Reorganization Is Not a Panacea for All Corporate Problems

Marie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Some firms which were once on the cutting edge now find themselves struggling to keep up with the competition. As revenue slips and competitors continue to innovate, once-successful companies try to breathe new life into their firms by reorganizing. Whether working from the bottom up or the top down, companies are striving to reform themselves.

Working from the top down

On July 17, 2012, Yahoo! (NASDAQ: YHOO) brought Marissa Mayer on board as CEO. Hiring this 13-year Google veteran was Yahoo!’s first step in becoming more “tech-focused.” Though revenue decreased 7% in this year’s second quarter, there is still hope for Yahoo! under Mayer.

She made her intentions known; she will gladly sacrifice short-term gains to develop a stronger future for her company. This outlook should make investors more confident in her decisions. We can also ground our confidence in the results we already see. For example, Yahoo! managed to increase search traffic 5% since last year after years of decline. (A feat rarely accomplished in the industry.)

Mayer also strives to shift Yahoo!’s focus to mobile apps. Hundreds of engineers at Yahoo! currently work to develop better mobile app services. The firm is also in talks with Apple about preinstalling additional Yahoo! apps on iPhones. Even though Yahoo! lags behind mobile app competitors, it has seen an increase of users. Only 8% of iPhone users had Yahoo! apps on their phones in July 2012. That percent double by June 2013.

Mayer faces a hard battle rebuilding Yahoo!, but her progress during her first year boosts hope and morale in the firm. A steady stream of job applications continues to flow into Yahoo!. 10% of these applications in the second quarter are previous Yahoo! employees who chose to return. As employee confidence returns, so should investor confidence.

Revamping the organizational chart

Microsoft (NASDAQ: MSFT) faces great challenges in the ever-changing tech environment. PC shipments continued to decrease in the second quarter and global unit shipments dropped by 10.9% in the second quarter. Windows 8 was not well received by the public, doing even worse than Vista sales in 2007. And Microsoft felt pressured to drop the price on its Surface RT tablet by $150. To overcome its many challenges, Microsoft is taking a play out of Apple's and Google’s playbooks. The firm aspires to shift its strategy and become known more for services and devices that run its software and less known for the software itself.

To execute this strategy, Microsoft plans to flatten its organizational structure. The firm is currently divided into product groups that function separately from one another. The new setup will have managers overseeing functions (such as marketing or finance) instead of specific products. Reorganization will allow the firm to pursue the new strategy. However, it is too late for this strategy to work for Microsoft as it tries to enter the mobile market.

Microsoft successfully executed the strategy with its Xbox, becoming associated with the game console and Xbox live service. But the firm is too late to the smartphone and tablet game. Some 61% of cell phone owners in the U.S. own smartphones. And the number of Americans upgrading their smartphones is down 9% from 2011 to 2012. Even with its partnership with Nokia, whose Lumia phones run Windows, Microsoft has little hope in conquering the smartphone market.

The tablet market provides little hope for Microsoft. As you can see, Microsoft commands an unimpressive 0.9% market share of tablets.

Microsoft’s restructuring effort may help the firm change its strategy, but that strategy provides no guarantee of success. It is too late to the game and will not make a name for itself as a smartphone maker, tablet maker, and service provider.

Reforming the workforce

Steel makers in the current global environment face falling steel prices and slim profits due to the 200 million tons of excess global steel capacity. U.S. Steel (NYSE: X) is no exception. The firm reported losses in four of the last six quarters. To reverse this trend, U.S. Steel is reforming the workforce.

Its large seven-story plant, Pro-Tec, in Leipsic, Ohio, is run by 312 nonunion workers. Compare this small workforce to the 5,880 United Steelworkers members who operate the U.S. Steel factory Gary Works in Gary, Ind. Pro-Tec’s workforce is both smaller and less expensive than other factories like Gary Works. U.S. Steel pays Pro-Tec’s workers $20 an hour, while United Steel workers make up to $27 an hour. Pro-Tec requires Pro-Tec’s workers to pay more for health insurance than union workers. Retirement benefits also cost the Leipsic factory less since workers have 401(K) plans instead of the union-demanded defined-benefit plans.

A nonunion workforce also makes the factory more flexible. U.S. Steel freely adds and cuts hours depending on the factories needs, not union demands. Pro-Tec is the step in the right direction for U.S. Steel. The factory helps the firm save on expenses. In the words of John Surma, the CEO of U.S. Steel, “This is probably the best, shining example of the direction for the company.” With an outlook like this and by pushing more of its workforce to be like Pro-Tec’s, U.S. Steel can end its losing streak. Pro-Tec proves that U.S. Steel can successfully reform its workforce and become profitable again.

Conclusion

Changing times call for changes in organizations. As firms reorganize their management, hierarchy, or workforce they hope to overcome present challenges and bring new strategies to their companies. Some efforts will pay off, such of those made by Yahoo! and U.S. Steel. Others, such as Microsoft, may find all their effort go to waste. As an investor, don’t get too caught up in the excitement of reorganization. Instead focus on the likely results.

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This article was written by Michele Milheim. She has no position in any stocks mentioned. The Motley Fool recommends Yahoo!. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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