Principles of Corporate Renewal, Second Edition

6. Employee Downsizing

CHAPTER 6 Employee Downsizing This chapter examines the choices, methods, and ramifications associated with downsizing people, plants, products, or processes during corporate renewal. Must a company with too many employees downsize?! Anyone with experience in the workforce knows that the answer to this question is unequivocally NO! At various times each day, every company, even those actively recruiting new personnel, experiences periods of slack time when certain workers are nonproductive or even idle; in some companies, slack periods are more protracted, extending into days, weeks, or even months before a strategy to reduce the workforce is implemented. To grasp why procrastination is not necessarily irrational requires that we integrate microeconomics, labor and inventory theories , and just-in-time production. These models provide the theoretical framework to understand layoffs. A short overview of the models and their conclusions is provided for the general reader in the first part of this chapter. In the chapter's later sections, the subject is considered from a practical perspective. Economic Considerations Microeconomic theory assumes that consumers maximize their utility (i.e., satisfaction) and that businesses maximize their profits. Both maximizations are constrained by the income available to the consumer or the level of consumer demand for the firm's product. Let us turn our attention to the producer alone, since our immediate interest is to explain why some producers layoff excess workers and others retain them. There are two basic types of industries: competitive and oligopolistic .2 In the former, there are numerous firms, each of which sells basically the same product, while in the latter, firms face little or no competition . The competitive firm in a competitive industry must accept the industry's normal price as its own since no consumer would pay more than that price for its goods. Thus, the competitive firm sells as many 201 202 Principles of Corporate Renewal units of its product as it wants to at the industry price. In contrast, an oligopolistic firm chooses the price at which to sell its product and thus influences its product-demand level. Both firms seek to maximize their profits. The competitive firm does so by minimizing its cost of production and selling products until no further profits are available. The oligopolistic firm maximizes profits by finding the optimal price level and then minimizing its cost of production for the demand level associated with that price. Microeconomic theory describes cost minimization as a trade-off between the unit cost of inputs (i.e., resources) and their marginal productivity. Unit resource costs are usually held constant. Feasible resource combinations (such as mixtures of machines, skilled and unskilled workers, and materials) come from the firm's production function (i.e., a mathematical relationship that describes output changes resulting from incremental changes in resource usage).3 The least-cost input mix capable of producing the desired output is the optimal resource combination. There are two general types of production functions: fixed proportions and neoclassical functions. The first type, developed by Wassily Leontief, a Nobel Prize-winning economist, assumes that factors of production (i.e., inputs) must be used in fixed proportion. The other type assumes that resources are infinitely variable in the production process. The producer's task, to minimize costs for a fixed level of output, is to discover the least-cost mix of resources given his/her production function. Leontief Production Function When a company's technology, or production function, is characterized as fixed proportions, it must use proportionately more (less) workers as its output increases (decreases). This relationship is illustrated in figure 6.1 using the traditional microeconomic concepts of an isoquant (i.e., a curve describing the various input combinations that can produce a given output) and an isocost curve (i.e., a curve showing the amount of inputs - individually or combined - that can be purchased for a fixed amount of money). The optimal input mix is found at the point where the isoquant and isocost are tangent (i.e., just touching). The firm depicted in figure 6.1, uses five machines and three workers to produce one unit of output; two units of output require ten machines and six workers, and so on. The firm expands its output along the expansion ray. If, however, a fourth worker is added when five machines are already owned, no extra output results. Similarly, adding a sixth machine when three workers are already employed adds no incremental Machines Used 5 Machines 3 Workers Employee Downsizing 203 ",~ ,/ Expansion Ray / 2 Unit Isoquant 1 Unit...