Reorganization definition
/What is a Reorganization?
A reorganization involves the reordering of a firm's activities to more tightly focus on its core capabilities. All other activities are eliminated, spun off, or outsourced. The remaining operations may be reshuffled into a different organizational structure, with revised employee job descriptions. Accompanying these changes is a revamping of the firm's capital structure, which may include the restructuring of debt agreements or the conversion of debt into equity. Creditors may also be contacted to discuss delayed payment terms. Reorganizations are closely associated with a Chapter 11 bankruptcy filing, though they may also be initiated when management wants to focus on improved profitability. If a reorganization is associated with a Chapter 11 filing, then the holdings of current shareholders will likely be wiped out. Ultimately, the main point behind a reorganization is to return a struggling business to long-term financial viability. It is commonly associated with the replacement of some or all members of the management team.
Results of a Reorganization
There are multiple outcomes resulting from a corporate reorganization, which include the following:
Lower breakeven point. Fixed costs have been reduced sufficiently to bring down the sales level at which the business can break even. This makes it easier to survive in a difficult economic environment.
Fewer products. The least profitable products have been eliminated, resulting in a narrower focus on the most important products.
Reduced headcount. Many of the positions not directly linked to the core mission of the business have been eliminated.
More streamlined processes. The proportion of non-value-added tasks within the organization’s processes has declined.
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Example of a Reorganization
An example of a notable corporate reorganization is the case of General Electric (GE) under CEO Larry Culp's leadership, beginning in 2018.
General Electric, a conglomerate historically engaged in diverse sectors including aviation, healthcare, finance, power, transportation, and consumer appliances, embarked on an extensive reorganization strategy designed to refocus the company on its core strengths. The initiative involved divesting or spinning off businesses that no longer aligned with GE’s central capabilities, simplifying its portfolio, and significantly restructuring its operations.
For instance, GE exited its lighting business, a historically significant division originally founded by Thomas Edison, selling it to Savant Systems in 2020. It also reduced its stake in Baker Hughes, a large oil-field services company, divested most of GE Capital’s financial service assets, and sold off its appliance division to Haier in 2016, prior to Culp’s appointment, as part of ongoing efforts to streamline its operations.
Ultimately, in 2021, GE announced its plan to split into three publicly traded, focused companies:
GE Aviation, dedicated exclusively to aviation technology and engines.
GE Healthcare, focused specifically on healthcare technology and medical equipment.
GE Vernova, centered on energy generation and renewable energy solutions.
Through this comprehensive reorganization, GE intended to achieve greater specialization, increased strategic focus, improved efficiency, and clearer operational objectives. These actions were explicitly designed to reduce complexity, improve financial health, and enable each entity to operate more effectively within its specialized market, thus driving shareholder value and overall corporate performance.