Picture this: Eastman Kodak Co., intent on improving its lagging profitability, undergoes a major restructuring. Then, the photography giant does it again, and again, and again -- all told, five times since 1985, costing $2.1 billion and more than 12,000 jobs. And here's what all that pain got Kodak: halved profit margins, a lackluster stock price, and a bottom line not much larger than it was a decade ago.
Unfortunately, Kodak's results are hardly unique. A growing number of corporations have embarked on massive restructurings in recent years only to find that the expected earnings benefits are far more elusive than they imagined. A recent American Management Assn. survey of 547 companies that downsized within the past six years found that operating profits improved for only 43.5%. "Downsizing doesn't have the effect on the bottom line that is hoped for medium- and long-term," says ama Research Director Eric Greenberg.
FEWER RESOURCES. True, by definition, restructuring companies are troubled. Some companies "might have been in far worse shape or not existent today," if they hadn't done something, concedes consultant John Parkington of Wyatt Co. Still, after a downsizing binge that has seen more than 3.5 million workers lose their jobs since 1987, consultants, analysts, and even some managers don't see layoffs as a panacea for corporate ills. While staff cuts may hold the line or prevent worse hemorrhaging, they don't produce revenue growth -- which comes only from more constructive strategies, such as developing new products, entering new markets, or taking business away from competitors.
What's more, some economists worry that Corporate America's addiction to layoffs may leave many companies unprepared for a recovery. "If demand does pick up, many companies are going to lose market share if they don't invest in more people and inventory," says economist Mark Zandi of Regional Financial Associates, an economic consulting firm based in West Chester, Pa.
Consider Zenith Electronics Corp., clobbered for years by cheap foreign-made televisions. The Glenview (Ill.) consumer-electronics company has halved its payroll since 1985, to 6,200. Another 400 workers will be let go before January. But analysts say that the chronic downsizing has now left Zenith without the manufacturing wherewithal to meet demand for its hot new product, the flat computer screens it sells to Compaq Computer Corp. and Groupe Bull. A spokesman for the company concedes that Zenith has "cumulative backlogs" it hopes to reduce in coming months.
BRIEF GAINS. Of course, layoffs are sometimes unavoidable. That was the case at Unisys Corp., which undertook a massive restructuring in 1986. As the computer industry turned away from mainframes toward personal computers, Unisys -- the unhappy union of computer companies Sperry and Burroughs -- narrowed its market to big-time users of information systems, such as airline-reservation operations. To match its smaller market, Unisys halved its work force to 56,000. But the restructuring has paid off. Unisys has had four quarters in the black after three years of losses.
Still, all too often downsizing is a knee-jerk reaction by management to bad times. When profits slide, the pressure to quell investor discontent with decisive action may be overwhelming. "It shows some demonstrated action of taking charge. In the U.S., taking charge means something dramatic, and dramatic is laying people off and cutting costs," says T. Quinn Spitzer, president of Kepner-Tregoe Inc., a management consulting firm. And with other companies announcing bold cost-cutting programs, few managers want to be seen doing nothing. "There's a certain lemming-like quality to some of the things that sweep through management," says management consultant Thomas Wallace.
There are clearly some immediate benefits to cutting staff. Wall Street, for one, loves restructuring, and it frequently rewards downsizing with higher stock prices. Kodak's June, 1991, announcement of 3,000 layoffs, for example, was met with an 8% jump in its stock price. And restructuring can produce some short-term earnings improvements. Profits at the 900 companies listed in business week's Corporate Scoreboard rose 31% in the third quarter, largely because of cost reductions, including staff cuts. Sales were up only by a modest 6%.
As long as sales growth remains weak, companies that turn to layoffs without pursuing more substantive strategies may be forced to lay off even more employees in the future to help buttress margins. Indeed, the ama predicts that 63% of all companies that downsized this year will do so again in 1993. All too often, however, the gains of such downsizings are temporary. A Wyatt survey of more than 1,000 companies last year found that restructurings failed to produce the expected savings 64% of the time. How come? Companies typically replace cut staff within a few years and then repeat the cycle all over again.
DISAPPOINTMENT. That's exactly what happened at Chrysler Corp. By the time the previous recession was winding down in 1982, the auto maker had trimmed its white-collar payroll from 35,000 to 21,000. But by 1987, the salaried work force was up to 27,000. Chrysler's chief financial officer, Jerry B. York, blames lack of oversight at headquarters. As car sales picked up and the company's fortunes improved, individual managers acted independently and hired people as they needed them. "When you do that 200 or 300 times, pretty soon it adds up to serious money," York says.
And even if layoffs produce quick savings, there's no substantial evidence that cuts improve profits in the long term (table). Sears, Roebuck & Co. has shown the gate to 48,000 employees during the past two years. But its earnings remain woefully disappointing. Overall, the corporation's 12-month return on equity has slumped to a negative 2.3%, compared with almost 11% five years ago.
Why have so many downsizings been such dismal disappointments? Perhaps it's because some companies turn to layoffs when they're unable to solve fundamental problems. In Kodak's case, the company is firmly established in businesses such as film and cameras that aren't growing much. And efforts to diversify, such as Kodak's acquisition of Sterling Drug, have yet to pay off. "The problem is strategy, but they're addressing the symptom of cost structure," says Prudential Securities Inc. analyst B. Alex Henderson. "It's a temporary salve." Kodak argues that its restructurings were strategic responses to changing technologies. Now, after pouring more than $4 billion into research and development over the past three years, it is launching new products such as its Photo cd system, which will allow people to look at their photographs on tv sets equipped with Kodak-brand players. And on Nov. 23, Kodak said it would sell three units as part of its plan to focus on its core businesses.
Sears, too, has struggled with basic business woes -- challenges from discounters such as Wal-Mart Stores Inc. or such niche retailers as The Gap. Says analyst Edward A. Weller of Montgomery Securities: "Layoffs haven't made them competitive. They're not responding to what customers want now."
HUMAN ASSETS. Worse, some downsizing companies make their more profitable units pay for weaknesses in other divisions. Westinghouse Electric Corp. has been cutting costs in response to chronic problems at its finance subsidiary, Westinghouse Credit Corp. Since the start of 1991, Westinghouse has laid off 6,800 employees, 6% of its work force. The cuts have even affected healthy divisions, such as Westinghouse Electronic Systems Group, which has lost 4,600 employees in the past two years. To bail itself out, Westinghouse announced on Nov. 23 that it will sell off several other profitable divisions, in addition to liquidating parts of the credit unit's portfolio.
Given the poor record for downsizing, some companies have decided that it might not be such a good idea. When business lags at one of Minnesota Mining & Manufacturing Co.'s 49 divisions, for example, excess workers are found similar work at another division. Over the past decade, 3M has reassigned about 3,500 workers this way, failing to place only a "handful," says Richard A. Lidstad, vice-president of human resources. "Our employees are corporate assets, not assets of a given business. It's like production machinery. In a downturn, you don't just throw it out." And what do you know? 3M's earnings were up 14% in the third quarter.
Not every company is likely to follow 3M's example. But there's growing evidence that executives should stop using layoffs as a remedy of first resort. "They're definitely not thinking of their staffs as an asset," says consultant Wallace. "They are commodities to be dispensed with. God, that's 1910 thinking." All too often, that's 1992 thinking, too.