Effect Of downsizing on the financial performance

on the firms of Pakistan

INTRODUCTION

Background
Some of the previous years economy was down and recession was dominent
on economies. So as the economy is related to employment and all other
flourishing activities. Due to the recession a number of peoples were
fired from there jobs. So the number of obless peopls increased
caausing increased umemplyement.
As we kknow that umemployment means when people are without jobs
and they have actively looked for work within the past four weeks.The
unemployment rate is a measure of the prevalence of unemployment and
it is calculated as a percentage by dividing the number of unemployed
individuals by all individuals currently in the labour force.

Rationale of the Study

Many firms have come to enjoy positive effect downsizing brought

for them. There have been many cases for instance Among Korean
firms, a representative success story related to the downsizing
effect comes from Samsung Electronics, which is one of the most
successful companies in Korea (Gyu-Chang Yu & Jong-Sung Park,
2006).
Despite a few successful cases of downsizing, however, the real
effect of downsizing on a firms financial performance and
employee productivity is an empirical question. In fact, we
cannot disregard hidden figures about the number of employees in
many cases.(Gyu-Chang Yu & Jong-Sung Park, 2006).

The purpose of this research paper is to investigate the effect

downsizing has on the financial performance of the firms in
Pakistan in terms of profitability and efficiency. AS it is
important for the all the strategic planners of the firms, the
investors and many shareholders to be aware if the adopted
strategy will bring positive or negative effect for the
respective firms.
 Problem Identification

Downsizing is one the most significant decision the firms has to

make. Downsizing, re-organizing, restructuring or as many call it
as lay-off results with the same result of unsatisfied pool of
employees. For long, downsizing has been considered as a social
problem and many raise issues and question it on the basis of
ethical grounds even.

There have been many researches done with the prime focus of the
downsizing effect on the human resource or other variables. Even
in Pakistan literature related to downsizing will be entirely
focusing on the consequences the downsized employees or laborers
are and will be facing.

Until recently, previous research on downsizing has mostly

focused on micro individual issues such as the effect of
downsizing on departing employees or the consequences of
downsizing on survivors. (Gyu-Chang Yu & Jong-Sung Park,
2006).There has thus been minimum attention towards its effect on
the financial performance. There have been little attention set
towards its impact on the profitability of the firm, will it be
impacting it positively or not.
 Problem Statement

This research investigates and analyzes the effects of

unemployment on the financial stability in terms of econmical
growth and recession. This esaerch aims to examine the impact of
unemployemnt with the help of

Research Question

is uneploymnet an indicaation of economic receesion?

Objectives of the Research

This research aims to examine the effect downsizing has on the

financial performance of the firms of Pakistan. The objectives of
this research are:

To find the effect of downsizing on firms in terms of

Profitability ,Efficiency & Employee Productivity

To determine whether downsizing will affect the financial ratios

of the firms

To determine whether downsizing will affect net profit margins.

 Resources

The resource includes financial journals, financial data records

of the selected firms, internet and books.

Limitations

The initial limitation for this research is that of the limited

budget and time available. Secondly, in order to measure the
financial performance of the firm affected various financial
ratios will be taken into account. Thus the limitations will be
mostly associated to it.

In Pakistan most firms are least concerned with making detailed

financial recordings based on the ratios making it more difficult
for comparative analysis. Since the research will include face to
face interviews it might be a possibility of it not being
authentic most of the times.

There is a greater chance of management exaggerating their

respective financial figures thus the financial ratios might not
be accurate and might end up affecting the overall research
result. The sample size is limited and might again affect the
results. There are many large firms which are engaged in
multiple lines of business. (Eugene Brigham, 2007). Thus it will
be difficult to identify their industry groups to which the
respective firm belongs. So comparing and analyzing their ratios
with each other may end up disrupting the result.
 Scope of the Research

The research analyzes the effect downsizing has on the financial

performance of the firms. The research is descriptive collecting data
from secondary sources. Thus the trend observed during the last five
year period of the selected major firms of Pakistan will guide and
help the financial managers for future implementations in order to
maximize the financial return.

Downsizing is more effective when a firm implements it proactively,

and less effective when a firm implements downsizing after a financial
loss as a quick fix to a financial problem (Gyu-Chang Yu & Jong-
Sung Park, 2006)
 LITERATURE REVIEW

Firms have faced long-term recession around the world and tried
to find out ways to improve corporate profitability and save
themselves from financial collapse. Downsizing is currently one
of the most critical issues for many firms around the world.

Downsizing can be defined as an involuntary employment

adjustment that firms intentionally implement for the purpose of
improvement of organizational performance (Gomez-Mejia et al.,
2004).

While many downsizing initiatives are obvious attempts to cut

expenses and improve earnings (Iqbal and Shetty, 1995), the
reality is that profitability does not necessarily follow. For
example, an often-cited study on the financial impacts of
downsizing is the Wyatt consulting firms survey of 1,005
downsized companies.

They found that only 46 percent of the companies achieved their

expense-reduction goals, 32 percent increased profits to the
degree anticipated, 21 percent met their expectations for
improving return on investment and 22 percent reached their
targets for increased productivity. (Bennett, 1991).

There are large variations of the actual implementation processes

of downsizing between western and Asian firms due to different
social and institutional constraints and different organizational
and human resource practices.
Since, unlike the western countries the social and institutional
constraints for lifetime employment in Asian countries have
rapidly diminished with global competitive
economic pressure (Ahmakjian and Robinson, 2001; Mroczkowski and
Hanaoka, 1997; Kitt, 2003).

This led Asian firms to follow western human resource practices

such as pay-for-performance and individual incentives as well as
downsizing. For example, many Japanese firms increasingly adopt
the downsizing practice as a strategic means for corporate
restructuring (Mroczkowski and Hanaoka, 1997).

Several studies in the management literature have examined

downsizing adopted. Although many researchers did not find any
significant change in the financial performance of downsized
firms but there are still many cases which prove it otherwise.
For example, Samsung Electronics made about $6.0 billion in
profits and $34 billion in sales with about 45,000 employees in
2002, compared to $1.2 billion in profits and $13 billion in
sales with about 60,000 employees in 1996. Its stock price also
soared from $83 in 1996 to $420 in 2004, a five-fold increase.
(Gyu-Chang Yu & Jong-Sung Park, 2006).

Many managers blame poor economic conditions and foreign

competition for the decline in performance (PETER.J.CARSWELL,
2005) if there is any and not due to the downsizing done.
Further, Firms that combined reduction in employees and asset
restructuring had higher return on assets and stock returns when
compared to other firms in their own industry.( REZA ESPAHBODI,
TERESA A. JOHN & GOPALAVASUDEVAN,2000).
 Researchers have identified many consequences of downsizing
including reduced workforce, ethical problems and unemployment
boom. However there have been many researches which highlighted
the impact of downsizing on both the financial and organizational
performance.

According to many, downsizing has brought both negative and

positive effect on the financial performance varying from firm to
firm. First and more importantly, negative results of the
downsizing effect have mostly come from studies that have focused
on capital market outcomes, i.e. stock prices (Worrell et al.,
1991; Cascio et al., 1997; Lee, 1997; Hallock, 1998; Chen et al.,
2001; Chalos and Chen, 2002).

While De Meuse et al. (1994); Suarez-Gonzalez (2001) and Cascio

and Young (2003) found a negative impact from downsizing on
financial and organizational performances, Espahbodi et al.
(2000) and Chen et al. (2001) found a positive effect from
downsizing on organizational performance.(Gyu-Chang Yu & Jong-
Sung Park, 2006).

However it should be noted that after much of the present

literature on the effect of downsizing on the financial
performance there is still ambiguity in the findings in terms of
the diverse experiences of multi-national and indigenous firms in
other parts of the globe, especially emerging market economies in
Asia.( Gyu-Chang Yu & Jong-Sung Park, 2006).
With increasing information and access to global markets, there
is ever increasing need for the corporations to be more
competitive. Unfortunately, because of low literacy rate, and
lack of technology usage as a result of little or no HRD efforts,
the skill level and the productivity of the Pakistani work force
have been lower than that of most competitors. Thus with time
the use of technology coupled with cost cut measures has lead to
downsizing (Zaheer Baig, 2005) in many firms of Pakistan.
 METHOD

Sample
The sample size will be 25 firms of Islamabad and Rawalpindi. The
sample population for this research will include all the firms
that are major Pakistani companies in terms of sales revenues,
the scale of the number of employees, reputations, and so forth.
Financial institutions such as banks & insurance companies are
not included in the research. Firms with missing financial data
will also be excluded from sample.

Instrument and Measures

This research will be based on secondary sources. Thus no

questionnaire will be distributed and instead financial data
including current and past records will be examined and made use
of. The data collected will be based on the financial data of the
last five year records. The paper will investigate the relationship
between downsizing and three measures of financial performance and two
measures of organizational performance which includes return on
assets, asset turnover, operating income per employee, sales per
employee, and value added per employee. These are the dependent
variables of the research.
The firms with the positive financial ratios will be marked as
the profitable sample and the ones with the negative financial
ratios will be marked as the non profitable. Firms with missing
financial data will be excluded. Non downsized firms will be
taken as control sample and later both results of the downsized
and non downsized firms will be compared and analyzed to examine
the differences and similarities.

Downsizing a rouses the expectation of the investors who

assumes that the downsizing can bring the financial health to the
firms t hat implemented downsizing. (Tomonori Tomura. ,2002).
Thus along with this the stock prices of both sub samples will
also be taken into account for the research. With the data
collection, the past research papers based on the topic will also
be taken into account.

Procedure

With the selected firms of Rawalpindi and Islamabad, various

financial ratios and average net profit margins will be analyzed.
The data of the downsizing firms will be compared with the data
of the non-downsizing companies based on the average net profit
margins. Statistical tools including timeline graphs and others
will be constructed and made use of to help determine the
respective effects and a comparison between the downsized and non
downsized firms will be done.

Research papers of different authors related to the topic will

be examined and compared with the results of this research. The
change in the rates of the stock prices of the downsized firms
and non downsized firms will be collected and examined for
determining the respective profitability.
 REFERENCES

Gyu-Chang Yu & Jong-Sung Park. (2006). The effect of downsizing

on the
financial performance and employee productivity of Korean
firms. International Journal of Manpower.27 (3), 230-250.

PETER J. CARSWELL. (2005). The Financial Impact of Organizational

Downsizing PracticesThe New Zealand Experience. Asia Pacific
Journal of Management.22 (2005), 41-63.

REZA ESPAHBODI, TERESA A. JOHN & GOPALAVASUDEVAN. (2000). The

Effects of Downsizing on Operating Performance. Review of
Quantitative Finance and Accounting.15 (2000), 107-126.

Tomonori Tomura.(2002). Effects of Downsizing on Corporate

Financial Performances in Japan. Retrieved on April 7, 2010,
from www.google.com

Zaheer Baig.(2005).Employer-Employee Relationship in Pakistan.

Market Forces.1 (2)

Eugene Brigham. (2007).Financial management theory & practices

(12th Ed.), Financial Analysis. (Pp.20-33).