To what extent does restructuring transform corporate market and financial performance? Discuss using an extended example. Restructuring is simply the reorganisation of a company’s structure to combat external or internal forces that hinder the maximisation of shareholder value. The term restructuring is quite broad an is an umbrella term for any action taken by a firm to maximise shareholders wealth (Wright et al) or a company’s reaction when it’s under pressure (Usui and Colignon, 1996).
These actions “bracket mergers and acquisitions with much else” (Froud et al., 2002, P.2). This essay should explain in great detail how restructuring can transform corporate market and financial performance. It will focus on financial, portfolio and organisational restructuring and more specifically the following restructuring actions: mergers and acquisition and outsourcing and off-shoring. In addition Marks and Spencer and British Airways would be used interchangeably as extended examples to further illustrate stated points. Restructuring actions usually occur to revive failing businesses.
By delayering or merging with another business firms are likely to become more competitive and more profitable. It is also not uncommon for restructuring to be used as a preventative measure to stay ahead of the game and react to competition. If done correctly and when necessary, it should result in economies of scale, decreased operational costs and easier communication.
Financial restructuring refers to changes in a company’s financial structure. It involves managing debts, stocks and shareholder payments. Portfolio restructuring on the other hand deals with products, acquisitions and diversification. Finally organisational restructuring is mainly concerned with the human resources in the company.
Mergers and Acquisitions are the most common forms of restructuring. “In value terms, the merger of whole companies through (often hostile) takeover continues to be the most important form of restructuring”. (Froud et al P 3). Companies prefer to restructure in this manner as it brings numerous instant benefits and can aid in transforming market and financial performance immediately. Firstly, merging with or acquiring a company gives an instant increase in market share. It is the easiest way to enter into a new market and have a larger customer base overnight. British Airways’ recent merger with Iberia has been beneficial to shareholders, employees and customers.
According to the airline their corporate market would be transformed as they would be flying to more destinations, own more aircrafts and have more passengers. Thus making it more competitive and strengthening the company’s image and brand. In addition, their financial performance would be transformed as they stand to benefit from a significant decrease in costs and benefit from economies of scale the merger is bound to provide. These costs savings can be then passed on to the customer and might enable British Airways to be competitive on price; a luxury it might have not been able to afford prior to the merger.
The merger might also help British Airways break into the South American market; a market in which it had no prior expertise or significant market share in. In addition to an increased market share, Kotler’s 8 C framework details how a firm’s market power could be increased through mergers and acquisitions (Kotler et al 2005).
Firms gain greater control of every aspect of their products, greater efficiency, greater control of customer experiences and increased buying power if they have links with their competitors, challengers, collaborators, commodities, components, customers or consumers. Despite aiding in transforming corporate market and financial performance to some extent, mergers and acquisitions aren’t exempt from critique. This form of restructuring despite being the most common is also the most critiqued. Firstly, there is the issue of Monopoly and fair competition.
The Acquisition of a competitor could instantly make a firm the market leader. Consumers suffer as a result. There might be little product differentiation, increased prices and barriers to new entrants could be put to prevent other smaller companies from entering the market thus giving a single organisation too much power. The government sometimes has to step in to minimise the formation of monopolies. British Airways were hopeful for a merger with American Airlines which would have made them a dominant airline in major airports across the world.
The deal was eventually stopped because of its anti competitive nature. In addition to monopolies, a popular critique on mergers and acquisitions is they just don’t work. “…the Boston consultancy group estimate that 64% of recent US acquisitions actually destroy value for the acquirers shareholders” (Kotler et al 2004) “rather than increased profitability, mergers and acquisitions have come to be associated with lowered morale, job dissatisfaction, unproductive behaviour…” (Meeks 1977, Sinetar 1981, Attendorf 1986, Cartwright & Cooper 1993).
Three major reasons for the failure of mergers and acquisitions are a clash of organisational culture, human relations dilemmas and abandoning core competencies. Different organisations have unique styles of going about their day to day operations.
When a company merges with or acquires another the dominant culture usually prevails however employees from the organisation with the less dominant culture might still carry on doing things the way they’ve always done it thus causing this clash. Errors associated with clashing cultures could range from minute to disastrous and if this carries on for a prolonged period of time, the opposite of the perceived benefits of mergers and acquisitions is most likely to occur.
Employees also tend to feel worried about their job security when any form of restructuring takes place. Their insecurities are manifested through their actions that usually prove costly for the newly merged or acquired organisation and can eventually drive it to failure. High labour turnover, absenteeism and decreased productivity are some of the actions that could be manifested as a result of job insecurity.
A disparity in core competencies is a final reason why mergers and acquisitions are becoming more prone to failure. Hamel and Prahalad (1994) argue that an organisation can never gain long term financial rewards if its core competencies are ignored. Thus merging with or acquiring a company with contrasting core competences isn’t likely to be successful. The merger between Daimler Benz (makers of Mercedes Benz) and Chrysler is a perfect example of a failed merger. Due to a clash of organisational culture and contrasting core competencies, the merger eventually ended in failure.
There were good intentions behind the merger but finding the balance between Daimler Benz’s high end auto mobiles and Chrysler’s middle of the road range proved more difficult than anticipated thus Chrysler was eventually sold off. Druckers (1985) critique of mergers and acquisition argued that managers often seek to restructure in this manner to spread risk but it doesn’t guarantee success and usually results in failure. His five rules for successful acquisition give useful steps that managers might want to take into consideration prior to restructuring their organisation in this fashion. Outsourcing is another restructuring initiative used by firms when they find it necessary.
Outsourcing aids in transforming the corporate market and financial performance of a firm to a great extent. It enables firms to focus completely on their core competencies as other organisations are hired to carry out activities that aren’t directly related to the company’s operations. It saves costs, improves efficiency and aids in the implementation of rapid change. In addition, finding workers with the necessary qualifications and skill in a specific country required might be difficult, thus offshore outsourcing becomes a necessity (King, 2009). One of the most outsourced operations in the United Kingdom and the USA is Information Technology.
”There are more IT positions in the USA than there are graduates” (Morrill, 2009). Mark’s and Spencer’s indulge in offshore outsourcing to aid with its IT operations. As a result they have been able to focus on areas of more importance to them which is the quality of their products and their customer service. Additionally, offshore outsourcing aids in creating jobs in developing third world countries where unemployment rates are high. Some of the accounting and research operations on Wall Street are outsourced offshore. The companies are usually based in India where the best candidates are selected for the job and would be paid a good wage according to the standard of living in India.
However if the very same operations were to be performed in New York, the staff may not be as skilled as those in India and would demand triple the salary in accordance to the higher standard of living in New York. All in all, Outsourcing is intended to ensure that the most skilled and most efficient people do the job at a mutually beneficial financial cost. On the other hand, there are so many ethical and political concerns associated with outsourcing.
Many believe that it’s damaging to the economy as creating employment offshore decreases employment in the company’s home country. “…outsourcing is a poor alternative to a firm’s internal management of Information Technology and services because it is tantamount to selling your ‘birthright’…” (Clark et al, 1995). Also, ethical issues such as exploiting local workers in offshore countries in a desperate bid to keep overheads to a bare minimum and maximise profits have been connected to outsourcing. Numerous companies have been scrutinised and criticised for this.
The likes of Nike and Primark have endured the embarrassment and scandal of engaging in child labour in an attempt to keep overheads unrealistically low. Pisano (2009) argues that outsourcing operations especially manufacturing can provide a leak in information which might enable competitors overseas to hone their skills and possible surpass the skills of the company outsourcing. Other criticisms of outsourcing include quality control, loss of managerial control and hidden costs or the service being outsourced proving to be more costly in the long run.
British Airways outsources almost all its operations. Back office operations, finance and accounting and its in-flight retail business are all outsourced. This has resulted in poor employee relations, a breakdown in communication and poor customer service amongst a host of other things. Whilst Marks and Spencer’s restructuring included outsourcing IT operations which resulted in some employees being made redundant and other transferred to their outsourced off shore location.
To conclude, restructuring transforms corporate market and financial performance to a significant extent. Every firm needs to change especially when it is at risk of failure or it’s not as profitable as it once was. Mark’s and Spencer’s restructuring ensured the company was re-branded in the customer’s mind and an emphasis was placed on quality. As a result sales soared and market share was gained.
On the other hand their restructuring initiatives also led to the company making the strategic decision to close all shops in France; thus bringing about bad press, criticism from trade unions and the French government, law suits and parties calling for consumers to boycott Mark’s and Spencer’s stores.
Restructuring is however necessary if a business is to remain competitive. If competitors are changing and a firm decides to remain stagnant, it is only a matter of time before it becomes irrelevant. The decision to restructure must be dependent on the overall business strategy. “Strategic management as a discipline is concerned with how firms formulate and implement strategies in order to accomplish desired performance goals.” (Schendel and Hofer 1979).
A more aggressive proactive strategy might be better suited for companies pursuing mergers and acquisitions whilst an organisation with a cost saving and value adding strategy might prefer to outsource. Restructuring does transform corporate market and financial performance but should only ever be used in synch with the overall corporate strategy to reap maximum benefits. Bibliography
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