“Effect Of downsizing on the financial performance

on the firms of Pakistan”

paf-kiet karachi

Syed akbar shah

MBA- REGN. NO 54203

A Proposal in partial fulfillment of the requirements

for the Degree of BBA-H

DEPARTMENT OF MANAGEMENT SCIENCES

IQRA UNIVERSITY, ISLAMABAD CAMPUS

2010

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 firm’s 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 firm’s 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 Practices—The 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).