An examination of the determinants of corporate restructuring in a family-based Chinese firm

Journal of the Academy of Business and Economics, March, 2004 by Lixian Liu, Fuming Jiang

ABSTRACT

This research aims to investigate what factors contributed to corporate restructuring decision in a family based small Chinese company. A questionnaire was designed with open-ended questions for the data collection. The data was collected through the email correspondence and complemented by telephone communication. The Managing Director of the company answered all of the questions. The data was analyzed with a qualitative approach. The research suggested that there were two major forces that contributed to the company's restructuring decision. The internal conflicts and control desire over the decision making and business operations as well as the ineffective and inefficient practices have been the significant internal forces associated with the decision for restructuring. The major external factors that contributed to the restructuring decision were the change of market demand in the favor of the company. This external factor contributed to the change of the company's strategy. The internal factors seemed to be more dominant than the external ones.

1. INTRODUCTION

Guangzhou Denuo Machinery & Trading Co. Limited (formally Guangzhou Yindaly Co. Limited) (Guangzhou Denuo), a family based small Chinese company engaged in international machinery trading business has recently completed its organizational restructuring. The firm is located in southern China's Guangdong province. Currently the company has employed thirty-seven staff including four middle managerial employees and three family members who have taken one financial and the two top executive positions in the company. The company has been performing well since its establishment in 1995. As Robbins, Bergman, Stagg, and Coulter (2000) pointed that restructuring may affect an organization for a period of time. Anecdotal evidence indicates that many companies that have restructured are reporting serious problems of mistrust of management. Koretz (1997) suggested that organizational restructurings had little, if any; positive impact on company earnings and the human costs can be high. Bolman and Deal (1997) also suggested that restructuring is a powerful but high-risk tool for organizational change. In the short term, it almost invariably produces confusion, resistance, and even a decline in effectiveness. Success or failure in the long run depends on how well the new model aligns the organization with its environment, task, and technology and on the effectiveness of the processes for putting the new structure in place. Montgomery and Thomas (1988) and Jain (1985) also indicated that restructuring was usually associated with a firm's poor performance. Therefore, the main aim of this research was to investigate why Guangzhou Denuo, a family based small Chinese firm with satisfactory performance, wanted to restructure its corporate structure.

2. LITERATURE REVIEW AND CONCEPTUAL FRAMEWORK

McKinley and Scherer (2000) defined restructuring as any major reconfiguration of internal administrative structure that is associated with an intentional management change program. This definition is consistent with Bowman and Singh's (1993) description of organizational restructuring. According to Gibbs (1993), there are three types of corporate restructuring transactions, namely 1) financial restructuring including recapitalizations, stock repurchases, and changes in capital structure; 2) portfolio restructuring involving divestment and acquisitions and refocusing on core businesses, resulting in change of the diversity of business in the corporate portfolio; and 3) operational restructuring including retrenchment, reorganization, and changes in business level strategies. Since Guangzhou Denuo was a family based private company, and the issues related to the financial restructuring (type 1) would not be applicable to the case situation. Therefore, this research focuses on the portfolio and operational restructuring only by examining the driving forces that contributed to Guangzhou Denuo, a family based private Chinese company.

Restructuring is also referred to as downsizing, which may boost organizational efficiency and effectiveness (Smallwood and Jackson, 1987; Bailey and Szerdy, 1988; Freeman and Cameron, 1993; Bartol, Martin, Tein, and Matthews, 2001). Miller and Friesen (1984, cited in Bolman and Deal, 1997, p.73) suggested that the environment shift, technology changes, organizations grow and leadership changes are the reasons that lead to restructuring. Massimo and Delmastro (2002) deemed that the adoption of advanced manufacturing technology and new human-resource management practices favors organizational change. Miles, Covin and Heeley (2000) suggested that environmental dynamism impacts the strategies chosen by small firms and moderates the relationships between organization structure, strategic posture, and firm performance. Firms in stable environment can often predict such factors as raw material suppliers, customer demand, and the amount of time required for particular operations. The unpredictability of dynamic environments, on the other hand, can negate any benefit that would be derived through the adoption of mechanistic structure. In these later contexts, companies must have the ability to rapidly respond to changing conditions. Accordingly, organic structure has been found to be particularly prevalent and effective in dynamic environments (Miller and Friesen, 1984). Moers (2000) suggested that restructuring is also associated with strong market competition. Gibbs (1993) believed that the restructuring is partially explained by free cash flow. Free cash flow is a function of investment opportunity, operating cash flow, diversification, financial leverage, and corporate governance. For a given value of a free cash flow variable the likelihood of restructuring increases. Jensen (1986) also suggested that restructuring could also be described as returning free cash flows to owners. The empirical work of Hoskisson and Johnson (1989) suggested that a significant amount of restructuring is associated with high levels of diversification strategies. This finding was confirmed by Hoskisson and Turk's (1990) study which concluded that restructuring is primary directed at overcoming control problems that are associated with diversification and that result in poor performance. Hill and Snell (1988) found that ownership concentration was associated with lower levels of diversification in R & D-intensive firms. Thus ownership diffusion is positively related to diversification.