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Case Code- HROB016
Publication Date -2002


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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.

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. In the 1990s, most firms were downsizing in spite of an economic boom; labor costs were not rising in relation to productivity and the companies anticipated greater demand for their products. However, this phenomenon is not very difficult to understand. During the early 1990s, organizations resorted to downsizing on account of various reasons: to eliminate duplication of work after mergers and acquisitions (M&As), to optimize resources and cut costs, and to increase productivity and efficiency by eliminating unnecessary intermediary channels.

Companies expected the productivity of employees remaining after downsizing to increase as they thought it would be easier to train and manage a smaller workforce. However, according to Hickok, an industry analyst, downsizing resulted in vast cultural changes (mostly negative) in the organization instead of an increase in cost savings or productivity. Hickok observed the following changes in organizational culture after downsizing: power shift from middle management to top management/owners; shift in focus from the welfare if the individual employee to the welfare of the organization as a whole; change in working relationships (from being familial to competitive); and change in employer-employee relationship (from being long-term and stable to being short-term and contingent). Other negative effects of downsizing included depression, anxiety, frustration, anger and bitterness in the downsized employees.

The harmful effects of downsizing could be seen in 'survivors' as well. They experienced low morale and high stress and had to cope with an increase in workload. In addition, they felt and downsizing syndrome marked with frustration, anger, depression, envy and guilt. The very thought of downsizing created anxiety in both the downsized employees and those who survived. They were concerned about possible job loss, relations with new superiors, revised performance expectations and uncertainties regarding career advancement (Refer Exhibit I for guidelines to tide over the downsizing phase).





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This case study is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation. This case was compiled from published sources.

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