To what extent does a mature and cyclical product market drive corporate restructuring? Use an example to discuss whether restructuring transforms market and financial performance.
A business, which has a product that runs in a cyclical and mature market, will eventually not have the ability to ‘grow’ anymore as it will reached the ‘top’. Therefore to continue making its business profitable, increase shareholder value and work more effectively they under go corporate restructuring. This is a process used in all sorts of firms, from small to big, and has many kinds of corporate activities, based on the transfer of assets. In this essay, I will discuss the impact of corporate restructuring in a mature and cyclical product on its market and financial performance, using GlaxoSmithKline (GSK), one of the largest pharmaceutical companies in the world.
Generally, a product has a life cycle, where the demand of its product is the main factor. There are four different stages. Introduction, this is when the product is launched. Then, if it enters the second level, growth, where more customers are becoming aware of its product, it will at some point reach the ‘mature’ stage, this will usually suggests that competitors have entered the market, there is no more prospective of growth, the sales becomes steady and eventually will drop with time and enter the ‘decline’ zone. (See fig.1 )
Figure 1: Product life cycle curve
This characterizes a cyclical market which is “ Generally a mature market in which volumes fluctuate around a steady level of demand” (Neale & Haslam , 1994 : 16 ). Depending on the popularity and demand, different kinds of products will remain on the market for a longer or shorter period of time. To prevent companies from remaining or reaching the ‘decline’ zone, this is when they start using restructuring, with the help of other strategies, or it would not be enough.
Restructuring is “ Triggered by using level of competency within an industry” (Peng, 2009: 336), and depending on the company it has a different effect. It is not unusual that firms undergo this process. Restructuring covers a wide range of corporate activities, these include Merger and Acquisition (M&A), Inter-corporate sell-offs, spin-offs, Management Buyouts (MBOs) or Management Buy-in (MBI) and Leveraged Buy-outs (LBOs). It also appears in other forms such as rightsizing (closures and downsizing or outsourcing), management incentive schemes based on share options and financial engineering (share buy backs and debt for equity). Even though there are many forms of restructuring, it relies on transferring assets and change in ownership of the firm. For mature and cyclical markets, it appears more useful to use M&A, plus it was the most used form of restructuring during the 1990s in the US. This is the technique GSK used, which appeared successful. The acquisition is the “transfer the control of assets, operations and management from one firm to another, the former being a unit of the latter “. (Peng, 2009: 331) Whereas merger is the“ combination of assets, operations and management of two firms to establish a new legal entity ” ( Peng, 2009, 331 ). Acquisition is usually the main point.
There are three different kinds of generic strategies adopted by Porter in order to prevent companies to go down, such as ‘cost leadership strategy’, which according to Segal- Horn is to produce goods or services cheaper than others,(1998 : 270), ‘differentiation strategy’ which is to create a unique product which is different or better than any other, and ‘focus strategy’ which is to concentrate on a particular segment of the business. Associating these strategies with corporate restructuring may reinforce the process, as the result is not always as initially expected. Indeed, this will be discussed with...
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