5 Reasons Why Companies Restructure Their Business

Is your business stuck and not growing? Are market changes or new competitors challenging your position? Has your performance dropped significantly?  If yes, it might be time to consider restructuring your company.

Restructuring can be a challenging but rewarding process. A McKinsey survey shows that 70% of corporate restructurings improve profitability. However, rushing the process can lead to failure, as seen with Kodak’s poorly planned changes in the 1990s, which sped up its downfall. To succeed, restructuring requires a well-thought-out and strategic approach.

As a business leader, it’s important to understand why companies decide to restructure. Knowing the main reasons behind these changes is the first step to making meaningful improvements. In this article, we’ll explore the top 5 reasons companies go through restructuring and share practical tips to help shape your strategy.

What is Company Restructuring?

Company restructuring refers to making significant changes to how a business is organized, runs, ownership, or finances of a business. Here are the key points to understand about corporate restructuring:

• It involves significant changes to a company’s strategy, business model, resources, and operations to achieve new goals or adapt to changing circumstances.
• Restructuring is typically driven by key factors such as poor financial results, the need to improve efficiency, a change in leadership strategy, or changing market dynamics.
• Typical activities include combining departments, selling off businesses or assets, closing offices or locations, reducing staff, hiring new leadership, merging with other companies, filing for bankruptcy protection, etc.
• The goals are usually to reduce costs, increase profits, drive growth by staying focused, adapt to industry changes, or improve performance when it’s declining.
• This can be achieved through strategies such as mergers, acquisitions, divestitures, spin-offs, restructuring of equity, cost-cutting initiatives, and improvements in operations.
• Company Restructuring can be risky and disruptive, so careful planning is essential for successful implementation. However, when done strategically, it can help turn around struggling companies.
• It affects the organization’s culture, employee morale, business processes, and budget. Managing the impact on people is an important part of the process.
• Legal, financial, and operational advisors are typically hired to help with strategic planning, ensuring compliance, and guiding through the transition and implementation process.

In summary, company/corporate 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 Company Restructuring?

Reason 1: Improving Efficiency and Streamlining Operations

One of the most common reasons for company restructuring is the desire to improve efficiency and simplify operations. As a business leader, you may notice that your company has become weighed down by unnecessary processes and roles, which slow down productivity and increase costs. Corporate Restructuring provides an opportunity to simplify the organizational structure, reduce expenses, and improve efficiency.

For example, You can consider merging business units that perform similar functions, such as HR, finance, marketing, and IT. Instead of having separate departments manage these tasks, bringing them together under unified leadership and strategy can reduce duplication. This streamlining helps to improve workflow, optimize staff levels, and redirect savings toward more productive areas.

Company Restructuring allows you to outsource non-core business functions to external vendors and service providers. While key functions like manufacturing or R&D are important to your competitive edge, supporting services such as payroll or facilities management could divert focus and resources. By outsourcing these tasks, your team can focus on what matters most, while experts handle the rest.

Adopting new technologies like automation, cloud computing, and data analytics can also drive improved efficiency through corporate restructuring. By identifying tasks that can be automated or improved with technology, and adjusting workflows accordingly, businesses can reduce manual work and speed up processes.

Restructuring your company helps to improve how it works by making things more efficient, cutting unnecessary costs, and speeding up decision-making. By removing unnecessary tasks, you can free up resources to focus on more important goals. With smoother operations, your company can save money and become more competitive.

Reason 2: Refocusing the Business Strategy

Another key reason for corporate restructuring is the need to refocus the business strategy and realign operations with core strengths. As business conditions change, companies may realize that they have expanded into areas that are no longer essential or have low growth potential. Restructuring enables refocusing the strategy on high-growth opportunities.

For example, you might choose to sell off assets in old, shrinking markets to raise money for buying fast-growing new businesses. By selling mature business units or product lines, you can invest in newer areas that match your long-term goals. This change in focus will require company restructuring to help make the transition easier.

Alternatively, you could choose to spin off non-essential parts into separate companies. Business units that are not directly related to your core strengths often perform better on their own. By doing this, you can concentrate on strengthening your main competitive advantage instead of spreading yourself too thin across multiple areas. A more focused structure helps improve strategic direction.

Restructuring can also help create opportunities to build new skills needed for future growth. By reorganizing departments, you can focus resources on developing expertise in new technologies, product areas, digital transformation, or data analysis. The right structure can help your business grow.

Making strategic moves like selling parts of the business, creating separate units, buying new companies, or developing new skills needs restructuring to make sure everything goes smoothly. By having the right plan that matches the company’s goals, you can shift the business focus and create a lot of value.

Reason 3: Responding to Market Changes

Restructuring often becomes necessary when companies need to respond to major market changes outside of their control. Changes in customer needs, new competitors, new technology, or rules can force businesses to change how they operate. Taking a proactive approach to restructuring helps businesses stay aligned with the new market conditions.

For example, the rise of e-commerce forced many traditional retailers to quickly create online sales platforms and adjust their supply chains to support direct-to-consumer deliveries. This change helped them focus on digital growth and offering products through multiple sales channels.

In some industries, new rules or changes in policies, like revised capital requirements, compliance standards, or trade rules, may require companies to reorganize. Restructuring helps businesses adjust their operations to follow these new rules and modify their business models accordingly.

When a large industry merges or buys each other, smaller companies may need to adjust to stay competitive. As larger companies grow, smaller players may need to consider merging their business units or assets to become stronger and more competitive.

Likewise, disruptive technologies can quickly change how businesses operate and force companies to adapt in order to stay competitive. For example, the rise of digital photography completely transformed the imaging industry. Companies had to adjust and reorganize their strategies to focus on new skills and technologies.

Reorganizing your business to adapt to changing market conditions helps create a strong structure that meets customer needs and stays competitive. By planning scenario analyses and stress tests, you can identify the necessary adjustments in advance to stay ahead.

Reason 4: Mergers and Acquisitions

Mergers and acquisitions (M&A) often require changes in the company structure to successfully combine the businesses. Restructuring is essential to achieving the expected benefits and ensuring smooth coordination of operations after the deal.

The top priority is to integrate cultures and mindsets by reshaping the organizational structure and leadership. This may include choosing executives from both companies to lead merged departments. Clearly defining new roles and reporting lines will help bring teams together.

Next, operational integration means bringing together different parts of the business, systems, and processes. For example, this could involve merging production facilities, having teams work in the same location, and combining IT systems to make everything work more smoothly. Standardizing processes helps create a unified way of working across the business.

Reducing duplicated roles and responsibilities is important. Simplifying functions like marketing, finance, and HR through restructuring helps avoid confusion and redundancy. However, some duplication might remain temporarily during the transition period.

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 experience long-term financial problems, such as falling revenue or losing market share, they often need to make changes to improve. Restructuring the organization can help these businesses recover and get back on track.

Restructuring may require replacing top leadership with turnaround experts who can make difficult decisions to revive the organization. New executives, with a fresh perspective, can identify problems and guide the necessary changes.

Struggling business units are often considered for closure or sale as part of restructuring efforts to reduce losses. Although downsizing is painful, exiting high-cost, low-profit areas can improve the bottom line.

Restructuring can also help to reduce costs by cutting jobs, closing locations, and writing off assets. Although challenging, reducing expenses through organizational changes is sometimes necessary for maintaining profitability.

At the same time, restructuring helps focus resources on the areas with the most potential by adjusting budgets, talent, and operations to support the parts of the business that are expected to grow the most.

A successful turnaround may take several months or even quarters to fully take shape. However, the changes made in the organization and the strategic direction provided by restructuring create a solid foundation for recovery. With a stronger competitive edge and reduced costs, the company will be in a better position to recover and thrive.

Conclusion

Restructuring a complex organization is challenging, but during times of change, slow down, or decline, it might be the necessary step to stay ahead of the competition. By carefully identifying the reasons for change – like inefficiency or the need to integrate after a merger – you can create a transformation plan that aligns with your company’s goals.

Restructuring initiatives come with risks, but when done well, they can lead to significant rewards. With strong support from leadership and proper change management, your company can become more efficient, focused, and ready to create value. As markets and business models continue to evolve quickly, corporate agility achieved through smart restructuring can be a key factor in ensuring success.