Companies go through different phases in their lifetime. Good times are followed by bad times, growth is followed by stagnation. Through their life cycle, companies sometimes need to be restructured, dramatically changing direction to return profitable operations.
In today’s business world companies must face the following tendencies that compel them to restructure continually:
- Globalization.
- Technological advancement/change.
- Changes in company ownership (mergers and acquisitions, management buy-outs, privatization).
- Replacement of the industrial society by the information society.
- Demographic changes.
- Growth of foreign direct investment.
The shift in the demands and expectations of society regarding the new role of business as dominant force is important. In general, business plays a much more important role in society today than ever before.
Company can be defined as a tie of contracts with shareholders, creditors, managers, employees, suppliers and other stakeholders.
Restructuring can be defined in many ways, including as:
Restructuring has also been found to be positively correlated to long term profitability, cost reduction and increase in the market share for the company.
- An (on-going) process through which a company radically changes these existing contractual relationships in a way to increase the value of all stakeholder demands.
- The act or process of changing the terms on the assets and/or liabilities of a company. That is, a company may consolidate its debts, significantly change the size and scope of its operations, and take other measures to reduce the pressure of continuing operation.
- Any substantial change (reorganization) in company’s capital(financial) and legal structure, ownership, management team, policies, programs, operations, business functions, business models, business processes, employees, control or business portfolio for the purpose of making it more profitable, or better organized for its present needs.
- Alternating or changing an organization in order to make it function more effectively and efficiently. This changes can involve adding, cutting, emerging functions of the organization.
- A thoughtful change in the way a company operates, involving changes in its strategy and structure.
- Conscious effort to transform (restructure) the whole structure of the company and the relationship between structures.
Structure can be defined as an organized unitary whole composed of two or more interdependent and interconnected components (dependent on each other). A company has many internal structures and structures connected with external participants.
Consequently, we can define six categories of structures:
Physical structure
(location, organization, working condition)
Technological structure
(equipment, processes)
Accounting structure
(balance of assets and resources)
Organizational structure
(the breakdown of responsibilities and duties, information and coordination system)
Human resources structure
(the characteristics of employees)
Mental structure
(the prevailing mentality in the company)
Companies must restructure almost on an ongoing basis to keep up with the change. Restructuring is often the company response to the wide ranging structural changes in the environment. To restructure an organization or system means to change the way it is organized, usually in order to make it work more effectively.
The survival and growth of companies in today’s environment depends on their ability to consolidate all their resources and put them to optimum use.
Restructuring is a difficult process, and requires a lot of time and effort to materialize. It is one of the most complex and fundamental development that management experiences. It is designed to address challenges and increase the value of the company. It is a value company tool to use in an attempt to maintain their goals and objectives, to attain greater efficiency or to adapt to new markets. It can be categorized as operational, financial and investment restructuring.
The different forms of restructuring may include expansion, contraction and organization control & changes in ownership.Very often, the purpose of restructuring is not only the financial and economic improvement of the company’s performance, but its very survival. In many cases, restructuring is the only solution. It usually takes place when a business is struggling and losing money. Most of the restructuring exercises are carried out with an impulsive reaction to the market variables or internal problems, without a serious attempt of looking at long term results. Most companies restructure either as part of a bankruptcy or as an effort to avoid it.
Restructuring can be divided into active and passive one. Restructuring processes are active when the owners/managers use various solution to eliminate causes of the crises, improve competitiveness and ensure long term growth and development of companies, or passive, when companies go through insolvency proceedings due to inadequate or late reaction by the owners/managers. This can led to replacement of the management/owners.
Reasons why you should consider restructuring are:
- To expand the business or operations by achieving faster growth.
- To carry on the business more economically or more efficiently.
- To focus on its core strength, development of core competencies.
- Increase the value of a company.
- Quality enhancement, rationalization and cost reduction.
- To obtain tax advantages.
- To implement innovation in technology.
- To improve the debt-equity ratio.
- To have a better market share.
- To overcome significant problems in a company.
- To facilitate horizontal and vertical integration.
- To become globally competitive.
- To eliminate (unnecessary) competition.
- Unloading unprofitable businesses.
- Responding to changing trends.
- Meeting regulatory change.
- Eliminate or balance the debt.
- To reduce dependency on others.
- Economic stability.
- Orderly redirection of the firm’s activities.
- Deploying surplus cash from one business to finance profitable growth in another.
- Risk reduction.
- Improving company image.
- Gaining access to management or technical talent.
- Achieving diversification with minimum cost.
- Exploiting interdependence among present or prospective businesses within the company portfolio.
- Downsizing or rightsizing.
- Decentralization or centralization.
- Flattening of the hierarchy.
- Change in strategy.
- Merger or acquisition.
- Adopting new product or service.
- Cultural change.
- Internal market re-alignment.
- Change of senior managers.
- Response to an internal or external crisis.
- Changed essence of business.
- New work or management
The following can be considered as primary spheres of a company restructuring:
- Financial (a financial and ownership company structure).
- Property (a property company structure).
- Production (it concerns both products and services, and used production facilities or technologies, but also an organization of a production process)
- Sales and purchases (oriented both on inputs and outputs)
- Organization (organization of a company structure defining function, roles and relation in business processes)
- Information (information systems)
- Human resources (number, structure and quality of employees)
Companies are restructuring as business strategy to achieve a higher level of performance, getting an edge over competitors or to survive when the given structure becomes dysfunctional thus to ensure their long-term viability.
Needs of restructuring
In spite of the reasons that lie at the cause of challenges you are facing, the following symptoms indicate that a situation exists where our competencies may be of useful to you:
- There is excessive debt or poor liquidity.
- You need to enter into discussions with your lenders.
- Capital structure needs to change.
- Change of ownership or ownership structure.
- Declining earnings and profitability.
- Loss of market share due to actions of competition.
- There is a downturn in your market or shifting consumer preferences.
- The company is trading at distressed levels.
- Company structure is no longer aligned with your business objectives.
- Units or subsidiaries are operating inconsistently with group strategy.
- There is a need, or desire, to divest/sell-off some non-core operations.
- Inability to retain talented professionals.
- Employee and client turnover is high.
- Morale is low.
- The industry is evolving.
- Old systems no longer work.
- Inefficiencies are rampant.
- Change in fiscal and government policies.
- Economic value of currency and foreign exchange rate implications.
- Stagnant or decreasing revenues.
- Too low gross margin.
- Too high operating costs.
- Poor cash flow.
- Over- or under-investment.
- Productivity/KPIs below market standards.
- High labor costs.
- Unclear roles & responsibilities.
- Insufficient internal communication.
- Lack of leadership.
- Inadequate design of processes.
- Marketing budgets allocated ineffectively.
- New consumer trends.
- Innovations that redefine the market.
Today, companies have to be consumer centric if they want to succeed. If consumer behaviors evolve, companies need to adjust their organisations to address these changes. A prominent feature of effectiveness today is satisfying customer needs.
To achieve success, vision and goals of restructuring should be clearly identified and communicated. During restructuring process we reduce complexity, focus on core activity, align structure to strategy, create feasible roles, engage employees, retain the right employees, maintain flexibility and shape future culture. We bind restructuring to organisation mission, values and strategy plan, set realistic timelines and communicate consistently and frequently. New organization structure should clearly facilitate the primary purpose of an organization.
Usual phases in any restructuring program are:
- Diagnostic Analyses the internal and external environment of the company.
- Planning /Design phase. Define appropriate type of restructuring for specific challenge, problem or opportunity that the company faces.
- Implementation/ Execution phase. Define how restructuring process should be managed and how to overcome the barriers to restructuring.
- Marketing phase. How should the restructuring be explained and interpreted to stakeholders.
Restructuring is more likely to be successful when owners/managers understand the fundamental business/strategic problem or opportunity that their company faces.
Strategy of restructuring
Restructuring starts with its very purpose. It begins with the analysing and redefining of the purpose of doing business. Once the purpose is adequately redefined, scope for restructuring is defined. Sometimes it also happens that realization of the scope for restructuring may bring you back to the purpose and you start rethinking about the purpose.
Results/benefit of restructuring
A company that has been restructured effectively will theoretically be leaner, more profitable, more controlled, more efficient, , more productive, better organized and better focused on its core business with a revised strategic and financial plan and a higher valuation of the company.
Bringing in our competent experts to help with your restructuring project will help to effectively achieve your business’ goals and outcomes with available resources.