Downsizing Strategies And Its Effects

Introduction

Companies that faced a decrease in sales, market share, or profits in the 1980s and early 1990s began to realize that their human resources were expensive and underutilized. To become more competitive, companies made strategic decision to gradually lower their payroll numbers. (Anthony, Kacmar & Perrewe al, 2002:434) Downsizing has become a critical issue around the world. Downsizing and mass lay-offs are happening not only on US companies but also organizations in the entire industrial world. The number of organizations and jobs affected by downsizing has been staggering. In 1993, in an unending quest for lower costs, higher productivity, and fatter profits, American firms announced 615,000 jobs cut, and all-time record. Many of these actions reached into the ranks of white-collar and middle management positions. Earlier, layoffs were generally limited to low-level, unskilled, or blue-collar labour. (Hitt et. al., 1994) (Internet Material #1) Making staff redundant is still a process many companies are forced to go through even in times of economic stability and modest growth. Why does it becoming a popular as a strategy used by the organizations? Why is it viewed as important issues on todayЎЇs competitive world? In theory, downsizing is presumed to have positive outcome for the organization. In many situations, downsizing did accomplish what management had intended. However, there are many critiques on the manager views where unintended and negative consequences of downsizing resulted. It is important to point out that downsizing can be approached from at least three different perspectives: a global or industry level, a micro or individual level, and an organization or strategy level (Cameron, 1994). From a global or industry point of view, discussions of downsizing include mergers and acquisitions, joint ventures, and market strategies. From a micro or individual point of view, discussions of downsizing focus on individual stress associated with job loss, psychological coping strategies, and the attitudinal effects of downsizing. (Internet Material #2) In this paper, I will focus on the downsizing strategies and the respective effects of these approached on organizational performance and effectiveness. Not only focusing on the strategies, its impact and consequences on effectiveness and employees in term of culture, motivation and survivor syndrome will also be discussed later.

What is Downsizing?

Downsizing simply means ÐŽ®reducing in sizeЎЇ by cutting the number of workers. Downsizing can also be interchangeable with other words such as ÐŽ®restructuringЎЇ, ÐŽ®de-layeringЎЇ, ÐŽ®de-selectedЎЇ, ÐŽ®re-sizingЎЇ, de-recruitЎЇ, ÐŽ®de-hiredЎЇ, transitionalЎЇ and etc. According to Kozlowski (1993), downsizing has been defined as a deliberate organizational decision to reduce the workforce that is intended to improve organizational performance. (Kozlowski et. al., 1993:257 as cited in Thornhill & Saunders, 1998:273) Cappelli argues that downsizing refers to reduction in employment that is not accompanied by a reduction in output. (Cappelli, 1995:577 as cited in Collins, 2000:286) More recently, Thornhill and Saunders (1998) contend that downsizing is a form of organizational restructuring which aims to improve a companyЎЇs overall performance by creating effectiveness, efficiency, productivity, and competitiveness. (Internet Material #3)

Cameron defines downsizing as a positive and purposive strategy. It thus falls into the category of management tools for achieving desired change, much like "rightsizing" and "reengineering". Downsizing is defined in this effort simply as a reduction in the size of the work force. (Internet Material #4) According to Cameron et al., although this literature has emerged from several disciplines and draws on a range of management and organizational theories, organizational downsizing is still regarded by many academic scholars as the most pervasive, yet understudied phenomenon in the business world. (Internet Material #3)

Shaw and Barrett-Power (1997) recognize that measures typically used to assess the effectiveness of downsizing from a corporate perspective are clearly inadequate as a means to understand and manage the impact of this process on stakeholders such as work groups and individuals who survive this event. Such corporate measures will be related to profitability, productivity, investment returns, customer satisfaction ratings, etc. While these measures may suggest that a downsizing process has had a negative impact on those who survive as employees in the organization, they can only serve to highlight the presence of psychological and behavioural consequences for survivors. (Thornhill, Saunders, 1998:273-4)

Why do firm downsize?

A diversity of reasons can be lead to the decision of downsize. Organization and employees are being force to adapt to an environment characterized by augmented competition, government deregulation and technological evolution. (Internet Material #7) (Refer to Appendix 1 for most common reasons of restructuring) It can increase productivity, the value of the companiesЎЇ shares and the profits by reducing the number of employees per unit. Companies downsize to cut cost, improve efficiency and to maintain a profit level acceptable to their shareholders. Other reasons include reorganization, minimizing bureaucracy, eliminating excess, business downturns, mergers, and acquisitions. (Makawatsukul & Kleiner, 2003:52) Downsizing has become strategic decision by systematically reduce workforce to become more cost efficient and competitive. For example, when Boeing CEO Frank Shrontz predicted 1993 price wars and increase competition, the company targeted 25%-30% cost reduction goals. Shrontz focused on the Defense and Space Group, eliminating 16,000 of 53,000 workers through attrition and transfer to other units. (Daft, 1997:416-417) The economic downturn that began in 2000 has again made the downsizing a common practice in AmericaЎЇs corporations. In addition, downsizing is part of many change initiatives in todayЎЇs organizations. Reengineering projects, mergers and acquisitions, global competition, and the trend toward outsourcing have all led to job reduction. (Daft, 2004:346)

Downsizing and lay-offs are almost always a necessary as a response to dramatic change. General Motors began downsizing after years of losing market share to Japanese automakers. As for Sears, it has had to shed 50,000 of its employees in response to competitors such as WalMart. In the majority of downsizing cases, the changes were painful yet necessary for the survivor