What Does a Company Do After Downsizing?
MANY corporate bosses have been on a binge of laying off employees and closing subsidiaries or company divisions. It is called downsizing, restructuring, or reengineering and is intended to make companies "leaner and meaner."
But something new has happened. An American Management Association survey of 1,000 large and mid-sized firms finds that work-force reductions have shrunk to the point where they are almost matched by concurrent job creation in the same firms.
Moreover, says Eric Greenberg, the AMA's director of management studies, fewer than half of those companies making job cuts in the 12 months ending in June 1995 blame them on weak demand for their goods or services. Most cite strategic or structural reasons for the reductions.
Downsizing often gives companies an immediate boost to profits. But academic studies find few long-term benefits.
"It is achieving diminishing returns," says Dwight Gertz, a vice president of Mercer Management Consulting Inc., based in Lexington, Mass.
Some executives have downsized their companies in well-planned and strategic ways, perhaps shifting resources from unproductive lines to more promising ones, continues Mr. Gertz. Many others have cut jobs just to keep the "wolves" - shareholders or directors - from their doors.
Cost-cutting, Gertz adds, has become "addictive ... the habit of choice for a generation of managers." Many of these managers, however, don't know how to make their companies grow, even if they want to. Gertz and a colleague, Joao Baptista, have written a book to address the "plaintive" question they hear from many executives, "How do you turn the corner?" ("Grow to Be Great; Breaking the Downsizing Cycle," Free Press).
Relatively few companies achieve rapid growth in revenues. In the past decade, only 30 percent of the Fortune list of 1,000 big companies reached 10 percent or better growth, Gertz says. He lists several myths executives hold about why this is so:
1. It's the economy. Actually, the state of the general economy in the United States "has almost no influence" on how rapidly an individual company grows. Much more important is the smaller economy represented by an individual firm and industry.
2. Big companies can't grow. Gertz says his study of the Fortune 1000 finds no relationship between the current size of a company and revenue growth rate. Multibillion-dollar companies can grow rapidly. Wal-Mart has grown 20 percent a year for five years. Nor are small companies more likely to thrive.
3. Companies in a dead, no-growth industry can't grow. In fact, companies in these industries can grow rapidly. Within a given industry, the range of performance between the fastest-growing and the slowest-growing companies is greater than the range of performance between the fastest- and slowest-growing industries.
In studying rapid-growth companies, Gertz finds that in general they are "good places to work." These companies have, as a rule, retained the sense of the social contract between the employer and the employee that is so often lost in companies that have engaged in major downsizing, he says. These growth companies are not usually contracting jobs out to cheap labor countries. And the employees of these companies retain some loyalty and thus are less likely to leave for employment elsewhere.
Gertz cites three "pathways to growth." Companies should target those customers most responsive to their company's products and marketing initiatives. They should develop and introduce a steady stream of successful new products that beat their rivals in the marketplace. And they should develop the most-effective ways to connect customers with company products and services.
Such measures may seem like common sense, he says. But most companies don't actually follow such practices.
One of the fastest-growing US banks, MBNA Corp., of Newark, Del., built its business by marketing credit cards and other financial services through affinity groups - customers who share some common bond such as a religious affiliation. Then it paid attention to retaining those customers. Hewlett-Packard, another growth company, gets 60 percent of its revenue from products and services introduced in the last five years. Hewlett-Packard figures it is vitally important to offer a competitive new product, even if it cannibalizes sales of one of its old products.