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STRATEGIC DOWN SIZING

STRATEGIC DOWN SIZING. Prof. Dr. Serkan BAYRAKTAROĞLU 08.01.2014. What is Downsizing ?. A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance (Robbins & Pearce, 1992).

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STRATEGIC DOWN SIZING

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  1. STRATEGIC DOWN SIZING Prof. Dr. Serkan BAYRAKTAROĞLU 08.01.2014

  2. What is Downsizing? • A downsizing strategy reduces the scale (size) and scope of a business to improve its financial performance (Robbins & Pearce, 1992). • A reduction of the workforce is one of only several possible ways of improving profitability or reducing costs.

  3. Definition; • Downsizing is themanagementprocedurewhichreducethenumber of employee in a specificcompany

  4. Introduction; • Theorganizationapplydownsizingtechniquesbythecuttingdowntheexpensesandincreasingemployeelayoffs

  5. Why do FirmsDownsize? • Reduce costs • Reduce layers of management to increase decision making speed and get closer to the customer • Sharpen focus on core competencies of the firm, and outsource peripheral activities • Generate positive reactions from shareholders in order to improve valuation of stock price • Increase productivity

  6. Downsizing(Gomez-Mejia, Balkin & Cardy, 2001)

  7. DownsizingEffects • Overall • Mixed effects on firm performance: some short-term costs savings, but long-term profitability & valuation not strongly affected. • Firm’s reputation as a good employer suffers. Example: Apple Computer’s reputation as good employer declined after several layoffs in 1990s. • Downsizing forces re-thinking of Employment Strategy. Lifelong employment policies not credible after a downsizing. Example: IBM abandoned lifelong policy after several layoffs in early 1990s.

  8. DownsizingEffects • EmployeeMorale • Employee motivation disrupted: increase in political behaviors, anger, fear - which is likely to negatively impact quality of customer service • Violation of psychological contract, leads to cynicism, lowered work commitment, fewer random acts of “good will” • “Survivors” experience more stress due to longer work hours with re-designed jobs, and increased uncertainty regarding future downsizings

  9. DownsizingEffects • WorkforceQuality • Many senior employees leave due to application of early retirement incentives: result is loss of institutional memory. • The use of voluntary workforce reductions (buyouts) results in the most marketable employees leaving (“stars”) -- difficult to control since all employees must be legally eligible to qualify. • Early retirements & voluntary reductions often result in too many people quitting, and some are hired back as consultants at higher cost to firm.

  10. DownsizingEffects • Downsizing Works Best When: • Changes in Strategy, Organization structure and Culture accompany job cuts of downsizing • Weak business units and plant closures are used as basis of reductions, rather than across the board cuts affecting all units (including healthy ones)

  11. Critical ThinkingQuestions 1. Which is a better criteria to use as the basis for downsizing employees: seniority or performance? State your reason. 2. Should employers give future notice to downsized employees, or tell them on the day they are expected to leave the firm? 3. Separation pay is voluntary. What benefits do firms get when they give separation pay to employees in a downsizing?

  12. Attention! • Makenomistake;downsizing is exteremelydifficult • Itdemandsall of a managementteam’sresources • No onelooksforwardtodownsizing

  13. Downsides • Companies can losecriticalknowledgetheydid not knowthey had • Employeesarefeelingstress of theenormouschanges in thecompany • Corporatedownsizing is badforsociety as a whole • High labourcost (firingpeople) • Decreasecompany morale

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