Are Layoffs the Answer?

Richard Clark became the new CEO for Merck, and one of his first moves was to layoff 7,000 employees to save an estimated $4 billion dollars. This may save $4 billion in payroll, but I wonder if he took into consideration to opportunity cost of losing these workers and what they were providing to the company. This company has been struggling for a little while and with a few of their main drugs about to lose patents, odds aren't looking good. This CEO is looking for ways to cut costs because of an expected decline in revenues, but cutting 7,000 workers doesn't look like the best answer to me. Merck paid over $200 million to co-develop a new diabetes drug that now seems to be dead. It looks like this CEO is trying to cut costs to save Merck, but I don’t know if this is the best move for a new CEO.


Bree said...

I don't completely understand the reasoning behind the layoffs, but, my only hope is that this won't be the new trend for other companies. One of the reasons listed for these layoffs was because there's expected revenue decline. If this becomes a trend and more and more workers, also consumers, are laid off then there isn't going to be any income for the consumers and of course there will be less revenue. To answer your question, no I don't think layoffs are the answer!

Dr. Tufte said...

I don't see what's so confusing here - revenue is down, so you bring your average costs down as well.

I do think there is an issue with the fixed costs of retraining people. But, the evidence that this was part of their decision is that they are laying off a bunch of people simultaneously rather than piecemeal.