Rationalizing downsizing with long-term profitability : an empirical focus in South African context

Mabaso, Fulufhelo Given (2008-03)

Thesis (MBA (Business Management))--Stellenbosch University, 2008.

Thesis

ENGLISH ABSTRACT: The purpose of this research is to test the rationale of corporate downsizing as a method of promoting long-term profitability in South African companies. This study is similar to that conducted by Pallian & Shalhoub (2002: 436-447) on US-based companies. The sample consists of 58 JSE-listed companies, which announced their intention to downsize during the period 1995 - 1997. This period gives 10 years after the announcement to study the effect of downsizing on long-run profitability. The original sample consisted of more than 172 companies (listed, non-listed and state-owned companies). 82 of these companies were listed on the JSE, and the rest were state-owned companies, government departments, universities or small companies. Of the 82 listed companies about 24 were delisted from JSE due to number of reasons, including liquidation, winding up and failure to meet the JSE listing requirements. Thus these companies did not survive, despite downsizing. For that reason, the sample was reduced to 58 companies. The financial data for each company was collected for the period 1997-2006. The relationship between the downsizing index and the six financial variables (i.e., ROE, ROI, operating costs, cash flow from operations, earnings per share (EPS) and market share) was explored to study the impact of downsizing actions in long-run financial performance. The findings of this study suggest that downsizing is not in the best interests of financial performance in the long run. There is a very low correlation between downsizing activity and these variables. Where the correlation does exist, it is negative. Downsizing also accounts very little for the variations in these variables. That means if there is an improvement in any of these financial performance variables it could not be explained by the downsizing, but instead by other variables. Thus there are many other factors that organizations need to explore in order to improve their long-run financial performance. These findings also similar those of Pallian & Shalhoub (2002) study. Some authors like Balazas, De Vries & Manfred (2004), and Biratti & Tziner (2004), suggested some ways to prevent downsizing failures, which include: • Giving advance notice, to give the victims a chance to look for employment elsewhere, • Supporting the victims by offering them financial aid, • Counseling support, etc. Despite these measures, downsizing will still reduce the level of trust in the organization, hence the negative impact on the financial performance. It is thus suggested that downsizing should be applied only as a last resort. Based on the findings of this and the US study, downsizing is seen as a painful and costly exercise that does not benefit organizations in the long run. Organizations need to adopt strategic directions which will be able to sustain them in the future. Therefore, as an alternative to the downsizing strategy, the following model by Oosthuizen (2006) is recommended in order to formulate successful business strategy, regardless of the situation the organizations find themselves in. This process is divided into four steps, namely: 1. Strategic intent, which includes defining the vision, mission, goals and objectives of the business. 2. External environment analysis. This includes macro analysis (PESTE) and industrial analysis. 3. Internal environment analysis. This includes analysis of company’s current strategy and its past performance, the value chain and processes (resources, capabilities and competencies). 4. Formulation of business strategy.

AFRIKAANSE OPSOMMING: Die doel van hierdie navorsing is om die rationale agter korporatiewe downsizing as metode om langtermyn winsgewendheid in Suid-Afrikaanse maatskappye te bevorder. Dié studie is soortgelyk aan ‘n studie wat op VSA gebaseerde maatskappye deur Pallian & Shalhoub (2002: 436-447) uitgevoer is. Die steekproef bestaan uit 58 Johannesburgse Effektebeurs (JSE) genoteerde maatskappye wat hulle voorneme aangekondig het om tussen 1995 en 1997 te downsize. Dié tydperk laat toe 10 jaar om die uitwerking van downsizing op langtermyn winsgewendheid te bepaal. Die oorspronklike steekproef het uit meer as 172 maatskappye bestaan (genoteerd, nie genoteerd nie en maatskappye in staatsbesit). 82 hiervan was op die JSE genoteer, die res was of in staatsbesit of staatsdepartemente. Van die 82 maatskappye, is omtrent 24 van die JSE verwyder om verskeie redes, insluitend likwidasie, afwikkeling of versuim om aan JSE vereistes te voldoen. Hierdie maatskappye het dus ten spyte van downsizing nie oorleef nie. Om die rede, is die steekproef tot 58 maatskappye verminder. Die finansiële data vir elke maatskappy is vir die tydperk 1997-2006 versamel. Die verwantskap tussen die downsizing indeks en die ses finansiële veranderlikes (d.w.s wins op uitgawes (ROE), wins op belegging (ROI), operasionele kostes, kontantvloei vanaf operasies, verdienste per aandeel (EPS) en markdeel) is ondersoek om die uitwerking van downsizing op langtermyn finansiële verrigting te bepaal. Die bevinding van hierdie studie stel voor dat downsizing nie die belange van langtermyn finansiële verrigting dien nie. Daar is ‘n lae korrelasie tussen downsizing optredes en dié veranderlikes. Waar korrelasies wel bestaan, is hulle negatief. Downsizing verklaar ook min van die wisseling van hierdie veranderlikes. Dit beteken dat as daar ‘n verbetering is in enige van hierdie finansiële verrigtingsveranderlikes, dit nie aan downsizing toegeskryf kan word nie, maar wel aan ander veranderlikes. Daar is dus baie ander faktore wat organisasies behoort te ondersoek om hulle langtermyn finansiële verrigting te verbeter. Hierdie bevindings weerspieël dié van Pallian & Shalhoub (2002) se navorsing. Skrywers soos Balazas, De Vries & Manfred (2004), en Biratti & Tziner (2004), stel sekere metodes voor om downsizing mislukkings te vermy, insluitend: • Om vooruit kennis te gee, sodat slagoffers kans kry om elders indiensneming te soek; • Om slagoffers te ondersteun deur middel van om finansiële hulp aan te bied; • Ondersteunende raadgewing, ens. Ten spyte van sulke maatreëls, sal downsizing steeds die vlak van vertroue in ‘n organisasie verminder en ‘n negatiewe uitwerking op finansiële verrigting tot gevolg hê. Dit word dus voorgestel dat downsizing slegs as laaste toevlug aangewend word. Gebaseer op die bevindings van hierdie en die VSA studie, word downsizing as ‘n pynlik en duur oefening beskou wat organisasies nie in die langtermyn baat nie. Organisasies behoort strategiese rigtings te volg wat hulle in die toekoms sal uithou. Dus, in plaas van die downsizing strategie, word die volgende model deur Oosthuizen (2006) aanbeveel om ‘n besigheidsstrategie te formuleer ongeag die organisasie se omstandighede. Die proses word in vier stappe opgedeel, naamlik: 1. Strategiese bedoeling, wat definering van visie, misie, doel en spesifieke doelwitte van die besigheid insluit. 2. Eksterne omgewingsanalise. Dit sluit in makroanalise en nywerheidsanalise. 3. Interne omgewingsanalise. Dit sluit in analise van maatskappy se huidige strategie, sowel as sy vorige verrigting, die waardeketting en prosesse (hulpbronne, bekwaamhede en beskikthede). 4. Formulering van besigheidsstrategie.

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