Corporate Restructuring in Modern Business

Corporate Restructuring

Corporate Restructuring is the corporate management term for the act of reorganizing the legal, ownership, operational, or other structures of a company for the purpose of making it more profitable, or better organized for its present needs. Alternate reasons for restructuring include a change of ownership or ownership structure, demerger, or a response to a crisis such as positioning the company to be more competitive, survive a currently adverse economic climate, or poise the corporation to move in an entirely new direction or major change in the business such as bankruptcy, repositioning, or buyout.

Restructuring may also be described as debt restructuring and financial restructuring. Financial restructuring It may take place in response to a drop in sales, due to a sluggish economy or temporary concerns about the economy in general.

Actions to be taken

• When this happens, the corporation may need to reorder finances as a means of keeping the company operational through this rough time.
• Costs may be cut by combining divisions or departments, reassigning responsibilities and eliminating personnel, or scaling back production at various facilities owned by the company.
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• With this type of corporate restructuring, the focus is on survival in a difficult market rather than on expanding the company to meet growing consumer demand.

People who do restructuring

Executives involved in restructuring often hire financial and legal advisors to assist in the transaction details and negotiation. It may also be done by a new CEO hired specifically to make the difficult and controversial decisions required to save or reposition the company.

It generally involves financing debt, selling portions of the company to investors, and reorganizing or reducing operations.

Reasons for restructuring

Restructuring a corporate entity is often a necessity when the company has grown to the point that the original structure can no longer efficiently manage the output and general interests of the company. For example, a corporate restructuring may call for spinning off some departments into subsidiaries as a means of creating a more effective management model as well as taking advantage of tax breaks that would allow the corporation to divert more revenue to the production process. In this scenario, the restructuring is seen as a positive sign of growth of the company and is often welcome by those who wish to see the corporation gain a larger market share. Corporate restructuring may take place as a result of the acquisition of the company by new owners. The acquisition may be in the form of a leveraged buyout, a hostile takeover, or a merger of some type that keeps the company intact as a subsidiary of the controlling corporation. When the restructuring is due to a hostile takeover, corporate raiders often implement a dismantling of the company, selling off properties and other assets in order to make a profit from the buyout. What remains after this restructuring may be a smaller entity that can continue to function, albeit not at the level possible before the takeover took place. Steps:

• ensure the company has enough liquidity to operate during implementation of a complete restructuring
• produce accurate working capital forecasts
• provide open and clear lines of communication with creditors who mostly control the company's ability to raise financing
• update detailed business plan and considerations

Characteristics

• Cash management and cash generation during crisis Retention of corporate management sometimes "stay bonus" payments
• Sale of underutilized assets, such as patents or brands
• Outsourcing of operations such as payroll and technical support to a more efficient third party
•  Moving of operations such as manufacturing to lower-cost locations
• Reorganization of functions such as sales, marketing, and distribution
• Renegotiation of labor contracts to reduce overhead
• Refinancing of corporate debt to reduce interest payments
• A major public relations campaign to reposition the company with consumers.

A company that has been restructured effectively will theoretically be leaner, more efficient, better organized, and better focused on its core business with a revised strategic and financial plan. If the restructured company was a leverage acquisition, the parent company will likely resell it at a profit if the restructuring has proven successful. Horizontal organization Horizontal organization (also known as Flat organization) refers to an organizational structure with few or no levels of intervening management between staff and managers.

The idea is that well-trained workers will be more productive when they are more directly involved in the decision making process, rather than closely supervised by many layers of management. This structure is generally possible only in smaller organizations or individual units within larger organizations. When they reach a critical size, organizations can retain a streamlined structure but cannot keep a completely flat manager-to-staff relationship without impacting productivity. Certain financial responsibilities may also require a more conventional structure.

Some theorize that flat organizations become more traditionally hierarchical when they begin to be geared towards productivity. The flat organization model promotes employee involvement through a decentralized decision making process. By elevating the level of responsibility of baseline employees, and by eliminating layers of middle management, comments and feedback reach all personnel involved in decisions more quickly. Expected response to customer feedback can thus become more rapid.

Since the interaction between workers is more frequent, this organizational structure generally depends upon a much more personal relationship between workers and managers. Hence the structure can be more time-consuming to build than a traditional bureaucratic/hierarchical model.

Fundamental Principles of the Horizontal Organization

The twelve fundamental guiding principles for creating horizontal organizations according to Ostroff are the following: The first five principles concern the design of the organization:

1. Organize around cross-functional core processes.
2. Install process owners
3. Make teams, not individuals, the cornerstone of organizational design and performance.
4. Integrate with customers and suppliers.
5. Decrease hierarchy by eliminating non-value-added work and by giving team members the authority to make decisions. The next seven principles concern the institutionalization of the change:
6. Build a corporate culture of openness, cooperation, and collaboration, a culture that focuses on continuous performance improvement and values employee empowerment, responsibility, and well-being.
7. Empower people by giving them the tools, skills, motivation and authority they need.
8. Use information technology to help people reach performance objectives and deliver the value proposition to the customer.
9. Measure for end-of-process performance objectives as well as customer satisfaction, employee satisfaction, and financial contribution.
10. Redesign functional departments or areas to work as partners in process performance with core process groups.
11. Emphasize multiple competencies and train people to handle issues and work productively in cross-functional areas.
12. Promote multi-skilling, the ability to think creatively and respond flexibly to challenges that arise in the work that teams do.

Diversification

Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification is part of the four main marketing strategies defined by the Product/Market Ansoff matrix: [pic] Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities.

The different types of diversification strategies The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. Generally, the final strategy involves a combination of these options. This combination is determined in function of available opportunities and consistency with the objectives and the resources of the company. There are next types of diversification:

Concentric diversification

This means that there is a technological similarity between the industries, which means that the firm is able to leverage its technical know-how to gain some advantage. For example, a company that manufactures industrial adhesives might decide to diversify into adhesives to be sold via retailers. The technology would be the same but the marketing effort would need to change. It also seems to increase its market share to launch a new product which helps the particular company to earn profit. However, there's one more example, Addition of tomato ketchup and sauce to the existing "Maggi" brand processed items of Food Specialities Ltd. s an example of technological-related concentric diversification.

Conglomerate diversification (or lateral diversification)

The company markets new products or services that have no technological or commercial synergies with current products, but which may appeal to new groups of customers. The conglomerate diversification has very little relationship with the firm's current business. Therefore, the main reasons of adopting such a strategy are first to improve the profitability and the flexibility of the company, and second to get a better reception in capital markets as the company gets bigger. Even if this strategy is very risky, it could also, if successful, provide increased growth and profitability.

Rationale of diversification

According to Calori and Harvatopoulos (1988), there are two dimensions of rationale for diversification. The first one relates to the nature of the strategic objective: diversification may be defensive or offensive. Defensive reasons may be spreading the risk of market contraction, or being forced to diversify when current product or current market orientation seems o provide no further opportunities for growth. Offensive reasons may be conquering new positions, taking opportunities that promise greater profitability than expansion opportunities, or using retained cash that exceeds total expansion needs. The second dimension involves the expected outcomes of diversification: management may expect great economic value (growth, profitability) or first and foremost great coherence and complementary to their current activities (exploitation of know-how, more efficient use of available resources and capacities).

In addition, companies may also explore diversification just to get a valuable comparison between this strategy and expansion. Risks Diversification is the riskiest of the four strategies presented in the Ansoff matrix and requires the most careful investigation. Going into an unknown market with an unfamiliar product offering means a lack of experience in the new skills and techniques required. Therefore, the company puts itself in a great uncertainty.

Moreover, diversification might necessitate significant expanding of human and financial resources, which may detracts focus, commitment and sustained investments in the core industries. Therefore a firm should choose this option only when the current product or current market orientation does not offer further opportunities for growth. In order to measure the chances of success, different tests can be done:

1. The attractiveness test: the industry that has been chosen has to be either attractive or capable of being made attractive.
2. The cost-of-entry test: the cost of entry must not capitalize all future profits. The better-off test: the new unit must either gain competitive advantage from its link with the corporation or vice versa.

Because of the high risks explained above, many companies attempting to diversify have led to failure. However, there are a few good examples of successful diversification:

• Virgin Media moved from music producing to travels and mobile phones
• Walt Disney moved from producing animated movies to theme parks and vacation properties
• Canon diversified from a camera-making company into producing an entirely new range of office equipment.