1.

INTRODUCTION
In the todays era of intensive competition, the survival and
growth of the business has become challenging. It is a well known
fact that the way to growth is either through Greenfield
expansions leading to organic growth in ones own unit, or
Brownfield expansions leading to inorganic growth. Since the
world is moving at a rapid pace and companies are in a hurry to
expand, restructuring through inorganic growth is an ideal
medium. In addition, restructuring becomes necessary whenever
there is change in business environment. For example, changes in
the business environment ensuing from liberalization and
globalization have contributed to dynamism in the Indian
economy. The new environment poses challenges to the methods
of operations practiced under the controlled economy. These
challenges have compelled Indian business to rethink the ways in
which they previously operated. With growth becoming central to
the new economic environment, mergers and acquisitions are
gaining acceptance as a mode of growth in India. This new
environment demands more stringently, than the controlled
economy did, that the business either perish or restructure
through amalgamations, takeovers or any other form of
restructuring.
With liberalization, privatization, and globalisation (LPG) many
firms felt that there are lots of profitable investment
opportunities, and it also means increasing competition. A firm
that feels globalisation is an opportunity needs to leverage the
benefits, which require lot of funds and resources, and also need
to go for restructuring. On the other hand a firm that feels
globalisation, liberalization and privatization as a competition, has
to compete with the new competitors by manufacturing products
at high quality and sell at reasonable prices, but it needs more
technological support and needs more funds. So companies use to
follow different strategies to achieve their objective of
shareholders wealth maximization at different points of time.
Corporate Restructuring is one of the strategies which are
followed in todays business world to give new height to the
business. In India companies also follow corporate restructuring

as a business strategy to create value for shareholders as well as

for the future growth of business.
2. CORPORATE RESTRUCTURING: MEANING AND DEFINITION
Corporate Restructuring is a very wide and varied term having
no legal definition. It has neither a clear and precise meaning nor
it can be defined with precision. However, it indicates to a broad
group of activities that expand or contract a firms operations or
substantially modify its financial structure or bring about a
significant change in its organisational structure and internal
functioning. It includes activities such as; mergers, buyouts,
takeovers, business alliances, slump sales, demergers, equity
carve outs, going private, leverage buyouts (LBOs), organisational
restructuring, and other performance improvement initiatives.
Originally, the term Restructuring means giving new structure
or rebuild or rearrange an existing structure. In this perspective,
Corporate Restructuring can be defined as a process of
rearranging the organizational or business structure of the
company for increased efficiency and profitable growth. Simply
stated, corporate restructuring is a comprehensive process by
which a company can consolidate or rearrange its organizational
set up or business operations and strengthen its position so as to
achieve its short-term as well as long term objectives and
establish itself as a synergetic, dynamic, continuing as well as
successful independent corporate entity in the competitive
environment.
DEFINITION
Corporate restructuring can be defined as
a) Any change in the business capacity or portfolio that is
carried out by an inorganic route; or
b) Any change in the capital structure of a company that is
not a part of its ordinary course of business; or
c) Any change in the ownership of or control over the
management of the company or a combination thereof.
Let us discuss the above points in detail to have a clear
meaning of Corporate Restructuring

A.1: Any change in the business capacity or portfolio carried out

by inorganic route.
Tata Motors launched Sumo and later, Indica- leading to an
expansion of its business portfolio. However, these products
were launched from Tata Motors own manufacturing capacity
in through an organic route. Hence, it would not qualify as
corporate restructuring
Tata Motors acquisition of Jaguar Land Rover from Ford,
through Jaguar Land Rover Limited is corporate restructuring
Grasims acquisition of Larsen & Toubros (L&T) cement
division through UltraTech Cement Limited is an example of
corporate restructuring
A.2: Change in the business portfolio could also be in the nature
of reduction of business handled by a company.
In the case of Grasim and L&T, the demerger of L&Ts
cement business into UltraTech Cement Limited was
reduction of its business portfolio and thus, amounted to
corporate restructuring of L&T.
B. Any change in the capital structure of a company that is not in
the ordinary course of its business. This can be further explained
with the help of the following:
(a)
Car finance loan
(b) Scheduled repayment of a term loan, etc. keeps on changing
the debt-equity ratio within planned or targeted range. Such
changes do not qualify as corporate restructuring. However,
(a)
An initial public issue
(b)
Follow-on public issue
(c)
Buy-back of equity shares may alter the capital
structure of a Company permanently. Such activities are not
in the ordinary course of business of company - amounts to
corporate restructuring.
(a)
Borrowing of a significant amount as term loan
(b)
Issue of five-year nonconvertible debentures, etc. Such
changes may alter the debt-equity ratio significantly but still
these do not qualify as leading to corporate restructuring.

Capital structure refers to the debt equity ratio, i.e., the

proportion of debt and equity in the total capital of a company.
This capital structure is never static and changes almost daily.
If the debt/equity ratio fluctuates within a targeted or
planned range, such changes in the capital structure do not
amount to capital restructuring.
Borrowing of a significant amount of term loan or an issue of
five year non-convertible debenture does not qualify to be
called corporate restructuring.
An initial public issue, or a follow-on public issue or buy-back
of equity shares would permanently alter the capital
structure of a company and thus, would amount to
corporate restructuring
c. Any change in the ownership of a company or control over its
management
a) Merger of two or more companies belonging to different
promoters
b) Demerger of a company into two or more with control of the
resulting company passing on to other promoters
c) Acquisition of a company
d) Sell-off of a company or its substantial assets
e) Delisting of a company
All these would qualify to be called exercises in corporate
restructuring.
3. REASONS OF RESTRUCTURING
There are a good number of reasons behind corporate
restructuring. Corporate restructure their firms with a view to:
1. Changed Nature of Business
In todays business environment, the only constant is change.
Companies that refuse to change with the times face the risk of
their product line becoming obsolete. Because of this, businesses
experiment with new products, explore new markets, and reach
out to new groups of customers on a continuous basis. Businesses
seek to diversify into new areas to increase sales, optimize their

capacity, and conversely shed off divisions that do not add much
value, to concentrate on core competencies instead.
All such initiatives require restructuring. For instance, expansion
to an overseas market may require changes in the staff profile to
better connect with the international market, and changes in work
policies and routines to ensure compliance with export
regulations. Starting a new product line may require changes in
the system of work, hiring new experts familiar in the business
line and placing them in positions of authority, and other
interventions. Hiving off unprofitable or unneeded business lines
may require changes to retain specific components of such
divisions that the main business may wish to retain.
2. Downsizing
It is another form of organizational change in which the business
organization substantially cuts down on its manpower, recurring
cost and/or capital expenditure, either as an objective itself or as
a result of re-engineering. The changing nature of economy may
force the business to adopt new strategies or alter their product
mix, making staff redundant. Similarly, cutthroat competition and
pressure on margins from competitors who adopt a low price
strategy may force the company to adopt lean techniques, just-intime inventory, and other measures to cut input costs and
achieve process efficiency. In such situations, the organization will
need to redo job descriptions, rework its team, group, and
communication structures and reporting relationships to ensure
that the remaining workforce does the job well. Very often,
downsizing-induced restructuring leads to a flatter organizational
structure, and broader job descriptions and duties.
3. New Work Methods
Traditional organizational systems and controls cater to standard
9 AM to 5 PM office or factory based work. Newer methods of

work, especially outsourcing, telecommuting, and flex time

require new systems, policies, and structures in place, besides a
change in culture, and such requirements may trigger
organizational restructuring. The presence of telecommuting
employees, temporary employees, and outsourcing work may
require a drastic overhaul of performance management
parameters, compensation and benefits administration, and other
vital systems. The newer work methods may, for instance, require
placing emphasis on the results rather than the methods, flexible
reporting relationships, and a strong communication policy.
4. New Management Methods
Traditional management science recommends highly centralized
operations, and the top management adopting a command and
control
style.
The new
behavioral
approach
to
management considers human resources a key driver of strategic
advantage, and focuses on empowering the workforce and
providing considerate leeway to line managers in conducting dayto-day operations. The top management intervenes only to set
strategy and ensure compliance; strategic business units receive
autonomy in functioning. Traditional management structures were
bureaucratic and hierarchical. Of late, management experts see
wisdom in flatter organizations with wider roles and
responsibilities for each member of the team. Job flexibility,
enlargement and enrichment are key features of such new
structures, but successful implementation requires changes in the
communication and reporting structures of the organization.
While new organizations can start with such new paradigms, old
organizations have to restructure themselves to keep up with
these best practices to remain competitive.
5. Quality Management

Competitive pressures force most companies to have a serious

look at the quality of their products and services, and adopt
quality interventions such as Six Sigma and Total Quality
Management. Implementing new quality standards may require
changes in the organization. Most of the new quality applications
strive to imbibe quality in the actual work process rather than
maintain a separate quality control department to accept or reject
output based on quality specifications. In many cases, an
organizational level audit precedes quality interventions, and such
audits highlight inefficiencies in the organizational structure that
may impede quality in the first place. For instance, reducing
waste may require eliminating certain processes, and thereby
reallocation of personnel undertaking such activities.
6. Technology
Innovations in technology, work processes, materials and other
factors that influence the business, may require restructuring to
keep up with the times. For instance, enterprise resource planning
that links all systems and procedures of an organizational by
leveraging the power of information technology may initially
require a complete overhaul of the systems and procedures first.
Such technology-centric change may be part of a business
process engineering exercise that involves redesigning the
business processes to maximize potential and value added, while
minimizing everything else. Failure to do so may result in the
company systems and procedures turning obsolete and
discordant with the times.
7. Mergers and Acquisitions
In todays corporate world, where survival of the fittest is the
maxim, mergers and acquisitions are commonplace and any
merger or acquisition invariably heralds a restructuring exercise.

The reasons for such restructuring accompanying mergers and

acquisitions are many. Some of the common reasons are:
Reconciling the systems and procedures of the merged
organizations to ensure that the new entity has consistency
of approach.
Eliminating duplication of work or systems, such as two
human resource or finance departments.
Incorporating the preferences of the new owners, and more.
Joint ventures may also require formation of matrix teams, special
task forces, or a new subsidiary.
8. Finance Related Issues
Very often, small and medium scale businesses have informal
structures and reporting relationships, and an ad-hoc style of
decision-making. When such companies grow and want to raise
fresh funds, venture capitalists and regulations might demand a
more professional set up, with formal written-down structures and
policies. A listed company may undertake a restructuring exercise
to improve its efficiency and unlock hidden value, and thereby
show more profits to attract fresh investors. Bankruptcy may force
the business to shed excess flab such as workforce, land, or other
resources, sell some business lines to raise cash, and become
lean and mean, to attract bail-outs or some other rescue package.
Companies may try to restructure out of court to avoid the high
costs of a formal bankruptcy.
9. Buy Outs
At times, the restructuring exercise may be the result of the
whims and fancies of the owners. For instance, the company may
have a new owner who wants to stamp his or her personal
authority and style onto the business. Restructuring allows the
new owner to:

 Reshuffle key personnel and provide power to trusted

lieutenants.
Start with a clean state and thereby exert greater control.
Preempt any inefficiency that caused the previous owner to
sell-out, and more.
With or without ownership change acting as a trigger, company
owners may appoint a management consultant to review the
company and suggest macro-level changes, as a routine exercise.
10. Statutory and Legal Compliance
At times, restructuring may be a forced exercise, to conform to
some legal or statutory requirements. For instance, the
government may mandate financial and healthcare institutions
that deal with sensitive personal data to monitor their computer
networks. A new bill may require that private computer networks
adopt the same security measures that government networks
adopt, to gain immunity from liability lawsuits in the eventuality
of cyber attacks. Any organizational restructuring is basically a
change initiative. Success depends on managing resistance to
change by convincing the remaining workforce of the need for
change and the possible benefits, an effective communication
system to lend clarity to the change process, and effective
leadership.
TYPES OF RESTRUCTURING
The broad types of Restructuring are displayed in the following
diagram:

Each of these can be further classified into various types or

methods of restructuring depending upon the objectives to be
achieved.
1. Portfolio and Asset Restructuring
Broadly, these types of restructuring affect distinctly the asset
base or the product portfolio/ service portfolios of the
organizations in consideration, as also the power and control
related issues. Also, these types of restructuring initiatives are
usually undertaken to enhance the profitability of the both
companies in a mutually rewarding situation - as in a Merger, or
either of the dealing parties as in the case of Acquisitions, or even
certain objective decisions as the disinvestments of certain
businesses to ensure growth and development.
1. Mergers

It is a combination of two or more

business enterprises into a single
enterprise. Usually mergers occur in
a friendly setting where executives
from the respective companies
participate in a due diligence
process
(the
process
of
systematically
researching
and
verifying the accuracy) to ensure a
successful combination of all parts.
The Shareholders of each company
must
agree
to
it
prior
to
implementation. Mergers can be of
three types; namely:
a)

Horizontal Mergers

Horizontal
mergers
are
those
mergers where the companies
manufacturing similar kinds of
commodities or running similar type of businesses merge with
each other. The principal objective behind this type of mergers is
to achieve economies of scale in the production procedure
through carrying off duplication of installations, services and
functions, widening the line of products, decrease in working
capital and fixed assets investment, getting rid of competition,
minimizing the advertising expenses, enhancing the market
capability and to get more dominance on the market. Following
are the important examples of horizontal mergers in India:

The formation of Brook Bond Lipton India Ltd. through the merger of
Lipton India and Brook Bond
The merger of Bank of Mathura with ICICI (Industrial Credit and
Investment Corporation of India) Bank
The merger of BSES (Bombay Suburban Electric Supply) Ltd. with Orissa
Power Supply Company

b)

The merger of ACC (erstwhile Associated Cement Companies Ltd.) with

Damodar Cement

Vertical Mergers
A merger between two companies producing different goods or
services for one specific finished product. By directly merging
with suppliers, a company can decrease dependence and
increase profitability. An example of a vertical merger is a Car
Manufacturer purchasing a Tyre Company. Vertical Mergers can
be in the form of Forward Integration of Business [E.g. A
manufacturing company entering in the Direct Marketing
Function. which was not its foray in the erstwhile times) or in the
form of Backward Integration of Business [E.g. A manufacturing
company also focusing on the producing the required raw
materials and managing its supply chain activities on its own.
which was not its foray earlier].
Example: Tata Motors Ltd acquired Trilix Srl, an Italian design and
engineering firm to enhance its styling and design capabilities to global
standards

c)Conglomerates Merger
A merger between companies which do not have any common
business areas or no common relationship of any kind is termed
as Conglomerate Merger. Such kind of merger may be broadly
classified into following:

Product-Extension Merger - Conglomerate mergers, which

involves companies selling different but related products in the
same market or sell non-competing products and use same
marketing channels of production process. E.g. Phillip MorrisKraft, Pepsico- Pizza Hut, Proctor and Gamble and Clorox

Market-Extension Merger - Conglomerate mergers wherein

companies that sell the same products in different markets/

geographic markets. E.g. Morrison supermarkets and Safeway,

Time Warner-TCI.

Pure Conglomerate merger- two companies which merge have

no obvious relationship of any kind. E.g. BankCorp of AmericaHughes Electronics.

On a general analysis, it can be concluded that Horizontal

mergers eliminate sellers and hence reshape the market structure
i.e. they have direct impact on seller concentration whereas
vertical and conglomerate mergers do not affect market
structures e.g. the seller concentration directly.
II. Joint Ventures
A Joint Venture (often abbreviated JV) is an entity formed between
two or more parties to undertake economic activity together. The
parties agree to create a new entity by both contributing equity,
and they then share in the revenues, expenses, and control of the
enterprise. The venture can be for one specific project only, or a
continuing business relationship such as; the Sony Ericsson Joint
Venture.
Sony-Ericsson is a joint venture by the Japanese consumer
electronics company Sony Corporation and the Swedish
telecommunications company Ericsson to make mobile phones. The
stated reason for this venture is to combine Sony's consumer
electronics expertise with Ericsson's technological leadership in the
communications sector. Both companies have stopped making their
own mobile phone.

III. Acquisitions or Takeover

An acquisition, also known as a Takeover, is a common
occurrence in the business world today. In some cases, the terms
takeover and acquisition are used interchangeably, but each has
a slightly different connotation. A takeover is a special form of
acquisition that occurs when a company takes control of another
company without the acquired firms agreement. Takeovers that
occur without permission are commonly called hostile takeovers.

Acquisitions, also referred to as friendly takeovers, occur when

the acquiring company has the permission of the target
companys board of directors to purchase and take over the
company. Acquisition usually refers to a purchase of a smaller firm
by a larger one. Sometimes, however, a smaller firm will acquire
management control of a larger or longer established company
and keep its name for the combined entity. This is known as a
Reverse Takeover. To illustrate, suppose a private company, XYZ,
wishes to acquire publicly-traded company ABC in order to
become publicly-listed in a cost-effective way. XYZ purchases an
increasing number of shares in ABC, eventually making active
decisions concerning its management and output. As the de facto
owner of ABC, XYZ may superimpose its own name on ABC while
retaining its original public listing.
For Example, in 2002, the board of directors of ICICI
and ICICI Bank approved the reverse merger of
ICICI, ICICI Personal financial services limited and
ICICI Capital services limited into ICICI Bank.

There are two major types of Acquisition.

These are explained as follows:
1. Management Buyouts

Swaraj PaulEscorts/DCM:
A case of Hostile
Takeover in India
In 1980s Londonbased NRI Swaraj
Paul sought to control
the management of
two
Indian
companies,
Escorts
Limited
and
DCM
(Delhi Cloth Mills) Ltd
by picking up their
shares from the stock
market. Though
Swaraj Paul failed to
fulfill his dream of
controlling
Escorts
and DCM, but was
successful
in
highlighting
how
particular
families
were able to exercise

It is a form of Acquisition wherein the

management of a company decides to take
their company private because it feels it has
the expertise to grow the business better, if
it can control the ownership. Quite often,
management will lineup with a venture
capitalist to acquire the business because
its a complicated process that requires
considerable capital. Hence, large borrowings are made by
managers to buy stocks held by large shareholders - who later

become the shareholders of the new entity to earn higher returns

for themselves.
For example, Company XYZ is a publicly traded company
where management controls 30% the company's stock and
the remaining 70% is stock floated to the public. Under
the terms of an MBO, management will arrange to purchase
enough shares of the outstanding stock from the public so
that they end up with a controlling interest of at least 51%
of the company's total shares. In order to finance their
venture, the management group may look to a bank or
venture
capitalists
to
assist
them
in
financing
the acquisition.

2. Takeovers
As discussed above, takeovers are normally viewed as unfriendly
acquisitions as in this case, one company purchases a majority
interest in the target company resulting in loss of management
control for the target company. Incidentally, the acquiring
company has a stronger market standing than the target
company in this case. It is definitely not a merger of equals.
Typically, this type of acquisition is undertaken to achieve market
dominance. There are three types of Takeovers; namely:
a) Defended/Hostile Takeover: A hostile takeover is a type of
corporate acquisition which is carried out against the wishes of
the board (and usually management) of the target company. In
a hostile
takeover,
the
target
company's board
of
directors rejects the offer, but the bidder continues to pursue
the acquisition. A bidder may initiate a hostile takeover through
a tender offer, which means that the bidder proposes to
purchase the target company's stock at a fixed price above the
current market price. Another method of hostile takeover is
acquiring a majority interest in the stock of the company on
the open market. If that is impossible or just too expensive, a
bidder may initiate a proxy fight, which means that the bidder

persuades enough shareholders to replace the management of

the company with one which will approve the acquisition.
India Cements Limited (ICL) in its hostile bid for Raasi
Cements Limited (RCL) made an open offer for RCL
shares at Rs. 300 per share at the time when the share
price on the Stock Exchange, Mumbai (BSE) was around
Rs. 100.

b) Leveraged Buyout: It is a type of acquisition wherein the

acquiring company uses a large amount of Debt financing to
pay the target company its valuation at the time of the
takeover.
c) Asset Buyout: A buyout strategy in which key assets of the
target company are purchased, rather than its shares. This is
particularly popular in the case of bankrupt companies, who
might otherwise have valuable assets which could be of use to
other companies, but whose financing situation makes the
company unattractive for buyers (an asset buyout strategy
may be pursued in almost any case where the potential target
company has an unattractive financing structure).
IV. Divestitures

A Divestiture is the partial or full disposal of an investment or

asset through sale, exchange, closure or
Divestiture:
bankruptcy. Divestiture can be done slowly and
An Example
systematically over a long period of time, or in
car
large lots over a short time period. E.g. Volvo AB the
business,
it
sold passenger business to Ford for $6.5B.
There are four types of Divestiture initiatives;
namely:
1. Spin Offs: The event through which a new
company is created and separated from its

might
divest the
business
by
selling it to
another
company,
exchanging it
for
another asset,
or
closing

parent company. After the event there are two separate

companies, each with their own outstanding share capital.
Shareholders of the parent company are distributed shares in the
spun off company on a pro rata basis (for example, each
shareholder in parent company A will receive 5 shares in the
spun off company B). Each shareholder holds shares in company
A as well as in B at the moment of the spinoff.
2. Splits: As the term denotes, Splits refer to splitting the
corporate entity into two or more parts to achieve its strategic
objectives such as enhanced profitability by removing non-core
businesses from the mainstream businesses, etc. There are two
types of Splits; namely:
a) Split-ups: It is a corporate action in which a single company
splits into two or more separately run companies. Shares of the
original company are exchanged for shares in the new
companies, with the exact distribution of shares depending on
each situation. This is an effective way to break up a company
into several independent companies. After a split-up, the
original company ceases to exist. A company can split up for
strategic reasons or because the government mandates it.
Some companies have a broad range of business lines, often
completely unrelated. This can make it difficult for a single
management team to maximize the profitability of each line. It
can be much more beneficial to shareholders to split up the
company into several independent companies, so that each line
can be managed individually to maximize profits. The
government can also force the splitting up of a company,
usually due to concerns over monopolistic practices. E.g. In
September 1995, AT&T spilt into 3 publicly traded companies
and the 4th business was sold.
b) Split-offs: In this case, some of the shareholders of the parent
company receive a subsidiary's shares on condition that they

Equity Carveout vs.

Spin Of
Equity
carve
out
differs from spin off in
two ways. First, in
equity carveout the
equity shares are sold
to the new investor,
whereas in the spin
off the equity shares
are
sold
to
the
existing shareholders.
Secondly,
equity
carveout brings cash
to the firm (since the
shares are sold to the
new
investor),
whereas in the spin
off there is no cash
infusion
to
the
company because the
shares value is broken
into small and the
same are distributed
to
the
existing
shareholders.
For
example, a company

return the shares they hold of the

parent
company.
Family
owned
businesses with complex cross holdings
in all subsidiaries use this approach to
separate the interest of different family
streams. e.g., The Reliance Industries
Group has now split-off into Reliance
Industries Limited, Reliance Infocomm,
Reliance Energy, etc.

3. Equity Carve-outs: An equity carve-out

involves the sale of a portion of the firm via
an equity offering to outsiders. In other
words, new shares of equity are sold to
outsiders, which give them ownership of a
portion of the previously existing firm. A
new legal entity is created. The equity
holders in the new entity need not be the
same as the equity-holders in the original seller. A new control
group is immediately created.
4. Disinvestment: It sometimes referred to as divestment, refers
to the use of a concerted economic boycott, with specific
emphasis on liquidating stock, to pressure a government,
industry, or company towards a change in policy, or in the case of
governments, even regime change. The term was first used in the
1980s, most commonly in the United States, to refer to the use of
a concerted economic boycott designed to pressure the
government of South Africa into abolishing its policy of apartheid.
2. CAPITAL RESTRUCTURING
Capital is generally the assets (often monetary assets) that are
available to generate further assets. Thus the liquidity of capital
should be high. Capital restructuring (otherwise known as

Financial Restructuring) is nothing but changing the capital

structure of an organisation to improve availability (liquidity) of
the capital. The process requires selling some assets to buy
different ones in order to improve the capital (monetary) position
of the company to earn more with them. It is generally
undertaken for better performance of company assets as well as
to stabilize their future performance.
Capital/Financial
aspects:

Restructuring

touches

a) Leverage of the company: This is

essentially the Debt-Equity Ratio.
Here, companies have the option of
undertaking
debt
restructuring,
especially if it is a high debt
leveraged company.
b) Investment Pattern: This relates to
ability of corporations to identify the
various investments opportunities
that would lead to higher returns.

upon

the

following

Debt Restructuring
The need for a debt
restructuring
often
arises
when
a
company
is
going
through
financial
hardship
and
is
having difficulty in
meeting
its
obligations.
If
the
troubles are enough
to pose a high risk of
the company going
bankrupt,
it
can
negotiate
with
its

c) FDI Participation: This aspect relates

to the change in structure of the
shareholding due to the increasing FDI inflows.

d) Divestitures: As stated earlier it relates to divesting divisions

and/or businesses to improve the financial standing of the
organization.
3. ORGANIZATIONAL RESTRUCTURING
Organizational restructuring has become a very common practice
amongst the firms in order to match the growing competition of
the market. It includes significant changes in the organisational

structure of a firm, including redrawing of divisional boundaries,

pulling down of the hierarchic levels, spreading of the span of
control, reducing product diversification, revising compensation,
streamlining processes, reforming governance and downsizing
employment. This makes the firms to change the organizational
structure of the company for the betterment of the
business. Restructuring is usually a result of a merger, dull profits
or a change in overall goals. It leads to a more centralized,
efficient and streamlined entity. The purpose of restructuring is to
make the organization more profitable and integrated.
The most common features of organizational restructures are:
a) Regrouping: This involves regrouping of the existing business
activities of firms into fewer business units. The
management then handles theses lesser number of compact
and strategic business units in an easier and better way that
ensures the business to earn profit.
b) Downsizing: Often companies may need to retrench the
surplus manpower of the business. For that purpose offering
voluntary retirement schemes (VRS) is the most useful tool
taken by the firms for downsizing the business's workforce.
c) Decentralization: In order to enhance the organizational
response to the developments in dynamic environment, the
firms go for decentralization. This involves reducing the
layers of management in the business so that the people at
lower hierarchy are benefited.
d) Outsourcing:
Outsourcing
is
another
measure
of
organizational restructuring that reduces the manpower and
transfers the fixed costs of the company to variable costs.
e) Enterprise Resource Planning: Enterprise resource planning
is an integrated management information system that is

enterprise-wide and computer-base. This management

system enables the business management to understand
any situation in faster and better way. The advancement of
the information technology enhances the planning of a
business.
f) Business Process Engineering: It involves redesigning the
business process so that the business maximizes the
operation and value added content of the business while
minimizing everything else.
g) Total Quality Management: The businesses now have started
to realize that an outside certification for the quality of the
product helps to get goodwill in the market. Quality
improvement is also necessary to improve the customer
service and reduce the cost of the business.
Types of Restructuring
Business firms engage in a wide range of activities that include
expansion, diversification, collaboration, spinning off, hiving off,
mergers and acquisitions. Privatisation also forms an important
part of the restructuring process. The different forms of
restructuring may include:
HURDLES OF BUSINESS RESTRUCTURING
Restructuring is not as simple as "Making the mission statement
in the morning, assessing the corporate strengths and
weaknesses in the afternoon and articulating the strategies by
evening". Some of these are discussed below:
a) Culture: Culture is an important intermediary which determines
whether the strategy will or will not be successfully
implemented. Culture either helps or hinders an organization as
it seeks to achieve competitive advantage. The right culture for

an organization is the one that best supports its strategic

objectives. The challenge for an organization is thus to assess
the fit between the current culture and the culture required to
be implemented and to take steps to change the organization's
culture to better support it with what is required.
b) Inadequate focus and commitment of top management: Any
change program will be successful only if it gets adequate
support and commitment of the top management. If the top
management themselves are not focused or committed the
restructuring will be a failure.
c) What is in it for me" attitude: Say in case of a merger or an
acquisition, if each party is concerned only about itself rather
than the organization as a whole, the restructuring would not
be effective nor successful i.e. if each party tries to gain
benefits for itself at the cost of the others, the new organization
would fail.
d) Mind set/resistance to change: Any restructuring activity
involves some amount of change. Be it a merger or a joint
venture or a takeover, the management as well as the
employees require to align themselves the new structure. If
they are not willing to change their mindset, the restructuring
will not be successful.
e) Lack of involvement of employees: A restructuring activity
requires a lot of change: change in the mindset, change in the
working, change in the reporting, a change in the structure,
etc. Since human tendency is to resist change, the best way to
incorporate any change is to involve people in the formation of
this change. Failure to do so would invite resistance from them
which in turn will affect a successful restructuring.

f) Poor planning: As goes the phrase "Well started is half done". If

your planning stage itself is faulty, the whole activity would be
affected.
g) Resource Availability: Resource availability could be another
constraint. Lack of availability of adequate resources could
affect the working of the business and affect the restructuring
activity as a whole.
h) Cost and time: The cost and time involved for the gains to seep
through into the organization may at times make the firm
retreat from the process of restructuring.
i) Poor communication: At times, due to poor communication, the
need and benefits of the restructuring activity has not been
percolated to the lower levels of the organization. This in turn
would affect the effective working of the employees and their
performance. Unstructured communication flow, unclear
reporting structures, etc, after a restructuring activity, could
also affect the efficient working of the organization.