Lucent Technologies, a spin-off of AT&T, is a telephone equipment business. On January 23, 2001, its stock fell to $18.81 a share from a high of $75.38 in March of 2000. The company's drastic decline led to an announcement of a turnaround plan. A turnaround plan is basically an investment in streamlining the business and reducing jobs. These changes are projected to cost the business over $1 billion. The costs included employee severance pay, plant closures and losses from goods no longer on the market. Employee severance pay is a sum of money paid to terminated employees based on how long they have been employed by the company. It is usually paid when the job is terminated for a nonperformance reason like downsizing. The projection estimates that at least 10,000 Lucent employees may lose their jobs .

Montgomery Ward is a chain department store company that had 250 stores in 30 states. When the company started operating in 1872, it was purely a catalog business. Its success led to the true beginning of the catalog industry. At the time, the location of retail outlets was limited. Catalogs offered an easily accessible consumer market. The first actual Montgomery Ward store opened in 1926. In 1985 Wards discontinued the catalog because the cost outweighed the profit.

Montgomery Ward's popularity did not keep up with the changing retail market. In 1997 Wards introduced a turnaround strategy. The strategy was to focus its store layout and marketing strategy on its identified target audience. Market research revealed that the target audience of Montgomery Ward was women ages 30-55 with a household income of between $25,000 and $50,000. This focus greatly limited its market share. It was a big risk, and it proved to be unsuccessful. On December 28, 2000, Montgomery Ward filed Chapter 11 bankruptcy, meaning that the entire company would close for good. Approximately 37,000 Wards employees were laid off.

CS Question #1: What do you think Montgomery Ward could have done differently in its turnaround plan that might have saved the business?

JC Penney was created by James Cash Penney in 1902. The first store, selling dry goods and clothing, was actually called The Golden Rule Store for its commitment to customer service. The business grew to 1,140 stores in 50 states employing 290,000 individuals. The JC Penney catalog, combined with e-commerce, is now the largest general merchandise catalog. The corporation also controls the Eastern-located drug store Eckerds, of which there are 2,600 locations.

JC Penney has not kept up with its competition or with fashion trends. In 2000, JC Penney announced the closure of 45 JC Penney stores and 279 Eckerds locations. On January 25, 2001, JC Penney announced that it would close 47 of its department stores and five to seven more Eckerds locations. This resulted in a job loss for over 5,500 employees. The 2001 store closures are expected to cost $275 million in unsold merchandise, employee severance pay and other closing costs. The corporation made the cuts to streamline their business, hoping for a turnaround. Analysts doubt that JC Penney will ever regain its height of success.

The car manufacturers of Daimler-Benz AG and Chrysler Corporation merged in 1998. Now it is focusing on a turnaround effort to create a more competitive, flexible and efficient business. By reducing overall costs, the corporation is hoping to boost its financial performance. This plan includes downsizing. On January 29, 2001, DaimlerChrysler AG proclaimed that it would cut 26,000 jobs, which is about 20 percent of its workforce, over the next three years. The corporation stated that about 75 percent of this reduction would occur in 2001. The job cuts are planned in accordance with existing union contracts and employee retirement. DaimlerChrysler AG Group President and Chief Executive Officer Dieter Zetsche said, "Part of this process may be painful for many people. However, to be truly competitive in today's auto industry environment, we need to be a more nimble company, more closely aligned with current and future market conditions."

CS Question #2: Why do you think analysts are not projecting that JC Penney will regain its previous market success?

On January 24, 2001, AOL Time Warner announced it would cut approximately 2,400 jobs in an effort to downsize the newly merged media corporation. It may also decide to close the 130 Warner Brothers retail stores, which would mean another 3,900 job losses. The remaining employees, approximately 82,500 of them, will be given a stock option grant. The company's goal is to move the employee compensation toward equity rather than continue to be cash dominated, as it is now. All these efforts are directed toward the goal of a $1 billion saving. The job cuts are referred to as fallout from the large-scale merger. The corporation has stated its desire to increase efficiency in its operations.

According to job placement specialists Challenger, Gray and Christmas, over the last year 41,515 Internet employees have been laid off by an estimated total of 426 Internet employers. Internet businesses are very volatile, and many tend to have extreme ups and downs in the market. Many Internet startups are having trouble making a profit. This results in cutbacks and even closures. Challenger, Gray and Christmas reinforce the idea that careers in technology will do nothing but grow. However, if an individual seeks stability in an Internet career, it may be wiser to look for employment with the Internet division of an existing and established business.

CS Question #3: Why would there be more stability in working for the Internet division of an established business than working for an Internet startup?

The long-term economic growth has been a direct result of consumer spending and confidence. How will these layoffs affect consumer optimism? Some feel that these layoffs simply represent the cost of making businesses more efficient and profitable and that this is a normal economic adjustment. Efficient use of resources leads to a higher profit margin. Other reasons may also motivate turnarounds and cutbacks. For example, stock performance is related to operating cash and business spending. Job cuts are partially prompted by the desire to increase stock prices or rally a falling stock.

Other analysts feel that the layoffs are the beginning of an economic downturn, possibly even a recession. The Consumer Confidence Index was at 114.4 in January of 2001, the lowest level in four years. The current unemployment rate is about 4 percent. The most recent recession, from July of 1990 to March of 1991, created a 7.8 percent unemployment rate - almost double the current rate.

Currently, there are still more jobs being created in the economy than are being lost. However, the consumer view of the situation is the key to economic prosperity. Expectations and consumer confidence are capable of pulling an economy into or out of a recession.

CS Question #4: Which phase of the business cycle do you believe the economy is currently experiencing?

Further Thought:

1. Apply your knowledge of the business cycle to the current U.S. economy. What will be the next part of the economic cycle to occur? Explain your answer.
2. Using your answer from the above question, predict when and how the next part of the cycle will occur. Explain your reasoning.
3. How do you think a closure of a department store, such as Montgomery Ward or JC Penney, affects a small community?

News sources: USA Today, MSNBC, Yahoo! News, Associate Press