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MBAO 6030 Human Resource Management
Downsizing
HR Management
MBAO 6030
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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.
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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
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Need to reducecosts
Downsizing(Gomez-Mejia, Balkin & Cardy, 2001)
Alternatives
To Layoffs
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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 overtimeCut 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
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Need to reducecosts
Alternatives
To Layoffs
Downsizing(Gomez-Mejia, Balkin & Cardy, 2001)
Voluntary
Quits
Involuntary
Separations
Early
Retirements
Voluntary
Workforce
Reductions
Layoffs
Outplacement
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Downsizing Effects: Overall
Mixed effects on firm performance: some short-
term costs savings, but long-term profitability &
valuation not strongly affected.
Firms reputationas a good employer suffers.Example: Apple Computers reputation as good
employer declined after several layoffs in 1990s.
Downsizing forces re-thinking of EmploymentStrategy. Lifelong employment policies not
credible after a downsizing. Example: IBM
abandoned lifelong policy after several layoffs in
early 1990s.
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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 tocynicism, lowered work commitment, fewer
random acts of good will
Survivors experience more stressdue tolonger work hourswith re-designed jobs, and
increased uncertainty regarding future
downsizings
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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.
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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
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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 training
investment fromturnover
Downsizing and other HR Systems
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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?
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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 companys
managers prefer to use layoffs instead of early
retirements or voluntary severance plans as a
way to downsize the workforce?