business strategic implementation-part3

Business Strategy Implementation

Question No. 3

What happens to a corporate life cycle during the process of corporate restructuring and how can corporate sustain and grow during the restructuring when the life cycles are negative?

Corporate Life Cycle

1. Introduction phase:The firm should only use equity financing because it needs all the flexibility available to change resources, adapt to market conditions and meet customer needs. The risk born by all providers of capital would be too great for any lender to accept. The firm incurs large losses throughout the period and no lender would accept that. Only trade financing may be used as soon as receivables build up.

2. Expansion phase:Most financing should be with equity because of the need to accumulate resources that are to stay permanently in the company. As soon as the company starts to break-even, short term financing should be used. The profits are not sufficient to pay interest on long term debt and the company is still too risky.

3. Maturing phase:The company becomes very profitable. Short term and long term debt are now accessible on good terms. Lenders are attracted by a high growth and profitability track record. Still, equity represents a good portion of capital. Acquisition of smaller firms in the industry uses up free cash and retained earnings.


4. Standardization and obsolescence:As the product market stabilizes, risk diminishes and profits become more steady. Lenders, both short and long term, see the company as a good credit risk and the repayments are indeed assured as long as the customers keep buying the products. The company needs to expand its sales, and for that, plant and equipment must be expanded. There are savings in automation to boot. Plant and equipment needs can be financed with long term debt. The company now follows a very conservative dividend policy that attracts shareholders who prefer income or defensive type of stocks. Equity as a proportion of total assets is reduced because most of the assets growth is financed by debt.


5. Corporate restructuring and new products:A firm will not continue existing with a product that becomes obsolete. The firm would be forced to close down, if it did. All firms must keep seeking new ways to serve their customers. As they do, they enter a new corporate life cycle and this mandates financial restructuring: to move through a new series of phases. New equity capital will be needed to pay some of the debt accumulated in the last phase of the previous cycle.

One can naturally imagine companies that go simultaneously through different phases of corporate cycles while handling products at different stages of maturity. Their needs for borrowing are more of a mix; there isn't one optimum capital structure for all firms. One way to determine if a given company is close to its own optimum is once again by looking at its costs of different sources of funds.

Outcomes of Corporate Restructuring

a) Regrouping of business: This involves the firms regrouping their existing business 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) DecentralizationIn 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) OutsourcingOutsourcing is another measure of organizational restructuring that reduces the manpower and transfers the fixed costs of the company to variable costs


e) Enterprise Resource PlanningEnterprise 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 EngineeringIt 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 a good will in the market. Quality improvement is also necessary to improve the customer service and reduce the cost of the business. The perspective of organizational restructuring may be different for the employees. When a company goes for the organizational restructuring, it often leads to reducing the manpower and hence meaning that people are losing their jobs. This may decrease the morale of employee in a large manner. Hence many firms provide strategies on career transitioning and outplacement support to their existing employees for an easy transition to their next job.

How to Sustain during restructuring when lifecycle is negative.

1. Align structure to strategyAll restructures must align to strategy. This may seem self-evident, yet a significant number of organisations fail to do so. For example, if local conditions are a predominant factor, then stress local sales and marketing functions rather than a centralised behemoth that then tries to matrix with local elements.


2. Reduce complexitySimply put, complexity costs. Whether it is a complex organisational structure, a complex product offering or complex transactional processes, the added cost of complexity can be a drag on performance.To mitigate complexity, there are three considerations that help with organisational design: Design structure for strategy before you design for specific personnel.

Organisational redesigns which are a compromise between strategic intent and line management preferences inevitably add complexity. So, while internal political intrigue is unavoidable, at least start with a clean and clear design that matches to strategy.

Avoid making leadership roles too complex. Minimise the use of matrices. They introduce measurement overhead and

a lack of clear direction to the staff.


3. Focus on core activityRemove noise (inefficiency in processes) and enhance core before restructuring roles. This means that you will need to know what people are doing today by obtaining a detailed understanding of tasks by role. This ensures that no value-added activities are thrown out when removing a role. Similarly, duplication and redundant activity can be removed at the time of the restructure.

4. Create feasible rolesDon’t overload roles – restructures generally leave an organisation with fewer people to do the same amount of work. When restructuring to reduce headcount, make sure you understand the current workload of employees.This will help to ensure you design roles that are neither too heavily laden nor indeed too light. Furthermore, role design must take into account realistic groupings of skills. Packing a role with too many distinct skill-sets reduces the pool of durable candidates.


5. Balance ‘own work’ and ‘supervisory load’ of managersThe case of leadership or “management loading” can be particularly troublesome in restructures. Often, the inability of managers to focus on leadership tasks due to increased output requirements can create significant problems for an organisation. For example, time spent mentoring and coaching staff drops off, staff become disengaged, more issues arise due to staff errors and managers end up spending more time resolving them. To ensure management are appropriately loaded, it’s critical to balance three elements: The number of staff directly managed or supervised. Staff ability to perform work without supervision. The amount of ‘own work’ managers have to do on top of their

leadership activity.


6. Implement with clarityOften there is confusion in the first weeks and months after an initial restructure. After all, who is supposed to be responsible for what? The answer is to clarify roles and responsibilities from the beginning, identify all functions (activities, tasks and decisions) that have to be accomplished for effective operation, clarify who should be involved and be specific about accountability.

7. Maintain flexibilityFinally, it is important not to cut your resources too fine. If the organisational change is material, you will need resource flexibility in the first few months. So even as you strive to operate more efficiently, be sure to give yourself some wriggle room in your staffing. Flexibility applies not only to staff members, but to staff capability.Leave yourself and your leadership team some room to respond to capability gaps in the new structure.