Employee Downsizing

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Case Details:

Case Code : HROB016
Case Length : 09 Pages
Period : 1990 - 2001
Pub Date : 2001
Teaching Note : Available
Organization : Varied
Industry : Varied
Countries : USA, India, etc...

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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The Downsizing Phenomenon Worldwide

Downsizing as a management tool was first introduced in the US during the mid-20th century. It refers to the process of reducing the number of employees on the operating payroll by way of terminations, retirements or spin-offs.

The process essentially involves the dismissal of a large portion of a company's workforce within a very short span of time.

From the management's point of view, downsizing can be defined as 'a set of organizational activities undertaken by the management, designed to improve organizational efficiency, productivity, and/or competitiveness.

This definition places downsizing in the category of management tools such as reengineering and rightsizing. Downsizing is not the same as traditional layoffs. In traditional layoffs, employees are asked to leave temporarily and return when the market situation improves.

But in downsizing, employees are asked to leave permanently. Both strategies share one common feature: employees are dismissed not for incompetence but because management decided to reduce the overall work force. In late 1990s and early 2000s, different organizations adopted different kinds of downsizing techniques and strategies (Refer Table II).

In the 1980s, downsizing was mostly resorted to by weak companies facing high demand erosion for their products or facing severe competition from other companies. Due to these factors, these companies found it unviable to maintain a huge workforce and hence downsized a large number of employees.

Soon, downsizing came to be seen as a tool adopted by weak companies, and investors began selling stocks of such companies in anticipation of their decreased future profitability. However, by the 1990s, as even financially sound companies began downsizing, investors began considering the practice as a means to reduce costs, improve productivity and increase profitability.

This new development went against conventional microeconomic theory, according to which a weak firm laid off workers in anticipation of a slump in demand, and a strong firm hired more workers to increase production anticipating an increase in demand...

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