Final answer:
Downsizing is a cost-saving strategy that financial services firms may use instead of creating new products for changing markets but has broader implications on employees and local economies. Firms might delay hiring during a recession, resorting to overtime work until certain of market recovery. Eventually, closing may be more sensible than operating at a loss or with low profitability expectations.
Step-by-step explanation:
When a financial services firm decides to downsize in order to save money, it often entails laying off employees as a response to not achieving profit goals, rather than investing in the creation of new products for a changing demographic. This can occur when businesses recognize a decline in consumer spending or when external factors, such as a pandemic, curtail their operations and thus reduce the expectations of the profitability of investment. However, downsizing can have significant consequences. Industrial-organizational psychologists outline the impact on employees, including those who remain with the company, highlighting how downsizing can affect their intent to quit, organizational commitment, and job security.
Furthermore, during a recession, firms may initially hesitate to lay off workers in anticipation that the downturn in demand may be temporary. Laying off workers risks losing them permanently and incurring costs for hiring and training if the demand picks back up. Thus, firms might initially retain workers, resorting to overtime work, and delay hiring new employees until they are confident the recession is over.
However, ultimately, there are situations where it makes sense for the firm to close, if the cost of remaining in operation exceeds the benefits or the potential for future profits does not justify the continuous investment. For example, large automotive companies have been known to sever ties with dealerships to realign their businesses, impacting local economies across the country.