Special Report On Corporate Restructuring

By George Russell

It is known as downsizing, rationalizing, streamlining and, perhaps most commonly, restructuring. With a bow to the diet culture, some prefer to call it just plain slimming down. By whatever name it goes, a compulsion is sweeping through corporate America to bring about fundamental, long-lasting changes in the way it does business. U.S. corporations have always undergone periodic cutbacks in times of recession or strain, but this time the tone and scope of the effort are vastly different. Says Keith Stock, a partner in the Manhattan-based McKinsey & Co. management consulting firm: "What we're seeing is nothing less than a transformation of American industry."

Forced upon business by unprecedented global competition and financial turbulence, the change is so swift and powerful that it is churning across the business landscape with the force of an army of bulldozers. American companies have started the huge task of rebuilding themselves from the ground up, erecting a sleek new operating architecture to replace the unwieldy processes of the past. At corporate headquarters and on factory floors from New York City to Los Angeles, newly cost-conscious executives are on a relentless examination of the efficiency and effectiveness of everything they do. They are tearing up organization charts, selling off unsatisfactory product lines and closing down unprofitable plants at a rate never seen before. Their aim: to produce streamlined, combative concerns that can withstand the frenetic, competitive pace of the late '80s.

The task has the general aim of sharply cutting back on costs to make dramatic and durable improvements in long-term profitability and growth. Restructuring's theme is "back to basics." That means, among other things, an end to the corporate ethos of expansion for expansion's sake. It spells farewell to the notion, always more imagined than real, of the corporation as a kind of private-sector welfare state, with unlimited perks and unshakable job security. It also involves frequently deep retrenchment, as U.S. corporations cut back on marginal operations, strip away unnecessary layers of management and staff and refocus their attention on proven areas of profitability. Says James Brown, an executive director of the Conference Board, a business-sponsored research group: "Everybody is cracking down."

So far in the '80s, well over half of the names on the FORTUNE list of the 1,000 largest U.S. corporations have undergone some form of significant reorganization. Gulf & Western in the past four years has spun off some 65 diverse subsidiaries worth more than $4 billion. IBM has closed three domestic plants, cut back on employee overtime, and is reducing its U.S. work force 7%, to 225,000, through attrition and early retirement incentives. AT&T last year cut 32,000 out of a work force of 322,000, in an effort to save $1 billion annually. Among the jobs lost were 11,600 management positions. Many of those who left were coaxed along by payments of up to a year's salary.

United Airlines announced two weeks ago that it would cut about 1,000 employees, or more than a quarter of the Chicago headquarters staff, as part of a program to save $100 million in 1987. Battered USX, which lost $1.83 billion in 1986 and fended off the predations of Raider Carl Icahn, last week said it would shut down four steel plants and lay off about 4,000 of its 22,000 active steelworkers. Something of a storm was stirred up last week when the New York Times reported that CBS, which has already pruned some 1,200 of its 15,500 employees, would ask its news division to slice $50 million from its $300 million budget. That draconian figure was denied by Chief Executive Officer Laurence Tisch, but the company admitted that it was still looking for ways to improve efficiency. Hundreds of other large corporations are planning or already carrying out slimming-down programs, including Exxon, Union Carbide and Time Inc.

What is remarkable about the current cutbacks is that they come at a time when the gross national product is expanding at a respectable 2.5% annual rate. The goal of the slimming exercise, then, is not merely to compensate for hard times -- though a quick fix for short-term profits is always welcome -- but to have a permanent effect. Says Alfred Rappaport, an accounting professor at Northwestern University's Kellogg Graduate School of Management: "Restructuring will be a way of life for a long, long time." Reason: the forces that prompted the movement are still growing in power and momentum.

Chief among those forces is foreign competition. In addition to traditional rivals in Europe and Japan, American companies face an ever expanding roster of formidable competitors in developing countries from South Korea to Brazil. By late 1986, imports amounted to 14.5% of the GNP, up from 10.6% in 1982. One of the industries that has been hit hardest -- and made the most radical adjustments -- is autos. Struggling General Motors, where profits declined 26% to $2.9 billion last year, has laid off 6.5% of its 578,000 workers since 1981 and announced plans to close twelve major plants by 1989. At the same time, GM will reduce the number of managers and other salaried workers by 25% by the fall of 1989. Similar moves are under way even at Ford, which earned $3 billion in 1986 to overtake GM as the most profitable American automaker. Ford plans to cut its salaried payroll by about 20% by 1990.

Another force behind restructuring has been the avalanche of corporate mergers and acquisitions. More than 4,000 of those unions, worth a record $190 billion, took place last year. After most of the buyouts, the merged company eliminates staff duplications and unprofitable divisions. In the past six years, for example, General Electric spent $11.1 billion to buy 338 businesses, including RCA, a $6.3 billion acquisition. During the same period, GE shed 232 businesses worth $5.9 billion and closed 73 plants and offices.

The buyout spree has created yet another powerful incentive for restructuring: fear of takeover. In many cases, corporations have fought off raiders only by buying up huge amounts of their own stock, and along the way accumulating huge amounts of debt. Once the threat has passed, firms have been forced to restructure to regain profitability. In other cases, they have slashed costs and boosted profitability precisely to keep their stock prices above the level at which they would attract bargain-hunting takeover sharks, who are likely to chop far more brutally and indiscriminately than the present managements. No less a titan than ITT warily shook off a takeover bid by Raider Irwin Jacobs in 1985. That effort gave renewed impetus to a slimming exercise already begun by ITT Chairman Rand Araskog. Since 1980, Araskog has sold off more than 100 businesses, and last year he cut ITT's work force by 100,000, or 44%, and slashed headquarters staff from about 850 to 350. Says Araskog: "Corporate executives have to learn to do things for themselves. Pick up the telephone if it rings. Draft their own memos."

The corporate fitness trend is cresting at a time when some Government officials have taken pointed aim at businessmen for their inefficient ways. Last November, Deputy Treasury Secretary Richard Darman stirred controversy when he used the terms bloated and corpocracy to describe the U.S. business hierarchy. Darman's epithets rebutted executives who blamed federal tax and budget policies for problems with U.S. competitiveness. Both Darman and other officials, however, acknowledge that Big Business is changing its ways. Robert Ortner, chief economist for the Commerce Department, acclaims the present restructuring efforts of corporate America as "amazing."

Amazing, perhaps, but like any radical surgery, however necessary, inevitably painful. The new leanness of U.S. business means, above all, a crackdown on heavy payrolls. A large portion of the layoffs from restructuring have taken place in manufacturing. From 1979 to 1986, total U.S. manufacturing employment declined from some 21 million jobs to 19.1 million. But partly because of this slimming down, U.S. manufacturing productivity -- hourly output -- has risen by an average of 3.8% annually over the past five years, compared with 1.5% in the '70s. But no such productivity improvement is yet evident outside of manufacturing. Says Treasury's Darman: "We have to make ourselves more efficient in the service sector."

High corporate rank has provided no immunity from the restructuring effort that has taken place so far. "The efficiency problem," Darman points out, "is a white-collar problem even more than a blue-collar problem." Between 1983 and 1987, some 600,000 to 1.2 million middle- and upper-level executives with annual salaries of $40,000 or more lost their jobs. An additional 200,000 to 300,000 such executives are expected to receive pink slips over the next two years.

At many once paternalistic companies, the cost cutting has produced stunning changes in the corporate culture. Eastman Kodak, which has always prided itself on being a home away from home for its workers, has closed its employee bowling alley and billiard rooms, and no longer provides dinners with dance bands. Reluctantly abandoning its virtual guarantee of job security, the company trimmed away nearly 13,000 of its 129,000 employees last year as part of a program to save $500 million annually. Says Kodak Chairman Colby Chandler: "The principal object is to make the company more agile, more competitive and more flexible."

Even with those goals in mind, cutting even one job, says AT&T President Robert Allen, is "painful." Cost cutting can also hurt the companies if it is done sloppily or with too little thought to the future. Robert Reich, a Harvard professor of political economy and management, cautions against "slash-and-burn management" that sacrifices employee loyalty and teamwork with an eye only to short-term profits.

Executives and academics agree, though, that most companies have no choice but to shape up. Says General Electric Chairman John Welch: "The managers in the 1980s who hang onto losing business ventures for whatever reason won't be around in 1990." A less somber view is that the corporations that rid themselves of bureaucratic excess now stand to be among the healthiest entrants in the strenuous competition of the future.

With reporting by Jay Branegan/Washington and Thomas McCarroll/New York