Question

A downsizing strategy at Archer Corp. has resulted in negative stock returns and lower profitability following the layoffs. According to your text, which of the following best explains the reason for these negative results at Archer?

a.) Downsizing conducts a complete review of the organization's critical work processes, which results in heavy expenditures.
b.) The HRM of a firm must provide downsized employees with multiple stock options.
c.) Downsizing tends to eliminate good performers instead of poor performers first.
d.) Downsizing demands the HR department have a third-party vendor provide services, which results in lower revenues.
e.)When labor costs fall after a downsizing, sales per employee also tend to fall.

Answer 1

The negative results at Archer Corp. following the downsizing strategy are due to the adverse selection of wage cuts, where the best workers leave and the least attractive workers stay. This leads to a loss of good performers and lower profitability.

Step-by-step explanation:

The reason for the negative results at Archer Corp. following the downsizing strategy is the adverse selection of wage cuts. When a company reacts to poor business conditions by reducing wages for all workers, the best workers with better alternatives at other firms are more likely to leave, while the least attractive workers with fewer options are more likely to stay.

Consequently, firms choose to lay off some workers instead of trimming wages across the board. This can result in a loss of good performers and lower profitability.