What Is Rationalization?

Rationalization is the reorganization of a company in order to increase its operating 澳洲幸运5官方开奖结果体彩网:efficiency. Thi🌺s sort of reorganization🍃 may lead to an expansion or reduction in company size, a change of policy, or an alteration of strategy pertaining to particular products offered.

Similar to a reorganization, a rationalization is more widespread, encompassing strategy as well as 澳洲幸运5官方开奖结果体彩网:structural changes. Rationalization is necessary for a company to increase revenue, decrease costs, and improve its 澳洲幸运5官方开奖结果体彩网:bottom line.

Rationalization may also refer to the process of becoming calculable. For example, the introduction of certain 澳洲幸运5官方开奖结果体彩网:financial models or financial technologies rationalizes markets and makes them more efficient. The introduction of the 澳洲幸运5官方开奖结果体彩网:Black-Scholes model for options pricing, for instance, helped to rationalize the options markets in Chicago in the late 1970s.

Understanding Rationalization

In the business world, rationalization is a process that most organizations consider. That’s because it’s aimed at improving efficiency, get﷽ting rid of waste, standardizing proc🅠esses, and ultimately boosting the bottom line.

Depending on the compa🤪ny and strategy, rationalization can result in the expansion or reduction in the size of the firm. It can also lead 🔥to structural changes.

Specifically, the process of rationalization may involve corporate actions including sales or closures of underperforming business segments, the expansion of outperforming segments, a comple🐠te restructuring of the company’s financial structure, and a streamlining or modernizing of manufacturing or other operations.

In a large numbe💦r of cases, asset rationalization results in the loss of hundreds of jobs.

The Need for Rationalization

There are several reasons that a particular organization might need to go throu🤪gh the process of rationalization. They include the need to:

• Reduce costs
• Maximize profits
• Conserve resources
• Unlock shareholder value
• Improve transparency and governance
• Simplify the business model
• Eliminate unnecessary products and idle capacity
• Update old machinery and other business processes

Types of Rationalization

The following subheads ar༒e examples of rationalization.

Products Rationalization

Product rationalization is an important part of managing a product’s life cycle. If products are not rationalized, their numbers continue to increase, adding complexity and increased support costs to the company’s bottom line. According to the 80/20 Rule, the bulk of a company’s revenue and profit (80%) comes from a fraction of its products (20%). Therefore, when rationalizing a 澳洲幸运5官方开奖结果体彩网:product line, executives need to consider various factors.

The portfolio effect describes how a product’s addition or removal affects the rest of the company’s products. Sales may go to other products or be lost completely. Although rationalization may reduce complexity in the 澳洲幸运5官方开奖结果体彩网:supply chain, as well as redundancy in both the portfolio and support costs, the coꦉsts can be difficult to quantify. The portion of sales that will not transfer to other products needs to be estimated and compensated for by new products entering the portfolio or the sales growth of existing products.

In addition, when products leave the portfolio, 澳洲幸运5官方开奖结果体彩网:fixed costs typically remain the same; the costs must be spread across the remaining product line, increasing 澳洲幸运5官方开奖结果体彩网:unit costs.

Production volume must be transferred to new or more profitable products to ensur💖e that the business remains solvent. Also, customer migration becomes an issue, as sales and operations managers mu♊st create and carry out migration plans. This is especially important with customers buying multiple products who may leave a company that is no longer providing one-stop shopping.

Applications Rationalization

Engaging in applications rationalization, especially during 澳洲幸运5官方开奖结果体彩网:mergers and acquisitions, helps companies reduce costs, operate more efficiently, and focus on supporting deal objectives, legal and regulatory issues, systems and process integration, and business con🍸tinuity.

Most businesses accumulate a vaཧst information technology application portfolio over time, especially when companies grow and do not fully integrate operations and assets wit𝐆h each transaction.

Many applications do not support ꦆthe company’s objectives after each merger or acquisition and need revision to support the new business.

Rationalization of Markets

In terms of market structure, financial models, theories, and technologies that embody these concepts have the force to rationalize markets—to make them calculable and more efficient, in terms of the 澳洲幸运5官方开奖结果体彩网:efficient market hypothesis (EMH).

As more information of various types is able to be processed by information technologies, transmitted and diss🌺eminated using communications technology, and incorporated into the market microstructure, prices become more efficient and the market appears more rational.

The increased use of mathematical formulas and financial models also helps🍌 with the rationalization of markets, as they become dissociated with human emotion and fallibility.

Advantages and Disadvantages of Rationalization

Rationalization helps companies standardize business processes in order to become more efficient and boo🍸st productivity.

It lets management introduce modern techniques and systems, allowing workers ꧒to improve t🅘heir efficiency levels. In turn, rationalization can lead to better working conditions and higher pay for the workforce, ultimately leading to a higher standard of living in society.

A💟dditionally, rationalization can translate into both reduced prices and a higher standard of products for consumers.

On the other hand, rationalization often focuses too much on efficiency at the expense of human capital. The emphasis on modernization and standardiza🦩tion often has negative consequences such as mass layoffs, a loss of initiative from the workforce, a significantly increased workload for the workers that remain, and a worse-off work environment.

Moreover, the process of rational🏅ization is costly, 💟requires consistent monitoring, and provides no guarantee of improved returns.

The Bottom Line

Rationalization is the reorganization of a company to increase its operating efficiency. It may lead to an expansion or reduction in company size, a change of policy, or an alteration of strategy pertaining to particular products offered.