The Downsizing Decision

8/8/2019 The Downsizing Decision

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The Downsizing DecisionThe Downsizing Decision


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What is Downsizing?What is Downsizing?

y A downsizing strategy reduces the scale

(size) and scope of a business to improve

its financial performance (Robbins &

Pearce, 1992).

y A reduction of the workforce is one of

only several possible ways of improvingprofitability or reducing costs.


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Why do Firms Downsize?Why do Firms Downsize?

y Reduce costs

y Reduce layers of management to increasedecision making speed and get closer to the

customery Sharpen focus on core competencies of the

firm, and outsource peripheral activities

y Generate positive reactions from

shareholders in order to improve valuationof stock price

y Increase productivity


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Downsizing Effects: OverallDownsizing Effects: Overall

y Mixed effects on firm performance: someshort-term costs savings, but long-termprofitability & valuation not strongly

affected.y Firms reputation as a good employer

suffers.

y Downsizing forces re-thinking ofEmployment Strategy. Lifelongemployment policies not credible after adownsizing.


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Downsizing Effects: EmployeeDownsizing Effects: Employee

MoraleMoraley Employee motivation disrupted: increase inpolitical behaviors, anger, fear - which is likelyto negatively impact quality of customer

servicey Violation of psychological contract, leads

to cynicism, lowered work commitment, fewerrandom acts of good will

y Survivors experience more stress due tolonger work hours with re-designed jobs,and increased uncertainty regarding futuredownsizings


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Downsizing Effects: WorkforceDownsizing Effects: Workforce

QualityQualityy Many senior employees leave due toapplication of early retirement incentives:result is loss of institutional memory.

y The use of voluntary workforce reductions(buyouts) results in the most marketableemployees leaving (stars) -- difficult tocontrol since all employees must be legallyeligible to qualify.

y Early retirements & voluntary reductionsoften result in too many people quitting,and some are hired back as consultants athigher cost to firm.


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Downsizing EffectsDownsizing Effects

Downsizing Works Best When:

y Changes in Strategy, Organization

structure and Culture accompany job cuts

of downsizing

y Weak business units and plant closures

are used as basis of reductions, rather

than across the board cuts affecting allunits (including healthy ones).


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Employee

Relations

Performance

Management

Reward Systems

Training

Employ-ment

Downsizing

Reputation

effects onrecruitment

Severance pay

& benefits Performance evaluation

as layoff criteria

Morale of survivors

Loss of training

investment fromturnover.

Downsizing and other HR SystemsDownsizing and other HR Systems


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Question:1:

A

: Perform the SWOT analysis?

S: Strength

W: WeaknessO: Opportunity

T: Threats


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Answer:Answer:

Strength:

y Managerial skill Mr. Naveen Mehta

y Strong market position Switch gear and

connectors

y High profitability Switch gear and

connectors

y Successful management in the

connectors and switch gear


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Weaknesses:

y Least profit wire and cable

y High costs - wire and cable

y Diversified product performance is also

erratic (Lacking consistency, regularity, or

uniformity ).

y Falling stock prices


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Cont..Cont..

y Current Chairman Mr. Patel and C.E.O

Mr. Navothan Patel is retiring.

y Slow growth rate

y Lacking of talent

y Lacking of goodwill ( Sateesh kumar- the

new chairman).

y Poor morale of employees


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Opportunity:

y Diversify into related product.

y New avenues for additional revenues.


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Threats:

y Competitors

y Investors may loose their confidence on

the company.


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Question:2:Question:2:

B: What strategy should Mr. Naveen adopt?


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Answer:Answer:

When making the decision to downsize:

y Downsizing should only be a last resort

y Craft a realistic and positive vision of

what should come out of the downsizing


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When planning the downsizing:

y Assign the planning and execution to a crossfunctional team

y Identify all stakeholders

y Use experts (e.g., outplacement specialists,financial consultants, psychologicalcounsellors)

y Train managers how to communicate andexecute the downsizing

y Give employees information on the state ofthe business


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When making the announcement:

y Explain the rationale

y Announce the downsizing

y Notify employees of the decision inadvance

y Be specific and time the announcement

welly Let employees take the day off on the day

of the announcement


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When implementing the downsizing:

y Be honest.

y Over-communicate

y Help downsized employees find other jobs

y Announce new information as it becomesavailable

y Be fair

y Be generous to laid-off workers

y Let voluntary separations occur

y

Involve employees in the implementationy Make career counselling available

y Train the survivors to handle changes in thework that will occur


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FactFact whichwhich shouldshould bebe consideredconsidered

beforebefore takingtaking decisiondecision::y In EPC company, the connectors and

switch gear are performing very well.

y The manager ( Mr. Naveen Mehta ) of the

connectors and switch gear has a

successful record of running the divisions

and the divisions has a great performance

record with maximum profit.y These divisions product has good market

positions.


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ContCont

y The problem is running in the wire and

cable divisions because its operating cost

is high but its profit is very low.

y Diversified product has a mixed response.


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DecisionDecision

y The downsizing should be only in the

cable and wire division rather than the

whole department.

y By following this divisions Mr. Naveen can

retain the best talent and also will be able

to minimize the bad impact of downsizing

on employee, investors, goodwill of thecompany.


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Avoiding Downsizing DisasterAvoiding Downsizing Disaster

With Three Simple StrategiesWith Three Simple Strategies

1: Check Your Perspective:

y As the person in a leadership role, your

perspective and attitude will have a

HUGE influence on the rest of your

company. How you show up every day

will determine how everyone else willfunction and react.


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2: Determine Your Outcomes

y Cost cutting

yWork as a team

y Faster growth

y etc


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3: Communicate:

Set up a clear communication strategy.Communication to the entire company

about what is going on is extremelyimportant. It helps each person feel more incontrol since they can make decisions bothfor the company and themselves based on

true and current information. Bycommunicating effectively, you will gain thetrust of your employees during this time andyou will increase your trust in them.


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Documents

The Downsizing Decision