June 24, 2018

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ABB: Poster Child for Skepticism

It looks bad when a stock goes down 90% in a year (Year High: 18.70 CHF Last Price: 1.85 CHF) but this number understates the troubles as ABB. In 2000, it was trading above 50 Sw Fr so even this year's high was an 80% drop from two years ago.

Failing companies, even big failing companies, are all part of business. We've come to terms with the stupidity around the high-tech bubble, but ABB falls into a different class. It is a big traditional company making real things for real profits. Sure traditional companies can get into trouble, just look at Fiat or Ford. The strange thing about ABB is that, for many years, the European giant was a poster child for global companies. They were seen as an innovative, fast moving, well managed firm who really understood how to be global. I suppose it's fair to say that was not entirely accurate.

There are several reasons for ABB's crash. Certainly massive asbestos litigation is a disaster. However, analysts point to other systemic problems such as poor internal reporting, way too much emphasis on speed, and a chaotic matrix management structure.

The post-mortem on where ABB failed will go on for years. However, there is one lesson that jumps out at us: the need for skepticism. ABB was believed to be an excellent company; it turns out it was a lousy company. Everything we knew was wrong.

So managers need to take what they read about other firms with a great deal of skepticism. We should be slow to ape the "best practices" of leading firms. We should place more weight on what we can touch and see than in what we read. That means staying grounded in the everyday reality of your people, your customers and your systems.

The nineties were a bad time for skeptics. Now as we move into the 21st century, it's time to return to skepticism to its time-honored place as a core intellectual tool.

- David Creelman