Why Firms Downsize
Since the 1990s, a considerable number of companies have downsized and restructured their companies with the main of achieving better profits and flexibility. The term downsizing refers to strategies employed by a company to reduce personnel to ensure a firm adapts to its environment ( Bravo & Herrera, 2017). The last couple of decades have been characterized by global competitive pressures forcing organizations to critically evaluate their cost structures to adapt to the ever-changing economic environment. With time, the term has expanded to cover measures that are applied to achieve adaptability. Reduction of personnel is intended to achieve cost-effectiveness while the broader term is geared towards attaining cultural systems and values.
Both internal and external factors influence downsizing decisions. Several changes have taken place over the last decade in the global macro environment. For instance, technological advances in recent years have led to employee layoffs as the companies seek to increase efficiency and productivity by incorporating technology. Many organizations face stiff foreign competition, forcing them to continually explore ways to cut down operation costs (Brauer & Zimmerman, 2017). Many firms have transferred most of their manufacturing and production operations to countries with lower production costs.
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Downsizing by some organizations is a response to the industry forces. When leaders in a particular industry downsize, other firms in the industry are likely to adopt a similar strategy. The institutional theory predicates that many companies are likely to give in to pressure within an institutional field to downsize their human resource. In the US, many companies have downsized as a response to Wall Street pressure. Revenue shortfalls force firms to cut costs to match the revenue required to ensure investors get returns (Cohee, 2019). Downsizing has also been justified by mergers and acquisitions, which have gained popularity in the recent past generating personnel redundancies.
Some organizations choose to downsize as a response to declining organizational performance. For underperforming firms, downsizing is an important signal to show its commitment to bridging the gap between stakeholder’s expectations and performance. Other firms may choose to downsize in order to maintain a competitive advantage in the industry by reducing costs and achieving more efficient use of human resources. Datta and Basuil (2015) postulate that downscaling in Japanese firms was generated by low profitability and financial losses. The relationship between weak firm performance and employee downsizing is reported in some US-based studies.
The Consequences to a Community when a Firm Downsizes
Employee downsizing only creates value when the reduced costs outweigh the costs brought by the downscaling process. However, it is associated with the significant potential to impact employee attitudes and behavior and distort relationship networks between employees and employers ( Friebel et al., 2016). Employees who remain after layoffs, often described as survivors, exhibit lower morale levels and greater work-related stress ( Frone & Blais, 2020). For instance, during a severe recession in the early 1990s, Finnish municipal employees reported higher levels of work demands, reduced work autonomy, and job insecurity. Most employees acquire friends and mentors among colleagues. A downsizing activity affects these relationships leading to psychological withdrawals that lead to poor work commitment.
At the community level, layoffs are most likely to affect an organization’s reputation. The public views downsizing as being less socially responsible (Ahlstrand & Rydell, 2017). The downsizing of over 7,000 employee capacity by DHL, an international shipping company, had a ripple effect on the businesses in the small town of Wilmington (Datta & Basuil, 2015). Many establishments were dependent on the DHL employees for revenue. The residents felt betrayed by DHL’s decision to downsize given the huge amount of infrastructural investment they had made to facilitate the company’s operations in the town.
Evaluate One Example of an Employer whose Downsizing was Necessary and its Impact on Employees
General Motors is an American multinational corporation based in Detroit, Michigan. In 2006, General Motors announced its intention to downsize its workforce to overcome financial losses made in the previous year. It focused on early retirements and buyouts with a target of releasing 30,000 employees. Thirty-five thousand employees agreed to the layoff plan, which would see each laid-off employee receive one month’s pay for every two years worked and three months of job placement help from firms such as Philadelphia –based Right management (Cascio, 2019). The employees were also allowed to keep the company car for a month. This downsizing method helped the firm retain the trust and commitment of the retained employees (Van Dick et al., 2016). The laid-off employees did not face extreme psychological effects as there was imminent hope of getting a job after early retirement. The downsizing measures proved successful to the firm as they were able to reduce the breakeven point of the firm to 11 million cars per year.
Annotated Bibliography
Ahlstrand, R., & Rydell, A. (2017). Corporate social responsibility in connection with business closures and downsizing: A literature review. Contemporary Management Research, 13(1), 53-78. doi: 10.7903/cmr.17291
The main concept of this paper is the responsibility organizations have to communities around them in relation to business closures and downsizing. The importance of this article to the current research literature is that it expounds on the effects of downsizing on the community and how firms can downsize effectively without impose extreme negative effects on the community. The article is important for research on this topic because of the perspective it offers on how employees and the community around them cope with downsizing and how businesses could apply better measures of downsizing. An area that will continue to add to the researchers’ work is overall better practices in management of downsizing as opposed to focusing on corporate social responsibility alone. I found the conclusion of this article to be extremely interesting and would recommend this article to others researching in the HR/OB disciplines.
Brauer, M., & Zimmermann, M. (2017). Investor response to workforce downsizing: The influence of industry waves, macroeconomic outlook, and firm performance. Journal Of Management, 45(5), 1775-1801. doi: 10.1177/0149206317734901
This article focuses on the responses of investors towards downsizing and how it factors such as the timing of downsizing. The article adds a wealth of information to this research as many companies downsize intending to ensure investors get good returns. The article is valid for this research as it addresses one of the major causes of downsizing in many organizations. An area that still has knowledge gaps and can be added to the researchers’ work is other factors that contribute to the timing of downsizing in most companies. The section that expounds on investor information processing in different circumstances was very interesting, and I would recommend it to anyone researching the HR field.
Bravo, C., & Herrero de Egaña Espinosa de los Monteros, A. (2017). The influences of the downsizing strategy on business structures. Review of Business Management, 19(63), 118-132. doi: 10.7819/rbgn.v19i63.1905
This paper focuses on the viability of downsizing measures applied to the Telefonica case. The research adds to the current literature as it validates the use of downsizing as a financial strategy by focusing on the Telefonica case. It covers diverse angles of downsizing as a strategic alternative to come up with a conclusion of the research. Future research will focus on the verification of the analysis model to help analyze the viability of downsizing in relation to sectoral characteristics. The empirical analysis section that focused on Telefonica was eye-opening and interesting. I would recommend it to anyone carrying out research on a particular company in the HR disciplines.
Cohee, G. (2019). Corporate downsizing: Getting our policy right. Organizational dynamics, 48(1), 38-43. doi: 10.1016/j.orgdyn.2018.01.004
This article focuses on the corporate responsibility firms have towards their employees after downsizing. The paper adds a wealth of knowledge to the current research literature by investigating the viability of downsizing as a corporate strategy and how to improve on the policy. The focus on most aspects of downsizing, such as organizational implications, compensation of employees, and the challenges faced by the engaged workforce make it valid for this research. A knowledge gap that could be researched further is how to adequately compensate employees that are laid off to ensure a smooth transition into unemployment. I found the executive compensation section interesting as it questions the ethics of compensating managers after carrying out downsizing measures.
Datta, D., & Basuil, D. (2015). Does employee downsizing really work?. Management For Professionals , 197-221. doi: 10.1007/978-3-319-08186-1_12]
The paper investigates the impact of downsizing on organizational performance. It explores possible reasons why downsizing is not always a good alternative for improving firm efficiency. The article is useful for studies on this topic because it provides key insights into the relationship between employee downsizing and firm value. Future research should focus on managing the downsizing process in different contexts to help managers and scholars understand the relationship between firm value and employee downsizing. The sections that relate employee downsizing with firm accounting returns and firm market returns were interesting and useful and could be used by scholars and managers in the HR sector.
Friebel, G., Heinz, M., & Zubanov, N. (2016). The effect of announced downsizing on worker teams performance - Evidence from a retail chain. Academy Of Management Proceedings, 2016(1), 17647. doi: 10.5465/ambpp.2016.17647abstract
The main concept of this article is to analyze the effect of downsizing on workplace performance with a specific focus on a German bakery chain with 193 shops. This article offers an in-depth analysis of individual and firm-wide consequences of downsizing used data from the retail chain. The further analysis of the relationship between employee mechanisms, technology-related mechanisms, and downsizing makes this paper valid for research. Future research should focus on administrative data within organizations to get better results on the importance of these mechanisms.
Frone, M., & Blais, A. (2020). Organizational downsizing, work conditions, and employee outcomes: Identifying targets for workplace intervention among survivors. International Journal Of Environmental Research And Public Health, 17(3), 719. doi: 10.3390/ijerph17030719
This study assesses the effects of firm downsizing on employee outcomes and work conditions. The article adds to the current research literature on the concept because it analyses cross-sectional data from a sample population of 2297 US employees. Various dimensions of the work environment were analyzed, including work role, relationships, rewards, and security, to adequately evaluate the deleterious consequences of downsizing on employees. Further research could be carried out on other dimensions to help organizational managers and public health researchers understand the negative effects of downsizing on employees. The data analysis in this paper was precise, interesting, and informative. I would recommend this article to scholars, managers, and public health researchers seeking information in the HR field.
Van Dick, R., Drzensky, F., & Heinz, M. (2016). Goodbye or identify: Detrimental effects of downsizing on identification and survivor performance. Frontiers In Psychology, 7. doi: 10.3389/fpsyg.2016.00771
The main purpose of this article is to highlight the reduction organizational identification can justify the survivor syndrome. It adds to the current research literature by adding necessary data found by carrying out a lab experiment whereby participants worked as a group of employees for another participant who acted as an employer. The results of this research are valid for this topic as they find causal evidence for survivor syndrome, which is an adverse effect of employee downsizing. It is important that future studies test if the relationship between downsizing and organizational performance is mediated by organizational identification. The focus on identity processes made this research unique and interesting. The identity processes are useful to managers who want to comprehend the negative side of downsizing.
Cascio, W. (2019). Employment Downsizing and its Alternatives: Strategies for Long-Term Success. Society for Human Resource Management .
This article was designed to provide authoritative information regarding downsizing, its effects, and alternatives available. The article is published by the Society of Human Resource, whose aim is to maximize the impact of the Human Resource profession on organizational management. It provides key insights on how to efficiently carry out downsizing, provides practical alternatives, and delves into the adverse effects of downsizing. The article is useful for research because it has been published and reviewed by seasoned authors with experience in the HR industry. Future studies can delve into the viability of the alternatives provided to give managers a basis to avoid downsizing as a way of improving performance. The alternatives to downsizing are well articulated, making the article extremely interesting and very important for Human Resource practitioners.
