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Examining the U.S. experience to discover successful corporate restructuring.

As the United States entered the 1990s, restructuring was the modus operandi in the large majority of its corporations. Pressured to compete globally, improve productivity and create value for their shareholder, these American corporations pursued restructuring vigorously. Restructuring provided a vehicle to rethink the concept of business these firms espoused and redeploy resources in pursuit of carefully revised strategic mandates.

By conservative estimates, more than half of the 1,000 largest corporations in the United States have restructured themselves during 1985 and 1989. In 1988 alone, the 50 largest deals totaled $111.8 billion, surpassing the previous record of $94.6 billion in 1985. Experts expect restructuring activities to continue for several more years, bringing about a new industrial structure that will be compatible with the demands of an emerging competitive global economy. However, evidence suggests that restructuring activities are risky, with about 50 percent of all such efforts ending in corporate failure.

What can senior executives and strategic planners learn from the experience of U.S. companies that have undergone restructuring? This article attempts to answer this question by: presenting a model of the antecedents, types, and consequences of restructuring; reflecting on unsuccessful restructuring activities and the lessons that emerge from them; and identifying major lessons from successful restructuring of U.S. corporations. These themes present recipes for engineering restructuring programs that revitalize companies' businesses and their approach to competition.

A model of corporate restructuring

Figure 1 presents a model of restructuring which is derived from literature and our analysis of various industries. This model presents antecedents forms and consequences of corporate restructuring.

The model identifies antecedents of restructuring as consisting of competitive (industry-specific) and company-related financial factors. Each of these factors includes a number of pertinent variables that jointly pressure companies to initiate restructuring strategies. The effect of these antecedent variables varies across industries and companies, thereby making it imperative for executives to carefully select the type (form) and duration of their restructuring activities.

On a macro level, three trends in particular appear to have intensified restructuring activities. The first is the globalization of industries and competition in many sectors of the economy. This trend has forced companies to reexamine their business concept and reconsider their resources and capabilities. In one industry after another, U.S. executives had to rededicate their companies' resources to their traditional fields of interest. Massive retrenchments were required to achieve such major transformation. In other industries, companies had to diversify in order to survive. This required acquisition of new skills and resources to revitalize U.S. companies and to reposition them well.

A second trend is the deregulation of several key industries in the United States (e.g., air travel, telecommunication and trucking), which has ushered in an era of intensive rivalry. Companies, in these and similarly deregulated industries, have recognized the need for different organizational structure and decision-making processes to respond effectively to these changes.

The third, and final, trend is the threat of raiders and takeover bids. These activities have caused companies to reconsider their financial and ownership structures and to initiate defensive measures in order to thwart such bids through restructuring. Fear of being taken over forced many companies to institutionalize fundamental internal changes by redesigning their administrative systems and organizational processes.

Several company-related forces have also created various types of restructuring. As displayed in Figure 1, one of the most important factors has been the growing realization that the traditional concept of the "perpetual" firm is becoming obsolete. In theory, the perpetual organization is presumed to have an indefinite life span as long as it has a business portfolio that maximizes shareholders' wealth and reduces their risk. This theoretical construction has been disputed in practice. By dismantling the firm or restructuring, its shareholders' interests have been better served than under the perpetual organization model. Divestment and corporate spinoffs have become respectable strategic tools of rebuilding viable organizations. They have enabled companies to "trim the fat," and focus on areas where they possess strong competitive position. Restructuring activities such as divestment and spinoffs have resulted in improving shareholders' wealth by revamping corporate business and operations.

Two types of restructuring

Restructuring has two basic forms: financial and strategic. When restructuring is financial in nature, it requires companies to undertake bold moves such as buying back stock, taking on more debt, reinvesting assets, divesting operations, and acquiring compatible businesses. Companies typically undergo financial restructuring to enhance their earnings so that they may increase their stock price and avert takeovers.

The second type of restructuring activity involves operational and strategic measures such as cutting back overhead and corporate staff, reorganizing day-to-day procedures, and changing the corporate focus. These strategic moves include divestitures, mergers, acquisitions, leveraged buyouts (LBOs), recapitalization, and decentralization. These types of moves usually aim to improve market share, achieve growth, correct past managerial mistakes, or create competitive advantages. Figure 2 summarizes each of these options.

Companies have considerable latitude in selecting the appropriate strategic restructuring approaches, depending on their competitive and financial position. Figure 3 provides an overview of the different options available for companies considering restructuring. Companies can use these options to achieve strategic and operational restructuring. Moreover, because it is rare that a single option can lead to successful restructuring, companies simultaneously use several strategic options to achieve such restructuring.

While there are no universal blueprints that work for all companies, seven distinct themes emerge from recent successful U.S. corporate restructuring activities. These themes represent some viable paths for companies to achieve successful restructuring.

Extensive, strategic restructuring yields better results than either moderate strategic or extensive financial approaches -- Extensive restructuring measures include reduction in the work force of 20 percent or more, significant debt recapitalization, firing top management, and buying or selling 40 percent of a company's operations. Strategic changes include: reducing costs, changing the market mix, acquiring new companies or businesses, undertaking new product efforts, and introducing significant changes in human resource practices. Strategic changes involve an analysis of the very concept of businesses coupled with a considerable reallocation of corporate resources in order to ensure successful corporate transitions.
Relative Corporate Use in
Activity Financial Strategic the 1990s
Acquisition x x high
Divestment x x high
Leveraged Buyout x high
Merger x x moderate
Recapitalization x moderate
Decentralization x moderate

When undertaking strategic restructuring, though, companies need not make drastic changes. For instance, firms should be cautioned not to remove too many experienced people which would leave vacuums in skills that could not be filled. In addition, firms should not cut critical services, or undertake changes as an end in themselves. Heinz, for example, realized that by laying off workers, closing factories and revving up production lines, gross profit makings increased from 33 percent to 39 percent of sales, and average earnings increased 15 percent per year. But the company now realizes that while it has become more financially successful, it has also alienated workers and may have cheapened the quality image of its products.

To avoid disasters, companies should not wait too long before initiating restructuring strategies. Problems should be recognized and diagnosed in a timely fashion, and executives should develop the ability to break away from their prior decisions. It is all too easy to get caught in the trap of believing that by allocating additional time, resources or efforts one can turn around poor company performance.

While extensive, strategically oriented methods are the most successful methods of restructuring, extensive financial programs should not be ignored. Financial restructuring activities have frequently produced positive results. Divestment, for example, can be a prudent option for conglomerates. Since some conglomerates suffer from a lower market value than more focused companies, divestment may increase such a conglomerate's profitability. A case in point is General Electric, which plans to launch one of the biggest stock repurchase plans ever. GE plans to buy back up to $10 billion of its own shares over the next five years. The program will boost GE's stock price and earnings per share and will absorb much of the substantial surplus of cash flow the company was generating.

Effective restructuring is more than one-time financial surgery. Cutting costs, selling marginal businesses, and buying back shares can raise the stock for a time. But companies may not achieve these benefits unless they plow money back into labor-saving machinery in core businesses, maintain a strong research and development effort, and seize appropriate growth opportunities through new products and markets.

Restructuring involves realignment of corporate governance structures -- There are three major changes involving the corporate governance of successfully restructured companies:

* Boards become more actively involved in strategic issues, sometimes even initiating strategic changes. Restructuring brings about an end to "rubber stamp" boards. Directors question the very purpose of the firm and the viability of its business concept. They must study the competitive environment in which the company competes, analyze company strengths and weaknesses, assess the company's standing in its markets, and develop strategies.

* Boards actively evaluate the performance of CEOs and other senior executives. When strategies are judged to be inadequate to create desired changes or when senior executives' style is viewed as the cause of poor company performance, replacements of the CEO and other senior executives may be required. For instance, after Allegis failed to achieve its goal of becoming an integrated, one-stop provider of travel services (by acquiring Hertz rental cars, Hilton International hotels and airline routes), the board removed the company's chairman, Richard Ferris.

* Board composition may be altered to reflect changes in the strategic orientation of the company or its ownership. United Airlines exemplifies this change; the company's new ownership by the pilot's union changed the board to reflect the needs of its core airline business. Pinnacle West (of Arizona) has made significant changes in the membership of its real estate business' board of directors. The purpose was to facilitate retrenchment activities away from the failing diversification in the electric power utility industry. In both cases, changes in the board were made to ensure that board composition would be compatible with the needs of a successful strategy implementation.

Restructuring requires the refocusing on what a company does best and the rebuilding of a competitive advantage -- Developing a competitive advantage (e.g., what gives a firm an edge in dealing with its competition) requires making a number of interrelated decisions. Foremost of these critical decisions is a definition of the firm's core business. Next, the firm must define its strengths and capabilities -- both existing and desired. This articulation of strengths and capabilities serves as a foundation for defining the firm's distinctive competence (what it does better than its rivals) that builds on its resources and unique skills. The next phase of the analysis requires consideration of practical ways of developing a distinctive competence into a competitive advantage; i.e., a superior competitive position relative to competitors and rivals.

Two cases illustrate this major theme of corporate restructuring. The first is Burlington Industries, a well-known leader in the embattled U.S. textile industry. Like other companies in the 1970s and early 1980s, Burlington produced a wide assortment of brands and products, which were not well-differentiated from its rivals. Awakened by the massive entry of foreign companies, Burlington could not compete effectively, and its performance deteriorated. In 1987 the company went private through a leveraged buyout (LBO); this was the turning point in Burlington's strategy. The firm redefined its strategy to emphasize specialty products in which it could excel. This strategy was supported by a massive effort to modernize plants and facilities and improve human resource planning.

Safeway offers a second interesting example of a corporate reorientation. The Oklahoma division of Safeway, called Homeland, is now back on the road to success after being sold twice through LBOs. Homeland has revamped its stores, created new marketing strategies and has experienced rising morale--all of which is attracting new customers. Executives feel free to make and implement decisions now that they no longer are captives of the Safeway corporate bureaucracy. These decisions are creating a whole new look for Safeway; for example, the chain so far has added video rentals, bakeries, fresh fish counters and flower vendors which will give it a new competitive edge. Innovation is fast becoming a major requirement for success at Safeway; it is evolving into the source of the company's competitive advantage. Innovation, in turn, is paying off--in the form of improved customer satisfaction, stronger market position, and enhanced company financial performance.

Effective restructuring requires sound human resource planning and practices -- There are two components to sound human resource planning as an ingredient in successful restructuring: an organization must be formed whose employees have both the motivation and skills needed to develop a firm's competitive advantage; and a corporate culture must be reshaped to reflect the changing values and priorities of the firm.

Restructuring creates many opportunities for novel human resource planning and management practices. It may allow companies to revamp existing systems or introduce new procedures to spur commitment to the strategy and to improve productivity. Restructuring also creates a momentum for examining, understanding and reshaping corporate culture.

Companies that have put these improvements in human resource management to work include Kodak, Square D and Colgate. Kodak boosted productivity by grouping workers into teams, teaching them how to inspect their own work, and then listening to their suggestions. In its precision components manufacturing division, assembly workers now arrange their own hours, keep track of their productivity and fix their machines. At Square D, a leading manufacturer of electrical equipment, CEO Jerre Stead sent all 19,200 employees to a two-day program of lectures and seminars that communicated the primacy of quality and customer service as the dominant values of that firm's strategy. At Colgate's "tech" group, the human resource department was upgraded to bring in experienced counselors who could advise the scientists on career opportunities, in anticipation of changes in the company's strategy and goals.

Restructuring cannot result in long-term financial improvements without effective human resource planning. This planning should consider required skills and capabilities, training and development requirements, and development of policies that foster innovation and risk-taking.

Redesigning the structure for flexibility -- Successful restructuring usually involves redesigning the structure of the firm, redefining the role of the company's headquarters, and defining appropriate structure for operations. Decentralization, by assigning greater responsibility and authority to a company's separate business units, is one way companies achieve such reorientation. A decentralized organization creates an environment where employees have the freedom to experiment and innovate. Domino's Pizza Distribution Corp. is an example of a company which hag employed this idea with great success. This firm -- which supplies Domino's with dough, pizza ingredients, equipment and promotional materials -- had annual sales of $5 million, but also experience losses of $300,000. In response, Domino's Pizza embarked on an ambitious restructuring program with an emphasis on decentralizing operations. This turnaround resulted in improved financial performance and profitability.

Successful restructuring, however, requires that decentralization be considered as only one aspect of change in a company's organizational structure. Decentralization should be balanced with the needs for effective, timely information processing, and the integration of diverse units to ensure unity of direction.

The extent of decentralization varies according to a company's size and the characteristics of its competitive environment. When the environment is dynamic (changing constantly) or volatile, some larger companies give autonomy to some of their divisions through decentralization. This autonomy is essential in order to achieve an agile response to such dynamic or volatile environments. This autonomy allows units to seize emerging opportunities in the environment by redeploying their resources. Thus, decentralization is a necessary part of restructuring in dynamic environments.

Restructuring is learning to unlearn -- Successful restructuring requires and fosters learning. Learning here means an organization's improved capability to diagnose its opportunities, define its business philosophy, and develop creative ways to succeed. This capability requires developing a system by which a company defines its boundaries and competitors, both of which demand experimentation and risk-taking.

Organizational learning requires unlearning, however. It demands that faulty perceptions of the environment be recognized and corrected, and poor managerial decision-making processes be redesigned in order to ensure effectiveness. Restructuring sets the stage for building a system through which a firm discards old habits and adopts new ways of thinking. It also creates an environment in which a firm can explore new perspectives.

Restructuring forces companies to relearn how to compete by understanding industry recipes (key factors for success), by differentiating themselves from their rivals (by building a competitive advantage), by examining fit among varying components of their systems, and by learning how to be creative.

Unlearning old ways of competing and discarding outdated assumptions about products, markets and competitors can open the door for new systems of management. New values can be developed, and new skills are acquired. When an organization is willing to adopt a fresh approach to its market, the stage is set for successful restructuring.

Corporate entrepreneurship is an integral part of strategic restructuring -- Whether intended to generate cash or deploy resources, restructuring involves a reorientation toward corporate entrepreneurship -- a set of organizational activities intended to improve a company's ability to innovate and deal proactively with its environment.

Corporate entrepreneurship involves both formal and informal efforts. Formal activities are usually sanctioned by the company and receive financial support. Informal activities arise from managers' self-interest, creativity and disposition to take risks. Informal activities reflect a desire on the part of employees and executives to improve their company's performance through novel product, process and technological developments.

Research shows that formal and informal corporate entrepreneurial activities require coordination among environmental strategy and organizational forces. That is, to flourish, these activities require vigilant scanning of the environment by collecting data on emerging trends and developing products or technologies that match them. Recognizing and shaping cultural values are also necessary for successful corporate entrepreneurship. Values conducive to successful corporate entrepreneurship include: openness to the external environment; closeness to the market and competition; and an emphasis on individual and organizational learning. When these values thrive in a firm; ideas for successful restructuring can converge on a viable strategic direction.

Matching environmental conditions and having the appropriate system of values will partially support corporate entrepreneurship efforts. To succeed, the firm must also develop the appropriate structure that will encourage the implementation of these ideas. Moreover, human resource planning is essential for success.

Corporate entrepreneurship provides a forum in which a company can articulate its business concept and explore ways to compete more effectively. Thus, corporate entrepreneurship can be a centerpiece in a company's search for self-renewal. Successful restructuring efforts consider the factors that spur both the formal and the informal aspects of corporate entrepreneurship. The path to successful restructuring emanates from corporate entrepreneurship.


Recent corporate restructuring activities have altered the structure of the U.S. economy in many ways. They have also changed the way companies view themselves and the way they compete. Successful restructuring efforts focus on making a significant reorientation of a company's strategy, rather than cosmetic changes in operations. They also build a system where a firm can learn how to compete differently and they involve extensive human resource planning. They also spur corporate entrepreneurship. These activities will persist through the 1990s, challenging executives to create new forms of organizations and experiment with new approaches to management. Though time-consuming and painful, restructuring will produce agile and innovative companies capable of competing in tomorrow's truly global economy.

Evelyn Heitman is currently a marketing analyst with The Washington Post. She received her B.A. from Stanford University and her M.B.A. from George Mason University, specializing in marketing. Shaker A. Zahra, Ph.D. is a professor of strategic management at Georgia State University in Atlanta. He is author and co-author of over 130 journal articles and professional papers and two books. He serves on the editorial review boards of eight journals.

For further reading

Bowman, E.D. and H. Singh, "Overview of Corporate Restructuring Trends and Consequences," in Corporate Restructuring: A Guide to Creating the Premium-Valued Company, M.L. and R.H. Rock, eds., New York: McGraw-Hill Publishing Co., 1990.

Brickley, J.A. and L.D. Van Drunen, "Internal Corporate Restructuring: An Empirical Analysis," Journal of Accounting & Economics, Vol. 12, no. 3.

Ginsberg, A., "Measuring and Modeling Changes in Strategy: Theoretical Foundations and Empirical Directions," Strategic Management Journal, 1988.

Greiner, L. and A. Bhambri, "The Dynamics of Strategic Change at Mega Corporation," Planning Review, Vo. 18, no. 2.

Knorr, R.O., "Strategic Restructuring for the 1990s," Journal of Business Strategy, Vo. 11 no. 3.

Kanter, R., When Giants Learn to Dance, New York: Simon & Schuster, 1989.

Lehn, R., "Public Policy Towards Corporate Restructuring," Business Economics, Vol. 25, no. 2.

Lewis, W.W., "Strategic Restructuring: A Critical Requirement in the Search for Corporate Potential," in Corporate Restructuring: A Guide to Creating the Premium-Valued Company, M.L. and R.H. Rock., eds., New York: McGraw-Hill Publishing Co., 1990.

Porter, M.E., Competitive Advantage, New York: Free Press, 1985.

Rizzi, J.L., "What Restructuring Has to Offer," Journal of Business Strategy, Vol. 8, no. 2.

Rock, M.L. and R.H. Rock, Corporate Restructuring: A Guide to Creating the Premium-Valued Company, New York: McGraw-Hill Publishing Co., 1990.

Tubbs, S.L. and R.A. Dischner, "Restructuring: From the Brink of Death," Industry Week, Vol. 235, no. 10.

Zahra, S., "Increasing the Board's Involvement in Strategy," Long Range Planning, Vol. 23, no. 6.

Zahra, S.A., "Predictors and Outcomes of Corporate Entrepreneurship: An Exploratory Study," Journal of Business Venturing, Vol. 6, 1991.

Zahra, S.A., "Environment, Corporate Entrepreneurship and Company Performance," Journal of Business Venturing, in press, 1993.

Zahra, S.A. and D. Ellor, "Accelerating New Product Development and Successful Market Introduction," S.A.M. Advanced Management Journal, in press, 1993.


* Acquisitions occur when one company takes over controlling interest in another.

* Divestment means selling off weak units that have failed to contribute significantly to company performance.

* Liquidation is the dismantling of an entire business; debts are then paid off in order of priority, and the remaining assets are distributed in cash to the owners.

* A spin-off means that shares in the new entity are distributed to the parent corporation's shareholders of record on a pro rata basis.

* Leveraged Buyout (LBO): An LBO occurs when a group of investors buys a company by incurring debt against its assets or resources. One of the most common forms of LBOs is purchase by the current management (MBO).

* Mergers involve two types: horizontal or vertical.

-- Horizontal mergers occur between companies at the same stage of production.

-- Vertical mergers occur when a firm acquires suppliers or distributors.

* Recapitalization means changing the financial structure of a company, usually by adding more capital, through selling additional stocks or bonds or by capital donations from existing shareholders.
COPYRIGHT 1993 Institute of Industrial Engineers, Inc. (IIE)
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Title Annotation:Organizational Restructuring
Author:Heitman, Evelyn; Zahra, Shaker A.
Publication:Industrial Management
Date:Jan 1, 1993
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