In an already struggling economy, the events of September 11th accelerated the deteriorating health of many organizations. Unemployment is now at 5.4 % (see the U.S. Bureau of Labor Statistics at http://www.bls.gov), the highest since 1996. According to The Washington Post, many companies have furloughed—the current word for laying off—over 10,000 workers, including Boeing, United Airlines, and Nortel.

Why Do Companies Use Layoffs As a Business Strategy?
Each company has a different approach to layoffs, often due to different tolerance levels for letting people go. Some companies seem to lay off easily, whenever they've had unusually poor quarterly profits for one or two quarters—or perhaps after a disastrous quarter, like several companies did as a result of the terrorist attacks. Other organizations, those espousing a belief that people are their most important asset, try to ride out several poor quarters without laying off any employee.

How Do You View Layoffs?
Chances are you will answer this question differently depending upon where you are in an organization. A senior manager who's facing a layoff decision may fear it's the only way to stem the red that's hemorrhaging from the company's fiscal aorta. Middle managers faced with the decision of whom to lay off may feel overwhelmed with the challenge of balancing the individual and group good. From the point of view of those workers let go, the impacts are many and varied—from just a little extra stress at home to perhaps the threat of mortgage foreclosure. And the carnage leaves the remaining riddled ranks standing in a shell-shocked organization with low morale and perhaps even lower productivity.

Looking at the Larger System
If we just focus on one view of layoffs, our perspective becomes simplified and narrow. But if we look at the larger system from a higher vantage point level (a 10,000 meter view), one which includes all pertinent views, it becomes possible for us to think through all the implications of layoffs. It's from this higher-level that we've written this column. We will use stocks and flows to build an explicit mental model of how a company operates to explore how these different approaches to layoffs affect a company's viability.

Let's look at how a fictional company justifies layoffs. We'll keep it very simple. Our company operates on a cash accounting basis. The stock of cash is an accumulation of money (like your bank account); this accumulation can be 0 or even less (just like your bank account can go negative if you owe money). The inflow is quarterly revenue; the outflow is quarterly expenses. If the level in the cash stock falls (because the outflow is greater than the inflow), the company may feel compelled to lay off employees (adjust down). In the short term, bringing the employee headcount down to a certain level will reduce expenses, allowing revenue to exceed expenses and cause the cash flow to increase. This is a balancing loop (B1) because it tries to balance the level of cash.

But There's More, Right?
One potential long-term consequence of reducing headcount is that it reduces the firm's ability to complete its work. This situation can create a reinforcing loop (R1) where the lower headcount results in less completion of work, less revenue, and less cash—a vicious cycle that resumes the layoff process. Another long-term impact might be that a firm's attractiveness in the marketplace could suffer, causing the firm to get less work. This is another reinforcing loop (R2).

What Should a Company Do?
Well, let's find out! Download the model (using the instructions below) to build your understanding of how one company uses layoffs as a business strategy. See how we've implemented some of the assumptions described in this column. And think about some of the assumptions we didn't model (for example, we didn't include loss of productivity due to loss of morale after layoffs). What do you like in the model? What do you think should be changed? Let us know your thoughts in the Pegasus forum.

Using the Model
To use the model, you'll need to download two files—the "current model" and the "isee Player" (the ithink® Runtime for the At Any Rate model series) that runs the model. Both are located in the "Get" section toward the top of the right-hand column. You'll then need to install the isee Player on your computer. (Once you have installed the isee Player on your computer, you no longer have to go through this process unless the reader is updated.)

1) Download the "Current Model"
• Click "Current Model."
• Choose "Save this file to a disk" and click "okay."
• In "Save As," save the ITR file to your desktop (or to a folder of your choosing).

2) Download and install the "isee Player"
• Follow the instructions on the isee Systems site.
After you install the isee Player, to run the model, you can go to your desktop and double-click on "model1.itr" or start the ithink® program and use the "file open" command to locate and open the model1.itr file.

You are ready to begin. Feel free to play with the model. We've put more content in it than we've described in this column. Try different things. If you've got an interesting idea, a question, or a comment, go to our Pegasus Forum. We'd enjoy hearing from you. 

This learning lab was developed using the ithink® software, a computer simulation modeling package developed and distributed by isee Systems.