ENGLISH SUMMARY: The purpose of this research is to test the rationale of corporate downsizing asa method of promoting long-term profitability in South African companies. Thisstudy is similar to that conducted by Pallian & Shalhoub (2002: 436-447) onUS-based companies.The sample consists of 58 JSE-listed companies, which announced theirintention to downsize during the period 1995 - 1997. This period gives 10years after the announcement to study the effect of downsizing on long-runprofitability. The original sample consisted of more than 172 companies (listed,non-listed and state-owned companies). 82 of these companies were listed onthe JSE, and the rest were state-owned companies, government departments,universities or small companies. Of the 82 listed companies about 24 were delistedfrom JSE due to number of reasons, including liquidation, winding upand failure to meet the JSE listing requirements. Thus these companies didnot survive, despite downsizing. For that reason, the sample was reduced to58 companies.The financial data for each company was collected for the period 1997-2006.The relationship between the downsizing index and the six financial variables(i.e., ROE, ROI, operating costs, cash flow from operations, earnings per share(EPS) and market share) was explored to study the impact of downsizingactions in long-run financial performance.The findings of this study suggest that downsizing is not in the best interests offinancial performance in the long run. There is a very low correlation betweendownsizing activity and these variables. Where the correlation does exist, it isnegative. Downsizing also accounts very little for the variations in thesevariables. That means if there is an improvement in any of these financialperformance variables it could not be explained by the downsizing, but instead by other variables. Thus there are many other factors that organizations needto explore in order to improve their long-run financial performance. Thesefindings also similar those of Pallian & Shalhoub (2002) study.Some authors like Balazas, De Vries & Manfred (2004), and Biratti & Tziner(2004), suggested some ways to prevent downsizing failures, which include:• Giving advance notice, to give the victims a chance to look foremployment elsewhere,• Supporting the victims by offering them financial aid,• Counseling support, etc.Despite these measures, downsizing will still reduce the level of trust in theorganization, hence the negative impact on the financial performance. It is thussuggested that downsizing should be applied only as a last resort.Based on the findings of this and the US study, downsizing is seen as a painfuland costly exercise that does not benefit organizations in the long run.Organizations need to adopt strategic directions which will be able to sustainthem in the future.Therefore, as an alternative to the downsizing strategy, the following model byOosthuizen (2006) is recommended in order to formulate successful businessstrategy, regardless of the situation the organizations find themselves in. Thisprocess is divided into four steps, namely:1. Strategic intent, which includes defining the vision, mission, goals andobjectives of the business.2. External environment analysis. This includes macro analysis (PESTE)and industrial analysis.3. Internal environment analysis. This includes analysis of company’scurrent strategy and its past performance, the value chain and processes(resources, capabilities and competencies).4. Formulation of business strategy.
