Why Do Companies Restructure? Common Catalysts

Has your business grown stagnant and inefficient? Have market disruptions or new competitors threatened your dominance? Has performance declined to alarming levels? If the answer is yes, it may be time to consider restructuring your company.

Restructuring is an often complex yet potentially rewarding undertaking. According to a McKinsey survey, 70% of corporate restructurings boost profitability. But hasty restructuring can also backfire – Kodak’s ill-fated organizational overhaul in the 1990s accelerated its decline. So how do you approach restructuring strategically?

As a business leader, having a solid grasp of why companies restructure is the critical first step. The most impactful organizational transformations are driven by a clear understanding of fundamental catalysts. In this article, we will explore the top 5 reasons companies opt to restructure, providing actionable insights to inform your strategy.

What is the Restructuring of a Company?

Restructuring of a company refers to making significant changes to the organizational structure, operations, ownership or finances of a business. Some key things to know about corporate restructuring:

• It involves fundamentally reorganizing a company’s strategic direction, business model, resources, and operations.
• Restructuring is usually driven by major catalysts like poor financial performance, the need for efficiencies, a new leadership strategy, or changing market dynamics.
• Typical activities include consolidating departments, divesting businesses/assets, closing locations, laying off workers, bringing in new leadership, merging with other companies, filing for bankruptcy protection, etc.
• The goals are typically to cut costs, improve profitability, drive growth through focus, survive competitive/industry changes, or reverse declining performance.
• It may be facilitated through tools like mergers, acquisitions, divestitures, spin-offs, equity restructuring, cost reduction programs, and operational redesign.
• Restructuring can be risky and disruptive, so thorough planning is required for successful execution. But used strategically, it can turnaround struggling companies.
• It impacts organizational culture, employee morale, business processes, and budgets. Managing the human impact is an important part of the process.
• Legal, financial and operational advisors are usually engaged to assist with strategic analysis, compliance, transition planning and implementation.

In summary, restructuring essentially involves redesigning a company’s building blocks to make it more efficient, competitive and profitable. It aims to unlock value by aligning the business to strategic objectives.

What are the most common reasons for restructuring a company?

Reason 1: Improving Efficiency and Streamlining Operations

One of the most common catalysts for company restructuring is the desire to improve efficiency and streamline operations. As a business leader, you may find that your company has become bloated or bogged down by redundant processes and roles that slow productivity and drive up costs. Restructuring presents an opportunity to streamline the organizational structure to reduce expenses and operate more efficiently.

For example, you may choose to consolidate business units that perform overlapping functions, such as HR, finance, marketing and IT. Rather than having separate departments handle these activities, combining them under shared leadership and strategic direction can eliminate duplicated efforts. This streamlining allows you to improve workflow, optimize headcount, and funnel savings to more productive areas.

Restructuring also enables you to outsource non-core business functions to external vendors and service providers. While functions like manufacturing or R&D may be central to your competitive advantage, supporting services like payroll or facilities management could divert focus and resources. Outsourcing these functions allows your team to concentrate on core activities while leaving non-essential tasks to experts.

Adopting new technologies like automation, cloud computing and data analytics can also drive improved efficiency through restructuring. Assessing processes that can be automated or enhanced by technology, and reorienting workflows accordingly, allows you to reduce manual tasks and work faster. Restructuring roles to leverage new technologies is key to unlocking their benefits.

By realigning your organizational structure and operations around efficiency, streamlining and cost reduction, restructuring sets you up to improve productivity, speed up decision-making, and better serve customers. Eliminating redundancies can free up resources to be redirected to more strategic goals. With nimble and efficient operations, your company gains an advantageous cost structure and competitive edge.

Reason 2: Refocusing the Business Strategy

Another major catalyst for corporate restructuring is the desire to refocus the business strategy and realign operations around core competencies. As business environments evolve, companies may find that their current structure has diversified into non-essential areas or stagnant business lines. Restructuring enables refocusing the strategy on high-growth opportunities.

For instance, you may decide to divest assets in declining legacy markets to free up capital for acquiring fast-growing new businesses. Selling off mature business units or product lines allows you to direct investments into emerging spaces aligned with your strategic vision. This reorientation of the business mix requires restructuring to smooth the transition.

Alternatively, you could choose to spin off non-core divisions into separate entities. Business units unrelated to your core competencies can often perform better as stand-alone companies. By spinning them off, you can focus on strengthening your main competitive advantage rather than getting spread thin across too many functions. The streamlined structure helps sharpen the strategic focus.

Restructuring also creates opportunities to develop new capabilities essential for future growth. You may reorganize departments in order to divert resources towards building skills in emerging technologies, new product categories, digital transformation, or data analytics. The right structure unlocks growth potential.

Making bold refocusing moves like divestments, spin-offs, acquisitions and capability development requires restructuring to ensure smooth execution. With the right organizational blueprint tailored to strategic goals, you can transition the business mix and unlock tremendous value.

Reason 3: Responding to Market Changes

Restructuring often becomes necessary when companies need to respond to major market changes outside of their control. Evolving customer preferences, new competitors, technological disruption or regulatory shifts can compel organizations to rethink their operational structure. A proactive restructuring helps realign the business to the new market reality.

For example, the emergence of e-commerce required many brick-and-mortar retailers to rapidly develop online sales channels and reconfigure their supply chains to enable direct-to-consumer delivery capabilities. Restructuring enabled shifting resources and priorities towards digital transformation and omnichannel strategies.

In some industries, changing regulations or policies like revised capital requirements, compliance standards or trade rules may dictate the need for reorganization. Restructuring helps streamline operations to adhere to new regulations and adjust business models accordingly.

When an industry faces consolidation due to mergers and acquisitions among major competitors, restructuring may be required to remain competitive. Increased scale among peers pressures smaller players to evaluate combining business units or assets to create stronger entities.

Likewise, disruptive technologies can rapidly change value chains and force companies to restructure to stay relevant. The emergence of digital photography redefined the imaging industry. Restructuring enabled incumbents to orient strategies around new capabilities.

By reorganizing the business to address evolving market forces, you can build a resilient corporate structure aligned to customer needs and competitive dynamics. Planning scenario analyses and stress tests help identify required restructuring moves proactively.

Reason 4: Mergers and Acquisitions

Mergers and acquisitions (M&A) almost always require corporate restructuring to integrate the combining companies. Restructuring is key to realizing synergies and effectively coordinating operations post-deal.

The top priority is integrating cultures and mindsets by redefining the organizational structure and leadership. This may involve selecting executives from both legacy companies to head merged departments. Defining new roles and reporting lines helps unite teams.

Next, operational integration involves consolidating business units, systems and processes. For example, combining production facilities, co-locating teams and consolidating IT infrastructure optimizes operations. Standardizing processes builds unity.

Reducing duplicated roles and responsibilities is also crucial. Restructuring to streamline functions like marketing, finance and HR avoids redundancy and confusion. However, some duplication may be retained temporarily during the transition.

Rationalizing brands, products and services enables focusing on the strongest offerings. Restructuring brings tough decisions on which brands to retain and which products to double down on based on strategic fit.

Reason 5: Turning Around Poor Performance

When companies face sustained poor financial performance, revenue declines or market share losses, restructuring often becomes imperative to execute a turnaround. Bold organizational reconfiguration can revive struggling businesses.

Restructuring may involve replacing top leadership with turnaround specialists able to make tough revival decisions. New executives with an objective outlook can identify issues and reorientation needed.

Struggling business units are often targeted for closure or divestment through restructuring aimed at stemming losses. Although downsizing is painful, exiting high-cost, low-profit areas can improve the bottom line.

Restructuring also enables cost-reduction measures like layoffs, location closures and asset write-offs. While difficult, eliminating expenses through organizational redesign is sometimes essential for profitability.

At the same time, restructuring helps channel resources toward high-potential areas by realigning budgets, talent and operations towards segments with best growth prospects.

A successful turnaround may take shape over months and quarters. However, the organizational changes and strategic clarity provided by restructuring lay the foundation for eventual recovery. With a reinforced competitive advantage and lower cost structure, the company can bounce back.

Conclusion

Restructuring a complex organization is far from easy. But during times of disruption, stagnation or decline, it may be the bold action your company needs to gain a competitive edge. With diligent assessment of the catalysts driving change – from inefficiency to M&A integration – you can craft a transformation plan tailored to your strategic goals.

While restructuring initiatives carry risks, the rewards can be game-changing if executed skillfully. With buy-in across leadership and effective change management, your company can become leaner, more focused and better positioned to create value. As markets and business models continue evolving rapidly, corporate agility unlocked by smart restructuring may well emerge as a key determinant of success.