An examination of the determinants of corporate restructuring in a family-based Chinese firm.

ABSTRACT

This research aims to investigate what factors contributed to corporate restructuring decision in a family based small Chinese company. A questionnaire was designed with open-ended questions for the data collection. The data was collected through the email correspondence and complemented by telephone communication. The Managing Director of the company answered all of the questions. The data was analyzed with a qualitative approach. The research suggested that there were two major forces that contributed to the company's restructuring decision. The internal conflicts and control desire over the decision making and business operations as well as the ineffective and inefficient practices have been the significant internal forces associated with the decision for restructuring. The major external factors that contributed to the restructuring decision were the change of market demand in the favor of the company. This external factor contributed to the change of the company's strategy. The internal factors seemed to be more dominant than the external ones.

1. INTRODUCTION

Guangzhou Denuo Machinery & Trading Co. Limited (formally Guangzhou Yindaly Co. Limited) (Guangzhou Denuo), a family based small Chinese company engaged in international machinery trading business has recently completed its organizational restructuring. The firm is located in southern China's Guangdong province. Currently the company has employed thirty-seven staff including four middle managerial employees and three family members who have taken one financial and the two top executive positions in the company. The company has been performing well since its establishment in 1995. As Robbins, Bergman, Stagg, and Coulter (2000) pointed that restructuring may affect an organization for a period of time. Anecdotal evidence indicates that many companies that have restructured are reporting serious problems of mistrust of management. Koretz (1997) suggested that organizational restructurings had little, if any; positive impact on company earnings and the human costs can be high. Bolman and Deal (1997) also suggested that restructuring is a powerful but high-risk tool for organizational change. In the short term, it almost invariably produces confusion, resistance, and even a decline in effectiveness. Success or failure in the long run depends on how well the new model aligns the organization with its environment, task, and technology and on the effectiveness of the processes for putting the new structure in place. Montgomery and Thomas (1988) and Jain (1985) also indicated that restructuring was usually associated with a firm's poor performance. Therefore, the main aim of this research was to investigate why Guangzhou Denuo, a family based small Chinese firm with satisfactory performance, wanted to restructure its corporate structure.

2. LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK 

McKinley and Scherer (2000) defined restructuring as any major reconfiguration of internal administrative structure that is associated with an intentional management change program. This definition is consistent with Bowman and Singh's (1993) description of organizational restructuring. According to Gibbs (1993), there are three types of corporate restructuring transactions, namely 1) financial restructuring including recapitalizations, stock repurchases, and changes in capital structure; 2) portfolio restructuring involving divestment and acquisitions and refocusing on core businesses, resulting in change of the diversity of business in the corporate portfolio; and 3) operational restructuring including retrenchment, reorganization, and changes in business level strategies. Since Guangzhou Denuo was a family based private company, and the issues related to the financial restructuring (type 1) would not be applicable to the case situation. Therefore, this research focuses on the portfolio and operational restructuring only by examining the driving forces that contributed to Guangzhou Denuo, a family based private Chinese company.

Restructuring is also referred to as downsizing, which may boost organizational efficiency and effectiveness (Smallwood and Jackson, 1987; Bailey and Szerdy, 1988; Freeman and Cameron, 1993; Bartol, Martin, Tein, and Matthews, 2001). Miller and Friesen (1984, cited in Bolman and Deal, 1997, p.73) suggested that the environment shift, technology changes, organizations grow and leadership changes are the reasons that lead to restructuring. Massimo and Delmastro (2002) deemed that the adoption of advanced manufacturing technology and new human-resource management practices favors organizational change. Miles, Covin and Heeley (2000) suggested that environmental dynamism impacts the strategies chosen by small firms and moderates the relationships between organization structure, strategic posture, and firm performance. Firms in stable environment can often predict such factors as raw material suppliers, customer demand, and the amount of time required for particular operations. The unpredictability of dynamic environments, on the other hand, can negate any benefit that would be derived through the adoption of mechanistic structure. In these later contexts, companies must have the ability to rapidly respond to changing conditions. Accordingly, organic structure has been found to be particularly prevalent and effective in dynamic environments (Miller and Friesen, 1984). Moers (2000) suggested that restructuring is also associated with strong market competition. Gibbs (1993) believed that the restructuring is partially explained by free cash flow. Free cash flow is a function of investment opportunity, operating cash flow, diversification, financial leverage, and corporate governance. For a given value of a free cash flow variable the likelihood of restructuring increases. Jensen (1986) also suggested that restructuring could also be described as returning free cash flows to owners. The empirical work of Hoskisson and Johnson (1989) suggested that a significant amount of restructuring is associated with high levels of diversification strategies. This finding was confirmed by Hoskisson and Turk's (1990) study which concluded that restructuring is primary directed at overcoming control problems that are associated with diversification and that result in poor performance. Hill and Snell (1988) found that ownership concentration was associated with lower levels of diversification in R & D-intensive firms. Thus ownership diffusion is positively related to diversification.

Most empirical studies of the determinants of restructuring have been based on samples of medium-to-large firms. Relatively little is known about why small firms change its structure, there is almost not report on a family-based Chinese firm's restructuring. Given that small firm management is often fundamentally different from large firm management (Cohn and Lindberg, 1972), many empirical findings based on samples of medium-to-large firms may not be pertinent in the small firm context, and particularly in a family-based Chinese company. This in fact indicates a need for restructuring research studies using small Chinese firms to provide additional insights regarding the determinants of restructuring. Therefore, this research was designed to examine the relevance of the management theories in restructuring an organization and the variables revealed from the past studies in this specific setting. The research findings should fill this gap in the literature in this specific context and provide practitioners as well as academics with both theoretical and practical insights. A conceptual framework indicating the relationship between the dependent variable (corporate restructuring) and independent variables is presented in FIGURE 1. The independent variables selected from the past research findings on the topic, observations based on one of the researcher's knowledge about the company and five years personal experience in a number of different managerial positions in the company.

[FIGURE 1 OMITTED]

3. RESEARCH METHODOLOGY

The researchers approached Ms Liu Qiong, the Managing Director of the company, and sought her help for the data collection for the research project early in September 2003. Ms Liu Qiong agreed and participated in the research project. A questionnaire was developed in English as the instrument for the data collection. The questionnaire was developed based upon the conceptual framework (Refer to Figure 1). It consists of twenty-six open-ended questions so as to gain in-depth knowledge on the issues. The data collection process took about two weeks to be completed through the email correspondence and complemented by a number of telephone communications to clarify some of specific issues. Ms Liu Qiong was graduated from Southern China University of Technology, a well-known Chinese University in China. Her major was in textile engineering. She had considerably good English skills. However, she believed that it was better and more convenient for her to express her meanings in Chinese. Therefore the answers for the questions were in Chinese, which were later translated into English by the researcher. The translation of the questionnaire was also reviewed by a knowledgeable bilingual academic.

There were two major issues encountered during the data collection process. Since the researcher used to work in the company for many years and knew most of the staff members in the company including the respondent's brother who is also her deputy. The respondent therefore was concerned about the possible leaking of her responses to other family members of her, especially to her brother. As indicated in previous section, the researcher made it clear that the data will be treated as strictly confidential, and the findings will not be published without the respondent's further permission. Also the research promised the respondent on the phone that any responses will not be leaked to any of other family members and relatives in the company. In answering the questionnaire, the respondent had a difficulty understanding some of the business and management theories and terminologies. She did not, for example, have a clear understanding of the concepts about 'corporate level' and 'business level' strategies, and was not clear what 'transformational' and 'transactional' leadership styles were. The researcher therefore explained those concepts on the phone to her. Positively, the respondent understood the concepts quickly and was able to come out some examples related to her company and her personal leadership experience.

4. DATA ANALYSIS

The responses were categorized in a similar way prescribed by Walsh, Wang and Xin (1999) and Coffey and Atkinson (1996). That is, after the qualitative data being scanned many times by the researchers, the qualitative data were classified into different bulk group of data sets based on the most meaningful bits of the data. Each bulk group of data set then was condensed into analyzable units within each category that is associated with each of the independent variables. All the variables that were found significant were then grouped into two groups of factors; i.e. the company's internal and external factors.

4.1 Internal Factors for Restructuring

At the beginning of the establishment of the company, the company was organized by a group of relatives of the family. First, there were two family members in the company, Ms Liu Qiong--the founding owner of the company, another one was the owner's father-in-law jointed company as an employee. Both of them had rather confused roles and functions. Both of them were in charged of delivery, reception, sell, drivers, office work etc. About two years later, the business was booming, the younger brother of the founding owner was brought into the company by his sister--the founding owner. Meanwhile, the younger brother brought his wife into the company. Still, the roles were mixed greatly, while the younger brother was mainly responsible for operational matters in the company, and the brother's wife was responsible for accounting tasks although she had almost no knowledge about the job she was doing. With the further business expanding, the company needed more employees, and other relatives were employed by the company with a number of outsiders. Since them the defects of the family-based company has started showing itself gradually. The business continued to grow, but the founding owner has been greatly responsible for the unnecessary loss due to inefficient practices among the family members and relatives in the company. The dilemma for the founding owner was that her brother and sister-in-law did not exactly follow her decisions. More importantly the sister-in-law was incapable with her job but exercise her power together with her husband to use significant amount of the company's money for her own purpose (e.g. buying a house, a car, etc) without permission from the founding owner. In most cases, when the couple withdrew some money from the company, the founding owner might know this a month later. Meanwhile, the founding owner had no idea about the financial performance of the company. But she could not blame them anyone at all. What she could do was to keep an eye on the accounting more often and set up another accounting book by herself. Another situation was that the brother was becoming more and more interested in one business that was the gardening machinery. The founding owner--the sister had to help him in this field by injecting capital into this business. The gardening business was rather complicated. The company had 18 outlets around China, which needed more cash flow.

The conflicts between the sister and brother were unavoidable. Oral fighting and cold war were often happening. Both of them were very strong, stubborn and subjective persons. Each of them thought what she or he does was the right thing. Each of them wanted to be over the other one. Both of them wanted to be an absolute leader in an absolute position to make the decisions for the company. Although the brother was the later one and was not the legal owner of the company, he still kept thinking he is the son of the family, and he needed more attention from everyone. He wanted to be a 'tiger' in the company. There is one old saying in China, "two tigers could not co-exist at the same hill", which reflect this situation vividly. When the younger brother joined the company in 1997, he brought nothing into the company, but the sister gave him some shares of the company as a gift as well as a motivation, also promising some proportion of profits to him. Under the Chinese culture, the brother becomes one of the bosses naturally, the later employees treated him as a leader very naturally as well. Everything seemed very natural, because if the sister did not do this in the family way, then she would have been blamed by other family members.

All of these internal factors had pushed the sister to take the restructuring step. First step was to reform the financial practice. Two independent financial systems were set up according to the new structure. The accounting job was taken by a qualified person outside of the family members, which could be fairer and more honest. Second step was to separate the responsibility with her brother. Before the restructuring took place, each of them had the right to manage and control something in common. After the restructuring, each manager is responsible for her/his own field. The company was named Guangzhou Yindaly Development Limited Company, after the restructuring, the old company was eliminated forever, instead of another two subsidiary companies, one was named Guangzhou Denuo Machinery and Trading Company, another one was named Guangzhou Huirong Dell Development Company. The sister and the brother manage these two subsidiary companies together. But they can't interfere in the other one's business. The two bosses have the rights to know the financial position of the other company. But they have no power over the decision making of each other's business with the exception of the corporate strategies of the whole company. Another change is the redistribution of shares of the profits. The brother's core business is gardening machinery; he has been given 50% of shares by the sister in this business. The sister's business is the other machinery, the brother could get 5% of the shares and profits from her business.

4.2 External Factors for Restructuring

When the company was set up in 1995, the business was relatively simple. The company only dealt with the spare parts of metal packing equipment and the related raw materials. Two years later, when the brother joined the company, the business was expended. They added the gardening machines, cleaning machines, reinforcing steel bar processing equipment and metal packing machinery into their business portfolio. Especially in the beginning of year 2003, the company becomes the sole agent of one of the world largest two-pieces can-making machinery manufacturer of United States. The company represents the US Company to sell the can-making machinery into the Chinese market. Also since China became a formal member of WTO, the can-food industry in China has been required to meet international standard. As a result, the can-making machinery that is produced by US multinational company is in strong demanding.

With the new market emerges and the more diversified business, the company urgently needed to change its old restructure to implement its diversification strategy in the new era. The company needed to allocate the capital and other resources more adequately and efficiently. The capital of the company was mainly allocated in a single gardening machinery business prior to restructuring.

5. CONCLUSION AND IMMPLICATIONS

In conclusion, the restructuring was successful with respect to the positive effects it had on the human resource management and the company's overall performance. The company's restructuring decision was determined by the company's internal and external factors. The internal factors seemed to be more dominant for the company's decision to undergo a restructuring. The family based company had no clear structure and job design policies in place. The company was run and fully influenced by family pressure and the constraints implied by the social norms or culture, which had provided a culture-base for the growth and development of the conflicts between family members in the company, the desire of other family member to control and exercise the power over the decision making and business operations in the company, as well as the inefficient and ineffective management and operations in the company in turn the company was forced to undergo a restructuring process. The main external factor that contributed to the restructuring decision was the change of market demand in favour of the company. This external factor contributed to the company's diversification strategy.

The findings of this investigation may provide the company with the following practical implications, which may also be useful for many other family based Chinese firms. Firstly, the company needs a better structure, although it seems that the founding owner and her brother have relatively separate role in each business section. Especially, the structure for the middle level management is still not clear, which appeared to be not capable to carry out strategy implementation. Structure served as a vehicle for implementing new strategies. Thus no strategy would be effectively and efficiently implemented with out the right structure. Secondly, management practice needs to be conducted in a professional manner. This could be achieved by bringing qualified outsiders into the company so as to gradually convert the family-based management approach to a formal management practice. Efforts from outside consultants may be worthwhile for doing so. Thirdly, the company needs to have some educational and/or training programs in place to educate its employees as well as the owners. As discussed earlier, most of the employees in the company are incapable and they are employed by the company on the sympathy basis rather than their capability. The company is growing and the environment is changing and becomes more dynamic and competitive. More importantly the nature of the company's business deals with multinational companies. The mismatched business and management practices between the company and its international business partners would at least mean ineffective and inefficient. The knowledge about management and business theories therefore has become even more crucial for the company's long-term success. Finally, there was no strategic planning concept in the company although the founding owner is ambitious with a long term view about the company's business. The development and success of the company are primarily based on her instincts and chance. So far she has been lucky enough, but the future is so changeable. In order to implement a formal strategic plan, the company has to establish an information system so as to conduct environmental scanning from time to time, which may allow the company to catch the wave of the environment and craft better strategies for its future business to both survive and succeed.

The application of the findings from this study, however, may have its limit. In terms of future investigation/research, a broader survey research approach with larger sample size may overcome the shortcomings of this research study. This research may have also contributed some variables for building up a better conceptual framework for such a broad investigation.

ACKNOWLEDGEMENT

We would like to thank Ms Liu Qiong, the Managing Director of Guangzhou Denuo Machinery & Trading Co. Limited, for her time and support for this research project, and her permission to use the company's and her real names for publishing the research findings.

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Author Profiles:

Ms. LIU Lixian is a Master candidate in Financial Management in The School of Finance and Applied Statistic, Faculty of Economics and Commerce at The Australian National University, Australia.

Dr. JIANG Fuming earned his Ph.D. at The Australian Graduate School of Entrepreneurship, Swinburne. Currently he is a researcher, lecturer and course coordinator in international business in The School of Business and Information Management, Faculty Economics and Commerce at The Australian National University, Australia.