LO and Big Layoffs LO5514

Sun, 11 Feb 96 11:59:46 GMT

Replying to LO5455, Ginger Shafer wrote:

> But if there are finite resources, is not growth eventually limited?

To my understanding every company is faced with limited resources.
It is the paradigm of our developed countries and most organizations, that
unlimit growth is a prime aim, regardless, if that is possible within a
biological system or not. I think that the idea of unlimited growth has by
itself become a constrain, especially since we are faced in most markets
with a deep saturation, without a real change to overcome that in short or

> As many have shared the statistics, has downsizing hurt productivity?

I would like to reframe the question, if downsizing hurts
productivity. The real question we have to answer is: "Does downsizing
improve profits?". To answer this question, let us have a look behind the
question by using system thinking (mainly for profit organisations).

A company reduces staff to reduce costs and raise profitability. That may
be caused by decreased margines in saturated markets, production
overcapacities and increased competitive rivalry.

The most advantage comes from encouraging older workers to leave the
organization, who have generally higher wages. Many companies in central
Europe do that by early retirement actions, or by golden handshakes. But
since the staff cuttings eliminate some of the older, more experienced
staff, and since morale problems from layoffs drain enthusiasm, production
costs increase through error and overwork. These factors contribute to
lowered productivity and drain away the added profitability from the
staffing cuts.

This sad story occures in reality: in one 1991 study of 850 companies
which had cut staff drastically, only 41% had achieved the savings they
hoped for (see Peter Senge's Fieldbook, p 128).

> Are there fewer jobs?

I have never heard from a downsizing or restructuring or
reengineering what improved number of jobs. Have you?

> What is a "sustainable competitive advantage until the whole industry is
> substitued by the next technology generation?"

Most authors in the field of strategic managment assume that a
competitive advantage is important. If you read Porterss 'Competitive
Advantage' or 'Competitive Strategy', or Key's 'Why Firms Succeed', or
Senge's 'Fifth Discipline' or 'Fifth Discipline Fieldbook', all Management
gurus assume that it is important to have a competitive advantage.

By its nature, a competitive advantage is something you have (or have not)
compared to your competitors. The newer literature assumes that
competitive advantage comes from 'distinctive competences' (Kay 1993) or
'core competences' (Prahaled and Hamel 1994) or from the 'accumulation of
distinctive competences' (Hamel and Heene 1994), while the older
literature assumes that it comes mainly from the 'cost position' or
'differentiation' (see Porter's generic strategies of costleadership and
differentiation, Porter 1985).

However, even if your company has a competitive advantage, there is still
the danger that it may become eroded through a changing baseis of
competition. But the eroding of competitive advantage depends on

- the ability of competitors to understand the nature of the
competitive advantage,
- the incentives to imitate, specialise or leap-frog the advantage,
- the disincentives the advantaged firm may employ.

The nature of the competitive advantage may be hard to understand for
competitors, since it may come also from less visible resources and
competences, like knowledge, skills, informal network, or the whole
architecture (=internal and external network) of an company (Kay 1993).

However, Senge and the other gurus of the metaphor of the 'learning
organization' seems to assume that in saturated markets most competitive
advantages can be copied, at least in the long term. I must say that I am
sceptical about that, since

- competitors may find it difficult to understand the source of
competitive advantage, especially the question which key-resources
do it underpin, and
- since even if competitors have understand what the key-resources
are, they still need to acquire those key-resources, what may
not only take time and money, but may be difficult if it are such
complex things like the architectur of a firm, but more: it may
cancel out additional profit to copy those resources.

But if you assume with Senge that most competitive advantage can be
copied, then you are faced with the question, if there may be any
competitive advantage in the long run, or if there may be any sustainable
competitive advantage at all. Senge's answer is that the only competitive
advantage that may exist in the long run is the learning organization. You
can ask yourself, if this is only hope, but he assumes that (see
Fieldbook, p 11: "In the long run, the only sustainable source of
competitive advantage is your organization's ability to learn faster than
its competition").

> ... until the whole industry is substitued by the next technology
> generation?"

For most products and therefor businesses there may still exist
lifecycles, even if in some industries they become so short that some
people asked if there are still any life cycles at all. However, I think
it is still valid to assume that there are life cycles in the end.
Fundamental change in technology may introduce the next generation of
products. Maybe we see today the beginnings, for example in the field of
information technology or genetic technology.

> I see the downsizing excercises more akin to pruning a tree. My husband
> sat in awe all last year as this beautiful tree in front of our home grew
> magnificently. Toward the end of the growing season, it was time to prune
> the lower branches so the tree's energy could go into upper branches next
> cycle. (The tree is there to provide shade to help us reduce our energy
> consumption.) So very reluctantly, he trimmed the lower branches. Not
> removing any, but shortening most. This year, I believe the tree will be
> even more magnificent as it reaches higher and broadens wider.

I think that biological methaphors deliver in many cases a very
valid picture of reality. But to be more precise, they never deliver you
the *whole* picture, but they underpin special aspects of your subjective
reality. After World War II, when most economies were constant growing
worldwide for 30 years, there was no fundamental or permanent downsizing
at all. However, after first oil-shock we are faced with clear limitations
in general growth, and in reallity we come from one recession in the next
(with short periods of growth, off course).

If there is a growing season as you described, than this season has ended
- at least for the developed countries - with the oil shocks. Maybe we
will be now in a long winter - and there are people who think that this
winter will last until 2020 or so (see for example Malik's assumptions).
If you assume that, then I suggest you to go on with downsizing, but maybe
you will be faced by the situation that you have downsized your business
to death.

> Corporations who re-engineered and downsized for the right reasons, in the
> right ways, should enjoy longer term benefits. By this I mean, those who
> reduced redundant functions, focused on priorities (customer satisfaction,
> specifically), got back to the knitting, as it were, literally cut the
> fat, communicating with employees on the whys and wherefores--should do
> well over the longer haul.

Especially in an old, bureaucratic organization commitment by the
employees is hard to imagine - especially if it is the commitment to cut
their own jobs. But maybe that is a bias of my own.

> Those who cut into the muscles and tendons as
> they went because they didn't have the skills to know better--or back to
> my tree pruning analogy--if they cut 15% off every branch because they
> could make the numbers look good, they will have succeeded at traumatizing
> the tree and it may begin to die a slow and sad death.

It is the question how to know when you cut into the muscles or
how long you cut only the 'unnecessary' fat - and without developing the
business to a new business what will grow in future, your tree will be
shocked and die.

> And let's face it, there's still a huge price to be paid for destroying
> notions of company loyalty. At least in the States, some companies
> "downsized" their vested employees, severing health benefits and pension
> plans, so they could hire new people without such perquisites. Those
> departees will never trust another employer, adding fuel to the fire for
> "What's in it for me" on the next job.

Companies downsize and restructure and reorganize today
everywhere. They tell their employees that they are the human resources
are the most valueable asset of the company, but the employees learn that
they seem to be the most needless asset at all. I always wonder that those
companies who act in that way still await loyalty and trust of their
employees. Especially in Europe, where lifelong employment is still part
of the psychological contract, employees cannot belief such companies
anymore. I think we are faced both in the States and Europe by the same
problem, as described by you very valid.

Wolfgang Schmid
e-mail: ws2@student.open.ac.uk
Compuserve: 100101.3210@Compuserve.com ($!!)

company address: OMV AG Raffinerie Schwechat Mannswoertherstrasse 28 A-2320 Schwechat Austria/Europe

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