Resizing The Organization 18 ppsx

1 and 2, the asset downsizers showed improvements in returns on assets that were significantly higher than those of stable employers and also higher than those of their industries.. Hypot

1 and 2, the asset downsizers showed improvements in returns on assets that were significantly higher than those of stable employers and also higher than those of their industries We conclude that while some categories of downsizers improved their profitability through downsizing, this effect is not sufficiently consistent across categories to justify rejection of the null hypothesis

The results of the regression of the change in ROA on the change in employment provided further support for this conclu-sion Firms with larger increases (or smaller declines) in employ-ment had larger increases in their returns on assets, although that effect was very small The same pattern of results held for the time period 1995 to 2000

Hypothesis 2 stated that there is no effect of changes in employ-ment on total return on common stock in the year of the em-ployment change and in the two succeeding years Figure 7.5 shows that for the 1982-to-2000 time period, only two categories of com-panies consistently and significantly yielded higher total returns

on their common stock than stable employers: the asset and em-ployment upsizers However, on an industry-adjusted basis, only the asset upsizers yielded returns that were significantly higher than those of all other groups, including stable employers (see Fig-ure 7.6)

The cumulative total return by the end of year 2 for a $1 in-vestment was $1.69 for stable employers For asset upsizers, it was

$2.42, and it was $1.99 for employment upsizers In contrast, it was $1.72 for employment downsizers and $1.72 for asset downsiz-ers The same overall pattern of results held for the 1995 to 2000 time period, as Figures 7.7 and 7.8 demonstrate

In terms of Hypothesis 2, we reject the null and conclude that some types of restructuring, namely, asset upsizing and employ-ment upsizing, do produce significantly higher returns on com-mon stock, especially by year 2 after the restructuring However,

on an industry-adjusted basis, this conclusion holds only for asset upsizers

These results suggest that downsizing strategies, either em-ployment downsizing or asset downsizing, do not yield long-term payoffs that are significantly larger than those generated by stable employers The latter group includes those companies in which the complement of employees did not fluctuate by more than ±5

F INANCIAL C ONSEQUENCES OF E MPLOYMENT C HANGE D ECISIONS 151

Team-Fly®

percent This conclusion differs from that in our earlier analysis of the data from 1982 to 1994 In that study (Cascio et al., 1997), we concluded that some types of downsizing, namely, asset downsiz-ing, do yield higher ROAs than either stable employers or their in-dustries However, when the data from 1995 to 2000 are added to the original 1982-to-1994 data, a different picture emerges That picture suggests clearly that at least during the time period of our study, that it was not possible for firms to “save” or “shrink” their way to prosperity Rather, it was only by developing their businesses (asset upsizing) that firms outperformed stable employers as well

as their own industries in terms of profitability and total returns

on common stock

Managers of publicly owned firms have an obligation to run them as efficiently as possible Even if these firms are large and sta-ble, managers should be searching for ways to improve profitabil-ity, including adjusting their workforces Yet what is striking about the results of the downsizings is the negligible impact on firm prof-itability relative to the size of the layoffs The employment down-sizers reduced their workforces by an average of 5.66 percent by the end of year 2 Although they did increase their returns on as-sets slightly (1/2 of 1 percent), their profitability never exceeded that of stable employers that did not downsize Relative to their in-dustries, they were able to attain an ROA that was only 3/10 of 1 percent above their industry average by the end of year 2 The combination downsizers reduced their workforces by 15.71 percent

by the end of year 2, yet showed profitability results that were little better than those of the employment downsizers

What are the implications of this study? Senior managers are under considerable pressure from their stockholders to improve fi-nancial performance They often try to do this by cutting costs or restructuring assets Many managers have accepted employment downsizing as a strategy for cutting costs in a manner that is tangible and predictable Does such cost cutting translate into higher prof-its? Our research, performed at the firm level rather than at the level of the strategic business unit, has not produced evidence that downsizing firms were able generally and significantly to improve profits or cumulative returns on common stock However, the evi-dence indicates that upsizing firms were able to please their stock-holders, and asset upsizers generated stock returns that were superior to those of their industries in every year after the base year

Given these results, we conclude that downsizing may not nec-essarily generate the benefits sought by management Managers must be very cautious in implementing a strategy that can impose such traumatic costs on employees, both on those who leave as well

as on those who stay (Cascio, 1993, 2001; De Meuse et al., 1997) Management needs to be sure about the sources of future savings and carefully weigh those against all the costs, including potential increased costs associated with subsequent employment expansions

Employment Downsizing and Flexibility

This study did not directly address the issue of flexibility However,

it is probably true that many firms increased their strategic flexi-bility by thoughtful downsizing and asset restructuring Many sharpened the focus of their business by divesting business units that did not fit with their mission Others eliminated excess em-ployees and cut costs to improve their competitiveness

However, there is a paradox in the attempt to make a company lean and mean, while maintaining the flexibility to be nimble In order to be nimble, a company must have the flexibility to take ad-vantage of emerging prospects To a great extent, flexibility de-pends on the firm’s having some excess capacity, or slack For example, in order to increase production when demand increases,

a manufacturing firm needs to have some excess production ca-pacity in its plants, and to take advantage of new investment op-portunities, it needs unused financial resources This need for excess capacity applies at least as much to its people as it does to its physical plant or financial resources Even if the firm has the physical and financial resources, its ability to make productive use

of those resources will be constrained by its human resources Sim-ply put, it needs the people to implement its plans, expansions, and investments, particularly in the increasingly service- and information-dominated U.S economy Consequently, it may be ad-vantageous to maintain human resources even in slower periods

in order to support flexibility

Implications for Decision Makers

Decisions about restructuring deserve the same diligent analysis

as any important capital investment decision That is, the same methods of capital investment analysis can and should be applied

to the firm’s hiring and firing decisions as are applied to the deci-sions to acquire or divest a plant or division Firms should evaluate the present value of the cash flows associated with the decision over the full course of the business cycle and over the entire life of the decision With respect to layoffs, this should take account of the cost savings in the short run, net of severance payments and outplace-ment costs (typically 10 to 15 percent of the salaries of profession-als and senior executives), as well as the costs of possibly having to rebuild the workforce at a later date

Notes

1 COMPUSTAT provides aggregate, total data for each industry based

on its Standard Industrial Classification code Our industry ratios are the ratios of the industry-aggregate variables If the number of companies in the industry is small or the data are unavailable, COM-PUSTAT does not produce the industry-aggregate data Stock re-turns for the industry are equally weighted portfolios of the companies in the industry SIC group

2 The tables from which these data are extracted are not included to conserve space They are available by request from the authors In addition, for clarity, figures do not show results for the combination downsizers and the combination upsizers

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Resizing and the

Marketplace

The Response of Customers

and Competitors

to Reorganization

David T Bastien

Todd J Hostager

A critical element of organizational performance is the behavior

of competitors and customers Ultimately, it is the customers of any company who determine its success or failure A major problem for almost any organization undergoing a resizing change is that its revenues drop, sometimes dramatically (Hughlett, 1997; Kover, 2000; Waters, 1997) Furthermore, in competitive contexts, com-petitors of the changing organization can have an important im-pact on the patronage of the changing organization’s customers (Bastien, 1994; Bastien, Hostager, & Miles, 1996; Grubb & Lamb, 2000)

The other chapters in this book have established that resizing efforts are frequently marked by a discrete set of performance characteristics: downturns in short-term productivity, upswings in unwanted employee turnover, upswings in production errors, downturns in revenues and in market share, and the unwillingness

or inability of strategic decision makers to anticipate these mark-ers Each of these markers can have a serious impact on customers, making a customer’s patronage more expensive in a number of

157

ways Customers of any competitive enterprise always have choices, and their patronage decisions do not involve stakes as high as those faced by employees, managers, or shareholders of the resizing com-pany In other words, when customers face changing or unhappy contact people, defective products or poor service, slowed delivery

or changes in delivery terms, or any other new customer routine,

it may be easier and cheaper to change vendors

Over the years of research on resizing changes in all their va-rieties, little attention has been focused on customers’ reactions to resizing change and the competitive response to resizing by rivals

In some measure, this inattention is due to the difficulty in gath-ering data directly from customers For example, resizing compa-nies are reluctant to allow researchers access to their customers, rivals are equally reluctant, and the customers often are difficult

to identify and access This has resulted in only a few studies in ad-dition to the case data and anecdotal data in the literature

In this chapter, we explore the reactions of customers and com-petitors to resizing change as explained in the literature and as is visible in the press Then we present a study of customer and com-petitor behavior in a resizing context, and integrate the literature with the study results to develop a set of guidelines for resizing managers who are trying to maintain revenues and market share while resizing

The Literature on Customers and

Competitors of Resizing Firms

Most of the other chapters in this book have looked at resizing as downsizing, but many other strategies involve resizing as well For instance, mergers and acquisitions (M&As) and reorganizations frequently are justified by the notion that administrative costs can

be decreased while increasing production, operational, or distrib-ution capacity In other words, the downsizing dimension of resiz-ing is embedded in a growth dimension Thus, the organizational performance dynamics associated with M&As, reorganizations, au-tomation, and downsizing as described in the literatures relating

to those strategies must be outlined, especially those dynamics likely to have some impact on customers

First, it is often noted that the process of implementing resiz-ing change is where many problems occur Marks and Mirvis

(1985) identified a pathological syndrome (see Table 8.1) that is more or less universally observed in M&As, downsizing, and other forms of resizing changes This syndrome focuses on internal dy-namics, including high levels of personal uncertainty about expected performance and behavior; increased attention to behavior of the top management; increased needs for communication and infor-mation with a tendency toward worst-case rumor generation in the absence of hard information; and strong resentment of the behav-ior of the acquiring organization’s managers On an organizational

Table 8.1 Common Responses

to Mergers and Acquisitions.

Responses at the Individual Level

Personal uncertainty about

expected performance and

behavior

Increased needs for receiving

communication and information,

combined with a decreased

willingness to give information

Heightened attentiveness to

communication from higher

organizational levels, especially

from the acquiring company

management

Simultaneous fight-or-flight

response by employees and

managers

Resistance to change

Culture shock

Focus on personal security rather

than organizational goals

Job searches by acquired company

employees and managers

Cultural differences reported as a

source of hostility and conflict,

including resentment of

acquiring company managers

Responses at the Organizational Level

Tendency toward rumor mills in the absence of hard information, with the rumors carrying worst case prophecies

Levels and units isolate themselves from horizontal and vertical communication channels inside the organization, leading to information constipation High rates of unwanted turnover among employees and managers, especially on the acquired side Generalized decline in

organizational performance manifest by decreased earnings, profits, and productivity

Source: Based on Bastien, 1989.

level, these same studies noted the following common phenomena: (1) a tendency not to pass news of problems either up or down; a tendency among top management on both sides not to communi-cate with their respective organizations about the resizing; (2) a tendency toward high rates of unwanted turnover; (3) conflict within the acquired organization or between the participating or-ganizations, often quite intense; and (4) a tendency toward a de-crease in earnings and productivity (Cameron, Whetten, & Kim, 1987; Cascio, 1998; Cascio, Young, & Morris, 1997; De Meuse, Van-derheiden, & Bergmann, 1994; VanVan-derheiden, De Meuse, & Berg-mann, 1999)

A number of other authors have confirmed and expanded on this change syndrome (Bastien, 1987, 1989; Buono & Bowditch, 1989; Burke & Nelson, 1998; Campbell, Goold, & Alexander, 1995; Cascio, 1993, 1995; Geneen & Bowers, 1999; Jick, 1985; Leana & Feldman, 1992; Marks, 1994; Noer, 1993; Sirower, 1997; Zweig, Kline, Forest, & Gudridge, 1995) Bastien, McPhee, and Bolton (1995), in examining a reorganization of a municipal government following the election of a new mayor, found that the syndrome as described by Mirvis and Marks (1986) exemplified the dynamics

in their reorganization case O’Neill and Lenn’s study of middle managers in a downsized organization (1995) revealed high levels

of anger, resentment, resignation, anxiety, and cynicism Blundell (1978) interviewed government employees whose staff had been downsized and reorganized and found that fear and uncertainty about the future produced declines in productivity

Many authors have pointed out that organizational culture is

an important source of problems in resizing efforts (Ambrose, 1998; Bastien, 1989, 1994; Cartwright & Cooper, 1996; Clemente

& Greenspan, 1998; Galpin & Herndon, 1999; Haspeslagh & Jemi-son, 1991; Lajoux, 1997; Marks, 1994; Marks & Mirvis, 1998; Mirvis

& Marks, 1992) They have reported that the process of change not only creates a negative effect in the changing organization but also involves a slowdown of organizational and operational process that must affect customers Furthermore, the process of change gen-erates errors, again affecting customers Cameron, Freeman, and Mishra’s study of downsizing in the U.S automobile industry (1991) revealed widespread implementation efforts and decreased levels of quality, productivity, and effectiveness