What Is Rationalization?

Rationalization is the reorganization of a company in order to increase its operating 澳洲幸运5开奖号码历史查询:efficiency. This sort of reorganization may lead to an expansion or reduction in company size, a change of policy, or an alteration of strategy pertaining to particula🌟r products offered.

Similar to a reorganization, a rationalization is more widespread, encompassing strategy as well as 澳洲幸运5开奖号码历史查询:structural changes. Rationalization is necessary for a company to increase revenue, decrease costs, and improve its 澳洲幸运5开奖号码历史查询:bottom line.

Rationalization may also refer to the process of becoming calculable. For example, the introduction of certain 澳洲幸运5开奖号码历史查询:financial models or financial technologies rationalizes markets and makes them more efficient. The introduction of the 澳洲幸运5开奖号码历史查询: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 wo🧸rld, rationalization is a🉐 process that most organizations consider. That’s because it’s aimed at improving efficiency, getting rid of waste, standardizing processes, and ultimately boosting the bottom line.

Depending on the company and str𝕴ategy, rationalization can resu♋lt 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 complete restructuring of the company’s financial structure, and a streamlining or modernizing of manufacturing or other operations.

In🧔 a large number of ca⛦ses, 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 through 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 fol𒅌lowing subheads are 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开奖号码历史查询: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开奖号码历史查询:supply chain, as well as redundancy in both the portfolio and support costs, the costs 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 portfo꧅lio or the sales growth of existing products.

In addition, when products leave the portfolio, 澳洲幸运5开奖号码历史查询:fixed costs typically remain the same; the costs must be spread across the remaining product line, increasing 澳洲幸运5开奖号码历史查询:unit costs.

Production volume must be transferred to new or more profitable products to ensure that the business remains solvent. Also, customer migratio🐈n becomes an issue, as sales and operations managers must 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开奖号码历史查询:mergers and acquisitions, 🐈helps companies reduce costs, operate more efficiently, and focus on supporting deal objectives, legal and regu🎃latory issues, systems and process integration, and business continuity.

Most businesses accumulate a vast information technology application portfoli💫o over time, especially when companies grow and do not fully integrate operations an꧟d assets with each transaction.

Many applications do not support the company’s objectiv🧸es after each merger or acquisition and need revision to support the new bu⛎siness.

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开奖号码历史查询:efficient market hypothesis (EMH).

As more information of various types is able to be processed by information technologies, transmitted and disseminated using communications technology, and incorporated into the market microstructure, prices become more efficien♓t 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 𓂃emotion and fal൩libility.

Advantages and Disadvantages of Rationalization

Rationalization helps companies standardize buܫsiness processes in order to become more🌠 efficient and boost productivity.

It lets management introduce modern techniques and systems, allowing workers to improve their effic♓iency levels. In turn, rationalization can lead to better working conditions and higher pay for the workforce, ultimately leading to a high💜er standard of living in society.

Additionall🌌y, 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 standardization 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 rationalization is costl🌌y, 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.