Need/Causes For Restructuring Business

Need/Causes For Restructuring Business

Restructuring is an attempt for the restoration of an enterprise in an orderly state. It is actually rearranging/ readjusting the existing organisation structure and resources of the company to meet the new situation or to solve the existing problems and challenges faced by the company. Sometimes, restructuring is introduced for taking the benefits of the opportunities created by environmental factors (e.g. demand for new products, invention of new technologies, on favourable terms, etc.).

Restructuring is a type of rescue operation management for solving the current problem     faced by a business unit. This will avoid possible poor performance and closure of a business. It develops capacity to face new challenges likely to develop in the near future.

The possible problems/causes for restructuring are as follows:

(1) Adjustment in the product-mix: The product mix of the company may not be proper i.e. loss-making items may be more while profit-making items may be less. As a result, the enterprise incurs losses even when the turnover is substantial. This can be rectified by closing the production of loss making items and by concentrating more on profit making products. Restructuring is also needed to meet competition.

(2) Modernization of an enterprise: Modernization of the enterprise might have been neglected over the years due to which the quality of production may be inferior and the cost may be high. This situation can be rectified through restructuring of production plan/ activities.

(3) Adjustment in the capital structure: The enterprise may have inadequate owned capital due to which dependence on borrowings may be abnormal. The interest payment liability may be substantial. As a result, the net profit may be less. For this, financial restructuring may be necessary. In addition, for the introduction of disinvestments and for securing taxation benefits, restructuring of financial structure will be necessary.

(4) Raising market share: The enterprise may not be able to capture market due to various reasons relating to cost, price, regularity in supply, after-sales service, may not be able to face market competition and its share in the total market for the product may be limited or insignificant. Here, restructuring may be necessary. In the long run, restructuring is for prestige and social recognition by satisfying societal expectations.

(5) Reducing/avoiding losses: Some plants of the enterprise may be incurring losses due to labour trouble, inadequate supply of raw materials, etc. Such plants may bring loss to the whole enterprise. Here, restructuring of production aspect is required.

(6) Creating cordial labour-management relations: Labour – ­management relations may not be cordial. As a result the employees may not be loyal, satisfied and co-operative. Their morale may be low. Strikes or go-slow may be common resulting in less production. Here, restructuring in the personnel management/personnel policies area may be necessary.

(7) Growth and diversification of business: Management might have neglected the enterprise as regards its growth and diversification. Attention might not have been given to product line, quality control and research and development activities. This brings the need of restructuring.

(8) Reducing financial burden: The financial burden on the company may be more as compared to its earning capacity. Such burden may be due to higher salaries and wages, interest payment liability, etc. Heavy financial burden may affect liquidity, market reputation and expansion programme of the enterprise. Here, financial restructuring is a must.

(9) Raising turnover: The marketing efforts of the company may be inadequate due to which total turnover may be less. This affects the overall working of an enterprise. Here, restructuring of marketing aspect is necessary.

(10) Removing sickness: There may be symptoms of sickness in the enterprise. This is reflected in the earning capacity of an enterprise. Naturally, restructuring of the affairs of the enterprise is urgently needed for the removal of sickness and making it a viable unit.

(11) Taking benefit of opportunities: Sometimes, environmental forces create new opportunities before a business enterprise. This may be in the form of demand for a new product, or invention of new technology, availability of funds on favourable terms and so on. Restructuring of financial, marketing or other aspects of an enterprise may be required to exploit new opportunities fully for business expansion.