The annual report of Maytag Corporation contained the following excerpt: The Com

Question

The annual report of Maytag Corporation contained the following excerpt:

The Company announced the restructuring of its major appliance operations in an effort to strengthen its position in the industry and to deliver improved performance to both customers and shareholders. This included the consolidation of two separate organizational units into a single operation responsible for all activities associated with manufacture and distribution of the Company's brands of major appliances and the closing of a cooking products plant in Indianapolis, Indiana, with transfer of that production to an existing plant in Cleaveland, Tennessee.

The restructuring cost Maytag $40 million and disrupted the lives of many of the company's employees.

Discuss why you think management felt it was necessary for the company to undertake the restructuring.

Explanation / Answer

To be sure, many of those companies are in better financial shape today than they’ve been in for a long time. Having implemented cost-cutting and austerity programs during the recession, they have relatively healthy balance sheets and sizable reserves of working capital. They have strengthened their ability to weather downturns and improved their productivity in ways that could potentially last for years. All these restructuring actions were required for survival between 2008 and 2011.

But as they shift their focus from the cost side of the ledger to the revenue side, searching for ways to move beyond cost cutting — entering new markets, commercializing innovative products and services, offering more compelling customer value propositions — these companies are strategically and financially out of shape. They have not made the hard choices involved in channeling investments to the capabilities that are needed most, and deemphasizing or eliminating their other expenses.

If you do not have clear growth priorities, there are several warning signs. You have so many initiatives that you can’t remember them all. Your executives go to multiple meetings on unrelated topics every day. Asked to name the most important capabilities your company has (the things it does well) or how they relate to your strategic objectives, different leaders give different answers. Your best people are working on so many programs and projects, they are burning out. Meanwhile, you are underinvesting in some areas — which might include parts of R&D, market development, and customer experience — where you could potentially build a distinctive edge against your competitors.

If your costs are not deployed appropriately, that’s also painfully apparent — especially in the amount you spend on nonessentials. Staffing levels in different parts of the organization are out of sync; for instance, you might have twice as many finance people counting the money as salespeople bringing it in. Your highest-priority initiatives falter because their investments do not get sufficient attention, while legacy programs with very little impact continue to be funded. Every function pursues an agenda of professional excellence, striving to be “best in class,” no matter what the cost. Each department’s annual budget is calculated as “last year’s, plus 3 percent.” Every once in a while, in moments of high pressure, you institute across-the-board cost-cutting programs that force the businesses to temporarily reduce overhead, but everyone knows that it won’t make any long-term difference.

If you don’t have a well-designed organization, that is evident as well. You are not nimble enough to move quickly, or aligned enough to work in harmony. It takes a week to get a sales quote approved, while your competition wins the business. Information is not readily available to the people who need it. Managers oversee fewer than four employees, on average, and get far too involved in their subordinates’ work. Incentives (such as bonuses and rankings) motivate people in ways that actually undermine the behaviors needed to achieve the company’s stated growth priorities — for instance, people put internal reports ahead of customer responsiveness. You have “shadow” HR, finance, and IT staffs popping up in places outside your shared-services organization. Since most suggestions are rejected, people become afraid to take calculated risks — and that derails the most innovative growth- or savings-oriented ideas.

These are common symptoms, even among well-run and well-managed companies. Unfortunately, company leaders cannot afford to be complacent about them right now — not if their goals involve expansion and profitable revenue growth. In just about every industry and region, companies are contending with a deflationary economic environment. It is relatively easy to find capital, but difficult to find attractive markets and opportunities that can offer promising returns. Emerging economies are still alluring but remain challenging, and achieving scale in them requires patience. Many companies have understandably implemented share buybacks to increase their stock price so as to offer a higher near-term return to shareholders, but that won’t make them competitive. Nor can companies wait for expansionary economic conditions to return; the global economy will probably be facing macroeconomic headwinds for some time.

However, the fact that everyone is struggling also provides a great opportunity for companies that are willing to prepare for growth through a more deliberate, lean, fit-for-purpose operating model. Some companies are already doing this. They are streamlining their operations by making disciplined choices concerning their capabilities, and undertaking continuous improvement of their efficiency and effectiveness. This is the corporate equivalent of a fitness regimen that focuses, in effect, on building muscle — developing the capabilities that define a company’s distinction — while cutting fat. By contrast, across-the-board cost reductions are the corporate equivalent of crash diets — they are ineffective because they do not last, and at worst they can cut into productive muscle. A successful program to become fit for growth contains three main elements:

These elements reinforce one another; when launched together, they provide the wherewithal for growth, even for companies facing today’s macroeconomic challenges.

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