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MBAO 6030 Downsizing details

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  • 8/13/2019 MBAO 6030 Downsizing details

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    MBAO 6030 Human Resource Management

    Downsizing

    HR Management

    MBAO 6030

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    MBAO 6030 Human Resource Management

    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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    MBAO 6030 Human Resource Management

    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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    MBAO 6030 Human Resource Management

    Need to reducecosts

    Downsizing(Gomez-Mejia, Balkin & Cardy, 2001)

    Alternatives

    To Layoffs

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    MBAO 6030 Human Resource Management

    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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    MBAO 6030 Human Resource Management

    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?

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