 2001). In this environment, Barnevik unexpectedly announced his resignation in November 2001 (Swissinfo.Ch., 2001).
Subsequent CEOs of ABB knew they needed to address the problems associated with a lack of coordination within the company. Over time, they changed the company’s organizational structure to more centrally controlled to capture global efficiencies better and increase coordination between local business units. This change led to a significant buildup of the corporate headquarters, a rapid rise in rules and policies, and increased bureaucracy throughout the company, which slowed organizational decision-making. During this time, the culture of the company completely changed.
Local business leaders were no longer valued for their leadership and decision-making abilities. Managers replaced leaders in key positions and were valued for their ability to follow the rules and implement corporate policy. Click To TweetLocal business leaders were no longer valued for their leadership and decision-making abilities. Managers replaced leaders in key positions and were valued for their ability to follow the rules and implement corporate policy. The author was a local business leader during this time and saw his authority stripped away over the years to the point where there were very few things he had the authority to do without corporate permission. ABB’s structure today looks like most centrally-controlled multinational corporations but is far from the company that Percy Barnevik envisioned. The company culture of speed, agility, and entrepreneurship was replaced with policies, rules, and compliance.
What Scholars Say About Organizational Change
The open system perspective of organizational theory says that the environment shapes, supports, and infiltrates the organization (Scott & Davis, 2007). For organizations to survive, they must adapt their structures and behaviors to respond to environmental elements (Őnday, 2018). Davis and DeWitt (2021) define open systems as organizations that “are congeries of interdependent flows and activities linking shifting coalitions of participants embedded in wider material-resource and institutional environments” (p. 32). ABB management was forced to adapt its structure, behaviors, and culture in response to environmental conditions and pressures placed on it by financial markets.
ABB needed to evolve to survive. Organizational evolution is an essential part of the ecological perspective of organizational theory—competition for scarce resources in the environment force organizations to make changes to remain viable. The ecological perspective traces its roots to the biological natural selection theories of Charles Darwin (Scott & Davis, 2007). According to the ecological perspective, competition is the primary interaction between organizations. Organizations that operate in the same niche compete for a common pool of resources needed for survival. Organizational ecologists are interested in how organizations are born and evolve as they fight to survive.
Scott & Davis (2007) say that “the ability to perpetuate one’s form is the hallmark of successful adaptation” (p. 248). In this case, the evolution of ABB’s structure and culture was necessary for its survival. It could be argued, however, that they took the evolutionary process too far. The CEOs after Percy Barnevik sacrificed the speed and agility of the original organizational structure for the assurance of global efficiencies and increased coordination between local business units. They also shifted from a natural to a rational perspective in managing the company.
The evolution of ABB’s structure and culture was necessary for its survival. Click To TweetNatural systems emphasize goal complexity and an informal structure (Őnday, 2018). According to Scott & Davis (2007), participants are motivated by their self-interests and look to impose these on the organization. The social cement that connects and regulates interactions among members in these natural systems is the behavioral structure, which focuses more on the consistency of behaviors and less on the prescriptions of that behavior (Őnday, 2018). Davis and DeWitt (2021) define natural systems as organizations that “are collectives whose participants are pursuing multiple interests, both disparate and common, but who recognize the value of perpetuating the organization as an important resource” (p. 30). In the case of ABB, under Percy Barnevik, leadership behaviors, decisiveness, and accountability were valued. Local business leaders had the autonomy to make decisions in their local self-interest that would perpetuate the overall organization.
Natural systems have a unique perspective of employees as well. Since the Hawthorne Studies of the 1920s, volumes of related studies regarding leadership, morale, and motivation have been conducted (Scott & Davis, 2007). One of the offshoots of the Hawthorne Studies was the work of Douglas McGregor, who proposed two different perspectives of how organizations view employee motivation. McGregor identified the rational perspective of employee motivation as Theory X. This is the view that employees must be controlled to achieve organizational objectives. The natural system perspective of employee motivation is called Theory Y. This view assumes people want to work and are self-motivated (Omodan et al., 2020). Percy Barnevik subscribed to the Theory Y perspective of employee motivation. He trusted his local business leaders to make the best decisions for their local markets. Subsequent CEOs took a rational approach and seemed to subscribe to the Theory X perspective. They took the position that employees needed to be tightly controlled to achieve organizational objectives.
Barnevik trusted his local business leaders to make the best decisions for their local markets. Click To TweetNatural systems also acknowledge the importance of the tacit knowledge of employees. While rational systems emphasize the significance of detailed work requirements developed by corporate staff to deal with work requirements, natural perspective proponents point more toward the ingenuity of employees as they gain knowledge through experimental learning. Scott and Davis (2007) say that “much of the knowledge on which the organization relies is contained in the skills and tacit knowledge of its workforce” (p. 146). The natural perspective acknowledges the value and importance of the tacit knowledge of employees developed over time through work experience. Mohiya (2022) says tapping into employees’ tacit knowledge is essential to create a performance-driven culture.
Percy Barnevik understood this. He believed and trusted in the tacit knowledge of his local business leaders. He understood those employees were the most experienced resources to make local business decisions and lead local business units. The CEOs that followed Barnevik did not share his views. Those CEOs expected local managers to follow detailed work requirements developed by corporate staff experts in office buildings far from the local business. These CEOs did not want local managers to make decisions inconsistent with these global rules and requirements. As a result, ABB lost much of its performance-driven culture.
ABB lost much of its performance-driven culture. Click To TweetIn order to survive, ABB management adapted the company structure and culture to control the decisions of local leaders more precisely. They evolved the company from a natural system to a rational system perspective where the trust was now placed in the hands of corporate experts, carefully crafted rules, and detailed work processes. The company no longer put its faith in the tacit knowledge and experience of local leaders. This change increased global coordination and minimized inefficiencies and extra costs. It allowed the company to improve profitability and survive. However, the changes went too far. Corporate leaders failed to consider how this shift affected those employees who were critical to the former structure and culture.
Corporate leaders failed to consider how this shift affected those employees who were critical to the former structure and culture. Click To TweetOmodan et al. (2020) say that Theory Y views employees as not just a “component in the company wheel” (p. 3). They explain that companies that embrace a Theory Y view of employees will see significant performance improvement by supporting and listening to their workforce. Scott and Davis (2007) say that the Hawthorne Studies and others carried out by the Harvard group show that “individual workers do not behave as ‘rational’ economic actors but as complex beings with multiple motives and values; they are driven as much by feelings and sentiments as by facts and interests” (p. 65). The Theory Y concept says that employees are active stakeholders who want to see the company succeed. This motivation means they can offer a rich and diverse source of ideas to help solve the most challenging company problems. By moving to an entirely rational perspective and embracing a Theory X view of employees, ABB frustrated and alienated long-standing, experienced employees. This frustration ultimately increased turnover and caused the loss of many key employees after the transition.
ABB frustrated and alienated long-standing, experienced employees. Click To TweetPersonal Perspective on the Changes at ABB
The experience and tacit knowledge of 1,300 local leaders in 150 countries helped Percy Barnevik build the newly-formed ABB into the most admired company in Europe. In his 17 years as CEO, eight with ASEA and nine with ABB, Barnevik led the company to increase its stock value 87 times, an average of 30% per year, and became a leading global player (Barham & Heimer, 1998). However, those same local leaders became victims of their success when ABB changed its structure and culture to embrace a more traditional rational perspective. Strong local leaders who were once prized for their experience and leadership skills were now seen as a threat to the new way of doing business. Almost overnight, these leaders went from being heroes to becoming an enemy. In the Old Testament, Elijah faced this same type of challenge.
Merida et al. (2015) remind readers of the classic Old Testament story of a hero who became an enemy. During King Ahab’s reign in Israel, a massive drought came to the country as punishment for Ahab and his wife Jezebel’s sin of pagan idolatry. Ahab had ignored the commands of Deuteronomy 11:16-17 which directly led to the punishment (Merida et al., 2015). Elijah, a Tishbite prophet, confronted the powerful king. Through God, Elijah had the wisdom to advise Ahab on how to end the drought. Elijah directed Ahad to submit to God and worship Yahweh alone.
Ahab initially blamed Elijah for the three-and-a-half-year drought, which had devastating consequences throughout Israel (Merida et al., 2015). But Elijah powerfully demonstrated to Ahab that he alone was responsible because he had “abandoned the Lord’s commands and [had] followed the Baals” (New International Version, 1978/2011, 1 Kings 18:18). After a decisive confrontation on Mount Carmel where God demonstrated His awesome power, Ahab realized his sin and turned away from the foreign gods. That single action brought rain back to Israel. Ahab had a challenging organizational problem, and he relied on the wisdom of one of his followers to restore health to Israel. For a moment, Elijah was a hero for the king and the nation.
The king and the prophet could have worked together in a great reformation movement to return Israel to God (Merida et al., 2015). But, instead of a national revival, Ahab changed course when his wife Jezebel learned about the events on Mount Carmel. Even as the rain fell in Israel, Ahab submitted to his wife’s authority and set out to kill Elijah. The hero who helped end the drought in Israel was now pursued as an enemy of the state. Inside ABB, the same thing happened. Throughout the company, experienced local leaders were replaced with compliant managers. The CEOs that followed Barnevik could have worked with these local leaders to bring about the needed changes in the company, but they chose to eliminate those who wouldn’t get on board the new structure and culture. Those leaders who remained in the company were frustrated that their experience and skill sets, which were once valued, were now seen as a threat to the organization.
They failed to appreciate and tap into a significant company asset, the deep tacit knowledge of experienced employees. Click To TweetIt could be argued that the evolution of the structure and culture was necessary for ABB to realize its full potential as a multinational corporation and survive in a competitive environment. However, company leaders went too far in pursuing a rational, top-down approach to the new structure and culture. They failed to appreciate and tap into a significant company asset, the deep tacit knowledge of experienced employees. As a result, many talented leaders left the company and either went to work for the competition or started their own businesses.
References
Barham, K., & Heimer, C. (1998). ABB: The Dancing Giant : Creating the Globally Connected Corporation. Financial Times/Prentice Hall.
Barnevik, P. (2014). Percy Barnevik on Leadership: 200 Lessons from 50 Years’ Experience. Sanoma Utbildning.
Davis, G. F., & DeWitt, T. (2021). Organization theory and the resource-based view of the firm: The great divide. Journal of Management, 47(7), 1684-1697. doi:10.1177/0149206320982650
Mohiya, M. (2022). Unleashing employees’ tacit knowledge toward performance-driven culture in a Saudi Arabian organization. Journal of Knowledge Management, doi:10.1108/JKM-04-2022-0263
Merida, T., Platt, D., & Akin, D. L. (2015). Exalting Jesus in 1 & 2 Kings. Nashville, Tennessee: B & H Publishing Group.
New International Bible. (2011). The NIV Bible. https://www.thenivbible.com (Original work published 1978)
Olson, E. (2001, July 25). ABB, Reporting Lower Profit, Will Cut 12,000 Jobs. The New York Times. https://www.nytimes.com/2001/07/25/business/abb-reporting-lower-profit-will-cut-12000-jobs.html
Omodan, B. I., Tsotetsi, C. T., & Dube, B. (2020). Analysis of human relations theory of management: A quest to re-enact people’s management towards peace in university system. South African Journal of Human Resource Management, 18(1), 1–10. https://doi.org/10.4102/sajhrm.v18i0.1184
Őnday, Ő. (2018). The relationship between concepts of rational, natural and open systems: Managing organizations today. International Journal of Information, Business and Management, 10(1), 245-258
Scott, W. R., & Davis, G. F. (2007). Organizations and Organizing: Rational, Natural, and Open System Perspectives. Routledge.
Swissinfo.Ch. (2001, November 21). Barnevik steps down as ABB chairman. SWI swissinfo.ch. https://www.swissinfo.ch/eng/barnevik-steps-down-as-abb-chairman/2382920
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