Downsizing in Mitsubishi Motors Australia - Essay Example

MANAGING CHANGE 2006 TABLE OF CONTENTS Introduction 2 Drivers of Change 2 The Possible Consequences of Downsizing 5 Recommendation 8 Conclusion 11 Reference List 13 Introduction Downsizing has been defined as "a set of organizational activities undertaken on the part of management of an organization and designed to improve organizational efficiency, productivity, and/or competitiveness" (Cameron, 1994, p. 194). A more specific description perhaps is that downsizing is a management tool for achieving desired change through restructuring or re-engineering initiatives by an organization. It involves the reduction in the size of the work force. Downsizing does not merely imply reduction of assets of the company, but the elimination of jobs of employees constitutes downsizing or layoff (Hickok, no date). This research paper will study in particular downsizing and its effects in Mitsubishi Motors Australia. Drivers of Change Downsizing in Mitsubishi Motors Australia has been underway since 2000 when the company was threatened with the possible loss of two of its plants in Adelaide, South Australia: the Tonsley Park car plant and the Lonsdale engine factory. This move would have resulted in the loss of 600 jobs in its combined workforce of approximately 4,200 employees from the two plants. For that year, annual production targets were also reduce from 70,000 units to merely 40,000. Global overproduction and a 17% slump in domestic sales for the second half of 1999 were the reasons cited by Mitsubishi for the downsizing. Mitsubishi officials also claimed that the decline in the value of the Australian dollar had made it too costly to import Mitsubishi components. The decision to downsize in 2000 followed the downsizing of already 300 production jobs for the company yet despite these decisions, profits for the company did not improve. As of December 1999, the company reported a $A 130-million loss, its worse in twenty years in Australia (Cook, 2000). In 1997, the Howard government suspended plans to end tariff protection for the car industry until 2010 due to pressure from car manufacturers and threats by Mitsubishi that it will wind-up production in Australia. This was initially regarded as guaranteeing job security for worker, but despite the existence of tariff protection, major restructuring and downsizing still continued in Mitsubishi. The reason is that downsizing is attributed not to the company's national performance but to a major global restructuring program announced by Mitsubishi in October 2000 to cut costs by $US 3 billion by 2001. The plan involved cutting 9,900 jobs from the company's international workforce of 88,800 over a span of four years. Of the 9,900 jobs to be cut, 1,400 of these are production and clerical jobs in Japan (Cook, 2000). Another factor that compounds to the company's problems is its debt of 1.75 trillion yen or $A 27 billion. Mitsubishi continues to be under pressure from Daimler-Chrysler, who has a one-third holding in the company, and the power of veto over Mitsubishi's board. Daimler-Chrysler is demanding Mitsubishi to take drastic steps to reduce its huge debt and that the company focuses its future investment in more efficient production plants in Malaysia and Thailand (rather than Australia) where there is cheaper labour and favourable local investment incentives (Cook, 2000). In addition to these problems, Mitsubishi is also burdened by a failed vehicle financing scheme in the U.S. and losses amounting to approximately $US 2.8 billion in 2003. Daimler-Chrysler, the majority shareholder for the company, also refused to give Mitsubishi a $US 6.5 billion restructuring package (Spoehr, 2004). In 2004, Mitsubishi released a restructuring plan and formally announced its decision to close down its Lonsdale Plant resulting in the loss of 650 jobs, including the reduction of 350 workers in their Tonsley Park assembly plant workforce (Spoehr, 2004). The plummet in sales have been attributed to the company's reputation being damaged by a series of safety scandals and cover-ups, and the recall of hundreds of thousands of vehicles (ABC South Australia, 2004). As can be seen from the experience of Mitsubishi case, there are generally two factors that influence an organization's decision to downsize. The first factor is the company's goal to increase its profits. The reasoning behind this factor is that the organization will be able to generate the same gross revenues in the future with a smaller pool of workers. If labour costs go down due to the lesser number of workers, and assuming company revenues stay constant, then the expectation is that profits will increase (Wikipedia, 2006). The second factor is that layoff is driven by macroeconomic forces. An organization may have to cut workers when its can the latter no longer profitably produce products at current market prices. Companies aim at employing workers whose per-hour output value, or marginal productivity of labour, exceed the cost of employing these workers (Wikipedia, 2006). In relation to Mitsubishi Motors Australia, the need to downsize were driven by both factors mentioned: the need to increase profits and to cut costs. The Possible Consequences of Downsizing The obvious negative consequences of downsizing is the loss of work for hundreds of workers. There are around 3,320 people employed at the Lonsdale and Tonsley Park plants, with most of these employees living in the cities of Marion, Mitcham, Onkaparinga and Holdfast in Southern Adelaide. The downsizing has had impact on hundreds of workers and local businesses since Mitsubishi operations in Adelaide purchased over $A 1 billion worth of goods and services in Australia during 2001 alone (Spoehr, 2004). As a response to the 2004 announcement by Mitsubishi to close down its plants in Lonsdale and to reduce its workforce at Tonsley Park, the Howard government announced that it would provide a major assistance package to the company worth $A 50 million. The package offered by the government includes an allocation of $A 10 million for employment and training support services to workers who lose their jobs due to downsizing, and $A 40 million for investment attraction. An additional $A 5 million was also given for employee support and industry diversification in Southern Adelaide (Spoehr, 2004). Thus, one positive consequence of the downsizing is that Mitsubishi received financial assistance from the Australian government. This assistance package given by the government to Mitsubishi is called the Structural Adjustment Fund for South Australia (SAFSA) and is a joint funding initiative of the Australian government and the South Australian government to encourage businesses, both domestic and international, to invest in Adelaide. The purpose behind this endeavour is to support investment that will eventually create new and sustainable jobs in South Australia, particularly in the southern districts of Adelaide. SAFSA combined labour market program assistance that are meant to address the needs of displaced workers and to support new investments for job opportunities in South Australia (Invest Australia, 2006). Another positive consequence for Mitsubishi of its decisions to downsize is that the government suspended plans to end tariff protection for the car industry until 2010, as earlier mentioned in this paper. The measure was intended as a guarantee job security for workers (Spoehr, 2004). The move did not make any difference to the workers however since downsizing continued in Mitsubishi. Another negative consequence of the downsizing is its impact on local businesses, particularly in Adelaide since the company purchases billions worth of goods and services from various industries in the country (Spoehr, 2004). As earlier discussed, downsizing is resorted to in order to increase profit and cut costs. These are the expected positive consequences behind the decision to downsize. However, studies have shown that downsizing does not necessarily make companies more profitable, more productive, or even smaller (Downs, 1996). It is true that a possible positive consequence of downsizing is the increase in the organization's profits. However, this is possible only if sales remain consistent despite a smaller workforce. Unfortunately, downsizing can occur even when management believes that revenue might actually plummet, such as when other companies in the same industries perform better or when the organization reduces excess capacity during period of lower volume of sales. Downsizing, or even just the hint or suggestion by the organization to downsize, may motivate workers to become more productive. This is only a possible positive consequence. But realistically, rumours of downsizing usually leave the workers scrambling around in panic searching for a new job instead of focusing on increasing their productivity in their current position (Wikipedia, 2006). Thus, conversely, this is a possible negative consequence of downsizing. Lastly, one major possible negative consequence of downsizing it its impact on the morale of the employees who were not laid off. Motivation and morale of the retained employees may decrease, as they live with constant fear of downsizing occurring again in their future with the company (Downs, 2000). Recommendation Downsizing, if used sparingly and well-planned, can actually operate as an organizational lifesaver. However, when it is done repeatedly within the same organization, without a well-thought out strategy, this measure can destroy the organization's effectiveness. The focus should be on how the organization treats its people - both the people who are downsized and the people who remain (Downs, 2000). Downsizing should also not be resorted to as a tool of communication to financial centres or investors of the organization's, particularly new management's, decision to adopt a tough-minded, no-nonsense style of management as it attempts to restructure the company. The cost of downsizing has historically outweighed any benefits gained there from (Downs, 2000). Thus, certain strategies must be applied to address the possible consequences of downsizing. The emphasis should be on "downsizing with dignity" and this can only be achieved through having appropriate Human Resources Management Development Strategies in place to address the threats and opportunities imbedded in a downsizing initiative. In planning its downsizing strategies, the organization has to consider the following three important questions: 1) For whose benefit does the organization exist; 2) What are the basic assumptions among people about working relationships in the organization; 3) What are the basic assumptions the organization and the employee make in relation to each other (Hickok, no date). It is important for the company to determine for whose benefit it exists so that it may know what to prioritize and what it can afford to lose. Has the company historically value the well-being of its rank-and-file employees or does it tend to focus on its shareholders The organization also has to assess the culture within the organization - the level of community, the sense of commitment and loyalty among its workers, and long-term working relationships among its employees. The possibility of downsizing may have drastic effects on the company's work culture as people become competitive, threatened, or paranoid with their own work and with their colleagues. The decision to downsize may complete alter an organization's existing culture, particularly with regards to the workers who were not laid off and continue working for the company. It is recommended that companies should resort to downsizing practices that tend to reinforce or at least leave the existing culture unaltered. The existing culture should not be destabilized as worker morale tend to go down after downsizing. One outcome of downsizing must emphasize on the preservation of the organization's intellectual capital and existing culture. The way downsized employees are treated affects the morale and retention of valued, high-performing employees who have not been laid off (Downs, 2000). Some factors that result in ineffective downsizing include: allowing corporate attorneys to design the layoff, lack of notice to the workers, and acting as if nothing happened afterwards (Downs, 2000). The problem with allowing corporate attorneys to handle downsizing is that attorneys tend to avoid saying anything more than what is absolutely necessary either to the downsized workers or the retained workers. This is meant to protect the organization from any promises the company may not be able to keep. This approach can be dangerous to organizational health. Managers also tend to not divulge as much information due to fear or guilty. Managers tend to avoid giving full disclosure to workers they plan to downsize for fear that they might become demoralized and unproductive even before the effective day of their lay offs. Lack of advance notice has also been resorted to in order to avoid employee sabotage. However, this measure effects feelings of betrayal and mistrust from workers who eventually find out that there were plans to lay downsize them a long time ago without their knowledge and input. Retained workers on the other hand see this and perceive this destroyed trust and live in fear that they may be next. This is why it is also important to ensure that the existing culture composed of the retained workers remains as stable as possible (Downs, 2000). The decision of how many workers to reduce from each unit or department should be based on an analysis of Mitsubishi's business needs and not from arbitrary statistics (Downs, 2000). Mitsubishi should determine whether the problem is that there are too many people or too little profit in the company. It has been established that the problem is mainly because Mitsubishi has been experience a plummet in sales, thus, there has been less profit for the company since 1997 (Spoehr, 2004). However, when the problem is that there is not enough revenue, downsizing means Mitsubishi is throwing away valuable talent and organizational learning (Downs, 2000). That Mitsubishi is scrambling for financial assistance and recover its losses, in addition to paying its massive debts, is apparent. The company needs to take stop of where it wants to go and what it wants to accomplish in the long run before it starts to execute any more downsizing initiatives. Without a clear vision of the future, Mitsubishi will simply carry over some of the same problems that were attendant that made it resort to its initial downsizing measures. This vision must be clearly defined and shared between Mitsubishi and its major shareholders, particularly Daimler-Chrysler. If downsizing becomes inevitable again, Mitsubishi should always strive to respect the dignity not only of the people they retrenched, but of the people who remained. How downsized employees are treated is how retained employees assume they will be treated (Downs, 2000), thus Mitsubishi's human resources department should take care not to disrespect laid off employees and to make them feel like they have been betrayed by their organization. Otherwise, retained employees will simply start looking for employment elsewhere as there lingers a continuing fear that they may be next in line for downsizing. Mitsubishi should also ensure that separation packages and downsizing techniques are inconformity to Australian employment laws. Conclusion The downsizing in Mitsubishi has been attributed to the decline of the Australian dollar which lead to increased expenses in the manufacturing of Mitsubishi components. The company has also suffered from a period of dismal sales revenues, and continues to contend with paying off its massive debts and securing financial assistance to facilitate its restructuring. The government has attended to assist the organization by suspending plans of ending tariff protection to car industries, and by providing financial assistance through the Structural Adjustment Fund for South Australia. However, despite these endeavours, Mitsubishi continues to downsize its employees, as can be seen from the closing down of its Lonsdale Park factory and the reduction of its workforce in the Tonsley Park plant. Negative consequences of these downsizing measures is the impact on the organization's existing culture, particularly with regard to its retained employees. The downsizing has resulted also in unemployment in the area as well as having adverse effects on local business in Australia from which Mitsubishi purchases goods and services. It is recommended that Mitsubishi adapt certain strategies in order to effectively manage downsizing or to eliminate it altogether. These strategies include re-assessing the company vision, determining the problem, communicating and treating the downsized employees with respects, and ensuring that their downsizing processes abide by Australian employment laws. REFERENCE LIST Cameron, K.S. (Summer 1994), Guest editor's note: Investigating organizational downsizing - fundamental issues, Human Resources Management 33 (2). Cook, Terry. (May 1, 2000), Mitsubishi announces 600 further job cuts in Australia, [Online], World Socialist Web Site, Available from: http://www.wsws.org/articles/2000/may2000/mit-m01.shtml [31 July 2006] Downs, Alan. (2000). Downsizing With Dignity, [Online], Business: The Ultimate Resource, Available from: http://humanresources.about.com/od/layoffsdownsizing/a/downsizing.htm [31 July 2006] Downs, Alan. (July/August 1996), The Wages of Downsizing, [Online], Mother Jones, Available from: http://www.motherjones.com/news/feature/1996/07/downs.html [31 July 2006] Hickok, Thomas A. (no date), Downsizing And Organizational Culture, [Online], Public Administration & Management: An Interactive Journal, Available from: http://www.pamij.com/hickok.html [31 July 2006] Mitsubishi Motors hit by first half loss. (November 8, 2004), ABC Australia, [Online], Available from: http://www.abc.net.au/sa/news/200411/s1237172.htm [31 July 2006] Spoehr, John. (May 27, 2004), What Mitsubishi tells us about manufacturing, [Online], Australian Policy Online, Available from: http://www.apo.org.au/webboard/results.chtmlfilename_num=12579 [31 July 2006] Structural Adjustment Fund for South Australia. (2006), Invest Australia, [Online], Australian Government, Available from: http://www.investaustralia.gov.au/index.cfmsetlanguage=UK&menuid=7AABF705-D0B7-180C-16672DFFEC80AEDF [31 July 2006] Read More