Cost Cutting During Recession: Short Term Benefits, Long Term Drawbacks

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Introduction

Recession is the time to strengthen governance. But if personnel are long gone, how can the firm strengthen governance? How can the company improve best practice if major players in the organisation have gone to other pursuits, looking for jobs, or other profitable businesses?

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This is a reality in times of recession. First of all, cost cutting should not involve firing employees or freezing salaries and benefits that would force employees to resign and find greener pastures. The blessing-in-disguise scenario could be applied on companies trying to cope during recessions. Human resource development could be enhanced during recession and cost-cutting measures.

Bart Perkins (2009), managing partner at Leverage Partners Inc., which helps organizations invest well in IT, says that virtually every IT organisation is feeling the heat of the recession, with many forcing to cut services and staff. Projects have been narrowed down. We can take the recession as an opportunity to eliminate defects in the system.

Companies are taking advantage of the recession by streamlining and saving money and prevent layoffs. There are those who have stopped hiring, and have frozen salaries (Patton, 2009, p. 29).

Business practices which have been enforced only upon request by executives but which proved ineffective could be reduced or eliminated now at this time of cost cutting. Alibis by executives that they used to have done this and that practice should now also be eliminated. The company should start anew, instead of accepting things as they are. Companies can also develop multiple budgets by describing multiple levels of cost cutting that will be made if there’s little income coming in. Those budgets can identify future events once profits start to come in again.

During recession, many positive steps could be realized. Employee relations can be improved, short training can be introduced. But there’s no way to do it anymore if employees who have been holding important positions in the company are forced to resign and look for other jobs. When the economy has improved, after the recession, the company is sure to spend more in hiring new employees who will feel positions formerly occupied by the employees who were forced to resign during the recession.

There should be an open communication with managers and the board of directors, including the other stakeholders of the company, to include suppliers and the low and middle level employees of the firm.

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What about ethical considerations? Companies should be certain they are on ethical grounds before embarking on major changes in the organisation. Charles Trainor (2009, p. 44), who is president of Management Audit Consultants, says that firms should be honest in their disclosure to the staff. Boards and administrators should have a clear focus in telling the staff of what they are going to do.

Trainor (2009, p. 44) says companies should have to make difficult choices about personnel and fringe benefits, the most costly portions of any budget.

Most economies are into the knowledge economy scenario, particularly the UK economy. People are a source of knowledge. They attain sustainable knowledge and experience as they are a part of the organisation. For this reason, the employees or the people running the organisation are the firm’s greatest asset. They have to be retained in spite of the difficulties of the recession.

The Toyota Strategic HRM

Let’s take for example Toyota Motors Corporation, one of the leading automakers worldwide. Toyota, as a global organisation, is now having its presence in the UK, with its vehicle and engine manufacturing plants named Toyota Manufacturing UK Ltd. Recruitment (Toyota, n.d.). It has passed downturn after downturn, but has retained a well-determined workforce, which means not firing a single employee in the midst of adversities.

As it is commonly known throughout the business world and in different circles, Toyota has recently been the subject of public scrutiny and controversy because of one of its hybrid products, the Toyota Prius. The Prius has been the subject of millions of recall due to complaints from drivers and valued customers regarding brake pedals and sudden acceleration of the car, which has resulted into accidents and even deaths.

The president of the company has appeared before a United States congressional investigation regarding the fiasco, and the Toyota leadership has vowed that it would not leave any stone unturned on such a ‘shame’ to their company, maintaining that Toyota has always valued its customers, providing them the satisfaction they so needed, and that Toyota still goes for quality for all of its products worldwide.

How was Toyota able to compete with its large competitors when it was a small company? The simple answer is through sheer determination and a company strategy or a series of strategies that has resulted into volumes of sales. Toyota has a unique brand of management and leadership that started with a root, a seed, which has been passed on to descendants and followers. It started with a vision of one man, Mr. Kiichiro Toyoda, a mechanic who ‘made’ small cars.

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In the early 1950s, Toyota was an ordinary car manufacturer, manufacturing an average of 18,000 vehicles annually. The company increased its production between 1950 and 2004. Toyota introduced the Toyota Production System which ‘originated as a means of achieving mass production efficiencies with small production volumes’ (Toyota Annual Report and Accounts 1998, quoted in Lynch 2008, p. 772). Toyota expanded to become export-oriented and began to open manufacturing plants in many countries including the United States and Europe, operating in the same strategy.

Lynch (2008, p. 772) says that Toyota’s successes between 1950 and 1980 could be attributed to the Toyota Production System. Taiichi Ohno, who was the chief engineer during that time, started experimenting to improve production. He introduced the concept which evolved from the Japanese kaizen and kanban concept of production, which refer to continual improvement.

Toyota has a close relationship with its suppliers and bought more products from them. By having a close contact or coordination with suppliers through computer linkages or the Information Technology, Toyota has the advantage of having supplies just in time for production.

One of the innovations that has made the company unique from other world class automakers is that it allows its employees and an effective salesforce to work almost independently, but with the guidance of their supervisors who serve not as bosses but as co-employees and mentors. Above all else, stakeholders’ expectations are met by Toyota’s continued progress and increased profit.

The UK vehicle and engine manufacturing plants employ a workforce of approximately 5,000 employees. The strategy of a combination of outsourcing and in-house production is a traditional method of Toyota. Vehicles are built by a pool of trained engineers and technicians. Toyota teams of experts are trained inside their own plants, not from the university or training centers outside. Cutting costs is everyone’s concern; same with Toyota. But Toyota does not sacrifice quality for the sake of saving, or increasing profits.

On the other hand, the automotive industry, being labour intensive, is very much affected by the worldwide economic downturn, and the global financial crisis as a result of the financial collapse in Wall Street. There have been cost cutting, reduction of jobs, and other cutting measures by companies. Automakers are sure to downsize, or lay off employees. Despite the financial crisis, Toyota maintains products that meet customer satisfaction. Prius is now worth $22,000; Camry Hybrid is worth $26,150, and Highlander Hybrid is worth $34,700 (Toyota, 2009).

Toyota management knows how to handle its pool of engineers and technicians. They see to it that the workplace has a good combination of work and life balance. They make and train staff, engineers and technicians inside, not outside or from the university. They don’t fire employees right away even in economic crisis, instead they retain these employees and engineers to last until retirement (Lynch, 2008, p. 772).

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The Japanese continual improvement concept is effective in business and production and operations management. It is inspired from the old Chinese maxim that says ‘step by step walk a thousand miles.’

HRM Theories

Cost cutting and downsizing have short-term economic benefits, but not the long term. The principles of strategic human resource management do not point to any of these during recessions and economic downturns. Examining about these principles can lead us to our point of view.

Human resource management is considered a determinant factor in the success or failure of a business. The success of global business depends most importantly on the quality of management in the organisation. If during a recession, valuable employees are lost, or if the knowledge and expertise of a dedicated work force are reduced, there can be long term drawbacks in terms of the strategic HRM.

There is a concept, and philosophy, in strategic HRM which says that the people in the organisation are the greatest asset. People should be taken care of, including but not limited to, their work and ideas, their aspirations and goals for the organization to which they dedicate their entire life and talent.

Strategic human resource management focuses on effective management of the staff, including retention, and turnover processes. The selection of employees should fit to the strategy and culture of the organisation. Studies reveal that executives and managers put more importance on strategic management than any other subject of interest in the organisation. (Armstrong, 2006, p. 3)

In the study of strategic HRM, we may discuss various subjects rolled into one. First, by attempting to discover the underlying phenomena in this subject, we can first focus on the terminology: What is ‘strategic’, and what is HRM?

Human resource management concerns primarily with employees and the circumstances and instances dealing with employees, and this would mean management of human resource which would lead to the success of the organisation’s objectives. Strategic management is linking human resource to the objectives of the organisation.

Human resource management is maximising human potentials, including their skill, talents, or capabilities. When these qualities, or traits, or intangible asset of human resource, are maximised, we expect positive results. Positive results would mean performance, i.e. positive performance of people all working for the success of the organisation’s objectives.

Another element of the terminology is ‘strategy’: what do we mean by strategy, and how does the term affect the meaning of HRM? Strategic HRM is linking people to the strategies of the firm. Strategy concerns a plan wherein goals and policies are integrated to become a strategy for the organisation.

On the other hand, human resource management encompasses areas which deal with recruitment, selection, appraisal, formal human resource policies, and other human resource philosophies. They specify the values that inform an organisation’s policies and practices. The overall objective of HRM is the success of the organisation through its asset, the people working there. Strategic HRM now means ‘getting everybody from the top of the human organization to the bottom doing things that make the business successful’ (Schuler, 1992, p. 18).

Torrington and Hall (2008, p. 7) state that the first concern of HRM is ensuring that the business is appropriately staffed, and this involves designing organisation structures, identifying under what type of contract different groups of employees will work. It may be followed with recruiting, selecting and developing the people required to fill the roles.

The objective of strategic management is to handle or manage human resource as successfully as possible in line with the objectives of the organization. It aims to maximize human potential – skill, talents, or capabilities of human resource – for the fulfillment of the organization’s objectives. An organization with a well-defined strategic management can have competitive advantage over the others.

HRM recognizes the fact that employees can make or break the organisation’s advantage in an industry, and that the functions and practices of human resource should be linked with the corporate strategy. Bratton adds: “… human resource specialists help organizational controllers to meet both efficiency and equity objectives” (Bratton, 1999, p. 11).

Armstrong’s (2006, p. 3) definition also focuses on the people as the greatest asset of the organization, but emphasises a strategic and coherent approach. Storey (1989) argues that HRM can be regarded as a ‘set of interrelated policies with an ideological and philosophical underpinning.’

Linking theories to the strategies of the firm

In strategic HRM, strategies and people are involved; in other words, we are putting people in the forefront of business, including their talents and skills and capabilities. The concept of strategic HRM is based on the important part of the HRM philosophy that emphasises the strategic nature of HRM and the need to integrate HR strategy with the business strategy (Armstrong, 2006, p. 6).

HRM or people management would not be called strategic ‘if decisions about recruitment, selection, pay, job design and so on were taken on an ad hoc basis and without concern for consistency or without reference to the organisation’s strategy’ (Storey, 2007, p. 65).

Human resource policies should be integrated with strategic business planning (Legge, 1989, cited in Armstrong, 2006, p. 13). But Sisson (1990) suggests that a feature increasingly associated with HRM is a stress on the integration of HR policies both with one another and with business planning more generally.

Strategic human resource provides effective management of the staff, retention, and turnover processes, selection of employees that fit with both the organisational strategy and culture, cost effective utilisation of employees through investment in identified human capital.

One standard recommended human resource development (HRD) practice is needs or front-end assessment whereby the knowledge, skills and abilities (KSAs) needed for job or task performance are identified and then used as the basis for assessing the extent to which individuals in those jobs possess those KSAs (Goldstein & Ford 2002; Rothwell & Kazanas 1992, cited in Clardy, 2008, p. 387).

In our case of Toyota, KSA is working well in the organisation. There are various teams working in Toyota’s manufacturing plants, all working for one goal – the fulfillment of Toyota’s objectives.

Human resource management is the proper handling or management of the organization’s most valued asset. It is the responsibility of management and the people working there to work as a team for the promotion or furtherance of the organization’s objectives. In HRM, there is the central involvement of middle and low level management, a stress on people management, from top to middle- and low-level employees, and a division of labor in the handling of people in the workplace and in the field.

“HRM emphasizes that employees are critical to achieving sustainable competitive advantage; that human resources practices need to be integrated with the corporate strategy, and that human resource specialists help organizational controllers to meet both efficiency and equity objectives” (Bratton, 1999, p. 11).

HRM Paradigm

There are two paradigms focusing on HRM. The more popular one is the universalist paradigm. This paradigm defines the concept of human resource management by way of improving management of employees strategically. This paradigm also emphasizes organizational performance to promote the aims of the organization. (Harris et al., 2003)

Another one is the contextual paradigm, which focuses on other contextual ways of promoting the organisation’s objectives.

The universalist paradigm has much strength because it has a simple, clear focus, a rigorous methodology, and clear relationships with the needs of industry. (Mayrhofer et al., 2000, p. 9).

A theory linked to Max Weber’s is that which argued that whether the economic system is organised on a capitalistic or a socialistic basis, applying technical knowledge efficiently requires the adoption of the bureaucratic system with its universal characteristics (Harris et al., 2003, p. 18).

Conclusion

We have formulated, in this study, a concluding concept which says that strategic human resource management is a broad subject, and covers many areas of human resource development. In times of recession, strategic HRM should be strengthened.

Firing employees is never a recommended option. For instance, as we have stated here, HRM encompasses areas on recruitment, selection, appraisal, formal human resource policies, and so forth. This particular aspect of HRM should be handled and managed by a dedicated workforce, which is composed of employees who have spent a considerable time in the company, and who are a part of the knowledge wealth that the organization has accumulated through the years.

The point here is that the organisation should provide a programme or mechanism to retain these expert employees, more so in times of recession. These employees will save the company someday. Cost cutting may be beneficial to the organisation only in the short term. However, this should not involve aspects of strategic HRM, because in times of recession, strategic HRM should be enhanced through strong governance.

References

  1. Armstrong, M., 2006. A handbook of human resource management practice. London: Kogan Page Limited. pp. 3-4.
  2. Bratton, J., 1999. Human resource management phenomenon. In J. Bratton and J. Gold, Human resource management: theory and practice. London: MacMillian Press Ltd., pp. 3-8.
  3. Clardy, A., 2008. Human resource development and the resource-based model of core competencies: methods for diagnosis and assessment. Human Resource Development Review 2008; 7; 387. DOI: 10.1177/1534484308324144.
  4. Gold, J., 1999. Human resource planning. In J. Bratton and J. Gold, Human resource management: theory and practice. London: MacMillian Press Ltd., pp. 165-167.
  5. Harris, H., Brewster, C., and Sparrow, P., 2003. International Human Resource Management. London: Chartered Institute of Personnel and Development.
  6. Lynch, R., 2008. Global automotive vehicle – strategy in a mature market and Toyota: What is its strategy for world leadership? In Strategic Management, 5th edition London: Financial Times/ Prentice Hall, pp. 772-3.
  7. Mayrhofer, W., Brewster, C., & Morley, M., 2000. The concept of strategic European human resource management. In C. Brewster, W. Mayrhofer, & M. Morley, (eds.). New Challenges for European Human Resource Management. Great Britain: MacMillan Press Ltd. pp. 3-35.
  8. Patton, C., 2009. Riding out the storm. University Business, 2009.
  9. Perkins, B., 2009. Take advantage of the recession. Computerworld.
  10. Schuler, R. S., 1992. “Strategic Human Resources Management: Linking the People with the Strategic Needs of the Business.” Organizational Dynamics, 1992, p. 18. Reprinted with permission from Elsevier Science.
  11. Storey, J., 2007. Human resource management: a critical text (3rd ed.). London: Thomson Learning. p. 60.
  12. Torrington D. & Hall, L., 2008. Human resource management. England: Pearson Education Limited. p. 7.
  13. Toyota (n.d.). About Toyota manufacturing UK.
  14. Toyota (2009). Where we started.
  15. Trainor, C. K., 2009. Tough choices, hard cuts. American School Board Journal.

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BusinessEssay. 2022. "Cost Cutting During Recession: Short Term Benefits, Long Term Drawbacks." January 6, 2022. https://business-essay.com/cost-cutting-during-recession-short-term-benefits-long-term-drawbacks/.

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