Improvement of corporate management under the conditions of restructuring of enterprises

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Lviv Institute of Management

Improvement of corporate management under the conditions of restructuring of enterprises

Hnylianska O.V.

Introduction

Many large, international corporations are like huge sea tankers carrying oil. It is difficult to change their collision course quickly and avoid hitting objects that stand in your way or react properly to unexpected market circumstances. Large organizations tend to follow routine, gain “organizational fat” and play the same game that made them successful in the past. However, the global market and consumer trends evolve so quickly that corporations cannot afford to do business as usual. If they want to play big roles in the market or even survive, they have to firm organizational restructuring processes in place. Business restructuring (or organizational restructuring) is a process that can address a company's unsatisfactory status quo in the constantly evolving market. It should be based on proper strategic planning, fueled by innovation, or it can be a tactical reaction to unexpected circumstances.

Presentation of the basic material

Many enterprises experience corporate restructuring at some point. Companies often undergo restructuring to improve their competitiveness by cutting costs, improving efficiency, and boosting profits. The financial aspects of corporate restructuring strategies may be aided by extensive valuations of firm assets, which can help optimize the advantages of reorganization. However, a successful business restructuring is an intensive and complicated endeavor, which is best served by an accurate assessment of the company's overall value or the value of the individual parts. To correctly formulate the impact of corporate restructuring methods, you must begin with an accurate assessment of the company's assets. There are many distinct forms of corporate restructuring, each with its unique characteristics and motivations.

Corporate restructuring is the process of reorganizing a company's management, finances, and operations to improve the efficiency and effectiveness of the company. Changes in this area can help a company increase productivity, improve the quality of products and services, and reduce costs. They can also help a company better serve the needs of its customers and shareholders. Restructuring businesses may also result in the closure of underperforming or unprofitable business units. For some ventures, a company restructure may be a final effort to retain solvency when a firm is in financial trouble and has to restructure its debts with its creditors. To keep the business afloat, the procedure entails reorganizing the company's debt and selling off non-essential assets.

Companies can either have their restructuring done informally (outside the court system) or through one of the various legal corporate restructuring strategies, depending on the severity of their condition. In the following cases, corporate restructuring is used:

* Organizational Strategy. Some divisions and subsidiaries that do not fit with the company's primary strategy are eliminated by the troubled company's management in an effort to boost performance. Strategically, the division or subsidiaries may

not fit in with the company's long-term goals. Such assets will be sold to possible purchasers so that the company may focus on its primary strategy.

• Economic Loss. The venture may not generate enough revenue to pay the company's capital expenditures, resulting in an economic loss. Management's erroneous decision to start the division or the reduction in profitability of the endeavor may be the cause of bad performance. This might be due to changes in client requirements or rising prices.

• Reverse Synergy. As the name implies, reverse synergy postulates that the value of a single unit may be greater than the combined value. This is a frequent motive for the corporation to sell up its assets. The concerned company may determine that selling a division to a third party is better than keeping it in-house since it would bring in more money.

• Cash Flow. Getting rid of an unprofitable project might bring in a significant amount of money for the organization. Selling an asset can be a way to raise cash and decrease debt for a company that is having difficulty securing financing.

Why is Restructuring Important? Restructuring company organization and financial assets through inorganic growth strategies include mergers, amalgamations, and acquisitions, which can be a lifesaver for businesses on the brink of collapse. Creating synergy is the common objective of these company restructuring strategies. The value of the combined firms is larger than the sum of their parts because of this synergy effect. For the most part, synergy might take the shape of higher revenues or lower costs. An individual company's competitive position and its contribution to corporate objectives are the primary goals of corporate restructuring. Companies expect to get the following advantages through various corporate restructuring strategies [2]:

Market Share. Mergers provide for a larger share of the combined market for the merged firm. Increasing your market share is as simple as offering your customers more of what they want and need. One way to achieve this result is through a horizontal merger. However, while companies attempt to become the dominating player or the market leader in their specific industry through mergers and acquisitions.

Reduced Competition. Company restructuring strategies resulting in a horizontal merger also have the added benefit of reducing competition.

Scale in Growth. Mergers and acquisitions allow companies to increase in size and become a more dominant force in the marketplace than their rivals. If you want to build a business by organic means, you'll have to wait for a long time. However, acquisitions and mergers (i.e., inorganic expansion) may accomplish this in rapid succession.

Scale in Cost. It is possible to reduce the cost per unit of production by merging two or more businesses. The fixed cost per unit decreases when the total output of a product rises.

Tax Advantages. Companies often utilize mergers and acquisitions for tax reasons, particularly in cases where a profit- and-loss firm merges with another.

Technology Adoption. Companies must pay attention to new technological breakthroughs and how they might be applied to the commercial world. Enterprises can gain a competitive advantage by acquiring smaller firms that have unique technology.

Brand Adoption. Brand loyalty is a huge driving factor in sales, and many companies will opt to buy a well-known brand rather than start from scratch in order to reap the benefits.

Diversification. Some companies hope to expand their offerings via the joining of businesses engaged in unconnected fields. It aids in the smoothing of the company's business cycles, hence lowering risk by having a large number of enterprises.

Situations when you might use a restructuring [3]:

1. Directors will likely use a restructuring to restructure a balance sheet where the underlying business is viable but for the existing debt burden.

2. The plan will likely be focused on a particular debt or category of contracts where the terms are particularly onerous. The rationale is that the company would be solvent if the specific debt or contracts could be restructured. This has already been seen in relation to the categorization and restructuring of property leases. However, this may equally apply where there is one particular contract that is so onerous as to impact upon the solvency of an otherwise viable company. As mentioned above, a restructuring does not necessarily need to be approved by all of the creditors but only those that currently hold a vested economic interest in the company. So, such a plan may also be a useful option when dissenting creditors that are not `in the money' are preventing a consensual restructuring or other formal compromise arrangement. Because the creditors do not vote together, but in classes, even large individual debts cannot block a restructuring where the relevant conditions are met.

3. While the underlying basis of a restructuring will likely be the compromise or restructuring of the debt, it may also provide a sustainable platform for the injection of new monies into the company for the future. As such, a restructuring may well be an appropriate option where a shareholder or debt provider wishes to retain control/primary security and is prepared to extend further funding to the business but only on the basis that such funding is used for the future benefit of the business and not used to fund the payment of historic liabilities.

4. A restructuring may also be used to deal with an underperforming division of a group in a wider group needs to be wound down in a controlled manner in order to minimize the impact on the remaining companies within the group.

However, each situation will have its own facts and circumstances and a restructuring can be shaped to each one as needed.

Different forms of Restructuring explained

There are different types of restructuring and the type used will depend on the reason for being restructured in the first place.

1. Debt Restructuring. Debt restructuring is one of the most common motivators that we see for business restructuring. Owing creditors can put the very existence of your company at risk, but there are often steps you can take to reduce your liabilities. You may be able to restructure your debt and continue trading by introducing a Company Voluntary Arrangement (CVA), which is a legally binding agreement between you and your creditors. If you think you will make profit again in the future, a CVA can provide short-term relief from your debts in return for a guarantee that you will honour them in the future. Alternatively, you may be able to clear part or all your debts by agreeing a corporate restructure to provide your creditors with equity in your business.

Debt restructuring could also include restarting the company or using an insolvency process call pre-pack administration. Both of these means closing the existing business and selling the assets to a new company. The money realized by the sale of the assets means that creditors can be repaid at least some of what they are owed. These processes also mean that jobs could be saved. Crucially a company restart can also be used when they may be very little in the way of assets to realise. restructuring business innovation strategic planning

2. Cost Reduction. If your business is facing a growing amount of debt, it is likely that its running costs are too high. In these situations, reviewing your company structure, or simply reviewing the basics, can highlight overspend, whether in the administration or operational side of your business.

To reduce costs, you may consider selling unneeded assets to realise cash, reducing the number of employees, or restructuring individual departments to remove unnecessary management costs.

Business simplification and streamlining is one of the more common ways restructuring can be carried out. By identifying and shutting down the departments or costs that are not necessary, or profitable will allow a business funds or resources to be channelled into areas that are more beneficial to the business. This process both reduces and maximises cost as well as increases the efficiency of the business. A company that has been effectively restructured, is supposed to have increased resilience enabling it to be well prepared for the future.

3. Mergers & Acquisitions. One of the best ways of increasing profitability in a business quickly is to incorporate an existing company into yours. This can come in a variety of forms, from buying a business outright to merging with one and absorbing their assets. Mergers and acquisitions (M&A) can allow a business to rapidly increase your revenue, production capacity and market reach, all without the time and hard work of building a new company. Mergers and acquisitions have their own variety of structures based on the relationship between the businesses involved. For example, horizontal mergers describe the process of two companies in direct competition coming together, while vertical mergers could take place when a company buys a supplier or complimentary business to expand service offerings.

4. Divestment and Spin-Offs. If M&As exist for companies that want to grow, divestment and spin-offs are useful for businesses that are looking to consolidate. They are usually used in larger businesses. Where part of a business unit, for example manufacturing factory in a largely service based business, is no longer profitable or fulfilling a strategic purpose, it could be sold to raise capital or simply closed to save on running costs -- this is known as divestment. If you want to reduce your involvement in a business unit without entirely stepping away from it, a spin-off can be a better solution. This involves restructuring the unit to become its own standalone company which you still have a stake in. This can be particularly useful if you want to achieve a high valuation on part of your business.

5. Legal Restructuring. In some cases, corporate restructuring may be necessary not because a business is struggling, but simply because there is a shift in responsibilities at the top. This could include adding new investors or a change in the ownership structure.

As already mentioned in our article organizations reorganize for a variety of reasons. Sometimes, they are compelled to do so by evolving markets that require a different approach to product and service delivery. At other times, a reorganization is required for growth. One thing is for sure: All company reorganizations bring about change, often transforming jobs and the people in them. Although some research has shown that 80 percent of reorgs fail to deliver their desired value, some company reorganizations succeed. Here are some recent success stories of company reorganization done right:

Facebook. When Facebook announced its first reorganization in 2011, the reasons included a desire to accommodate growth and streamline the company's product development process. By that point, Facebook had already become the world's second most visited website, bested only by Google. The company's reorganization proved to be fruitful, as Facebook went on to achieve worldwide success and a steadily rising number of users of its services.

In 2018, Facebook announced another reorganization, at the same time that the company has been under scrutiny for its handling of cybersecurity attacks related to the 2016 U.S. presidential election. Although Facebook says its decision to restructure is unrelated to security and data privacy issues, it has announced a reorganization around three key product areas instead of five. The reorganization brings new leaders to Facebook's existing product suite and fledgling product lines such as block chain technology. Time will tell how successful this latest reorganization will prove to be, but if the past offers any indication of what the future holds for Facebook, greater growth may be coming.

Tesla. Manufacturer of electric cars, solar-powered batteries, and spaceships, Tesla has earned a reputation for innovation and rapid growth since its founding in 2003. Tesla's CEO, Elon Musk, recently announced a major reorganization and cost-cutting initiative, citing the need to achieve a flatter organizational structure and improve communication between teams. Facing pressure from investors to increase cash flow and speed up new car production, Tesla also laid off 3,000 employees, or 9 percent of its workforce, as part of the reorganization. Most of the individuals affected were salaried, rather than production workers, illustrating the company's willingness to make cuts in areas other than frontline production. Conducting layoffs is often difficult and sometimes a necessary part of restructuring. In Tesla's case, early signs suggest that the company's reorganization is paying off. Its share price is recovering, with market analysts now predicting the company will soon meet production and cash flow goals.

The Wall Street Journal. In early 2017, Dow Jones announced plans to reorganize its flagship publication, The Wall Street Journal, saying that it would help the company shift toward a more digital strategy. Dubbed WSJ2020, the reorganization was announced as a plan to move away from outdated editorial processes and shift the focus from print to digital. The company also announced the creation of new job categories and alignment of journalist positions with a more technology-driven vision. Some employee positions have already been cut in the WSJ Asia and Europe bureaus, but in the U.S., WSJ plans a reorganization of existing staff rather than a series of layoffs or position eliminations. According to the Editor-in-Chief, the company plans to keep the WSJ headcount of 1,300 roughly flat. The plan is to avoid mass layoffs by reallocating employees into new roles, for which existing employees must self-select and apply. Although such a strategy can seem like a veiled attempt to cut jobs, having employees apply for new positions could help the publication identify internal candidates for roles rather than having to do layoffs and subsequently recruit from the outside.

Hulu. Recently announced a company reorganization to accommodate company growth and further enhance and expand its streaming content for customers. In the new structure, the company will be organized around four strategic priorities, resulting in both the elimination of key management positions, as well as the hiring of a new Chief Technology Officer (CTO) and Chief Data Officer (CDO). Since announcing its reorganization, Hulu has taken steps to streamline and consolidate smaller offices, and says it plans to add at least 200 tech and product employees through 2018. In Hulu's case, its reorganization and growth may make it more attractive to potential buyers. Hulu is jointly owned by several media companies, including Disney, Fox, and Comcast, and is widely considered the valuable prize in Disney's current bid to purchase 21st Century Fox. Hulu has built up over 20 million subscribers to date, and with its recent reorganization (and possibly a new parent), it may be well poised to continue its growth in profitable areas such as original programming.

Google. In 2015, Google announced a reorganization and the creation of its Alphabet holding company to solidify its lead as one of the world's most successful tech innovators and expand into new industries. The reorganization named a new CEO and also provided Google's two cofounders more time to focus on exploring new business opportunities. Since reorganizing, Google has continued its growth trajectory. After two years of operating under the new structure, the company announced some of the positive outcomes of its reorganization, including: The separation of its traditional business from speculative ventures has offered greater transparency for investors. Each business unit has its own CEO and greater autonomy in day-to-day operations. Alphabet's speculative “moonshot” business units have controlled spending and are working toward becoming profitable. The company's leadership team has become more diverse, with more women on its senior executive team (six out of 13) than any other tech company in the Fortune 100.

Disney has grown exponentially since Walt Disney created the company's first org chart, which featured a mass of arrows pointing in every direction. Most recently, Disney announced a corporate restructuring to help it capitalize on U.S. and international growth opportunities. Under the new structure, the company will be organized into four key business segments, a move that is intended to position the company for global expansion, more technological innovation, and the creation of more diverse content for its audiences.

Disney creates theme park magic and movies that captivate both young and old, and it is also taking steps to compete with the likes of Netflix and Amazon in direct-to-consumer streaming. The recent reorganization consolidates certain business units and expands responsibilities for certain individuals on the management team. In addition, CEO Bob Iger has committed to delaying his planned retirement from 2019 to 2021, evidence of flexibility in the company's succession and workforce planning as it continues to grow.

At the heart of any successful reorganization is a well thought-out and well-executed plan that considers a range of industry, customer, and employee implications. Although companies are reorganizing all the time, those who find success take their reorganization in stride and continue to grow and compete. As some of the recent reorganizations demonstrate, restructuring can lead to the redundancy of certain positions and layoffs, but it can also expand individual responsibilities and may even create jobs. No one knows what the future holds, but these real-world examples prove that reorganizations work and can help companies achieve their long-range strategic goals.

Conclusion

As a result of the research, it was found that thanks to corporate restructuring, the corporation can continue to function in some capacity. The company's management takes all conceivable efforts to keep the organization afloat. Even if the worst happens and the firm is forced to dissolve due to financial difficulties, there is still optimism that the sold components will work effectively enough for a buyer to purchase the weakened company and restore profitability.

What makes the current environment unique is its suddenness? Firms nosedive into the financial danger zone has been startlingly abrupt. Some are prepared to withstand it, either by preparedness or good fortune. Others now find themselves in circumstances wholly unfamiliar, navigating uncharted waters. Many companies must reinvent themselves to survive and prosper beyond the restructuring, and in many cases that transformation is already underway. Time is of the essence. Nuanced liquidity strategies are crucial for creating the breathing room necessary to execute transitions. Quickly finding ripe opportunities and implementing them efficiently will buy time and confidence. Finally, ensuring that the workforce strategy is drawn up and carried out to drive home the business strategy, and at the same pace, will determine success. Boldness in all phases is the only option.

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