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11 - Good downsizing

Published online by Cambridge University Press:  05 July 2014

By
Rocki-Lee Dewitt
Edited by
Cary L. Cooper ,
Alankrita Pandey  and
James Campbell Quick
Rocki-Lee Dewitt
Affiliation:
University of Vermont
Cary L. Cooper
Affiliation:
Lancaster University
Alankrita Pandey
Affiliation:
University of Texas, Arlington
James Campbell Quick
Affiliation:
University of Texas, Arlington
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Summary

Downsizing, broadly conceptualized here as an intentional selective reduction in a firm’s physical and/or human capital (DeWitt, 1998), is most commonly equated with layoffs, one choice in a broad range of intentional workforce reduction alternatives (Cascio, 1993; Greenhalgh, Lawrence, and Sutton, 1988). Because of downsizing’s often detrimental effect on those let go (Leanna and Feldman, 1992; Newman, 1988; Uchitelle, 2006), it is difficult to promote the idea that downsizing might be considered great. But research suggests that downsizing can be good.

Insights into what makes downsizing good can be found in studies of the relationship between downsizing and a firm’s financial performance. First, downsizing does not happen without a reason. Erosion in corporate performance, either experienced or expected, precedes use of workforce reductions (Datta, Guthrie, Basuil, and Pandey, 2010; Wayhan and Werner, 2000). Second, poorly executed downsizing, including large employment cuts and across the board cuts, triggers negative market reactions (Nixon, Hitt, Lee, and Jeong, 2004; Worrell, Davidson, and Sharma, 1991). Thirdly, short-run financial improvements are evidenced when employment cuts are part of corporate refocusing (Nixon et al., 2004; Wayhan and Werner, 2000) or asset restructuring (Cascio, Young, and Morris, 1997). Additionally, where short-run financial erosion occurs, longer-run financial recuperation may follow (De Meuse, Bergmann, Vanderheiden, and Roraff, 2004). But, many of these studies focus on market reactions to very large, diversified, publicly traded company announcements. As it is hard to discern what a firm did other than at the most coarse of levels, questions remain regarding how “good downsizing” is obtained. What are investors reacting to? Is it the change in the relative weight of the business units within the portfolio or the change in the size of the corporate staff? Is it change in the way business units are positioned within their market? Or, perhaps more appropriately, is it the relative effectiveness of the change; how does the change being undertaken by a particular firm compare to the changes being undertaken across the firm’s competitive context? Answers to these questions, though important, are not this chapter’s focus.

Type
Chapter
Information
Downsizing
Is Less Still More?
 , pp. 326 - 355
Publisher: Cambridge University Press
Print publication year: 2012

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