RESTRUCTURING:Characteristics, Results, Reengineering

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Strategic Management MGT603

Lesson 34

RESTRUCTURING

Learning Objectives

This chapter enables you the concept of Restructuring, Reengineering and the difference between them.

This chapter also includes merits and demerits of these topics. After understanding this chapter you also

understand various pay strategies and also how to manage environment.

Restructuring

Restructuring is the corporate management term for the act of partially dismantling and reorganizing a

company for the purpose of making it more efficient and therefore more profitable. It generally involves

selling off portions of the company and making severe staff reductions.

Restructuring is often done as part of a bankruptcy or of a takeover by another firm, particularly a

leveraged buyout by a private equity firm such as KKR. 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.

Characteristics

The selling of portions of the company, such as a division that is no longer profitable or which has

distracted management from its core business, can greatly improve the company's balance sheet. Staff

reductions are often accomplished partly through the selling or closing of unprofitable portions of the

company and partly by consolidating or outsourcing parts of the company that perform redundant

functions (such as payroll, human resources, and training) left over from old acquisitions that were never

fully integrated into the parent organization.

Other characteristics of restructuring can include:

· Changes in corporate management (usually with golden parachutes)

· 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

Results

A company that has been restructured effectively will generally be leaner, more efficient, better organized,

and better focused on its core business. If the restructured company was a leverage acquisition, the parent

company will likely resell it at a profit when the restructuring has proven successful.

Firms often employ restructuring when various ratios appear out of line with competitors as determined

through benchmarking exercises. Benchmarking simply involves comparing a firm against the best firms in

the industry on a wide variety of performance-related criteria. Some benchmarking ratios commonly used

in rationalizing the need for restructuring are headcount-to-sales-volume, or corporate-staff-to-operating-

employees, or span-of-control figures.

The primary benefit sought from restructuring is cost reduction. For some highly bureaucratic firms,

restructuring can actually rescue the firm from global competition and demise. But the downside of

restructuring can be reduced employee commitment, creativity, and innovation that accompany the

uncertainty and trauma associated with pending and actual employee layoffs.

Another downside of restructuring is that many people today do not aspire to become managers, and

many present-day managers are trying to get off the management track. Sentiment against joining

management ranks is higher today than ever. About 80 percent of employees say they want nothing to do

with management, a major shift from just a decade ago when 60 to 70 percent hoped to become managers.

Managing others historically led to enhanced career mobility, financial rewards, and executive perks; but in

today's global, more competitive, restructured arena, managerial jobs demand more hours and headaches

with fewer financial rewards. Managers today manage more people spread over different locations, travel

more, manage diverse functions, and are change agents even when they have nothing to do with the

creation of the plan or even disagree with its approach. Employers today are looking for people who can

do things, not for people who make other people do things. Restructuring in many firms has made a

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manager's job an invisible, thankless role. More workers today are self-managed, entrepreneurs,

entrepreneurs, or team managed. Managers today need to be counselors, motivators, financial advisors,

and psychologists. They also run the risk of becoming technologically behind in their areas of expertise.

"Dilbert" cartoons commonly portray managers as enemies or as morons.

Reengineering

Reengineering (or re-engineering) is the radical redesign of an organization's processes, especially its

business processes. Rather than organizing a firm into functional specialties (like production, accounting,

marketing, etc.) and looking at the tasks that each function performs, we should, according to the

reengineering theory, be looking at complete processes from materials acquisition, to production, to

marketing and distribution. The firm should be re-engineered into a series of processes.

The main proponents of re-engineering were Michael Hammer and James Champy. In a series of books

including Reengineering the Corporation, Reengineering Management, and The Agenda, they argue that

far too much time is wasted passing-on tasks from one department to another. They claim that it is far

more efficient to appoint a team who are responsible for all the tasks in the process. In The Agenda they

extend the argument to include suppliers, distributors, and other business partners.

Re-engineering is the basis for many recent developments in management. The cross-functional team, for

example, has become popular because of the desire to re-engineer separate functional tasks into complete

cross-functional processes. Also, many recent management information systems developments aim to

integrate a wide number of business functions. Enterprise resource planning, supply chain management,

knowledge management systems, groupware and collaborative systems, Human Resource Management

Systems and customer relationship management systems all owe a debt to re-engineering theory.

Criticisms of re-engineering

Reengineering has earned a bad reputation because such projects have often resulted in massive layoffs.

This reputation is not all together warranted. Companies have often downsized under the banner of

reengineering.

Further, reengineering has not always lived up to its expectations. The main reasons seem to be that:

· Reengineering assumes that the factor that limits organization's performance is the ineffectiveness

of its processes (which may or may not be true) and offers no means of validating that assumption

· Reengineering assumes the need to start the process of performance improvement with a "clean

slate", i.e. totally disregard the status quo

· According to Eliyahu M. Goldratt (and his theory of constraints) reengineering does not provide an

effective way to focus improvement efforts on the organization's constraint.

There was considerable hype surrounding the book's introduction (partially due to the fact that the authors

of Reengineering the Corporation reportedly bought numbers of copies to promote it to the top of bestseller

lists).

Abrahamson (1996) showed that fashionable management terms tend to follow a lifecycle, which for

Reengineering peaked between 1993 and 1996 (Ponzi and Koenig 2002). While arguing that Reengineering

was in fact nothing new (as e.g. when Henry Ford implemented the assembly line in 1908, he was in fact

reengineering, radically changing the way of thinking in an organization), Dubois (2002) highlights the

value of signaling terms as Reengineering, giving it a name, and stimulating it. At the same there can be a

danger in usage of such fashionable concepts as mere ammunition to implement particular reforms.

The argument for a firm engaging in reengineering usually goes as follows: Many companies historically

have been organized vertically by business function. This arrangement has led over time to managers' and

employees' mind-sets being defined by their particular functions rather than by overall customer service,

product quality, or corporate performance. The logic is that all firms tend to bureaucratize over time. As

routines become entrenched, turf becomes delineated and defended, and politics takes precedence over

performance. Walls that exist in the physical workplace can be reflections of "mental" walls.

In reengineering, a firm uses information technology to break down functional barriers and create a work

system based on business processes, products, or outputs rather than on functions or inputs. Cornerstones

of reengineering are decentralization, reciprocal interdependence, and information sharing. A firm that

exemplifies complete information sharing is Springfield Remanufacturing Corporation, which provides to

all employees a weekly income statement of the firm, as well as extensive information on other companies'

performances.

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A benefit of reengineering is that it offers employees the opportunity to see more clearly how their

particular jobs impact the final product or service being marketed by the firm. However, reengineering

also can raise manager and employee anxiety that, unless calmed, can lead to corporate trauma.

Linking Performance and Pay to Strategies

Most companies today are practicing some form of pay-for-performance for employees and managers

other than top executives. The average employee performance bonus is 6.8 percent of pay for individual

performance, 5.5 percent of pay for group productivity, and 6.4 percent of pay for companywide

profitability.

Staff control of pay systems often prevents line managers from using financial compensation as a strategic

tool. Flexibility regarding managerial and employee compensation is needed to allow short-term shifts in

compensation that can stimulate efforts to achieve long-term objectives. NBC recently unveiled a new

method for paying its affiliated stations. The compensation formula is 50 percent based on audience

viewing of shows from 4 p.m. to 8 p.m. and 50 percent based on how many adults aged 25 to 54 watch

NBC over the course of a day.

How can an organization's reward system be more closely linked to strategic performance? How can

decisions on salary increases, promotions, merit pay, and bonuses be more closely aligned to support the

long-term strategic objectives of the organization? There are no widely accepted answers to these

questions, but a dual bonus system based on both annual objectives and long-term objectives is becoming

common. The percentage of a manager's annual bonus attributable to short-term versus long-term results

should vary by hierarchical level in the organization. A chief executive officer's annual bonus could, for

example, be determined on a 75 percent short-term and 25 percent long-term basis. It is important that

bonuses not be based solely on short-term results because such a system ignores long-term company

strategies and objectives.

DuPont Canada has a 16 percent return-on-equity objective. If this objective is met, the company's four

thousand employees receive a "performance sharing cash award" equal to 4 percent of pay. If return-on-

equity falls below 11 percent, employees get nothing. If return-on-equity exceeds 28 percent, workers

receive a 10 percent bonus.

In an effort to cut costs and increase productivity, more and more Japanese companies are switching from

seniority-based pay to performance-based approaches. Toyota Motor switched in mid-1999 to a full merit

system for twenty thousand of its seventy thousand white-collar workers. Fujitsu, Sony, Matsushita

Electric Industrial, and Kao also have switched to merit pay systems. Nearly 30 percent of all Japanese

companies have switched to merit pay from seniority pay. This switching is hurting morale at some

Japanese companies that have trained workers for decades to cooperate rather than to compete and to

work in groups rather than individually.

Profit sharing is another widely used form of incentive compensation. More than 30 percent of American

companies have profit-sharing plans, but critics emphasize that too many factors affect profits for this to

be a good criterion. Taxes, pricing, or an acquisition would wipe out profits, for example. Also, firms try to

minimize profits in a sense to reduce taxes.

Still another criterion widely used to link performance and pay to strategies is gain sharing. Gain sharing

requires employees or departments to establish performance targets; if actual results exceed objectives, all

members get bonuses. More than 26 percent of American companies use some form of gain sharing;

about 75 percent of gain-sharing plans have been adopted since 1980. Carrier, a subsidiary of United

Technologies, has had excellent success with gain sharing in its six plants in Syracuse, New York;

Firestone's tire plant in Wilson, North Carolina, has experienced similar success with gain sharing.

Criteria such as sales, profit, production efficiency, quality, and safety could also serve as bases for an

effective bonus system. If an organization meets certain understood, agreed-upon profit objectives, every

member of the enterprise should share in the harvest. A bonus system can be an effective tool for

motivating individuals to support strategy-implementation efforts. BankAmerica, for example, recently

overhauled its incentive system to link pay to sales of the bank's most profitable products and services.

Branch managers receive a base salary plus a bonus based on the number of new customers and on sales

of bank products. Every employee in each branch is also eligible for a bonus if the branch exceeds its

goals. Thomas Peterson, a top BankAmerica executive, says, "We want to make people responsible for

meeting their goals, so we pay incentives on sales, not on controlling costs or on being sure the parking lot

is swept."

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Managing Resistance to Change

No organization or individual can escape change. But the thought of change raises anxieties because

people fear economic loss, inconvenience, uncertainty, and a break in normal social patterns. Almost any

change in structure, technology, people, or strategies has the potential to disrupt comfortable interaction

patterns. For this reason, people resist change. The strategic-management process itself can impose major

changes on individuals and processes. Reorienting an organization to get people to think and act

strategically is not an easy task.

Resistance to change can be considered the single greatest threat to successful strategy implementation.

Resistance in the form of sabotaging production machines, absenteeism, filing unfounded grievances, and

an unwillingness to cooperate regularly occurs in organizations. People often resist strategy

implementation because they do not understand what is happening or why changes are taking place. In

that case, employees may simply need accurate information. Successful strategy implementation hinges

upon managers' ability to develop an organizational climate conducive to change. Change must be viewed

as an opportunity rather than as a threat by managers and employees.

Resistance to change can emerge at any stage or level of the strategy-implementation process. Although

there are various approaches for implementing changes, three commonly used strategies are a force change

strategy, an educative change strategy, and a rational or self-interest change strategy. A force change strategy

involves giving orders and enforcing those orders; this strategy has the advantage of being fast, but it is

plagued by low commitment and high resistance. The educative change strategy is one that presents

information to convince people of the need for change; the disadvantage of an educative change strategy is

that implementation becomes slow and difficult. However, this type of strategy evokes greater

commitment and less resistance than does the force strategy. Finally, a rational or self-interest change strategy is

one that attempts to convince individuals that the change is to their personal advantage. When this appeal

is successful, strategy implementation can be relatively easy. However, implementation changes are seldom

to everyone's advantage.

Managing the Natural Environment

The natural environment comprises all living and non-living things that occur naturally on Earth. In its

purest sense, it is thus an environment that is not the result of human activity or intervention. The natural

environment may be contrasted to "the built environment."

All business functions are affected by natural environment considerations or striving to make a profit.

However, both employees and consumers are especially resentful of firms that take from more than they

give to the natural environment; likewise, people today are especially appreciative of firms that conduct

operations in a way that mends rather than harms the environment.

The ecological challenge facing all organizations requires managers to formulate strategies that preserve

and conserve natural resources and control pollution. Special natural environmental issues include ozone

depletion, global warming, depletion of rain forests, destruction of animal habitats, protecting endangered

species, developing biodegradable products and packages, waste management, clean air, clean water,

erosion, destruction of natural resources, and pollution control. Firms increasingly are developing green

product lines that are biodegradable and/or are made from recycled products. Green products sell well.

Managing as if the earth matters require an understanding of how international trade, competitiveness, and

global resources are connected. Managing environmental affairs can no longer be simply a technical

function performed by specialists in a firm; more emphasis must be placed on developing an

environmental perspective among all employees and managers of the firm. Many companies are moving

environmental affairs from the staff side of the organization to the line side, to make the corporate

environmental group report directly to the chief operating officer.

Societies have been plagued by environmental disasters to such an extent recently that firms failing to

recognize the importance of environmental issues and challenges could suffer severe consequences.

Managing environmental affairs can no longer be an incidental or secondary function of company

operations. Product design, manufacturing, and ultimate disposal should not merely reflect environmental

considerations, but be driven by them. Firms that manage environmental affairs will enhance relations

with consumers, regulators, vendors, and other industry players--substantially improving their prospects

of success.

Firms should formulate and implement strategies from an environmental perspective. Environmental

strategies could include developing or acquiring green businesses, divesting or altering environment-

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damaging businesses, striving to become a low-cost producer through waste minimization and energy

conservation, and pursuing a differentiation strategy through green product features. In addition to

creating strategies, firms could include an environmental representative on the board of directors, conduct

regular environmental audits, implement bonuses for favorable environmental results, become involved in

environmental issues and programs, incorporate environmental values in mission statements, establish

environmentally oriented objectives, acquire environmental skills, and provide environmental training

programs for company employees and managers.

Creating a Strategy-Supportive Culture

Strategists should strive to preserve, emphasize, and build upon aspects of an existing culture that support

proposed new strategies. Aspects of an existing culture that are antagonistic to a proposed strategy should

be identified and changed. Substantial research indicates that new strategies are often market-driven and

dictated by competitive forces. For this reason, changing a firm's culture to fit a new strategy is usually

more effective than changing a strategy to fit an existing culture. Numerous techniques are available to

alter an organization's culture, including recruitment, training, transfer and promotion, restructure of an

organization's design, role modeling, and positive reinforcement.

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