The rapid advancement of technologies related to new product development and design, engineering, manufacturing, marketing, and distribution has caused many companies to gain new competitive advantages over rivals with regard to the efficiency of providing products and services. Conversely, companies that have failed to incorporate these advancements have lost the ability to compete effectively, resulting in losses in market share and profit margin. These companies have resorted to basic reengineering of business processes—reinvention of those processes—to lower costs, speed production and reaction to changing consumer demands, lower cycle times, and improve quality.
This process often involves a general restructuring of the existing enterprise. Noncore businesses, defined as less profitable or lower-growth sideline operations that share few synergies with the principal business, are sold or closed down, with the proceeds used to invest in improvements in the core business.
These improvements commonly involve increased automation and better-organized logistical processes, often resulting in the elimination of jobs. The combination of spinning off noncore businesses and reducing employment is referred to as "downsizing," or "right-sizing." In fact, the operative factor is really more a matter of improved skill matching, where outmoded job skills are replaced by skill sets that are better matched to new business processes. This is typically synonymous with workforce reductions as new, more efficient processes allow consolidation of job functions. During the 1980s, many companies in the service and manufacturing sectors restructured in response to increased competition, both from within the domestic economy and from foreign competitors able to enter new markets because of the progressive removal of trade barriers.
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 favor 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.
An example of restructuring by a manufacturer is provided by Toshiba. An electronics manufacturer, Toshiba was created in 1939. It was the first company to manufacture one-megabit memory chips (in 1985) and began shipping laptop computers in 1986. Toshiba's willingness and success in creating joint ventures with companies such as IBM and Apple make it one of the computer industry's strongest companies, despite the Japanese recession and an ever-increasing competitive worldwide market. Toshiba was losing market share in the notebook market, however, dropping from 30 percent of the market in 1996 to 20 percent in early 1998. The loss was attributed to stiff competition from IBM and Compaq in price and technology, though Toshiba hoped to reverse the trend during the 1998 fiscal year.
On January 30, 1998, Toshiba President Taizo Nishimuro announced his intention to reposition the company as a more "agile" player in the global market. Nishimuro felt his proposed restructuring would allow the company to "remain a winner into the 21st century." He described Toshiba's plans to improve productivity and efficiency in the semiconductor market, including such internal efforts as simplified production processes and increased use of cooperative efforts with other companies in areas such as research and development. Flexibility was a key concept in Toshiba's reorganization, in terms of meeting customer needs and operating the company. Another important goal was decentralization, including the possible divestiture of Toshiba business units to increase their autonomy and improve efficiency.
At Toshiba headquarters, corporate activity was streamlined to facilitate decision making, reduce costs, and increase competitiveness. The management structure was under review, and the company evaluated which businesses should be the focus of Toshiba development efforts. Additionally, top management decision making was completely separated from operational management. And the board making top-management decisions was reduced from 33 members to 12.
Similar restructuring efforts occurred at General Electric, Motorola, Inc., Lockheed Martin, IBM, LTV, Siemens, and Zenith.
Restructuring generally refers to the reorganization of corporate operations to achieve higher levels of operating efficiency. This can involve the elimination of noncore businesses and business processes, the consolidation of related operations and business functions and, to a great extent, reengineering of existing processes.
A company reengineers its operations first by viewing its markets and evaluating its strengths with regard to those markets. It then determines how it would operate under ideal conditions. In other words, if it were entering the business from scratch, how would it operate?
The process of reengineering lies in establishing a detailed strategy to transform the operation as it exists today into the ideal operation it has defined. This process must be performed carefully to ensure that projects bearing the greatest benefit are pursued first, and that each project will have a minimum adverse effect on the operation and the transformation strategy.
SEE ALSO : Spin-Offs
[ John Simley ,
updated by Wendy H. Mason ]
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