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Discover the basic factors and appropriate timing for the business restructuring: financial problems, market conditions, and changing strategy. Find out how restructuring can increase operational effectiveness, increase profitability, and guarantee sustainability.
Restructuring a business is a very important step for any organization. It entails shifting a firm’s organizational structure, mode of operation, or financial state to enhance productivity, respond to market conditions, or contain solvency problems.
Therefore, it’s important to understand that you should consider restructuring seriously as it might have significant long-term benefits for the business’s growth. This blog will establish whether it is wise for businesses to consider restructuring and when to do so based on facts and case studies.
When to Consider Business Restructuring
- Financial Distress
Financial distress is among the many reasons why organizations have to engage in restructuring. Organizations facing reduced revenues, shrinking profit margins, or increasing outstanding dues may need to transform to stay in business.
The same report by Deloitte shows that 80% of firms have resorted to restructuring to solve financial issues. In such circumstances, management sometimes finds it beneficial to restructure the organization to integrate better performance of the organization’s operative model and minimize the cost of operations while at the same time enhancing its cash flow.
- Mergers and Acquisitions
It is well known that mergers and acquisitions (M&A) frequently require organizational restructuring. When two companies merge or one company acquires another, it has all sorts of headaches, such as duplications of functions, cultural differences, or overlapping jobs.
Thus, there is a need for a clear and practical plan to absorb one organization and make the processes more efficient in the second one. McKinsey’s research shows that 30% of M&A operations may fail to meet the projected value since the integration of M&A transactions fails, and restructuring plays a crucial role in such cases.
- Market Changes
Another reason for restructuring is fluctuations in the market, which can cause the need to restructure the organization as markets change in the blink of an eye. This might be due to technological changes, variations in the consumer palate, or changes in the industry’s laws.
For instance, the emergence of e-commerce advances led to the evolution of many conventional retailers as they adopted the Internet as a new form of selling. Statista shows that global e-commerce sales summed up to $5. 7 trillion in 2022, thereby stressing the need for businesses to embrace this trend as it grows continuously.
- Strategic Redirection
It is also common for companies to increase their complexity by restructuring to achieve new strategic objectives. This could entail market expansion, product development or their transition from one business segment to another.
For instance, IBM has undergone several organizational transformations over the years. They migrated from a company focused on manufacturing computing hardware to one specializing in software and services. This strategic redirection has enabled IBM to sustain competitiveness within a constantly shifting industry.
- Leadership Changes
Leadership changes can bring about restructuring since they alter the management structure of an entity. A change in an organization’s management, especially with new CEOs or teams, often requires a shift in structure. This is more likely if the new leadership differs from the previous one.
For instance, when Satya Nadella took over the helm of Microsoft in 2014, he began a massive corporate overhaul because of new business on cloud and mobile technologies. It has been attributed to the increase of Microsoft volume and was followed by colossal growth in the subsequent years.
Why Restructuring is Important
- Enhanced Efficiency
Restructuring can result in more operational efficiency. Companies aim to increase efficiency and minimize overhead expenses by reorganizing employees’ roles and responsibilities and optimizing business processes. A study by PwC, after surveying the companies that successfully restructured, indicated enhanced operational efficiency ranging from 20% to 30%.
- Improved Financial Performance
In most cases, restructuring enhances the corresponding enterprise’s financial performance. It can include cost reduction initiatives, the sale of unprofitable companies, or even a better capital structure. As reported by EY, the organizations that restructured their debt increased their equity value, on average, by 15% within two years after the restructuring.
- Adaptability
Flexibility is a crucial virtue in the contemporary business climate. Change for a company implies adapting to market dynamics, innovation and competition pressures. The nature of the external environment and new entrants compel organizations to remain flexible and not be overtaken by new entrants.
- Cultural Alignment
It can also be used to fix cultural problems within an organization, as in the case of IBM cognoscenti. Whenever there is change, such as growth or acquisition, there is a clash of cultures, which results in clashes and poor performance. Organizational change can effectively reform the corporate culture to suit a company’s strategic direction and increase employee engagement and productivity.
- Risk Mitigation
Restructuring can act as a solution to risks that may occur to a firm. Companies can achieve this by supplementing revenue sources, reducing reliance on a single market or product, or addressing regulatory matters. By managing these risks in advance, companies are likely to achieve sustainable development in the long run.
Conclusion
Business restructuring is a complicated affair. However, it is a strategic weapon that any organization should use to guarantee success in its business. Restructuring might result from a company facing serious financial problems or changes in the market environment; it can also initiate strategic redirection. In these cases, restructuring may result in improved efficiency, financial results, and adaptability.