Strategic Restructuring: Create a Strategy That Cuts Fat, Not Muscle

During times of economic uncertainty, restructuring is a common reaction of many business leaders. While most managers agree that structure should follow strategy, few have a process for moving from strategy to restructuring. With or without a strategic framework, restructuring goes on. The result of not basing restructuring decisions on a clear business strategy has been that less than a third of restructuring efforts involving downsizing have improved profitability, even in the short term. Even worse, half of the managers in these firms are unhappy with the results, many fearing that the long-term viability of the business has been jeopardized. The following story is one that we encounter far too often.

The CEO of a parts manufacturer asked the presidents of the firm’s business units to consider restructuring to maintain competitive pricing. One president moved swiftly on this counsel. The restructuring plan was completed within five months; it recommended substantial cuts in positions and labor costs. The president implemented the recommendations rapidly and reported his accomplishments at the next meeting with the CEO.

Over the next six months, however, the reorganization and outplacement costs actually increased overall costs, although indicators suggested that costs would ultimately decrease. The president heard some complaints that morale had dropped. Some individuals commented that they were now doing three people’s jobs and had trouble keeping up. Several customers reported that quality and delivery specifications had not been met. The president directed managers to resolve these problems as soon as possible, but considered them minor, considering the estimated cost savings.

A month later, the business’s largest customer notified the sales department that they were shifting their business to a competitor. The president immediately called the customer and not only promised that he would correct the quality and delivery problems, but threw in a permanent 6% price reduction for all parts. He was shocked when the customer responded that the quality and delivery problems were costing it far more than the value of the price reduction he offered. Moreover, the customer’s operating people no longer believed that his firm could provide the quality parts and reliable delivery they needed.

Some managers argue that in today’s turbulent business environment results like these are regrettable but inescapable. They believe that it is better to be doing something than nothing and argue that they will learn as they go. We disagree. Businesses that guide restructuring using a clear and widely understood strategy are able to cut fat, not muscle. They can eliminate unnecessary work and have a clear shared set of criteria to guide them as they “reinvent the organization.”

The findings of multiple studies coincide with our observations that the choices and trade-offs involved in restructuring a business can only be made after answering the question: Where do we want to go in the future? They require a clear business strategy. Moreover, when organizations engage in restructuring and downsizing, they often wreak havoc in the lives of those directly affected and spread fear and uncertainty among those remaining. They can’t help asking the question, “Why are we doing this?”

It is imperative for senior managers to be able to articulate a clear, strategic justification for restructuring to help their people appreciate why these changes are necessary to maintain the viability of the organization.

Before the managers of any organization can determine how to do work better or how to organize to perform processes more efficiently, they must first determine what work needs to be done and what processes are critical to perform. Opportunities for increased revenues as well as for reduced costs need to be examined. Choices among those opportunities can only be made on the basis of strategy.

Strategy Is Key

In most organizations, strategy is seldom formulated, articulated or understood in a way that provides managers with a useful basis for making decisions about restructuring. There are a number of reasons for this, of course. One reason is that people have different things in mind when they use the term “strategy.” Often strategy is used to describe budgets and forecasts. Sometimes managers use the word strategy to designate a business objective. Neither of these provide context that allows for effective prioritization or the ability to determine what work is strategic to the business. We advocate an approach to strategy that describes how you will create competitive advantage and distinctiveness. This involves answering two questions:

1. What unique technical and social capabilities will you focus on to create and sustain competitive advantage?
2. What about your products and services create distinctiveness in the eyes of your target customers?

These questions are not simple to answer, but when answered well, they provide a succinct and easy to communicate strategy that informs what opportunities you will pursue as well as what you will say no to. Equally as important, it provides a framework for identifying what work is strategic and provides context for effectively structuring the business.

Prioritizing Work

One of the first signs we encounter that indicates non-strategic restructuring is across the board cuts. The view is that every group or department needs to do their share so everyone will reduce some fixed percent. When the business strategy is clear it makes more sense to be targeted in where you cut and why. Strategic clarity allows you to answer the following questions about an organization’s work:

• What work should be the object of our most intense improvement efforts?
• What work activities need to be improved together and which can be improved separately?
• What work should be eliminated?
• What work should we outsource?
• When is efficiency (i.e., doing things right) and when is effectiveness (i.e., doing the righ things) the most useful driver of improvement efforts?

Strategy clarification assists restructuring by establishing a basis for prioritizing organizational work. We have observed that most businesses that are successful at restructuring are able to identify and protect the work that creates competitive advantage or distinctiveness in their industry. A clear understanding of the business’ strategy also helps groups operating outside of the competitive advantage work processes reexamine and restructure the work they perform. If it is clear the group is involved in non-competitive advantage work, it must first decide which of the following categories of work it performs:

1. Strategic support work, which facilitates accomplishment of competitive advantage work;

2. Transactional support work, which is essential for the business to operate but does not create distinctiveness;

3. Non-essential work, or activity that has lost its usefulness but continues to be done.

Strategically prioritizing work also allows an organization to make effective outsourcing decisions. Outsourcing the wrong work, such as competitive advantage work, almost always hurts performance and ends up being a costly decision.