Organizational Restructuring Strategies
By: Thomas G. Huffine
Prepared for: Dr. Steven Williamson and Dr. Gary Fane
MAN 6426: Advanced Business Policy
March 1, 2000
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The objective of this paper is to briefly explore organizational restructuring strategies. During the analysis the restructuring strategies will be called a variety of different names. Some of the terms used will be a reduction in force (RIF), downsizing, rightsizing, reorganizing or redesigning but each has the same purpose - change the organization. The aim of all organizational restructuring strategies is to change the organization and make it work more effectively, more efficiently, to be more productive and increase profits. Whether in the private sector or in government agencies restructuring is a never ending process. Restructuring strategies are also used by global organizations to improve and enhance their business's position. Decision makers worldwide are faced with taking actions to improve their organizations and organizational restructuring is one tool all of them use.
This paper will show some of the positive and negative effects organizational restructuring can have on an organization in terms of manpower and financial changes. It will also be shown what performance measures are available for managers to assess the effectiveness of restructuring. Some examples of how restructuring strategies are limited or imposed by government regulations will be demonstrated. Finally some examples of local restructuring and the effects they have on the Jacksonville community will be cited.
Before looking into what is organizational restructuring there must first be an understanding of what is an organizational structure. As defined by Robbins (1999):
"Organizational structure defines how task are to be allocated, who reports to whom, and
the formal coordinating mechanisms and interaction patterns to be followed." (Pg.5)
Each organization's structure can be reduced into three basic components: complexity, formalization, and centralization (Robbins, 1990). It is within one or all of these components that an organizations tries to make changes to improve specific new goals.
The second element in organizational restructuring is the strategy to be used. So what is a strategy? Strategy is defined as "the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and allocation of resources necessary to carry out these goals" (Robbins, 1990). The discussion of restructuring strategies looks at any change an organization has made in their long-term goals or objectives and how it applies to these three base components of the organizational structure.
Organizational Restructuring has been the subject of numerous articles in the past decade. During the research for this paper no less than 500 articles, book reviews, and research summaries were found on this topic using ABI/Inform. One of the most comprehensive articles was a review by Edward H. Bowman, Harbir Singh, Michael Useem, and Raja Bhadury which will be the focus of the remainder of this paper. Bowman and his co-authors concluded, organizational restructuring strategies can be broken down to three modes, portfolio restructuring, financial restructuring and organizational restructuring (1999). The other issue in organizational restructuring is how to measure the performance following those changes. The two performance measures most widely used are market performance and accounting performance. They will also be addressed in this paper.
The question for any manager of an organization to address when considering restructuring is, what effect it will have on that organization's economic performance (Bowman, et al, 1999).
Today's executives have more information about restructuring in other organizations and a thorough review of these attempts by top management executives have lead to more positive results in their own restructuring efforts. Managers now can reduce cost, increase productivity, and enhancing shareholder wealth in their own organization using lessons learned in other organization's restructuring attempts (Bowman, et al, 1999).
Portfolio Restructuring Strategy
The first of the three restructuring strategies discussed by Bowman is portfolio restructuring. Companies involved in acquisitions, divestitures, or spin-offs are using a portfolio restructuring strategy. This type of strategy includes selling off those business units that are drawing down operations or spinning off business units to raise more capital. The organization's objective is to regain its perspective on the core business. Portfolio restructuring has the best results when the firm uses the spin-off strategy and count on subsequent mergers (Bowman,et al, 1999). Research indicates more positive market response to the restructuring when shareholders receive new business from spin-offs than new cash through sell-offs.
The Bell & Howell Company is an example of portfolio restructuring. In a recently announcement they are using this form of restructuring strategy to create of two new companies. The first company will still be called Bell & Howell and will focus on the Mail and Message Technologies. A second, still unnamed company, will focus on information access business. The belief of Bell & Howell's CEO is that this strategy will maximize the organization's strength and help them attract and maintain a talented workforce (Hane, 2000).
In still another example of possible portfolio restructuring is the case of Microsoft. Some analyst believe the break up of the software giant could be beneficial following that company's antitrust suit. The spin-offs along product lines within Microsoft could produce a flurry of new business activity. It would release the entrepreneurial spirit and generate new wealth for Microsoft investors.
An example of the potential the breakup of Microsoft might have was demonstrated by the spin-off of Expedia.com. On November 10,1999 it was spun off and was immediately followed by a 280% jump on the first day of its initial public offering (Hamm, 2000). Microsoft has the potential to gain substantially for its shareholders by using the portfolio restructuring strategy to break into baby Microsofts before organization is forced on them.
Organizational Restructuring Strategy
Of the three modes of restructuring strategies, the type that captures the most headlines is Organizational Restructuring. In this strategy the terms downsizing, redesign and layoffs are often used. Many times a company tries to redesign the organization for one of two major reasons: (1) either they have changed the strategic thrust of the company, or (2) the organization has drifted away from the original design of the company. Organizational restructuring will normally change the levels of management in the company, effect the span of control or shift product boundaries. There is also a change in production procedures and compensation associated with this strategy. Reduction in the work force is the main by-product that accompanies organizational restructuring and is the reason for the least positive impact on organizational performance (Bowman, et al, 1999).
The first example of an Organizational Restructuring Strategy in action is the case Allstate Insurance Company. Following a review of their core business, Chairman and CEO Edward Liddy announced numerous changes to Allstate's distribution strategy and cost saving measures that would save $600 million annually and eliminate 4,000 jobs. In his redesign plan, 6,500 current captive agents would move into a single independent contractor program where the majority of Allstate's agents work. The savings would come from the change to managing the one agent program instead of separate agencies. As with all reduction in employees, Allstate feels most will come through attrition, but these cuts will effect some 460 jobs at the company's home office (Gjertsen, 1999). The thrust of Allstate's reorganization is clearly to streamline the process, but the resulting by-product in job being cut.
In yet another example of the organizational approach to restructuring, CompUSA is using what is termed a "slash and burn approach" to return to profitability (Heller, 1999). Part of their redesign effort is to centralize its commercial sales business to CompUSA call center in Dallas. Taking this function away from the individual stores will effect some 2,400 jobs. Executive VP for Merchandising, Larry Mondry stated "Nine-nine percent of store are profitable…," however there are currently ten stores being review for possible closure (Heller, 1999).
In both cases the elements of organizational restructuring are the prime movers. Change the design of how business is done to improve profitability. The reduction in workforce is the headline grabbing by-product.
Financial Restructuring Strategy
The final restructuring mode Bowman discussed is the financial restructuring strategy. This type of restructuring is identified by changes are in the firm's capital structure. Changes can include debt for equity swaps, leverage buyouts, or some form of recapitalization (Bowman, et al, 1999).
In a financial restructuring that is in the form of a leverage buyout, research reveals there is an immediate influx of free cash flows, organizational efficiency is enhanced and the company refocuses on the core business. Additionally, long-term performance of the organization is significantly improved after the LBO (Bowman, et al, 1999). Leverage buyouts of divisions have greater improvement in efficiency than when the entire company is acquired.
Most LBO are by managers and a group of investors the results are companies with less waste and better decision making.
So what good is organizational restructuring without seeing some results? In each of the above restructuring strategies the results can be measured by one of two performance standards: market performance or accounting performance.
The market performance standard addresses the stock price of the organization following a restructuring. The changes can be directly attributed to restructuring action are short term indicators of how the restructuring has effected the organizations performance (Bowman, et al, 1999).
To determine long term performance of an organization accounting standards are used to calculate restructuring performance. A comparison is make on financial ratios ROI (Return of Investment) and ROE (Return on Equity) of pre-restructuring and post-restructuring data over several years (Bowman, et al, 1999). The results using this method take longer to obtain but should give a clearer picture to whether the restructuring objectives have been met.
Other Restructuring Issues
Organizational restructuring by the government is a topic in itself. The military with all the base closures and reduction in forces have made big news in Jacksonville and across the nation. In this section of the paper cases of the federal and local government intervention will be illustrated. One special case will demonstrate how some legal matters effected a company's decision to restructure.
State & Federal Government
In the case of Empire Blue Cross and Blue Shield of New York their restructuring strategy was financial and they were watched by state insurance regulator. Their restructuring effort calls for the company to shift from a not-for-profit to a for-profit organization. The required approval has been received from the New York Department of Insurance but the state's attorney general, Eliot Spitzer still opposes such a move (D'Allegro, 2000). The restructuring has raised concerns of attorney Mark Scherzer who said,"Non-profit insurers are public assets" and putting those public assets to use in the private sector raises concerns (D'Allegro, 2000).
In another government-related restructuring case the FCC is using a form of organizational restructuring strategy. The restructuring has begun with the opening of a new Enforcement and Consumer Information bureau. It is part of a five-year plan, pushed for by Republican legislators on Capital Hill. The objective is for the FCC to streamline license transfer procedures and reduce duplication in the license review and merger review processes (Albiniak, 1999). The outside influence of government legislators to force restructuring is similar to stockholders demanding more profits and causing business to restructure.
A very special case of restructuring is the one by The Phillips, Team and Myers Agency. They are using a type of financial restructuring to protect itself from creditors. Following the bankruptcy of their largest client the organization chose to dissolve operations and reopen as The Phillips Agency. In this unusual form of restructuring the company relocated their offices from Dallas to Fort Worth and two of the partners, Team and Myers left the agency (Hill, 1999). While not your typical restructuring strategy this illustrates the measures some companies must take to retain their core business.
These three cases are but a small example of how restructuring can be imposed on organizations by out side forces. The changes in the legal climate and the rules governing how organizations can restructure must clearly be understood before any action is taken.
In the Local News
Organizational restructuring is in the news every day. Pick up the local Florida Times-Union or any business magazine and there will be an article on restructuring. Within the last month four Florida Times-Union articles have addresses restructuring issues with four Jacksonville companies.
PSS World Medical Inc.
The first to make headlines was PSS World Medical Inc. A Jacksonville based medical supply company was the lead business headline stating PSS needed "strategic alternatives to maximize shareholder value." The company's disappointment stems from their acquisition of Gulf Medical Supply two years ago and the organization's inability to restructure it into a more profitable operation (Basch, 2000). This case looks like a portfolio restructuring that needs to be reversed. In an attempt to diversify PSS acquired Gulf Medical, but now they should explore the alternative of selling it since other divisions of PSS are doing well.
A second local company with restructuring headlines is CSX Corporation. To meet their organizational restructuring goals of cutting 800 jobs, CSX announced they had meet their objectives by eliminating 200 jobs and would save $65 million this year (Gordon, 2000). This is the more typical restructuring strategy, reduction in force, to cut jobs in the name of savings. In an effort to ease the impact on employees, CSX used voluntary early retirement and separation programs to achieve their goals. This restructuring received favorable comments from University of North Florida Professor Don Wiggins on how a smart company [CSX] used a good plan to reach their objectives (Gordon, 2000). Organizational restructuring goals are normally increase profits and the by-product is reduced labor force.
J.C. Penney Company Inc.
In still another announced restructuring plan with local significance is that of the J.C. Penney Company. It announced it would be closing 45 of its department stores and 289 Eckerd drug stores. The company feels the organizational restructuring will produce $300 million of savings per year. Local impact has not been determined since specific closures will not be announced for two to three weeks (Paul, 2000). Shareholder value is stated as being $12 million net loss compared to $207 million net gain for the same three-month period last year (Paul, 2000). Again this form of restructuring goes to the needs to improve the profits and shareholder wealth. Workforce reduction will be a large part of this restructuring and not just a by-product of the actions management is taking.
Baptist St Vincent's Health System
The biggest restructuring headline is the split of the Baptist St. Vincent's Health System after a 4 1/2 year merger. The reasons given for the restructuring were neither financial or business, but instead to allow each organization to act independently and make their own strategic decisions (Ostrow, 2000). This split came as a surprise since the merger has been seen a financial success. Some indications for the restructuring appear to be that Baptist board members want to return local control to the organization. Many of St. Vinent's board of directors are out of town. The division of facilities has yet to been worked other but employees and patients should seen little change (Ostrow, 2000). This restructuring is more of a reversal of the previous portfolio restructuring. The merging companies are trying to return to some form of pre-merger status with little or no impact on employees or customers.
Organization structure is at the heart of all businesses. It applies to those involved in the manufacturing of a product or providing a service. It can be concluded that organizational restructuring is a value tool for an organization to use in an attempt to maintain their goals and objectives. The choice of which strategy to use will depend on which area the company wants to improve: profitability, performance, or operation. As has been illustrated restructuring is an on going process. It is a very complicated subject and this paper has only brushed the tip of the iceberg. The results of how well those restructuring efforts were can take years to determine depending on which performance measure is used.
A final area of consideration is the effect on human resources. An entire paper relating to employee dismissal during organizational restructuring has been written by Lillian Eby and Kimberly Buch (1998). The treatment of employees during downsizing and restructuring has only briefly been discussed as a by-product of organizational change and because it receives so many headlines. A more comprehensive discussion of three important employee issues, advanced warning of job loss, employer support services, and the internal communication of pending changes can be the subject of a separate research paper (Eby, 1998).
Albiniak, P. FCC begins restructuring. Broadcasting & Cable, November 1, 1999, pp. 19.
Basch, M. "Disappointing diagnosis: PSS seeks advice on strategic alternatives." The Florida Times-Union 26 January 2000, sec. F:1+.
Bowman, E. H., & Singh, H. When does restructuring improve performance? California Management Review, Winter 1999, pp. 34-54.
D'Allegro, J. N.Y. Dept. Oks empire Blue restructuring. National Underwriters, January 10, 2000, pp. 3,22.
Eby, L.T. & Buch, K. The impact of adopting an ethical approach to employees dismissal during corporate restructuring. Journal of Business Ethics, September 1998, pp. 1253-1264.
Gjertsen, L.A. Allstate to cut jobs, revamp distribution. National Underwriters, November 15, 1999, pp. 1,31.
Hamm, S. Multiple Microsofts May Be Better Than One. Business Week, January 31, 2000, pp. 43.
Hane, P.L. Bell & Howell will restructure to create to separate companies. Information Today, February 2000, pp. 1,6+.
Heller, L. CompUSA restructuring in face of $45 million year-end loss. Discount Store News, September 20, 1999 pp. 3,20.
Hill, J.D. Phillips Restructures. Adweek, August 9, 1999, pp. 8.
Ostrow N. "J.C. Penney closing less-profitable stores." The Florida Times-Union 25 February 2000, sec. C:1+.
Paul, P.C. "Surprise split: Baptist, St. Vincent to end 4 1/2-year-old merger." The Florida Times-Union 26 February 2000, sec. A:1+.
Robbins, S.P. Organizational Theory: Structure, Design, and Applications. 3rd ed. New Jersey: Prentice-Hall, Inc., 1993.