With one of the worst recessions in decades, businesses are now forced to decrease costs and improve productivity. The most often “go-to” plan is to restructure the organization. Indeed, many view that recessions offer less costly opportunities to implement needed restructuring or “creative destruction” that will allow for future growth once the economy starts to pick up again.
Organizational restructuring has been frequently associated with such terms as “streamlining”, “flattening” or “delayering” the organizational structure. As these synonyms suggest, organizational restructuring entails the removal of unnecessary management levels until the organizational structure is stripped to its “barest minimum”. What is the lowest number of management layers that can be achieved while still allowing a well-functioning organization? According to business thought leader and best-selling author Tom Peters, the number of management levels should be limited to a maximum of three within a business unit (branch, factory, etc.) and five within the whole organization.
Why does organizational restructuring decrease costs and improve productivity? The obvious reasons are that overhead costs reduce (from wages and other employee-related expenses) and given a fewer number of people to do the same amount of work, productivity per person should naturally increase.
However, if restructuring is done right, it offers even more important benefits. With fewer layers, decision-making management is closer to the “frontline” workers, customers, and the marketplace. This allows for more efficient communication flows and quicker resolution of problems as decision-making becomes swifter.
Furthermore, greater intimacy and understanding of the market enables management to be proactive and design more effective strategies and systems that will prevent problems from occurring in the first place.
How can organizational restructuring be implemented? A common method has been to reorganize organizational units to focus on major brands. This brand-oriented organizational structure has been used by the Chrysler Group to aim for the benefits discussed above: to enhance communication and decision-making and bring management closer to its employees and customers. Distinct business units for each of its major brands have been created: Chrysler, Jeep (R), Dodge and Mopar (R). Each brand is responsible for its own profitability and commercial and industrial investments. But to ensure optimal economies of scale, industrial and corporate staff units have been organized in order to fully support the brand organization:
- Product Engineering organization
- Product Design organization
- Manufacturing organization
- Quality organization
- Procurement organization
Corporate staff units:
- Finance organization
- Information Technology (IT) organization
- Human Resources organization
- Legal organization
- Communication organization
- Audit organization
- External Affairs organization
- Business Development
Procter & Gamble (P&G) has implemented a similar restructuring program, by shifting its organizational units from a geographic-based structure to a global business unit (GBU) structure organized according to major product categories wherein P&G participates: Baby, Feminine & Family Care, Beauty Care, Fabric & Home Care, Food & Beverages, and Health Care. The reorganization aimed to boost growth, innovation and quicken management decision-making for the company’s global-marketing initiatives. It also aimed to reorient the strategy-formulation and profit-creation responsibilities on products rather than on regions. The GBUs had to devise global strategies for all P&G’s brands and the heads of GBU were held accountable for their unit’s profit. The sourcing, R&D and manufacturing operations were also undertaken by the GBU. One of the pioneers of the trend to outsource back-office business processes, P&G consolidated its support services for human resources, finance and accounting and information technology into a Global Business Service (GBS) organization and located these service centers in low labor cost areas that would serve multiple geographic areas.
In summary, organizational restructuring involves the removal of unnecessary management layers. This streamlining decreases costs and improves productivity by bringing management closer to its “frontline” workers, customers and the marketplace, allowing for lower overhead costs and more efficient and effective communication flows and decision-making. A popular method of restructuring has been to reorganize business units according to major brands or product categories and consolidating support services in low labor cost areas.
Written by: RICHAREST BARRETO