To address the growing business diversity within Google, the management recently decided to separate its many services into multiple companies, with all the enterprises operating under a new umbrella company, called Alphabet.
It’s an example of how large companies use restructuring, a difficult and expensive process, to respond to market changes and opportunities. The goal is to enhance a company’s market strategy.
So why do similar companies obtain successful outcomes from reorganizing while others do not? It depends on how the various internal players behave, said Daniel Albert at the University of Wisconsin-Milwaukee.
He examined 14 years of reorganization decisions in large European banks and found that choices made during restructuring could end up limiting a company’s future agility.
“One way to deal with the company’s complexity and changing industries is to break business operations down into stand-alone divisions that later may be recombined with one another when new opportunities arise,” said Albert, an assistant professor in UWM’s Lubar School of Business.
“Which businesses may be reorganized later, however, can quite substantially depend not only on the companies’ existing structure, but also on potential power dynamics within the top management team.”
Albert used archival data to track reorganization decisions in 18 of the largest universal banks in Europe for the years 2000 to 2013. His findings, forthcoming in the journal Organization Science, are relevant to the dynamics in other large companies.
Looking at top management and how the banks’ other divisions were represented on executive boards, he documented the following trends:
- More powerful units tend to absorb other divisions.
- The more centralized the company, the more likely it was to reorganize its divisions. The reason, said Albert, is that more exchange of information occurs between the corporate headquarters and its divisions. That exchange can turn up opportunities for recombination that otherwise would have been missed.
- In contrast, when divisions where relatively influential in terms of their top management team representation, they were substantially less likely to be tampered with. This is significant, said Albert, because it’s an aspect that could hinder important company change.
- Divisions with powerful subunits tended to promote a breakup of their divisions, often seeking autonomous division status for themselves.
“If we assume that reorganization is necessary, the study suggests companies should pay attention to the drivers of their choices,” he said. “Whatever route you impose on your company, it forms the strategic opportunities the company will encounter tomorrow, and that can really matter.”