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Rationalisation - What is Rationalisation?, Definition & Elements

What is Rationalization?

Reorganizing a business's operations to enhance its efficiency is what we refer to as rationalization. This kind of restructuring can result in either an expansion or contraction of the company's size, a shift in policies, or adjustments in the approach to specific products. Unlike a mere organizational change, rationalization covers a broader spectrum, encompassing both strategic and structural alterations. For a company aiming to increase its revenue, reduce expenses, and improve its overall financial performance, rationalization is a crucial step.

Further, rationalization can also describe the process of making something more systematic or calculable. For instance, the implementation of certain financial models or financial technologies can rationalize markets, making them operate more efficiently.


Understanding Rationalization

In businesses, rationalization stands out as a crucial process that nearly all organizations contemplate. Its primary objective is to enhance efficiency, eliminate unnecessary waste, standardize procedures, and ultimately bolster the company's financial performance.

Depending on the specific company and its strategic goals, rationalization can lead to either the expansion or downsizing of the organization. Furthermore, it can prompt significant structural adjustments.

Concretely, the rationalization process may encompass corporate actions such as divesting or closing underperforming business segments, expanding successful segments, undertaking a comprehensive overhaul of the company's financial framework, and modernizing manufacturing or other operational processes.

In a considerable number of instances, asset rationalization, unfortunately, translates into the reduction of a substantial workforce.


Elements of Rationalization

  • Standardization

  • Mechanization

  • Specialization

  • Simplification

  • Combination

  • Modernization

  • Research

Types of Rationalization

  • Product Rationalization - Product rationalization refers to a process of reducing the product line that your deal in to invest more of your money in the products that make profit. 

  • Applications Rationalization - Participating in application rationalization, particularly during mergers and acquisitions, assists companies in cutting costs, improving efficiency, and prioritizing support for deal objectives, legal and regulatory matters, system and process integration, as well as business continuity.