To What Extent Does a Mature and Cyclical Product Market Drive Corporate Restructuring?
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.
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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 Source: http://msc-ks4technology. wikispaces. com/GCSE+GP+Unit+2+Minimising+Waste+Production
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 GSK. Restructuring has an effect on workers in two different ways, first it is costly, therefore it requires some workers to negotiate the transition to a new job or exit labour market while others claim a pay increase. Then it becomes vulnerable as it affects the moral conditions of the workers, due to change, therefore decreases the financial performance. It acts on it instantly. GSK, is a pharmaceutical and consumer healthcare company formed in 2000, originally named Glaxo.
Glaxo was the “ most successful European company of the 1980s “ (Kay, 1993: 30). It then acquired Wellcome followed by the merger of Beecham plc, and SmithKlineBeckman Corporation, which lead to GlaxoSmithKline. It has produced many remedies against cancer, viruses or even diabetes. Its market is of cyclical nature, so when a patent becomes invalid, the drug (asset), looses its significance, then the“ revenue will fall away precipitously (…), will enter the mature phase and soon the decline.
This is when generic becomes available”. (Froud Johal Leaver, 2006: 178) A generic is a” patent-expired substitute “. ( Froud Johal Leaver Williams, 2006 : 153 ). Patents, for pharmaceutical companies such as GSK, are major as they secure the high sales, till it matures. Therefore, “ the pharma industry offers high visibility and predictability of future revenue “. (Froud Johal Leaver Williams, 2006 : 150) This was the case with Glaxo, and as a result to go against this cycle, they went through restructuring using M&A.
Glaxo had produced an anti-ulcer drug, ‘Zantac’ , the companies increased 10% growth in annual turnover because of it, however the patent was going to expire 1997. As a business activity varies throughout the year, they sometimes need to restructure. Therefore, in 1995, in order to keep the company growing, Glaxo bought ‘Wellcome’ to form Glaxo Wellcome plc. It was by acquiring a smaller firm that would help the growth of the company after ‘Zantac’ expiry in 1997, as it made it into a strong financial position, by preventing a rapid decrease in the revenue.
It was at first seen as a risk as this smaller firm was purchased partially with debts, but the combination of both companies’ sales was actually rather attractive. In 1996, Zantac reached $1. 6 billion sales, and was already contributing to half the profit of Glaxo Wellcome. Later, the sales decreased, as its patent expired and generics such as ‘Pfizer’ were found in the market; therefore there was no more competition and no more differentiation. Zantac was going through a decline.
As said previously, cutting costs is inevitable during restructuring; here using acquisition, and over 7000 employees lost their job. ( Froud Johal Leaver Williams, 2006 : 189 ) The result not being as successful as they had wished, even after the creation of two new drugs, a merger seemed inevitable, to keep their profits high. So, in 1998, there was a hypothesis of a merger between Glaxo Wellcome and SmithKline Beecham and was later completed in 2000, as a $70 billion deal, which lead to GlaxoSmithKline (GSK).
Not only did it have positive effects on Glaxo as it increased its market performance, indeed there were over twice as more sales between 1999 and 2003 ; but there was no need to cut costs with regarding the workers as this had already been done during the acquisition, which made the firm more productive cost wise. The M&A had a different effect on the company as profits increased gradually with ‘SKB’ unlike with the acquisition of Wellcome, which was immediate.
According to Pearce & Robinson “the two organizations which merge have more market power in implementing its strategies and attaining its mission as two minds are better than one“ (2005). Even though there was several positive aspects such increasing the risk, and enlarging the products sales, the shareholder value decreased between 2000 and 2002 which shows that restructuring cannot always go ‘perfectly’, and should therefore be accompanied with Porters generic strategies. Corporate restructuring is used in several cases. This happens when there is an increase in competition, but also pressure from shareholders and falling share prices.
It Is important to know that restructuring does not necessarily lead to success, but companies should concentrate on different kinds of strategies to make it as successful as possible, for example by creating a high shareholder value. If a company is in debt, corporate restructuring can be seen as positive, as it “makes managers get up in the morning” (Gressle, 1990). A mature and cyclical product market will therefore tend to drive to corporate restructuring, as the product will eventually reach a maturity phase, and in order to prevent from a decrease in the companies turnover, this is the only solution.
This was proven with the case of GSK, “ the world’s second largest pharmaceutical company (ranked by sales) in 2003” (GSK). Nowadays the firm affirms that they are ”very conscious of the effect restructuring has on our employees and if options exist where we can achieve our financial goals and still preserve jobs we will do everything we can to do so “ (2009) Finally “The pharmaceutical industry is hugely innovative. But it now must apply that innovation to its own business model. If governments work to support, not stifle, innovation, the industry will deliver the next era of revolutionary medicine. ” (The Economist, 2010)
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(2010) , Andrew Witty, CEO of GlaxoSmithKline, calls on the pharmaceutical industry to do more with less—and still be innovative, The Economist , http://www.economist.com/node/17493432?story_id=17493432 , Date Accessed 20/03/11
(2009), GSK , http://www.gsk.com/responsibility/our-people/restructuring.htm Date Accessed 19 /03/11