what is rationalization 
rationalization is the reorganization of a company in order to increase its operating 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 particular products offered similar to a reorganization a rationalization is more widespread encompassing strategy as well as structural changes rationalization is necessary for a company to increase revenue decrease costs and improve its bottom line rationalization may also refer to the process of becoming calculable for example the introduction of certain financial models or financial technologies rationalizes markets and makes them more efficient the introduction of the black scholes model for options pricing for instance helped to rationalize the options markets in chicago in the late 1970s understanding rationalizationin the business world 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 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 complete restructuring of the company s financial structure and a streamlining or modernizing of manufacturing or other operations in a large number of cases asset rationalization results in the loss of hundreds of jobs examining a company s application portfolio is important to attain more efficient operations and cost integrations reducing stranded costs left by a seller and streamlining the portfolio to best serve the business the need for rationalizationthere are several reasons that a particular organization might need to go through the process of rationalization they include the need to the process of rationalizing is especially common during recessions and after corporate actions such as a merger acquisition or new ceo hire types of rationalizationthe following subheads are examples of 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 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 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 portfolio or the sales growth of existing products in addition when products leave the portfolio fixed costs typically remain the same the costs must be spread across the remaining product line increasing unit costs production volume must be transferred to new or more profitable products to ensure that the business remains solvent also customer migration 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 engaging in applications rationalization especially during 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 continuity most businesses accumulate a vast information technology application portfolio over time especially when companies grow and do not fully integrate operations and assets with each transaction many applications do not support the company s objectives after each merger or acquisition and need revision to support the new business rationalization of marketsin 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 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 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 rationalizationrationalization helps companies standardize business processes in order to become more efficient and boost productivity it lets management introduce modern techniques and systems allowing workers to improve their 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 additionally 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 costly requires consistent monitoring and provides no guarantee of improved returns helps companies become more efficient and boost productivityallows management to implement modernized techniques and systemslowers market volatilitycan provide the workforce with better working conditions and higher paytranslates into a higher standard of living in societycan lead to lower prices and better products for consumersemphasizes efficiency at the expense of human capitaloften involves large layoffscan lead to a significantly increased workload for the workers that remainloss of initiative from workers due to the mechanization of processescostly and requires consistent monitoringno guarantee of improved returns