Strategies management _WJ

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    Management
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    Undergraduate
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Restructuring Strategies

Downscoping

Downscoping denotes to the means employed in eliminating the processes or businesses that have no relation to the organization’s core functions. In essence, downscoping refers to the refocusing of an organization’s fundamental or central business. It is important to note that downscoping as a restructuring strategy often includes or involves the aspect of downsizing, it does not get rid of the organizations core workforce as it may lead to the loss of the business’ central competencies. Downscoping therefore is a restructuring strategy that aims to eliminate any aspects of the business that are not related to the main business that the organization is focused on. The strategy is directed at the establishment and reinforcement of the organization’s core focus. An example of downscoping is when an organization is managing various businesses; when they implement downscoping as a strategy for restructuring, they reduce the number of businesses they are managing in order to concentrate of the core business that advances the objectives and goals of the original business.

Downscoping is said to lead to better outcomes for a business or an organization as it enables the business to streamline its functions and focus on the most important aspect of the business. Additionally, the strategy is both a long and short term restructuring strategy that improves the functions of the business. In this manner, downscoping as a long-term restructuring strategy is aimed at the achievement of greater performance. This is achieved through a reduction of the costs of the debts that the business has accrued in the other businesses that are unrelated to the core business of the organization. The strategy also lays emphasis on tactical controls resulting from focusing on the organization’s core function and bottom line. In this way, the streamlined and more focused organization is able to advance its competitive ability in a particular industry. In downscoping, the organization restructures and might even sell off entities that are unrelated to the central business without actually getting rid of employees or trying to reduce the organization’s workforce. The strength of downscoping as a restructuring strategy is that it enables the company to direct its focus on its strength in a bid to make the organization more competitive which means that it is a competitive strategy as much as it is a restructuring strategy. In most cases, the organization which is now known as the parent firm is able to achieve the improvement of its performance through the institution of this strategy. Diversified organizations often benefit from the downscoping strategy as the effectiveness of the management is bound to increase since there will be less diversification that needs the management’s efforts to be directed at different directions. The top level management is this case are then able to manage the central business of the firm in a more effective manner (Hittet al. 2006).

In some cases, organizations will adopt the downscoping strategy in restructuring in conjunction with downsizing though this is not always the case. In the United States, the downscoping strategy is used widely than in other places in the world. Most countries in Europe chose the direction of developing diversified conglomerates but the United States organizations have been known to recently prefer this restructuring method in light of advanced development that has brought forth much more competition. The trend is however catching on in various parts of the world as it is noted that it has long-term benefits for an organization in various aspects such as the strengthening of an organizations functions and brand. A good example of a company that employed this restructuring strategy is General Motors, which closed twenty-one plants and reduced the scope of their business operations by closing the diversified aspects of the organization to focus on their core business.

Reasons for Downscoping

Organizations in their restructuring efforts adopt downscoping for various reasons. The reasons for downscoping may include the aspect of declining revenue. A reduction in an organization’s profits may force an organization to restructure to deal with cost and advance profitability. There would be little need to keep a diversified organization if the output is little which means that the organizations profit would also be low. The money that goes into sustaining a diversified business with a decline in profit is counterproductive and hurts the bottom line of the company. Every business has the aspect of profit as its bottom line and therefore, declining profits would mean that the organization needs to streamline to meet the demands of the core company and still be sustainable enough to be paid without denting the company’s revenue. An organization may also be forced to restructure as a result of decline in business which means that business has gone low and becomes necessary to downscope to cut costs and advance the company’s objectives.

Therefore, following the above reasons, it is notable that the most underlying reason that necessitates downscoping in a restructuring effort is the need to reduce or cut the cost of operations within the organization and focus on the core business. Other reasons for downscoping as a restructuring strategy include the need to get rid of businesses and operations that do not perform and as such have become deadweight that drags the company down and sometimes there is need to minimize the levels of management within the organization. The management incentive in instituting downscoping as a restructuring strategy is a reduction in cost and an improvement of the financial presentation of the organization.

Planning for a downscoping as an aspect of a restructuring within the company is an important step in restructuring. It is important as one of the errors that a company should refrain from if they are to achieve successful restructuring in the organization. Failing to plan will often result in many hiccups that may cost a company more than they had bargained for. If the company has made the decision to implement the strategy of downscoping, planning is key. They have to determine the associated businesses that will be affected and the reasons why that particular business is a suitable option to be eliminated. The organization also has to decide the manner in which the downscoping will be conducted. This makes it easier to restructure according to the resources that are available within the company and also addresses potential legal issues in the bid. If conducted in a bad way with minimal or no planning and forethought, downscoping as a restructuring method may result in legal issues for the organization. Due diligence has to be followed before an organization can implement this strategy.

Leveraged Buyouts

Leveraged Buyouts are a restructuring strategy whereby the organization’s management or some outside party purchases the assets of the organization. The financing of the purchase is often through debt and the resulting action is the privatization of the organization(DePamphilis, 2016). Most of the time, this restructuring strategy is necessitated by the mistakes conducted by the organization’s management. It is done in a bid to rectify inefficiencies by the management and the stakeholders of the organization where the directions they took are in self-interest rather than the interest of the organization. In essence, leveraged buyouts entail the action by a number of stakeholders who through debt by the company. When leveraged buyout is adopted as a strategy for restructuring, the shares of the organization are no longer available for public trading. In this way, the company thus will have new owners.

Leveraged buyouts make an organization private through the action of the stakeholders that buy the assets of the company. They restructure the organization by downscaling it an action aimed at reducing the organization’s impending debt. This strategy of restructuring is also aimed at reducing operations costa and advancing the organization’s efficiency. It makes it easier for the company to be sold directly to a different stakeholder or stakeholders while retaining the value of the organization. An example of the adoption of this strategy is the Hilton Hotels. The Blackstone Group bought the Hilton Hotels in leveraged buyout in which the transaction was financed with an estimated twenty billion in debt and just over five billion cash.

Reasons for Leveraged Buyout

A number of reasons necessitate management and stakeholders to pursue leveraged buyout as a restructuring strategy. One of the reasons for the adoption of the strategy is the need to cut down on the cost of administration within the company. Privatization of an organization achieves this in the sense that, a public company with shares that are traded in the public market has to give reports and adhere to the regulations set by the different authorities that govern the processes of public entities. They also have to have periodic stakeholders’ meetings and comply with the needs of the shareholders. All these things are costly to an organization. The costs that go into such processes are eliminated by leveraged buyout as a private company is not subject to most of these requirements.

The management of a private company is also not answerable to the stakeholder electorate. In essence, they are not accountable to outside influences, which mean that the organization’s management is restructures to be flexible and improves in efficiency. Additionally, leveraged buyouts result in a reduced number of shareholders who consequently will direct their efforts to the advancement of the company as most of the bureaucratic measures have been eliminated by the action of privatization. The stakeholders that remain after leverage buyout are accountable to themselves which means that they play a central role in the organization’s management. Streamlining the levels of management in an organization through leveraged buyouts makes the company a more compact entity that is directed at achieving the organization’s bottom line and less interested in pursuing public protocol and following bureaucratic procedures that may make it easier to dedicate time to pursuing short-term objectives.

Restructuring Errors to Avoid

In their bid to restructure, an organization should avoid the mistake of thinking that the restructure is solely financial. This is because; an organization’s restructure is bound to affect every scope of the organization. There will be changes to the company on every level with the aim of making the organization more efficient and progressive. In this regard, the changes are not solely of a financial nature for instance, downsizing affects the workforce, the systems, and processes of the organization. Leveraged buyouts affect the structure and ownership of the organization even though the underlying need for a restructure is the financial aspect aimed at advancing the organization’s bottom line.

Another mistake to be avoided in the restructure of an organization is the failure to plan. Planning is important to ensure that the strategy adopted will be beneficial for the organization. The plans also have to be of a realistic and attainable nature. They have to be consistent if they are to be successful. Finally, the restructuring should be done in an objective way that ensures the organization does not lose itself in the process.

References

Depamphilis, DM, 2013, Mergers, acquisitions, and other restructuring activities: an integrated approach to process, tools, cases, and solutions. Amsterdam: Academic Press.

Hitt, M., Ireland, R.D. and Hoskisson, R., 2006. Strategic management: Concepts and cases. Cengage Learning.