Introduction to Organizational Restructuring in Business Management
Organizational restructuring in Business management means to re-construct your organizational structure. There has been an increasing trend of large multinational firms seeking external help to streamline their organizational structure in order to optimize functioning. To fully comprehend the reason behind this phenomenon, we must first briefly look into what organizational structures really are, how they function and how its optimality almost ensures enhanced performance.
What is an organizational structure?
An organizational structure refers to a mechanism that skeletons how tasks are formed and directed in order to fulfill certain goals of an organization. These tasks can comprise of role, accountabilities, assignments or even norms. An organizational structure also determines how information flows among various hierarchy levels from the top end management of an organization to all employees. Organizations need to be efficient and flexible to uncertainties in order to sustain a competitive advantage in the market.
Centralized and Decentralized structures
According to where decision making takes place, there are two ends of organizational structure extremes. Like the name suggests, in a centralized organizational structure all decisions are centralized, and major decisions always flow from the top down, which means from the upper management.
Due to its centralized leadership structure, this structure has a defined chain of command. A good example of a centralized structure would be the military service where they have lengthy and well defined hierarchy of superiors and subordinates. Whereas, in a decentralized structure, key decisions are made at various hierarchy levels.
Decentralized structures allow key decision making at every hierarchy level. This allows quick and holistic decision making which in turn allows firm to remain quick, agile and adaptable to market uncertainties. With the rise in spread of technology, there has been a surge in technology based start-ups.
Most of these start-ups have small decentralized teams with almost every team member holding an elevated level of personal agency. These are the two extremes of how hierarchy can be structured. Apart from this, there are many other structures that organizations adopt which varies according to workforce specialization, functional divisions/subsidiaries, autonomy and cross-functional duties.
Some popular organizational structure types are:
- Hierarchical structure: Probably the most popular and typical organizational structure. Subordinates group strictly as per their functions and receive directions from one defined supervisor.
- Matrix structure: Decision flow from upper management to subordinates is set up in a grid structure so subordinates may have cross-functional duties reporting to multiple managers.
- Flat structure: Mostly adopted by start-ups or small organizations. Decision making is shared and so is accountability among employees. Managers and employees also bear cross functional duties.
- Network structure: More decentralized and flexible than most organizational structures. Relies on communication and dependability. Its more agile than other structures as it allows flexibility and decision making to the lowest level.
- Divisional structure: Usually adopted by large multinationals, each division is defined as per subsidiary, product line or geography and not as per functions like marketing, accounting etc. So in a way, every division acts as a mini organization with their own structure. This allows divisional autonomy and reduces dependence between divisions. However, potential operational inefficiency is a major potential threat.
- Line structure: Simple structure where chain of command flows from top to bottom without any intermediaries. Departmental managers have control over the entire department allowing a streamlined chain of command and efficient operations as well as decision making.
- Team based structure: Managers have assigned teams/projects besides their usual tasks. This allows enhanced decision making, accountabilities and team work. This also allows the organization to take on multiple projects and allocate work accordingly whilst not losing efficiency. This type of structure is becoming increasingly popular due to its flexibility and scope.
What is organizational restructuring in business management?
A massive part of change management, organizational restructuring is defined as a phase that requires a revamp of subordinates, managers, processes, systems and business departments. This maybe done in order to reprioritize objectives, to augment efficacy or to adjust to budget fluctuations or even market fluxes.
The main goal of this mostly arduous task is to eliminate potential threats or re-align to new opportunities. This could require a top to bottom overhaul and a refurbishment of the current hierarchy structure or merely some adjustments to enhance efficiency.
Need for organizational restructuring
Now there might be various reasons as to why organizational structures need to be changed. One of the most common reason is a possible merger/acquisition or joint venture. These transactions usually result in a change in ownership which can possibly result in transfers or alliance between entities. Results might include processes like staff restructuring, re-alignment of functional divisions or even balance sheet consolidation. This potentially requires a makeover of the entire organizational blueprint and the structure of the said organization plays a big part in that.
Another reason might be a result of strategic management. Strategic management usually involves a re-alignment of objectives. This could lead to a need for change in the entire organizational structure too. A business based in a certain city might change its strategy from targeting the local market to expanding to a completely new continent. This might require them to produce certain results in a quick turnaround. An organizational restructuring from a centralized framework to a decentralized may be necessary in business management.
Organizational restructuring might also require, if there are disruptions affecting its operations. Due to disruptions leading from conflicts of interest between personnel, a restructuring of the hierarchy structure to streamline all the information flow and decision making could do wonders. Disruptions and inefficacies might result in lower gross margin, which could have a detrimental effect both in long run and short run.
Current State Assessment CSA
Another major reason for an organizational restructuring could be a result of a current state assessment (CSA). A CSA is a methodology that gauges metrics like ongoing costs, productivity and hierarchy levels within an organization. The CSA procedure assesses all the metrics relevant to the organization and bases its structure and information flows around it. If an organization isn’t performing at the expected level as per CSA, organization requires restructuring to ensure optimality. A comprehensive CSA would evaluate the strengths and weaknesses of the current environment, challenges and potential gaps in the future and peer/competitor evaluations.
In addition, it would also deal with near future possibilities such as technology adoption and implementation, streamlining organizational information management system and change management. An unfavorable organizational structure almost always translates to poor internal management. Inefficiencies result in uneconomical design processes.
This habitually leads to bad cash flow and high operational costs, factors which trigger reduced margins. These factors shape up the structure of an organization as they ultimately deal with decision making process.
How is restructuring done?
If the upper management of an organization realizes that they’re in need of restructuring, they will most likely seek aid externally via consultants or retain it in-house. Also described as ‘greatness over growth’, this ‘quality over quantity’ loom might be desired for restructuring, considering the fact that more personnel don’t translate to more output. Lately, the organizations boasting the highest profits aren’t the ones with the biggest teams. This trend has expanded beyond tech or boutique firms.
For example, popular ice cream ingredients manufacturer firm Rhino Foods, who supply to ice cream giants such as Ben & Jerry’s only has about 140 employees but boasts revenue figures of over $50 million.
Rhino Foods even have an employee exchange program where employees get transferred to work in partner firms in case of overcapacity and employees from other firms fill in for short run-in case of under capacity. Innovative initiatives like these aid restructuring efforts by streamlining them to adjust to market fluctuations.
As strange as it may sound, sometimes, disorganization of resources and command lines enables smooth restructuring. At times, a defined organizational structure only encourages a bureaucratic process flow. This might lead to a lengthy and time consuming process flow which only makes the organization more inefficient.
Thus, a level of disorganization within a firm might enable flexibility if done right. Having a number of subordinates without any division designation or department with no fixed report is beneficial. This enables an adjustable production line that can react accordingly to the market’s fluctuations.
Strategies for effective organizational restructuring and business management
There are certain strategies, upper management and consultants use to restructure organization in the most optimum way. Aligning the organization’s structure as per its strategies. Say, an organization might need to value its marketing higher than production in order to thrive. A good restructuring is to add more subordinates and hierarchy levels to its marketing department. In contrast to, comparing its production in order to rationalize its operations.
Another approach to a successful organizational restructuring is cutting down convolutions faced by the firm. Complexity is costly when we put it down on numbers. Whether it be organizational hierarchy levels, production methodology, pricing mechanism or even paper work on HR, cutting down complexity plays a big role in organizational restructuring and provides certainty to make operations smoother than before. Organizations involved in restructuring efforts also should focus more on boosting their activity levels. Improved delegation of tasks to subordinates down hierarchy levels might be a small initiative in restructuring that could play enormous dividends to the firm. Maintenance of an apt workload balance is another measure that greatly aids restructuring efforts. Creating the good balance of specialized workforce as well as cross-functional flexible workers seems the right approach. This makes it easier to move resources around incase of production fluctuations without compromising productivity.
Evaluating the impacts
Thus, we can see the significance of organizational restructuring and more importantly, the criticality of executing it the right way. Whether the aim is growth, eliminating overheads or re-aligning, restructuring is a familiar phenomenon among organizations. It goes without mentioning that restructuring brings numerous potential advantages as well as drawbacks. Improved efficiency, reduced overall costs, enhanced managerial control, positive corporate cultural change, enhanced productivity and a sustainable model of resource allocation could be some of the benefits.
On the other hand, increased administrative burden, unexpected costs, increase of speculative roles, lack of leadership and ample amount of required investment would be some drawbacks. Similarly, it is imperative for the upper management to follow through the restructuring process. And ensure its completion as incompletion might only pile up organizational inefficiencies.