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Argues that downsizing is a short-sighted and counterproductive strategy, and suggests that even large companies can grow
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Dwight L. Gertz is a vice president in the General Management Consulting Practice at Mercer Management Consulting. He lives in Lincoln, Massachusetts.Excerpt. © Reprinted by permission. All rights reserved.:
Chapter 1: YOU CANNOT SHRINK TO GREATNESS
America's great corporations have been on a size reduction regimen for over a decade. Downsizing, "rightsizing," restructuring, and reengineering are very different terms that collectively describe this great corporate shrinking act. To their advocates, these are surgical tools for reshaping bloated and inefficient organizations. In the right hands and in the right situations these tools have been effective in improving business performance. Misused, however, these represent little more than analytical excuses for wholesale unemployment.
The downsizing of American corporations, one of the economic landmarks of the 1980s and 1990s, has had profound implications for the middle class, and has left no group of employees untouched. It has spread beyond the traditional class of victims -- blue-collar and lower-level clerical workers -- to the ranks of managers and technical professionals. According to a 1987 study by the Conference Board, U.S. corporations eliminated more than a million managers and professional staff positions between 1979 and 1987. And the impulse to shrink corporate headcounts among these employee categories continues unabated.
Some of the biggest companies have been the biggest shedders of personnel. Between 1982 and 1992, General Electric reduced its work force by 25 percent, or 100,000 employees. In 1993-1994, NCR cut 21,500 positions. Atlantic Richfield began the 1980s with a work force of 50,000; less than half of that number remains with the firm today. Sears, Kodak, and Procter & Gamble were also among the shrinking giants of the early 1990s, accounting for well over 73,000 lost positions -- many in the managerial ranks. Taken together, the Fortune 500 industrial companies managed to shed 2.6 million jobs between 1984 and the end of 1993. Even among Fortune 500 service companies, current employment has shrunk to 1989 levels.
In general, the huge work force cuts in American corporations have not been tied to performance in the overall economy. In fact, some of the biggest force reductions have coincided with a period of national economic growth. Everyone expects big personnel cuts during hard times, and the recession of 1990-1992 proved to be no exception. Some 1.6 million jobs were lost during that period. But according to a recent American Management Association (AMA) study, as little as one-third of these employment reductions can be attributed solely to general business conditions. Some other factor has been at work, eliminating positions on a permanent basis. The pattern of restaffing that normally follows a recession did not occur once the economic engines of the country regained their momentum. America's big corporations didn't hire many people back, in part because a large percentage of the original layoffs -- an estimated 680,000 -- were attributable to corporate downsizing. Fewer positions needed to be refilled once the recession ended. Many corporations, in fact, just kept on cutting as the economic recovery surged forward in 1993-1994.
A BRIEF HISTORY OF CORPORATE SHRINKAGE
Downsizing was a response to a situation that faced many major U.S. corporations. In general, the first companies to begin the process of downsizing were those hit by direct foreign competition in the late 1970s: companies in steel, machine tools, automobiles, and electronics. These firms recognized that they had massive cost disadvantages, primarily in comparison with their Japanese competitors. Automakers, for example, discovered that they had roughly a $1,000 per vehicle cost disadvantage when compared to Japanese vehicles in the small-car category. Only a small part of this startling difference was traceable to direct labor, the traditional whipping boy for U.S. cost problems. The bulk of the difference was embedded in other cost structures of the corporation, in particular, the number of middle managers and engineers throughout the company. Sheer survival for Chrysler and other industrial companies required massive reductions in the number of "suits" on the payroll.
American steel was another industry to feel the heat during the late 1970s and early 1980s. Companies saw their profit margins evaporating and jumped to the conclusion that foreign competitors, chiefly in Japan, were dumping steel onto the U.S. market at less than their own costs of production. Studies of Japanese steel-making costs, however, pointed to a different conclusion. The Japanese were actually making a profit on their U.S. sales. They enjoyed such favorable cost structures that they could sell beneath the prices of U.S. competitors and still enjoy healthy margins. Big Steel found itself squeezed as well by domestic rivals like Nucor, which had made tremendous innovations in the production of steel.
The wave of Japanese competition that began in the 1970s did not confine itself to heavy manufacturing but spread to other sectors where U.S. firms supposedly enjoyed important advantages in technology and innovation. Xerox Corporation, which had dominated the market for photocopying machines, found itself in a similar cost predicament. In 1981, Xerox discovered that machines offered by Minolta, Ricoh, Canon, Toshiba, and other Japanese firms were selling at prices that were less than Xerox's own cost of production! And the new Japanese machines offered equal or greater quality and reliability. Three years later, William F. Glavin, then Xerox executive vice president, summarized his company's problems in a statement that described the cost problems of many American companies at the time: "Our manufacturing facilities were highly labor intensive. We built up a huge overhead structure of indirect white-collar workers. Our organization was bogged down with far too many checks and balances."
Clearly, the behemoths of U.S. industry would have to get lean and mean if they hoped to compete and maintain leadership in the future. Xerox's response was thoughtful and effective. Through its partner, Fuji-Xerox, it learned and adopted Japanese principles of quality management and product design that had given Japanese companies such a cost and quality advantage. Other U.S. firms in electronics, autos, and other industries followed a similar course, bringing costs and quality into line with the wave of tough new competition sweeping their markets.
At the same time, these companies sought ways to eliminate layers of bureaucracy and management. Some did it for all the right reasons: too many layers added to costs, slowed the pace of decision making, and isolated decision makers from both customers and their own line workers. Others companies simply took a broad-ax approach to eliminating employees.
Freight rail is another example of a stagnant and bloated industry in which downsizing, restructuring, and reengineering were long overdue. Until 1980, rail companies were kept at inefficient levels of staffing by a century of government regulation and labor agreements that thwarted technological advancement, even as truckers were stripping rail transport of the most attractive segments of the freight business.
Deregulation during the 1980s changed this situation abruptly, with the result that massive layoffs swept away more than half of all employment in the industry. Thanks to these various downsizing and reengineering efforts, the freight rail industry is experiencing a renaissance, gaining market share once lost to the trucking industry.
For other companies, the imperative to downsize has been driven by a simple fact: their product markets are shrinking and there are no new products to create growth. Consider the plight of thousands of U.S. defense contractors. With the Cold War now behind us, the market for most defense-related products is declining on a year-to-year basis. If you're in the business of building nuclear submarines, you must either develop new pr
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