SULAMAN SADIQ, ROLL # AR524302

Impact of Downsizing

Present By: Sulaman Sadiq

Roll # AR524302

Teacher Name: Imran Ashiq

SULAMAN SADIQ, ROLL # AR524302

Downsizing

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.

SULAMAN SADIQ, ROLL # AR524302

Downsizing

Why do Firms Downsize? 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

SULAMAN SADIQ, ROLL # AR524302

Need to reducecosts

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

AlternativesTo Layoffs

SULAMAN SADIQ, ROLL # AR524302

Alternatives to Downsizing (Gomez-Mejia, Balkin & Cardy, 2001)

Employment Changes in Pay/Benefits Training

Policies Job Design Policies

Attrition Transfers Pay freeze Retraining

Hiring freeze Relocation Cut overtime

Cut PT employees Job Sharing pay

Cut interns Demotions Use vacation &

Cut temps leave days

Voluntary Pay cuts

time off Profit sharing

Reduced work or variable pay

hours

Employment Changes in Pay/Benefits Training

Policies Job Design Policies

Attrition Transfers Pay freeze Retraining

Hiring freeze Relocation Cut overtime

Cut PT employees Job Sharing pay

Cut interns Demotions Use vacation &

Cut temps leave days

Voluntary Pay cuts

time off Profit sharing

Reduced work or variable pay

hours

SULAMAN SADIQ, ROLL # AR524302

Need to reducecosts

AlternativesTo Layoffs

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

Voluntary Quits

InvoluntarySeparations

EarlyRetirements

VoluntaryWorkforceReductions

Layoffs

Outplacement

SULAMAN SADIQ, ROLL # AR524302

Downsizing Effects: 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.

SULAMAN SADIQ, ROLL # AR524302

Downsizing Effects: Employee Morale

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

SULAMAN SADIQ, ROLL # AR524302

Downsizing Effects: Workforce Quality

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.

SULAMAN SADIQ, ROLL # AR524302

Downsizing Effects

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)

Source: Cascio et al. 1997

SULAMAN SADIQ, ROLL # AR524302

Employee Relations

Performance Management

Reward Systems

Training

Employ-ment

Downsizing

Reputation effects on recruitment

Severance pay& benefits Performance evaluation

as layoff criteria

Morale of survivors

Loss of traininginvestment fromturnover

Downsizing and other HR Systems

SULAMAN SADIQ, ROLL # AR524302

Downsizing

Critical Thinking Questions

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?

SULAMAN SADIQ, ROLL # AR524302

Downsizing

Critical Thinking Questions

4. Is there a set of “best practices” to let an employee know she/he has been downsized?

5. Under what circumstances might a company’s managers prefer to use layoffs instead of early retirements or voluntary severance plans as a way to downsize the workforce?

SULAMAN SADIQ, ROLL # AR524302