Reasons for Using Downsizing Strategies in Organisations - Essay Example

?Downsizing And Globalization – Why Are These Strategies Used By Companies, And What Implications Do They Have For Work And Daily Life In The Economically More Developed Nations? Table of Contents Introduction 3 Downsizing 3 Downsizing Strategies 4 Reasons for Using Downsizing Strategies in Organisations 5 Downsizing and Globalisation 5 Implications of Downsizing 8 Implications of Downsizing on Work in Developed Nations 10 Implications of Downsizing on Daily Life 12 Conclusion 13 References 15 17 Introduction Downsizing is recognised as the process of retrenching the total number of workers in an organisation as a strategic measure to enhance organisational competencies. However, downsizing does not change the arrangement of businesses in organisation’s structure. It is a strategic process where reducing the workforce is a conservational or managerial occurrence which happens willingly and results in loss of organisation’s resource (Hitt & et. al., 2010). Downsizing has become a corporate strategy used in organisations as they fight for reduction of overheads and to make adjustments with fluctuating market demands. Downsizing is generally used during financial crisis situations as a responsive and strategic action. Downsizing is a kind of workforce strategy which is used for improving the swiftness of the organisation in the market (Cascio, 2009). The objective of the paper is to understand the implications of downsizing in developed nation with respect to work and daily life. Downsizing Downsizing generally is implemented as a temporary administration strategy in order to maintain its cost competitiveness. In the current phenomenon, the notion has emerged as a permanent characteristic of world’s financial landscape. Notably, downsizing was developed to cope up with the economic impacts due to global competition, monetary deregulation, trade contracts, reengineering and other methods of industrial reforms as well. Downsizing, through which large numbers of workers are discharged from employment, is mostly expected to have a positive impact the organisations which seek competitive advantage by the means of reduction of cost. It is worth mentioning in this context that one of the most significant drivers of downsizing in organisations is globalisation. The reason is that globalisation lead to increase the pressure of competition for maintaining the expenses of business operations. Downsizing is the effective way to save money by reducing excess workforces (Kakabadse & et. al., 2004). Downsizing Strategies Organisations which decide to implement downsizing can undertake it by selecting any of the four types of inclusive strategies which are attrition, voluntarily termination, early retirement incentives (ERI) and compulsory termination. Attrition: Attrition is often considered to be the easiest way of downsizing, where a job position is termed as vacant when an employee willingly resigns from his/her job. Therefore, in this method, the probability of conflict and sense of subjection is reduced. Voluntary Termination: Voluntary termination is another strategy often implemented for downsizing which provides employees with a choice to continue or discontinue with the job. This strategy helps to reduce certain discomfiture related with the forceful loss of employment. Early Retirement Incentives (ERI): In ERI strategy, organisations intend to provide better and encouraging substantial retirement advantages to the employees for departing from organisation at a particular time which is often prior to their fixed retirement date. This strategy helps to prevent mass departure of employees from the organisation at a particular instance. Retaining advantages with different resigning dates can certify systematic withdrawal of employees from organisation and thus can be regarded as an advantage of ERI. Compulsory Termination: In compulsory termination, organisations provide employees with no other alternatives but to leave the organisation at a specified time. It is an ultimate downsizing strategy used by organisations which is generally applied for discontinuing of a particular organisational plant or excluding business entities or certain divisions within an organisation. In this strategy, organisations possess the opportunity to redesign and apply new employment criteria on the basis of business requirements (Cascio, 2009). Reasons for Using Downsizing Strategies in Organisations Organisations, in the international business context, use downsizing strategies with the sole intention to accomplish financial advantage. It is majorly due to the reason that modern organisations largely believe that steep increase in profit can be obtained by two methods, i.e. by reducing the expenses or by increasing the incomes. In the similar context, employee expenses represent almost 30% to 80% cost of the total business in any middle or large sized organisation. This indicates that the organisations which downsize by minimising employee costs or payroll costs and thus can enjoy low overhead expenses, low organisational hierarchy, instantaneous decision making and higher output (Kakabadse & et. al., 2004). Payroll costs are fixed costs in an organisation and apparently constitutes of a major proportion in the total cost incurred by any organisation. It is thus through downsizing that organisations can easily minimise costs by a substantial extent. Minimisations of costs through employee retrenchments allow the organisation to attain greater profit which in turn tends to increase its stock price and ultimately derives satisfaction amid the investors of the organisation. Organisations often tend to overlook their employees contribution towards the overall profitability treating them as merely cost incurring variables. With this belief, by making other aspects unchanged, numerous organisations go for downsizing in order to stay competitive in the market (Blackburn, 1999). Downsizing and Globalisation Globalisation is often regarded as valuable for organisations as it enhances opportunities present in the international context to expand and diversify their operations. Through globalisation, organisations can reposition its manufacturing and other activities from one nation to another at a time-efficient and cost-efficient way. In many instances, organisations based in developed countries do not generate employment opportunities in developing nations while expanding. Globalisation can represent serious threat to a developed country, where foreign organisations compete more efficiently on aspects of product/service quality and price through employee productivity. Due to globalisation, the strong competition within employees, products and services influence organisations into an anxious attempt to lower expenses (Scholte, 2005). Marx has described the process of market expansion as one of the essential characteristics of capitalism which is regarded as globalisation in the present day phenomenon. Globalisation is not driven by imperialist desires of a specific cultural, national or religious group, rather by the technical requirements of a specific system of manufacturing. Marx has described that constantly expanding market and workforce is the result of high desire of capital of organisations which can be apparently related with the notion of globalisation. Thus, the 20th century has viewed mass international movement from underdeveloped nations to developed nations such as (America and Northern Europe) representing global drive of workers (Granter, 2009). Due to mass automation of international movement, the entire background of workplace in developed nations has changed significantly. The development in workplace has presently generated cybernation where computer are involved to gather information based on intelligences and commentaries on work. The rapid globalisation and technological advancement also influenced the work in developed nations as the aspect of education was not equipped for taking the advantages; whereas, the creation of new requirements begun to move quicker compared to their capability in order to integrate those desires (Granter, 2008). In past two eras, globalisation has increased the unusual employment rates in majority of developed regions in the global economy. Simultaneously, the developing nations have experienced considerable increase in the employment opportunities due to globalisation. However, due to economic recession, majority of developing nations had experienced extensive deterioration in wage rates and associated informal jobs. It is worth mentioning that the international businesses and investment techniques tend to privilege capital, particularly in those organisations which can exchange employment rapidly and effortlessly across borders. In order to raise the international competitiveness, more and more financiers are moving to nations which have low employment expenses or have informal employment provisions for accomplishing high flexibility of business. Besides, there has been fundamental rearrangement of manufacturing and delivery in major industries which is characterised by outsourcing though globalisation. Overall, globalisation provides stress on low-skilled employees and minor manufacturers by weakening their negotiating strength and exposing them to higher competition because multinationals can easily enter in the new markets but it is difficult for minor entrepreneurs to gain easy access to other emerging markets. As a result, the efforts of low-skilled employees become obsolete in the high competitive market where multinational corporations strive for gaining higher profit (Bloch, 1999). Several evidences propose that globalisation tends to strengthen the association between poverty and informality. It is fundamentally owing to the fact that international competition tends to inspire formal organisations to downsize and make use of employment as a relaxed method lacing in rendering standard salary, work promise and benefits to motivate informal divisions of organisational structure to shift employees from permanent contracts to semi-permanent contracts. Globalisation is also believed to result in changes from safe self-employment to unwarrantable self-employment. As a result, an increasing number of people tend to enter in the informal economy (i.e. street merchants and home-based employees among others) and thus be pushed towards lower income growth (Carr & Chen, 2001). Globalisation has also increased the opportunity for huge expansion of Informational Technology in the business environment by means of computer networking. It facilitates downsizing where organisations decides partial outsourcing of their processes. For instance, in Germany, a few organisations alter company projects in order to save money by compromising on the wages of former workers. In this context, the Deutsche Bank can be regarded as a significant example of employee downsizing due to mass automation. With this concern, Deutsche Bank has significantly reduced employments from labour intensive associated workplaces which resulted in numerous job cuts. In other instances it was observed that organisations such as Motorola and Hewlett Packard have initiated to engage professionals from developing countries such as India at low wages i.e. fraction of American standard wage rate (Bloch, 1999). Furthermore, in Germany, software organisations such as IBM, Siemens Nixdorf and Digital Equipment have retrenched above 10,000 employments approximately since 1991 and large proportion of these jobs represented towards corporations operating in developing nations. It is in this context that several jobs have been wiped out in the wave of computerisation and internet. For instance, journals such as Der Stern and Der Spiegel which were traditionally a great source of employment for journalists now provide only fewer business agreements and thus less job opportunities. Part of the job is done through online articles by specific line rate (Bloch, 1999). Globalisation provides organisations a greater competitive strength with low operation expenses. Globalisation also helps organisations to achieve larger variety and quantity of goods and services to customers. In developed nations, globalisation induces organisations to adjust with different tactics on the basis of new socio-political tendencies and thereby attempts to balance the desires of both organisation and stakeholders. Globalisation brings restructuring at the global, domestic and sub-national levels. Specifically, it encourages the reorganisation of manufacturing, international business and incorporation of monetary markets. The renovation of manufacturing system thus creates an impact on the organisational structure, the employment procedure, the use of technology and management of capital allocated. Globalisation in developed nations is viewed as marginalisation of less educated and low experienced employees (Granter, E., 2009). Implications of Downsizing In today’s business environment, downsizing for reducing the headcount within the workforce has emerged as a widespread strategy for organisations than before. As economy fluctuates, organisations find themselves in need to reduce expenses and gain rise in “return on net assets”. Downsizing is considered as one of the mostly used and less challenging strategies to minimise expenses and to increase the profit within a short span of time avoiding severe organisational complexities. The reduction of jobs or finding more effective ways to perform the business operations through job incorporation and outsourcing, further assists to minimise the costs on salary of employees as well as reduce the employee welfare expenses, and release the reserves for further investment activities. However, several organisations do not consider the possible long-standing consequences of downsizing (Slaughter & Swagel, 1997). Cost minimisation by downsizing poses no regulatory associations or policy infringement on organisations; however, it certainly represents several ethical difficulties. The background of present economy dictates alterations in commercial and employee association. For instance, due to downsizing, the loss of income and employment not only causes an impact on the family, but also influences the fund of the country as well as charitable organisations (Slaughter & Swagel, 1997). Organisations engage in downsizing with the expectations that they can accomplish economic and organisational advantages as the measure is likely to retain its financial performance. The major objective of downsizing is to increase the efficiency and production of organisations i.e. to earn more incurring lesser labour costs. The other financial gain from downsizing is often regarded as the increase in the worth of shareholders. According to Mone (1997), the advantages of downsizing are correspondingly present in the form of low pay, less workforce and more reorganised organisational structure. The impacts with respect to cost reduction are also among other anticipated consequences of those organisations that have downsized their business operations. Hence, it can be stated that lowering the expenses by reducing number of employees is a good method to intensify remunerations and raise the stock price of an organisation, even though for the short term period only. In present days, organisations are under pressure to discourage the demand of employees and at the same time reduce the expenses. This has resulted in a steady increase of workplace burdens on employees in organisations of developed nations (McCann & et. al., 2008). According to Casico (1993), the expected economic advantages of downsizing comprise lower expenditure, higher return on investment and improved communication. On the contrary, downsizing assists organisations to stay competitive, especially in ever progressively changing international market. It is worth mentioning in this concern that the organisations which initiate to downsize should be capable of regulating the product costs and improve its competitiveness. Although downsizing is accepted by many organisations to minimise expenses, an indication can be identified that in certain extent it does not reduce expenses. According to a research conducted by “Society for Human Resource Management”, almost 50% of downsized organisations had to experience decline in terms of their overall employee efficiency. Hence, it can be affirmed that downsizing cannot measure the expense of better quality and increased examination of products among others as due to downsizing, proportionately a fewer numbers of employees need to manage same portion of work and sacrifice new business prospects. The reason is that with downsizing, organisations can have low human resources having limited advantages of enjoying new business opportunities. Almost one third of downsizing organisations require temporary employees and professionals and further needs existing employees to work overtime or be re-educated as they need to deal with extra responsibilities owing to the reduction in the adequate number of employees. When the number of long-term employees is reduced, organisations suffer loss of official heads which result in short-term method of decision making. The financial performance of downsized organisations generally faces lag in the long run (Appelbaum & et. al., 1999). Implications of Downsizing on Work in Developed Nations Downsizing in organisations can have a strong impact on the working conditions of developed nations by numerous ways. It is in this context that ‘Antagonism’ is often regarded as a common reaction of downsizing having an impact on the performances of the survivors in organisations. On the other hand, relief from downsizing can also increase the efficiency of organisation, presumably because employees will feel appreciative towards employers and thus will be indebted to respond with increased faithfulness. In the meantime, primarily low job security is most likely to increase and result in representing more reliability and diligence to incorporate themselves with the organisational decision-makers reducing the probability of unemployment. Simultaneously, the survivors who might feel uncomfortable in organisation can demonstrate their worthiness towards the employers, by providing more efficiency and better service than others (Hales, 2010). Downsizing has a strong possibility of increasing the workload of existing employees. In spite of impartiality, employees can feel de-motivated viewing the strategy to be unfair and thus cause resentments within the workplace hampering its stability by a large extent. It is owing to the fact that higher workload can influence employees to view the downsizing as partial and undeserved. As a result, it can hamper their morality or loyalty towards the organisational as well as their participation towards the attainment of the determined organisational objectives. Hence, downsizing can reduce or minimise disaffection amid the relationship of employees and employers and thus have a severe impact on their perceived value towards work. In other words, majority of workers are observed to have less faith towards their employers. Moreover, those who survive from downsizing are certainly less expected to have trust on the employers than others. Consequently, less faith can lead to inability to forecast employer’s activities. As a consequence employee become unable to understand the way through which employers can be influenced leading towards a negative consequence on the working conditions prevailing in the organisation. The major implication of downsizing on work is high level of competition. Due to the threat of profession loss, it can increase the competition among existing employees in an organisation. Higher competition can thus increase the disbelief between employers and employees and make it more challenging for employees to forecast impacts caused by their performances and systematise the work in an organisation. This situation occurs especially in recurrent crises where employees view themselves as rivals in order to perform in the current job with fellow co-workers depicting higher degree of professionalism. During crisis situation, employers intentionally use competition and insecurity in order to make employees perform effectively yielding better (Archibald, 2009). Certain implications of globalisation and downsizing in developed economy can be observed in the manufacturing sector of America. In the year 2007, the production employments in the United States were recorded to be reduced by 2.1 million amounting to a total of 13.7 million. Furthermore, during 2011, almost 1.9 million employments had been reduced in the production sector, making the total employment at around 11.7 million. In spite of continuous economic growth and almost full employment in 2008, it became more challenging for unemployed persons to get new jobs. Thus, the unemployed population had no choice but to accept low paid work in order to get employed again (Ahearn, 2012). Implications of Downsizing on Daily Life Other than the professional life of any individual and the organisational environment, downsizing also tends to have a significant effect on individuals’ personal life or daily life by a large extent. Downsizing negatively creates an impact on the contentedness of employees’ psychologically such as loss of confidence, increased stress and social dispossession. It is due to this reason that decision of downsizing taken by employers can be reinforced by numerous actions such as economic reward, external re-employment and personal counselling. For many people, employment is a social channel through which they inaugurate relationships. Therefore, downsizing tends to significant impression on the social stature of a society through which people intend sharing their life experiences (Blackburn, 1999). It is in this context that employment is a crucial facet of individuals’ daily life and identity. Therefore, downsizing can frequently generate an existential crunch for people. To be precise, people who originate sense and determination of daily life from their occupation can have the feel of desolation and lack of direction after downsizing. Limited financial resources can also result raise doubts in the mind of employees whether they have adequately complied with all job responsibilities in the organisation and thus make them suffer from inferiority complex. Finally, downsizing can result in raising questions about personal efforts and result in the re-examination of the perceived abilities of the terminated employees. Consequently, the loss of employment can further result in changes of family duties, relations and everyday practices creating a long-lasting influence over the lifestyles practiced within the society. As family acts as a system, every person in a family is affected by downsizing. Furthermore, with respect to family relations, downsizing can provide pressure to marital and paternal association. It not only increases the uncertainty in daily life, but also raises conflicts aid the social partners and family members (Westman & et. al., 2004). However, from a positive perspective, due to globalisation, wide ranges of works in commercial services, bookkeeping and computer programming can be obtained more cheaply in developing nations with low cost employees. Simultaneously, organisations which are not shedding employees, can be observed as dragging back on old promises to deliver numerous benefits (such as health or allowances) to the employees as they hunt for new means to remain competitive in present day’s international economy. These aspects help in erosion of employments and thus create an impact on the overall job security and family confidence (Ahearn, 2012). Contradictorily, downsizing also results in income inequality within the developed nations by a certain extent. Stating precisely, the stress of international competitiveness and technological improvement contribute towards higher gap of income in developed nations. In many developed economies it is viewed that salaries of low skilled employees remain unchanged or declined due to globalisation and downsizing. However, there is also evidence of substantial increase in salaries of high skilled employees in developed nation who are thus signified to be less affected due to downsizing (Ahearn, 2012). Conclusion It is apparent that downsizing and globalisation strategies have an intense affect on the low skilled employees and low educated employees of both developed and developing nations (The Independent, 2011). As organisations in developed nations attempt to reduce the operational expenses, they use downsizing strategies in order to increase the profit and the shareholder value. Furthermore, when organisations are observed to face global turmoil in terms of economic recession or financial crises, they do not have many alternatives to preserve its competitiveness apart from reducing the workforces. Besides, in response to the crisis situation and to maintain its competitive position in the market, downsizing is used by various organisations with the intention to preserve the revenue and increase the confidence level amid the shareholders. The increased level of globalisation augmented the reach of organisations to gather talented employees from other nations incurring comparatively low-cost. The implication of downsizing on developed nations can be thus found with respect to low job security, increased anxiety in family and uncertainty in daily life. Therefore, it can be stated that along with a few noteworthy positive impacts, globalisation and downsizing can also have a major negative influences over the global business scenario taking into concern both the developed and developing nations. References Appelbaum, S. H. & et. al., 1999. Strategic Downsizing: Critical Success Factors. Management Decision, Vol. 37, No. 7, pp. 535-552. Archibald, W. P., 2009. 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