- Why do companies restructure?
- Common obstacles to restructuring
- Actionable steps for the restructuring process
- Case studies from Nike, Inc.
Many large, international corporations are like huge sea tankers carrying oil. It is difficult to change their collision course quickly and avoid hitting objects that stand in your way or react properly to unexpected market circumstances. Large organisations tend to follow routine, gain “organisational fat” and play the same game that made them successful in the past. However, the global market and consumer trends evolve so quickly that corporations cannot afford to do business as usual. If they want to play big roles in the market or even survive, they have to firm organisational restructuring processes in place. Business restructuring (or organisational restructuring) is a process that can address a company’s unsatisfactory status quo in the constantly evolving market. It should be based on proper strategic planning, fuelled by innovation, or it can be a tactical reaction to unexpected circumstances. The final sections of this article will detail some real-life case studies of restructuring I encountered during my time as the CEO of Nike Poland.
A strategy is about creating a long-lasting competitive advantage by focusing on key priorities to succeed. It can be written on a piece of paper only accessible by a company’s top management team or a clear template given to each and every employee to follow. An organisational restructuring process has to be rooted in corporate strategy. You cannot predict everything, but a strategic approach can help you react better. Wherever you plan to go, you should know where ‘north’ is. Tactical organisational restructuring can work and is sometimes necessary, but if you do not see the long-term vision on the horizon, you may end up in the wrong place.
Being active or reactive
The proactive approach to reorganisation is a virtue of market leaders. It is the way to change the rules of the game. Market leaders follow market trends, but also create them. Having strategic initiative is extremely important in any market, just like in war. All famous business leaders and military commanders were always prepared for constant attack and ready to restructure organisations/troops to address unforeseen problems. A reactive approach to reorganisation is an adaptation to the actions of market leaders or to market developments, which is a strategy that often adversely impacts any company’s financial situation. Reactive companies usually act too late. However, it’s better to react late than never.
Why Do Companies Restructure?
Nowadays, companies have to be consumer-centric if they want to succeed. As Nike likes to say: “consumer decides”. If consumer behaviours evolve, companies need to adjust their organisations to address these changes. Following and creating consumer trends through periodic adjustment can be considered as a non-financial reason for reorganisation. In fact, if restructuring is part of a company’s strategy, it will have a direct impact on long-term financial results.
Examples of internal reasons behind corporate restructuring
Profitability below expectations:
- Stagnant or decreasing revenues,
- Too low gross margin,
- Too high operating costs,
- Bad cash flow,
- Over- or under-investment,
- Productivity/KPIs below market standards,
- High labour costs,
- Unclear roles & responsibilities,
- Poor internal communication,
- Lack of leadership,
- Bad design of processes,
- Marketing budgets allocated ineffectively.
Of course, there are some “easy” ways in which one can address the low profitability problem, for example, through headcount reduction or closing unprofitable stores/branches/facilities/countries. As large organisations tend to grow in an uncontrolled way, such cost cuts may help. Nevertheless, simple cost-cutting exercises may jeopardize the long-term market position of companies affected by such restructuring. It is much more difficult to increase profit by growing revenues, gross margin and through cost optimizing, all at the same time. Such restructuring process is very complex, time-consuming and often requires top management to get out of its comfort zone and to apply strategic thinking. A lack of strategic approach in corporate restructuring is short-term problem fixing or “fire fighting”. You should not forget that “corporate politics” are sometimes the driving force of some organisational restructuring requirements. Some of the transformations have just one goal for top management: to gain more time to stay at their position as long as possible. It is false, but usually minor, scale restructuring.
Examples of external reasons behind corporate restructuring
- New consumer trends
- Innovations that redefine the market
- Company’s market share decrease due to actions of competition
Most companies declare their commitment to address market changes in their strategies, but not many of them really realise this goal in practice. Deep organisational restructuring is not an easy fix and requires radical changes in distribution network, channel management, supply chain, HR policy, production and its sourcing, communication with consumers, product/category management, etc.
Common Obstacles To Restructuring
Resistance from employees
Successful restructuring process requires support of the majority of company’s employees from all levels. The flow of internal communication should be from top to bottom of the organisation, but also from the opposite direction. We do not realise how much the middle and lower layers of each organisation know about how to make positive changes to their organisations and impact the overall process of organisational restructuring. Every employee has certain psychological limitations, own comfort zone, old habits, limiting beliefs, etc. During restructuring process, employees and managers go through the process presented in Figure 1 below.
Figure 1: The development of a manager’s or employee’s reaction to new solutions/ideas, based on how much their ego is involved in the process over time, in different project scenarios. Source: LinkedIn.
After looking at the graph above, it becomes clear that gaining the support of valuable employees for the organisational restructuring process saves time and energy of every party. It can be achieved through proper communication of expected changes, supported by trust-building corporate culture.
Many corporations are never fully ready for deep, advanced forms of organisational restructuring. That is why many of them are not successful. We do not live in an ideal world and there is gain without pain or mistakes. However, realising the elements that have to be fixed to make any restructuring successful may help managers prepare better.
They are presented in Figure 2 below.
Figure 2: Complex Change Management/Organisational Restructuring – How a lack of crucial elements affects the outcome for the organisations. Source: LinkedIn
To make organisational restructuring processes successful, companies need clear vision (as part of the strategy), should seriously take care of the human aspect of the process (knowledge and motivation), have sufficient resources and a realistic and actionable template for its implementation.
Actionable Steps For The Restructuring Process
The scopes of the restructuring process can vary a lot. There are organisational restructuring efforts with short implementation times, and which are extended even for years. “One size fits all” approach can be a big mistake. The basic steps of the restructuring process are presented in Figure 3 below.
Figure 3: Restructuring process as a cycle. Source: Adaptation of Management Cycle Concept
Once the test phase is completed, sometimes after going through many cycles, full restructuring can be implemented. In fact, it is not a process with a predetermined end, but a stream of continuous cycles of improvements, as presented in Figure 4 below.
Figure 4: Organisational restructuring as a process of constant improvements. Source: Adaptation of Management Cycle Concept[/caption] The following detailed, actionable steps serve as an application template for short-term restructuring projects
1. 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.
- 1 “sponsor” from top management team who will support the process
Without support from the top management level, the process can get stacked easily.
- 1 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.
2. 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.
3. 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.
4. Full rollout
- Measuring results against SMART objectives
- Corrections to implementation
Large implementation projects are never mistake free. Companies should be ready to make the necessary corrections, as many times as needed.
Typical mistakes in the planning and implementation of the organisational restructuring process
Some project objectives do not meet SMART criteria and results of restructuring are not fully measured and analysed properly. In such a case, it is easier to “sell” a doubtful project as a success. Insufficient internal communication destabilises the organisation too much during the process. Limited co-ownership of the project at all organisational levels negatively affects the implementation. Restructuring is not rooted in the company’s strategy. In the worst case, scenario restructuring is tactical, with vague objectives, planned at top level only, without collecting feedback from all levels of the organisation, and with diluted responsibility. A great recipe for total failure!
Organisational Restructuring Case Study From Nike, Inc.
Nike Inc. is a globally recognised company as a world’s leader of the sports market, famous for product and organisational innovations, with a globally known brand and sport marketing assets. It can serve as a perfect example and inspiration for numerous organisational restructuring processes implemented in its 40-year history. The author of this post – Witold Kowalski – was a General Manager of Nike Poland and a member of Nike’s CEMEA management team for 13 years and has experienced Nike’s evolution over that period. The following are case studies of Nike’s organisational restructuring projects, selected by him.
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.
When you find out about some of Nike’s internal slogans like “Evolve immediately”, “Nike is about to change”, “There is no finish line”, you will understand that evolution or prompt reorganisations were and are an ordinary practice at Nike. The company made several mistakes on its way, but constant product and systems innovation as part of a bold strategic plan gave Nike a permanent, competitive advantage in the market. Nike always behaved like a market leader and was able to quickly adjust its organisation to serve consumers better than its competition. Reorganisation is a necessary process to respond to external market developments or to take any company to the next, higher level. It is the company’s friend if executed properly.