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Downsizing and Restructuring
Chapter 11
Learning Objectives
2
After reading this chapter, you should be able to:
 Appreciate the importance of defining “downsizi...
Downsizing
What is Downsizing?
 A downsizing strategy reduces the scale (size) and scope
of a business to improve its fin...
The Downsizing Strategy
 Downsizing - strategies to
improve an organization’s
efficiency by reducing the
workforce, redes...
Survivor
 Survivor – an
employee remaining
with an organization
after a downsizing
5
Three Types of
Downsizing Strategies
Cameron identifies
three types of
downsizing
strategies:
1. Workforce reduction
2. Wo...
Definitions
7
 Workforce reduction - a short-term strategy to
cut the number of employees through attrition, early
retire...
Definitions
 Systematic change - a
long-term strategy that
changes the
organization’s culture,
attitudes, and employees’
...
Why do Organizations
Downsize?
9
 Declining profits
 Business downturn or
increased pressure from
competitors
 Merging ...
Downsizing Effects:
Overall
 Mixed effects on firm performance: some short-term
costs savings, but long-term profitabilit...
Downsizing Effects:
Employee Morale
 Employee motivation disrupted: increase in political
behaviors, anger, fear - which ...
Downsizing Effects:
Workforce Quality
 Many senior employees leave due to application of early
retirement incentives: res...
Downsizing Effects
Downsizing Works Best When:
 Changes in Strategy, Organization structure and Culture
accompany job cut...
Ethical
Considerations
14
 Downsizing may infringe on principles of distributive,
procedural and interactional justice
 ...
Employee
Relations
Performance
Management
Reward
Systems
Training
Employment
Downsizing
Reputation
effects on
recruitment
...
Downsizing Alternatives
1. Cutting non-personnel costs
2. Cutting personnel costs
3. Providing incentives for
voluntary re...
Downsizing Alternatives
(Gandolfi, 2008)
Short-term
 Hiring freeze
 Mandatory vacation
 Reduce workweek
 Reduce overti...
Downsizing Alternatives
(Gandolfi, 2008)
Medium-term
 Extending reductions in salaries
 Voluntary sabbaticals
 Lending ...
Inplacement and
Outplacement Issues
19
 Outplacement -
providing a program of
counselling and job-search
assistance for w...
Planning for Downsizing
20
 Determining how many people will lose their
jobs
 Who will be let go
 How the reduction wil...
Adjusting to Job Loss
21
 Advance notification of
layoffs
 Severance pay and
extended benefits
 Education and retrainin...
Can Losing a Job Be a
Good Thing?
There are some benefits
of losing a job:
 Time to reflect
 Grow new ideas, direction
a...
The “Survivors” of
Downsizing
 Job insecurity -
feelings of concern
about the continuing
existence of a job
23
Perceptions of Justice
Three types of
justice warrant
consideration:
1. Procedural justice
2. Interactional justice
3. Dis...
Perceptions of
Justice
25
 Procedural justice – procedures or rules used to
determine which employees will be down-sized
...
Survivor Reactions
 Negative attitudes and
behaviours
 Reduced performance
capabilities
 Lower organizational
productiv...
Financial Performance
and Downsizing
27
 A downsizing strategy is typically implemented to
improve the bottom line
 Evid...
Effective Downsizing Strategy
28
 Increased communication
 Increased employee
participation
 Systematic analysis of tas...
Best Practices of
Downsizing
29
1. Downsizing should be initiated from the top
2. Workforce reduction must be selective in...
Best Practices of
Downsizing
30
4. Decision-makers should identify where inefficiencies
and costs exist
5. Should result i...
HRM Issues
 Managing the Changing
Psychological Contract
 The “New Deal” in
Employment
 Altering the Psychological
Cont...
New Terminology
32
 Psychological contract – an unwritten commitment
between employers and their employees that historica...
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downsizing and restructuring

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downsizing and restructuring

  1. 1. Downsizing and Restructuring Chapter 11
  2. 2. Learning Objectives 2 After reading this chapter, you should be able to:  Appreciate the importance of defining “downsizing”  Be familiar with the complexity of the downsizing decision  Recognize the need to address concerns of both the victims and survivors of downsizing  Be aware of the ethical issues and consequences of downsizing  Understand what downsizing strategies are effective in enhancing organizational performance  Comprehend the concept of the “psychological contract”  Develop an awareness of the importance of HRM in managing the downsizing process
  3. 3. 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.
  4. 4. The Downsizing Strategy  Downsizing - strategies to improve an organization’s efficiency by reducing the workforce, redesigning the work, or changing the systems of the organization 4
  5. 5. Survivor  Survivor – an employee remaining with an organization after a downsizing 5
  6. 6. Three Types of Downsizing Strategies Cameron identifies three types of downsizing strategies: 1. Workforce reduction 2. Work redesign 3. Systematic change 6
  7. 7. Definitions 7  Workforce reduction - a short-term strategy to cut the number of employees through attrition, early retirement or voluntary severance packages, and layoffs or terminations  Work redesign - a medium-term strategy in which organizations focus on work processes and assess whether specific functions, products, and/or services should be changed or eliminated
  8. 8. Definitions  Systematic change - a long-term strategy that changes the organization’s culture, attitudes, and employees’ values with the goal of reducing costs and enhancing quality 8
  9. 9. Why do Organizations Downsize? 9  Declining profits  Business downturn or increased pressure from competitors  Merging with another organization, resulting in duplication of efforts  Introduction of new technology  The need to reduce operating costs  The desire to decrease levels of management  Getting rid of employee “deadwood”
  10. 10. Downsizing Effects: Overall  Mixed effects on firm performance: some short-term costs savings, but long-term profitability & valuation not strongly affected.  Firm’s reputation as a good employer suffers. Example: Apple Computer’s reputation as good employer declined after several layoffs in 1990s.  Downsizing forces re-thinking of Employment Strategy. Lifelong employment policies not credible after a downsizing. Example: IBM abandoned lifelong policy after several layoffs in early 1990s.
  11. 11. 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 to cynicism, lowered work commitment, fewer random acts of “good will”  “Survivors” experience more stress due to longer work hours with re-designed jobs, and increased uncertainty regarding future downsizings
  12. 12. 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.
  13. 13. 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
  14. 14. Ethical Considerations 14  Downsizing may infringe on principles of distributive, procedural and interactional justice  Communication during a downsizing may be mismanaged  Managers may use and abuse information as a source of power  Managers may choose to conceal or distort information regarding the financial status of the business
  15. 15. Employee Relations Performance Management Reward Systems Training Employment Downsizing Reputation effects on recruitment Severance pay & benefits Performance evaluation as layoff criteria Morale of survivors Loss of training investment from turnover Downsizing and other HR Systems
  16. 16. Downsizing Alternatives 1. Cutting non-personnel costs 2. Cutting personnel costs 3. Providing incentives for voluntary resignation or early retirement 16
  17. 17. Downsizing Alternatives (Gandolfi, 2008) Short-term  Hiring freeze  Mandatory vacation  Reduce workweek  Reduce overtime  Reduce salaries  Facility shutdowns  Employee input for alternatives to cutbacks 17
  18. 18. Downsizing Alternatives (Gandolfi, 2008) Medium-term  Extending reductions in salaries  Voluntary sabbaticals  Lending employees  Exit incentives 18
  19. 19. Inplacement and Outplacement Issues 19  Outplacement - providing a program of counselling and job-search assistance for workers who have been terminated  Inplacement - reabsorbing excess or inappropriately placed workers into a restructured organization
  20. 20. Planning for Downsizing 20  Determining how many people will lose their jobs  Who will be let go  How the reduction will be carried out  Determine the legal consequences  Designing current and future work plans  Implementing the decision  Performing follow-up evaluation and assessment of the downsizing efforts
  21. 21. Adjusting to Job Loss 21  Advance notification of layoffs  Severance pay and extended benefits  Education and retraining programs  Outplacement assistance  Clear, direct, and empathetic announcement of layoff decisions  Consideration of HR planning practices that represent alternatives to large-scale layoffs
  22. 22. Can Losing a Job Be a Good Thing? There are some benefits of losing a job:  Time to reflect  Grow new ideas, direction and career plan  Get out of a job that was substandard  Spend more time with family and hobbies 22
  23. 23. The “Survivors” of Downsizing  Job insecurity - feelings of concern about the continuing existence of a job 23
  24. 24. Perceptions of Justice Three types of justice warrant consideration: 1. Procedural justice 2. Interactional justice 3. Distributive justice 24
  25. 25. Perceptions of Justice 25  Procedural justice – procedures or rules used to determine which employees will be down-sized  Interactional justice – the interpersonal treatment employees receive during the implementation of the downsizing decision  Distributive justice – the fairness of the downsizing decision
  26. 26. Survivor Reactions  Negative attitudes and behaviours  Reduced performance capabilities  Lower organizational productivity  Emotions: anger, anxiety, cynicism, resentment, retribution, hope 26
  27. 27. Financial Performance and Downsizing 27  A downsizing strategy is typically implemented to improve the bottom line  Evidence suggests that some companies improve profits while others do not  Investors usually respond negatively to downsizing if it is financially motivated  Companies that offer incentives for voluntary resignations are viewed more favourably
  28. 28. Effective Downsizing Strategy 28  Increased communication  Increased employee participation  Systematic analysis of tasks and personnel requirements  Visibility of senior management  Focus on rightsizing  Establish a sense of ownership  Active role for HR department  Monitor downsizing and link to organizational strategy  Train management with downsizing techniques
  29. 29. Best Practices of Downsizing 29 1. Downsizing should be initiated from the top 2. Workforce reduction must be selective in application and long-term in emphasis 3. Special attention should be paid to both those who lose their jobs and to the survivors who remain in the organization
  30. 30. Best Practices of Downsizing 30 4. Decision-makers should identify where inefficiencies and costs exist 5. Should result in the formation of small, semi- autonomous organizations within the broader organization 6. Must be a proactive strategy focused on increasing performance
  31. 31. HRM Issues  Managing the Changing Psychological Contract  The “New Deal” in Employment  Altering the Psychological Contract  Downsizing and “High- Involvement” HRM  Labour Relations Issues 31
  32. 32. New Terminology 32  Psychological contract – an unwritten commitment between employers and their employees that historically guaranteed job security and rewards for loyal service  High involvement HRM – a commitment to HRM practices that treat people as assets

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