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MANAGEMENT OF AN INDUSTRIAL COMPANY ATLAS COPCO INDUSTRIAL TECHNIQUE

HÅKAN KULLVÉN

The book is also available in Swedish: Industriföretagets ekonomi, Studentlitteratur 2018

Copying prohibited This book is protected by the Swedish Copyright Act. Apart from the restricted rights for teachers and students to copy material for educational purposes, as regulated by the Bonus Copyright Access agreement, any copying is prohibited. For information about this agreement, please contact your course coordinator or Bonus Copyright Access. Should this book be published as an e-book, the e-book is protected against copying. Anyone who violates the Copyright Act may be prosecuted by a public prosecutor and sentenced either to a fine or to imprisonment for up to 2 years and may be liable to pay compensation to the author or to the rightsholder. Studentlitteratur publishes digitally as well as in print formats. Studentlitteratur’s printed matter is sustainably produced, both as regards paper and the printing process.

Art. No 40162 ISBN 978-91-44-12928-0 First edition 1:1 © The author and Studentlitteratur 2018 studentlitteratur.se Studentlitteratur AB, Lund Cover design: Jens Martin/Signalera Cover illustration: Shutterstock.com Photographs: Copyright Atlas Copco Industrial Technique AB, where nothing else is stated. Printed by Interak, Poland 2018

CONTENTS

Preface: Management of an Industrial Company 7

1 The Business 13 The Atlas Copco Group 13 The Business Logics of Atlas Copco Industrial Technique 24 Atlas Copco: A Group of Limited Companies 32 Entrepreneurship 34 2 Planning the Business 37 The Atlas Copco Culture 37 From Mission to Action 39 Management Control 44 Models Used in Strategic Work 56 Forecasting 59 3 Acting in the Market 65 Markets 65 Product-Driven and Customer-Focused 68 What Does a Customer Focus Mean? 69 Market Segmentation 73 Two Perspectives on Marketing 75 The Network Perspective 76 Marketing Mix: The 4P Model 79 © T h e aut h o r and S tudentlitte r atu r

Contents

4 Organizing the Business 91 Organizational Structures 91 Organizational Structures in Theory 98 Leadership 104 Inventory Carrying and Procurement 121 5 Costing Products and Orders 125 Use of a Costing System 125 Basic Concepts 126 Different Costing Systems 131 The Costing System: At First Glance 133 The Full Cost 134 Contribution Margin Costing 143 Other Costing Methods 148 Stepwise Costing 150 6 Decisions about Investments 153 What is an Investment? 153 The Concept of Interest 154 Concepts in the Calculations 158 Methods for Investment Appraisal 164 Investment Classification 172 An Investment Proposal 173 Investments in Companies 175 7 Following up the Business 177 Enterprise Resource Planning (ERP) 177 Bookkeeping 179 Monthly Internal Reports 184 The Annual Report 193 Accounting Measures 206 Measures for Profitability 210 Sustainable Development 213 4

Contents

8 Analyzing Change 217 What Happens when Volumes Change? 217 The PK-bridge 224 Variance Accounting 229 9 Financing the Business 231 Finance 231 Operational and Financial Risks 232 The Need for Capital 233 Reducing Capital 235 Need for Capital 236 Acquiring Capital 243 Cash Flow Statement 247 Financial analysis 252

Tables 257 Reading list 261 Index 263

CHAPTER 4

Organizing the Business

In this chapter, the organization and leadership of the Atlas Copco Group, as well as of the business area of Industrial Technique, are presented. For Industrial Technique, we also discuss how it has set up its production and the supporting activities surrounding this. Finally, we look at how they have organized themselves into becoming a learning organization.

Organizational Structures What is the structure of a company? A companyâ&#x20AC;&#x2122;s structure often refers to its informal and formal organization. The informal organization is made up of those with the greatest influence in the company, those considered the dominant players, and so on. The formal organization is controlled by the management and involves rules about who decides over who. The organization may be designed as a hierarchy, with clear decision paths within the company, or more from a customer perspective, so that it reflects its customers and their needs. Next, we look at a few such different forms of organization. We also look at how managers and others work in organizations, both in Industrial Technique as well as in general.

The Shareholders Let us start with the organization of the Atlas Copco Group (see Figure 4.1). That structure is the same as for most companies owned by shareholders (i.e., limited companies). The main decision-makers are the shareholders (1) and they make their decisions by votes at the annual general meeting (AGM) (2). The nomination ÂŠ â&#x20AC;&#x2030;T h e aut h o r and S tudentlitte r atu r

4 Organizing the Business

committee (3) suggests a board of directors (4), which the shareholders decide on at the AGM. The board of directors is responsible for the organization and management of the group. It consists of the head of the board, Hans Stråberg, and ten other members, including Mats Rahmström, who is the chief executive officer (CEO) of the group. The CEO is responsible for the ongoing management of the group following the board’s guidelines and instructions. Another member of the board is Peter Wallenberg Jr, who represents the Wallenberg family, as we discussed in Chapter 1. In the board, there are also two representatives for the labor unions, so the total number of board members is eleven, and the rest have been chosen by the annual general meeting. The board governs the work of the company and appoints the group management (9), which makes sure the company works in the best interest of the shareholders. The group management consists of nine individuals: the president and chief executive officer (CEO) of the group, Mats Rahmström, the senior vice presidents for Human Resources, Controlling and Finance, Corporate Communications and Governmental Affairs, and General Counsel. It also includes the business area presidents for Power Technique, Compressor Technique, Vacuum Technique and for the business area we follow in this book, Industrial Technique, where Henrik Elmin is the president. The shareholders also decide on an auditor or auditing company (they decide which of the two) (7), which audits the work of the board of directors

3. Nomination Committee

6. Remuneration Committee

1. Shareholders 7. Auditor 2. Annual General Meeting

4. Board of Directors

5. Audit Committee

9. Group Management

8. Internal Audit and Assurance

Business areas and divisions

Figure 4.1 The governance for the Atlas Copco Group.

4 Organizing the Business

Picture 4.1 The headquarters of Atlas Copco in Sickla, Sweden; exterior to the left and the reception to the right. Note the large copy of the Atlas Copco book in the background in the center of the reception. Photo: Susanne Melin.

and the group management. Also, an audit committee (5) controls the work of the board of directors, while internal audit and assurance (8) control the work of group management and the business areas and divisions. A remuneration committee (6) suggests which compensation the board of directors should receive for their work, and this is also decided by the shareholders at the annual general meeting. The Atlas Copco Group is organized based on this structure. Of course, there are many different parts in this organization. The group consists of a parent company, 11 directly owned product companies, 29 directly owned customer centers, 24 directly owned holding companies and similar, and close to 400 holding and operational subsidiaries.

The Business Areas and Their Divisions In most large companies, like Atlas Copco, the top level is divided into strategic business units (SBUs) or, as Atlas Copco refers to them, business areas. These are units responsible for operations that are unique in the company, that are strategically different. There are four business areas in Atlas Copco (previously five, but one of them, Mining and Rock Excavation Techniques, is now a separate group under the name of Epiroc): Compressor Technique, Vacuum Technique, Power Technique, and the one we follow in this book, Industrial Technique. These are very different in what they produce and sell. Of course, there are also similarities, but in most cases they have separate products, customers © T h e aut h o r and S tudentlitte r atu r

4 Organizing the Business Group Management Business Areas and Corporate Functions Compressor Technique

Vacuum Technique

Industrial Technique

Power Technique

Divisions: Motor Vehicle Industry, MVI General Industry, GI Industrial Technique Service, AIS Chicago Pneumatic Division Industrial Assembly Solutions, IAS

Figure 4.2 Business areas in Atlas Copco and the divisions in Industrial Technique.

and so on. The business areas are responsible for developing their respective operations by implementing and following up on strategies and objectives in order to achieve sustainable, profitable development. Note that it says “Business Areas and Corporate Functions” at the top of Figure 4.2. These corporate functions include things such as information, financial services, accounting, and so on. A few of these are at the group management level, some at the business area level and a few at the divisional level. These corporate functions serve the rest of the organization, but do not make decisions for them; they are staff organizations. At the divisional level, as well as in the product companies, these types of staff functions also exist, and one may also find staff functions for operations, sourcing, research and development here. We discuss these types of organizational parts in the form of staff functions later. Under each business area, there are divisions. The same holds true for most other large companies. Under Industrial Technique, we find five divisions: Motor Vehicle Industry Tools and Assembly Systems, General Industry Tools and Assembly Systems, Industrial Technique Service, Chicago Pneumatic Tools, and Industrial Assembly Solutions. The divisions are responsible for delivering results in line with the strategies and objectives set by the business area. These divisions are also quite different from one another. In some cases, this is because they produce different products, and that is to some extent true for Atlas Copco Industrial Technique. This may clearly be seen in the case of Chicago Pneumatic Tools, and for Industrial Assembly Solutions. To 94

4 Organizing the Business Atlas Copco Industrial Technique AB Tool

Atlas Copco Tools Sverige CC

Atlas Copco Industrial Technique PC

Divisions MVI, GI, AIS, IAS and R&D

Scanrotor

Figure 4.3 The organization of the legal entity of Industrial Technique Sweden.

some extent, that is also true for the other parts, but they mainly differ when it comes to which customers, or which industries, they serve. The different legal entities of the group also have their organizations. In Figure 4.3, Industrial Technique Sweden, covering the Swedish part of the business unit this book focuses on, is presented as an example.

The Main Operating Units Atlas Copco’s organization is based on the principle of decentralized responsibilities and authorities. The main operating units in Industrial Technique are of three types and they are organized as a process (see Figure 4.4). A division may have one or more of each of these types of units, dedicated or shared with other divisions. They are all evaluated with a set of measures for quality, delivery and cost, besides what is said below. The types of units are:

Product company

Customer center

Distribution center

Product company

Customer center

Figure 4.4 Product companies, distribution centers and customer centers in Atlas Copco Industrial Technique.

4 Organizing the Business

• Product companies that produce the tools and other products.

They are responsible for product development, manufacturing and product marketing. They sell the products to distribution centers for a price calculated as the product cost (more on this later). • Distribution centers, one major in Belgium and a smaller one in China. They distribute the products. • Customer centers that sell the products to the customers. They are responsible for customer contacts, sales and service. At these centers, the profit or loss for the products is measured. Also, for each country in the organization (e.g., the United Kingdom), there are three business lines, each with one business line manager, representing three of the divisions in the business area: Motor Vehicle Industry, General Industry, and Service. Each of these sort under the respective division, with a manager responsible for all units in the Motor Vehicle Industry Division, all units in the General Industry Division and all units in the Service Division. To summarize, the operations are performed in an organization that follows the process of the flow (from product companies over distribution centers to customer centers), and they are also organized per country and per division (for the Motor Vehicle Industry, the General Industry, and Services). This results in the matrix in Figure 4.6: With the three main divisions (Motor Vehicle Industry, General

Manager for Industrial Technique in United Kingdom

Manager for the Motor Vehicle Industry Division in United Kingdom

Manager for the General Industry Division in United Kingdom

Manager for the Service Division in United Kingdom

Manager for the Motor Vehicle Industry Division Globally

Manager for the General Industry Division Globally

Manager for the Service Division Globally

Figure 4.5 The organization of the divisions for different countries.

4 Organizing the Business The Division of Motor Vehicle Industry

The Division of General Industry

The Division of Service

Product Company in Sweden Distribution Center in Belgium Distribution Center in China Customer Center in United Kingdom … and so on …

Figure 4.6 The matrix between divisions, on the one hand, and units in different countries on the other.

Industry and Service) on one axis and the different centers (customer centers for the United Kingdom and Sweden, product companies for the United Kingdom and Sweden and distribution centers for Belgium and China) on the other. Finally, as an example of an administrative organization within Atlas Copco Industrial Technique, Figure 4.7 shows the organization of the controller unit of Industrial Technique. Finance Manager IT AB/ Business Controller

Accounting Manager Accounts Payable (4 employees)

Operations Controller

R&D Controller

Assistant Business Controller Tierp

Accountant Tierp

Accounts Receivable

Senior Accountant

Figure 4.7 The controller function at Atlas Copco Industrial Technique.

4â&#x20AC;&#x201A; Organizing the Business

Next, let us analyze these organizational structures in relation to theory; which kinds of organizational structures are found in Atlas Copco and the business area of Industrial Technique?

Organizational Structures in Theory The starting point for a traditional organizational structure is a line organization, where the company is divided into departments responsible for different functions: a purchasing department, a production department, and so on. You can see this organization at Atlas Copco at the top level of the organization, for the business areas and the divisions and also in the organizational structure for the different countries. There, each level has a manager, who has other managers below her/him. You can also see it in the organization of controlling the Service Division of Industrial Technique. The line organization is often combined with staffs, which are not part of the decision tree, but are more there to support other departments. This type of organization is referred to as a line and staff organization. For instance, we discussed these staffs when we discussed the organization of the business areas: There are staffs for finance, accounting, human resource management, and so on. At other levels, such as at the divisions, there are also such staff functions, even if we do not discuss them here. In a line organization, each employee only has one senior manager above him or her. In some cases, the organization is instead a functional organization, where employees can have several managers and where who is in charge of whom depends on what is to be done; for instance, a production manager manages all production decisions, an investment manager all investment decisions, and so on. There is no such structure in Industrial Technique. However, at a university, for instance, there are often two managers at a certain level; one responsible for the scientific development and one for the course part, where who is in charge depends on what is discussed. A model called the value chain has inspired many companies to organize their activities as a process, a flow. Instead of a hierarchy of functions, companies are organized based on the primary activities carried out, the flow of these activities. The units that are not part of this flow (these primary activities) may instead be organized as support activities. In this way, a leaner and more flow-oriented organization is created. In Industrial Technique, we 98

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4 Organizing the Business Line organization CEO Human Resources

Finance

Marketing

Information Technology

Production

Staff

Value chain (based on the flow) Support Activities

Firm Infrastructure Human Resource Management

n rgi

Technology Development Procurement Outbound Logistics

Marketing and Sales

Service

rgi n

Operations

Inbound Logistics

Primary Activities Line and staff organization Line President

Staff Legal Department Human Resource Department VP Production

VP Finance

VP Marketing

Head of Accounting Department

National Sales Manager

Matrix organization Management Research

Production

Sales

Finance

Product A Product B Product C

Figure 4.8 Organizational structures in theory.

4 Organizing the Business

can see this type of organization when it comes to the units in the flow: the product companies, distribution centers and customer centers. This flow, or process, is at the heart of the operational activities in the company: this is where “the work is done” so to say. In a matrix organization, the traditional line organization is combined with another division that follows the flow; for example, the flow of products, projects or the like. This means that there are two managers at each intersection. For example, for the production of product 1, there is both a manager of production and a manager of product 1 involved. In Atlas Copco Industrial Technique, we saw this when we looked at how the company is organized in different countries combined with the process organization for the units just discussed. There are also many other ways of dividing the organization in theory: as a network, in different groups or teams, as a flexible division depending on current goals, and so on. And, the project organization, something Atlas Copco also uses for its projects, such as for product development. Let us next focus a little on this type of organization.

Project Organization The project organization is used for tasks of different kinds; for developing a new product, for investigating the possibilities of moving production to another country, for buying a new system for enterprise resource planning (ERP), and so on. This means that there are three different dimensions in the project: the output that should be accomplished, the deadline for the project and the resources (e.g., costs and man-hours) that can be used. These three parts need to be balanced. It could, for instance, be the case that a project has met the deadline but not the output strived for, or that the output has been accomplished but at costs that are too high, and so on. Output

Deadline

100

Resources

Figure 4.9 The project triangle.

4 Organizing the Business

In Atlas Copco, projects are formed in relation to things such as research and development. These projects are mainly formed from employees in the line organization based on their competence in different technical areas. This means that the projects become cross-functional teams. One important part here is the previously mentioned Pulse method for agile development, which focuses on what meetings between employees with different competencies may contribute with regard to helping the project maintain its momentum. For each project, there should be a project manager who is responsible for the project vis-à-vis the project owner, the one who has decided on the project. To her help, there is a project group consisting of the project leader and other employees, consultants and so on who are needed for the project to succeed. Often, a project is multi-disciplinary, so when it comes to developing a new tool, for instance, Atlas Copco has engineers from different technological fields, marketing people, controllers, employees with knowledge about procurement of the modules needed and sometimes even customers in the project, in order to have all of these perspectives in the project. There could also be an advisory board that could be consulted for advice of different kinds for the project, and a steering committee that follows the project and what it accomplishes. For specific tasks, there could be sub-groups within the project that work with these tasks. Since a project deals with something that needs to be accomplished in a certain time, the project is often divided into different packages: different steps that should be accomplished. What should be accomplished is often defined in terms of gates. These gates define what should be accomplished before the next step is taken. You saw examples of these packages and gates when we discussed research and development at Industrial Technique in Chapter 1. Common techniques for this are PERT (Program Evaluation and Review Technique) and CPM (Critical Path Method), which define which steps should be taken, in what order and how they are linked to one another. But there are also companies that use more agile project methods, as described earlier. Earned value management is a tool that combines cost, time and result accomplished with each other and analyzes the variances from this and what this means for the project. The purpose is to focus on the three parts of the project (resources, deadline and output) and how they succeed. The model divides the variance between planned cost or planned use of resources, called planned value, for a period of time and the actual use of this, actual cost, by the two reasons for the variance: a variance in cost, © T h e aut h o r and S tudentlitte r atu r

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4 Organizing the Business

Planned Value

Earned Value

Actual Cost

Planned Costs of Planned Activities

Planned Costs of Actual Activities

Actual Costs of Actual Activities Cost Variance

Schedule Variance

Total Variance

Figure 4.10 Earned value management.

which is called cost variance and a variance in time, which is called schedule variance. This is done by introducing the concept of earned value, which are the planned costs for the activities actually performed for that same period. Total variance, again, is planned value less actual cost. Cost variance is earned value less actual cost, and schedule variance is planned value less earned value. Through this, we may, for instance, see whether a negative variance in total (we have used more resources than planned) is because we have a negative cost variance (we have used more resources than planned for the activities we have actually carried out) or because of a negative schedule variance (we have performed more activities than planned, which is positive in some respect but which causes more costs than planned, since each activity demands specific resources). Or, it could be a combination, where one could be positive and the other negative, and so on. From this, we may also estimate where the project will land should it continue like this. We can calculate the estimate at completion, how much the total cost for finalizing the project will be, by first dividing actual cost by earned value and then multiplying it by the budgeted total cost for the project. And we can also calculate the estimated time to complete by first dividing the planned value by the earned value, and then multiplying this by the budgeted total time. 102

4 Organizing the Business

Example AtCop

In January 2018, AtCop presents the information in the table below for one of its projects. The first column contains the planned value for each month: the expected costs for each month (the sum of the planned cost for all the planned activities). The next column contains the actual cost: the sum of the actual costs for all activities that were performed for each month. And the next column is the earned value: the sum of the planned cost for the activities actually performed. So far, they have a planned value of SEK 1,060,000 compared to the actual cost of SEK 1,210,000. This means that the total variance is –SEK 150,000 (SEK 1,060,000 – SEK 1,210,000), indicating that the project has used SEK 150,000 more than according to plan. Since the earned value is SEK 840,000 so far, the cost variance is –SEK 370,000 (SEK 840,000 – SEK 1,210,000) and the schedule variance is SEK 220,000 (SEK 1,060,000 – SEK 840,000). So, they have used SEK 370,000 more than they should have for what they have accomplished, and they have also accomplished less than expected – the planned cost for the activities that they should have accomplished, but have not, is SEK 220,000. This indicates that they experience problems both with resources and with the deadline. Period

Planned value

Actual cost

Earned value

Total variance

Cost variance

Schedule variance

August 2017

160,000

250,000

220,000

–90,000

–30,000

–60,000

September 2017

250,000

340,000

240,000

–90,000

–100,000

10,000

October 2017

240,000

280,000

110,000

–40,000

–170,000

130,000

November 2017

80,000

140,000

120,000

–60,000

–20,000

–40,000

December 2017

330,000

200,000

150,000

130,000

–50,000

180,000

Accumulated

1,060,000

1,210,000

840,000

–150,000

–370,000

220,000

January 2018

220,000

February 2018

100,000

Total

1,380,000

103

4 Organizing the Business

From this information, AtCop has also calculated an estimated time to complete by first dividing the accumulated planned value so far (SEK 1,060,000) by the accumulated earned value so far (SEK 840,000), and then multiplying this by the budgeted total time (7 months), which results in 8.83 months. So, it will take 1.83 months longer than planned, which means that it will be ready at the end of April 2018. They also calculate an estimate at completion, how much it will cost in total for the project to be finalized by first dividing the accumulated actual cost (SEK 1,210,000) by the accumulated earned value so far (SEK 840,000), and then multiplying this by the budgeted total cost for the project (SEK 1,380,000). This gives an estimated cost of SEK 1,988,000, which is SEK 608,000 above budget.

Leadership What is a leader? And, perhaps even more interesting, what is a good leader? The problem when discussing this is that there are many different opinions about this. And this is natural. Probably, different characteristics and abilities suit different situations, different times, different countries, and so on. People act differently and different companies have different cultures, different leadership ideas, and so on. So, let us start by looking at what leadership is at Industrial Technique, take a look at some leaders in the company and how they work, and then go into different theories in the field.

Leadership in Industrial Technique In Atlas Copco, leadership is defined as the ability to create lasting results. The leaders should have a “cool brain, warm heart and clean hands.” The company needs a flow of growing managers wanting to take on more and more complex responsibilities. Atlas Copco believes in internal management resourcing and the vast majority of managers are recruited internally. As an example, the former business area president of Industrial Technique, which we study in this book, was Mats Rahmström, who is now the president and chief executive officer (CEO) of the whole Atlas Copco Group. And the new business area president of Industrial Technique, Henrik Elmin, used to be the president of one of its divisions, Industrial Technique Service. This shift was done in early 2017. 104

4â&#x20AC;&#x201A; Organizing the Business

This ambition to find top leaders inside the organization has many advantages. But it also has some disadvantages, one being that they have relatively few women as leaders in the company. They have received some criticism for this for several years. As recently as in the annual general meeting for 2017, in April 2018, the question was raised. Only one of the top managers of the organization, according to the annual report, was a woman, and she would go on to the spin-off company Epiroc. This is a problem. There are many good leaders in the company who are women, but not as many as the number of men, and this makes it more difficult to achieve a good balance in this regard. In Atlas Copco, as in most other large companies and as we described earlier in the section about organizations, the annual general meeting is seen as the highest level of management, the corporate governance. There, the shareholders decide on how the company should handle their capital. The board is then responsible for the organization and the management, and it appoints a chief executive officer (CEO) who is in charge of the daily management. Under the CEO, there are other managers: for the business units, the divisions in those and the different units in the flow, countries, factories and other organizational units in the divisions. All managers in Atlas Copco Industrial Technique receive a mission from their superiors, outlining their long-term expectations and goals. Based on this, each one is expected to develop their own vision clarifying how he or she intends to achieve the mission with their respective teams. The strategy defines which focus areas and activities will put the vision into action. When the strategy is set, a structure is established for the organization to ensure that processes for the implementation are in place. The role of the manager in the company is to coach the employee in her/his professional life, but the responsibility stays with the employee. Performance and development reviews are performed on a yearly basis, while coaching takes place continuously.

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105

HĂĽkan KullvĂŠn is an associate professor at the Division of Industrial Engineering and Management at the Department of Engineering Sciences, Uppsala University. He has also published books in the areas of management control, budgeting and service quality.

MANAGEMENT OF AN INDUSTRIAL COMPANY ATLAS COPCO INDUSTRIAL TECHNIQUE How is a company managed? In this book, this is explained by following an industrial company, Atlas Copco Industrial Technique, in order to understand how they plan, carry out, account for and follow up their business. The book presents activities such as innovation, product development, financing, investing, marketing, organizing, pricing, producing, costing, evaluating and accounting. How is this carried out by Atlas Copco Industrial Technique? Which are the possible alternatives? This perspective differs from other textbooks in the area, which usually start by describing the general models followed by presenting examples in relation to these. This book gives the reader the opportunity to follow a real company throughout different models and concepts, thus providing a more real-life understanding of the subject.

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