For an organization to register growth, it constantly goes through revolutions. The manager should be able to conform to the changes by responding appropriately thus ensuring that things run well. Any business corporation aims to make maximum profit. This is by ensuring that the resources available are optimally utilized. One of the strategies commonly adopted by managers is by downsizing the company through restructuring. Restructuring involves reorganization of the company that may include selling off some of its subsidiaries.
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This exercise intends to effect cost reduction and amplify the profit margins (Hill & Gareth, 456). This is often done on a company that has shown a declining trend in profits made from its operations. When restructuring, the management conducts research to determine which part of the company is not profiting and has been taking the attention of the management while it should focus on its central business. Restructuring is a common practice during bankruptcy, takeovers, acquisitions, and buyouts. Besides increasing the profits of the company, this exercise also improves the efficiency of production by reducing wastage of resources (Hill & Gareth, 326).
Spin-off or sell-offs
A decision to downsize a firm may be made to shrink production costs. A company may divest through either a sell-off or a spin-off its units. With the sell-off, the company trades its item without upholding ties with the buyer. On the other hand, when a company spins off its items it retains ties. Downsizing also involves the closing of a product line, operating division or even a key strategic unit. This is done to eradicate uncontrollable, unprofitable, or even unrelated operations. A company may be driven to undertake a divestment move for several reasons (Narayanan & Vikram, 78). To start with, if the market share that a certain company occupies was too small, it would be a wise decision for the company to downsize.
This helps in increasing its competitive power in the market. A firm may also decide to downsize if it gets a better investment opportunity. This means that if an opportunity comes up that allows the company to make more profit than it currently does, the prudent thing is to change the line of operation. The company can thus spin-off or sell off the redundant line of operation and invest in the lucrative one. A company may also divest when a line of operation of the company becomes too expensive to maintain. Such a line may incur more maintenance cost such as advertising to remain valid. In such cases, the company may sell off such a line of production and focus resources on other lines that are less demanding and profitable. That way the company will have cut down production costs. A company may also divest if it has a line that is unrelated to its main line of operation. This helps the company to specialize in its chief production operations thereby promoting efficiency ( Philippe & Rey, 80).
Both of these strategies result in a reduction in cost. However, a company would gain more benefits by spinning off its items rather than selling them off. During a spin-off neither, neither the parent company nor the shareholder is required to pay any operation tax. In a spin-off, the parent firm dispenses its stock to the subsidiary. The subsidiary thereby becomes a separate entity. The parent shareholder at this time owns both the stock of the subsidiary and that of the parent. One of the benefits is the lack of taxation of the process when conducted in the right way.
On the contrary, sell-offs calls for a 35% corporate tax on and other state taxes are imposed on the sale of a split unit. Furthermore, in a sell-off, the shareholder is bound to pay an additional second level tax in instances where the parent firm distributes the proceeds in the form of dividends. Any corporation intending to down scope its operation should consider spill offs. The company can use this strategy in meeting its important objectives in crucial times when it has no capital to expand its investments. In a spin-off operation, all the parties involved benefit. The parent company is also able to buy back its shares in a tax-efficient procedure (Narayanan & Vikram, 56).
A leading benefit of the spin-off is that it may increase, in the price of the stock. This is because the total of the separate parts has a higher value than when it is only a single entity. Naturally, the stock shares of the parent and subsidiary will be sold at a superior price than the merged company. Another advantage of a spinoff is the decrease in debts. This is because the company after the spill off gets more profit that exceeds its capital costs (Hitt & Hoskisson, 134).
When to sell off?
A sell-off which can also be termed as divestiture is down scoping strategy when the company sells its subsidiary. This is often done on a subsidiary that deals with an unrelated line of operation to the main operation of a business. This then implies that sell-offs are appropriate for conglomerate companies. This helps the firm is focusing on its core business. The lack of synchronization of operation between the parent firm and the subsidiary may be the cause of the devaluation of the stock of the synchronized company in the market. The company, therefore, sells off the subsidiary to have a higher competitive price in the market. The capital rose from such sell-offs can then be used to offset the firm’s debts (Narayanan & Vikram, 130).
When to consider spin-offs
The good thing about a spinoff is that any company regardless of its size can adapt it. A company having subsidiaries that complement the key operation or are directly related may consider applying spin-off as a method of restructuring. One way that the company can benefit is that the parent company can test the market by applying innovations on the subsidiary without affecting the operations of the parent firm. Spin-offs have an advantage in the subsidiary divisions. It helps them to thrive under focused management, unlike the consolidated management which would not give the division the needed attention. Spin-offs also help in protecting the company’s assets from liabilities. Finally, just like in sell-off, the company that adapts spin-offs also benefits from the increased value of the stock as a result of breaking down the company into parts (Narayanan & Vikram, 76).
Restructuring in a global context
Nature of market failure in emerging markets, in Southern Korea
Adapting focused strategies for emerging markets can largely be said to be the cause of the failure market. This can be evidenced in the state of the western corporate world of the 1960s and 1970s where the many conglomerates were disintegrated. Companies that were diversified at this time remained strong in the market compared to the downsized ones. The diversification of their lines of operation gave them a greater impact on the global market because of the sound, competitive power (Hill & Gareth, 78).
The emerging markets in Southern Korea have registered a fail due to several reasons. The major one is because the companies ape the western’ practices of down scoping their firms. As these emerging markets try to penetrate the global market, they get investment advice that pushes them to adapt the western methods of downscaling their firms. They consult business consultants who assert that a conglomerate is too slow for the current, fast-moving world. Downsizing and restructuring may work well for countries in the UK and other western countries but may not have the same results for the emerging markets.
The nature of these two markets is quite distinct. Companies based in the western world have a wide range of supporting institutions. They may be oblivious but which have major impacts on the company’s operations. Such institutions include sound educational systems that produce a skilled workforce. Without adequately skilled human resources, the company’s performance would not be commendable. They also have adequate funding institutions that offer capital to the companies at affordable interest rates. The infrastructure in these countries is also highly developed making communication a very easy and affordable process (Philippe & Rey, 235).
Such institutions are absent in most developing countries such as Korea. Focused corporations in these countries are unable to raise enough funding for their operations since there are no efficient funding institutions. The company also has difficulties getting qualified to the workforce since the educational institutions available are not adequately equipped for that. The infrastructure network is deplorable making communication between the company and its customers to be hampered (Fenestra, & Hamilton, 67).
What companies in the emerging markets need to understand is that the success of each company is brought about by different factors since their settings differ. Each company should be treated differently according to its context. Imagining that by adopting management strategies taken by companies in the west will also lead to success in the developing world context is presumptuous. A firm, therefore, needs to come up with business strategies that are in accord with the country’s capital, workforce, legal requirements, and products. This difference like support institutions explains why diversified companies in emerging markets such as Indonesia and India register success. Contrary, specialized focused companies have failed. On the other hand, diversified corporations in western countries such as the U.S.A and UK have failed (Phillippe & Rey, 34).
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Research has shown that diversified companies would do very well for developing countries, as they are well suited for the institutional context of such markets. This is because the conglomerate’s several branches can be used to compensate for the lack of support institutions that you find in the established economies. The lack of uniformity in the emerging markets is an advantage in its self. This is because different divisions of the set up occupy different levels providing links throughout the economy. They, therefore, offer the function given by the support institutions in the developed markets (Fenestra & Hamilton, 87).
Potential market failure in a country
Market failure is said to have occurred when a market falls short in an efficient allocation of resources. This failure can be brought about by several factors. Excessive differentiation of products can cause a failure. This is because the companies spend many resources on branding rather than the quality of the product or service. This leads to the production of goods and services under strong brand names but of low quality. Another cause of market failure can be brought about by ignorance about the goods or services on the part of consumers. This can be brought about by inadequate and misleading advertisements.
The consumers could also be lacking technical knowledge on how to utilize a particular good or service. Another potential cause of market failure is when the resources exhibit a high level of immobility. It could also stem from companies having excessive market power. This could be due to the existence of oligopolies and monopolies, market rigging, price-fixing, abnormal profits, and collusion. The government should protect its citizens from potential market failure. When the government foresees a market failure, it should come up with measures to counteract the effects. These measures include taxation, offering subsidies, prohibition, regulation, income redistribution, and positive discrimination (Hitt & Hoskinson 45).
Are the threats for market failure different from those in South Korea?
The threat to market failure in the UK and South Korea is fundamentally the same. The difference is only that these threats arise from different institutional contexts. For instance, the issue of ignorance brought about by a lack of proper communication is a common potential threat for both countries. However, whereas, in the UK, this is because of miscommunication from improper advertising and other misnomer coming from technology, in Korea communication is broken down by lack of proper infrastructure. The infrastructure for communication in the emerging market is still wanting. These countries often have acute power shortages that hamper communication.
At this age where the use of wireless communication marks the daily routine in the western world, there are still enormous portions of India and China that lack telephones. Mailing services in these countries are slow and inadequate thus rendering them unreliable. However, the threat associated with the management strategy for these two countries is quite the opposite of each other. In the UK, the companies that are most likely to have a market failure are the ones, which have diversified their operations. Those that show focused specialized production is under no threat. On the other hand, in Korea, those companies with diversified productions are under no threat while the focused ones are threatened by market failure (Fenestra & Hamilton, 567). This explains why companies in different regions need to adapt strategies that fit in their institutional context.
Restructuring a company when appropriately done has many positive benefits for the company. It makes it well organized increases its efficiency narrows its operations, and improves its focus on its chief operations. A company restructured after acquisition in most instances result in the company being resold at a higher price than the one it was bought at. This then implies that restructuring improves the value of the company. Restructuring can help in protecting a company from the unhealthy competition and from collapsing by reducing the costs incurred in production (Philippe & Rey, 38). Nevertheless, this process may also have some detrimental effects such as reducing worker commitment as they feel that their job is not secure. The employees also reduce their contributions to the company in terms of innovation and creativity. Another major disadvantage of downsizing that it has led to many employees shunning from managerial positions. This is because after a company has been resized, it demands a lot from the manager in terms of more responsibility and longer working hours. The rewards for these increased responsibilities are also relatively low (Hitt & Hoskinson, 456).
Fenestra, Robert and Hamilton, Gary. Emergent Economies, Divergent Paths: Economic Organization and International Trade in South Korea and Taiwan. Cambridge: Cambridge University Press, 2006. Print.
Hill, Charles, and Gareth, Jones. Strategic Management Theory: An Integrated Approach. Boston, MA: Houghton Mifflin, 2010. Print.
Hitt, Michael, and Hoskisson, Robert. Strategic Management: Competitiveness & Globalization. Mason, OH: South-Western Cengage Learning, 2011. Print.
Narayanan, and Vikram, Nanda. Finance for Strategic Decision Making: What Non-Financial Managers Need to Know. San Francisco: Jossey-Bass, 2004. Print.
Philippe, Martin, and Rey, Helene. Financial Globalization and Emerging Markets: With or Without Crash. Cambridge, Mass: NBER, 2002. Print.