224 Part 2: Strategic Actions: Strategy Formulation
change and learning from acquisitions, they are more skilled at adapting their capabilities
to new environments.^87 As a result, they are more adept at integrating the two organiza-
tions, which is particularly important when firms have different organizational cultures.
As we have explained, firms using an acquisition strategy seek to create wealth and
earn above-average returns. Sometimes, though, the results of an acquisition strategy fall
short of expectations. When this happens, firms consider using restructuring strategies.7-5 Restructuring
Restructuring is a strategy through which a firm changes its set of businesses or its finan-
cial structure.^88 Restructuring is a global phenomenon.^89 Historically, divesting busi-
nesses from company portfolios and downsizing have accounted for a large percentage
of firms’ restructuring strategies. Commonly, firms focus on fewer products and markets
following restructuring.
Although restructuring strategies are generally used to deal with acquisitions that
are not reaching expectations, firms sometimes use restructuring strategies because of
changes they have detected in their external environment. For example, opportunities
sometimes surface in a firm’s external environment that a diversified firm can pursue
because of the capabilities it has formed by integrating firms’ operations. In such cases,
restructuring may be appropriate to position the firm to create more value for stakehold-
ers, given environmental changes and the opportunities associated with them.^90
As discussed next, firms use three types of restructuring strategies: downsizing,
downscoping, and leveraged buyouts.7-5a Downsizing
Downsizing is a reduction in the number of a firm’s employees and, sometimes, in the
number of its operating units; but, the composition of businesses in the company’s port-
folio may not change through downsizing. Thus, downsizing is an intentional managerial
strategy that is used for the purpose of improving firm performance. In contrast, organi-
zational decline, which too often results in a reduction of a firm’s resources including the
number of its employees and potentially in the number of its units, is an unintentional
outcome of what turned out to be a firm’s ineffective competitive actions.^91 When down-
sizing, firms make intentional decisions about resources to retain and resources to elim-
inate. Organizational decline however, finds firms losing access to an array of resources,
many of which are critical to current and future performance. Thus, downsizing is a
legitimate strategy and is not necessarily a sign of organizational decline.^92
Downsizing can be an appropriate strategy to use after completing an acquisition,
particularly when there are significant operational and/or strategic relationships between
the acquiring and the acquired firm. In these instances, the newly formed firm may have
excess capacity in functional areas such as sales, manufacturing, distribution, human
resource management, and so forth. In turn, excess capacity may prevent the combined
firm from realizing anticipated synergies and the reduced costs associated with them.^93
Managers should remember that, as a strategy, downsizing will be far more effective
when they consistently use human resource practices that ensure procedural justice and
fairness in downsizing decisions.^947-5b Downscoping
Downscoping refers to divestiture, spin-off, or some other means of eliminating busi-
nesses that are unrelated to a firm’s core businesses. Downscoping has a more positive
effect on firm performance than does downsizing^95 because firms commonly find thatRestructuring is a strategy
through which a firm changes
its set of businesses or its
financial structure.