With global markets in turmoil over the last several weeks, leaders throughout the world are starting to think about how they should respond if confronted with an economic downturn. Yet what do we know about how leaders decide what to do when demand suddenly falls? And how do these choices affect a company’s competitiveness after the downturn ends?
For the last five years, we have been studying layoffs and their alternatives. Our goal with this research is to help leaders understand when it makes sense for companies to use layoffs to address their financial and competitiveness challenges and when other approaches would produce better results for customers, employees, and shareholders and foster better long-term performance of the company.
“I’VE BEEN A LEADER DURING THREE RECESSIONS, AND I’VE NEVER HEARD A MANAGEMENT TEAM TALK ABOUT HOW THE CHOICES THEY MAKE DURING A DOWNTURN WILL AFFECT PERFORMANCE DURING A RECOVERY”
A search for leaders who have taken alternative approaches to managing their workforce during economic downturns led us to Honeywell CEO Dave Cote, and drives the narrative of our new case study, Honeywell and the Great Recession. The case puts students in the shoes of Cote and his leadership team and asks them to consider the choices they would have made in the face of the extreme uncertainty surrounding future business conditions in the fall of 2008.
Cote joined Honeywell as CEO in 2002. The company was emerging from the 2001 recession and a series of mergers that had left the company in a compromised state. Over the next six years, Cote worked to turn Honeywell around through implementing a series of improvements in the company’s operating systems, forming a single culture from all the merged organizations, and instituting a disciplined approach to future hiring and M&A activity.
When the Great Recession hit in late 2008, Honeywell, like all diversified manufacturers, experienced a drop off in new orders. Yet after six years of improving operating efficiency, there was little room left to cut costs through additional efficiency improvements. Company executives would have to make a choice of whether and how to cut their workforce costs—either through mass layoffs or furloughs.
Our goal with the case was to explore the tradeoffs between these two forms of employee cost reduction. We also wanted to examine the long-term orientation that Dave Cote and his team brought to managing their company during the Great Recession.
The shift to managing companies for short-term financial interests has been an increasing trend among US businesses, leading to a focus on actions that are believed to yield immediate financial results to boost profitability and returns for shareholders. During the last two recessions, layoffs were an almost universal go-to cost-saving choice in the United States. Compared with other recessions since 1973, companies were much more likely to lay off workers than to suffer short-term declines in productivity, according to a report by the McKinsey Global Institute.
