Downsizing in the corporate world is used to mean the process in which a company re-organizes its structure by bringing about layoffs in a part of the workforce of the company (Drew 4). There are several reasons as to why a company would decide to layoff part of its workforce. Some of the reasons could include merging decisions; attempts to increase the profitability of the company through elimination of labor costs, or it could be in a bid to comply with new company goals among other reasons (Gandolfi and Hansson 498). Whichever the reasons leading to corporate downsizing, the fact is that a number of the company’s employees will be rendered jobless starting from the top executives to the low workers paid on hourly basis normally referred to as casuals (Gandolfi and Hansson 498). As such, corporate downsizing is bound to affect several sectors of the organization. This paper is therefore an exploration of the downsizing issue by first reviewing the literature available on the topic before discussing on how downsizing affects an organization at the individual, group, and organizational levels.
Downsizing has for a long time, been used as a strategic response to changes in the management of several business enterprises and companies across the world. As such, much research has been conducted on the topic given its use and importance in the business sector. However, those in the business arena have different views on organizational downsizing. There are those who look at it as way of reducing costs within the business enterprise in response to internal or external factors facing the organization. Others look at downsizing from the perspective of being a strategic management initiative, which has its own rights. On the other hand, business literature on downsizing also indicates the negative side of the downsizing process whereby it is argued that in addition to the psychological impact it brings about to the victims of the process; downsizing could lead to negative impacts on the operational and financial outcomes of the firm.
According to Wagner, research done indicates that about fifty per cent of the companies that were studied proved not to be ready for the downsizing process in their organizations hence leading to large effects afterwards (Wagner 3). The main reason behind this was that most of the companies had not put in place programs or policies to reduce the effects of retrenching part of the workforce. Literature from this article indicates that a number of the companies that opt for downsizing as a strategic tool, normally fail to achieve the desired goals. This can be evidenced by a study that was conducted by Wyatt Company in 1991 whereby 46 percent of the 1,005 companies realized their objective of reducing expenses in their organizations.
About 33 per cent realized their objective of profit increment as a result of downsizing, while 21 per cent met their goal of increasing the shareholder’s return on their investments (Wagner 3). It is therefore true to note that the process of downsizing normally keeps most of the organizations in a state of anticipation not knowing what will be the outcome of the whole process. It is therefore a risky venture that companies indulge themselves in, and it is recommendable that before planning on downsizing, organizations put in place policies and effective programs that will cater for the possible effects that could result from the process.
When Pedersen decided to study the impacts that layoff has on the performance of engineers in 1991, he gave a report that explained that retrenching workers based on merit could have advantages to the organization (Wagner 3). This is because it could make the remaining workforce improve on their performance for the fear of being laid off in the next downsizing process (Wagner 3). This would in turn help the organization get back on track since the productivity from the workers would definitely be high. As such, downsizing could be used as a strategy of minimizing the cost of labor yet at the same time increasing the workers output. Given the high rates of unemployment being experienced in most parts of the world, the survivors of downsizing have no other option than to improve their work or be rendered jobless.
In another study conducted by Johns Frazier in 1994, the effects of downsizing on an organization’s middle managers were looked at (Frazier 4429). It was reported that most of the middle managers were significantly affected the process of downsizing in the organization thus leading to a decline in their performance in work (Frazier 4429). As such, Johns recommended that to avoid this, organizations should ensure that their downsize process is done based on design and not on the basis of quotas, which is commonly used (Frazier 4429). In addition to this, it is important that the new roles be clearly defined to the managers after the restructuring process to avoid instances of frustration.
Given the above review of literature on downsizing, it is evident that this topic has been widely researched. However, despite that fact that the findings and conclusions from the articles discussed to a greater extent may not be consistent, it is evident that the aftermath of the downsizing process may at times not be successful. This is attributable to the poor or lack of the required planning to be put in place before the downsizing process. It is therefore important that a downsizing plan be part of the strategic management plan in each and every organization regardless of whether it has plans of downsizing or not. It has been noted that by putting in place the downsizing plan, organizations will be better prepared to deal with the effects that could arise as a result of the downsizing process.
Case Studies on Downsizing
This research will not be perfectly complete without looking at the some of the companies of global or national reputation that have practiced downsizing. Additionally, the aftermath on what happened after the downsizing process will also be looked at. In a case study on the approaches used by Ford and GM in corporate downsizing, Mishra and Sinha indicate that the two companies planned to retrench some of their workers in 2006. GM is the largest automobile company in the United States of America followed by Toyota then Ford. GM wanted to lay down part of their blue collar job workers while Ford planned on cutting down about 14, 000 of the workers in the white collar jobs based in North America (Mishra and Sinha 1). Just like most companies who carry out the process of downsizing, Ford expected that this process would help it reduce its annual cost by a figure of five billion US dollars (Mishra and Sinha 1). From this, it can be clearly depicted that downsizing is a process that normally occurs sin almost all companies regardless of their size and location. This is therefore a real example to show that downsizing is not fiction but practicable.
In another case study by Appelbaum, Leblanc, and Shapiro, the aftermath of downsizing was discussed with regard to a company by the name Dominion Travelogics Unlimited of Canada. This case study aimed at describing the impact of downsizing on the culture of the organization (Appelbaum Leblanc, and Shapiro 402). From the results of the study, it was depicted that downsizing had significant impacts on the corporate culture since it greatly affected the behavior of the employees. As such, those who remained in the organization after the downsizing process were affected thus making them change their attributed in terms of loyalty to the organization. To a larger extent, the case study revealed that some of the survivors as well as the retrenched employees were furious and angry of the organizations’ decision to have some of the workers laid off. It is because of this that the authors of this case study concluded that downsizing had a negative impact on the employee behavior hence the new culture of the organization.
In another case study by Kothen and McKinley, the alternative to downsizing was established. Up to this point, it is clear that downsizing could bring about effects that could compromise the future and success of the organization. It is because of this that the Volkswagen model was developed to substitute organizational downsizing. “This model when implemented in an organization, it is aimed at meeting discursive tests of legitimation for the acceptability of company policy” (Kothen and McKinley 6). This is done with the sole aim of maintaining the competitiveness of the company. Through this model, several alternatives have been put in place, which are applicable instead of downsizing. First, the organization could reduce the number of working hours for the employees (Kothen and McKinley 9). This means that all employees work but for lesser hours.
As such, a company whose intention is to cut off the labor costs through downsizing could use this method as an alternative, whereby the organization does not have to lay off part of its workforce. Early retirement of some of the workers could be used as an alternative to organizational downsizing (Kothen and McKinley 9). This will mean that those employees that are of old age and have worked for the organization for several years are sent home prior their retirement age. Compared to downsizing, early retirement is an option that would get the support of most of the workers including those of old age. The benefit of such a decision is twofold, since the organization will be able to get rid of the elderly employees whose productivity is lower thus remaining with the younger generation that is more active, hence high productivity.
This means that the organizational productivity will generally go up while at the same time having to cut down on the labor costs. The other alternative of downsizing mentioned in the case study is that of consensual termination. In this, the organizations agree with part of the workers that they are going to have their jobs terminated. This is done by having both parties sign a consensual termination agreement, which stipulates that payments to be made on the terminated employees (Kothen and McKinley 9). Unlike organizational downsizing, this is considered a friendlier manner of terminating the employment contracts of the employees.
The process of Downsizing
As mentioned earlier in the paper, the process of organizational downsizing is one of the critical decisions that the management of any organization could make. This is attributable to the serous impacts that it could possibly result if performed in an ineffective manner. Just as many processes carried out in organizations, downsizing entails a number of steps that ought to be strictly followed to ensure the achievement of its goals. The steps entail the following:
Making the Decision
This is the first step in the downsizing process of any organization. The management of any organization wishing to lay off some of its work force should make the make the decision based on the goals is wishes to achieve with regard to the downsizing process. In making the decision, the management considers the pros and cons that could result from the process and thereby comes up with a conclusion on which option to take.
Strategic Plan for Future of Company
Earlier in the paper, it was mentioned that all organizations ought to have a plan on downsizing regardless of whether they intend to carry out the process or not. This plan is normally prepared so as to ensure that the future of the organization is safe. As such, it is from the strategic plan that the company I able to determine whether the company will succeed or fail in the future.
Assessing the Workforce
It is very unfortunate that some companies make the decision of downsizing yet their workforce size is very small. By doing this, the organization is left with limited workforce thus requiring the organization to embark to the recruitment process once again. Yet as it is known, the recruitment process is one of the few processes in an organization that is very costly. As such, it is important that before the downsizing process is initiated, the workforce of the organization be assessed to determine the current capacity, the required capacity hence the number of workers to be laid off.
Deciding who should leave
Since not all the workers are to be laid off, those who are to leave, the company should be selected in a manner that is acceptable and fair to all. From the literature review of this paper, one of the studies recommended that the downsizing process be made on merit instead of the quota system. The advantage of this is that the survivors who remain will improve on their work performance hence to the advantage of the company. At the same time, laying off workers based on merit will also be fair ways of having workers leave the organization, as they will be able to understand why they were laid off.
Carrying out the Downsizing
This is now the final stage of the process whereby the actual laying off is done with some of the workers having to leave the organization. This is bound to come with a lot of trauma to most of the laid off employees. As such, the organization should organize counseling sessions so that the employees are counseled and advised on what to do next after the retrenchment.
The Effects of Downsizing
The decision on whether to downsize an organization or not, may draw the thin line between the success and failure of such an organization. This, therefore, shows the critical need to evaluate the circumstances that make organizations to consider downsizing before implementing the strategy. In some cases, organizations do not have another option other than downsizing and thus, it is of essence that a carefully thought strategy is followed while carrying out the downsizing. An example of a case in which downsizing may be warranted is in cases of mergers and acquisitions, where both organizations being merged have duplicate processes and/or portfolios. A small business may also need to lay off some of its employees if it has more than it requires.
This may be the case if the efficiency of employees is more than anticipated or even due to a reduction in demand (McDonald 1). This is because after the merger, some people, equipment, portfolios, etc. may be rendered redundant or even useless. Thus, a downsizing decision affects individual employees, groups and even the organization as a whole. In other cases, it is possible to avoid a downsizing decision. For instance, an organization may consider looking for opportunities for growth in order to cushion it from the effects of a merger decision.
Although downsizing usually affects all the people in an organization, the most affected people are those who are laid off. The following are some of the effects that downsizing has on the employees who are laid off. Victims of downsizing may be paid severance pay, which will indubitably have a positive impact on them because it is paid in lump sum. The employees can use the lump sum to increase their savings or even to clear their outstanding debts. In addition to this, losing a job due to downsizing opens up opportunities for the employee who has been laid off. Some organizations offer outplacement support to former employees who lose their jobs as a result of downsizing (McDonald 1). By this, the laid off employees will be able to get other jobs, which may offer better terms than the one they were laid off from. Some of the employees may even engage themselves in profitable business ventures that may make them more successful than they would be in their jobs. This is especially the case because the severance pay provides capital for venturing into business.
In cases where employees lose their jobs due to downsizing, they may become angry and bitter at the organization for laying them off. They may even lose confidence in their abilities because some of the employees will be left behind. This means that the former will consider their skills to be less than those of the latter. This is a psychological problem and therefore they will need counseling or it may affect their subsequent endeavors. Studies have shown that people who are laid off as a result of downsizing tend to stay for long without getting other jobs, and that after they get other jobs, most of them settle for less-paying jobs. This could translate to a financial crisis, especially for individuals who had commitments like mortgages on their salaries.
A downsizing also has significant effects on surviving employees. These employees experience dwindling corporate loyalty, performance in their jobs, job satisfaction, and even strained relationships in the workplace (West 1). This is especially the case if the surviving employees had close relationships with the laid off employees. In some cases, management may involve other employees in the downsizing process. Although this is recognized as one of the most effective downsizing strategies, the involvement of employees in downsizing decisions may heighten tensions after employees are laid off.
This is because friends of former employees may be angry with some of their colleagues because they may view them as the ones who chose the former to be sent off (West 1). This will also affect group work because relationships within groups will be strained. In addition to this, some of the laid off employees may have had special skills that were helping certain groups within the organization to perform their duties effectively, leading to overall organizational success. The laying off such individuals will mean that the groups will not be as effective as they were before the layoff. This may translate to low productivity and even losses for the organization because after downsizing, employees should work with increased efficiency in order to cover up for the laid off employees.
Despite the fact that the exit of employees due to downsizing may have a negative effect on groups, it can be sometimes advantageous. This highly depends on the specific circumstance of the organization that is carrying out the downsizing. For instance, in some groups, there are people who distract their fellow group members, or who are ineffective in their activities. If an organization retrenches such people, the result will be groups that are more effective because the rest of the members of the groups will be able to work more efficiently (Freeman and Cameron 15). This can translate to more profits for the organization.
Downsizing may have a great impact on the organization as a whole. First, the process of downsizing requires careful planning and therefore it takes up a considerable amount of the organizations time and capital (Freeman and Cameron 10). During the actual laying off, employees who are sent off may be given the severance pay, which may translate to hundreds of millions of dollars, or even billions of dollars in expenditure. This means that the organization may have to wait for several years before starting to reap absolute benefits of a downsizing exercise. In addition to this, some organizations offer counseling services to the retrenched employees to help in reducing the psychological effects that the layoff could have on their lives. Others also offer outplacement support. These translate to additional expenditure for the organization and they consume the time of the organization.
As stated in the discussion above, downsizing may have serious effects on the surviving employees. Their loss of trust in the organization, their anger at the management for retrenching some their colleagues and other related feelings might translate to low productivity. This makes the organization to fail to utilize its potential meaning that the organization will not realize profit maximization. The discussed effect of downsizing on groups also leads to low productivity, which may translate to low profits or even losses (Bommer & Jalajas 30).
In spite of all the negative effects of downsizing, the process has been proven to have positive effects on specific organizations. It has particularly been seen to work in organizations that downsize with the strategic goal of reducing costs. With the advent of information technology, many organizations have opted to automate many of their operations rendering some of their workers redundant (Cappelli et al 98). It is therefore apparent that if such an organization uses a good approach at downsizing, it will automatically increase its profitability and efficiency. In addition to this are organizations that merge with other organizations. In such cases, some processes may be duplicates in each of those organizations making the merged organization to have redundant portfolios. It would therefore be wise for such organizations to downsize appropriately in order to minimize operational costs and consequently maximize their profits.
Finally yet importantly, it is important that organizations wishing to undertake the downsizing process determine the impact that the process could have regarding its reputation. In this era where all organizations are required to practice social corporate responsibility, organizations strive to create a good reputation in the society that they operate in since this could have significant effects on the success of the company (Deetz 132). Downsizing has been regarded as one of the factors that could portray a negative image of the company that practices it. Therefore, when an organization lays off some of its workers, it is not only the retrenched employees that are furious and angry with the company but also their relatives, friends and the society. As such, the image of the organization is portrayed as that of being bad, selfish, and uncaring. With this kind of image, the society deters from using the goods and services of the company while opting for those provided by other companies. The people affected by the downsizing process could also run negative campaigns regarding the company in order to ruin its reputation. This could greatly affect the profitability of the company since the main customers of their services or goods have become their enemies and no longer use them.
In this section, the literature review will be analyzed in order to determine, compare and contrast the concepts and principles of downsizing reviewed earlier in the paper. It is by no doubt that extensive research on the topic of downsizing has been done. From the literature, it is depicted that most of the researchers studied the effects of downsizing on the organization at various levels. This is because of the fact that downsizing has significant effects on the organization at the organizational, group and individual levels. That is why most of the researchers have opted to study the effects of downsizing.
From the literature reviewed, it was noted that in one of the studies conducted, it was concluded that about fifty percent of the organizations/ companies who undertook the downsizing process were not prepared for it. However, what does preparing for downsizing entail? This is the question that most people would ask themselves, when previous statement is mentioned. Nevertheless, just as the writer continues to explain, preparing for the downsizing process is a requirement of all companies cautious about their future regardless of whether they carry out the process or not. It is from the downsizing plan that the management of an organization can predict of what could possibly occur in the future thus make proper strategies to overcome them. This is of great significance in the business enterprises since they are able to carry out the downsizing process in an effective manner.
Further, in the literature review, one of the researchers by the name Pedersen suggested that the best method to be used when retrenching workers would be based on merit. He refuted the quota system, which was the commonly used method of retrenching workers from organizations during downsizing. Pedersen argued that the merit-based system would be to the advantage of the organization since the surviving workers would improve on their performance hence work diligently. I concur with Pederson that the merit-based system be used in retrenching workers during the downsizing process. In fact, this should pose as one of the reasons that organization would decide to carry out the downsizing process. Therefore, in an organization where a large part of the workforce has decided to be reluctant in their work and efforts to incite them to improve their hard work prove futile, the organization could therefore use this as one of the strategies of improving the employees’ performance.
In another study on the impacts of organizational downsizing on the middle level mangers reviewed in the literature, confirms the several effects that come about as a result of downsizing. From the study, it was depicted that most of the workers would be affected by organizational downsizing but this study emphasized on the middle level mangers whose performance deteriorated as a result of downsizing. This can be attributed to the decreased morale in work after witnessing the retrenching of some of their colleagues (Chao et al, 270). Most of them are encompassed with great fear since they do not know the next step that the organization would make.
From the findings of this research, it is clear that downsizing is a topic of significant importance in the business world. This is attributable to the positive and positive impacts that this process has on the organizational success. Nevertheless, it has been noted that the success of organizational downsizing could be achieved by having the downsizing plan. Therefore, the downsizing plan is an important tool for all organizations regardless of whether they are to carry out the process or not. Downsizing has been depicted to have positive impacts including increase in profitability, cutting down of labor costs, increase of surviving employee performance as well as being of help when it comes to mergers and acquisition.
On the other hand, downsizing has negative impacts on the organization, individuals and the society which include decreased of employee loyalty, decreased performance by some of the employees, poor reputation in the society and psychological problems on the retrenched workers just to mention a few. As such, it is important that organization make the decision of downsizing after considering the pros and cons of the process (Devine 109). Additionally, in the paper, alternatives to downsizing have also been discussed which could be used as options for downsizing. Some of the alternatives include consensual termination, reduction of employee working hours and early retirement among others. The aforementioned methods could be used to serve the same purpose of downsizing but in a manner acceptable by the society.
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