Collective layoffs are sadly a rather common affair, with an estimated 556 announced between December 2018 and November 2019 in Europe alone. These layoffs, which affected over 250,000 employees, have an obvious effect on the individuals involved, and their families and communities, but new research from IESE Business School highlights the impact they have on the firm laying the workers off.
Obviously the very act of laying off large numbers of people suggests the firm involved is not in good shape, but the researchers wanted to test how the impact of layoffs differs from other forms of organizational crisis, such as poor publicity or breaches of ethical norms.
Unique crises
The researchers identify a number of unique characteristics of mass layoffs, not least that they, unlike other crises, are usually deliberately initiated by the organization. Therefore, the firm has control over things like the timing, the location, and how the layoffs are communicated.
Similarly, the researchers believe that layoffs don’t necessarily reflect the quality of the firm’s offering, in the way that product-harm crises inevitably do. It’s likely that the merit of the firm’s prior actions will be called into question, however, as will their future prospects.
The findings emerged from a study of the automotive industry in nine developed countries, which collectively underwent 205 collective layoffs from 20 major brands over a 15 year period. Between them, these layoffs resulted in over 300,000 people losing their jobs. The researchers compared these with the advertising effectiveness and price sensitivity of each of the brands over this timeframe, and also between countries.
Financial consequences
Three common factors seemed to influence the scale of the financial consequences associated with layoffs:
- Is the firm domestic or foreign to the country in which the layoffs occurred?
- Was the layoff motivated by a fall in demand?
- How many employees were affected by the layoff?
The results suggest that the majority of collective layoffs result in lower sales in that country in the year of the announcement, with an average fall of 6.6%. What’s more, the data suggests that consumers became less affected by the firm’s advertising in the wake of a layoff, but more sensitive to price changes.
It also appears that firms that lay employees off en-masse spend less on advertising, with a typical decline of around 16% less than they would ordinarily do without such redundancies.
“Our results regarding the commercially adverse effects of collective layoffs suggest that marketing managers should claim a place in the taskforces that manage such layoffs, alongside functional representatives of other areas such as finance and operations, to reflect the potential adverse demand-side consequences perspective of the layoffs in layoff discussions,” the researchers explain.
They believe that advertising is a crucial part of the response to any mass redundancies, and yet firms often significantly reduce their advertising spending, which has a clear impact upon their commercial performance.
“As a result, the adverse effects of collective layoffs on sales in the layoff country loom larger, not only because of lower advertising elasticity, but also because of lower advertising spending,” the researchers conclude. “An alternative response could be to increase advertising spending to compensate for the decreased effectiveness and to consider such higher ad spending in the layoff country as a restructuring cost.”
