A business, both as an organization and as an institution, is dynamic which requires revamping, with the passing time, to meet its needs, as well as the demands of customers it serves. Learn what is Organizational restructuring.
Moreover, in today’s era of globalization, when the tastes and preferences of the consumers change swiftly, there exists a need for making adjustments according to the requirements.
This is what organizational restructuring means, in simple words, that is going to be discussed, in greater detail in the coming sections.
What is organizational restructuring?
Organizational restructuring refers to the reforming of an organizational structure for a positive transformation. This revamping can be initiated by changing the ownership, legal framework, operational process, or any other structure within the organization.
Restructuring can be done for various innumerable reasons, which range from making a business profitable to expanding an existing profitable business, etc.
The process of organizational restructuring is not as elementary as its definition is. Therefore, it is essential to understand the process of organizational restructuring.
What is the process of organizational restructuring?
The process of organizational restructuring requires the following of some crucial steps of planning and execution.
- Planning
Before jumping to the decision of initiating a restructuring, it is important to plan all are the areas that need restructuring, etc. Planning, therefore, has some important parameters which need to be worked upon. These include:
- Emphasis on Quality
An organization needs to give more emphasis on quality over quantity both in terms of the products the company sells and the workforce required. For example, a business that hires three people for work at a higher salary would be better off than the one hiring ten people for the same work at a lower wage.
- Greater Flexibility
One of the keys to a successful business is the flexibility that the organization provides. This is in terms of forming teams and working on it as well as the freedom to present the ideas and strategies developed.
- Collaboration
It is the stage where an organization works on realizing the requirements of the audience targeted. Subsequently, the company then can collaborate externally (mergers or acquisitions, etc.) and internally (setting common goals by various teams working together) which helps in setting a proper planning process for restructuring.
- Execution
Once the decision on restructuring the organization has been made, the strategies and forms are to be carefully executed. The most crucial step is analyzing the effect of restructuring on the business and judging whether restructuring has served its purpose of betterment. If not, then there exists a need for revision and subsequent implementation.
What are the various strategies of organizational restructuring?
Following are the various strategies of organizational restructuring:
- Downsizing
Downsizing includes limiting the number of employees by laying off the ones which add less to the company’s value. Sometimes it may also include reducing the number of units working under the company whose work can easily be managed by the more efficient ones.
- Downscoping
It involves eliminating the businesses that are less important or not core to a company. This may include spin-off, disinvestment, etc. it helps the company on focusing on the business that fetches more profits in comparison to its other businesses.
- Leveraged Buyout (LBO)
A company becomes completely private after it buys all its assets. It enables a private equity company to prevent its shares from being traded publicly. It is one of the strategies of organizational restructuring which is often opted to maximize profits.
Why restructure? OR What are the reasons to opt for organizational restructuring?
There can be indeterminate reasons for organizational restructuring. However, some of them are discussed in greater detail below:
- Changing Needs with Changing Times
With the booming rise in the demand for goods and services, there has also been a rapid change in the tastes and preferences of the people. This has necessitated a business that is adaptive to the needs and demands of society. If a corporation doesn’t adjust to the changing environment, it will soon wither away.
For example, with the growing concerns for the environment, people are gradually shifting to electric vehicles (EVs). If the car manufacturing companies ignore its surging demand and do not introduce electric vehicles, a time will come that there will be no mark of their existence.
- Dynamic Nature of Operative Methods
It is evident that with time passing by, there has been a substitution of old operative methods with newer ones. These include the usage of computers and systems, telecommunication, technological up-gradation, etc. The widely practiced culture of Work from Home (WFH) that started as an impact of COVID-19 lockdown, is also a form of adopting the methods according to the changing needs.
Hence, the businesses must respond by following the changes time throw at them. These changes may initiate revamping that may lead to the formation of new units, etc.
- New Direction
Restructuring can also ascribe to giving business a new direction altogether. The attempt to give a new direction might be because of the poor performance and heavy losses incurred by the company or for changing the existing business with the trends of the market.
Therefore, it becomes inevitable to restructure the organization, keeping in mind the requirements of the time, that if, neglected can threaten its survival.
- Financial Distress
One of the main reasons for organizational restructuring comprises financial distress. When despite many efforts, a company is not able to extract profits to run the business further, or the costs are exceeding, many companies opt for organizational restructuring. It helps the company to analyze its shortcomings and then work to maximize its profits.
- Expansion
An owner of a business can expand it as much as he/she wants. However, this requires investment both in terms of efforts and money. Apart from this, restructuring play a crucial role in the expansion of a business. It has to be done, keeping in mind the changing needs of the consumers at different times. Further, restructuring is done, according to the owner or manager needs more attention. For example, a bigger workforce, a revision of products, etc.
- Management
There are many instances when a company has the potential and all the resources to grow. However, due to a lack of proper management and hierarchy, there is chaos, and the business is not able to grow suitably. Therefore, many companies reorganize to make the management efficient and effective.
- Buyouts
Every owner has its style of running and managing a business. A buyout is one of the significant reasons for restructuring an organization. Usually, the new owner prefers changing the organizational structure and practices according to needs and the style that person possesses. This helps the organization to start afresh with a new mindset and goal.
In such cases, there is usually a revamping of legal and organizational structures.
What are the various types or forms of organizational restructuring?
- Financial Restructuring
Financial restructuring involves reorganizing the finances of the company. This can be done through debt capital and equity capital. When one of them is changed according to the needs, the latter is automatically adjusted.
Debt restructuring is commonly used by companies, where the high-cost debt is replaced by low-cost borrowings to minimize the costs. Equity restructuring, on the other hand, involves capital reduction by jumbling the shareholders’ capital and reserves.
- Legal Restructuring
A restructuring that requires changes in the legal framework is called legal restructuring. It includes changes in the terms and conditions of the agreements, policies of the company, etc. It happens when there is a shift of responsibilities, specifically at the top of the hierarchy. Apart from this, legal revamping is usually undertaken when a company faces a significant problem or is on the verge of bankruptcy. This is done to turn the company around.
- Mergers and Acquisitions
Many surveys have shown that a company undergoes major reorganization when it is either merged or acquired by another company. When two or more parties come together to do a business, it is called a merger. On the other hand, acquisition happens when a company buys the other company or some of its stakes.
Mergers and acquisitions are effective in generating revenue, increasing reach to the target audience, and enhancing production capacity. The impact is more profound if the acquiring company is ambitious in the acquisition and wants to fetch greater profits.
- Repositioning
Repositioning is one of the most crucial types of restructuring. Repositioning, in simple, is changing the perceptions of the consumers of the products or goods offered. In simple words, it refers to changing what the consumers think of the product so that it can compete with other companies.
Repositioning is often undertaken when a company has a downward sloping trend of sales. It helps in boosting sales by making the consumers realize how the product is better than the one offered by its competitors.
- Cost Reduction
Huge losses mean that the business has been overspending, and there is a lack of proper monitoring of the funds. Such styles of operation can prove harmful with the passing time as it can drain all the company’s funds.
Therefore, reducing the costs becomes inevitable. It is done by firing off the unnecessary workers, reducing additional spending, and so on, which comprises major organizational restructuring.
- Disinvestment
Disinvestment is another type or form of organizational revamping where the company sells its unit that is not producing any profits or fulfilling a strategic purpose for which it was started. It is usually done to lay off a company, which requires funds to operate but does not fetch returns.
- Spin-offs
There are many instances when a company is not willing to sell its unit for the mere reason that it is not fetching profits. Therefore, the company gives that unit a standalone position, which means that it is made a company in itself, and the parent company retains its ownership. It is called a spin-off which is one of the types of organizational reorganization.
More often, it is undertaken to get a higher valuation of a part of the company with less involvement in its functioning and retaining its ownership.
What are the benefits of organizational restructuring?
Organizational restructuring is a tool that if used appropriately, can prove to be extremely beneficial. Some of the benefits of organizational restructuring are:
- Increase in Profits
Organizational restructuring is majorly used by companies that are suffering from losses. It helps them to identify the problem and the target to make the business profitable.
- Greater Efficiency
Downsizing involves laying off the units and employees which are less profitable. It means only those employees stay productive and contribute to the company making the company efficient as a whole.
- Enhanced Reach
It is often seen that the companies, despite being competent, are unable to grow. This gap can easily be bridged by mergers, acquisitions, spin-offs, etc. that plays an essential role in increasing the reach to the target audience.
- A rise in Productive Capacity
Proper management and efforts can fetch both an increase in overall production and productivity per worker or employee. It can, in turn, produce greater revenue and profits contributing to the success of the business
Conclusion
It is rightly said that change is the only constant, specifically when it comes to business. It is, therefore, necessary to respond to the needs of the changing times. It can be in the form of restructuring or reforming the current practices and procedures of running a business. Organizational restructuring simply is analyzing and managing the shortcomings of a business by bringing in some changes in the structure and arrangement of a business. Though it is a time taking process and may also be exhaustive, it can prove to be extremely beneficial if used the right way to hit the right target. It can help a business to grow by leaps and bounds by increasing profits, enhancing reach, eliminating unprofitable practices, and prescribing better management techniques.
In the end, it can easily be concluded that organizational restructuring is an effective tool to transform a business. It not only helps in reducing losses but is also a crucial key for a company that looks for ambitious expansion and growth.
