Downsizingbegan as the strategy of sickly corporations shedding workers in the face ofweak demand, but soon strong firms looking to boost shareholder value even furtheradopted the policy. Downsizing will be examined as a strategic option that managementcan exercise in order to boost equity value. Downsizing will be present day amacro-economics phenomenon, having an impact on inflation, and therefore the retreatwhich stock prices are discounted and valued. Since the early 1980s, jobdisplacement has continued at many companies even in periods when there wassizable employment growth in the economy as a whole.
For example, although from1985 to 1989 total employment expanded by 11.7 million, during this period 4.3million workers who had been with their employers for at least three years losttheir jobs because their plants or businesses closed down or moved, theirposition or shifts were abolished, or not enough work was available for them todo (Herz, 1991).Roughlyone in five workers saw his or her job disappear permanently during the1980’s.The rate of job loss among older and more educated workers was actuallyhigher in 1990-1991 than it was in the depths of the recession of 1982-1983.
Thedata from the American Management Association (AMA) survey reported in Table2.1 reveal no letup in the pace or scale of downsizing, even in the midst ofthe strong national economic growth that occurred in 1993 and 1994 (therecession that started in 1989 ended in most industries by early 1993). Thepercentage of companies Planning to downsize actually rose slightly in 1994.
Why docorporations downsize so abruptly and discharge so many employees all atonce? That mightat first seem like a silly question, but it is justified by the fact thatcorporate growth,the opposite of downsizing, tends to occur in a very gradual manner.New employees aretypically hired after deliberate screening in an incremental fashion.Why,then, do companies let go of thousands of employees with so little notice? Onereason for the abrupt character of downsizing is the fact that corporate turnto downsizing in an effort to respond to severe financial pressures and as aresult of the need to show quick results.
A slow reduction in force would notdo the job. In addition, since there is often resistance to change, companiesoften wait until financial conditions deteriorate substantially before makinglarge-scale layoffs. Furthermore, the fear that disgruntled employees will turnto equal employment opportunity or age discrimination suits to challengelayoffs, appears to lead organizations to carry out reduction in mass, whichoffer some defense for their actions, since it is more difficult to make acharge of discrimination stand when so many other people (and many others withsimilar demographic or personal attributes) are simultaneously being laid off.