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Organizational Restructuring (All You Need To Know)

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What is Organizational Restructuring?

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What Is Organizational Restructuring

In business, the term organizational restructuring generally refers to an important change in the company’s business model, structure, or processes.

In other words, when a company changes how it does things, how it is structured, or its processes, we refer to that as organizational structuring.

For example, a company may perform an organizational restructuring by changing its legal structure.

You can also have a financial restructuring where the company makes important changes to its capital structure.

The main reason why a company may restructure itself is to transform itself so it can better do business, strengthen its position, or become more profitable.

The organizational restructuring may also be necessary for light of important changes to the market or business landscape.

For example, with the COVID-19 global pandemic, many companies were “forced” to restructure so they can adapt to the new realities of the market.

Keep reading as I will further break down the meaning of organizational restructuring and tell you why it’s important.

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Why Is Organizational Restructuring Is Important

Successful companies are those that offer products and services to a market where there is a demand and where the company can generate profits.

If there are changes to demand levels, the business environment changes, or the company is no longer able to generate profits, company managers must assess the situation and steer the company in the right direction.

In some cases, the best path forward for a company is to perform a restructuring.

The restructuring can be as a result of strategic decisions made by company executives or to adapt to the realities of the marketplace. 

A company that is financially struggling or can no longer grow may potentially need to restructure itself so it can focus on a core area of business, focus on optimizing its processes, change its legal structure, or make other changes so it can survive.

This is when the concept of organizational structure becomes essential.

Organizational restructuring is the process of making important changes to a company’s legal structure, financial structure, human resources, processes, operations, or other aspects, so the company can become more efficient or profitable.

The more a company is able to differentiate itself in the market and do things better than its competitors, the more it will have the chance to succeed.

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Why Companies Perform Organizational Restructuring

There are many reasons that can bring a company to contemplate and perform an organizational restructuring.

Changing Business Landscape

One reason is for the company to adapt to changes in the business environment.

For instance, many companies had to adapt to new market realities following the COVID-19 pandemic that structurally changed how many industries operated.

Technological Advancements

Another key reason for restructuring is to enable a company to take advantage of the most recent technologies or automation systems available.

For instance, if a new technology allows a company to execute certain operations or tasks more efficiently and at lower costs, the company may want to invest in that technology so it can get an upper hand on its competitors.

Mergers And Acquisitions

Another common reason for organizational restructuring is in the context of mergers and acquisitions, buyouts, or changes of control.

In essence, the buyer of the business or new managers will want to implement their business philosophy and methods requiring important changes to the organizational structure.

Survival 

It’s also possible that a company has no other choice but to restructure to survive.

This can be the case if the company is suffering financially, is no longer profitable, is operating with outdated machines and equipment, or needs to take a different direction altogether.

Recommended article: What is a management due diligence 

Types of Organizational Restructuring

There are many types of organizational restructuring that can be possible.

Let’s look at the main ones.

Legal Restructuring

The first type of restructuring is referred to as legal restructuring.

This type of restructuring is when a company changes its legal form, ownership, or makes other legal changes.

For instance, a company may spin off a subsidiary, enter into an inter-company agreement with another company, create a holding company, change stock ownership, form a new business entity in another jurisdiction, and so on.

Financial Restructuring

Financial restructuring is another type of organizational restructuring where the company’s main objective is to make important changes to its capital structure.

For instance, a company may choose to buy back equity securities, raise more capital via debt, or make other changes to its capital structure.

Mergers & Acquisitions

Organizational restructuring is very common in the context of M&A deals and corporate actions.

Typically, companies that are required to merge with one another will need to make important changes to their structure so they can effectively integrate the two entities into one efficiently working business.

A company may restructure to be able to absorb another company that it acquired so the post-transaction business is more profitable and efficient.

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Cost-Reduction Strategy

Sometimes, organizational restructuring is necessary for a company to reduce costs either to increase profitability, be more competitive in the market or survive.

Companies looking to cut costs may choose to restructure their human resources, make changes to their operations, automate processes, renegotiate contracts with their suppliers and vendors, or find other ways to cut costs.

Market Repositioning

Restructuring can be an effective strategy for a company that is looking to reposition itself in the market.

This can be the case when a company expands its line of products and services or looks to cater to a specific niche market.

Companies in the B2B space have to pay attention to their market positioning so they can get the type of clientele.

This is also true for B2C businesses but to a lesser extent.

Divestiture

A company may want to divest a particular business or segment so it can focus on its core area of expertise or improve its profitability.

For example, a company may want to sell an underperforming segment so it can focus on the business segments where it generates more profits.

Alternatively, a company may want to sell a business segment that is not part of its core area of business.

Recommended article: Difference between merger and acquisition

Spin-Off

A spin-off refers to a type of organizational restructuring where a company will separate a business unit in such a way that it is run and operated independently while holding ownership.

In other words, a spin-off is when one company becomes two or more independent companies but where the parent company retains ownership in the newly created entities.

Other Reasons

There are many reasons why a company may find that restructuring its business will be the best path forward.

Here are some other reasons why an organizational restructuring may be beneficial:

  • To eliminate inefficiencies
  • To reduce overhead costs
  • To reduce taxes
  • To properly allocate budgets
  • To rebrand a business
  • To satisfy customer needs
  • To solve internal cultural problems 

How To Plan An Organizational Restructuring

Properly planning and executing an organizational restructuring is key to its overall success.

The first step is to assess and understand your current organizational structure.

This means that you must have a good understanding of what your organization looks like today and what problems you are facing.

Once you have a view of your current structure and the challenges that you are facing, the next step is to prepare a restructuring plan.

This plan consists of identifying your objectives, forming a team of people who will be involved, assigning a project manager to the team, estimating costs, creating a budget, determining the tools needed to get the job done, and so on.

Once your plan and objectives are set, the next step is to communicate your plans to the company so employees know what you are doing, how you will do it, and what to expect.

This is crucial as organizational restructuring can bring a lot of stress and anxiety to employees and companies must regularly communicate their plans and be transparent to their employees.

Once everything is in place, now it’s time to execute the plan.

If it’s possible, start with a small project or execute a small organizational change to see how things go, if you have the right tools, and can measure your success on a small scale.

If things are good, you can then apply your restructuring on a large scale while ensuring you listen to employees, gather all the feedback from those involved, and make changes in such a way that you have the most buy-in.

Recommended article: What is a vertical integration

Business and law blog

Takeaways 

So there you have it folks!

What does organizational restructuring mean?

In a nutshell, organizational restructuring refers to all acts or steps taken to change a business model, make changes to business processes, or make any type of important change to a business to remain competitive in the market.

Organizational restructuring can include legal restructuring, financial restructuring, spin-offs, spin-outs, divestitures, layoffs, downsizing, human resource restructuring, cost-cutting initiatives, technology adoption, and more.

A company may want to restructure itself as part of an active plan to become more profitable, adapt to new market forces, or survive.

Now that you know what organizational restructuring means and how it works, good luck with your research!

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Author

Amir K.
Hello Nation! I'm a lawyer by trade and an entrepreneur by spirit. I specialize in law, business, marketing, and technology (and I love it!). I'm also an expert SEO and content marketer. On this blog, I share my experience, knowledge, and provide you with golden nuggets of useful information. Enjoy! Feel free to connect with me on LinkedIn.

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