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DR.

GAUR HARI SINGHANIA


INSTITUTE OF MANAGEMENT AND
RESEARCH

Corporate Strategic Management


[T 402]

Submitted To:- Submitted By:-


Dr. Hari Lal Bhaskar Vishal Sachan
(Asst. Professor) Roll No:- 2045
Restructuring

DEFINITION
a. Corporate restructuring can be defined as any change in the business capacity or
portfolio that is carried out by an inorganic route or
b. Any change in the capital structure of a company that is not a part of its ordinary course
of business or
c. Any change in the ownership of or control over the management of the company or a
combination thereof.

1. Any change in the business capacity or portfolio carried out by inorganic route.
Tata Motors launched Sumo and later, Indica-leading to an expansion of its business portfolio.
However, these products were launched from Tata Motor’s own manufacturing capacity in
through an organic route. Hence, it would not qualify as ‘corporate restructuring’
 Tata Motors acquisition of Jaguar Land Rover from Ford, through Jaguar Land Rover
Limited is ‘corporate restructuring’
 Grasim’s acquisition of Larsen & Toubro’s (L&T) cement division through UltraTech
Cement Limited is an example of ‘corporate restructuring’
2. Change in the business portfolio could also be in the nature of reduction of
business handled by a company.
In the case of Grasim and L&T, the demerger of L&T’s cement business into UltraTech Cement
Limited was reduction of its business portfolio and thus, amounted to ‘corporate restructuring’
of L&T.
3. Any change in the capital structure of a company that is not in the ordinary course
of its business.
This can be further explained with the help of the following diagram:
(a) Car finance loan
(b) Scheduled repayment of a term loan, etc. keeps on changing the debt-equity ratio within
planned or targeted range. Such changes do not qualify as Corporate Restructuring.
(a) An initial public issue
(b) Follow-on public issue
(c) buy-back of equity shares may alter the capital structure of a Company permanently. Such
activities are not in the ordinary course of business of a company- Hence amounts to corporate
restructuring
(a) Borrowing of a significant amount as term loan
(b) Issue of five year nonconvertible debentures, etc. Such changes may alter the debt-equity
ratio significantly but still these do not qualify as leading to corporate restructuring.
Capital structure refers to the debt equity ratio, i.e., the proportion of debt and equity in the
total capital of a company.
4. This capital structure is never static and changes almost daily.
 If the debt/equity ratio fluctuates within a targeted or planned range, such changes in the capital
structure do not amount to ‘capital restructuring’.
o Borrowing of a significant amount of term loan or an issue of five year non-convertible
debenture does not qualify to be called ‘corporate restructuring’.
o An initial public issue, or a follow-on public issue or buy-back of equity shares would
permanently alter the capital structure of a company and thus, would amount to
‘corporate restructuring’
5. Any change in the ownership of a company or control over its management
 Merger of two or more companies belonging to different promoters
 Demerger of a company into two or more with control of the resulting company passing on to
other promoters
 Acquisition of a company
 Sell-off of a company or its substantial assets
 Delisting of a company
All these would qualify to be called exercises in ‘corporate restructuring’.
THE ACTIVITIES OR CHANGES WHICH ARE NOT TERMED ‘CORPORATE
RESTRUCTURING’
(a) Initial creation of a company
Here, an instructor should explain the concept and distinguish between
- a limited company
- a proprietary concern and a company
- a partnership firm and company
- a private company and a public company
Its various examples are:
1. Incorporation of a limited company
2. Conversion of a proprietary concern into a company
3. Conversion of a partnership firm into a company
4. Conversion of a private company into a public company
(b) Change in the internal command structure or hierarchy: The command structure of an
organization or its hierarchy simply means the reporting relationships among the employees,
managers, top management and their various functions.
 Functional organization
 Divisional organization
 Matrix organization
With businesses having become more complex along with the acceptance of newer concepts
of organization building such as tutorship, mentorship, etc., the hierarchies have stopped
strictly falling into one of the three types mentioned above.
Any migration of an organization from functional to divisional or to matrix type or to any new
or hybrid type or vice-versa would not be a case of ‘corporate restructuring’.
(c) Change in the business process
Re-engineering is the fundamental rethinking and redesign of business processes to achieve
dramatic improvement in critical, contemporary measures of performance such as, cost,
quality, service and speed.
Thus, It refers to the radical redesigning of business processes and not to the ownership and
control or to the capital structure of the organization.
(d) Downsizing
It is another form of organizational change in which the business organization substantially
cuts down on its manpower, recurring cost and/or capital expenditure, either as an objective
itself or as a result of re-engineering.
(d) Other Activities: Since there is no standard definition of corporate restructuring, activities
such as outsourcing, enterprise resource planning, total quality management, licensing, etc.,
have not been termed as corporate restructuring activities.

Types of Corporate Restructuring

 Mergers / Amalgamation
 Acquisition and Takeover
 Divestiture
 Demerger (spin off / split up / split off)
 Reduction of Capital
 Joint Ventures
 Buy back of Securities

Merger / Amalgamation: A merger is a combination of two or more businesses into one


business. Laws in India use the term ‘amalgamation’ for merger. Amalgamation is the merger
of one or more companies with another or the merger of two or more companies to form a new
company, in such a way that all assets and liabilities of the amalgamating companies become
assets and liabilities of the amalgamated company.

Merger through Absorption:- An absorption is a combination of two or more companies into


an ‘existing company’. All companies except one lose their identity in such a merger. For
example, absorption of Tata Fertilisers Ltd (TFL) by Tata Chemicals Ltd. (TCL).

Merger through Consolidation:- A consolidation is a combination of two or more companies


into a ‘new company’. In this form of merger, all companies are legally dissolved and a new
entity is created. Here, the acquired company transfers its assets, liabilities and shares to the
acquiring company for cash or exchange of shares. For example, merger of Hindustan
Computers Ltd, Hindustan Instruments Ltd, Indian Software Company Ltd and Indian
Reprographics Ltd into an entirely new company called HCL Ltd.

Acquisitions and Takeovers: An acquisition may be defined as an act of acquiring effective


control by one company over assets or management of another company without any
combination of companies. Thus, in an acquisition two or more companies may remain
independent, separate legal entities, but there may be a change in control of the companies.
When an acquisition is ‘forced’ or ‘unwilling’, it is called a takeover.

Divestiture: Divestiture means an out sale of all or substantially all the assets of the company
or any of its business undertakings / divisions, usually for cash (or for a combination of cash
and debt) and not against equity shares. In short, divestiture means sale of assets, but not in a
piecemeal manner. Divestiture is normally used to mobilize resources for core business or
businesses of the company by realizing value of non-core business assets.

Demerger: Demerger is a form of corporate restructuring in which an entity’s business


operations are segregated into one or more components.

Demerger can take three forms:

 Spin-off
 Split-up
 Split-off

Reduction of Capital: Reduction of Capital is a process by which a company is allowed to


extinguish or reduce liability on any of its shares in respect of share capital not paid up, or is
allowed to cancel any paid-up share capital which is post or is allowed to pay-off any paid –up
capital which is in excess of its requirements.

Joint Venture: Joint Venture is an arrangement in which two or more companies (called joint
venture partners) contribute to the equity capital of a new company (called joint venture) in
pre-decided proportion. For e.g. Maruti Suzuki

Buy back of Securities: When a company is holding excess cash, which it does not require in
the medium term (say three to five years); it is prudent for the company to return this excess
cash to its shareholders. Buy-back of securities is one of the methods used to return the excess
cash to its shareholders.

SERVICE INDUSTRY RESTRUCTURING:

AMERITECH CORPORATION

One example of restructuring within the service industry is provided by


the Ameritech Corporation, a provider of local telecommunications services serving five states
in the Midwest. Established in 1984 as the result of the divestiture of AT&T, Ameritech
operated for ten years as the amalgamation of five Bell companies. A regulated entity prevented
from entering the long-distance, manufacturing, and information services industries by judicial
decree, Ameritech retained essentially the same operational model established decades earlier
by AT&T.
Largely precluded from expansion into new markets, Ameritech's earnings were strictly
regulated. State authorities mandated that Ameritech was entitled to a return on equity of about
12 percent. As a result, Ameritech was a "cost-plus" type of business; as long as it could
maintain certain levels of service performance, regulatory authorities allowed it to maintain
employment levels to support those service levels. The costs of operation were supported by
service rates, while also providing a guaranteed return of about 12 percent.

In the early 1990s, Ameritech began to experience competition from alternative service
providers, in the form of local network providers and long-distance companies (including
AT&T). These competitors were unburdened by the regulatory restraints on Ameritech and
were capable of generating much higher returns than Ameritech.

In response, Ameritech and other "Baby Bells" facing similar conditions launched an effort to
replace the regulatory regimes under which they operated with new systems that promised
better service levels, lower rates, and higher earnings. In effect, Ameritech lobbied for the
elimination of costly regulatory burdens that were not in the public economic interest.

In anticipation of gradual deregulation, Ameritech launched a transformation of its structure to


improve its cost competitiveness compared to its emerging rivals. It eliminated its
geographically defined operating companies in favour of business units defined by market
types, such as large business, small business, consumer, information industry, and cellular.

By incorporating more efficient business processes, Ameritech found it possible to consolidate


or eliminate entire job functions, resulting in workforce reductions. And as deregulation
enabled it to enter new businesses, it gained a need for employees possessing new skill sets. In
effect, its workforce declined in some areas, but grew in others.

Similar restructurings occurred at British Airways, Bank of America, Citicorp, GTE, and
AT&T.
Business process reengineering
Business process reengineering (BPR) is, in computer science and management, an approach
aiming at improvements by means of elevating efficiency and effectiveness of the business
process that exist within and across organizations. The key to BPR is for organizations to look
at their business processes from a "clean slate" perspective and determine how they can best
construct these processes to improve how they conduct business.

Business Process Reengineering Cycle:


Transformation, or Business Process Change Management. Reengineering is a fundamental
rethinking and radical redesign of business processes to achieve dramatic improvements in
cost, quality, Business process reengineering is also known as BPR, Business Process
Redesign, Business speed, and service. BPR combines a strategy of promoting business
innovation with a strategy of making major improvements to business processes so that a
company can become a much stronger and more successful competitor in the marketplace.
The main proponents of reengineering were Michael Hammer and James A. Champy. In a
series of books including Reengineering the Corporation, Reengineering Management, and The
Agenda, they argue that far too much time is wasted passing-on tasks from one department to
another. They claim that it is far more efficient to appoint a team who are responsible for all
the tasks in the process. In The Agenda they extend the argument to include suppliers,
distributors, and other business partners.

Re-engineering is the basis for many recent developments in management. The cross-
functional team, for example, has become popular because of the desire to re-engineer separate
functional tasks into complete cross-functional processes. Also, many recent management
information systems developments aim to integrate a wide number of business functions.
Enterprise resource planning, supply chain management, knowledge management systems,
groupware and collaborative systems, Human Resource Management Systems and customer
relationship management systems all owe a debt to re-engineering theory.
Overview
Business process reengineering (BPR) began as a private sector technique to help organizations
fundamentally rethink how they do their work in order to dramatically improve customer
service, cut operational costs, and become world-class competitors. A key stimulus for
reengineering has been the continuing development and deployment of sophisticated
information systems and networks. Leading organizations are becoming bolder in using this
technology to support innovative business processes, rather than refining current ways of doing
work.
Business process reengineering is one approach for redesigning the way work is done to better
support the organization's mission and reduce costs. Reengineering starts with a high-level
assessment of the organization's mission, strategic goals, and customer needs. Basic questions
are asked, such as "Does our mission need to be redefined? Are our strategic goals aligned with
our mission? Who are our customers?" An organization may find that it is operating on
questionable assumptions, particularly in terms of the wants and needs of its customers. Only
after the organization rethinks what it should be doing, does it go on to decide how best to do
it.
Within the framework of this basic assessment of mission and goals, reengineering focuses on
the organization's business processes--the steps and procedures that govern how resources are
used to create products and services that meet the needs of particular customers or markets.
Basic elements of business process:

 Motivation to perform
 Data gathering, processing and storing
 Information processing
 Checking, validating and control
 Decision making
 Communication

A business process in any area of business organization performs through basic steps, such as,
receive input, measure, analyze, document, perform, process, record/store, access, produce and
communicate.

As a structured ordering of work steps across time and place, a business process can be
decomposed into specific activities, measured, modeled, and improved. It can also be
completely redesigned or eliminated altogether. Reengineering identifies, analyzes, and
redesigns an organization's core(critical) business processes with the aim of achieving dramatic
improvements in critical performance measures, such as cost, quality, service, and speed.[1]
Reengineering recognizes that an organization's business processes are usually fragmented into
sub processes and tasks that are carried out by several specialized functional areas within the
organization. Often, no one is responsible for the overall performance of the entire process.
Reengineering maintains that optimizing the performance of sub processes can result in some
benefits, but cannot yield dramatic improvements if the process itself is fundamentally
inefficient and outmoded. For that reason, reengineering focuses on redesigning the process as
a whole in order to achieve the greatest possible benefits to the organization and their
customers. This drive for realizing dramatic improvements by fundamentally rethinking how
the organization's work should be done distinguishes reengineering from process improvement
efforts that focus on functional or incremental improvement.

Process Model of the Organization

Value Stream Model of the Organization:


The organization is established to fulfill customer needs, having associated customer values.
The customer is satisfied when he believes that the price paid by him fulfils his value
expectations. The Organization has to decide which customer segment it will like to serve.
Depending on the value choice of the customer, the processes of the organization become
critical and relevant. Only these critical processes really matter for business success in terms
of survival, growth, leadership and competitive advantage.
Every organization must ,therefore, identify value streams in the process model, consistent
with the business, the goods manufactured and the objectives of business.

Steps to build Process Organization :


 Motivation to perform
 Free Data/Information from ownership
 Build seamless information flow
 Provide access unlimited
 Empower person(s) through support
 Recast business operations into process
 Designate process managers
 Segregate processes where customer is internal, from external
 Take the process beyond the organization
 Think in terms of business partners/associates and not as buyers and sellers
 Retain only the processes which contribute to the value to the customer and sub-contract
others
 Re-engineering Opportunities:
 Identify process and map them across the organization
 Classify the by following norms:
 Cycle time
 Overheads
 Capital intensive
 Manpower intensive
 Information intensive
 Decision intensive
 Risk intensive
 Rank them by value to the customer
 Cost/Price
 Quality
 Product value
 Delivery
 Classify processes by customer
 Internal (user of the process)
 External (buyer)
 Select processes for re-engineering
 Organization needs
 Market needs
 Business strategy

Process of BPR Exercise:


o Recast people organization into process organization
o Segregate process by customer type-internal and external
o Identify process by:
o Impact on customer
o High decision incidence
o High information exchange
o High incidence of checks, control and validations
o High knowledge base
o Determine the value to the customer in terms of:
o Price/Cost
o Quality
o Service
o Delivery
o Identify the enablers of redesigning
o Set a benchmark for achievement
o Rank the process by:
o Feasibility
o Cost
o Impact on value to the customer
o Appoint the team for each process
o Monitor the process of re-engineering
Through this process, a typical business transaction is settled for acceptance, fulfilling various
other needs outside the process in the organization. For example, the receipt of goods, a
transaction when processed with the information technology application, settles a number of
aspects of this one transaction. The aspects are whether:
1. The receipt is against the valid purchase order
2. Goods received are as per specifications both in terms of quality and quantity
3. The terms and conditions of supplies are fully met
4. The value declarations are correct and complete
5. Amount payable is computed and kept ready for confirmation the bill of the supplier.
Since all such aspects with the variations are settled at one place in one stroke, the
dependent steps in rest of the business functions are expedited reducing the total process
cycle time.

Relevance of Information Technology:


The capability of IT is phenomenally higher and assures dramatic results in the cost, time,
service and delivery. It increases the people productivity and process effectiveness. The
relevance of IT is appropriate due to its merit as catalyst and the process partner for
improvement. .....
The role of information technology
Information technology (IT) has historically played an important role in the reengineering
concept. It is considered by some as a major enabler for new forms of working and
collaborating within an organization and across organizational borders.
Early BPR literature identified several so called disruptive technologies that were supposed to
challenge traditional wisdom about how work should be performed.
 Shared databases, making information available at many places
 Expert systems, allowing generalists to perform specialist tasks
 Telecommunication networks, allowing organizations to be centralized and decentralized at
the same time
 Decision-support tools, allowing decision-making to be a part of everybody's job
 Wireless data communication and portable computers, allowing field personnel to work
office independent
 Interactive videodisk, to get in immediate contact with potential buyers
 Automatic identification and tracking, allowing things to tell where they are, instead of
requiring to be found
 High performance computing, allowing on-the-fly planning and revisioning
In the mid 1990s, especially workflow management systems were considered as a
significant contributor to improved process efficiency. Also ERP (Enterprise Resource
Planning) vendors, such as SAP, JD Edwards, Oracle, PeopleSoft, positioned their
solutions as vehicles for business process redesign and improvement.

Successes:

BPR, if implemented properly, can give huge returns. BPR has helped giants like Procter and
Gamble Corporation and General Motors Corporation succeed after financial drawbacks due
to competition. It helped American Airlines somewhat get back on track from the bad debt that
is currently haunting their business practice. BPR is about the proper method of
implementation.
General Motors Corporation
General Motors Corporation implemented a 3-year plan to consolidate their multiple desktop
systems into one. It is known internally as "Consistent Office Environment" (Booker, 1994).
This reengineering process involved replacing the numerous brands of desktop systems,
network operating systems and application development tools into a more manageable number
of vendors and technology platforms. According to Donald G. Hedeen, director of desktops
and deployment at GM and manager of the upgrade program, he says that the process "lays the
foundation for the implementation of a common business communication strategy across
General Motors." [12] Lotus Development Corporation and Hewlett-Packard Development
Company, formerly Compaq Computer Corporation, received the single largest non-
government sales ever from General Motors Corporation. GM also planned to use Novell
NetWare as a security client, Microsoft Office and Hewlett-Packard printers. According to
Donald G. Hedeen, this saved GM 10% to 25% on support costs, 3% to 5% on hardware, 40%
to 60% on software licensing fees, and increased efficiency by overcoming incompatibility
issues by using just one platform across the entire company.
DELL Incorporated
Michael Dell is the founder and CEO of DELL Incorporated, which has been in business since
1983 and has been the world's fastest growing major PC Company. Michael Dell's idea of a
successful business is to keep the smallest inventory possible by having a direct link with the
manufacturer. When a customer places an order, the custom parts requested by the customer
are automatically sent to the manufacturer for shipment. This reduces the cost for inventory
tracking and massive warehouse maintenance. Dell's website is noted for bringing in nearly
"$10 million each day in sales."(Smith, 1999). Michael Dell mentions:

"If you have a good strategy with sound economics, the real challenge is to get people excited
about what you're doing. A lot of businesses get off track because they don't communicate an
excitement about being part of a winning team that can achieve big goals. If a company can't
motivate its people and it doesn't have a clear compass, it will drift."
Ford Motor Company
Ford reengineered their business and manufacturing process from just manufacturing cars to
manufacturing quality cars, where the number one goal is quality. This helped Ford save
millions on recalls and warranty repairs. Ford has accomplished this goal by incorporating
barcodes on all their parts and scanners to scan for any missing parts in a completed car coming
off of the assembly line. This helped them guarantee a safe and quality car. They have also
implemented Voice-over-IP (VoIP) to reduce the cost of having meetings between the
branches.
Procter and Gamble Corporation
A multi-billion dollar corporation like Procter and Gamble Corporation, which carries 300
brands and growing really has a strong grasp in re-engineering. Procter and Gamble
Corporation's chief technology officer, G. Gil Cloyd, explains how a company which carries
multiple brands has to contend with the "classic innovator's dilemma — most innovations fail,
but companies that don't innovate die. His solution, innovating innovation..." (Teresko, 2004).
Cloyd has helped a company like Procter and Gamble grow to $5.1 billion by the fiscal year of
2004. According to Cloyd's scorecard, he was able to raise the volume by 17%, the organic
volume by 10%, sales are at $51.4 billion up by 19%, with organic sales up 8%, earnings are
at $6.5 billion up 25% and share earnings up 25%. Procter and Gamble also has a free cash
flow of $7.3 billion or 113% of earnings, dividends up 13% annually with a total shareholder
return of 24%. Cloyd states: "The challenge we face is the competitive need for a very rapid
pace of innovation. In the consumer products world, we estimate that the required pace of
innovation has double in the last three years. Digital technology is very important in helping
us to learn faster." [15] G. Gil Cloyd also predicts, in the near future, "as much as 90% of P&G's
R&D will be done in a virtual world with the remainder being physical validation of results
and options."