Planning, Formulation and Execution of Various Restructuring Strategies
by Corporate restructuring has been fueled by variety of forces such as global competition, regulatory changes, technological breakthroughs, managerial innovations, transformation and formerly centrally planned socialistic economies and expansion of international trade. It has led to dramatic improvement in corporate performance. Restructuring of a company involves an activity to make the organization more balanced, profitable and enable the company to achieve its objectives in a more simplified manner than previously. It may include the organizational restructuring such as merger, amalgamation, takeover, joint venture, divestment, expansion and so on or financial reorganization such as buy-back of shares, issue of sweat equity shares, redemption of shares, issues of convertible debenture/preference shares, issue of bonus shares, issue of deep discount bonds and so on. However, corporate restructurings fail if they are not in conformance with the strategic objectives.
Strategic Fit
The first step of the model is to check whether the restructuring fits in to the vision and strategy of both/all the parties involved. For example, A typical merger is one where two (or more) parties come together and form a new entity. Neither is taking over or acquiring the other. Even where company A takes over part or whole of company B, the result is a merger.
In either case, that is, whether coming together, or whether there is a sale and purchase, it is desirable that the top managements of both A and B have evolved their own respective perspective visions and come to the considered conclusion that a merger is the best strategy.
For A, takeover may be a useful strategy for entry into a new product, territory or segment; or a means for faster growth, in addition to internal, organic expansion; or access to resources like capacity, talent, technology, brands or funds. For B, selling out may be a good strategy to divest an unrelated business, focus on core businesses and release resources for such concentration.
- Planning Phase
- SMART objectives, ROI
Restructuring makes sense only if profitability and market position are improved. The business objectives should be ambitious, but realistic, time bound, specific and clearly measured.
- Budget for restructuring
Without a sufficient budget, any restructuring is “mission impossible”.
- Internal communication to gain team’s support & give/get ongoing feedback
Incorrect/poor communication of the process creates chaos.
- Project team creation: x-functional, x-country
The project team should include all key people who are needed to make the project successful.
- One fully dedicated project manager/coordinator
“Shared” responsibility does not work in restructuring.
- “Sponsor” from top management team who will support the process
Without support from the top management level, the process can get stacked easily.
- Person responsible for each country
For multinational restructuring, the voice from the country level with first hand, local knowledge should be heard.
- Project management tools and procedures in place
Project management tools should be used, especially in complex projects. A company can use existing procedures or create new ones.
- Implementation test phase
- Test phase for one country, area, division, function, head office, etc.
Small-scale tests are needed to avoid the risk of big and costly mistakes affecting the whole organisation.
- Measuring & analysis of test phase
- Measuring results against SMART objectives
- Corrections of initial plans, if necessary
This is the most important part of organisational restructuring process in its implementation phase. If a test is not successful, the whole organisational restructuring is in danger.
- Full rollout
- Measuring results against SMART objectives
- Corrections to implementation
From business units to category management
Nike started as a company selling footwear for runners. After some years, they added sneakers for other sports categories like soccer, sportswear (lifestyle), tennis, basketball, x-training, women’s fitness and American football. Nike quickly realised that its consumers need specialised apparel and equipment to practice their sports, so the two business units were added to the product portfolio. The company’s organisation reflected all these changes by including “business unit” departments: footwear, apparel and equipment for all sports to typical functional divisions. At a later stage, Nike’s top management decided to organise the company by sports categories. The main reason was that, for example, products for soccer differ significantly from products for running by product range, expertise needed, distribution channel, sports assets, product features, places where consumers play, etc. Each category is a different “field of play”, where producers compete to win the hearts of each category consumers. It was much easier to respond to consumer needs and to grow distinctive category markets when the organisation reflected the category approach. Each sports category division includes footwear, apparel and equipment, but has also a team to manage category marketing, retail, visual merchandising, product development, and so on. Nike’s organisational evolution from a business unit organisation to sports category set up is a great example of how a company can adjust to meet consumer needs better and grow business at a very fast pace. Such an approach helped Nike become number one globally and in each sport “field of play”. The transformation from footwear to BU divisions took several years, but the reorganisation from BU to categories was executed within 1 year. Nike’s mission to serve and inspire athletes from all over the world (“if you have a body, you are an athlete”) helped the company make the right organisational decisions and redefine a service model in the industry. The competition followed by doing the same but was unable to regain strategic initiative.
Geographic expansion: an example of CEMEA region
Nike was established in Oregon, USA. It soon expanded to all other states and then started the business in Western Europe and on other continents. For CEMEA region (Central Europe, Russia, Turkey, Israel, Middle East and Africa), Nike picked Poland as the first, test country for the region. With the help of shared services in Nike’s European headquarters in Holland and central warehouse for Europe in Belgium, Nike Poland was opened as their own, buy-sell subsidiary. After one year of tests, the country’s opening pattern was applied for other countries of CEMEA region, one after another. Poland was treated as a training and knowledge centre for other countries’ teams. Before Nike’s rollout of its own subsidiaries, these markets were serviced by ineffective, exclusive distributors who were not able to promote Nike brand and grow revenues the Nike way. Each CEMEA country had its own customer service in the European headquarters, CEMEA functional and category teams and centralised supply chain model. With its own subsidiaries in each CEMEA county, Nike was able to offer better commercial terms to its retail partners, start marketing activities to position the brand properly, grow revenues (for example, with the impressive CARG of 19% during 13 years in Poland). The big organisational restructuring innovation was the European headquarters as a service centre for all European countries which enable countries to be less staffed, more focused on sales and with less headcount needed to cover all functional departments in each country. Nike worked as a matrix, where all functional and category positions are represented at all levels (global, geography, country). Marketing activities were integrated across all departments (sales, marketing and retail) and executed in each country, according to global guidelines, and with local adjustments.
Supply chain: centralization of deliveries
After Nike expanded to Europe and started in some countries with traditional logistics in the first couple of years, instead of having warehouses in each country, one central warehouse was built in Laakdal, Belgium, to supply all European customers from one place. All Nike global factories shipped their products to Laakdal, and then, outsourced logistics companies delivered seasonal orders to the doors of Nike European customers. In the 90s, opening a huge warehouse facility in the middle of nowhere in Belgium, but close to the sea ports was a huge supply chain innovation, which simplified logistics and was a labour and operational cost saving compared to having warehouses in each country. The system did not work perfectly from day one, but gradually, Nike made it very functional and partly automated.
From “prop” to “futures” orders
In the early stage of its development, Nike met the demand by collecting orders from customers, ordering production at factories and delivering products to customers. The idea of making customers order products, with the help of product samples and catalogues, 6 months before each of 4 seasons was revolutionary. It enabled better demand-based, supply planning, with less cash and logistics constraints. This system called “futures” ordering, as opposed to on-demand “prop” system, has changed Nike’s organisation dramatically. Instead of collecting orders by Nike’s sales force during visits to customers, Nike built a network of unified showrooms in each country. Nike’s sales force presented new seasonal collections to customers in a similar way, with similar visual merchandising support, and well ahead of their delivery to the market.
From a wholesale model to direct-to-consumer
Any success in business depends on good interaction with consumers and a high gross margin. As the founder of Nike, Phil Knight, used to say: “Once gross margin is good, everything else can be fixed”. In the past, the main business partners for Nike were: key accounts like Footlocker, Intersport, Decathlon, El Corte Ingles, Sports Direct, JD Sport, Go Sport, Bata, mid-size “field” accounts and Small Value Accounts. Nike sales departments clearly reflected that approach. In a way, Nike was partly dependent on the customer experience that their partners offered. Many of them were far from being brand enhancers and frequently decreased prices through aggressive discounting. The company did not have its own retail, except for a few Nike Towns or factory outlet stores. With the growing role of e-commerce and periodic market overstocking due to the aggressive strategic goals, Nike decided to strengthen its direct-to-consumer presence on the global market by opening Nike-only stores, its own online store www.nike.com, its own factory outlet stores and by introducing category shop-in-shop concept with key accounts. These actions required considerable restructuring of Nike organisation to cope with new tasks like channel and space planning, category directive assortments for its own stores, product differentiation in retail, return logistics, among a number of other challenges. Although the direct-to-consumer approach is continuous learning for Nike, earning double wholesale and retail margins from their own, a brand-enhancing retail stores network was a huge gain for Nike’s P&L.
Selected cost optimisation restructuring initiatives
“Shared services” is a concept introduced by Nike to reduce employment by offering 1 central or regional service centre for many countries. It was applied for a group of smaller countries or the whole Nike regions. The shared services were applied to HR, customer service, logistics, IT, procurement, etc. It is nothing new these days, but 20 years ago, it was a very innovative solution. Global or regional headcount reduction is a bit primitive type of reorganisation to reduce labour cost. Nike executed it when the organisation gained excessive “fat” while revenues and gross margin did not grow as planned. When the top line went back to normal and headcount limits were eased, the total number of headcount usually came back to the number from the previous level or more. “10 per cent cut in costs” was Nike’s initiative to reduce excessive operational costs at country’s or regional level. This task was surprisingly easy to execute by Nike countries, despite their initial resistance, as long as the exercise was not repeated in the following year.